Duke Energy Corp.’s diversified portfolio, spread across seven business segments throughout the United States and abroad, was not enough to stabilize the energy giant in a year in which forecasts have been thrown out the window. Plagued by a prolonged economic downturn, investigations and continued market uncertainty, Duke readjusted its 2002 earnings guidance for the second time in two months on Friday, slicing another 50 cents off of expectations, and warning that next year could even be worse.

The Charlotte, NC-based company also deferred construction of three western power plants that were scheduled to being operations next summer. The facilities are 40% completed, adding another $200-$300 million write-off in the third quarter.

“This year has defied tradition, particularly in the energy merchant business,” said Richard Priory, CEO. Priory and his executive team spent an hour Friday morning speaking with analysts about Duke and its projected earnings. “If conditions don’t improve, earnings in 2003 may be even lower,” Asked about what the future looked like, Priory said, “frankly, our team assumes the remainder of 2002 will be pretty much as ugly as [it] is today…with some gradual movement in 2003.” However, no trends have yet been established to allow it to accurately forecast.

Recalling analysts’ suggestions that the merchant industry had fallen into a “perfect storm,” Priory said the conditions today could not have been predicted a year ago. Besides the economic skid that began late last year, Priory included the abundance of generation capacity available in most regions and declining spark spreads and volatility as contributors. Duke’s counterparties continue to have liquidity problems, and he said the ongoing investigations, litigation and government intervention also are cutting into Duke’s earnings power. “All of these have created dynamic changes in the marketplace.”

Duke now estimates earnings for 2002 to fall between $1.95-$2.05 per share, excluding charges for delaying the three power plants. Just two months ago, Duke had estimated earnings of between $2.45 and $2.55; Wall Street analysts’ estimates ranged between $2.35 and $2.60. New terms to purchase turbines and associated equipment from General Electric planned this year are being negotiated as well. Taken together, the new turbine contracts and the construction deferrals will result in a one-time pre-tax charge of between $250-$300 million (19-to-23 cents per share) against third quarter 2002 earnings. No other write-offs are anticipated this year.

The company’s North American wholesale energy business, which is operated primarily through Duke Energy North America LLC (DENA), is the culprit in the company’s earnings decline, he said. With its cyclical patterns of business, DENA usually provides traditional peak earnings in the second and third quarters. However, DENA had a “severely depressed” second quarter, and in the third quarter, there was “further deterioration that was well beyond our plan,” he said.

The deferred facilities include the 620 MW Grays Harbor Energy Facility in Grays Harbor County, WA.; the 1,200 MW Moapa Energy Facility in Clark County, NV; and the 600 MW Deming Energy Facility in Luna County, NM. Duke had temporarily halted construction at the Grays Harbor and Deming facilities in August, and had already slowed work at the Moapa facility. To provide security and maintain the equipment in place, all three plants will have minimum staffing, said Duke.

“As forward wholesale markets change in a region, we sharpen our focus on optimizing the operation and value of our existing assets and carefully evaluate construction of new facilities,” said Jim Donnell, CEO of Duke Energy North America (DENA). “The western market has seen a dramatic decline in the economics of bringing any new generation on line for summer 2003, the previous schedule for these facilities.”

Donnell said Duke would continue to evaluate the market to determine an “appropriate” time to complete construction. “At this time, it would be inappropriate to speculate when that decision will be made.”

However, construction will continue on two other Duke facilities that also are scheduled to come online in 2003: the 620 MW Fayette Energy Facility in Fayette County, PA, and the 1,240 MW Hanging Rock Energy Facility in Lawrence County, OH.

“The reality is, the market has been moved hard in the last few months,” said Priory. Although all of the other businesses are performing well, especially Duke Power and Natural Gas Transmission, he said DENA’s “uniqueness” — which so far is defying any forecasts — has led to across-the-board cuts. That trend is expected to continue through the year, and in 2003, earnings are expected to be “basically flat, assuming a modest improvement in market conditions. We are continuously taking the pulse of the market and we are planning conservatively. If conditions don’t improve, earnings in 2003 will be lower.”

The “depth and dimension” of Duke’s integrated services will protect the company in the long run, he predicted. “The perfect storm had an impact on energy conditions. We’ve had the wind at our backs and now there’s wind and a little bit of rain in our faces. But we’ve navigated through the tough markets before, and we will weather the storm.”

Until conditions warrant, Priory said, “we will live within our means,” with internally generated cash and perhaps some asset sales. The capital expenditures through 2002 were cut to $6.2 billion, after first being cut to $6.8 billion in July. Next year, capital expenditures will be $3.5 billion. Duke also has a group of non-core assets worth $1 billion to $3 billion, and Priory said “any” of them could be sold if needed. He did not detail which properties might be considered. However, the CEO said he did not expect the latest moves to affect the company’s annual dividend of $1.10 per share.

“We have reduced our investment, but we will optimize performance from every asset we own,” he said. “The market downturn is not stopping Duke Energy from what it does best. We are aggressively pursuing origination services, origination of wholesale customer business and wholesale customer share.” The company also will “continue to do restructuring to reduce costs and to respond to the signals.”

Following the conference call, Standard & Poor’s Ratings Services said the latest announcements do not affect the ratings of either Duke Energy or subsidiary Duke Capital Corp., rated “A/Stable/A-1”. It said an August 2002 review of the company “incorporated an extremely conservative view of the future earnings contribution from Duke Energy’s merchant generation portfolio (DENA) and trading activities. Future earnings prospects will also be dampened by the indefinite delay in completion of three generating plants, and attendant loss of revenues. In response, Duke Energy has made material cuts in it capital expenditure program, which should permit ongoing construction to be funded with internal cash generation. In addition, planned asset sales should enable Duke Energy to reduce debt.”

S&P plans to review the company’s revised projections in more detail, “however, preliminary estimates are that cash flow interest coverage over the next several years should approximate [an] expectation of 4.5 times.”

Also on Friday, Moody’s Investors Service placed Duke on review for a potential downgrade, “prompted by Duke’s announcement that its earnings expectations will be materially lower in 2002 and 2003 based on continued weakness in Duke Capital’s merchant energy subsidiary, DENA.” Moody’s noted that DENA contributed 13% of consolidated earnings before interest and taxes in the first six months of this year. “With the outlook for 2003 earnings and cash flow flat at best, Duke’s ability to improve credit measures will be limited.”

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