Duke Energy’s second quarter ongoing earnings were sharply higher than Wall Street estimates and were up 12 cents from 2Q2003 on strong performance from utility, field services, gas transmission and real estate operations, but losses from Duke Energy North America (DENA), the company’s marketing, trading and merchant power arm, continued to be a significant drag on results.

Duke reported ongoing earnings of 42 cents per share versus 30 cents in second quarter 2003 and compared to analysts’ estimates of 24 cents/share. The company reported second quarter earnings per share of 46 cents versus 46 cents in 2003. Net income was $432 million compared to $424 million in 2Q2003. For the first half of the year, net income was up 16% to $738 million.

“We accelerated progress on our financial objectives in the quarter,” said Chairman Paul Anderson. “We’ve already surpassed a number of our year-end targets and our business units are showing encouraging results.”

However, DENA continued to post losses. DENA earnings before interest and taxes (EBIT) was a negative $39 million compared to EBIT of $211 million in 2Q2003. For the first half of the year, the division reported a $596 million loss. The key factors for the quarter were: 1) a previously announced $105 million charge related to the California and western U.S. energy markets settlement, offset by a $108 million positive settlement in the Enron bankruptcy proceeding; 2) positive mark-to-market earnings of $24 million as a result of changes in power and natural gas prices; and 3) a $10 million loss on the liquidation of Duke Energy Trading and Marketing contracts.

During the quarter, DENA announced two significant asset sales. In May, it announced an agreement to sell eight power plants in the Southeast, and in June, it announced the sale of its unfinished Moapa project in Nevada. These transactions are expected to close in the third quarter and fourth quarters of 2004, respectively, and will provide Duke Energy with $1.3 billion in cash proceeds and tax benefits.

Aside from the negative affect of the DENA merchant segment, Duke’s other business performed well during the quarter. Duke Power, the company’s electric utility, posted quarterly EBIT of $338 million compared to $316 million. Its natural gas transmission business reported EBIT of $311 million compared to $306 million in 2Q2003. International operations posted EBIT of $68 million compared to $91 million and Crescent, the company’s real estate business, reported EBIT of $87 million compared to $21 million in the second quarter of last year. The Field Services business segment, which represents Duke’s 70% interest in Duke Energy Field Services (DEFS), reported higher second quarter EBIT of $94 million from continuing operations, compared to $53 million in the second quarter of 2003.

Fixed income analysts from CreditSights said they are maintaining an “overweight” rating on Duke Energy and Duke Capital bonds “based on the strong underlying regulated businesses DUK owns.”

“DUK’s debt reduction plans remain on track with Q2 showing a $645 million reduction in debt outstanding, bringing the to-date reduction to $1.7 billion and debt-to-cap to 56.7%, by our calculation,” the CreditSights analysts said. “Additionally, DUK’s cash balance has grown from $1.2 billion at year-end to $2.6 billion at quarter-end. This will be enhanced in Q3 when DUK closes on two previously announced asset sales that will result in an additional $1.3 billion in cash proceeds and tax benefits. In total, DUK is on track to reduce total debt by $3.5-4.0 billion in 2004.

“We would not be surprised to soon hear the same analysts who were asking Duke last year about their contingency plans for an imminent drop below investment grade rating at the parent, to start asking about potential dividend increases.”

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