Duke Energy told federal regulators last Tuesday it participated in round-trip, or “wash,” trading activities, but said it did not do so “for the purpose” of inflating reported revenues or influencing prices. Nevertheless, the trades did result in a relatively small gain in revenues, the company said, while also admitting to a small number of bogus transactions that were intended to boost trading volumes.

The Charlotte, NC-based energy company, which had been relatively untouched by the scandals in the industry until lately, saw its stock hammered on Wall Street in the days following the report, falling to about $20 a share in mid-day trading Friday from $24.75 at the opening Monday bell. Duke Energy’s stock had been selling at more than $41 a year ago.

In a preliminary report submitted to the Securities and Exchange Commission (SEC), Duke Energy said it identified 23 paired power and natural gas transactions that “had the apparent purpose of increasing volumes on the IntercontinentalExchange (ICE),” an electronic trading platform in which Duke Energy is one of 13 equity owners.

The 23 trades on ICE had no effect on Duke Energy’s earnings, the company said in a press statement. The transactions did inflate Duke Energy’s reported revenues by $126 million in 2001, which was about “one-quarter of 1%” of the company’s total $51.4 billion revenues derived from natural gas and electricity trading and marketing activities last year, it noted.

The trades involved 37 Bcf of gas, or 0.73% of Duke Energy’s total gas trades in 2001, and 706 gigawatt hours of electricity, or 0.21% of the company’s annual power trades, according to the company.

ICE last week said it was conducting an internal investigation into Duke’s report. ICE said that as a part of its investigation it will consider whether enhanced internal procedures are necessary to ensure the “orderly, efficient and fair markets that customers expect.”

In the wake of the SEC report, Standard & Poor’s Tuesday placed the credit ratings for Duke Energy, Duke Capital Corp. and its subsidiaries on CreditWatch with negative implications. While the magnitude of the round-trip trades reported by Duke Energy was “negligible,” the ratings agency said it found “more disturbing” the fact that the company still had 3,000 trades to review.

Moody’s Investors Service reacted by changing the rating outlooks for Duke Capital and Duke Energy to “negative” from “stable.” Although the $126 million in revenues from the trades “are not material relative to total sales, it causes some concerns about company trading practices and related controls,” the agency said.

John Diaz, Moody’s managing director, said in his review the revised outlook for Duke Energy “reflects the potential for further discoveries in the investigations or for negative ramifications from them such as fines, penalties or inhibited capital market access, which could become material.” If the current investigations find no more evidence of impropriety and the “situation resolves itself without further implications,” he said, the outlook could again return to “stable.” But if other trading-related problems “materialize on their own,” Diaz noted that Moody’s would consider placing the securities under review for a potential downgrade.

Likewise, Fitch Ratings lowered the ratings outlook Friday for Duke Energy and subsidiaries Duke Capital, Texas Eastern Transmission and PanEnergy Corp. to “negative” from “stable.” Fitch Senior Director Robert Hornick, who said he had a “very high opinion of Duke and Duke management,” declined to speculate about whether the 3,000 trades still being reviewed might bring more bad news for the company. “That doesn’t mean that there’s anything necessarily negative,” he told NGI.

When quizzed about the “wash” trading practices of energy companies on Capitol Hill last Tuesday, Federal Reserve Chairman Alan Greenspan said he was “puzzled” as to why companies “play those games. I’m not sure it makes any sense whatever,” since “while revenues do rise, margins go down.”

Duke Energy spokeswoman Cathy Roche said that while the trades did artificially inflate the company’s revenues, that was not the “motivation” behind the trades. “The distinction is these [trades] were not done to increase revenues.” Instead, the objective apparently was to hike trading volumes, she noted.

Duke Energy said it didn’t report the 23 bogus trades, which were intended for eastern markets, to the Federal Energy Regulatory Commission, since the agency’s probe is focused on round-trip trading activity in western energy markets.

The company’s preliminary report to the SEC covered its energy trading activities between Jan. 1, 1999 and May 31, 2002. It still has about 3,000 more trading transactions to analyze and expects to provide an update to the SEC next month, she noted.

Duke Energy has put a trading manager on indefinite leave with pay to “assure the independence of the review” of its trading practices during that period, according to Roche. The report was in response to a “confidential inquiry” being carried out by the SEC into the round-trip trading activities of Duke Energy. Because of its confidential nature, Roche said the report was not available to the public.

In addition to the SEC inquiry, Duke Energy received a subpoena from the U.S. attorney’s office in Houston earlier this month for its trading records and documents, and is the target of ongoing investigations being carried out by FERC and the Commodity Futures Trading Commission into the sham trading practices of energy companies.

Duke Energy was given a deadline of Aug. 19 to turn over records to the U.S. attorney’s office, said Roche. Other energy traders being investigated by the U.S. attorney’s office in Houston include El Paso Corp., CMS Energy, Reliant Resources and Dynegy.

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