Can Duke insulate itself from shocks to its sector?

AuthorBreznick, Alan
PositionMoney Matters

Duke Energy Corp. executives will probably be glad to turn out the lights on 2002. Who could blame them? Power companies have been feeling the heat of greater scrutiny from Washington and Wall Street since Houston energy-trading giant Enron revealed it kept more than $1 billion of debt off its books.

Even Charlotte-based Duke (NYSE: DUK), which Fortune magazine this year dubbed the "Un-Enron" for its conservative ways, hasn't been above criticism. After denying wrongdoing, Duke confessed in July that it had made 23 "wash trades" -- selling energy and then buying it back quickly at the same price to inflate demand, prices and revenue. Later, it said the number of trades was 89. The trades boosted revenue just $217 million -- less than 1% of its total revenue from 1999 through 2001. Even so, Duke fired two employees and revamped its trading and marketing operations.

Also in July, Duke, which had $59.5 billion revenue last year, cut its projected profit for 2002 and 2003. It still beat analysts' forecasts with a second-quarter profit of $474 million. But 16% of that came from onetime gains such as asset sales. Without those, Duke would have come in below expectations.

The stock fell from $30 on July 8, shortly before Duke admitted making the wash trades, to $18.80 on July 23. It had rebounded to more than $26 by mid-August, though some analysts remain skeptical. Samir Nangia, with Credit Lyonnais Securities in New York, questions the $46 million gain from the estimated value of its energy-trading futures contracts. He says Duke is using unreasonable assumptions about future gas prices to boost earnings.

At least six analysts, including Nangia, cut their Duke ratings from buy to hold during the summer. Some are fretting about the impact of government investigations. Others fear that Duke's plans to raise $1 billion in equity by year's end will dilute earnings.

In answering critics, Duke spokesman Terry Francisco says the company has disclosed more about its energy trading than in previous years. It is following new federal accounting rules in adjusting its futures-trading assumptions. And year after year, it trades enough assets to consider it a normal part of its operating revenue.

Duke has grown net income an average of 13% a year in the past four. In 2001, net income was $1.9 billion. This year should be about the same. That's not the electrifying growth its investors are used to.

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