Marking a quarter in which it completed its $8 billion acquisition of Westcoast Energy Inc., Charlotte, NC-based Duke Energy reported that it is on track to meet 2002 financial goals through execution of its balanced energy portfolio strategy. The company posted net income of $382 million (48 cents per share) in first quarter 2002, compared with $458 million (61 cents per share) in first quarter 2001. Despite the fall-off, the company still beat a Thomson Financial/First Call estimate of 41 cents a share. The company posted earnings before interest and taxes (EBIT) of $761 million during the first quarter 2002, a steep decline from the outrageously volatile first quarter of 2001, which saw natural gas spot prices reach $10.00/Mcf and more. The company posted EBIT of $1.254 billion for the first quarter 2001.

The company’s earnings remained in line with Duke Energy CFO Robert Brace’s estimates revealed in late March (see NGI, April 1). Brace warned that earnings could not “reasonably” be compared with those of the first quarter of 2001, when there were record commodity prices and unusually cold temperatures.

Following the company’s earnings release Wednesday, CEO Richard B. Priory, said, “We are on plan to achieve toward the higher end of the range of our stated goal of 10 to 15% compounded annual EPS [earnings per share] growth from a base of $2.10 in 2000. Historically our greatest earnings contributions have occurred in the second and third quarters. This year our merchant generation portfolio will nearly double before the end of the second quarter.”

First announced last September (see NGI, Sept. 24, 2001), Duke completed the acquisition of Vancouver, BC-based Westcoast Energy in March (see NGI, March 25). The transaction was immediately accretive to Duke’s earnings and is expected to contribute 3 cents per share in 2002 earnings, after recognizing issuance of 49.9 million shares of common stock.

Through the transaction, Duke obtained a network of mostly Canadian-based natural gas assets, including 6,900 miles of transmission pipeline, 141 Bcf of storage capacity, major processing plants and more than one million natural gas distribution customers. Duke said it also provides significant access to North America’s major natural gas supply basins and markets and better positions the company for the coming expansion of North America’s natural gas infrastructure.

“Looking ahead, we believe that our strong balance sheet and sustainable cash flow provide us with the capability to seize attractive opportunities to enhance our energy portfolio,” Priory said.

After the company’s announcement, Credit Suisse Equity Research analyst Curt Launer said that results from Duke’s business units — except for the pipelines — were below expectations and year-ago results. “In summary, we view the EPS target of $2.78, indicated by Duke, to be less visible and subject to greater volatility,” he said in a Credit Suisse Earnings note. “With this report we are maintaining our estimate of $2.65 for ’02 based upon a reduced tax rate and lower than expected interest expense. For ’03, we are reducing our EPS estimate from $3.10 to $3.00 to reflect lower growth rates in the Energy Services and pipeline units.”

Duke’s results were led by its gas transmission segment, which reported first quarter EBIT of $268 million, a 53% increase over the $175 million in first quarter 2001. Results included one month of earnings from the acquired Westcoast Energy natural-gas transmission and distribution assets, which contributed $62 million to first quarter EBIT. Also contributing to 2002 results was a $9 million after-tax gain on the sale of a portion of the natural gas transmission unit’s ownership interest in Northern Border Partners LP.

Duke added that its gas transmission segment also received numerous approvals for the quarter on proposed lines and expansions. Islander East Pipeline Company LLC, equally owned with KeySpan Corp., received a positive preliminary determination and a draft environmental impact statement from FERC to construct, own and operate approximately 50 miles of interstate natural gas pipeline in Connecticut and on Long Island, NY. Maritimes & Northeast Pipeline LLC and Algonquin Gas Transmission Co. received final approval from FERC for the Maritimes Phase III and Algonquin HubLine natural gas pipeline projects that will interconnect the 650-mile Maritimes pipeline with the 1,000-mile Algonquin system. In addition, Maritimes also filed its Phase IV expansion. Duke Energy’s affiliates own a majority of Maritimes with a 75% stake. The remainder is owned by affiliates of ExxonMobil (12.5%) and Emera Inc. (12.5%). Algonquin is a wholly owned subsidiary of Duke Energy.

FERC also granted a positive preliminary determination for the $289 million Patriot project, which will transport natural gas along a new pipeline route — the Patriot Extension — to meet growing demand for natural gas in the Southeast.

Duke’s other segments mostly reported declines from the first quarter 2001 due in part to the unusual market volatility experienced during the first quarter of 2001. Duke said this quarter’s results reflect a return to more normal commodity pricing and volatility. The company’s energy services businesses, which include the North American Wholesale Energy (NAWE), International Energy and Other Energy Services segments, delivered combined EBIT of $132 million for the first quarter, compared to $428 million during the same period last year. NAWE, comprised of Duke Energy North America (DENA), Duke Energy Trading and Marketing and Duke Energy Merchants (DEM), reported EBIT of $67 million for the quarter, as compared to $348 million in EBIT during first quarter 2001. The earnings for first quarter 2001 were the result of DENA’s ability to create value from unusual levels of market volatility.

This summer, DENA said it expects to complete construction of 11 new plants with 6,700 additional MW, nearly doubling its current operating portfolio to 15,300 MW. These new facilities are expected to provide NAWE with significant earnings growth in third quarter.

The Field Services business segment, which represents Duke Energy’s majority interest in Duke Energy Field Services (DEFS), reported EBIT of $35 million as compared to $123 million in first quarter 2001. DEFS said the results were primarily affected by a significant decrease in natural gas liquids prices. The average NGL price per gallon was 31 cents in the quarter, as opposed to 60 cents in first quarter 2001.

During the quarter, DEFS signed agreements to acquire ChevronTexaco’s 33.3% interest in Discovery Producer Services LLC (see NGI, March 25). The transaction, expected to close during second quarter 2002, will significantly increase DEFS’ midstream presence in the Eastern Gulf of Mexico.

Duke Energy also released some metrics for its trading and marketing operations. Daily earnings at risk (DER), a measure of the likely one-day favorable or unfavorable movements in commodity prices and their corresponding effects on EBIT within Duke Energy’s trading portfolio, averaged $17 million in first quarter 2002. This amount does not include Westcoast Energy trading activity. Duke said the average DER for first quarter 2001 was $30 million.

DENA said its merchant generation portfolio — including merchant generation facilities and hedging contracts held for power, natural gas, crude oil and petroleum products — had a total estimated value of $6.8 billion as of March 31. On a cumulative basis, approximately 11% of the fair value of these contracts is expected to be realized by the end of 2002, 22% through 2003, 35% through 2004 and the remainder in 2005 and beyond. The North American merchant generation capacity hedged for 2003 is 74%, for 2004 is 60%, and for 2005 is 59%.

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