Taking into account a charge related to new accounting changes, Duke Energy reported first quarter net income of $225 million (25 cents per share), compared to $382 million (48 cents per share) in first quarter 2002. Results for first quarter 2003 included a $162 million (18 cents per share) after-tax charge for the cumulative effect of previously announced accounting changes.
“We had a good quarter and have made solid progress toward achieving our goals for 2003, Duke CFO Robert Brace said in a conference call. “Franchised Electric and natural gas transmission were rock solid and provided strong earnings and cash flows as we expected.” Brace added that through non-core asset divestiture the company expects to reduce debt by approximately $1.8 billion in 2003.
Despite the drop in net income, the company’s revenue soared to $6.2 billion for the quarter, nearly doubling last year’s first quarter results of $3.2 billion.
“We entered 2003 with an aggressive plan to deal with the merchant energy downturn by cutting our exposure to the unregulated marketplace and strengthening our balance sheet,” said Richard B. Priory, CEO. “Our first quarter results show we are executing on our business plan and producing significant earnings and cash flow at our strongest businesses.
“As we continue to size our business for market realities and focus on cash generation and capital management, we are confident we will achieve our previously stated guidance of $1.35-$1.60 earnings per share (EPS) in 2003 before a charge for the cumulative effect of previously announced accounting changes.”
Duke said the charge related to changes in accounting principles was primarily due to implementation of EITF Issue No. 02-03, “Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and for Contracts Involved in Energy Trading and Risk Management Activities,” which changes the timing of earnings recognition for certain energy contracts. EITF represented an after-tax charge of $151 million (17 cents per share), while an $11 million (1 cent a share) charge is due to implementation of SFAS No. 143, “Accounting for Asset Retirement Obligations.”
Not including the charges, earnings before interest and taxes (EBIT) for the entire company was $974 million, an increase of 26% over the $770 million in first quarter 2002. Of that, Duke Energy Gas Transmission (DEGT) reported EBIT of $423 million, a 59% increase compared with $266 million in first quarter 2002, while Duke’s Franchised Electric EBIT was $454 million, an 18% increase from first quarter 2002 EBIT of $384 million.
DEGT’s results included a full quarter of earnings from Westcoast Energy, acquired in March 2002. The segment noted that the two additional months contributed $135 million to first quarter 2003. First quarter 2003 and 2002 results both include gains of $14 million from the sales of DEGT’s limited partnership interests in Northern Border Partners LP. During the quarter, Duke said its DEGT segment moved ahead on several expansion projects to meet growing demand for natural gas in various regions across North America, including the U.S. northeast corridor, the U.S. Southeast and western Canada. They include:
Duke attributed the jump in earnings from its Franchised Electric segment, which generates, transmits, distributes and sells electricity, to colder than normal weather during the quarter and increased wholesale power sales, partially offset by charges of $35 million for expenses related to 2003 severe winter storms and $17 million of amortization expense related to the North Carolina 2002 clean air legislation.
Taking a hit due to lower proprietary trading results, a reduction in mark-to-market earnings due in part to changes in accounting rules and higher depreciation expenses related to new plants, Duke Energy North America (DENA) reported EBIT of $23 million for the quarter, a sizeable drop when compared to EBIT of $54 million in first quarter 2002. DENA said the decrease was partially offset by lower general and administrative expenses.
In mid-April, DENA announced that it was exiting proprietary trading as the company continues to aggressively manage its risk profile (see Daily GPI, April 14 ). A Duke executive said the company would focus on more profitable businesses and that the move was consistent with Duke’s strategy of sizing its business to market realities.
In the conference call, Brace said, “Our ongoing trading activity will focus solely on maximizing the value of our energy asset position.”
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