Power Engineering - Duke Energy reports first quarter 2003 results

CHARLOTTE, N.C., April 30, 2003 -- Duke Energy reported first quarter earnings of 25 cents per share, or $225 million in net income, compared to 48 cents per share, or $382 million net income in first quarter 2002.

Results for first quarter 2003 included an 18 cent, or $162 million, after-tax charge for the cumulative effect of previously announced accounting changes. Before the effect of accounting changes, Duke Energy earned 43 cents, or $387 million, in first quarter 2003.

"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, chairman and chief executive officer. "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," Priory said.

The first quarter 2003 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. This represents an after-tax charge of $151 million, or 17 cents per share. The remaining element of this charge, $11 million, or 1 cent a share, is due to implementation of SFAS No. 143, "Accounting for Asset Retirement Obligations."

* Overall Earnings Before Interest and Taxes (EBIT) was $974 million, an increase of 26 percent, compared with $770 million in first quarter 2002

* Natural Gas Transmission reported EBIT of $423 million, a 59-percent increase compared with $266 million in first quarter 2002.

* Franchised Electric EBIT was $454 million, an 18-percent increase from first quarter 2002 EBIT of $384 million.

Below is a reconciliation of consolidated operating income to EBIT (in millions):

Operating income for the first quarter 2003 was $893 million, compared with $668 million for the first quarter 2002. Other income and expenses were $81 million, compared with $102 million in 2002. EBIT was $974 million in the first quarter 2003, compared with $770 million in 2002.

First quarter 2003 EBIT from Franchised Electric was $454 million, an 18- percent increase from first quarter 2002 EBIT of $384 million. Higher results were due to colder than normal weather during the quarter and increased wholesale power sales. The increase was 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.

Franchised Electric continues to benefit from outstanding operating performance. During the quarter, the capacity utilization at Duke Power's nuclear stations increased to 97 percent from 95 percent in first quarter 2002.

The Duke Energy Gas Transmission (DEGT) segment reported first quarter 2003 EBIT of $423 million, a 59-percent increase over the $266 million in first quarter 2002. Results included a full quarter of earnings from Westcoast Energy, acquired in March 2002. 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 L.P.

During the quarter, DEGT 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.

In the Southeast, DEGT began construction of the Patriot project, which includes a 94-mile pipeline extension of the East Tennessee Natural Gas system into southwest Virginia and North Carolina. In the Northeast, the company's Algonquin Gas Transmission unit has made filings with the Federal Energy Regulatory Commission (FERC) to develop HubLine Phase II, a project that will transport natural gas to the greater Boston market and increase the reliability of natural gas infrastructure in eastern Massachusetts.

In western Canada, DEGT received final approval from Canada's National Energy Board to proceed with the construction of the Grizzly Pipeline extension in Northeastern British Columbia, which will tie new natural gas production in western Canada to growing markets in British Columbia, the U.S. Pacific Northwest and beyond. DEGT demonstrated outstanding reliability this past winter in response to strong demand due to severe cold weather.

For example, DEGT's Texas Eastern system, which transports natural gas into the northeast corridor, experienced 13 of its top 25 all-time, peak-delivery days during the winter of 2002 to 2003.

Duke Energy North America (DENA) reported EBIT of $23 million in first quarter 2003, compared to EBIT of $54 million in first quarter 2002. The decrease was 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, partially offset by lower general and administrative expenses.

Recently, DENA announced that it was exiting proprietary trading as the company continues to aggressively manage its risk profile.

For first quarter 2003, Duke Energy International (DEI) reported EBIT of $54 million, compared to first quarter 2002 EBIT of $57 million. Included in DEI's first quarter 2003 EBIT is a non-recurring, non-cash charge of $11 million related to the timing of revenue recognition at the Cantarell investment in Mexico, a nitrogen-production plant which was acquired with Westcoast.

The Field Services business segment, which represents Duke Energy's 70- percent interest in Duke Energy Field Services (DEFS), reported first quarter 2003 EBIT of $33 million compared to $35 million in first quarter 2002. The effects of significantly higher natural gas prices and hedges on the prices of natural gas liquids (NGLs) substantially offset the favorable impact of strong NGL prices during the period.

The Other Operations segment, including Crescent Resources, DukeNet Communications, Duke Capital Partners, Duke/Fluor Daniel, Duke Energy Merchants and Energy Delivery Services, reported an EBIT loss of $26 million in first quarter 2003, compared to EBIT of $17 million in first quarter 2002. Results were negatively affected by charges related to the exiting of proprietary trading and hydrocarbons businesses at Duke Energy Merchants.

During the first quarter, Duke Energy announced that it is exiting the merchant finance business at its wholly owned subsidiary, Duke Capital Partners, LLC. The company expects to realize positive cash flows in 2003 and 2004 from Duke Capital Partners' portfolio of approximately $340 million. For 2003, Duke Energy expects approximately $200 million of the portfolio to be monetized, with the remainder being closed during the first six months of 2004. Approximately $80 million of that portfolio has already been monetized in first quarter 2003.

Interest expense was $340 million for first quarter 2003, compared to $198 million for first quarter 2002. The increase was primarily due to debt related to the Westcoast Energy acquisition, reduced capitalized interest at DENA and additional debt.

For first quarter 2003, cash flow from operations was $1.4 billion, compared to $0.8 billion in first quarter 2002. In 2003, Duke Energy expects cash flow from operations, which includes real estate sales at Crescent Resources, combined with proceeds from divestitures at other business units, to more than adequately fund capital expenditures of approximately $3 billion and the approximately $1 billion needed to fund the $1.10 per share dividend. The company's current business plans for 2003 fully support the dividend at this level.

In 2003, the company has announced or completed approximately $1.1 billion in gross proceeds from asset sales. During the quarter, Duke Energy closed on asset sales of non-strategic assets of approximately $350 million. The company expects asset sales to contribute approximately $1.5 billion in gross proceeds for 2003. Proceeds in excess of the amounts needed to help fund capital expenditures and pay the dividend will be available to pay down debt.

Duke Energy's consolidated capital structure as of March 31, 2003, including short-term debt, was 55 percent debt, 37 percent common equity, 4 percent minority interests and 4 percent preferred securities.

Under various credit facilities, Duke Energy, Duke Capital and other subsidiaries had the ability to borrow up to $5.3 billion as of March 31, 2003. The companies had borrowings and letters of credit outstanding under these programs of approximately $2.2 billion as of March 31, 2003, resulting in unused capacity of approximately $3.1 billion. The company also had approximately $1.1 billion in cash and cash equivalents as of March 31, 2003. Subsequent to March 31, 2003, a credit facility at Duke Capital of $0.5 billion matured and was replaced with a facility of $0.25 billion.

For first quarter 2003, revenues were $6.2 billion, up from $3.2 billion in first quarter 2002. The key drivers for the increase include significantly higher NGL pricing, two additional months of Westcoast operations, greater wholesale power sales and the adoption of the final consensus on EITF 02-03, which requires the company to present revenues for certain natural gas transactions on a gross basis in 2003. Adopting this final consensus did not require a change to prior periods and therefore the company did not change the 2002 revenue amounts.

Earnings before interest and taxes, or EBIT, is the primary performance measure used by management to evaluate company and segment performance. On a segment basis, it includes all profits (both operating and non-operating) before deducting interest and taxes, and is net of the minority interest expense related to those profits. Management believes EBIT is a good indicator of each segment's operating performance as it represents the results of our ownership interests in operations without regard to financing methods or capital structures. EBIT should not be considered an alternative to, or more meaningful than, net income, operating income or cash flow as determined in accordance with generally accepted accounting principles (GAAP). Duke Energy's EBIT may not be comparable to a similarly titled measure of another company.

Duke Energy is a diversified multinational energy company with an integrated network of energy assets and expertise. The company manages a dynamic portfolio of natural gas and supply, delivery and trading businesses meeting the energy needs of customers throughout North America and in key markets around the world. Duke Energy, headquartered in Charlotte, N.C., is a Fortune 500 company traded on the New York Stock Exchange under the symbol DUK. More information about the company is available on the Internet at: www.duke-energy.com.

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