Duke Energy pulled out of proprietary energy trading, closed two North American trading offices and has completely made over the business plan of its unregulated business unit. However, Duke is keeping its options open in the energy merchant sector, because even though “the current opportunities are not that great, when they are, we want to be in a position to react,” the COO said last week.

Fred Fowler, speaking at the annual RBC Capital Markets North American Energy and Power Conference in Houston, offered Duke’s take on the state of the company and the energy industry for analysts. Duke is steadily paring down debt and streamlining operations, but it also is “vigorously watching the market” to ensure it can take advantage of future business opportunities.

“We’re in the midst of the merchant sector’s first down cycle, and it’s been pretty painful. It doesn’t feel very good,” said Fowler. But he added, “I don’t see how exiting a business at the bottom of a cycle serves shareholders very well. It’s certainly something we’re trying to avoid.”

The “field of companies able to capture value along the energy chain has narrowed considerably in the last few years, and we’ve watched as companies have retrenched to the regulated franchise model. We’re pleased with our regulated operations…they provide dependable earnings. But competitive energy markets will continue to play an increasingly large role in the U.S. economy for years to come.”

Duke has spent a “tremendous amount of energy” to gain a “clear and factual understanding of the merchant sector,” he said. “It’s still a very immature industry, and we are just beginning to have a very clear understanding of it today.” Among other things, Duke has centralized its trading operations to Houston and shuttered its Canadian and Salt Lake City offices. Like most of its peers, proprietary trading was discontinued to reduce the company’s financial risks.

However, the unregulated operations within Duke Energy North America (DENA) remain viable, said Fowler. The North Carolina-based company has revised DENA’s business model and now places “far more emphasis on the wholesale customers as opposed to hedging in the financial markets.” More emphasis has been put on sales to wholesale customers. Still, the assessment is ongoing. “There is tremendous flux. But with some perspective, we do see the value in retaining our long-term options.”

Fowler noted that “the energy markets are a pretty tough place to play right now. Our entire sector continues to struggle with issues.” Business has been stung by Enron Corp.’s bankruptcy, the California energy crisis, ongoing litigation and regulatory scrutiny as well as a “fairly anemic economic recovery” that was exacerbated by last month’s Northeast blackout. However, even with the many challenges, Duke is making steady progress, said Fowler.

“We’ve made a lot of tough decisions this year,” he said, referring to hundreds of company-wide layoffs and cancelled building projects. “Much of the scaling back has been in the merchant energy business. But across the board, we have been looking to streamline our costs and make sound business decisions that didn’t compromise our competitive positions.”

Duke has “tested the ability of our portfolio to make the most of this tough market. We’ve critically assessed the landscape, and the strategy that still stands out is the one we embarked on about six years ago, the integrated energy model.” Most of the adjustments, he said, have been “in weaker links to strengthen the whole.”

Not every area has been cut back, Fowler noted. “We are doing our part to reinvigorate the natural gas markets this year,” he said, referring to the extension of the Gulfstream Natural Gas system, which was announced in July (see NGI, July 28). By the end of 2003, Fowler said Duke will have pipe additions that total more than 1.1 Bcf/d of pipe capacity, and added that there are a “number of developments” still to be announced for that segment of its business.

“We’re not waiting out this current cycle; we are working through it,” and “taking appropriate short-term actions” that include focusing on positive net-cash generation. “We are on plan and in many cases, we are exceeding plan.” However, he noted that above all, the most important issue for Duke this year is debt reduction. Its target this year is $1.8 billion, and by 2005, the company hopes to reduce its debt by $5.5 billion.

“We’ve got a lot of work obviously to complete but I am pleased with our progress to date, relative to our peers,” Fowler said. “No doubt we have a steep road ahead. No doubt about that.” But he said management had a “very realistic grasp of the challenges facing them.”

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