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2003
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2002
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2001
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2000
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1999
Noon 1

The Noon Meeting was held in Charlotte, North Carolina on December 9, 2002. It was hosted by Ruth Shaw, executive vice president and chief administrative officer.

Ms. Shaw did not make any comments about hosting this meeting being a treat, as she did the last time. Rick Priory probably pushed her onto the stage, saying “I don’t want to face this crowd!”

She was probably muttering “Thanks for throwing me to the wolves!”

Ruth Shaw: First, Fred Fowler has been named president and chief operating officer for Duke Energy Corporation. As you know, we haven’t had anyone in that position since 1998, and I think it’s exactly the right move for our company at this time. Rick made the recommendation to our Board of Directors, who unanimously approved the recommendation. Having worked with Fred for five years on the Policy Committee, I also think he’s exactly the right person to do the job.

Employee Advocate: What did you expect her to say, that she thinks this move is all wrong and the timing is all wrong? Did you think she would say that her brother-in-law could do a much better job?

Unanimous board approval, evidently, is supposed to mean that nothing can go wrong. When Sadam Husein makes a recommendation, it is always unanimously approved. So, that can be a good indication that the right move has been made, or it can merely demonstrate that one man pulls all the strings.

Ruth Shaw: Coming out of 12-18 months in which our reputation has been assaulted and our business challenged, we need the teamwork of two very strong leaders. Fred’s hand will guide the stick of the day to day operations of our business units, and Rick will focus on strategy, corporate culture, our external constituencies and the Board of Directors.

Employee Advocate: Oh so, Mr. Fowler is going to guide “Stick” (Diversity and Ethics).

No, that’s not right.

Now we get it. It’s the carrot and the stick. Mr. Fowler will be applying the stick. Or, will he be applying the “Stick”?

Don’t forget that Mr. Priory will be off to Washington with a sack full of money to do some serious lobbying. Why the sack of money? Everyone knows that the more money you have, the more lobbying you can do. When everything is going wrong, just get the laws written in your favor. Hey, it worked for Kenny-boy, until he got just too greedy. That could be a problem. Kenny-boy was not the only CEO to be obsessed with power and greed.

Will any of this lobbying benefit the employees, investors, or ratepayers? Don’t count on it!

Complaining “our reputation has been assaulted,” implies that the company did absolutely nothing to deserve the bad press. The implication is that Duke was just walking along, full of goodwill for employees, investors, and ratepayers and someone jumped out from behind a Dumpster and assaulted their reputation.

Duke often tries to play the victim card, but no one is buying it. Duke is not the victim; Duke is the predator. Duke receives bad press for doing bad things. The underlying problem behind all of the negative headlines is GREED! Every time Duke is caught in some shady deal, they scream, “I’m a victim!”

Ruth Shaw: Fred quickly decided that he would eliminate the two group president positions – his former leadership role of Energy Transmission, as well as the Energy Services leadership position left open following Harvey Padewer’s resignation.

Employee Advocate: A lot is being glossed over here. The media reports gave the impression that Harvey Padewer and Jim Donnell resigned after their jobs were eliminated. Later articles said that they were forced out.

Ms. Shaw’s version is that Mr. Padewer resigned and then the position was eliminated. She skipped right over any mention of Jim Donnell. Mr. Fowler eliminated three president’s jobs, not just two, according to Dow Jones. Mr. Donnell is a human; he was a president and CEO. Don’t treat him like he never existed!

Eliminated Mr. Fowler’s old job was not too big of a deal, since he no longer occupied it. But what about the other two jobs (and people). Well, it is a sure fire way to eliminate any petty jealousy!

We can see where Mr. Padewer may have harbored some resentment, as he seemed to be on the fast track. As it turns out, he was on a fast track – right out the door! That’s the thing about fast tracks. One can never be exactly sure where the track will lead, only that one will get there fast.

Suffice it to say that there is probably a detail or two that has been left out of the story.

Ruth Shaw: We will enter 2003 with the restructuring of the unregulated power segment and come out of it as a stronger competitor.

Employee Advocate: So, they are still beating that dead horse. Rigor mortis has set in and they are still beating the animal! And, just what was it that brought about ninety percent of Duke’s problems? Deregulation - that's what! The root problem was greed; deregulation provided the vehicle.

Ruth Shaw: There will be more change to come in our organization because we’re taking advantage of this opportunity to realign the business for the future. Our structure has stayed basically the same for five years, which is a long time.

Employee Advocate: These have undoubtedly been the worse five years in Duke’s history. Extrapolate the rate of devolution into the future, and Duke would soon cease to exist. There is a common denominator. But far be it from us to put too fine of a point on things.

Ruth Shaw: In the midst of change, the fundamental values of this company stay the same.

Employee Advocate: We understand. Money still rules. It will still override people, ethics, and truth.

Ruth Shaw: As you look around, you’ll see integrity, stewardship, inclusion, initiative, teamwork and accountability.

Employee Advocate: That’s true. But one can only see these things in the employees. If only senior management could somehow get a grasp on it, there would not be all of these problems. Employees would still have their pensions, ratepayer’s would not pay quadruple rates, and investors would not be standing in the windows of tall buildings.

Ruth Shaw: We’re trying to wire them in, as you’ll see in the new code of business ethics.

Employee Advocate: (Sigh) It's statements like this that proves that management still does not have a clue. The foxes are forming a posse to bring the chicken thieves to justice.

The problems run so deeply that they will never be solved by nifty cookie cutter programs. They may partially achieve their real objective. The programs may distract some from the true cause. They may help run out the clock and allow time for a quick getaway.

Ruth Shaw: The code lives on the portal so we can keep it updated and make people aware of changes as soon as they occur.

Employee Advocate: How appropriate. Existing on the web, as a vapor of smoke, ever nebulous, easily malleable, shifting with the wind, easily twisted to fit any situation. “Pencil whipping” a situation would be as easy as, say, legalizing pension age discrimination, after the fact. And, as an added bonus, no lobbying dollars would even be required!

Ruth Shaw: We’ll go into 2003 as a year of rebuilding and restoration.

Employee Advocate: If the new tower is built on the same sand, expect the same results. Hey, why not run more “feel good” ads in The Wall Street Journal? They have been soooo successful!

Ruth Shaw: And the South Carolina Commission approved our settlement offer that resulted from the inquiry into alleged accounting irregularities at Duke Power.

Employee Advocate: Alleged? The accounting firm, which investigated the matter for a long time, found Duke guilty as charged. Duke paid millions of dollars to settle the issue. Does this sound like a mere allegation?

Ruth Shaw: Now, your questions.

Question: What is your personal opinion on what our Houston operations will look like in a year or so?

Ruth Shaw: Obviously, the growth in those businesses has slowed significantly and will result in a reduced number of employees.

Employee Advocate: Rick Priory, and others, said that Duke’s trading division would not be downsized. We can chalk that one up there with declarations that the collapse of Enron did not faze the electric markets. Saying that it is so does not make it so!

Question: What is your vision for international markets?

Ruth Shaw: A year from now, you’ll probably see a more limited focus and lower overhead than we have today.

Employee Advocate: So, things are will be getting back to more like they were about six years ago. There is just something about this disastrous time frame. (But we don’t want to put too fine of a point on it.)

Ruth Shaw: The question you haven’t asked, and I’ll preempt you, is about trading and marketing.

We have excellent capabilities in that area, and in logistical work and the component of trading as well, because we see value opportunities ahead. But I also think you’ll see us tailoring our staffing levels to fit the current and anticipated market demand.

Employee Advocate: Translation: Mr. Priory was wrong; heads will roll. That is, more heads will roll!

And, about financial derivatives; cowboys do not need to trade them! If a mistake is made, nothing will bury you any faster. They have brought down institutions much bigger than Duke Energy.

Question: I’m at the point in my life where I’m more interested in cash balance plans then some other people. I’ve heard other companies were underfunded in their cash balance plans; I’d like to hear how we stand in that area.

Ruth Shaw: We haven't made a contribution to the Retirement Cash Balance Plan since the late 1990's, in part due to the performance of the stock market, as well as the consolidation of the Duke Power Retirement Cash Balance Plan and the PanEnergy Retirement Income Plan.

The dismal performance of the stock market over the past year means many companies need to make a contribution to their plans. These are highly federally regulated plans with requirements about the funding level. At this point, we don’t know if we’ll have to make a contribution in 2003, because the actuaries have not come in and measured the funding level. If we’re required to make one, we will.

Employee Advocate: The truth is, Duke never intended to make another contribution to the plan. The cash balance conversion and equities appreciation were to make the plan totally self-funded. There were two problems with this grand plan. First it made liars out of Duke Energy senior management. Many employees will never receive their promised pensions. “Reducing pension liabilities” means that someone is not going to get what they were promised. Someone’s deferred compensation is going to evaporate. Guess who that someone is! The second problem was that there are never any guarantees with the stock market. It easily turns today’s gurus into tomorrow fools. Multiply what the stock market risk by 1,000 and you can get some appreciation of what financial derivatives can do for you. The real danger is that some hot shot will start playing “make up.”

There was some slight of hand in the phrase “the consolidation of the Duke Power Retirement Cash Balance Plan and the PanEnergy Retirement Income Plan.” This implies that Duke “saved” money by mere consolidation. Consolidation does not bring in the bucks that Duke took in. The cash balance conversion did it. The “saved” money was actually pension money that the employees lost. This is money that had been earned after years of labor. The conversion eliminated the early retirement subsidy and threw many employees into years of “wear away.” Some would never see any new pension money. Not exactly a mere consolidation, is it?

Question: In my many years at Duke Power, we have had a reputation for practicing high ethical standards in our work. Now, we have been questioned for our accounting methods. If we have been using an accepted accounting standard for years and people had faith in the honesty of our reports and filings, why did we decide to change to a questionable method of accounting? If one of our own employees was worried enough about this accounting method to report it, why did we still use it? If we said that we have done nothing wrong, why are we refunding millions of dollars to North and South Carolina?

Answer: (This is the entire answer.) We have always approached accounting for our nuclear insurance program differently than other utilities that own nuclear power plants. Duke Energy uses a regulatory-approved reserve account to protect against the cost and rate swings that would result from a substantial nuclear loss. In 1998, the reserve account totaled $100 million and we concluded that was adequate. At the same time, we were faced with the unusual situation where the cost to insure our nuclear operations was less than the nuclear distributions we were receiving from our founding membership in the nuclear mutual insurance company. After studying the issue, we concluded the distributions were not electric income, so they should not be recorded in the electric accounts. In our opinion, and in the opinion of other experts, to account for them in the electric accounts would not accurately reflect the income resulting from our electric operations.

In its accounting review, Grant Thornton rendered a different opinion, and the utility commissions agreed with that opinion. In our response to the Grant Thornton review, we made it clear that we disagree with that opinion. Having said that, we acknowledge we should have done a better job communicating with the commissions. We think settling the matter was the most effective way to bring closure and move forward with the commissions in a positive fashion.

Employee Advocate: That was a very thoughtful question, and very well written. Did there seem to be a tad of desperation in the answer? The Duke accountant did not believe Duke. The investigating firm did not believe Duke. The regulating commissions did not believe Duke. Duke paid up, but still babbles about allegations.

Question: In 2002 the minimum contribution required to RCBP was $0. Does this mean the company did not make any contributions to the fund for 2002? Additionally, since the inception of the RCBP, how many years has the minimum contribution been $0? If the conversion to a RCBP had not been made, can the company estimate if the pension fund would have required additions?

Answer: Currently Duke Energy has not made a contribution for 2002 to the Retirement Cash Balance Plan. The required minimum contribution has been $0 for five years -- since the transition to the Duke Power Retirement Cash Balance Plan in 1997 and the consolidation of that plan with the PanEnergy Retirement Income Plan. While it may be possible to estimate what any required contributions would have been if there had not been a conversion to a cash balance plan, the consolidation of the Duke Power and PanEnergy plans probably had a greater impact on required contributions than the conversion to cash balance.

Employee Advocate: Contributions are really not the problem. If a company gets behind, they can catch up. As long as they are paying the retirees what was promised to them under their implied contract, no harm is done. The cash balance conversion did real damage to many employees. The terms of their implied contract were violated. Promised deferred compensation was not delivered. Just because the baby boomers are a big crowd is no reason for them to be gypped!

That’s it in a nutshell. Big crowd equals big bucks. Duke wanted it. Duke took it. If you sit idly by, Duke will get to keep it. The ball is in your court.

G. W. Bush is fully owned by big corporations and wants to help them keep your retirement money. By legalizing the age discrimination aspects of cash balance conversions, after the fact, this can be accomplished. That is why all employees of all corporations need to go to the home page and access the direct link to the IRS comments form. Tell them loud and clear that you do not want the Treasury Department to legalize cash balance plan age discrimination.

Even if you work for a company that does not have a cash balance plan, these regulations will help ensure that you get one in the future! Save your pension while you still can! Send in your comments and tell your co-workers. Send a copy to your congressman and senators. This is the last train out. Don’t miss it!

The November 11, 2002, Noon Meeting was held in Charlotte, North Carolina. It was hosted by Rick Priory.

Rick Priory: As you know, I typically spend the first part of this session discussing the great progress we’ve made since our last meeting. I hope you also know that I’m committed to being forthright with you, so I’ll say up front that this meeting will address more challenges than progress. I’ll do my best to provide context behind the current headlines.

Employee Advocate: One has to keep a close eye on Mr. Priory. This month he tried to slide one by us with his first statement. Mr. Priory has been anything but forthright in dealing with employees and the public! That is exactly why he is facing a multitude of challenges and negative headlines. If one has others best interest at heart, he can afford to be forthright. If one has only his own best interest at heart, he dare not be forthright!

Speaking of headlines, last month Mr. Priory boasted of a TheStreet.com article about Duke. They have published another Duke article that Mr. Priory evidently forgot to mention:

California Could Be Duke's Waterloo

And, here’s one from September that Mr. Priory forgot to mention:

Blue Forecast Bedevils Duke

Yes, he did admit that he is address more challenges than progress. But that revelation is about like the captain of the Titanic announcing that the ship might not arrive on time – after hitting the iceberg.

Rick Priory: We reported earnings of 27 cents per share, a decline from last year. We took a 25 cents per share charge related to our merchant energy business, DEI and workforce reduction costs. Excluding those charges, we reported earnings of 52 cents a share, which is not a pretty picture. However, the natural gas transmission business has done a good job in integrating Westcoast Energy and delivering solid earnings. Duke Power is also performing well. Field Services has been hurt by low natural gas liquid pricing and low frac spreads in that marketplace…

Employee Advocate: It’s strange to hear Mr. Priory give Duke Power credit. He has downplayed electric generation since day one. He repeatedly denied being an utility CEO. He insisted that he was an energy CEO. He was going to make his mark by wheeling and dealing and energy trading. We feel that he shall surely make his mark. Time will tell if it will be a mark in the history books of great CEO’s, or a mark in the pavement.

Mr. Priory has never been short of excuses. Now it is the low frac spread. Oh dear! Not the dreaded frac spread. It will get you every time. Just when everything was going so well, out jumps the frac spread to get you!

We are happy to report that we never use frac spread. We will accept nothing less than Grey Poupon.

Rick Priory: Hardest hit has been DENA, which is suffering from low spark spreads and a profound loss of volatility and trading partners in the marketplace.

Employee Advocate: We know…we know. If one survives the frac spread, the spark spread will always be waiting to do you in. But does laying on the spread blame seem to be wearing a little thin?

What if the company had not pilfered the employees benefits, not bought Pan Energy, not tired to break the bank through trading derivatives, not tried to dominate world markets, and not have lusted after deregulation?

The answer is simple: There would be no problems, no challenges, and no negative headlines. It would not be necessary to run weekly ads in the Wall Street Journal in an effete effort to salvage a reputation that was once above reproach.

And about the loss of volatility and trading partners - it was Mr. Priory who said that the collapse of Enron had no repercussions on the energy market. Not only does he have real mistakes to live with, but he also must live with all the outlandish statements that he has made in an attempt to hide his mistakes. So much for being forthright.

Trading Rides Into The Sunset

Companies Retreat From Trading

Rick Priory: We are working hard on those issues and adjusting our strategy to accommodate rapid market changes.

Employee Advocate: Translation: Running for the exits. The hard sell will be in trying to convince everyone that this was really his true plan all along.

Rick Priory: We have enjoyed great expansion for four or five years and created shareholder value of over $2.9 billion. In response to today’s dramatic down cycle, we are having to manage much differently – and be able to respond and adapt quickly to external factors.

Employee Advocate: Any reported gains will not begin to cover the real losses in employee, investor, and public trust. Nearly a century of trust was wiped out in six years of speculating and employee gouging. It may be regained – in another hundred years.

Rick Priory: Assuming a slight improvement in market conditions, we expect to deliver 2003 earnings similar to what we’re seeing this year. On the other hand, if the marketplace doesn’t improve—then earnings performance would actually deteriorate next year from where it is today.

Employee Advocate: So, if the market improves, the company may not do worse next year. Mr. Priory is slowly beginning to face reality, at least partially. His line used to be that the investors just did not understand, and that he needed to tell “our story.” Well, the investors have heard “Rick Priory’s story.” The California ratepayers have heard Rick Priory’s story. They are no longer buying it. The employees never bought it. The fruit of Mr. Priory’s work is a bleaker future for all involved, except of course, for Rick Priory.

Rick Priory: As part of our third-quarter earnings call, we announced the elimination of some 1,500 jobs and 400 contract positions from the company in 2002 and 2003. That is never an easy decision, and it always feels bad, but it is an essential move to manage through the severe conditions in our sector. We are resolved to manage our costs consistent with the revenue that we can expect to derive from our portfolio of assets and positions.

Employee Advocate: Will the 1900 heads to roll include those who caused the problems? Not a chance! They will still be around to concoct even “bolder and greater” schemes for world domination of the energy market.

Rick Priory: We announced a quarterly dividend for the 76th consecutive year. We’ll pay a 27.5 cent dividend on December 16th to shareholders of record on November 15th.

Employee Advocate: This seems like a really desperate attempt to find something to boast about. The dividend, often associated with a stable blue-chip stock, was scaled back to reflect Duke’s new “growth stock image.” Prior to Priory, the only dividend announcements were the regular increases in dividends! It is amazing that now Mr. Priory is clinging to everything that he once despised!

Rick Priory: We reached a settlement with the North Carolina Utilities Commission on the review of certain Duke Power accounting entries.

The NCUC unanimously approved a joint settlement which will result in Duke Power crediting $25 million to customers’ fuel clause adjustment…

Employee Advocate: Duke is paying up because the outside auditor found that they were guilty of exactly what the Duke accountant and the utility commissions of two states charged them with.

Duke is paying, but still protesting – there were some mistakes – but this and but that – it was a lack of communication – the auditing firm did not understand.

Can you imagine if the outside auditor had found Duke innocent? You would have never heard the end of it. There would be full page ads in the Wall Street Journal. There would be press releases enough to wallpaper the world. The auditor’s report would be thrown up at every opportunity. The auditing firm would be praised for the thorough and painstaking job it did in examining every fact. The finding would even be pulled into the market manipulation issue, even though it would have absolutely no bearing on it.

But Duke lost. Now they will try to bury the report and cover it with excuses.

Duke Whistleblower Vindicated

Rick Priory: At the end of October we gathered the Senior Leadership Team to talk about the challenges we face and our forward direction. We had a good meeting. We talked about business, financial, legislative and regulatory strategy, as well as reputation and brand challenges that we—and our industry -- face. “Challenge” was certainly the watchword for the day. Our toughest choices used to be prioritizing the many opportunities that we had before us. Today, we’re busy working through a long list of challenges – and trying to achieve closure on those challenges so we can focus on our highest priority – creating value for our employees, customers and shareholders.

Employee Advocate: You will notice that Mr. Priory always gets “and our industry” in when it comes to passing out blame. There is always an attempt to lay some of the blame on someone else – anyone else! When things were going better, Mr. Priory gave no credit to “a rising tide raising all ships.” No, he took full credit. But he is ever willing to share blame with the industry, other companies, the employees, the market, and the proverbial “frac spread.” Hey, what about sunspots? Maybe it was all caused by sunspots!

Now there is talk of “creating value for our employees, customers and shareholders.” It still seems strange to see the employees included on the receiving end of anything. The talk is usually only about “creating value for shareholders,” which actually means “creating value for Rick Priory.”

Hey, he’s got us on a technicality – he is a shareholder. He just never got around to mentioning that he was the only shareholder that he was interested in increasing value for!

Rick Priory: A key message at the Senior Leader meeting was the importance of business values.

There has never been a more important time to reinforce with every stakeholder that Duke Energy honors and follows a clear business purpose, a strong set of core values, and a sound strategy for long-term value growth.

These strong values ground us in the fundamentals of doing the right thing, making the right decisions, and treating all stakeholders with openness and respect.

We are reinforcing these important and long-held principles, beginning with our senior leaders and then reaching the entire organization. You’ll be hearing more from your managers, company leaders and me about these values in the weeks and months ahead.

Employee Advocate: Here we go again. Mr. Priory is again attempting to revive the comatose Ethics Policy. Duke senior management never followed the old Ethics Policy. What is grinding it up and repackaging it into an online version supposed to prove? One advantage for management is that they can change it on the fly - when it suits their purpose. When the old smoke screens do not work, what does ever resourceful management do? Why, they retry the same ineffective smoke screens again, of course! What will it be next – teambuilding? What about a nice quality-circle? Anything will be tried to get the spotlight out of the boardroom!

Here’s some news for Rick Priory: The employees do not need to hear anything from their managers about the new improved Ethics Policy. It was never a lack of employee ethics that caused the problems!

Rick Priory and the board of directors should sit down and read the Ethics Policy. And after that, get someone from outside of management to explain to them exactly what it means. There will be some foreign words to comprehend, such as, “honesty” and “integrity.” If they try really hard, they may be able to crack these concepts. If there are those in senior management unwilling to do this, it may be time for them to step aside.

Rick Priory Blows Smoke

Faking Ethics After Enron

Humbled Energy Sector Sends Execs Packing

Rick Priory: The energy industry continues in a state of upheaval, as market conditions remain challenged, and our sector continues to be the focus of prolonged regulatory scrutiny.

The Federal Energy Regulatory Commission issued a data request to major gas traders, including Duke Energy, about price reporting by energy traders…

It goes without saying – but I’ll go on record anyway: Intentionally submitting inaccurate market data would be improper and in conflict with our business values…

Employee Advocate: This is only the latest in a long string of inquires and lawsuits. The Ethics Policy should have been read by senior management some years ago.

California Files Lawsuit on Gas Prices

Rick Priory: The SEC formalized its inquiry into our trading activities.

Back in late May, we received an informal inquiry from the Securities and Exchange Commission into so-called “wash trades.” We disclosed receipt of that inquiry, and provided a great deal of information in response.

The SEC formalized the inquiry sometime back without telling us. Apparently they did so in order to ask for information from our auditor. Since the information was client-confidential, they had to formalize the audit in order to get it.

Employee Advocate: Yes, the Ethics Policy should have been read by senior management some years ago.

The first energy company has already voluntarily offered to settle with California. Will this be an omen of things to come?

First CA Energy Settlement Reached

SEC has "Formalized" Duke Trading Inquiry

Rick Priory: The California Independent System Operator substantiated our response to the CPUC.

This is welcome news – and long overdue. In September, the California Public Utilities Commission released a report which asserted that Duke Energy and four other generators had withheld power from the state during periods of high demand. In our response, we ferreted out every kilowatt hour the report cited--where it went and why—and if it wasn’t produced, why not. We quickly responded to the CPUC and also to the California Senate Committee with a set of clear facts. The California Independent System Operator was asked by the Senate Committee to review the report -- and their review upheld our arguments.

Employee Advocate: See what we mean by attempting to exaggerate any small victory into a panacea for the entire issue? Here is a quote from an Associated Press article:

“Managers of the state's power grid said Friday they didn't have enough information to agree with energy regulators' finding that electricity generators were at fault for California's rolling blackouts in 2001.”

It was not exactly a Get-Out-of-Jail-Free card. But it does not take much for Mr. Priory to run with it. Will he again be making the claim to have been completely exonerated from any wrongdoing in California?

CA Energy Withholding Debate Continues

Rick Priory: We received a subpoena for information related to our activities in California energy markets.

The subpoena was issued by the U.S. Attorney for the Northern District of California as part of a grand jury investigation. Based on the news reports we’ve seen, it would appear that several other industry players received subpoenas as well.

We are cooperating with the U.S. Attorney, as we have with other government organizations inquiring into similar issues.

Employee Advocate: The blame is being shared once again: “it would appear that several other industry players received subpoenas as well.”

Duke and Williams Subpoenaed

Rick Priory: Last week, Duke Power informed the North Carolina Utilities Commission that we will withdraw our May 2001 filing in which we proposed that Duke Energy Generation Services (DEGS) operate and maintain Duke Power’s generating facilities.

The DEGS proposal was part of an effort to put all of our generating facilities under one group so we could benefit from the synergies in operations and maintenance. The Commission agreed that we could do that, but issued an order that included several onerous conditions. The benefits we had hoped to derive would clearly be negated by the cost of implementing the conditions. We therefore decided the better alternative would be to withdraw the request…

Employee Advocate: One cannot blame the Utilities Commission for being leery of letting Duke write its own ticket.

Whistleblower Complains Under Sarbanes-Oxley

Question: Rick, you talked about the charges in the 3rd quarter. I don’t know how much you can say, but do you foresee another quarter with charges of that magnitude?

Rick Priory: The third-quarter charges captured everything we knew of at the time. I think we dealt aggressively with the turbine issues by renegotiating with GE, and we’ve dramatically altered our capital budget because of the credit crunch in the industry.

What the future holds, nobody knows. Even a small change in the market could change our perspective on things, for better or worse.

Employee Advocate: Mr. Priory is learning that humans cannot consistently predict the future. If he were aware of this fact six years ago, maybe he would not have been making those wild earnings growth promises to investors. They turned out to be like the promises made to employees – merely empty words.

Question: There is a great deal of concern from retirees about the future. They want to know, “are we okay?” They’re fearful about their pensions and the value of our stock and concerned about health care premiums. What do we say to give them a sense of peace?

Rick Priory: Employee pensions, of course, are guaranteed by the Pension Benefit Guarantee Corporation, and we pay insurance premiums for that coverage.

In my mind, healthcare is the most worrisome issue when it comes to employee and retiree benefits. We’re seeing a really serious move upward in medical costs – you’re reading that everywhere.

In terms of the company, we have to deal with the ups and downs of the market, and we’re in the process of doing that. The Wall Street Journal reported that this is the worst credit squeeze on the electric utility industry since the Great Depression.

We have a sweet spot in our hearts for the dividend – and I know our retirees and fixed income investors do as well! So we try to keep an eye on that at all times. Our management team is doing its best to keep our hands on the critical things that will keep the ship going in the right direction until market cycles change.

Employee Advocate: Pension Benefit Guarantee Corporation is the payer of last resort. If a company goes belly-up, the employees will receive at least a portion of their retirement benefits. How much peace does that give you? Boasting of paying premiums for PBGC coverage is really scraping the bottom of the barrel!

Healthcare is not too worrisome for Mr. Priory. He is getting better off each day. For the last six years, the employees have been getting in worse shape each day.

“A sweet spot in our hearts for the dividend”? The dividend was not eliminated, but it was curtailed. Now Mr. Priory claims to love it. Mr. Priory changes directions with the wind, just like a weather vane.

Question: Mr. Priory, recognizing there’s no simple answer to what occurred this past year, did we have a true picture of the market and its intelligence? With the RMIS (Risk Management Information System), and other things, are we putting in the correct safeguards to help us get a truer picture--or maybe an earlier picture--of the market than we had this past year?

Rick Priory: I don’t know if anybody predicted the moves that took place in our industry. Our job is to be aware of what moves can occur in a market, and manage our exposure to those changes…

When we searched for the root cause, we found we underestimated the amount of new capacity being built by non-major players…

On top of that was a litany of horrible things we had no control over that exacerbated the market weakness: a credit crunch, the California crisis, the implosion of Enron, etc. For example, Enron’s failure caused the rating agencies to tighten credit dramatically…

Employee Advocate: At least Mr. Priory is now admitting that the failure of Enron did have a very real impact on the energy market. He is constantly talking about predicting things when he is often unwilling to face the present day facts! Making predictions based on wishful thinking will always result in failure.

Root Cause for Duke’s Problems

Question: Rick, the election results puts both houses of Congress under the same party. What’s your prediction on what effect this will have on national energy policy?

Rick Priory: There was an effort underway to pass the energy bill a couple of weeks ago, just before the session ended. From our perspective that bill had some terrible provisions. I would think that the Republicans, with their newfound majority, will come back pretty strongly on an energy policy in the next session, and I think there will be an opportunity to create a more balanced bill than the previous one.

Employee Advocate: Stand clear - Rick Priory is making more predictions! You mean that there are things in the energy bill that Mr. Priory does not like. There were plenty of give aways for energy companies. Maybe there were not enough.

Question: Could you help me understand an apparent contradiction I see? When the company is doing well, leadership appears to take credit for understanding and managing the factors that are critical to our success. However, when the company performs poorly, they seem to attribute the poor market, the industry or someone or something outside the company. How does this pattern represent the model of leadership that we say we want in Duke Energy? It seems like that type of behavior is in total contradiction to what we say we expect from employees at all levels in the organization regarding performance and accountability.

Answer: You are absolutely right regarding accountability: it is a key expectation of each employee and one of our core business values. We all share in the rewards of strong performance, and we all feel the consequences of underachievement. Likewise, Duke Energy benefits from a strong economy and positive market cycles. And while we prepare strategically for down cycles, we are nonetheless affected by prolonged market weakness.

There is always room for improvement within our company, and the toughest of times provide the best learning curve. Duke Energy’s senior leadership team recently discussed some lessons we can take away from the past year to 18 months: avoid over-exposure in any one area; asset portfolio diversification is a critical survival skill; rely on credible, verifiable market information; don’t outrun your headlights; measure what matters; don’t let success lead to a sense of infallibility; and bad news tends to converge.

While market conditions were extreme and hurtful to our entire sector, there are certainly areas where we fell short or could have done a better job minimizing our risk and exposure. And we’re working on those!

Employee Advocate: Employees are beginning to catch on to the game. Anything good is because of excellent management. Anything bad is always the result of the poor market or the old standby: the “frac spread.” Duke senior management is not much on accepting accountability. They talk a good game, but that’s about as far as it goes.

We all do not share in the rewards of strong performance, Rick Priory and the executives do. During times of strong performance the employees lose basic benefits. In times of market weakness the employees are downsized. Duke’s root cause analysis of their problems was a total failure. One will never see the problem as long as one tries very hard not to see it.

Question: In the wake of recent business scandals, analysts have stated that employee compensation and promotion practices are shifting back toward performance and monetary-based rewards. What is Duke Energy's compensation and promotion philosophy? What shifts, if any, do you see Duke Energy making in these areas?

Answer: We strive to provide competitive compensation to all employees. While the various lines of business use slightly different compensation approaches based on business needs, all of these approaches generally tie pay to market data as well as individual performance through merit increases. Employee incentive plans are paid as monetary rewards rather than stock-based performances and are generally developed around line-of-business or enterprise measures. Executive incentives are a mixture of monetary rewards and stock-based compensation, and also reflect line-of-business and enterprise measures.

As far as promotions are concerned, our philosophy is to identify the best candidates for vacancies, and to select from among those most qualified for any given position.

We plan no major shifts in either of these strategies.

Employee Advocate: Translation: The executives still get everything!

Question: As I hear of layoffs at Duke Energy, I wonder whether excessive executive compensation contributes to this and financial difficulties at the company. Does it? Can you explain Duke Energy's compensation philosophy regarding executive pay?

Answer: Recent layoffs are a result of prolonged weak market conditions in the energy sector and Duke Energy’s continuous efforts to improve efficiency.

Our business environment has changed rapidly and dramatically and we are adjusting all parts of our business in response to these changes. In addition, we are reducing workforce in some areas to capture business efficiencies.

Duke Energy’s compensation philosophy is to provide compensation competitive with the market in which it competes for talent to attract, motivate and retain executive employees. Compensation is generally targeted at the median of the competitive market which is based on size, scope, complexity and line of business.

Employee Advocate: Translation: The executives will continue to get everything!

Question: It's been a while since there has been any discussion on the N.C./S.C. Utility Commission's investigation into the alleged "accounting irregularities" that were raised by an unnamed Duke Energy employee some months ago. Could you give us an update on the status of this issue?

Answer: Grant Thornton’s accounting review, Duke Energy’s response and a proposed settlement were filed with the North Carolina Public Utilities Commission and the Public Service Commission of South Carolina on Oct. 22. In our response, we disagreed with Grant Thornton on some of their accounting judgments and strongly objected to their mischaracterization of the intent of Duke Energy employees. However, we agreed to a settlement with the commissions in order to put this matter behind us and get back to the business of supplying safe, reliable competitively priced power for our customers…

Employee Advocate: Translation: Duke got nailed! Duke will fight tooth and nail for each dime. If they ever let go of a dime, it is only because they were totally beaten.

The “put the matter behind up” copout always means that they were thoroughly beaten.

Throwing in the boilerplate “supplying safe, reliable competitively priced power for our customers” does not do anything to lessen the defeat. It only serves to make the executives look more foolish.

In summary: Duke was beaten!

Question: I think Duke Energy’s ad campaign in The Wall Street Journal is a great brand development campaign. However, I’m disappointed by a detail in the Oct. 8 ad, "We Generate Choice.” The ad states, “With this second pipeline to Florida, local utilities have another gas source to choose from." Grammatically correct sentences do not end with a preposition. I don’t believe basic grammar mistakes like this should show up in ad campaigns, unless the mistake is intentional to help the audience remember the ad. What was the reasoning behind the wording?

Answer: Our English teachers did teach us not to end a sentence with a preposition. Over time, however, this rule has been relaxed for informal, conversational writing – like our advertising copy. (The Microsoft Word grammar check doesn’t even identify it as questionable grammar.) Duke Energy’s advertising must compete with the thousands of messages that our readers hear and read everyday. Our advertising aims to engage readers with brief and conversational language that “speaks” to readers, as they themselves speak.

Employee Advocate: This question cuts to the very heart of the problems facing mankind today. Well, maybe not.

Look! If Duke has no respect for the employees, investors, or the public why should they respect the English language?

Why are they wasting your retirement money on those dumb ads anyway?

Question: After reading about the funding of the Retirement Cash Balance Plan on the portal, I have a few questions:

1. When my RCBP statement states that I received various deposits for the quarter (that is, 4 percent of my monthly salary) -- did actual money get deposited into an account, or is that a calculated "credit" that I will receive when I meet requirements and retire?

2. Is this "my" money? My Retirement Savings Plan (RSP) account is my money -- I own it, I can withdraw it (per rules and penalties, I understand) and I can take it with me if/when I leave Duke Energy. Are funds in the RCBP "my" money that Duke cannot control or alter in the future?

3. If the interest credited is tied to the 30-year Treasury, is it not invested in secure/safe investments? Is the interest rate influenced by the stock market?

4. Why is the RCBP "under-funded?"

Answer: Your RCBP account is a bookkeeping account that records your accrued benefit, the RCBP benefit that becomes payable to you if, and when, you satisfy the plan's conditions for payment. Your accrued benefit grows as pay credits and interest credits are entered in your account, but these credits do not represent actual contributions made by the company to the RCBP’s trust or earnings on trust assets. Instead, as with any defined benefit pension plan, Duke Energy's required funding of the RCBP’s trust is determined by actuarial valuation and IRS funding rules. Investment earnings/losses on trust assets have no impact on your RCBP account balance. Investment performance will ultimately impact the level of company contributions necessary to satisfy IRS funding rules, which are intended to ensure that a defined benefit plan is adequately funded. So, in that sense, the company takes the investment risk on the assets that fund the accrued benefits of all RCBP participants.

The company reserves the right to change the plan at anytime, but cannot reduce the benefit you have already accrued (the accrued benefit equals the balance plus interest credits). However, changes to the plan may affect future trust accruals.

The portal article you referenced answers your other questions. The under-funded status reported for Sept. 30, 2002 has primarily been the result of the significant decrease in the market value of assets held by the trust. The company does pay premiums to the Pension Benefit Guarantee Corporation (PBGC). In the event the RCBP is unable to pay benefits when due, the PBGC would step in to pay certain benefits…

Employee Advocate: You do not fully understand the cash balance plan because you were never intended to understand it. The plan was presented in a effort to hide more than inform. This albatross has been hanging around Duke’s neck for six years now, and it stinks more every day. Looking at the way the company deceived the employees regarding the pension plan provides a clear roadmap of the other problems cropping up.

Your account is fictitious; all money goes into a pool. The statement is designed to give you the illusion that you are getting somewhere. In reality, you may work for years with no new retirement benefits ever being accrued.

No it not your money. It is merely a sheet of paper. You do not even get the money if you leave the company, unless you are at least 55 years of age. As you can see, there are plenty of string attached to this account.

Any appreciation above the cheap rates that you will be paid goes to Duke. Hey, Duke designed the plan for Duke, not you.

The plan is underfunded because Duke has not been contributing to it. They never intended to contribute to it again. They wanted it to be self-funding. The pension plan originally designed to benefit the employees has been reduced to a cash generator for the company. Any profits (or losses) are included on the bottom line. That little feature worked against Duke during the bear market. Duke’s free ride came to an abrupt end. A combination of no new money being added to the fund and the stock market crash brought about the current underfunding situation.

The convent loophole “the company reserves the right to change the plan at anytime” means that your retirement promises are written in the sand. That is, unless you happen to be an unionized employee, with your retirement benefits enforceable by contract. The contract can also protect you retirement health care. Without a contract, you have only Duke’s shaky word, which has been broken many times in the past.

Florida Power’s Union Contract Offer

Duke is again boasting of paying premiums to the Pension Benefit Guarantee Corporation. When you ask the captain about the navigation system, and all he talks about is the life boats, that is a very bad sign.

Duke effectively reduced our promised retirement benefits. That is why cash balance age discrimination charges have been filed with the Equal Employment Opportunity Commission. The age limit was waived for Duke employees. The charges are still active.

For more information, contact the EEOC at 1-800-669-4000.

The Noon Meeting was held in Charlotte, North Carolina on October 14, 2002. It was hosted by Rick Priory.

Rick Priory: The energy marketplace is in the midst of an unprecedented level of change, causing a tremendous amount of associated upheaval. Every sector participant has been affected, as have the capital markets that fund energy projects.

Employee Advocate: It appears that Mr. Priory has caught on to the fact that the collapse of Enron did devastating damage to the energy market and the market in general. Mr. Priory is no longer cheerfully saying that after the Enron failure “the markets didn’t miss a beat.” Those who were riding on Enron’s coattails were caught flat footed when Enron ran off a cliff. Denials and happy talk will not save the day.

Rick Priory: In many ways, the marketplace we’re experiencing today is similar to what we faced in the 1970s. Stock prices were low, and energy companies couldn’t raise money from the capital markets. Duke Energy faced tough times then, to the point of halting the bulldozers at Catawba Nuclear Station for fear we wouldn’t be able to cover construction costs.

Employee Advocate: In one very important way the marketplace today is nothing like the 1970’s market. This time Duke was not merely a hapless victim. Mr. Priory was trying to clone Enron, and thus, had a hand in creating his own problems.

Rick Priory: We came through that period, and we’ll weather the current challenges as well.

Employee Advocate: That is entirely possible, but there are no guarantees. In the 1970’s Duke was innocent. No one blamed the company for a downturn in the market. The employees, investors, and public still believed in Duke. With this goodwill, the company survived.

This time around, goodwill has often turned to disgust. And, one cannot help but wonder what other foul smelling things are hidden in the closet.

Rick Priory: Duke Energy is working hard to stay a couple of steps ahead of that market, to anticipate its direction, and to navigate accordingly.

Employee Advocate: Is that not what caused today’s problems – trying to bob and weave and stay just a step ahead of disaster?

Rick Priory: Our franchised electric and pipeline businesses were delivering solid results, but our North American merchant business was having significant difficulty. Don’t forget: this business created a majority of our growth over the last three or four years. Suddenly, it was faced with a tremendous downturn in the marketplace, driven by government intervention, oversupply in some regions, price caps, loss of trading partners due to rating agency actions and the continuing deterioration of the market.

Employee Advocate: The government was forced to intervene because of the unsavory practices of Enron and all the Enron wannabes. Price caps were put in place to stop the plundering of ratepayers. Companies were downgraded because of their own actions. Enron and followers were so greedy that regulations were cried out for.

Rick Priory: Managing through the tough cycles is difficult for everyone. We’ve had to cut back dramatically in our capital expenditures, and I suspect your business group may be feeling some pressure with regard to expenditures. We will likely feel the effect on our incentive plan later in the year in terms of the EPS goal.

Employee Advocate: Cutting back is nothing new to employees. This has been going on for six years! While the company raked in record profits, the employee's benefits shrank and shrank even more.

Rick Priory: In the past, companies were given the option to record trading revenues as either net or as gross. Duke Energy actually did it both ways…The new rule, which requires the use of all net figures, will have the effect of reducing revenues for companies that trade in energy industry.

Employee Advocate: Now energy companies will not be able to record “phantom revenue.” This little accounting loophole was courtesy of the Enron lobbying effort. Its creation is a sordid story in itself. The old rule allowed energy companies to inflate revenues with impunity. This gave an incentive for “round-trip trading.” Again, none of this came about by chance; it was all carefully plotted.

Deregulation Aids Enron’s Looting

Enron Influence

Rick Priory: We’re still receiving some positive recognition from Wall Street and the media. An analyst featured in Money magazine recently picked DUK as a good value, and The Street.com ran a great article on Duke Energy, calling us one of the healthiest players in the sector with a strong balance sheet.

Employee Advocate: The Street.com also ran a Duke article on October 28, 2002. Here are the first two sentences: “In the eyes of some investors, Duke has gone from royalty to royal pain.

“The North Carolina energy giant -- one of the last real powers in the ragged merchant energy sector -- keeps buckling under the weight of its own lofty promises.”

Now just where have we been hearing that Mr. Priory’s big promises to investors would come back to bite him? The only thing surprising is how rapid many of the results materialize!

The article went on to state that the biggest drag was from Duke's energy trading unit. Energy trading was Mr. Priory’s baby. (It has turned out to be a very ugly baby.) There was a time that Mr. Priory refused to attend meetings with analysts who were interviewing power company CEO’s. Why? Because Mr. Priory maintained that he was NOT the CEO of a power company, but the CEO of an energy company! Mr. Priory seem to be embarrassed about power generation. But his glorious energy trading has become a nationwide embarrassment.

Duke a Royal Pain?

Question: There are rumors going around about freezing employee salaries in 2003. Can you address that?

Rick Priory: No, we are not freezing employees’ ’03 salaries – except within the leadership compensation group, which affects approximately 1,200 employees. As part of our efforts to control costs and maintain our competitive position, the Policy Committee has decided that there will be no increases in leadership compensation for 2003.

Employee Advocate: But the vast majority of these 1,200 people did nothing to cause the problems. The real problems were caused by a handful of executives. Those that contributed to the problems also profited handsomely through bonuses and stock options. Now that the game has been exposed, even the innocent in management will suffer.

Question: Rick what can you tell us about plans for workforce reductions?

Rick Priory: As I mentioned earlier, we are aggressively cutting costs in all areas of our business. A good example of that is the development of power plants around the country. We have a very limited need to develop power plants until we see the end of this down cycle. Throughout the entire company, we have every leadership team looking at reducing the cost of operations. Included in that review are staff reductions. That’s a general answer, but there’s no doubt this company will be smaller as we go forward.

Employee Advocate: Now whom do you think will get the ax? Will it be those who caused the problems, or those who make the turbines spin and the gas flow?

Duke Secretly Cutting Jobs

Duke to Cut Trading Staff

Duke Energy Will Cut 1,900 Jobs

Duke Layoff and the IBEW

Duke Layoffs to Hit Houston

Question: Our company's reputation and stock price continue to suffer from issues relating to the California energy crisis. Given what we know today – and the fact that our stock price is essentially the same as it was five years ago – what could we have done differently? Should we have avoided California altogether?

Answer: That question is asked with some regularity!… Had we known everything that would occur in California when we entered the state in 1998, we might not have made the same decision today, but that could be said for many business and personal decisions we all make. The answer to this really gets to return on investment – and it doesn’t have to be economic return. Any damage to our reputation is lost value to our shareholders, and we’ve been damaged by the California issues. However, we invested in California and elsewhere in the West because of strong demand growth in the West and our belief that merchant energy generation is a viable long term business strategy. Aside from the headlines, our California investments have been successful and continue to operate well.

Employee Advocate: That is as probably as close to an admission of bungling the job as you will ever get. There was almost an apology made, but it was taken back before it got out the mouth good. Duke claims that the California investments are successful. The financial success came at a price. And, the dust has yet to settle on this episode.

Question: Why did we not see that gas-fired merchant plants would struggle to make a profit when energy supply levels returned to normal levels? I was told by my local management in 1996 that the value of generation assets would drop significantly when the volatility in the market faded. Were we trying too hard to be another Enron?

Answer: We expected that the value of merchant energy generation assets would decline when energy supply levels returned to normal levels – it’s an inherently cyclical market. However, the industry as a whole underestimated the number of proposed merchant plants that could be financed and built to meet the power supply needs of most regions. Also, demand has been weaker than expected due to the prolonged economic downturn….Even as we’re faced with today’s tough marketplace, we are confident that asset values and sales margins will improve with economic recovery.

Employee Advocate: Oh no! You didn’t ask the Enron question? Yes you did, and a good question it was. By now it should be obvious that most problems stemmed from Enron envy.

Question: In an earlier Noon Report, you noted that Duke Energy would issue $1 billion of equity by year-end and that this “relatively broad timeframe…permits us to maintain important marketplace flexibility.” How are we going to use flexibility to issue this equity more profitably now that the stock is below $20? Shouldn’t we have issued the equity earlier? Could you explain the logic being used?

Answer: Duke Energy had committed to the rating agencies (Standard and Poors, Moody’s and Fitch) that it would issue equity or equity-linked securities in 2002 to fund the Westcoast Energy acquisition. The company could not access the equity market for the stock offering earlier in the year due to several issues, including the informal SEC inquiry and related disclosure items. The company carefully evaluated its options and selected the timing based on a number of factors, including the likelihood of continued uncertainty in the marketplace and the energy industry.

Employee Advocate: Duke could not sell stock sooner because they had some explaining to do. They had to sell at a low price, because they realized that the price could go even lower.

Question: Can you share the rationale behind the headline for the Sept. 3 Wall Street Journal ad, "We generate 1 + 1 = 3”? Is this the best way to portray Duke Energy supporting math education in the midst of massive corporate accounting irregularities? The equation may be cute, but it doesn't help our corporate image or the cause of helping math when we can't get a basic equation correct.

Answer: While the intent of the headline was to reflect the old saying, "the whole is greater than the sum of the parts" 1+1=3, your sensitivity to the current environment is appropriate. We frequently receive feedback from people who see our ads in The Wall Street Journal – sometimes to compliment an ad, sometimes to say they don't like it and sometimes to ask additional questions. We have not, to date, received any negative external feedback from this ad. We would, however, based on internal feedback, use a different headline for any future uses of this story.

Employee Advocate: And all this time we thought that they were explaining their accounting methods.

Duke Wall Street Journal Ads