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DukeEmployees.com - Duke Energy Employee Advocate

Duke - Page 3 - 2003

"The secret behind the numbers at Duke is starting to come out." - Melissa Davis, TheStreet.com

Duke Says No Dividend Cut in 2003

Reuters – March 2, 2003

NEW YORK, Feb 28 (Reuters) - U.S. power company Duke Energy Corp. said on Friday its business plan for this year will enable it to preserve its common stock dividend at the current level.

"Our plans for 2003 fully support the dividend at current levels," Treasurer David Hauser said on a conference call with investors and analysts. "While the Board of Directors has the final decision on dividend policy, the current plan was approved with dividend at current pay-out of $1.10 per share."

Several utilities, including El Paso Corp. and Dynegy Inc., have responded to an industrywide credit crunch by slashing their dividends or eliminating them outright to conserve cash, leading investors to speculate whether Duke might follow suit.

The Charlotte, North Carolina company, which has cut nearly 10 percent of its workforce and is in the process of selling assets to raise cash, has suffered from a meltdown in the energy-trading market prompted by Enron Corp.'s collapse.

Also during Friday's conference call, Hauser said Duke was expected to have about $4.65 billion in cash on-hand for the year, which includes $1.1 billion in proceeds from expected asset sales.

Of that $1.1 billion, nearly half is expected to come from sales at its Crescent Resources real estate development unit. The remaining $600 million will come from sales of other assets but does not include the potential sale of merchant power plants.

"Duke has a good pot of assets other than merchant power plants we are looking at selling," Hauser said. "The base we are working off of is over a billion dollars of potential."

Capital expenditures are expected to be below the $3.2 billion set aside for the year after the company deferred construction plans on three power plants.

"With regard to capex, the $3.2 billion budget that we have, we are very confident we will come in under that number," Hauser said.

The company has $1.3 billion worth of debt maturing this year, some of which will be paid off while the rest is refinanced. Duke also plans to take steps to reduce its short-term debt in 2003.

Fired Duke Employee Wins Jury Award

Houston Chronicle – by L. M. Sixel – February 27, 2003

(2/25/03) - A jury has awarded a former natural gas trader $545,000 after finding he was unfairly fired over a sex harassment complaint weeks before he was to receive $450,000 in stock options.

The state district court jury also found that DETMI Management, a subsidiary of Duke Energy, discriminated against Vicente Garcia on the basis of gender and age.

Garcia was fired in December 2000 after a secretary claimed he was stalking her, his attorney, Ellen Sprovach, said. But taped phone conversations between Garcia and the secretary revealed both laughing and joking about the stalking complaint, Sprovach said.

The phone conversations, which weren't listened to by company officials who investigated the complaint, are taped in the everyday course of business in a trading firm, Sprovach said.

Regarding Garcia's own complaint about gender discrimination, he said he complained to the company, before the harassment allegation was lodged against him, that a director was harassing him, referring to Garcia as a "thief" who is "robbing us blind," Sprovach said.

The company hadn't investigated the complaint, she said, which indicated it treated men's and women's harassment complaints differently.

The jury, which deliberated about four hours before reaching its verdict Friday, also found that Garcia was discriminated against because of his age. The 49-year-old was referred to by supervisors as the "older male" several times.

Garcia had received stock options in 1998 that he could exercise three years later. Because he was terminated six weeks before the options vested, Garcia did not receive the $450,000 he was expecting.

Garcia, whose annual salary was $92,000 plus bonuses, couldn't find another trading job after he was terminated. He is working as a plant dispatcher for another energy company for $60,000 a year.

Duke Energy is examining its options with respect to its next legal steps, spokesman Stephen Morisseau said.

Duke’s Private Commissioner

San Diego Union-Tribune - by Ronald W. Powell - February 26, 2003

(2/16/03) - Files retrieved from the laptop computers of former Port Commissioner David Malcolm provide the sharpest outlines to date of his business dealings with port tenant Duke Energy - a relationship that led him to step down.

Documents from the files show that Malcolm partnered with Duke in a plan to buy, operate and decommission power plants across the country for profit. The template for the power plant acquisitions was Duke's lease of the South Bay Power Plant, which Malcolm spearheaded while serving on the Port Commission.

He lobbied city politicians in Washington, D.C., and Alexandria, Va., and congressional representatives to help Duke and his private company, Public Benefit Power Co., acquire waterfront power plants in those cities.

Malcolm also drafted a proposal that would have allowed Duke to walk away from its 10 1/2-year lease with the Port District for a fee. He proposed receiving 3 percent of the construction costs of the replacement plant, which Duke is required to build under its port lease. That fee could have netted him millions of dollars.

The District Attorney's Office has been examining the files since last spring, when it took possession of the two laptop computers. The office has declined to make the files public, but The San Diego Union-Tribune obtained copies.

Asked for an interview on the computer files, Malcolm declined. "No thank you. Have a good week," he said.

District Attorney Bonnie Dumanis, who took office in January, said she will intensify efforts to conclude the Malcolm investigation, which is more than a year old, but declined to provide a time frame for completion.

Dumanis pledged to vigorously pursue the conflict-of-interest allegations involving Malcolm's relationship with Duke to see if the evidence warrants prosecution.

"We're on it," she said last week.

'Cloud' over port

The District Attorney's Office has conducted tape-recorded interviews with most of the port commissioners who worked with Malcolm in 1998 and 1999, when he took the lead in pressing for Charlotte, N.C.-based Duke to operate the South Bay plant. The $110 million lease went into effect in April 1999.

About a year later, Malcolm began working for Duke as a consultant at $20,000 a month. Shortly after his consultant position became public knowledge, Malcolm resigned from the Port Commission on Jan. 4, 2002.

Part of the district attorney's investigation centers on the files from two Port District laptop computers issued to Malcolm for use on port business.

Duke officials have denied wrongdoing in their dealings with Malcolm.

Some port commissioners are incensed that the investigation has not been completed.

"This kind of thing makes me sick," said Port Commission Chairman Jess Van Deventer. "It leaves a cloud over the Port Commission. Everywhere I go, there's a shadow."

Van Deventer said he and his wife recently introduced themselves to a couple attending a Professional Golfers Association dinner in Torrey Pines.

"The first thing they asked about was the David Malcolm scandal," he said.

Said Port Commissioner Stephen Cushman: "I'd deeply appreciate it if the DA would wrap it up."

Dealings with Duke

Documents from the files suggest Malcolm was working with Duke on power plant deals before Duke's lease with the Port District went into effect on April 28, 1999.

A sampling:

Two unsigned copies of contracts between Malcolm and Duke, dated January 1999 and March 1999, outline how they would work together to acquire and operate power plants across the country.

The January contract guaranteed that Duke would have the option of 49 percent ownership of any power plant acquired by Public Benefit Power.

The March contract assigned 49 percent ownership to Malcolm's company and 51 percent ownership to Duke of any power plant acquired.

On March 28, 1999, Malcolm wrote a letter to prominent local developer Tawfiq Khoury about a possible power plant deal in Alexandria, Va. Malcolm notified Khoury, an investor in Malcolm's Public Benefit Power Co., that he was meeting with Alexandria Mayor Kerry Donley about buying a power plant in that city.

"I'm meeting with the mayor the week of the fifth (of April) to get his approval on an exclusive negotiating agreement. Duke is flying into San Diego Tuesday to meet with me on San Francisco, Alexandria and a game plan for the U.S.

"The gentleman I started negotiations with at Duke has been replaced. I met his replacement when I was in Houston and he seems very supportive. They have been moving very slow so I hope things will improve with management now in place. I'll let you know how the meeting (with Mayor Donley) goes on Tuesday."

On April 9, 1999, Malcolm sent a thank-you letter to Donley for meeting with him to discuss the Alexandria power plant deal.

"Please be assured that the team of Duke Energy and Public Benefit Power will complete this worthwhile endeavor," Malcolm wrote.

After the Duke lease in Chula Vista took effect, Malcolm sent letters to elected city officials in Virginia and Washington, D.C, as well as to congressional representatives in attempts to acquire the Benning, Buzzard Point and Potomac River power plants.

In several letters, he said he enlisted the assistance of U.S. Rep. James Moran, a Democrat who represents the northern Virginia suburbs, and U.S. Rep. Maxine Waters, a Democrat from Los Angeles, to help his partnership obtain the power plants.

"Attached are letters from Congressman Moran and Mayor Donley to Pepco (Potomac Electric and Power Co.)," Malcolm wrote to Khoury in September 1999. "Congresswoman Maxine Waters has also informed Pepco and Moran of her support of the city of Alexandria."

Letter on lease

Port commissioners who served with Malcolm were particularly upset with an undated letter in which he proposes to help Duke abandon its 10 1/2-year lease with the port long before the lease expires.

Malcolm wrote that Duke could walk away in four years with the assistance of his company.

"Public Benefit Power would like the opportunity to work with Duke, the state Public Utilities Commission, the California Independent Systems Operator and State Sen. Steve Peace to obtain the necessary debt relief to build a new power plant in San Diego," Malcolm wrote.

(Part of Duke's deal with the port is that it will dismantle the South Bay plant before the lease expires and build a state-of-the-art replacement somewhere in the county.)

"Public Benefit Power would propose a fee of 3 percent of hard construction costs should an acceptable arrangement be made with all government agencies," Malcolm wrote.

Deputy District Attorney Sally Williams and district attorney investigator Vincent Giaime have conducted taped interviews with current and former port commissioners. Those interviewed include Van Deventer, Cushman, Patricia McQuater, Paul Speer, Frank Urtasun and Susan Lew.

"It seems they've got bits and pieces of information and they're trying to fit them together," said Speer, a former commissioner. "I don't know if I was able to help them any."

While port commissioners and others have criticized the pace of the investigation, Williams said that the probe is moving forward and that Dumanis, who defeated incumbent Paul Pfingst in November, has expressed particular interest in it.

"We're considering information we got from the laptops as well as a lot of other material," Williams said.

Lawyer Michael Aguirre has filed a class-action lawsuit against Duke and other energy companies alleging rampant overcharging of customers during the energy crisis.

"If the port's contract with Duke was procured by fraud or corruption, it might be set aside," he said. Aguirre, an unsuccessful district attorney candidate, said he is confident Dumanis "will vigorously investigate the case."

Duke Energy “Consultant” Resigns

Shareholder Fights Duke Over Dividend

Charlotte Business Journal – by Jen Zoghby – February 25, 2003

(2/21/03) - Federal regulators have forced Duke Energy Corp. to allow a vote on a proposal from a shareholder unhappy that Duke has increased executive salaries while keeping dividends constant.

The plan, to be voted on at the annual meeting in April, urges Duke's board to consider dividends in relation to corporate growth and executive pay. In his proposal, shareholder David Bailey writes, "In a sense, growth could be viewed as being financed on the backs of shareholders."

Duke sought to have the proposal excluded from its proxy because a federal regulation prevents shareholders from dictating specific dividend amounts.

Securities and Exchange Commission regulators excluded a similar proposal from last year's proxy, but they ruled last month that Duke must allow its shareholders to vote on the measure. Both proposals were written by Bailey, a 67-year-old retired engineer from Maryland.

The proxy fight comes at a time when analysts are debating Duke's $1.10 per share annual dividend on its common stock. Other companies, including some in the battered energy sector, have reduced or eliminated dividends. That led Duke Chief Executive Rick Priory to reiterate to analysts last week that the company would maintain its dividend.

A reduction in the dividend might cause a short-term hit for the beleaguered stock, he says, but it may be the right thing to do.

"They've been so adamant that they're going to maintain it," Meade says. "But the company would be more quickly returned, and long term I don't think (a dividend cut) would hurt them."

Duke's dividend is the fifth highest of corporations in the Standard & Poor's 500 index, as a percentage of its stock price, according to Bloomberg News. The company's total annual dividend payout approaches $981 million.

David Schanzer, an analyst at Janney Montgomery Scott, thinks Duke would be foolish to cut the dividend many of its shareholders depend on. "Duke is still held significantly by retail investors — your everyday mom and pop who sit on the porch and watch the dividend come in," he says.

The company still has a good reputation, Schanzer says, but that could be tarnished if the dividend is trimmed. "The dividend can be a place where they can pretty much regain that high ground."

Duke stock slipped to $13 per share last week, the lowest since November 1989. That's far from the 52-week high of $39.60 last April. On Wednesday, the stock closed at $14.19.

Bailey says he wrote the proposal because he wants Duke to consider the needs of its shareholders equally with its management compensation and its growth plans. "It's right that management be rewarded; it's not right that small shareholders be 'left behind,' " his proposal states. "Duke could still continue a 'growth' strategy, but perhaps slightly moderated."

He says Duke executives have been receiving significantly larger salaries and options during the past five years as the dividend remained constant.

"That may not matter to Duke's top executives or large institutional investors," his proposal states. "But it could to small investors who may need money for daily expenses or to 'seniors' who bought Duke some time ago as part of a retirement portfolio, counting on the income for things like medicines, doctor bills, food and, generally, greater self-sufficiency."

Duke spokesman Terry Francisco says Bailey's proposal is redundant because the board considers the dividend at least quarterly.

Bailey says he owns several thousand shares of Duke stock. He has written Priory on a number of occasions, continuing a habit that dates back to the days of late Chief Executive Bill Lee.

"I don't think Priory and the rest of them are doing a good job," Bailey said in a telephone interview from his Derwood, Md.-home.

He says the board needs more oversight from shareholders. "Whatever Duke management wants to do, the board acquiesces. I have not seen that the board does anything but tow the line."

In the aftermath of scandals at Enron Corp. and other companies, shareholders and labor unions have been much more active in filing proposals for inclusion in proxy statements.

The Investor Responsibility Research Center has tracked 629 corporate-governance shareholder proposals as of Feb. 1, compared with 527 for all of 2002.

Wake Forest University Dean Charles Moyer says shareholder proposals rarely succeed. In most cases, opposition from a board of directors will doom any proposal.

Moyer also believes the comparison between the dividend and executive salaries isn't valid because companies have to compete for top executives regardless of a company's performance. He says companies, such as Duke, are loath to reduce dividends because it signals the potential of tough times ahead.

"It's a very credible signal that the company is not as confident in the future as they have been in the past," says Moyer, who leads the Babcock Graduate School of Management.

Dividends were a key consideration in the days when energy stocks were largely investments in regulated utilities — a safe haven for steady, if unspectacular returns. Bailey says he understands the changes in the energy industry, but he questions management decisions of the past few years. "I think they've slipped," he says. "They're not the company they once were."

Yet some analysts, including Meade, question the consistent-dividend strategy in a changed era.

"It's maybe not the wisest thing to be paying out a pretty substantial amount of cash right now," Meade says.

Bailey says if the proposal doesn't pass, he'll be back next year. "I've done all I can do as a little man, as a little cog in the wheel," he says.

Research director Amy Shapiro contributed to this report.

Duke Must Allow Dividend Vote

The Charlotte Observer – by Stan Choe – February 23, 2003

5 years without boost leads shareholder to request policy inquiry

(2/22/03) - Federal securities regulators have ruled that Duke Energy Corp. must allow a vote on a shareholder's initiative asking the company's board to re-examine its dividend.

The initiative, similar to one Duke successfully blocked last year, was sponsored by a shareholder angry that Duke's dividend has not grown along with management salaries.

Unlike last year's initiative, which asked Duke's board to increase the annual dividend, this year's proposal simply asks the board to "re-examine present policies for establishing annual dividend yield that has produced no increase in five years."

A federal rule allows companies to block proposals if they require a maximum or minimum dividend payout.

Shareholders will vote on the proposal at Duke's annual meeting in April.

Charlotte-based Duke has again pledged a $1.10-per-share dividend this year. All the while, Duke senior management's salaries have increased annually, shareholder David Bailey says.

"It's right that management be rewarded; it's not right that small shareholders be left behind," he wrote in his proposal.

Duke tried to block the proposal from appearing on its annual proxy statement, but the U.S. Securities and Exchange Commission refused the protest.

Duke spokesman Terry Francisco said the proposal was redundant, as the company's board examines the dividend each quarter, when it votes on it.

Bailey, who lives in Maryland, said individual investors often depend on dividend payouts for income, and their costs for medicine, food and doctor bills are increasing.

Bailey's proposal comes as dividends are becoming more attractive to investors. President Bush is pushing a plan to leave dividend income untaxed for shareholders. Investors have also been opting more for the stability of stocks with cash payouts, rather than risking the wait for share prices to increase.

It's a turnaround from the late '90s, when many companies were pumping cash back into operations, rather than dividends, in attempts to boost share prices.

Duke says it will spend $1 billion this year in dividend payments, even as the company says it wants to sell assets to preserve cash. Duke lost $52 million last quarter, its first quarterly loss in three years, after being stuck with a hefty bill of unexpected costs and the U.S. economy's continued funk.

Credit agencies are slashing ratings for energy companies, including Duke, making it harder for them to borrow money. Duke has $1.3 billion in debt coming due this year. It plans to pay down several hundred million and refinance the rest.

Corporations Reject Safety Procedures

Reuters - February 22, 2003

US withdraws offshore oil pipeline safety proposal

WASHINGTON, Feb 21 (Reuters) - The U.S. Interior Department on Friday withdrew a proposal that would have imposed tougher pipeline safety procedures for firms drilling on federal leases in the Gulf of Mexico, after several companies raised concerns about the plan.

The department's Minerals Management Service withdrew a proposed rule to require oil firms to submit, in writing, the measures and procedures they are planning to ensure the safety of offshore workers and to prevent pollution before beginning any operation that involves cutting into a pipeline or opening a pipeline at a flange where two pipes are bolted together.

The agency said it withdrew the proposal, which was unveiled in August 2001, at the request of several energy firms that expressed concern about overlapping safety regulations between MMS and the Transportation Department's Office of Pipeline Safety.

"The withdrawal of this rule will not diminish the safety of offshore operations," MMS said in a notice published in Friday's Federal Register.

Affiliates of Duke Energy, CMS Energy, Shell Oil, and Enron had sent in comment letters on the proposal.

As a result of those comments, MMS said that rather than continue with new rulemaking, the agency would review and rewrite its current regulations in cooperation with the Office of Pipeline Safety to ensure both agencies have compatible rules.

MMS said it will publish a new proposal for public comment at a later date.

Another Duke Executive Quits

Dow Jones Business News – by Mark Golden – February 21, 2003

(2/20/03) - NEW YORK -- Duke Energy Corp.'s head of eastern U.S. gas and power trading is leaving the company's trading and marketing division at the end of February after about a month on the job, the company said.

The move comes on the heels of a series of management changes at Duke's troubled merchant energy division. Duke hasn't identified a successor to the executive, Lance Halgren, said spokeswoman Kate Perez.

"He's leaving to pursue some other business options," Ms. Perez said. "This has nothing to do with Duke Energy. It's just coincidental with what's going on with the rest of the company."

In December, Duke announced the resignations of Harvey Padewer, group president of Duke's wholesale operations, and Jim Donnell, president and chief executive of Duke Energy North America. In January, C. Gregory Harper was named senior vice president of energy marketing, taking over half of the responsibilities given in the spring to Nancy Deschane, who continues to serve in a transitional role.

In the second half of last year, the value of Duke's trading and merchant- generation contract portfolios fell some $1.6 billion. A small part of that was realized in cash, but the vast majority was due to a deterioration in the market value of those contracts.

Duke has significantly lowered its 2003 corporate earnings estimate, mostly because its unregulated operations look to be far less profitable amid lower wholesale power prices and a less active U.S. market for wholesale energy trading. In addition, Duke has been one of the targets of various investigations and lawsuits surrounding the California electricity crisis of 2000-2001.

"The nature of the industry right now is a challenge for everybody," Ms. Perez said.

As for Duke's trading situation specifically, several energy traders have said that in 2001 and 2002 Duke sold an enormous amount of electricity at fixed prices through the end of the decade, but the traders didn't see Duke buying a similar amount of natural gas to back up those sales.

Gas prices have more than doubled over the past 12 months, so electricity sales not supported by gas purchases would have suffered significant market losses.

Duke said recently that it has "substantially covered the costs of the requisite gas" for generating power sold under contract for 2003.

Duke's stock price has fallen 58% over the past 12 months. In late-morning trading on the New York Stock Exchange, shares of Duke were down 22 cents, or 1.6%, at $13.97.

Message From a Retiree, Stockholder

Employee Advocate – DukeEmployees.com - February 18, 2003

Message received from a Duke retiree and stockholder

Sir or Madam,

Mr. Priory made a comment a few years ago of which I have waited a long time to be fed back to him in the form of "crow". It has not happened, at least to my knowledge.

In a stockholders meeting held during the time that both high tech and electric companies like Duke (especially those in the merchant and trading business) were going great, Mr. Prior made the tongue-in-cheek comment that perhaps Duke's name should be amended to "Duke-Energy.Com".

I think that the proposed name is more appropriate now than it was at the time of the proposal. Remind him of this.

Stockholder and retiree from Duke

The Employee Advocate reply is below.

Message From a Retiree, Stockholder Reply

Employee Advocate – DukeEmployees.com - February 18, 2003

Reply to the above message

We did not let that little tidbit go without comment. In the January 2002 “Noon Rebuttal,” we noted:

“Mr. Priory is desperately attempting to build a glorious empire on a foundation of sand. The higher the tower grows, the more unstable it becomes. He may be wildly successful for a time, but the weak foundation will betray him eventually. Enron was wildly successful for a time, but their weak foundation eventually destroyed them.

“In fact, Mr. Priory has spent five years shaping Duke Energy into ‘Little Enron.’ He coveted Enron from the beginning, just as he coveted the Internet ventures, when they were soaring into the stratosphere. When the shaky Internet ventures collapsed, he wanted no part of them. He no longer wishes to call the company ‘DukeEnergy.com.’ ”

And, on November 10, 2001, in “Getting What You Wish For,” we commented:

“Not too long ago, Mr. Priory was so envious of the prospering internet companies that he threatened to rename Duke to DukeEnergy.com. Then the internet companies went down in flames, and just plain Duke Energy did not sound so bad after all.”

Sure, the matter could have been brought up more often, but far be it from us to rub things in!

Noon Rebuttal – January, 2002

Getting What You Wish For

Oh No! More Promises!

Employee Advocate – DukeEmployees.com – February 14, 2003

Hang on to you wallet. Duke is making more promises, according to the Associated Press.

Duke has a history of making promises. But that is not the problem. The problem is their poor history of actually keeping any of the promises!

Duke promised their employees that if they worked for 30 years, they would be entitled to an early retirement subsidy.

Duke made promises of retirement medical care if employees would work for them for 30 years.

Promises were made to ratepayers that deregulation would lower their power bills.

Rick Priory went on to make promises to investors of grand returns on Duke stock.

Duke has made a lot of promises to employees, investors, and ratepayers. How have all these promises worked out? Not too good!

Duke welshed on their early retirement promise. Instead of retiring at ages 51 to 55, workers will now have to labor until age 65 to eke out the same benefits.

Duke broke the retirement health care promise also. Employees who now survive to age 65 will be dumped into Medicare. Medicare was never more than a little better than nothing. G. W. Bush is working now to make it even weaker. Those already retired are finding that the “paid” health care is costing them more each year.

Many of the ratepayers suckered into the deregulation game found the promises of lower power bills to not be true. The payoff for some was quadrupled power bills!

The grand stock return promises have also turned sour. The actual return has turned negative.

Enron used to get blamed for everything. Now El Paso is the whipping boy. Each failure to deliver on the promises has been blamed on everything except the true cause – Duke’s own greed.

What is Duke doing for an encore? Why, making more promises, of course!

There has been much speculation that Duke will, again, curtail its dividend. In an attempt to “talk up the price of stock,” Rick Priory vowed that the dividend will not be cut. Mr. Priory cited the support of the duke board in making the promise.

This all sounds very good, but this is the same crowd that broke all of the other promises!

As Mr. Priory spoke on Thursday, the price of Duke stock rose from its 12 year low. P. T. Barnum was a very wise man.

Duke Vows to Maintain Dividend

Associated Press – February 14, 2003

CHARLOTTE, N.C. - Duke Energy Corp.'s shares continued on their roller coaster ride Thursday, as chairman Rick Priory vowed that the Charlotte-based company has no intention of cutting its dividend.

"Duke has paid quarterly dividends for 77 consecutive years," he told analysts at UBS Warburg's 2003 Natural Gas & Electric Utilities Conference in New York. "Our plans for 2003 . . . is for the continued payment of dividends at the continued path of $1.10 per share."

Priory said he has the support of Duke Energy's board in making that promise.

After losing nearly 7 percent of their value earlier in the day, Duke shares rebounded near the close and ended the day at $14.24, up 28 cents, or about 2 percent, on the New York Stock Exchange.

Duke Energy's stock has lost more than 50 percent of its value in the past year.

"The energy marketplace has not been sweet to us or the sector," Priory said. "We are taking strong and decisive steps to prepare for the future."

He blamed the recent volatility of the stock to problems with some of Duke's counterparts in the energy sector, particularly Houston-based El Paso Corp. The pipeline giant is facing federal investigations for potentially manipulating natural-gas markets.

"Our business strategy is strong and we are well positioned to take advantage when the recovery begins," Priory said. "We are at the low point of the business cycle and we see great opportunities to create value moving forward."

Shares of Duke Energy, the nation's second-biggest utility owner, have been trading near their lowest levels in more than a decade as rumors spread that it may be forced to cut its dividend.

But Priory made it clear at the conference that there are no plans in the works to do that. As he spoke, Duke's shares rose. Duke's dividend payment is among the highest on the Standard & Poor's 500 index.

Shares of Duke Energy fell to a 12-year low on Wednesday, losing $1.21. It was 1991 when Duke's stock last traded at that price.

Duke Director May be Out

The Charlotte Observer – by Stan Choe – February 12, 2003

Esrey may lose director's seat at energy firm

(2/11/03) - Executive troubles at Sprint Corp. have rippled to Duke Energy Corp., and the Charlotte company may have to jettison one of its high-profile board members.

The Internal Revenue Service is auditing tax shelters Sprint CEO William Esrey established under the guidance of Sprint's accounting firm Ernst & Young. The Overland Park, Kan., phone company is worried Esrey's personal financial dealings could taint it, and is searching to replace the top executive.

Duke wouldn't comment Monday on the status of Esrey's board membership at the energy company, except to point to its proxy statement. On page 19 is the company's resignation policy for board members.

"We have a policy stating that members of the Board of Directors are to submit their resignations when they change employment or have another significant change in their professional roles and responsibilities," the proxy says.

Esrey's term is up for re-election at Duke's next shareholder meeting in April.

Esrey could not be reached for comment Monday.

The 63-year-old has been on Duke's board since the company's 1997 merger with PanEnergy Corp. He had been a director of PanEnergy since 1985.

Esrey, a member of Duke's compensation and corporate governance committees, receives an annual $40,000 retainer for serving on the board. He receives an additional $1,000 for each board meeting he attends.

Among his duties on the governance committee is approving resignations of Duke board members.

An Esrey departure from Duke Energy likely would have a minimal effect on the company, analysts say.

"If you lose the chairman and the vice chairman of the board at the same time, that would cause concern," said David Schanzer, an analyst with Janney Montgomery Scott.

Schanzer doesn't own any Duke shares, and his firm doesn't do any underwriting for Duke.

If Esrey does resign from Duke's board, he would be joining Bill Coley, who's leaving Duke at the end of the month.

Coley, Duke Power President and a board member, is retiring after 37 years with the company.

Duke's bylaws require between nine and 18 members to sit on the board. The company currently has 12.

Duke Seeks Plant Delay

Associated Press – February 12, 2003

Critics call request an admission that board will reject the project

Duke Energy Corp. wants to deal with environmental concerns over its plan to build a power plant near the New River Trail State Park before a Virginia board decides on its application.

Duke Energy asked Virginia's State Corporation Commission to delay a decision on the application for the $275 million power plant, a move that Duke's critics hailed as an admission the project will be rejected.

"They were obviously worried that the plant would be denied if it went to the board," said Lynn Caldwell of the National Committee for the New River.

Last month, an administrative judge working for the three-member commission issued a 78-page report critical of Duke's proposal for the gas-fired generating plant in Wythe County.

Critics have focused on the Charlotte-based energy company's plans to draw about 7 million gallons of water daily from a nearby mine for use in the plant's steam turbines.

The abandoned Austinville lead mine was considered for the U.S. Environmental Protection Agency's Superfund toxic-waste cleanup program, but it was determined the contaminated water was sealed underground.

Critics worry the Duke proposal to turn the water from the mine into steam will cause air pollution. The project also could hurt tourism at the Foster Falls Recreation Area, about half a mile from the plant site, the report said.

The 57-mile New River Trail in southern Virginia, primarily used by bicyclists from North Carolina and Virginia, is 150 miles north of Charlotte, about a three-hour drive. The Foster Falls Recreation Area is the trail's approximate midpoint, just east of where the trail and the New River pass under Interstate 77.

Duke Energy officials said the company wants to work with the hearing examiner.

"We are hopeful that the commission will follow the recommendation to remand the case to the hearing examiner for further proceedings," said Lea Gibson, a spokeswoman for Duke.

Duke's opponents also want to kill the company's plan to build a 93-mile natural-gas pipeline that would cross four Virginia counties before entering North Carolina near Eden, 125 miles northeast of Charlotte.

The proposed power plant is listed as a major customer for Duke's $289 million Patriot pipeline, which the Federal Energy Regulatory Commission approved in November.

The National Committee for the New River and the Blue Ridge Coalition, a local group formed to fight the pipeline, are appealing the federal agency's decision.

A plan for Cogentrix Corp. to build a second gas-fired power plant near Martinsville, Va., has been postponed because of the slumping national economy.

Opponents say the gas pipeline is not needed if the commission denies Duke permission to build the 260-megawatt plant. The two power plants would use 56 percent of the pipeline's capacity.

Duke Looking Less Regal

TheStreet.com – by Melissa Davis – February 11, 2003

(2/7/03) - The secret behind the numbers at Duke is starting to come out.

Last week, Duke revealed new information about the true health -- and earnings power -- of its merchant energy business. The picture, while clearer, isn't exactly pretty.

In a nutshell, Duke can generate a whole lot more electricity than it can sell. It needs to hunt down additional buyers -- in an oversupplied market -- just to hit 2003 earnings targets. And in this regard it faces an uphill battle, as capacity grows and power prices decline, through at least 2004. That surprising fact has some observers reassessing just how strong Duke, the hardiest of the companies that once earned riches in the energy-trading business, really is.

"While we applaud more transparent disclosures, they also appear to illustrate a longer and more severe wholesale downturn than we previously anticipated," Raymond Niles, an analyst at Salomon Smith Barney, wrote last week. "Duke's disclosures paint, in our opinion, a rather stark outlook for their wholesale generation operations for the next few years and will continue to pressure Duke's valuation."

Niles is among a crowd of analysts currently recommending that investors hold, or even sell, Duke's stock. They look at Duke, once a Wall Street darling, as a risky investment going forward. Meanwhile, short-sellers -- who sniffed trouble ahead of the curve -- are citing new evidence that Duke was riskier than it seemed all along.

For its part, Duke blamed Wall Street's dim view of the company on "extreme conditions" in the merchant energy sector, while stressing that it remains generally healthy overall. But investors' newfound understanding of the bets the company is making will mean Duke remains under the microscope in an economy where uncertainty is becoming the rule. The company's stock, which is hovering near a 52-week low set last October, fell 29 cents to $16.50 Thursday.

If all goes as promised, Duke will deliver 2003 earnings of $1.35 to $1.60 a share -- at least some of it from Duke Energy North America, the company's troubled wholesale unit.

Duke's expectations for DENA have clearly fallen. At its peak in 2001, DENA generated $1.5 billion in EBIT -- more than every other division, except franchised electric, combined. This year, DENA must cough up only $200 million, matching last year's contribution from Duke's real estate division, to meet its earnings goal.

Even so, analysts are skeptical.

"This would seem to be a demanding target, given the current market conditions," said Steve Fleishman, an analyst at Merrill Lynch who rates the stock a sell.

Despite analysts' doubts, Duke spokesman Terry Francisco said the company remains "pretty confident" in its guidance for DENA.

For 2003, DENA has locked in contracts worth about $600 million -- or $250 million less than it needs just to break even. The company is, therefore, counting on $450 million worth of extra merchant energy business to hit its earnings target.

"They're making a bet," one short-seller said. "It's like setting up a hot dog stand and hoping people will buy."

If nobody at all bites -- an unlikely worst-case scenario -- up to 25% of Duke's projected full-year earnings could fall through. And from there, the company's new disclosures indicate, things may only get worse.

Downhill Trend

This year, Duke will generate 28 million megawatts of electricity -- or about one-third of the amount it's capable of producing. The company has contracts to sell all of that power, and even a little extra, at an average price of $51 a megawatt/hour.

But going forward, Duke's guaranteed power sales decline. For 2004, Duke has locked in contracts for 79% of its estimated production at an average price of $44/MWh. For 2005, Duke has hedged only 64% of its production at an even lower $39/MWh.

Francisco described the decline in hedges, and even prices, as typical. But Niles for one is troubled by that trend.

Francisco described the decline in hedges, if not prices, as typical. But Niles for one is troubled by the overall trend.

"For 2005, EBIT for DENA could drop ... to around zero in our estimate unless there is a meaningful improvement in market conditions," Niles wrote last week.

Armed with fresh disclosures -- and burned by past surprises -- analysts are relying less on Duke's management than their own calculators to estimate the company's earnings. Niles expects Duke to fall short of even the low end of its 2003 guidance. Meanwhile, short-sellers continue to rumble about an alleged lack of disclosure that they say makes Duke's forecasts murky at best.

Secret Ingredient

This isn't the first year Duke has built extra -- and uncertain -- trading profits into its earnings targets.

The company has issued similar guidance, with the same vulnerabilities, in the past. Wall Street just didn't know it.

Last year, Duke told investors that extra trading profits could push the company's earnings to the high end of its guidance. But Duke's new disclosures now indicate an even heavier dependence on trading than most people realized. Without those extra profits, it appears that DENA -- a turbo-charged profit machine in 2001 -- could have become a sudden money loser in 2002.

Duke said Thursday that it has always assumed "a minimal level of performance in trading" when figuring even the low end of its guidance. But short-sellers recall a far different story.

"Duke always said the way to get to the upper end (of guidance) was trading," said a utility fund analyst. "But in fact, to even get positive EBIT, it was trading."

That safety net has disappeared along with the trading boom. So critics warn that Duke must exploit other opportunities -- at a particularly inopportune time -- in an effort to bounce back.

Side Business

Duke is best known, and rightly so, as an energy company.

But it's also in the real estate business. Last year, Duke Ventures -- dominated by the Crescent Resources real estate division -- generated more money than either international energy or field services. This year, Ventures could easily surpass DENA with contributions to the bottom line.

Indeed, that almost has to happen for any upside earnings surprise.

"Running [the] numbers through our model would suggest that the real estate business will likely need to deliver higher earnings than in 2002 if Duke is to earn at the higher end of its stated range," Fleishman wrote in a recent report.

But critics are already challenging the quality of those earnings, calling them one-time gains rather than recurring income. Duke claims otherwise, comparing Crescent Resources to any other real estate business that counts real estate investments as expenses and -- in turn -- real estate sales as income.

"Crescent develops buildings and sells them," CFO Robert Brace said during a recent conference call. "So we don't consider them to be one-time gains at all."

But some people doubt that Duke can afford to keep buying real estate while money grows tight. And if Duke stops buying, these people insist, then Crescent's profits start looking more like one-time gains than ever.

"If you're not investing and you're just selling," one short-seller said, "then that income's not ongoing."

To date, Duke has yet to disclose how much of its 2003 earnings guidance hinges on real estate sales. It simply says it expects the real estate division to turn in a consistent performance this year.

Basket of Risks

Duke's guidance isn't the only -- or necessarily the largest -- concern for analysts right now.

Niles sees a potential threat to Duke's dividend, although the company says it's "very confident" in plans to fully fund the dividend this year. Analysts also worry about the deteriorating credit quality at Duke Capital, which could result in costly downgrades and -- even worse -- the need to issue additional stock.

Duke says it has no plans to issue equity in 2003. But analysts remain wary.

"Management did not disclose updated Duke Capital credit ratios on the conference call," Fleishman said. "But we suspect that the already stretched metrics have deteriorated further following the additional balance sheet writedowns seen in Q4."

Meanwhile, short-sellers warn of more -- potentially crippling -- writedowns to come. They support their claim by pointing to dwindling cash flows from power assets whose reported values have remained unchanged.

"They cannot afford to take those kinds of writedowns now because they might blow through their covenants and their ratings measures," one critic said. "But they've got to take them sometime."

So far, Duke has announced charges limited only to accounting changes. But the company admitted Thursday that it's "hard to say" whether major writedowns are coming.

Duke - Page 2 - 2003