Duke Energy defied analysts’ expectations by announcing last Wednesday that it would maintain its $1.10/share annual dividend. However, new CEO Paul Anderson outlined a major restructuring plan and said the company would have to take a $3.3 billion fourth quarter 2003 pretax charge as a result of asset impairments.

Anderson also said Duke intends to sell off about eight power generation plants (5,300 MW) mainly in the Southeast, including plants in Georgia, Mississippi, Kentucky and Arkansas, despite likely receiving only a fraction of their original cost (see related story). The sales, however, would eliminate a cash drain and would have tax advantages, he said during a conference call with analysts and investors.

Duke also will shelve unfinished merchant power plants in Moapa, NV; Deming, NM; and Grays Harbor, WA. It may look for buyers from some or all of the shelved units, Anderson said. The company will keep its wholesale power plants in California, the Northeast and Midwest because power markets in those regions have lower capacity reserve margins and fewer regulatory restrictions, he said.

Anderson added that Duke also plans to sell its gas pipeline and power plants in Australia and its gas marketing operations in Europe. The asset sales are expected to draw about $1.5 billion in 2004.

Meanwhile, the company also revealed that it will wind down its trading and marketing joint venture with ExxonMobil. Although it had been scaling back speculative trading, Duke Energy North America’s (DENA) trading shutdown apparently is the result of pressure from its joint venture partner.

Mainly because of the asset impairment charges, Duke will post a loss per share for the year in the range of $1.45 to $1.50. Excluding special items, the company expects ongoing earnings for the year to be between $1.20 and $1.25.

If those earnings for 2004 are not reached, Anderson said top management would not receive certain financial incentives. He also noted that his own salary is in stock and “as such is explicitly linked to the long-term interests of shareholders.”

Since assuming his position in November 2003 after the unexpected departure of former CEO Richard Priory, Anderson has promised to take a number of steps to strengthen the company’s financial outlook and streamline its business and management structure.

“Looking at the progress we’ve made over the last two months, I feel quite good about where we are at this point,” Anderson said. “We’ve scrubbed the numbers. We set realistic targets for 2004. We put a management team in place, and we made key operational and financial decisions. We are now working to deliver on our targets and build on the foundation that we set before you today.”

He said the company intends to strengthen its balance sheet in 2004 through a $3.5-$4 billion debt reduction program. It currently has about $23 billion in debt. The debt reduction will be funded in part by selling power plants and international assets. Going forward, Anderson said Duke will head down a path of much more moderate growth.

“Having considered our shareholder base, current capital structure, investment opportunities and future earnings potential, we have adopted an investment proposition of income with modest growth,” he said. “We feel that this approach will generate the greatest shareholder value over time and will provide attractive returns for long-term investors in Duke Energy securities.”

He said that in addition to supporting the $1.10 per share dividend, Duke Energy’s cash flow in 2004 will fund $2.2 billion in capital expenditures, including maintenance costs and some room from moderate corporate expansion.

Anderson said that although DENA will continue to be a drag on earnings for the next year at a minimum, the company’s franchised electric, gas transmission and distribution operations, gas gathering and processing business and other operations provide significant and dependable earnings and cash flows.

“Next year includes an EBIT loss of $300 million at DENA — even worse that we thought — but this could improve as sales of loss-making assets advance,” said Steve Fleishman of Merrill Lynch. “We are raising out 2004 [estimate of earnings per share] to $1.20 although the source of the improvement is not that clear absent company estimates for other business units (expected next month.”

Fleishman said he was not surprised to see Duke stock rally on the news. It gapped higher Wednesday morning on the New York Stock Exchange and reached nearly $21.50 after trading near $20 Tuesday. “We were not alone in anticipating a [dividend] cut and there was substantial short interest outstanding,” he said.

“Out rating remains neutral, however, as we see limited scope for valuation upside at the new level of base earnings outlined.”

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