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Duke Sees Improvement During Tough 3Q

Duke Energy didn't have the kind of quarter it would have liked, management conceded, as lower gas prices, plant outages and higher operating expenses crimped results.

Excluding special items and discontinued operations, earnings per share were 48 cents, versus 56 cents in the year-ago period. The former Cinergy Corp. operations (see Daily GPI, March 13) benefited utility operations and Duke Energy's commercial power business. However, Duke Energy Gas Transmission was down on increased operating costs and decreased earnings from Canadian operations. Duke is on its way to spinning off its gas business to become a pure-play power company once again (see Daily GPI, June 29).

Duke reported 3Q 2006 diluted EPS of 60 cents, or $763 million in net income, compared to 4 cents per diluted share in third quarter 2005, or $41 million in net income. Results for the quarter were primarily affected by a 9-cent gain on the sale of interest in Crescent Resources. The previous year's quarter included charges related to the exit of Duke Energy North America's (DENA) business outside of the Midwest, which totaled approximately 83 cents/share, reported as discontinued in third quarter 2005. This amount was partially offset by a gain during the third quarter of 2005 on the transfer of a 19.7% interest of Duke Energy Field Services to ConocoPhillips, which totaled 38 cents/share.

"Despite what was a lackluster quarter when compared with 2005's strong third-quarter ongoing results, we remain on track to achieve our 2006 employee incentive target, adjusted to reflect the sale of Commercial Marketing and Trading (CMT) to Fortis, which closed on Oct. 1," said Duke CEO James E. Rogers. "This adjustment is consistent with Duke's handling of the 2005 employee incentive target associated with the DENA exit.

"Thanks to the hard work of our team, we overcame unplanned outages during the quarter at two of our baseload power plants in the Carolinas, and continued to meet the needs of our customers. With two quarters of combined operations in the books, the new Duke Energy is making good progress in capturing the savings and realizing the promise of the Cinergy merger. In addition, during the quarter we executed on a number of strategic actions, including the creation of a joint venture for Crescent. What's more, we continue to make progress against our plan to separate the gas and electric businesses, targeted for Jan. 1, 2007."

U.S. Franchised Electric & Gas (FE&G) reported third quarter 2006 segment EBIT of $678 million, compared to $606 million in the prior year. The increase over third quarter 2005 is due primarily to the addition of the former Cinergy regulated utility operations in the Midwest and reduced regulatory amortization expense during the quarter. The former Cinergy operations contributed EBIT of $181 million for the quarter. This increase was partially offset by lower results at Duke Energy Carolinas, which were driven by lower bulk power marketing results, higher operating and maintenance costs and milder weather than last year. Results were also affected by rate reductions related to merger approval requirements -- a $17 million charge in Ohio, Indiana and Kentucky, and a $39 million charge in North Carolina and South Carolina during the quarter.

FE&G added about 65,000 new customers, a 1.5% increase. Year-to-date segment EBIT for U.S. Franchised Electric & Gas was $1.4 billion, compared to $1.2 billion in 2005.

Duke Energy Gas Transmission (DEGT) reported third quarter segment EBIT of $303 million, compared to $329 million in third quarter 2005. The lower results were largely due to higher operating costs, lower earnings on Canadian operations and lower income from equity earnings related to project financing. These results were partially offset by improved natural gas processing margins associated with the Empress assets acquired in 3Q 2005. Results were also positively impacted by the strengthening Canadian currency and a special item, the gain related to the issuance of units of DEGT's Canadian income fund.

The favorable Canadian currency impacts on DEGT's EBIT were partially offset in Duke Energy's consolidated net income by currency impacts on Canadian interest and taxes. Year-to-date segment EBIT for Natural Gas Transmission was $1.1 billion, compared to $1 billion in 2005.

The Field Services business segment, which represents Duke Energy's 50% interest in Duke Energy Field Services (DEFS), reported third quarter equity earnings of $158 million, compared to equity earnings of $126 million in third quarter 2005. Including special items in the previous year's quarter results, related to a gain on the transfer of 19.7% interest in DEFS to ConocoPhillips, and the impact from settlement of certain de-designated hedges at Field Services, segment EBIT was $701 million in third quarter 2005. Increased equity earnings for the quarter were driven by strong commodity prices and improved gas marketing results.

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