Duke CEO Says Spending Cuts, Asset Sales Designed to 'Put Questions Behind Us'

Focused on its current challenges but positioning itself for recovery, Duke Energy announced another cut to its forecasted capital expenditures for 2003 to $3 billion from a previous $3.2 billion. The reduction, said CEO Richard Priory, will ensure financial flexibility and enhance its cash positive position for 2003.

Priory, who spoke Wednesday at the 10th Annual Morgan Stanley Global Electricity Conference in New York City, said reduced spending and additional asset sales this year will "put any questions behind us...way behind us" as the energy marketplace regains its health and vigor. "We reduced it to $3 billion because we think we can fund it quite comfortably."

Of the $3 billion, Priory maintained that $1.8 billion is "absolutely critical," which would include $1.2-$1.3 billion for power company environmental projects; $300-$400 million for natural gas pipeline expansions; and expenditures for two power plant completions by this June that will be funded by Duke.

Priory said, Duke was confident that it would soon be able to complete the California investigation and improve the confidence of shareholders. "Keep in mind things can happen to us. But we feel pretty good right now," he said. Duke's regulated gas transmission business "prospered even in the midst of last year's sluggish economy."

Duke's franchised electric and natural gas transmission businesses are expected to contribute 80% of the company's earnings before interest and taxes, or $2.8 billion this year. "Positive net cash flow from 2003 through 2005 will be strongly supported by modest future earnings growth at our regulated operations. Franchised Electric's sales typically grow by about 2% a year and Natural Gas Transmission is expected to deliver earnings before interest and taxes growth of 5% to 7%," Priory said.

Also, Duke's Algonquin and Texas Eastern pipes set new peak-day records this winter; of the 25 historically highest peak days, 13 occurred this winter in the Northeast. "It shows the need for new capacity," said Priory. "Our pipeline capacity in the United States is fully subscribed today...with an average contract of nine years." Last year, he said, the "market turned around dramatically," and the company obtained several 15-year term contracts.

When asked what additional assets the Charlotte, NC-based utility has on the table, Priory responded that at any one time, three to 10 divestitures were being discussed regularly as a normal part of business. "We have quite a list of asset sales, that is not different frankly from what we normally would do...to create value for our shareholders. Remember that we are a portfolio manager. We've gotten into a frame of mind with liquidity that this [asset sales] is something new to pump up the balance sheet, but we've been doing a lot of these proposals...we're just doing them faster...speeding it up a bit to take the question off the table."

Duke, he said, is focused on keeping its net cash generation positive and strengthening the company's balance sheet, both efforts to enhance liquidity. Among its priorities, the utility is focused on investing in its "strongest" businesses, sizing the businesses to market realities and "strengthening our relationships with customers." Duke, said Priory, also is paring down the "merchant energy issues" one by one, as it works to reduce its regulatory and legal risks.

Duke had forecast non-strategic asset sales in 2003 to be about $600 million. In the first three months, the company has completed the sale of Empire State Pipeline to National Fuel Gas for $240 million; and sold the remaining units in Northern Border Partners LP and a portion of the loan portfolio held by Duke Capital Partners for about $75 million.

"To secure the remaining portion of our $600 million divestiture target, we have a variety of non-strategic assets that we expect to monetize in the coming months," said Priory. Earlier this month, Duke announced it would exit the merchant financing business. By monetizing Duke Capital Partners' portfolio of approximately $300 million, "we expect that approximately 50% of this portfolio will either mature or be sold before the end of 2003. The remainder of the portfolio should be closed out during the first half of 2004."

Unlike many of its debt-laden peers, Duke also plans to maintain its dividend through 2003 and most likely through 2004, said the CEO. "Duke Energy has paid quarterly dividends for 76 consecutive years and our plans for 2003, which have been approved by the board of directors, fully support the dividend at the current payout of $1.10 per share." It would take a "five-notch" credit rating downgrade or something unexpected for the company to reconsider a dividend cut, he said.

As far as capital expenditures this year, "While our plans for 2003 include about $3 billion in capital expenditures, in 2004 and 2005 we can support our current operations with approximately $1.8 billion in maintenance capex. Any additional capex over this amount would be discretionary and driven by solid-growth opportunities."

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