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www.DukeEmployees.com - Duke Energy Employee Advocate

Duke - Page 11 - 2002

Blue Forecast Bedevils Duke

TheStreet.com – by Melissa Davis – September 21, 2002

(9/20/02) - Stormy market conditions continue to melt away Duke's sugar-coated earnings promises.

For the second time in as many months, Duke has slashed its earnings guidance because of sharp deterioration in the merchant energy sector. The giant energy concern has managed to escape the worst of an industrywide meltdown. But some observers say the company has been -- and continues to be -- too optimistic for its own good.

"These guys are guiding down for the second time this year," one short-seller said. "And even this time around, they're still not being honest and forthcoming" about what lies ahead.

Following Friday's new earnings forecast, Duke's stock plummeted 11.5% to a morning low of $18.73. Even after regaining some lost ground, punching back towards $20, the stock continues to trade near the bottom of its 52-week range of $18.10 to $41.35.


As it neared the end of a normally strong quarter, Duke announced Friday that sour market conditions will prevent the company from hitting fresh earnings targets set just two months ago. Duke finally conceded that it has been swept up in the "perfect storm" that's left some once-powerful peers flailing to stay above water.

"We aren't the first to revise earnings guidance in the gales of this perfect storm, and we probably won't be the last," said CEO Richard Priory. But "we're very focused on the prospect of clear skies ahead."

Duke now expects full-year 2002 earnings of $1.95 to $2.05 a share, a 20% cut from July's forecast. The company predicts that 2003 earnings will be flat -- instead of rising to $2.61 -- and even that is dependent on slight market improvements.

In the meantime, Duke reassured investors that it has no plans to scrap, or even cut, its dividend as other energy merchants have done. But some wonder how Duke can fully fund capital expenditures and its dividend without tapping the capital markets.

Duke has promised to "live within its means," operating entirely on its own cash flow, by cutting capital expenditures by nearly one-half next year. But even after those cutbacks, some say, Duke will need almost $4.5 billion to fund capital expenditures and its annual $1.10 dividend.

"They're going to struggle to earn $4 billion in cash flow from operations," one critic said. "So they're going to be free cash flow negative."

Less Rosy

Analysts have already expressed skepticism about Duke's future earnings projections, which are higher than some market conditions imply they should be. The company is expecting its trading division to contribute up to $600 million worth of earnings next year. But some analysts question whether Duke can depend on its trading arm to deliver any profits at all.

"If I project the current environment into the future, ultimately all the earnings go away," one analyst said during a conference call Friday.

Duke's earnings power has been sapped, in part, by its decision to cease construction of three power plants in the western U.S. The plants -- located in Nevada, New Mexico and Washington -- are nearly halfway finished. Costs associated with the construction deferral will result in an immediate third-quarter hit of 19 cents to 23 cents a share.

Short-sellers expect other charges to follow.

"Duke still hasn't taken a mark-to-market loss like everybody else," one said. "They've taken gains instead. How is that even possible?"

Duke assured analysts that it foresees no major charges or writedowns on the horizon. And the company maintained that it's doing its best to keep the investment community properly informed.

"I demand precision of myself and my company," Priory said. "The more you know about our company and our industry, the better you can evaluate us."

Duke Lowers Earnings Forecasts

Associated Press – by Paul Nowell – September 21, 2002

(9/20/02) - Duke Energy on Friday sharply lowered its earnings forecast for the rest of the year and 2003, citing continued weakness in its wholesale power market in North American.

The Charlotte-based energy company also confirmed that it was ending plans to build three new merchant power plants. The company will take a charge of between 19 cents and 23 cents a share in the third quarter after deferring construction on the plants.

Merchant plants generate power outside the system of utility companies creating electricity at regulated rates for local customers. Merchant plants sell the power at generally unregulated prices, usually to utilities.

Duke Energy's shares fell $1.20, or more than 5 percent, to $21.42 in morning trading on the New York Stock Exchange. The company is now projecting earnings of $1.95 to $2.05 for 2002, far below Wall Street's consensus estimate of $2.46 a share.

Duke Energy also warned that its 2003 earnings may be flat or lower than 2002. If the North American merchant energy market does not improve in 2003, earnings may be lower than 2002 ongoing earnings, the company said.

"The young merchant energy sector has experienced both an extreme up cycle and an equally extreme down cycle," Richard Priory, Duke Energy's chairman, president and chief executive officer, said in a statement. "A number of factors sharply depressed spot and forward wholesale power prices during the critical summer months and led us to our revised expectations."

Priory cited continued low price volatility, further reduced spark spreads and decreased market liquidity for the company's warning.

The company said it cut capital spending for 2002 from the $6.8 billion indicated in July to $6.2 billion, excluding the acquisition of Westcoast Energy, a Vancouver, British Columbia-based natural gas distributor. Capital expenditures for 2003 have been reduced to approximately $3.5 billion.

The company confirmed it was stopping construction of three power plants in the western United States until market conditions improve. Deferred are the Grays Harbor Energy Facility in Washington, the Deming Energy Facility in New Mexico and the Moapa Energy Facility in Nevada.

Earlier this week, Duke Energy and other power producers disputed the results of an investigation by California regulators that found most rolling blackouts could have been avoided if generators had not withheld electricity at crucial times.

The report, released Tuesday by California's Public Utilities Commission, analyzed sales data, documents and electronic records of the five largest non-utility power generators between November 2000 and May 2001. That's when an energy crisis forced prices skyward and repeatedly darkened traffic signals, homes and businesses.

Future of Halted Duke Plants

Duke Secretly Cutting Jobs

The Charlotte Observer – by Stella M. Hopkins – September 21, 2002

(9/19/02) - Facing weak demand and low prices for wholesale power, Duke Energy Corp. continued cutting jobs Wednesday, laying off an unspecified number of people in its Western operations.

The most recent layoffs, which include California workers, follow cuts this week in Charlotte-based Duke's European trading operations and earlier job losses in Houston.

The job cuts are all in Duke's unregulated energy business, which includes energy trading.

These job losses do not affect Duke Power, the Carolinas' largest utility, which is Duke Energy's regulated business and by far the company's largest employer in the two states.

Duke won't say how many people it has laid off or how many more will lose their jobs. Spokesman Bryant Kinney said some business groups are still evaluating operations, and that the layoffs will be global.

"As we've seen the market decline so dramatically this year, we've had to step back ... look at our budgets," he said. "It's challenging to go through the cycle we're going through."

Kinney wouldn't provide specifics but said laid-off employees will receive the company's standard severance package.

Last month Duke suspended construction of two Western power plants, each about 40 percent complete. The company also has slowed construction of a plant near Las Vegas, eliminating all overtime and weekend work.

Energy stocks have been hard hit by increased regulatory scrutiny and fallout from the collapse of Enron Corp. The California energy crisis also haunts the industry.

Duke Energy joined other power producers Wednesday in disputing the results of an investigation by California regulators that said blackouts last year could have been avoided if generators had not withheld electricity at crucial times.

The report, released Tuesday by the state Public Utilities Commission, analyzed sales data, documents and electronic records of the five largest nonutility power generators, which include Duke. The crisis forced prices skyward and repeatedly darkened traffic signals, homes and businesses.

The companies said they acted on orders from the state's grid operator. Duke said Wednesday the report contained "blatantly false and misleading statements" and that the company made power available when its plants were not down for maintenance or to avoid breaking air pollution standards.

Moody's May Cut Duke Energy Ratings

Reuters Market News – September 21, 2002

(Full text of press release provided by Moody's Investors Service).


Approximately $21 Billion of Debt Securities Affected.

NEW YORK, Sept 20 - Moody's Investors Service placed the securities ratings of Duke Energy and Duke Capital Corporation on review for potential downgrade. Ratings under review are Duke Energy's Aa3 first mortgage bond rating, A1 senior unsecured and issuer ratings, and its P-1 short-term commercial paper rating. Also under review are Duke Capital's A3 senior unsecured and issuer ratings, Pan Energy's A3 senior unsecured rating and Texas Eastern's A2 senior unsecured ratings. Duke Capital's P-2 commercial paper rating is not under review, nor are the long term Baa2 and short term P-2 ratings assigned to Duke Energy Field Services or the A1 secured rating assigned to Maritimes and Northeast. The review is prompted by Duke's announcement that its earnings expectations will be materially lower in 2002 and 2003 based on continued weakness in Duke Capital's merchant energy subsidiary, Duke Energy North America (DENA). Since Duke Capital's credit profile drives business and financial risks at Duke Energy, Moody's has placed the parent's ratings on review as well. DENA contributed 13% of consolidated EBIT during the first six months of 2002. The company's revised forecast incorporates the current depressed environment for power prices and dim prospects for recovery in the intermediate term. This will impact operating cash flow relative to debt and other key measures of credit quality. With the outlook for 2003 earnings and cash flow flat at best, Duke's ability to improve credit measures will be limited. The company further announced the deferral of three merchant plants contributing to a pre-tax charge of $250-$300 million in the third quarter. Steps to mitigate the impact of poor performance at DENA include further capital expenditure reductions and asset sales to bolster the company's overall liquidity position. Along with realized or announced asset sales proceeds of $500 million, the company expects that capex reductions of $800 million for the remainder of this year will enable cash from operations largely to cover capex with some external financing requirements. Along with asset sales proceeds, management expects cash from operations to cover reduced 2003 capital expenditures of $3.5 billion. Duke estimates that non-core assets available for sale could realize proceeds in the $1 - $3 billion range. The company's core regulated businesses buffer cyclicality exhibited in the merchant energy sector. Core businesses include franchised electric (Duke Power Company) a 43% EBIT contributor for the first six months of the year; and gas transmission (the Texas Eastern, Algonquin, East Tennessee Natural Gas, Market Hub Partners and WestCoast Energy assets) a 32% EBIT contributor. Moody's review will focus on the following issues: the implementation and impact of capital expenditure reductions on the company's cash generating capabilities; the company's financial flexibility and liquidity position; longer term prospects for merchant energy and its ongoing impact on the risk profile of the company; the financial health and credit profiles of the regulated businesses; the timing and use of asset sale proceeds; and the likely outcome of various governmental investigations into the company's trading operations. In addition, we will review the appropriate relationship between the long and short-term ratings assigned to Duke Energy and to Duke Capital. Duke Energy is headquartered in Charlotte, North Carolina.

Companies Allegedly Withheld Power

New York Times – by John M. Broder – September 19, 2002

LOS ANGELES, Sept. 17 — Widespread power failures during California's energy crisis of 2000 and 2001 could have been avoided if five independent energy companies had not withheld electricity they were capable of producing, a study by state regulators said today.

The investigation by the California Public Utilities Commission said the five companies — Duke, Dynegy, Mirant, Reliant and AES/Williams — had withheld power from their California plants.

This contributed to the "unconscionable, unjust and unreasonable electricity price spike that California experienced during the energy crisis," the report said.

The commission did not directly accuse the companies of deliberately trying to drive prices up. Officials said investigations were continuing into possible price manipulation and collusion among the companies.

The commission said that the companies took plants off line for necessary maintenance and were subjected to sharp increases in natural gas prices but that they still had sufficient generating capacity to avoid all four days of blackouts in Southern California and 65 percent of the blackout hours in Northern California.

"On all but 2 of the 32 statewide blackout and service interruption days shown, the five biggest independent electricity generators did not supply well over 500 megawatts of power they could have generated," the study found.

A megawatt of electricity is roughly the amount needed to power 750 homes.

The generators responded that there were legitimate reasons for the service disruptions and that their plants were running as hard or harder during the crisis as before or since.

"California's merchant generators ran at historically high levels to power our state throughout the crisis," said Jan Smutny-Jones, executive director of the Independent Energy Producers, a trade group. "The average age of these plants is over 36 years old. Despite their age, California's power plants ran 88 percent harder in 2001 than they did in 1999, and some increased output as much as 206 percent to meet our state's energy needs, making up for decreased energy imports from the Northwest caused by a drought."

Company officials also said that some plants were taken off line to add equipment required by state environmental regulations. They also blamed the public utilities commission for ordering continued sales of electricity to Mexico at a time of power failures in San Diego.

The report looked at the 38 days from November 2000 through May 2001 when millions of Californians experienced large-scale blackouts and selective power failures. The blackouts were the first in California since World War II and caused thousands of businesses to close and interrupted power to homes, hospitals, schools, theaters and shopping malls.

Wholesale prices for power leaped to as high as $1,500 a megawatt-hour from $40 per megawatt-hour, causing electricity bills to jump, forcing two major utilities into bankruptcy and plunging the state into debt as it spent billions of dollars buying electricity on the deregulated market. The state entered into long-term energy contracts at the inflated prices of 2000-2001, one factor that has led to the state's $24 billion budget deficit.

The utility commission found that on each of the days when power was interrupted all of the five main electricity generators had capacity that went unused. For example, on May 8, 2001, there were two-hour blackouts caused by a shortage of 400 megawatts of power in Northern and Southern California. But Duke Energy had about 1,000 megawatts of available capacity that was not used that day, the commission report said. "Thus, Duke alone had more available and unused power than the total amount of power that was needed to avoid the blackout that day," it said.

Terry Francisco, a Duke spokesman, responded: "Duke's plants have run harder, broken down less and been available more than any other time during utility ownership and never more than during the crisis. Our capacity utilization during the crisis was among the highest in California among all the generators."

The report mentions the role of Enron Corporation only in passing, noting that federal officials had found that its energy trading strategies contributed to California's energy woes and might have been an effort to manipulate prices.

Enron, employing a variety of trading schemes known by such names as Death Star, Fat Boy and Get Shorty, tried to "game" the state's power grid to make quick trading profits, according to internal company documents.

"Thus, the potential for simultaneous withholding and gaming (including strategies not yet revealed) is very serious," the report stated, "and probably accounts for a large part of the rapid increase in costs in California during the crisis."

An Enron spokesman, Eric Thode, said that company officials had not seen the report, but that Enron "continues to cooperate in the various investigations."

Frank Wolak, a professor of economics at Stanford University and chairman of the market surveillance committee for the state's power grid, said the utilities commission did not establish that the generators deliberately withheld power they were capable of producing. But he compared that task to an employer's proving that an employee was playing hooky when he called in sick.

"It sure looks suspicious," Mr. Wolak said, because the shortages led to huge increases in prices and profits. "But it comes down to a `he said-she said' sort of story."

Duke to Cut Trading Staff

Dow Jones – by Sarah Spikes – September 18, 2002

(9/16/02) - LONDON (Dow Jones)--U.S. energy company Duke Energy Co. (DUK) plans to cut staff in its 100-strong European energy trading business based in London, a company spokeswoman told Dow Jones Newswires Monday.

"We're going through a staff reduction process right now, but we're not yet sure exactly how many staff will be made redundant and from which divisions," said the spokeswoman.

Duke trades in energy markets in the U.K., Belgium, France, Ireland, Germany, Italy, Switzerland, the Netherlands and Nordic region, said the spokeswoman. The European division employs 12 energy traders. The cuts are part of a wider restructuring process that the company began after a credit-ratings downgrade by Standard & Poor's Corp. to A from A+ in August, said the spokeswoman.

Duke is reviewing all of its departments for possible job cuts, including trading, legal, strategy, human resources and other support staff.

"Staff were told that there would definitely be cuts to the trading department and not just support staff," said an industry source.

"They (Duke) look ready to really scale back on power trading and focus more on gas and oil," he added. For the last two weeks Duke has been undoing deals in the U.K. power market but particularly late last week, traders said.

Traders have also seen Duke getting out of other European markets.

"Particularly last week, they (Duke) looked to be unwinding their positions in Nord Pool (the Nordic power market)," said a trader.

Duke sold heavily into Nord Pool, on Thursday and Friday, another trader said. The company was selling power that it had previously bought, preparing to cut back on its commitments, he said.

Duke's spokeswoman said that, despite the job cuts, the company isn't planning to get out of Europe altogether, and that the cuts wouldn't result in a significant scaling back of trading. The company isn't planning to sell the combined heat and power station that it owns in France, or to get out of its virtual ownership of natural gas pipeline capacity.

U.S. merchant energy trading companies have suffered since the scandal about trading and accounting practices by U.S. energy giant Enron Corp. (ENRNQ) forced the company to go bust late last year.

Duke Wall Street Journal Ads

Employee Advocate – www.DukeEmployees.com – September 8, 2002

Below are some of the titles of ads that Duke has placed in the Wall Street Journal, and our interpretation of what they must actually mean:

"we generate 1+1=3" – This one must have something to do with accounting!

"we generate thank you" – Delivering on promises is better than empty words.

"we generate Keynesian power" – And, Enron power.

"we generate desert" – Employees have been left high and dry.

"we generate the facts" – Generate, as in “fabricate.”

"we generate win win" – The CEO wins; the executives win.

"we generate tortoise and hare" – Like a hare pursuing profits; like a tortoise pursing ethics.

"we generate independence" - Financial independence for executives.

"we generate triple standard" – Duke has blown way past the old double standard!

"we generate gifts" – Stock options, retirement bonuses – all for the executives.

"we generate boomerang" – Unfulfilled promises have boomeranged back against Duke.

"we generate contrarians" – Whatever is in the press, Duke has an opposite version.

"we generate clarity" – The only thing clear is the avid use of smoke screens.

"we generate no. 14" – There were 14 lawsuits; now there are many more.

"we generate who says!" – The IRS, the SEC , the DOL, the DOJ, the EEOC.

"we generate what if" – What if we reduced benefits 10%...15%...25%...

"we generate dinkum" – Also, pabulum and “stinkum.”

"we generate promise" – But do not generate delivery to employees!

Panel Refuses Duke a Quick Decision

Coastal Alliance on Plant Expansion – Press Release – September 6, 2002

A panel of the California Energy Commission (CEC) has refused to give Duke Energy a quick decision on two high-profile issues in the Morro Bay Power Plant expansion case, which Duke had said it needed to decide "whether, how and when the project moves forward."

Duke's request came amid its cancellation or postponement of six power plant projects across the nation in recent weeks following a sharp cutback in capital spending on new plants.

Duke had asked for an "intended decision" on whether diversion of water from the Morro Bay National Estuary by a proposed new and larger power plant would be permissible under state law and whether installation of "dry cooling" chambers at the plant site would be feasible.

The panel, a two-member committee that has been reviewing Duke's proposed project for nearly two years, said it would prefer to issue a decision later on the overall project containing "all the Committee's logic and reasoning," which it said "will generate a better and more reliable result." It said it saw no compelling need for a quick ruling on water use and dry cooling feasibility. Its order was made available yesterday. The CEC staff, the Regional Water Quality Control Board staff and the Coastal Alliance on Plant Expansion, a nonprofit citizens group that is an intervenor in the project review, urged the Committee to reject Duke's request.

The panel did grant Duke's request on a third point by stating what the committee considers a "baseline" of water use by the 47-year-old existing plant for purposes of comparison with the proposed new plant's expected water use, if it is allowed. This comparison is used under the California Environmental Quality Act to determine if the new project will have greater environmental impact.

If more water would be used, the impact would be greater, and therefore the CEC would have stronger legal grounds for requiring alternative cooling technologies, such as dry cooling, if it votes to license the plant.

A team of marine scientists hired by the CEC and water board has determined from sampling studies that diversion of water by the existing plant would kill up to 33% of the larvae and eggs among the estuary's fish species. If water use would increase, the proportion of fish species would increase, the CEC staff has said.

The panel ruled that the baseline is the five-year average of water use between 1996 and 2000, or 387 million gallons a day. CEC staff reports have stated that the new plant would use more water--up to 475 million gallons a day at times, which could coincide with "spawning and other life-cycle events that can dramatically increase impacts" on the estuary's fish population.

In order to prevent the plant from killing fish and other marine life, dry cooling, which uses no water, has been recommended by the CEC staff, the National Marine Fisheries Service, the California Coastal Commission staff and the California Department of Fish and Game staff.

The Duke plants that have been canceled or delayed are located in New Mexico, Arizona, Washington, Illinois and Florida. Duke officials have said all projects--including the one proposed in Morro Bay--"are going to be looked at carefully to see what projects go forward."

According to media reports and Duke's own filings with the Securities and Exchange Commission (SEC), Duke is mired in legal, regulatory, financial and market problems that prompted the corporation to cut capital spending significantly in 2003 and 2004. The new Morro Bay plant, if licensed and built, would be finished in 2005.

Duke's SEC filings said it is the target of more than 30 shareholder and electricity purchaser suits, which charge it improperly engaged in the so-called "round trip" trades that resulted in an alleged overstatement of revenues over a three-year period of approximately $1 billion. It also is under investigation by federal and state agencies for the alleged unlawful manipulation of the California wholesale electricity markets, Duke reported to the SEC.

Duke told the SEC that its earnings were reduced by $17 million after revealing that it had engaged in 89 round-trip trades, Bloomberg News reported.

The CEC committee's order on the Duke motion is available at:

CEC Committee's Order

Previous Morro Bay article:

Duke Power Project Hits Roadblock

Energy Fire Sale

Wall Street Journal – by Kathryn Kranhold - September 2, 2002

(8/27/02) - WARREN BUFFETT LED the way. Now, a number of big private-equity investors are taking a close look at the energy industry in the hopes of picking up potentially lucrative assets on the cheap. In recent weeks, deep-pocketed firms such as David Bonderman's Texas Pacific Group, the Blackstone Group, Boston's Thomas H. Lee Partners, and Chicago's Madison Dearborn Partners and Apollo Advisors LP have begun analyzing the financial prospects of power plants and pipelines, people familiar with the situation say.

The assets belong to a slew of power companies laid low by the collapse of the merchant energy market in the wake of industry pioneer Enron Corp.'s filing for Chapter 11 bankruptcy protection in December. Many power companies borrowed heavily to expand into the merchant power business of generating electricity that is sold at market prices to utilities, which resell the power to their customers. But, hit by credit-rating downgrades and a cash crunch from lower power prices, as well as a steep decline in electricity and natural-gas trading, companies are looking to sell assets so they can raise cash and stay alive.

So far, few deals have been cut, in large part because buyers and sellers still remain far apart on price. But interest is picking up in the wake of a couple of big-ticket purchases by MidAmerican Energy Holdings Co., which is part-owned by Mr. Buffett's Berkshire Hathaway Inc. In the most recent of these, MidAmerican closed a deal to buy Dynegy Corp.'s Northern Natural Gas pipeline subsidiary for about $1.8 billion in cash and debt.

Private-equity firms haven't typically been big players in the power industry, which traditionally has offered low returns, required huge amounts of capital and has been heavily regulated. But with the advent of deregulation in the mid-1990s, the energy industry started taking on some characteristics that make it more attractive to private-equity investors.

During that period, electric companies and their unregulated subsidiaries roamed the globe buying and building power facilities to show Wall Street that they, too, could be growth companies like their telecom and Internet counterparts. Attracted by the prospect of higher returns, Goldman Sachs Group Inc. pushed into the merchant power market, forming Orion Power Holdings in 1998. Last year, it sold the company to Houston's Reliant Resources Inc. for $2.9 billion.

Kohlberg Kravis Roberts & Co. also dipped into the business, investing in 2000 in DPL Inc., a Dayton, Ohio, electric utility and merchant energy. The firm partially cashed out last year.

But KKR and Goldman haven't had a lot of company -- until now. In recent weeks, merchant energy companies such as Dynegy, Mirant Corp., Aquila Energy Inc. and CMS Energy Corp. have begun announcing they want to sell assets. The list of assets for sale ranges from a majority stake in British utility Midland Energy that Aquila put on the block after buying it in May to Duke Energy Corp,'s Empire Pipeline in western New York. Empire, a 150-mile pipeline, was part of Duke's $8 billion acquisition of Westcoast Energy Inc. this year.

"Marketplace inquiries have led us to begin evaluating outside interest in the Empire Pipeline. As with any asset, we're willing to consider offers from those whose valuation of the system might be greater than ours," says Duke spokesman Terry Francisco, though he adds that this doesn't signal any big Duke sell-off. Pipeline firm El Paso Corp. is expected to sell a significant portion of its 4,000 megawatts of merchant power plants; the plants are in a special-purpose vehicle called "Project Electron," which the company is currently looking to unwind, say people familiar with the situation. An El Paso spokesman declined to comment.

All together, some energy analysts predict that plants with generating capacity totaling as much as 100,000 megawatts, or about one-eighth of the country's power supply, could be unofficially up for grabs as companies such as AES Corp., Calpine Corp. and Mirant look to raise cash to strengthen their balance sheets. "Merchant generators born into a bull market used excessive leverage and now must manage through a down cycle," says Michael Johnson, a banker with Deutsche Bank AG.

This means opportunity for the private-equity firms, and possible much-needed capital for energy companies. "The financial firms can provide an important source of capital in a market that currently has a lack of liquidity and needs more capital," says Jeff Holzschuh, who heads the global energy group at Morgan Stanley.

Power companies have little choice but to seek private equity these days, says Erroll Davis Jr., president and chief executive of Alliant Energy Corp., which owns electric utilities and has a merchant power subsidiary that is seeking to buy assets from other firms. Mr. Davis says his finance people "are leaving no stones unturned" in looking for new sources of funding, including private-equity firms, because "other sources are drying up."

Still, energy companies are reluctant to part with their assets at a price the private-equity firms seem to be willing to pay. Financial analysts say many energy companies would sell a plant or pipeline if they could get 80% of the replacement value. Potential buyers, however, are hoping to pay only about 50% of replacement costs, says Mr. Johnson of Deutsche Bank. The reason more deals haven't been done is that, in many cases, the lower price wouldn't cover the debt used to finance the plant, he adds.

In the meantime, private-equity shops, which don't have the trading and risk-management capabilities to run a group of power plants, are scouting for managers who have the skill to do the job. People familiar with the discussions say some firms are moving toward backing a handful of management teams. For example, Michael Polsky, who previously sold an independent power company SkyGen Energy to Calpine for $650 million plus debt, has formed a new energy investment firm called Invenergy LLC that has raised private equity to invest in the industry.

No one expects a rash of plant sales anytime soon. Both private-equity firms and Wall Street financial institutions are still waiting for the prices to drop further.

Mr. Johnson predicts plant owners will "resist selling until liquidity concerns override" the long-term cash value of the plants. He says some owners may sell a portion of their assets to "preserve the upside" on the remaining assets.

For Sale: Power Plants and Pipelines

Energy companies, facing cash crunches, are putting assets on the market, quietly in some cases.

COMPANY: Duke Energy
LOCATION: Charlotte, N.C.
ASSET: Empire Pipeline

ASSET: Power plants

ASSET: Power plants and 49% interest in WPD, a British electric utility co-owned with PPL Electric Utilities.

COMPANY: FirstEnergy
LOCATION: Akron, Ohio
ASSET: Power plants

LOCATION: Dearborn, Mich.
ASSET: Panhandle Eastern Pipe Line Company

LOCATION: Kansas City, Mo.
ASSET: 79.9% stake in Avon Energy Partners Holding Co., owner of British electric utility, Midland Electricity

Duke Pipeline Opposed

The Roanoke Times – by Lois Caliri - September 2, 2002

(8/22/02) - Opponents of Duke Energy's proposed natural gas pipeline will be in Washington, D.C., today asking the federal government to reopen the draft environmental-impact study.

Opponents say East Tennessee Natural Gas, whose parent is Duke Energy, withheld information from the statement that was issued in April. They also say East Tennessee bypassed staff at the Federal Energy Regulatory Commission by asking the commissioners to issue a ruling by Sept. 5 on whether it can build the pipeline. The 24-inch-diameter pipeline, called the Patriot Extension, would stretch through Tennessee, Virginia and North Carolina, ending in Rockingham County, N.C.

"We have provided all the environmental information requested by FERC and have complied with FERC timelines and filing requirements," said Gretchen Krueger, spokeswoman for East Tennessee. She also said it's not uncommon to send a letter to the commissioners, and staff also received a copy of the letter. East Tennessee said it wants enough time to safely build the pipeline so it can move natural gas to its customers by May 1, which would meet the customers' demands.

However, the Blue Ridge Coalition argues there are unresolved environmental issues relating to East Tennessee's proposed 93-mile pipeline.

Also, the National Committee for the New River submitted an issue paper Aug. 19 to FERC. The paper asked for more disclosure about environmental effects and for more public comment about the effects of the proposed pipeline on the New River and the New River Trail State Park.

What concerns the National Committee for the New River is FERC's recommendation to East Tennessee that it submit plans for crossing the New River and the New River Trail State Park before construction of the pipeline. The committee argues that the plans should have been submitted before the environmental impact statement so the public could comment.

East Tennessee has proposed crossing the river by drilling under it or by cutting an open trench. The company also plans to either drill underneath or cut an open trench through the new campground at the New River Trail State Park. FERC suggested there be no open trench through park property. The draft statement did not disclose that the proposed gas line route would pass through the state park on the south side of the river that is under development for a campground, the committee said.

Only after the public comment period ended did East Tennessee disclose specifics to FERC on the use of drilling under both the river and the park, the committee said. In those comments, the company said that the drilling has a 30 percent chance of failing.

The company's engineers said the New River area has a subsurface of "very poor quality limestone and dolomite" that could affect drilling because of loose rock fragments falling into the hole. Therefore, the open trench would be required.

"From our standpoint, the environmental impact of the open trench is disastrous," said Jeffrey Scott, executive director of the National Committee for the New River. "An open trench would create a permanent 50 -- foot to a 100 -- foot scar upon which no trees could be planted or buildings built through the campground area."

The Blue Ridge Coalition also said East Tennessee withheld documents from the public until after the draft statement was issued.

Among them are :

--The wetland delineation report was prepared in October, but East Tennessee submitted it to FERC on June 17, the last day for public comment on the draft statement. The day after, FERC extended the public comment period for two weeks. Opponents argue they weren't given enough time to prepare rebuttals. Another study on potential drilling crossings of Big Reed Island Creek and Dan River also was submitted June 17.

--The Virginia Department of Conservation and Recreation has recommended the New River and Big Reed Island Creek be evaluated for designation as Virginia Scenic Rivers. East Tennessee has applied for an amended application, completely altering more than 30 miles of the proposed route, and plans for several compressor stations. Henry County Power, the largest single customer for East Tennessee, has voluntarily suspended its state application for its gas - fired power plant. And since the draft statement, a potential buyer of Henry County has abandoned its purchase plans.

Duke, Others Face Federal Audit

Reuters – August 31, 2002

WASHINGTON, Aug 29 (Reuters) - The Federal Energy Regulatory Commission (FERC) has asked affiliates of Xcel Energy Inc., Duke Energy Corp. and 10 other electricity and pipeline companies to submit additional data as part of an audit of their annual financial disclosures.

Electricity and natural gas companies must file basic financial data with FERC every year on assets and liabilities.

In an industry-wide audit of data from 1998 through 2001, FERC accountants found some firms listed negative balances for their accounts receivable instead of positive balances, the agency said in letters sent on Tuesday and available on the agency's web site.

The firms' "accounts receivable from associated companies" had a negative balance for some of those years, when "generally, asset accounts should carry a positive balance," John Delaware, FERC's chief accountant, wrote in the letters.

FERC gave the firms until Sept. 30 to explain the balances.

A FERC spokesman said he did not know if the financial data requested from the 14 companies was connected to the agency's proposal earlier this month to tighten cash management or "money pool" rules for large companies with utility or pipeline affiliates. Money pools are established by a corporate parent to provide unsecured, short-term loans to subsidiaries at low interest rates.

Companies selected for the audit include two affiliates of Xcel Energy -- Southwestern Public Service Co. and Public Service Co. of Colorado. Audit letters were also sent to two pipeline units of Duke Energy -- Algonquin Gas Transmission and East Tennessee Natural Gas Transmission…

Franklin Utilities Fund Dumped Duke

CBS.MarketWatch.com – by William L. Watts – August 31, 2002

(8/30/02) - RANCHO CORDOVA, Calif. (CBS.MW) -- To say it's been a wild year for the utility sector would be a shocking understatement.

For Bob Becker, manager of the Franklin Utilities Fund, the fallout from the Enron scandal, regulatory probes of other power generators, and falling power prices has spawned an emphasis on integrated companies with visible earnings and cash flow.

Becker began dumping some formerly red-hot holdings such as Mirant last fall, disposing of the stock at around $29. Duke Energy, another former high-flier, was sold off in the winter as the fund grew increasingly worried about firms with significant exposure to market power prices and exited virtually all of its pure plays in the commodity sector and reduced its exposure to merchant generators.

Both Mirant and Duke were picks Becker made in a May 2001 Stockpickers column.

The fund always avoided pure plays in the energy trading and marketing sector, such as Enron, Becker said..

"We view [trading and marketing] as an important skill set to have, but it should be used for the purpose of mitigating commodity price risk" rather than as a profit center unto itself, he said…

Scandalous CEO Salaries

Associated Press – by Matt Moore – August 28, 2002

Executives at companies being investigated for accounting irregularities earned an average of 70 percent more between 1999 and 2001 than CEOs at large companies in general, a new report finds.

According to the Institute for Policy Studies and United for a Fair Economy, the CEOs of 23 large companies under investigation earned an average of $62 million from 1999 to 2001, compared with an average of $36 million for all CEOs in the annual Business Week executive pay survey.

The institute's ninth annual CEO pay study looked at companies under investigation by the Securities and Exchange Commission, Department of Justice and other agencies and which have had market capitalizations over $1 billion sometime since January 2001.

The companies include Adelphia, AOL Time Warner, Bristol Myers Squibb, CMS Energy, Duke Energy, Dynegy, El Paso, Enron, Global Crossing, Halliburton, Hanover Compressor, Homestore, Kmart, Lucent Technologies, Mirant, Network Associates, Peregrine Systems, PNC Financial Services, Reliant Energy, Qwest, Tyco, WorldCom, and Xerox.

Collectively, the CEOs at those companies earned $1.4 billion from 1999 to 2001.

Duke Downgraded by CS First Boston

CBS MarketWatch – August 25, 2002

(8/23/02) - Duke Energy forfeited 3.2 percent after CS First Boston sliced its rating on the energy company to a "hold" from a "buy."

Duke Power Protest at Belews Creek

Winston-Salem Journal – by Fran Daniel – August 23, 2002

Protesters say more in N.C. should be used

(8/22/02) - Unemployed construction workers gathered yesterday at the entrance of the Belews Creek Steam Station in Stokes County to protest what they allege is Duke Power's practice of bringing in construction workers from outside of North Carolina.

Duke Power denied the allegations.

About 64 people - including electricians, laborers, sheet-metal workers and pipe fitters - went to the steam station to express their concerns about Duke Power's hiring practices.

In addition, the protesters are upset about Duke Power's hiring practices in light of the Clean Smokestack Bill, which the General Assembly passed in June, said Gary M. Maurice, the business manager of the International Brotherhood of Electrical Workers, Local Union 342.

The legislation to reduce pollution is aimed at cutting emissions at 14 coal-fired power plants, including Belews Creek. Electricity rates for Duke Energy and Progress Energy customers will be frozen through 2007 to pay for the plant upgrades.

"This is an issue about North Carolinians going to work locally for jobs that they are qualified for at a cost that would be far less than what Duke is spending right now or incurring to seek former employees," Maurice said.

Maurice, who is also the president of the N.C. State Building and Construction Trades Council, said that a number of electricians (union and nonunion) called the personnel department of Duke/Fluor Daniel about jobs but were told that the company was hiring former Fluor Daniel employees.

The electricians were told that "if they couldn't find a sufficient number of former employees then they might give them consideration and call them back," he said.

But Duke Power and Duke/Fluor Daniel said that the allegations are untrue.

Duke/Fluor Daniel, a partnership between Duke Energy and Fluor Corp., is working on a project valued in excess of $325 million at the steam station.

Tom Williams, a spokesman for Duke Power, said that the project is part of a state plan to meet the Federal Clean Air Act.

"We are doing a project to reduce nitrogen-oxide emissions," he said.

Jeremy Dreier, a spokesman for Duke/Fluor Daniel and Duke Energy, said that the people who asked about jobs at Duke/Fluor Daniel misunderstood what was told to them.

"It's not true that North Carolina residents are categorically excluded or passed over in favor of people with previous Fluor Daniel experience," Dreier said.

"Duke/Fluor Daniel and Fluor Daniel have a certification process and this ensures that job applications and workers on the projects have the skills and qualifications necessary," he said. "If you have a resident nearby from any (area) who has already been certified to work on a Duke/Fluor Daniel or Fluor Daniel job, they move to the head of the line. This does not preclude people from getting certified for a job."

When Duke/Fluor Daniel goes into the marketplace, Dreier said, it has to be competitive in order to get contracts.

"So the very foundation of work is that it's competitive and it's competitive in terms of quality and cost," he said, referring to skilled craft workers such as electricians, pipe fitters and sheet-metal workers. "Our focus is on hiring quality, qualifications and competitive cost."

He said that a key in hiring is the skills of workers and their availability. The work force and profile of craft workers at a project the size of Belews Creek fluctuates, said Dreier, so there can be 300 workers on a site one month and 900 another.

The current work force at the steam station is about 650. Of those workers, 40 percent are from North Carolina and the majority of the other workers are from Virginia and South Carolina, Williams said.

"The plant is employing both union and nonunion workers to do this job," he said.

In making his case for the cost-effectiveness of hiring craft workers from North Carolina, the union's Maurice said he has shown Jerry Kelly, the director of construction for Duke/Fluor Daniel, a spread sheet that shows a savings of $368,400 in electrical work alone if they don't hire out-of-state workers.

"If they were concerned that they couldn't find enough people, all the various building trades and local unions are willing to work with them," he said.

Maurice said that the Clean Smokestack Bill freezes utility rates at their current level for five years and produces the revenue for Duke Power to pay for related costs involved in meeting the emission standards contained in the new law. He said that electrical rates were scheduled to decrease but are now frozen at a higher rate.

The protesters say they feel that, as Duke Power customers, they shouldn't have to pay higher rates when Duke Power is spending more than necessary for qualified workers, Maurice said.

But Williams of Duke Power said that the current construction project, which will run through 2004, at the Belews Creek Steam Station has nothing to do with clean smokestacks. He said that the $325 million Belews Creek project is being done within existing rates, which are at 1986 levels.

Sham Trades Inflated Duke’s Profit

Wall Street Journal – August 23, 2002

(8/22/02) - Duke Energy Corp. said it adjusted pretax earnings downward in the second quarter by $19 million after completing an internal probe into round-trip trading.

The adjustments had been made before the company reported earnings in July but were only disclosed in the company's quarterly filing with the Securities and Exchange Commission earlier this month.

A Duke spokeswoman declined to specify why the accounting adjustments were made. She also wouldn't say how much of the adjustments were directly connected with the company's previously disclosed round-trip trades, which are mirror-image swaps that have artificially inflated trading volumes and revenue. Duke had said those round-trip trades didn't affect earnings.

The company reported second-quarter net income of $474 million on revenue of $16.33 billion. Those figures included the impact of the $19 million adjustment.

In the course of an internal investigation prompted by inquiries from federal investigators, "we found errors, not all necessarily related to round-trip trades," Cathy Roche, the Duke spokeswoman said. She added the company made corrections to trading-related earnings "in both directions," but she said, "I can't break it down any further than that."

Earlier this month, Duke said an internal probe found its traders executed 89 round-trip trades.

Separately, Duke said it suspended construction on two new Western power plants, a move that pushed down the stock of construction company Fluor Corp. by 11%. Fluor is a partner in building the projects.

Duke said it decided to review the plants' construction schedules because of declining wholesale energy prices. Construction was suspended on a 600-megawatt plant located in Elma, Wash., and a 570-megawatt plant in Deming, N.M. Both are about 40% complete, Duke said.

The plants are being built by Duke/Fluor Daniel, a joint venture between Duke and Fluor.

Fluor, based in Aliso Viejo, Calif., said the move by Duke, which is the owner of the two plants, won't materially affect Fluor's 2002 earnings guidance. A Fluor spokeswoman said the company couldn't comment on whether the suspension could affect its 2003 results…

Duke - Page 10 - 2002