As several competitors struggled for their very survival Tuesday, Duke Energy reported earnings rose to 57 cents per share in the second quarter from 54 cents a share a year ago, due to hefty profits in the company’s gas pipeline business, which it said offset lower results for its sagging merchant energy business. Despite the upbeat report, the company’s stock fell slightly to $19.06 a share in late-day trading.

For the half, the Charlotte, NC-based energy company reported earnings per share fell to $1.05 from $1.27 during the six-month period a year ago, before a 13-cent per-share charge in the first quarter of 2001.

Net income for the second quarter rose to $474 million from $419 million for the same period in 2001. Six-month net income was pegged at $856 million, down from $877 million a year ago. Quarterly operating revenues were $16.3 billion, up from $15.58 billion in the year-earlier period, while first half revenues fell to $28.2 billion from $32 billion in the comparable 2001 period.

Acknowledging “decreased opportunities for the trading and marketing business,” Duke lowered slightly its earnings guidance for the year to a range of $2.45 to $2.55 a share. “These lower expectations are primarily the result of reduced volatility, subdued commodity pricing and reduced energy demand, due to the prolonged economic downturn,” said Richard B. Priory, Duke chairman. But the company anticipates a turnaround in 2003, with earnings projected to grow from 5% to 10% per share above the 2002 base.

“The recent dramatic softening of the energy market is affecting our near-term outlook, and we’ve accordingly adjusted our business plan to reflect this climate and align future expectations with the reality of these markets,” Priory said. For starters, the company plans to tighten its belt with respect to its capital spending program. While it has budgeted approximately $6.8 billion for capital expenditures this year, excluding its acquisition of Westcoast Energy, Duke said it expects to spend a total of $4-6 billion for 2003 and 2004.

Despite the ongoing weakness and shake-ups in the energy markets, Priory said that if a mirror were held up to Duke Energy, the company’s would emit a “strong and healthy breath.” While competitors are quickly fleeing from the energy trading sector, “we believe the business remains a key part” of Duke, he told analysts Tuesday.

The current focus on trading has been “fervent and clearly disruptive,” Priory said, but he believes in the long-run the close scrutiny by federal regulators and Wall Street will be helpful. Duke hasn’t “shied away” from the requests of regulators to review its trading activities. While Duke identified some round-trip trading practices in an interim report to the Securities and Exchange Commission (SEC) last week, these activities have had “no material financial impact on the company,” Priory said.

Duke Energy is being investigated by the Department of Justice, SEC, Federal Energy Regulatory Commission and the Commodity Futures Exchange Commission for round-trip trading practices.

On a segment basis, Duke Energy’s gas transmission business turned in second quarter earnings before interest and taxes (EBIT) of $312 million, up 120% over the $142 million reported during the same period a year ago, due largely to the recent acquisition of Westcoast Energy. Westcoast’s gas pipeline and distribution assets contributed $109 million to the segment’s second quarter EBIT.

Earnings associated with the new Gulfstream Natural Gas System, including a $27 million fee for the successful completion of the pipeline that began operation in May, also factored into the favorable performance for the segment. The 581-mile Gulfstream system, which is jointly owned by Duke Energy and Williams, is the first new pipeline to serve the Florida market in 40 years, bringing in natural gas from the Gulf of Mexico.

The year-to-date EBIT for the gas transmission business was estimated at $580 million, up considerably from the $317 million reported during the first six months of 2001. Gas transmission has been a “good source of earnings growth” so far in 2002, said Priory, who predicted this would continue next year and beyond.

In contrast, Duke Energy North America (DENA), which includes Duke’s 60% interest in Duke Energy Trading and Marketing, posted a 72% loss in EBIT for the quarter, falling to $196 million from $272 million a year ago. Last year’s higher second-quarter EBIT stemmed from net gains from the sale of interests in power plants and a more volatile energy market, Duke Energy noted.

Year-to-date EBIT for DENA was $250 million, significantly lower than the $656 million reported in 2001, according to Duke Energy.

While DENA turned in lower profits, Duke Energy said its entire Energy Services business — which is comprised of DENA, International Energy and Other Energy Services segments — saw a slightly higher combined EBIT of $335 million for the second quarter, compared with $328 million for the same period a year ago.

EBIT for the Field Services business segment, which includes Duke’s majority interest in Duke Energy Field Services, fell by more than half to $41 million for the second quarter from $84 million in the comparable period in 2001. Results primarily were influenced by a drop in natural gas liquids (NGL) prices and increased operating costs, the company said. The year-to-date EBIT for Field Services was $76 million, a nearly three fold reduction from the $207 million posted a year ago.

For the six-month period, Duke Energy reported Field Services gathered and processed/transported 8.4 trillion Btu/d of natural gas, and marketed 1.6 TBtu/d of gas at an average price of $2.86/MMBtu, or half of the average price of $5.88/MMBtu a year ago.

DENA marketed 14.2 TBtu/d of natural gas in the half, down from 12.3 TBtu/d during the first six months of 2001, according to Duke Energy. It traded and marketed 202,565 GWh of electricity, up significantly from 110,842 GWh a year ago. Total operating revenues from trading and marketing of gas dropped to $16.3 billion for the six-month period, from $19.26 billion a year ago. Six-month revenues from trading and marketing of power fell as well, to $7.88 billion from $9.16 billion for the year-earlier period.

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