Duke CEO Richard Priory said in order to deal with the downward pressure and volatility in the energy industry the company has taken and will continue to take some “very strong and decisive steps” to position the company for the uncertain future.

Speaking at UBS Warburg’s Natural Gas & Electric Utilities conference, Priory said Duke’s business model is built upon diversification and balance to be able to deal with the volatile energy market.

“Certainly you’re all painfully aware of the dramatic market volatility that we have experienced in the relatively short life span of the merchant power sector in general,” said Priory. “Just a couple of years ago, a very strong economy was driving very excellent demand growth and driving it really to the point of tight reserve margins in some regions of the country. There was not enough supply to go around to meet the demand, so merchant construction accelerated…accelerated well beyond our expectations as well. Today, of course, we find ourselves in a sea of abundant generation, at least for a couple of years out here.

“For the next year we really don’t expect a dramatic change in any of these indicators,” he said. “If we look to 2004 and 2005, we see some moderation in reserve margin as we burn it down and of course as we see more and more plants that were intended to go forward either being cancelled or simply delayed and put into mothballs for a period of time.”

Priory said that Duke expects a “gradual recovery” from this situation, rather than a rapid one, noting that the entire picture is not clear yet because the industry has not experienced a cycle quite like this before. As a result, he said Duke has moderated its outlook on Duke Energy North America and reshaped its businesses and portfolio in order to address the difficult markets, which he expects will stick around through 2003 and 2004.

In the near term, Priory said Duke Energy is focused on reducing shareholder risk and restructuring its business to be well positioned in today’s tough energy marketplace. “We are investing in our strongest businesses going forward, we have not set that aside,” Priory said. “If we had to set that aside we would set that aside,” but “we don’t see any reason why we will have to at this point in time, so we continue to grow out our pipeline business, and likewise finish a couple power plants that we think are areas where we are truly advantaged and will continue to be advantaged.”

Priory said Duke Energy has and will “carve back” all of the infrastructure that is unnecessary to run the existing business it has grown into. This program will likely continue through 2003. “We are sizing businesses to market realities,” priory added.

As an example Priory listed Duke’s recently completed $240 million sale of the Empire State Pipeline to Buffalo, NY-based National Fuel Gas Co. (see NGI, Feb. 10).

In addition, Duke Energy said it has cut its capital expenditures for 2003 to half of what it had previously planned. Of the $3.2 billion, approximately $1.8 billion is maintenance-oriented with the remainder going to the few growth prospects in the pipeline business as well as the few power plant completions.

Looking forward, Priory said Duke Energy is looking to post $1.35-1.60 per share for 2003. “Earnings for 03 will be largely from our regulated operations — franchise electric — and our gas transmission,” he said. “Together, these businesses represent about 80% or so of the EBIT [earnings before interest and taxes] that we are planning for in 2003.

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