Duke Energy Corp (DUK) 2001 Q1 法說會逐字稿

Good day everyone and welcome to the Duke Energy first quarter 2001 earnings conference call. Today's call is being recorded. At this time for opening remarks, I would like to turn the call over to the Senior Vice President of Investor Relations for Duke Energy, Ms. Sue A. Becht. Ms. Becht, please go ahead.

Thank-you Kim. Good morning everyone and thank-you for joining us today. We have a whole host of executives here on the table at Duke just eager to discuss this quarter's results, but let me tell you who is here and how the conference call will proceed. We have to open the call, Richard Priory, our Chairman, President, and CEO. Then the bulk of the prepared remarks will be by Robert Brace, Executive Vice President and Chief Financial Officer. Available for your questions along with Rick and Robert are Harvey Padewer, Executive Vice President and Group President of Energy Services, and Fred Fowler, Executive Vice President and President of Energy Transmission. Before we begin today's discussion, let me just remind you that some of things we discuss in today's call may be forward-looking statements under the SEC Safe Harbor Provisions, so let me just refer you to our filed documents for factual information. With that, I will turn the call over the Rick Priory. Rick?

Thanks Sue. Good morning everybody. We are glad that you could join us here this morning to talk about the quarter that Duke Energy had which was an outstanding quarter. It has also been a very busy quarter for Duke Energy. Thinking back over the last three months, we are [slipped a] stock. As you are well aware, we had an equity offering which was historically the largest equity offering in our industry, raising $20 billion for future growth prospects. We have been working hard with California to try to untangle, if you will, the [regulatory] morass, and have made some progress towards solving the real problem in California, the supply-demand balance that we are currently experiencing in that market. We are building plants to meet new power demand in markets throughout the United States and have been very busy getting ready to place some six units into service this summer. We are looking for a number of more integrated opportunities in domestic and international markets, and are enjoying some opportunity in finding those opportunities. Let me remind you also as we look at quarter one 2000 versus quarter one 2001, which are the comparisons that we will be talking about for the most part of today. 2001, in this quarter, we have four new [_______________] plants in operation throughout the United States, none of which actually are in California by the way. They were not included, of course, in any results for quarter one 2000 that we are comparing to. Our field services GPM merger, as well as Conoco acquisitions in our field services business will all be fully reflected in this quarter as opposed to the first quarter of 2000, when there were only partial results in there. [_____________] gas acquisition in Europe is fully reported in this quarter 2001 and our minority shares interest in Paranapanema, our investment in Brazil, is fully reflected in this quarter of 2001 as opposed to the results that were compared to in 2000. We are clearly, our corporation, of course, focused on a number of things in addition to California although I must say 80% of the questions we seem to get these days relate to California, which is a fraction, a small fraction of our business. We [_______________] a business, a very big business with an exciting future, and frankly, we don't have time to sit and watch everything that is taking place and what happens. We're [out in front], we are leading the way and working hard to create our company's growth projectory. This quarter's results, I think, proves that point very clearly. Earnings for our competitive energy businesses now deliver more to the bottom line than ever before, some 57% of our total EBIT was generated by our competitive businesses and of course substantially more than our historically regulated utility company [in the Carolinas]. These businesses have truly become the drivers of Duke Energy's earnings growth, and they really are delivering the results [_____________] we are delighted to report the outcome to you. At this point in time, I will turn it over to Robert who is going to discuss these results in much greater detail.

Thank-you Rick. Good morning everyone. You should all have had a chance to review our earnings release given out yesterday evening, and we are very pleased with our results for the first quarter of 2001. Duke Energy announced a 51% increase in ongoing earnings per share of 74 cents for the first quarter 2001. Reported earnings per share was 61 cents, which included a 13 cents one-time charge related to the cumulative effect of a change in the accounting principle for FAS 133. Ongoing earnings per share for the first quarter of 2000 was 49 cents, which excluded a 4-cent gain for the sale of the LNG Ships at Duke Energy International. Earnings before interest and taxes for the quarter were $1.3 billion representing an increase of nearly 48% over the results for the first quarter of 2000. Top-line revenues continued to show strong growth increasing 126% to $16.5 billion for first quarter compared with $7.3 billion the same quarter last year. I'll move on to EBIT, the company reported earnings before interest and taxes of $1,269 million. This represents an increase of nearly 48% over last year's quarterly EBIT of $859 million. Duke Energy's competitive energy business, gas transmission, field services, and energy services continue to post strong results and contributed more than 57% of EBIT this quarter. Franchised Electric contributed 36% to total EBIT this quarter compared with 54% at the same time last year. The energy services segment doubled its contribution to EBIT this year, delivering 33% of total EBIT for the company. Energy services is well on its way to delivering more earnings to the bottom line than the regulated utility. The energy services segment, which includes North American Wholesale Energy, International Energy, and Other Energy Services continues to deliver substantial earnings growth and reported $428 million in EBIT for the quarter, an overall increase of $289 million or 208%. EBIT from ongoing operations for the first quarter of 2000 was $139 million, which excludes the $54 million gain on the sale of LNG Ships last year. Field services also reported significant earnings growth by increasing its first quarter EBIT by 71%, from $72 million in 2000 to $123 million this year. Duke Energy Gas Transmission increased its EBIT for the quarter by approximately 11%, reporting EBIT of $175 million compared with $158 million last year. EBIT for Franchised Electric was down 1% or $5 million for the quarter. EBIT for the quarter was $460 million compared with 465 million last year. Duke Ventures posted first quarter results of $7 million compared with $18 million for the same period last year. Now, let me move on to the main business units in more detail. Firstly, North American Wholesale Energy. North American Wholesale Energy increased the operation of Duke Energy North America, including gas and power trading operations and Duke Energy Merchants. For the first quarter, North American Wholesale Energy announced EBIT of $348 million. Strong results for the quarter were primarily due to increased earnings from long-term origination transactions and favorable trading results on commodity positions. Partially offsetting these strong results were increased operating and development costs. You will recall that we took a $110 million reserve in the fourth quarter of 2000 against questionable receivables relating to Energy sales in California. Throughout the first quarter of this year, Duke Energy has conducted its business in California to supply the maximum possible electricity to meet the needs of the state while limiting the company's exposure to less creditworthy counter parties. The company has managed the balance of questionable receivables to a lower level today and is confident that the $110 million reserve taken in the fourth quarter of 2000 is conservative and appropriate. No additional reserve has been taken. DENA continues to build out its generation portfolio in markets across the country. DENA has more than 11,800 net megawatts in operation or under construction compared with 6900 net megawatts last year. DENA announced the construction of approximately 4100 megawatts of new generation capacity to serve markets in Arizona, Arkansas, California, Georgia, and Ohio. All of these facilities are gas-fired combined cycle plants and expected to be in service by mid 2002. In addition, DENA expects to announce another 2000 megawatts of peaking capacity during the second quarter. DENA also signed a memorandum of understanding with the California Department of Water Resources (CDWR), for long-term power sales totaling approximately $4 billion over a 9-year period. Discussions continue with the CDWR to finalize this transaction. Duke Energy Merchants entered a 10-year transmix processing agreement with Kinder Morgan Energy partners at their facilities located in Illinois, Pennsylvania, and Virginia. Transmix is a byproduct of refined products pipeline operations. Transmix processing plants [split] the transmix back into specific products such as unleaded gasoline and diesel fuel. Duke Energy Merchants will market the products after processing by Kinder Morgan. This transaction is another example of the company's growing marketing efforts in the refined products business. Power trading volumes in the first quarter increased by 13% from 50,000 to 57,000 gigawatt-hours. Natural gas trading volumes in the first quarter increased 13% from 12 TBtu per day to 13.6 TBtu per day. I'll move on to International Energy. For the first quarter of 2001, DEI substantially increased its EBIT to $76 million, up from $50 million for the same period last year, and that is excluding the $54 million gain last year on the sale of LNG Ships. Strong portfolio operations in DEI's Latin American businesses continue to provide substantial earnings growth. Trading operations in Europe also contributed to the strong earnings results for the quarter. In Australia, plans to build the $380 million Tasmanian gas pipeline are well under way, and construction of the pipeline is slated to begin in mid 2001. Let me move on to Field Services. Field Services reported EBIT of $123 million for first quarter of 2001, a 71% increase over last year's quarter. The combination of Duke Energies gas gathering and processing business with Phillips gas processing and marketing units and strong NGL pricing, all contributed to strong results from Field Services. As a result of the GPM combination and other acquisitions, natural gas gathering volumes increased 37% and volumes of NGL production increased 61% for the first quarter. Field Services substantially increased their gas marketing volumes from 0.5 TBtu per day to 1.6 TBtu per day. NGL prices averaged 60 cents per gallon for the quarter, compared with 50 cents for the first quarter in the year 2000. Let me give you a feel for the sensitivities which we have discussed with you before. If NGL prices increased by 1 cent per gallon, it would have an EBIT impact at the DEF 100% level of $26 million, so that is 1 cent per gallon, $26 million, and if natural gas prices increased by 10 cents per MBtu, that would have a negative impact of $3 million. However, at the Duke Energy level, we do hedge some of this, so an increase of 1 cent per gallon in NGL prices would only have a $7 million impact on Duke Energy Corporation. I will move on to Natural Gas Transmission. The gas transmission group reported EBIT of $175 million for the first quarter of 2001 compared to $158 million last year. The increase in EBIT for 2001 is attributable to the new businesses acquired over the last year, East Tennessee Natural Gas Company and Market Hub Partners in particular. Throughput for the quarter was 511 TBtu compared with 505 TBtu last year. Given the quarter Duke Energy Gas Transmission and Williams closed on their joint purchase of the Gulfstream Natural Gas System from The Costal Corporation. The project has an estimated cost of $1.6 billion and will deliver approximately 1.1 billion cubic feet per day of natural gas supply to the customers in Florida. This pipeline is expected to be in service by June 2002. Market Hub Partners is planning to expand its Egan, Louisiana, and Moss Bluff, Texas, salt cavern storage facilities from 24 billion cubic feet to 32 billion cubic feet. These expansions will provide additional capacity to meet the needs of traditional customers, as well as the growing number of power generation customers. I'll move on the Franchised Electric. EBIT for the first quarter of 2001 was $460 million, down 1% compared with last year. This decrease is primarily driven by decreased sales to industrial customers and certain Catawba joint owners, and increased nuclear outage costs, partially offset by strong growth in sales to residential and general service customers. Total number of customers increased 2.3% in the first quarter of 2001 and electric sales total 19,362 gigawatt hours for the quarter, a decrease of 5.8% from last year. Nuclear operations reported 89 outage days for the quarter, 44 more days than last year, primarily related to Oconee facility. Domestic utilization for the first quarter was 89% compared with 94% last year. If we look ahead, Duke Energy had a strong first quarter, but there is still work to be done to reach our goals for the year. The business units are actively pursuing growth opportunities to deliver more services to our customers and higher returns for our shareholders. North American Wholesale Energy, approximately 3,000 megawatts were under construction for operation this summer. For the summer of 2002, we have approximately 4,100 megawatts of combined cycle plants currently under construction, and we expect to announce another 2,000 megawatts of peaking facilities in the near term bringing the total new generating capacity for 2002 to approximately 6,100 megawatts. Negotiations with the CDWR, as I said earlier, are still progressing in California. Duke Energy International. Last week DEI signed a contract with the pipe supplier and signed a long-term supply agreement with Exxon Mobil, the gas supplies for the Tasmanian gas pipeline projects. [_______________] the numbers for another auction of the CESP generation assets in Brazil is happening as we speak. As far as Field Services is concerned, NGL pricing continues to remain historically strong. Crude oil prices are on the rise again, and you should see a similar trend, therefore, in NGL prices. Continuing to optimize operations, efficiency in cost savings remains a priority. As far as gas transmission is concerned, we are gearing up for the construction of the Gulfstream project, the Maritimes and Northeast recently filed to add compression to its system to increase deliverability to markets in New England by 10% or 40 million cubic feet per day. And at Duke/Fluor Daniel, we continue to add to the backlog of construction generation projects, with approximately 14,000 megawatts under construction or under contract. So you can see, we are going to be busy. Thank-you for listening. I will now be happy to take your questions.

Thank-you. The question and answer session will be conducted electronically. If you would like to ask a question, please press the * or asterisk key followed by the digit 1 on your touch-tone telephone. We'll proceed in the order that you signal us, and we'll take as many questions as time permits. Once again, press * 1 to ask a question. Our first question today comes from Andre [_______________] from Commerce Bank.

Hi guys. Great quarter. I have a couple of questions, and they are not related to California, and I'm sure you will get a few. Start with DEI in Latin America, a couple of things obviously have been in the news, and I think are certainly have been overhanging your stock a bit. One is Brazil and two is Argentina. In Brazil, you are under a tariff regime for your generation which I believe is fixed price, but adjusted annually for inflation. Can you walk through how the fall in the [real] has impacted your Q1 earnings and whether you think inflation adjustment makes you whole at the end of the year?

Andre, Harvey is nodding his head here, so I think he is fully prepared to take that one on.

Okay.

We are very bullish on the Brazilian market for a number of reasons, not least of which is that both supply and demand, or demand is actually outstripping supply, and there is need for power in that market. Now, with respect to the economics, we are still on investment mode in Brazil. So the declining real has actually helped us in our investments, in our planned investments in Brazil. So we are really bullish on it. We think that the economy can support quite a bit of additional investment and the need for generation there will continue to fuel this growth. With respect to Argentina, the assets we have are very efficient. They are very low in the supply [stack]. In other words, they are very low cost producers. As a consequence, we tend to be [dispatched], our contracts are with creditworthy entities. So, we believe the change or the recession that Argentina has gone through has not had any negative impact on our earnings in that region, and so we are continuing to watch the economic situation, but thus far, the results for us in our investments has been good.

Have you made any provisions or hedging arrangements if Argentina was to devalue, and then going back to Brazil, do you have an estimate of the earnings impact of the fall in [real] this quarter.

I am sorry, of the fall in real? No. We don't comment on specific results of our individual businesses within DEI. And so we can tell you that we very carefully evaluate local market conditions and local currency conditions and take that into account in our plans.

[_______________], this is Robert Brace. [We also have a conservative] stance as a corporation, and we hedge both in the financial markets and through natural hedges, through borrowing, and we have a non-material impact on currency movements in the course.

Okay. Let me go on to Field Services, a quick question. It looks like the negative [_______________] spread in the early part of the quarter made your margin from your keep-whole contracts lose money. I think it is about 20 million, and it looks like about a 40 million swing in margin versus Q4, now that the [_______________] spread has turned positive again, I assume you expect your margin in keep-whole contracts to go back to where we saw in 2000.

This is Fred Fowler. Yes we do. Really what is going on right now, you still have quite in certain areas, rejection of ethane and propane, and with inventory levels where they are, and that lack in production, we think, and based on the way [_______________] is trading, we feel pretty good about the [_______________] prices at this point. So yes, we do expect those margins to increase more back toward that level of last year.

Okay, and Duke/Fluor Daniel, I want to get a sense of how many plants you are trying to build or you are planning to build this year simultaneously, and what are the constraints on building more plants in the US at the same time?

Well there are, we have now within Duke/Fluor Daniel, 34 plants, being in various stages of construction throughout North America, but certainly that stresses, brings us to the limit of capacity, but the market place is going to have a difficult time building a lot more plants. The number of engineer constructors in the market place is dwindling and dwindling rapidly, and as a consequence, Duke/Fluor Daniel will actually becomes a dominant EPC contractor in North America, and certainly strategic to us as we build out our own non-regulated power generation within [DENA].

Okay, and in the 34 plants, do you have a breakdown roughly between combined cycle and combustion turbine, and do the constraints impact them differently?

Andre, this is Sue. Could you give me a call on that one later. I don't think we have that breakdown with us.

Well, we can't say, but we have 14,000 megawatts in total under construction or under contract, but breaking that down between combined cycle and simple cycle, we can get you that information.

Okay. I will do that and just one last question on the Gulfstream pipeline. We have heard a lot of talk about LNG coming in, especially in Florida, displacing gas. Are the firm contracts for customers enough to give you your return on equity on this project?

Yes. This is Fred Fowler.

Okay. So if you don't sign up any customers, you are still fine.

Yes.

Okay.

Thank-you Andre.

Thanks.

Moving on, we have a question from Raymond Niles from Salomon Smith Barney.

Good morning. Couple of questions here. First, can you characterize in a little more detail the results of your trading and marketing activities in Europe? Maybe discuss power versus gas, and how the continent is shaping up, a market that has just recently opened up, especially in the gas market.

This is Robert Brace. We have done really well in Europe, but we don't want to split it down. Obviously, it's a new operation for us, but it's growing nicely, and we are very happy with what is happening there.

Okay, but you mentioned that it's a profitable operation at this point.

Yes.

Okay. One of these things that I know you are involved, and we are hearing more about it from some of your peers is the idea of treating plants on a portfolio basis, buying and selling them based on regional pricing differences in power and gas. Can you give us a little bit of flavor on that? Which markets you are kind of viewing more from a long perspective, which ones, if any, you are viewing from a short perspective, and what you are doing in terms of transactions?

Well, we don't comment on specific transactions, but our strategy has been to manage our exposure through evaluating regional supply-demand imbalances and taking various actions with respect to our portfolio, including hedging forward, adjusting and [selling] down in our assets, or doing off balance sheet financing. So we manage our exposures in various ways, not just in [selling] down. That's just one tool in managing our regional supply-demand imbalance changes.

Do you have to outright sell a plant necessarily? Can't you just contract out all the output if you need to [get] short in the market?

Well absolutely. Hedging forward is just another tool for managing that exposure, and I can tell you that we do that very actively and very well in our North American operations.

Ray, this is Rick Priory. It is all a matter of shareholder value creation. That is the best option.

Okay and then, maybe just one another question here. Maybe this is a quick followup there, but I will jump into the other question, and that will be it. If you could just characterize any reasons why you think, maybe we are sensing overcapacity, any one reason you want to name and when you think that is likely to happen, but if not that's okay. The other question though is from the Duke/Fluor Daniel perspective, do you have a sense as to maybe how many megawatts you think are going to get added, net, just industry wide in the United States for 2001 and maybe 2002? Anything you would like say there?

Ray, this is Rick again. From an overcapacity perspective, we don't see any markets at this moment showing imminent signs of oversupply at this point in time. It is as simple as that. There were markets that we anticipate, some of that [threatens] to show up, really not shown up yet, and so that's kind of where we are as we sit here today. In terms of megawatt additions, as you know, we have said, we thought over the next decade or so it will be 200,000 or so megawatts required in this marketplace to bring our supply-demand back into clear balance. With regard to 2001 and 2002, we don't have an estimate as we sit here right now, and in fact if we did, we probably [wouldn't have disclosed it], Ray, for obvious reasons. It figures right into our models with regard to our predictions of forward [curves].

Okay. Great. Thank-you very much.

Thank-you.

Our next question today comes from William Maze from Banc of America.

Hi guys. Congratulations on a very good quarter. A couple of quick questions. A couple for Rick. Just wondering, Rick, you characterized your growth guidance and your earnings guidance in the past which has accelerated. You have got to crawl before you walk and walk before you run. I am wondering where you are in that stage now. If you might be able to update us on that and how you feel about the business. Obviously, secondly, there is still a lot of unrealized value in the stock. Give us your thoughts on that and then switching over to Harvey, if you could just talk about the energy market in trading business or give us a little bit more color on the quarter and you know what really was driving earnings here.

Okay, William, let me take a shot [stemming] off the first two questions you asked. First is growth guidance. Heavens [_______________] will you give us a chance. We are beginning to trot a little bit. We're not yet running, but we are trotting. We've certainly moved from crawling. [Recall] on January 19th, I had the growth projectory for the company from 8-10% to 10-15%. You see a good quarter here, and we feel very good about that growth projectory. That's buoyed our confidence and our ability to deliver in a high range of that growth projectory this year, and we feel very, very, comfortable about that growth projectory at this moment looking off into the future at this stage. With regard to unrealized value in the stock, you know, you are sort of giving me a chance to moan and grown as the CEO of this company, that we agree with you. We see it as seriously undervalued at this point in time in view of the results that they've been presented to the marketplace over the last 3 years, for that matter and so, true. We think there is unrealized value that the market will recognize as we continue to very deliberately deliver to the market the kinds of results that you have been seeing out of us for the last couple of years, and we intend to continue to doing that. With that I'll turn it over to Harvey to address trading and marketing.

With respect to trading and marketing, we see outstanding opportunities going forward now that the marketplace continues to offer opportunities, trading around our own physical assets. In addition, customers are increasingly concerned with price volatility of energy, and so commodity risk management and supplying commodity risk management services to the industry continues to be a strong opportunity for continued growth in our business. And so we're very bullish about that, and certainly we are expanding in areas to meet customers' needs and continue to grow the business.

Okay, thanks guys. I will give someone else a chance.

Thank-you Will.

And moving on, we'll take a question from Tom Hamlin from First Union Securities.

Yes, good morning.

Hi Tom.

Two questions, real quick. One has to do with the big jump in earnings attributable to minority interest. What's the source of that, and is it sustainable at this level?

Well, it's a bit of a structural change in the business, whereas this year we have, you know, a full quarter from DEFS, where we are own 70% and Phillips own 30, and we also have a full quarter from the DETM where we own 60%. So both those businesses have done well, and the minority interest is substantially higher because of that 30% and 40% minority in those two businesses, but there are others as well, but those are the main drivers.

Okay, the second question has to do more with the earnings on the new capacity additions at DENA in particular. You've given many times, a number, earning of $75 to $100 per kilowatt enterprise EBIT per each new unit of capacity. Can you tell me the units that are coming on? Are they meeting those projections or are they at the high end or the low end or do you see a reason for that to be even better?

We continue to be, it's terrific. We're seeing the ability to meet and exceed those kinds of targets. As we've stated in the past, that agility is driven by the fact that we build the plants, we develop them ourselves, we market the energy, both on the gas and power side from our plants. We use our own companies to supply the interconnections, both Duke Engineering and Services and Field Services. We try to locate our plants near our pipeline, so we get an accumulation of value, and that accumulation of value coupled with strong energy market has given us outstanding results.

Is it safe to assume then in taking these new numbers that you're saying this 6100 megawatts for 2002 to be looking at the high end of that range in terms of projecting additions to EBIT?

I don't think there's a linear projection between megawatts and contribution EBIT because we are doing so many other risk management activities around our physical assets, and originating around our physical assets, but there isn't a direct correlation. I think, if you do the multiplication, you'll see that we're doing better than that.

Thanks.

Let me just say in terms of aggregates on the company, as Rick said earlier, you know, we are still looking at a 10% to 15% growth range that we are indicating to you, and these strong results obviously help us to aim towards the upper end of that range.

And I guess, finally, just any news out of the North Carolina legislature on the deregulation front, and then I'll call drop off.

No, not a lot [_______________] legislature continues in really the same mode that they were in in January at this stage of the game. Studies of opening up the wholesale market continue to progress under the guidance and tutelage, if you will, of the North Carolina Restructuring Task Force. They have begun to look very guarded [_______________] issues in preparation for the upcoming task force meetings. So they'll be prepared to address how North Carolina could most effectively open up the wholesale markets and get themselves prepared for later retail restructuring, if you will, in [the state]. That's where we stand right now.

Thank-you very much.

If you find that your question has been answered today, and you would like to remove yourself from the queue, please press the pound key. Our next question comes from Keith [_______________] from Bradley, Foster, and Sargent.

Good morning gentleman. Great quarter, congratulations. I did wanted to ask, I don't know if this is a fair question or not, but what differentiates, what makes your trading operation, your energy trading operation the premier energy trading operation in the United States? And if you could, your quick comment on how that compares, or how you're different than Enron's trading operation in the United States?

I'll take it. I'll [try] answering that. A year ago, we combined our development business and our trading business, giving us the capability to do trading around our physical assets, and that is a strong differentiator with Enron. Having a physical asset gives you the ability to provide optionality to customers without being naked or selling naked options in a sense, and so that gives us a level of security and a level of strength that enables us to grow our business and layer our activities on top of our physical assets. So that's an added plus. I believe that we have the strongest team in the industry with respect to our trading, marketing, and leadership within the North American group.

Thank-you.

We'll take a question from Dale Meyerhoeffer from Millennium Partners.

Hi, a couple of just quick questions for Harvey I believe. First, could you just clarify for me the ownership that you share with Exxon Mobil? Is it just DETM and not Duke Energy Merchants or Duke Energy North America? And then sort of along the same lines, could you update us on the status of your negotiation with Exxon Mobil, regarding that ownership structure and maybe give us an estimate of when you think you may have some resolution of that issue and what the possible outcomes are?

First, before I talk about what that joint venture is, I'll just say that we don't comment on ongoing negotiations or discussions with our partners or our relationship with our partners in these businesses. The DETM business markets and sells the physical gas of Mobil Energy and that the original arrangement as you recall was with Mobil before the Exxon Mobil merger. The partnership does not include trading around our own assets, which we're doing within DENA, so it's really the physical execution of sales of the Mobil gas and the execution of certain DENA transactions.

Okay. Then, are you physically trying to end that partnership with Exxon Mobil.

Well, we don't comment on the structure of our partnership or the dealings with our partners.

Okay, thanks.

Steven Fleishman from Merrill Lynch has our next question.

Hi Steve.

Yeah, hi Rick. How are you doing? A couple of questions. First, the refunds that were ordered by FERC in California or proposed order during the summer, did you book that income or did you never book those revenues in the quarter?

You're talking about in this quarter?

In this quarter, yeah.

Yes, they were in fact booked.

They were booked?

Yes.

Okay, secondly, in California and with respect to your position there, you said for a while that you had forward sold most of your power for this year, and I assume, as we look forward, I believe, that was done middle to late last year, the whole pricing framework both near term and outward is much higher since then. Versus maybe some others, there might be some more substantial upside to your portfolio there as you sell that power, you know, in the next year or are we seeing kind of peak prices now?

Okay. Let Harvey address that one.

Yeah, Steve. Well, first let me say that the majority of our power in California is sold under long-term contracts, and at the time we enter into those contracts, we generally hedge the gas side as well, so those contracts basically lock in our margins, and at the same time provide power, in this case, as the market moves away from those contracts, actually provides power to the rate payers in California at a very favorable rate, so it's really a win-win for Duke Energy shareholders as well California rate payers. There is a percentage of the power that we sell at spot market, and that's a small percentage, that percentage is subject to the FERC refunds. Now, I will tell you that we have gone back to FERC and protested those refunds on the basis that our pricing included a credit premium, and history has demonstrated that that credit premium was necessary, and so we feel very confident that that's a legitimate argument the courts will accept.

Just so I understand, if I were to look at 2002, and how much you have sold [forward] for 2002, is it still in that 90% area or is it 50% roughly?

Well we don't comment on our hegding strategies going forward. [It is competitive] information.

But it would be lower than 90%?

Steve, we just don't comment.

Okay.

Because of its sensitivity.

Okay, last question. In the quarter, your total capex was less than a billion dollars, and I think you have a capex estimate for the year of almost $8 billion.

Our capex in the quarter was just over a billion dollars, 1040 to be precise.

Okay, so about a billion.

And we have a, you're right, and we have a capex including acquisitions going forward higher than that of the run rate. There were no major acquisitions in the quarter, and the vast majority of that 1.4 billion went on business expansion as opposed to sort of maintenance of assets. I mean, 80% or so was related to building the business in gas transmission in North American Wholesale Energy in particular and in other parts of the business. So we still envisage increasing the run rate on the capital and investment over the next 9 months.

Okay, great. Thank-you very much and congratulations on a great quarter.

Thanks Steve.

We'll go next to Kate [_______________] from Seneca Capital.

Hi Kate.

Hi [_______________]. I was just hoping that you could comment briefly on the turbines that you have on order and then also I know that most of your generation that you have in the pipe is natural gas fired, but are you considering any other fuel sources?

With regard to the turbines that we have, on order, of course, that pretty much satisfies our build up needs through 2003 at this stage of the game, and so we are proceeding, and you know the megawatt numbers and what we forecasted in terms of when things are coming into service. And what was the other question?

Natural gas or other fuel sources.

Okay. Yeah, as you know, we are heavily diversified in terms of our fuel utilization for this increment of growth that we are putting into service, which is all natural gas fired though we have substantial amounts of uranium fired equipment, as well as coal. We still feel like clearly, the competitive advantage at this time goes to natural gas. There is no question about that, and our view of the markets going forward suggest that they will maintain their competitive advantage for sometime, unless of course you are looking perhaps sitting on top of a coal mine or something of that sort. A [mine map] kind of facility in which case those are the first kind of coal facilities that could enter the picture and be competitive. So we keep our eyes on those very closely. As you know, through Duke/Fluor Daniel we're building some coal plants at this point in time for others. We watch that very carefully. We know a lot about coal. It's most of our generation, frankly. So we continue to maintain a strong interest, and whatever creates the greatest economic values for the customer, if you will, we think will lead to the greatest shareholder value creations. So that's kind of our thinking on diversified fuels.

Great, okay. Thanks very much.

Thanks Kate.

Our next question today comes from [_______________] from Credit Lyonnais.

Good morning guys.

Hi Sam.

Just, some people seem to be out there saying that perhaps a significant portion of the earnings is coming perhaps from California gas sales instead of California power sales. I was wondering if you could comment briefly on that and then perhaps on some talk going on about the implementation of the soft cap of $150 per megawatt hour. I am talking about the FERC soft cap which they had talked about I think on December 15th. Thanks.

Let me do the first half on the profits and then. Our profits as you can see from the schedules that we released come from all parts of the business, and we have been pretty strong across the board. I mean across the US, in International, in South America, in Europe, and in Australia. So our profits don't come from just selling gas in California. I mean, we have a strong across the board profit, profit performance, and as Harvey said earlier, our sales in California were primarily sold forward year ago.

Okay, but I guess I was referring more to the earning surprise rather than the overall profitability.

Let me take a shot at that, Sam. Your earnings surprise comes out of obviously direction we have given to the street with regard to Field Services, [_______________] 30% or so, and they turned in a 71% performance. DE International turned in a 51% performance. Obviously, their targets were substantially lower than that, and likewise DENA has turned in a terrific performance in view of what's happening in the markets throughout the United States. We have plans in Connecticut, we plans in Maine, we have plans literally all over the country. So it's that strength in the general marketplace, I think, that's lead to that kind of [out] performance. There is no question about that.

Okay. So, what could that do to earnings estimates perhaps for the remainder of this year and going forward?

Well, you have to tell me what the markets are going to be, what prices are going to be, and I could run the numbers pretty quickly for you. The fact of the matter is we are very bullish about the market at this time, and we all know that these are markets that can turn quickly. We are none the less very confident about 2001, 2002 at this point in time based on the results that we have seen this far, and knowing the path that one has to go down to resolve the tightness in the supply and demand equation, if you will. It's not a path that you can run down in just a few months. So we see a very healthy horizon, if you will, at this stage of the game, but I can't really predict it because I don't know precisely what the markets are going to be.

Fair enough. Thanks.

Thanks Sam.

Our next question today comes from Andy [_______________] from [_______________].

Hi guys. Just a quick question. On the bonus side, I know you talked about it last year. There were certain targets that were set, and I guess you got a double amount as you have reached certain earnings per share targets. Is that something that has been shared with us or could be shared with us?

Yeah, it has been shared. Probably at this point in time, it's pretty darn simple these days. We have a 10 to 15% earnings growth projectory. If the company grows at 9.95%, there is no incentives paid out at the senior level of the company. If the company grows at 10%, there is a 50% payout [of the] targeted incentive per individual, if you will. You know if the company hits the midrange at 12.5%, then there is a targeted payout to the executives of the company and the senior leadership of the company. If you happen to hit 15% in terms of earnings growth, then it would multiply to the 200% [_______________] in terms of the targeted payout.

Great, thank you very much.

Those are the short-term issues that Rick is talking about. As you know, Andy, the long-term compensation, [incentive] compensation is based on stock [prices or] stock options.

Okay. Thank-you very much.

Thank-you Andy.

And we'll take a question from [_______________] from National Bank.

Hi, good morning.

Hello [_______________].

Approximately what portion of the improvement in DEI's EBIT year over year is attributable to the Latin America?

Well, we don't disclose the Latin America versus Europe, but the heaviest investments in DEI has been in Latin America, so you don't have to be a genius to deduce that if Latin America doesn't do well, then DEI doesn't do well. So Latin America has done well for us, but we shouldn't ignore the rest. The Asia Pacific and the European operations have also done well.

I had heard rightly or wrongly and appreciate if you set me straight that water levels in Argentina and Brazil are below average levels so far this year and may be below average levels for the rest of the year.

Well, that's true that water levels in Brazil are at low levels, but the fact is that our own reservoirs are actually at all time high levels. The benefit and the risk concerning water levels is shared by the hydro-generators in Brazil and so because of that sharing arrangement, there is not a lot of upside or downside related to the water levels per se, but I will say that, you know, I think, Robert's statement on subject of our success in Latin America was right on track, and we continue to do successful international operations on all accounts.

And what is the situation in Argentina.

Well, in Argentina, again, as I mentioned before, we are a low cost producer. The hydro levels have not had a major impact on our success in that market. We don't talk about specific earnings, but I can say that even with the economic situation and hydro situation situations, we are satisfied with our investments in Argentina.

[_______________] water levels in Argentina are also below average at this time?

Water levels in Argentina are also below average.

Thanks, one more question, if I may. In March of last year, we heard of fair bit about your company's expectations for DukeNet Communications, and I am wondering whether your assessment of the market potential for that arm of yours has changed and if so, in what way.

This is Rick Priory. With regard to DukeNet, no. We think there is a tremendous opportunity there, and we're currently in the process of launching and executing that strategy. The second surprise for us, to sharpen that strategy and to experiment with that strategy a bit with regard to finding the cash engine and all that. We didn't want to fall victim to what was going on in the last few years in that marketplace. We have found that cash engine. It has really two heads to it, and we're visually executing with regard to that strategy at this time. Again, as DukeNet is a startup, if you will, [_______________] slower in terms of dramatically accelerating its growth projectory, but we are very confident frankly in DukeNet's ability to do that. Yet keep in mind it's still a small part of the Duke Energy story at this point in time, but I trust it will be much larger.

Yeah, I appreciate that, but would you expect to be in the positive territory with EBIT for DukeNet this year.

Oh [_______________] already in the positive territory for EBIT at the present time, and we have been for sometime actually. Remember, we monetized our PCS investment of last year [_______________] and that was the only negative element with regard to our strategy in terms of the investment. We had to invest $100 million, and that resulted for [407], but with regard to negative results, that was the only contributor to negative results in DukeNet. We made it all back up obviously with that sale and the gain associated with it, but it has been very EBIT positive for sometime. The net effect was pretty in the positive for sometime.

It's EBIT positive, EBITDA positive, and cash positive.

Okay, I appreciate that. All I wanted to say is your company has the habit of growing small things very significantly, so what might be small today may not be so small tomorrow.

Thank-you [_______________]. We hope that you are absolutely right on that.

I hope so too. Thanks, good-bye.

And just as reminder, if you have a question today press * 1. We'll take a question from Tim [_______________] from Salomon Smith Barney.

Hello Tim.

Mr. [_______________], your line is open. Please go ahead.

I just wanted to ask a quick question. This is [_______________]. I have heard that there were going to some potential curtailments in Brazil. Should that effect more the generators or more the distributors and could you explain.

Curtailments in what [_______________]?

Curtailments, potential curtailments in Brazil.

That situation primarily affects distributors because, you know, the GDP of Brazil has grown, electric demand has grown dramatically, but the power generation supply has not grown at the same pace, and so we think Brazil needs another 20,000 megawatts, and certainly we are continuing to actively look at opportunities in that market to see how we could participate in helping Brazil solve that problem.

Thank-you.

Okay, and let's take one more call, and then we will need to let these people go.

And we have followup question from Raymond Niles from Salomon Smith Barney.

Yeah, a quick followup, just came off a question that was asked earlier. In regards to Exxon Mobil gas marketing agreement, is it currently such that you're just marketing the Mobil gas, and I guess any thoughts on the possibility, I know that you don't want to comment on negotiations, but on the possibility of getting the Exxon gas' part of the deal.

Well, again, we just can't comment on the nature of that relationship and our partnership.

But I assume it's just Mobil gas right now I mean.

That's correct.

Okay, great. Thank-you.

Thank-you Ray.

Thanks Ray. Okay Kim, we are going to wrap up here. Thank-you everybody for joining us today. We'll be glad to take any questions that you have if you would like to give John or me a call throughout the day.

And that concludes our conference call today. Thank-you all for participating.