Duke Energy Corp (DUK) 2002 Q3 法說會逐字稿

Good day, everyone, and welcome to the Duke Energy third quarter 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 Becht. Please go ahead.

Thank you, Chelsey. Good morning everybody and welcome to the conference call for the third quarter. Before we begin the call I have some safe harbor to take care of so I would remind you that we will be mentioning things that would be deemed forward looking in the context of securities laws. So, for the actual factual information I refer you to our filed documents with the SEC. With that I would invite any of you who have not dialed - signed onto the webcast to sign on and at www.duke Energy.com, Duke-energy.com, and follow along with the slides. As you know, we E mailed a financial bulletin to you at the time we released earnings every quarter. We did so this morning, but that financial bulletin got hung up on the server of the service that we use for blast E-mails. So if you have not gotten that financial bulletin, it is posted on our web site. Go to the investor page and it is listed as financial bulletin. So you will see all the usual attachments that you get on your E-mail on our web site today if that's necessary for you to go there.

All right. With us today to discuss our earnings is Robert Brace, Executive Vice-President Chief Financial Officer. Robert will open the call with prepared remarks and then we'll take your questions. Also with us today to help answer your questions are Bill Coley, the President of Duke power, Harvey Padewer, President of Energy Services, Dorothy [inaudible] Chief Financial Officer of the Gas [inaudible] group, and David [inaudible] Treasurer. So with that I'll turn the call over to Robert.

Thank you, Sue. Good morning everybody and thank you for joining us this morning. I would like to do a brief review of earnings which were released this morning and then we'll be happy to take your questions.

Duke Energy reported earnings per share of 27 cents for the third quarter, a substantial decline from last year's results. Higher earnings contributed by the acquisition of West Coast energy were more than offset by significantly lower earnings [inaudible]. [inaudible] our Duke Energy North American business unit continued to experience negative impact from a continued economic downturn and extremely depressed market conditions including low spot spreads and low volatility. Ongoing earnings per share were 52 cents before one time charges. These one time charges related to our energy merchant businesses and severance costs of both dealer and franchised electric. These charges which totalled 15 cents or $195 million pretax at dealer, included costs for plant demobilization. Termination obligations for some GE turbines, a write down relating to certain uninstalled turbines, an impairment of our south bay power facility in California, and the write^off of development costs associated with certain future plant sites. In addition, Duke Energy international took a 7-cent charge, that's $91 million pretax this quarter for the write^off of certain site development costs and the write down of some uninstalled turbines. Both dealer and franchised electric have announced plans to layoff a number of employees in response to market conditions and have taken a total charge of 3 cents that's $33 million pretax for severance costs. In 2002 and 2003 we expect to eliminate more than 1,500 positions through targeted layoffs and the elimination of open positions approximately 60 percent of these positions will be from energy services and approximately 20 percent from Duke power. Planned reductions will result in over $100 million in annualized savings for the company. Reported earnings per share for the first nine months of 2002 were $1.32 or $1.57 per share if you were to exclude the 25 cents of one time charges that I've discussed. Ongoing earnings per share for the first nine months of 2001 were $2.30. EPS for 20201 excluded a 13 cents one time charge taken in the first quarter which related to the cumulative effect of a change in accounting principle on the adoption of FAS 133. Now let me review EBIT for the third quarter. Duke Energy reported total segment earnings before interest and taxes of $675 million for the third quarter of 2002, down from last year's results of nearly $1.5 billion. Franchised electrics EBIT third quarter decreased nearly 4 percent to $585 million in 2002 from $607 million in 2001. The primary drivers for the quarter were lower industrial and wholesale boat power sales and increased nuclear maintenance expenses due to the timing of planned outages. These were offset by a prior year reclassification related to the treatment of nuclear insurance distributions. Also during the quarter franchised electric took a $21 million charge for severance.

Natural gas transmissions doubled its EBIT for the quarter by reporting EBIT of $287 million, the increase in EBIT is primarily attributable to the acquisition of West Coast energy and increased earnings from business expansion projects. Fuel services reported third quarter EBIT of $23 million, that compared with $75 million in 2001. the decrease in earnings is primarily due to an increase in provisions for gas imbalances and higher maintenance and general and administrative costs together with some other charges. NGL prices for the second quarter averaged 39 cents per gallon which was the same as the price was in the third quarter of 2001. Duke Energy North America Deema [phonetic] reported [inaudible] from $654 million in 2001 to $100 million before one time charges of $207 million this year. Earnings for the quarter continued to be negatively impacted by a slow economic recovery along with depressed spark spreads, low levels of volatility and low levels of liquidity. In some areas. As we announced in our September monthly chat, dealer has taken a $195 million charge related to plant demobilization, termination obligations for some GE turbines, a write down relating to certain uninstalled turbines, partial impairment of our south bay power facility and the write^off of development costs associated with certain future sites, mostly located in California.

[Inaudible] also took a [inaudible] $12 million. We anticipate an additional charge of approximately $25 million in the fourth quarter relating to these demobilization costs that are associated with the three plants where we've deferred construction. Last year's third quarter included a net gain from the sale of the McLane power plant and there were no gains on divestitures in this quarter this year. International energy reported EBIT of $66 million excluding $91 million of onetime charges. DEI Duke Energy international booked one time charges relating to the write down of certain uninstalled turbines and the write^off of site development costs primarily relating to Brazil. Before the one time charges, EBIT for DEI was lower than last year as a result of low levels of liquidity and reduced trading margins from its European operations. This was part of the partly offset by EBIT from Latin America and Asian Asia Pacific operations. Other energy services which includes Duke 4 Daniel and Duke Energy merchants reported EBIT of $9 million compared with a loss of $58 million at this time last year. Positive results for the quarter were attributed to increased project activity for Duke floor Daniel. The earnings recognized by Duke floor Daniel for the construction of deaner plans eliminated on consolidation at the Duke Energy level. Duke Energy merchants had a loss for the quarter as a result of lower trading margins. Earnings comparisons for the quarter benefited from prior year write downs for agriphos [phonetic] and Duke engineering services which were sold earlier this year. Duke ventures hosted third quarter results of $21 million compared with 51 million for the same period last year and EBIT for the quarter was adversely affected by lower commercial project sales and reduced rent to income at present.

Interest expense was higher for the quarter primarily due to increased debt decline in conjunction with the West Coast energy business. Interest expense increased 125 million for the quarter. The effective tax rate for the corporation in the third quarter was around 32 percent. Let me move on to EBIT for the year to date.

Duke Energy reported total segment earnings before interest and taxes of approximately $2.4 billion for the year to date 2002. That compared to last year's results of nearly $3.5 billion. The primary drivers for the year to date were increased earnings from the acquisition of West Coast energy which contributed approximately $2 62 million. Depressed market conditions include low spot spreads in volatility. And one time charges of Deena, DEI and franchise electric totaling $319 million or 25 cents per share.

Duke Energy continues to manage its treasury activities in a centralized fashion. Duke Energy successfully issued 54 million shares on October the first and used the proceeds to pay down the approximately $1 billion in temporary CEP associated with the West Coast acquisition. Duke Energy has a total credit capacity of $3.4 billion including credit facilities totaling more than $2.3 billion and lateral credit facility of just over a billion dollars. In August we renegotiated the 364 day portion of the credit facility and also removed all the ratings triggers from the multi year tranche of that credit facility. The ratings trigger on the Duke Energy portion was replaced by the debt covenants [inaudible]. The ratings trigger on the Duke capital portion was replaced with a 2.5 times EBITDA coverage excluding mark to market earnings. Of this amount Duke Energy is an outstanding CP balance of approximately $1.2 billion and Duke capital has an outstanding CP balance of approximately $550 million. The outstanding balance on the letter of credit facility at the end of September was $103 million. So all together Duke Energy has unused capacity of about $1.5 billion which we believe is sufficient to serve our business needs. And in addition to this capacity, this $1.5 billion, we also have a separate $105 million bank facility and of course cash on hand is also useful and we have $473 million cash on hand at the end of September.

Let me move on to training disclosures. [inaudible] at risk. The first thing I'd like to address is [inaudible] Dell I don't know's at risk. The average Duke Energy third quarter 2002 was lower than the previous quarters at $12 million. This compared with an average DER [phonetic] of $16 million for the same period last year. The value of our trading portfolios reduced in the quarter our accrual book, as we call it, had a value at the end of September of $5.3 billion in gross margin and our mark to market book had a valuation of $0.7 billion. The reductions from last quarter resulted from significant market movements. In particular changes in forward volatility and correlations. The forward value on a gross margin basis of the accrual and mark to market books was roughly in the 85 to 15 split of the total value of our portfolio. The realization periods of these portfolios, the accrual book, 3 percent of the accrual book will be realized by the end of 2002. 14 percent cumulatively by the end end of 2003 and 23 percent by the end of 2004. So the mark to market book the same numbers by the end of 2002 we will have realized 17 percent of the current mark to market book; by the end of 2003, 35 percent; by the end of 2004, 50 percent. The next metrics for Deena is the value of our expected economic generation output for this hedged forward. The annual hedged percentages for the next three calendar years as of the end of September for 2003 we were 94 percent hedged for 2004, 64 percent and for 2005, 65 percent. You will notice a significant increase in the percent in hedge for 2003. This is partly due to the lower number of megawatts that we now expect to begin commercial operation next year as a result of the plant deferrals. And a reduction in the expect in output from our plants as a result of depressed market conditions. For Duke Energy the unrealized portion of mark to market margin included in the third quarter results was a negative margin of $161 million. That compared with a positive margin of $103 million in the second quarter of 2002.

The decrease in unrealized mark to market earnings for the quarter was primarily due to valuation changes as a result of reduced volatility and inkeysed correlations. Increased correlations. This next slide, if you can see it, should help you gain a better understanding of the value drivers for our option portfolio. When we examine our portfolios, there were a variety of factors that determine the value of a particular asset or contract. The first two factors, power and gas prices, are the most significant items on this list that can be actively and effectively hedged. The other significant variables, power volatility, gas volatility and correlation cannot be effectively hedged. The arrows, if you can see them, represent the direction of pricing or volatility movement that has a positive effect on the valuation of such an asset or contract. For those of you who don't have the slides, I'll briefly review the directional moves that have a positive effect.

The Duke Energy will see an increase in its portfolio valuation if power point is increased, if gas prices decrease, if power volatility increases, if gas volatility increases, if correlations decreases and if interest rates decrease. Likewise, the movement in the opposite direction of any of those who have a negative impact on the portfolio valuation. Over the last 18 months five of these six variables have moved against us. Interest rates have been the only variable that has moved in our favor.

The last item I'd like to discuss before we take your questions is the grand [inaudible] audit at Duke power. As you may recall the North Carolina and South Carolina utility commissions ordered an audit of Duke power to review various accounting entries from the first of January in 1998 to the 1st of July, 2001. On Tuesday of this week, grand fountain filed its audit report with the commissions and Duke Energy filed its response to that report. In addition a proposed settlement developed by the commission starts and Duke Energy was filed with the North Carolina public utilities commission and the Public Service Commission of South Carolina. The commissions will consider the settlement proposals at their regularly scheduled meeting on October the 28th in North Carolina and October the 29th in South Carolina. If approved, this settlement agreement would result in a net charge to Duke Energy's fourth quarter earnings of $19 million and will conclude the audit and all associated issues related to that review.

In conclusion, I'd like to reiterate our earnings guidance for this year and for 2003. Our current forecast for 20202 full year ongoing EPS remains in the range $1.95 to $2.05 per share. We still believe this range is achievable [2002] but with current performance in market conditions we expect our results to be at the low end of this range. Our earnings outlook for 2003 continues to be flat, assuming a modest improvement in the currently extremely depressed market conditions in the merchant energy business. We are confident in the performance much our franchise electric and gas transmission businesses. However, if the North American merchant energy market does not improve in 2003, earnings may be lower than 2002's ongoing earnings. Good news our franchise electric business and gas transin addition business are large relative predictable business with goods profits and cash flows not directly affected by these very [inaudible] merchant energy market in the U.S.

At that point I'd like to stop and we'd be delighted to take your questions.

Thank you, sir. Our question and answer session will be conducted electronically. If you'd like to ask a question, please press the star key followed by the digit 1 on your touch-tone telephone. We'll take your questions in the order that they are received and we will take as many questions as time permits. Again, to ask a question, please press star 1. We'll take our first question from kit Cohen with Morgan Stanley.

Good morning.

Good morning, kit.

We were wondering if you could address the decline in the accrual book, Robert. It was down fairly significantly, factors that went into that?

Yes. It is down significantly from about 6.4 billion at the end of the last quarter. Obviously it's a long book, goes out a long time into the future, and it includes the current outlook from our plants and is significantly affected by volatility and correlations. The current volatility and correlations, the volatility is much lower and the correlations are actually much higher than the recent norms. And we have assumed that these continue into the future. Whether they will or not is a different matter, but in terms of the valuations, our assumption is that we're not assuming a recovery, we're assuming these volatilities stay as they are and the correlations stay as they are. As a result of that you get the vast majority of the movement over $500 million comes from reducing the forward volatility and the correlations. And obviously to the extent that the market moves, that would come back automatically as well.

Another big hit to the valuation is the new plants that we've deferred, the three plants that we've deferred obviously are no longer producing power in those outer years, and therefore that isn't taken into account and that was in the order of a quarter of a billion dollars. And then we also have the roll on and the roll off as you move quarter by quarter, you get one quarter rolls off and the way we do the calculation, one quarter rolls on. The quarter that rolled off was at much higher prices than the quarter than our assumption for the quarter that rolled on in the future, because we are - we're assuming depressed conditions continue. We don't necessarily believe that will happen. We think there will be movement in the volatility, but we think it's a prudent assumption. So it's a billion dollars. Those are the main movements, kit.

Right. Can I ask one follow-up question, just a much more general sort of question? And granted, you know, no one can predict the level of volatility, level of activity, but we know that for the time being, any^way, a lot of counter parties have dropped out of the trading and let's say origination business. Are the downsizings that you're looking at, are these affecting your ability to do trades and deals in the future? And are you removing capital from that business as well so that - in other words, I guess I'm trying to get at should we expect this just to be a much smaller business and a much smaller part of Deena, if you will, in the future?

Well, the 1500 position reductions that we talked about are across the board. They're not particularly focused on trade in the marketing. Energy services is obviously will bear a large brunt of it just as the return of that business has fallen off so dramatically as a result of the market conditions. The fountain trading market operation is [inaudible]. I think we're very proud of our trading market in operation. We think they're very able people and we have no doubt they will add and have added a lot of value to our portfolio and will continue to do that. So we are not looking at pulling back from trade in the marketing. It's an integral part of the way we run the business and the way the business will be run effectively in the future. And the lower people have pulled out for partly as a result of credit concerns or squeezes that they've had in their businesses. We've also seen some large players such as UBS Warburg and Bank of America say they're going to enter the trading business and we welcome that. We'd like to see more trading partners and more and stronger liquidity. But I don't think you should take a message from this that we are pulling back from our trading commitment in any way.

Great. Thank you.

Andy Lee vie with bear Wagner has our next question.

I'm actually going to skip. Thank you, though.

Thank you. We'll now hear from bill maze with Bank of America.

Yeah, hi. Good morning. Just wondering if you could quickly run through - you talked about taking a charge or write down of some of the uninstalled turbines. I'm wondering, did you write down the full value of the turbines or partial and if it's partial, how did you come to that valuation?

We've taken a partial right down of the turbines that we will - that we either have or will have in the near future and we've taken a view of what the market value of those will be, you know, in the future and we don't believe today they're worth 100 cents on the dollar even though they would work perfectly well. This is just a reflection of the market conditions. We have taken a partial write down and we've done our best estimate of what we think it is. Basically we've written about 20 or 25 percent off the turbine values.

Okay. That was my next question. Can you give us a sense of the spar spread that you're hedged at or you're still not disclosing that?

We're not disclosing that at the moment. But I think we will involve - evolve our disclosures so that we will start doing that, certainly for '03 and maybe even next quarter.

Okay. Wondering also if you could just lastly, here, if you could address the departure of Bruce William son and who will be taking his slot, etc.

We got Harvey [inaudible] over at energy services to whom Bruce reported. Let me ask Harvey to address that.

Thank.

UNKNOWN SPEAKER:

Bruce's responsibilities were primarily for Duke Energy international and our A and D function. We have basically had Richard McGee has been running our international business and now he will report directly to me. And the A and D function we have a temporary head of that function. His name is Eric Ludkey and he's handling the difficult vest tour program that's underway now.

Okay, thank you.

We'll now hear from Bob decker with Harrison investment management.

Yes, just was wondering if you could give us an update on the SEC investigation on the round trip trading, any news on that?

There's no real news really. The SEC investigation, we investigated 7 50,000 trades going back to January the first, 1999. We supplied information earlier in the year to the SEC, significant amounts of information. We published our reply on the web site and made it public. We've had some follow-up questions from the SEC and as a normal part of their investigation they evolved it into a formal investigation rather than an informal data request which it was in the beginning. And what - I don't believe you can read anything in particular into that. I think this is a normal thing that happens as they go through their work in a proper way as they are charged to do.

Okay. Thanks.

Moving on to Tom Hamlin with Wachovia Securities.

Yes, good morning, Robert. Back to the change in the value of the accrual portfolio, you were talking about forward volatility as well as the removal of three plants. I was I guess always under the assumption that the accrual book reflected contracts that you had signed to fulfill power, specific commitments and so are specific commitments from a portfolio plants even though they weren't plant specifically specific. This reduction in value from that on the accrual book rather than on the other book kind of reflects that you were sort of putting in that value future trading gains and other contracts that may have not been signed or whatever. Can you help me out with that?

Yes. I mean our accrual book as we call it consists of several things. It's basically the portfolio we have of power out [inaudible] going into the future, power from our plants that we intend to sell, or the hedges that we have put on the balance sheet, or the under FAS 133, the normal purchases and sell agreements which is exactly the same. They just don't appear in the balance sheet. And please don't ask me to explain the logic of FAS 133. But we have them all out together. So you have the balance sheet hedges, you have the normal purchases and sales contracts which are signed contracts, and you've got the unhedged - the power out from the plants at the forward spot spread. So as the markets move what happens is you get a movement in the hedge value, but you get a compensating movement in the value of the entrance value moves at the same time. So what has hit the accrual book here is the underlying volatility on the correlation, because you know, we've taken basically the spot, the current short term forward correlations in volatility that we can deduce in the market and we've applied that, you know, through the outer years. and that takes a big hit.

It's I guess, then, the value of the accrual book is the present value of the output from plants that you own, not necessarily the present value of contracts that you have signed? Is that a fair way to simplify that?

Well, it's a combination of the output from the plants, the present value of the output from the plants, but taken into account the hedges that we've put in place for the sale of that power, the firm contracts. But the accrual book, because it's got the hedge in it, as the market moves, the value of the hedge moves, but equally well the value you get for the power moves compensatingly.

Okay. I'll stop there. Thanks.

Rosalin Armstrong with SAP Capital has our next question.

Yes, I have three questions. First with regard to mark to market, the loss in the quarter from an income statement perspective was 161 million gross margin. That differed from the number that you identified on the cash flow statement. I'm curious what causes that differential?

Well, they're not exactly the same - they're not exactly the same number. I mean, the unrealized Mark to - the unrealized margin was a number that we disclosed because some quarters ago there was concern post the Enron collapse of people claiming profits on a mark to market basis where the cash was coming in in future periods. And so what we wanted to do was we wanted to disclose the amount of the profit or loss because obviously it moves around, that happened in the period that was noncash. But on the balance sheet, that's what flows through earnings, but it's not directly tied to the cash on the balance sheet which is a separate number. If you want to ring us later, we'll take you through the two different numbers.

You can walk me up to the 288?

Yeah, we can do that.

Okay. With regard to pension, do you expect any change from an income statement perspective with regard to pension expense going forward in 2003?

As far as pension is concerned, we have a pension plan that is about 2 points - has an obligation of about 2.$5 billion. It is not a final salary scheme, salary plan based on the final salaries, based on defined contributions and a yield on third year U.S. treasuries [30 year]. the scheme, the plan is under funded at the moment because of the drop in the value of the equity investments. So we will experience an increased charge of the order of $30 million in '03 compared with '02. Compared with the size of Duke Energy I think the size of our pension plan and the liabilities involved in it are relatively small compared with some of the larger companies in the U.S. that are experiencing these sort of problems.

How much is the plan under funded by?

About $400 million.

That's post the incremental contribution that you made this quarter?

We didn't make any cash contribution this quarter. I mean, the accounting works on a different cycle from the cash. We have not put any cash in this quarter. 200 million is more or less happened over the last 12 months or so as the market, you know, it was sort of evenly funded [inaudible] 12 months ago, so it's a reflection of the market moves in equities that we've all seen.

Okay, fair enough. And lastly, with regard to the Econie [phonetic] units, can you discuss your outage plans, inspection plan to the vessel head and any perhaps repair or replacement plans that you have upcoming at the three cone I units?

Bill cone I can answer that.

Yes, we are on target to begin replacement of reactor vessel heads starting with the outages I believe next year. I don't have the exact calendar dates for that, but we are in the process of [inaudible] secured reactor vessel heads a year ago to have manufactured. The intent to have them available for certain outages which were already planned and we're on target to begin replacing those with our outages next year.

Okay. If I understand correctly cone iTwo is scheduled for a fall outage ; is that correct? The fall 2002 outage?

Yes, yes.

Okay. And when does that outage begin? Has it begun already, have you found anything that causes alarm? Can you talk a little bit about that?

Okay. At this point we are in the course of a refueling outage on cone iTwo. We shut down on October 12 for nor normal refueling. and we're doing a reactor vessel head inspection. This is, of course, we we had had some leaking penetrations before. So we have knocked down not done anything major at this point. What we have seen at Econie is very, very different from the kind of degradation at Davis Bessie, and we've got a third inspection plan in place. We've ordered our new reactor vessel heads on all three units. We're going to install them on unit 3 in the spring of '03 in the one, in fall of '03 and unit 2 in spring of '04. By the spring of '04 we will have replaced all of the reactor vessel heads.

And what method of inspecs are you using now at number 2 [Inspection]?

We are using visual as well as other electronic nondestructive examinations.

Okay. Thanks.

Uh-huh.

We'll now hear from Philip [inaudible] with Monday arc capital.

Good morning, gentlemen.

Good morning.

Given the circumstances of the markets, not a bad quarter all in all. Got a question for you, though. You indicate that your earnings outlook for 2003 is flat assuming modest improvement and currently quote, extremely depressed merchant energy market. If there were no modest improvement, how much lower would you think your earnings would be?

Well, I mean, what we - you know, we don't have a Chris crystal ball, but we have in our plan for '03 for the moment which is not firm, we'll give you improved guidance in January of '03 as we normally do when our budget is set for 2003. But in the plan for '03 at the moment and in the numbers that we indicated that we have about $500 million EBIT contribution from Deena and if I can remind you we have $9 billion of capital invested, capital employed in basically in brand-new gas fire power station as cross the U.S., most brand-new, most efficient you can build at the moment and relatively clean. So that's clearly a pretty low return on capital employed pretax 5, 6 percent.

In terms of EPS, that 500 million would translate into about 40 cents. And so the rest of the business is much more predictable with good profits in cash flow. So one way of looking at it for '03 at the moment is the rest of the business, if we say if we're talking about 195, 205, you can deduct, say, 40 odd cents for Deena and you say the rest of the business would predict would be in the order of 150 to 160 and then you can take your view of what you think we'll earn through Deena, you know, in the recent past Deena has earned 18 percent to 20 percent return on capital employed. We don't envisage them being able to earn that return in 2003. So you can take your view and you can move it up or down on that basis. Our gas transmission business and our franchise electric business is a large profitable businesses with much more predictable profits and cash flows.

Okay. Thank you. I have two more questions. You had if I remember correctly I don't have thees in front of me for your pension assets you were assuming annual return of 9 percent ; is that correct? That was in '99, 2000, 20,000 1?

That was in the past.

What does it look like pro forma?

When I [inaudible] returns generally have gone down. Our actuary is advising at the moment we haven't actually done the formal calculations, but for internal purposes, you know, we're using about eight and a half percent [2001] obviously we'll take whatever the actuary, you know, advises when we come to do the formal reviews.

Not down 50 basis points?

I think we were at 9 and a quarter at one point, 9, so we drop it 50 or 75 basis points.

Okay. One last question. You indicate regarding regulatory matters, you indicate that the SEC formalizees inquiry its investigation in your round trip trading - you were advised some^time in mid October. What exactly was this? This is just being publicly released now. The formalization of the SEC investigation?

Oh, I see. Well, as I understand it, you know, I'm not a lawyer - the SEC at some point in their normal process moves the investigation to a formal stage to allow them to move on. This happened a month or so ago. But we became aware of this in October.

I'm not a lawyer either, but I guess I'm a little confused why this wasn't considered material and immediately released -

Because we - you'll have to address that to the SEC.

I'm sorry. How does the SEC control what you release to investors?

No, I mean when the SEC moved it to a formal inquiry, they did not formally notify us. That's not part of their process.

Right. They told you over a week ago?

This is Dick [inaudible]. I'm the general counsel. Let me say a word about this. What happened here is in the course of routine interviews that the SEC is conducting as they follow-up to their inquiry this summer, we were advised that they were about to issue a subpoena to our accounting firm D and T. And to do that, the SEC had formalized the investigation to support an order from the SEC to back up the subpoena.

Right.

The mechanism of using a subpoena to get documentation from accounting firms is standard operating procedure for the SEC and we were told that that's why they had moved this to a more formal mode. We have not yet received from the SEC the order that backs that up, and we made the disclosure we did in the press release this morning because we thought it was important to pass on the information we have.

But I guess if it's material, why wasn't it released immediately is really my question. I guess I'm a little bit clearly put off by this.

We don't consider it material. That's a procedural mechanism that the SEC has adopted to facilitate its investigation. We see it have having no material impact on the investigation of Duke Energy.

So the issuance of subpoenas is not a material issue?

The subpoena was not issued against us.

Okay. One last question. The grand Thornton report that was issued I guess just a couple days ago, is there any possibility that the SEC could pick up on this and start investigating this? Even though you did settle with the local regulatory authorities.

The SEC has wide powers to do whatever they think appropriate. I can't see any particular connection with the grand Thornton report and we have briefed the SEC thoroughly on the background on the reported self. What the SEC does is up to the SEC.

And if the SEC did investigate this, would it be material and would you release it that information?

I mean, we've made public our views on the grand Thornton report. And we've issued our reply and as I've said in my introductory remarks, later this month the north and South Carolina commissions will be considering a settlement that has been negotiated by their staff which, if it were agreed, would put all this behind us and we would take a $19 million charge to our fourth quarter results.

All right. Thank you very much.

Thank you.

Moving on to Andre [inaudible] with Lazard.

Hi. A couple questions on DESS. This seems like a third quarter running where there are nonrecurring items in the O and M line, really pushing down your EBIT. What's driving the higher operating and add minute costs? Can you explain in more detail why you're taking provisions for gas imbalances, what's driving that, the total provisions taken year to date [Imbalances], and when we can expect this ongoing internal review to be concluded?

Let me give you a brief answer. We are having some problems in DESS. We do have some reconciliations as we've announced to complete. I think -

What are you reconciling exactly?

The customer accounts, the gas imbalances accounts and it's quite a complicated business with lots of things moving around and I think it's quite normal in this business for there to be gas imbalances. And we are just going through in an orderly way and reconciling all these items with our customers which takes time. and that's costing us some money in order to do that, both in terms of the add minute costs and in terms of the write^offs that we have taken that we have announced.

Sorry to butt in. It sounds to me like you've had errors in your accounting for gas between customers and suppliers. I mean they're all in the negative side it seems this year. What are the problems specifically?

There are errors in the accounting. I think it's a complicated business and we certainly didn't do the reconciliations in a way that we would have like to have done them. And what we're doing now is cleaning it up and your previous question about how long is it going to take, you know, I think we have a few more months of this before we're satisfied that everything is fine.

Okay. So you expect similar results in Q4, I assume. And can you tell us the total provision you've taken since the beginning of the year or since the beginning of your review?

Well, it isn't just one number. There isn't one provision. I mean, some of them we've written off a few tens of millions of dollars, but we've also got expenses for doing the work. We've got expenses for improving the systems. We have a significant improvement underway across the board in the company to improve the administrative and control systems which is costing money which we would have been doing any^way. So I can't quote one number. But in terms of the cash balance the only thing we've written off is tens of millions of dollars.

Okay. Now, heading into '04, can you give us - I mean - okay. You've written off some issues already. You have costs of doing the more detailed analysis, internal review, and then I assume you're going to implement some improved procedure so you don't get into this issue again. Can you give us kind of a recurring O and M estimate for 2003?

Not off the top of my head. But if you give me a ring later I'll look it up.

Okay. I'll do that. Thanks.

We'll take our next question from Elizabeth noble with vanguard.

I have two questions. When you talk about economic output, could you tell me what that number might be like?

You mean how many megawatts?

Yes, I guess it would be megawatt hours.

Megawatt hours. I don't have that off the top of my head. I mean, it's quite difficult to calculate at a point in time because you have to estimate how many hours you think the plant will run, what will it be dispatched which obviously depends on market conditions. But what we're trying to reflect in this calculation is at a point in time of that expected output which might for instance be two and a half thousand hours for a particular plant next year. What proportion of that have we sold forward at this point in time.

Okay. And then I wondered if you could briefly go over your sources and uses of cash for 2003.

Okay. For 2003, I think a good way of looking at this is to say that if you were to assume, if you took the mid point of our indicated range for 2003 is sort of $2 EPS, and as I said previously we will update you properly in January when our budgets are set. But if you just for the sake of this calculation, if you took $2 because it's a nice round number, and we have just under 1 billion shares in issue, so - you know, you start off with $2 billion worth of net income. If you add back noncash items, again in round numbers, that's about $2 billion. And then the way I do the calculation, I add back about 4 or $500 million for sales of present properties. That's different from sales of business units or whatever, sales of plants even. I mean, the present business isn't to consume capital it's to use capital. So each year they spend about 4 or 500 million on capital and they sell about 405, 4 to 500 million of developments that they built. So they're sort of cash neutral from that point of view. And so if you add that back, you get about 4.$5 billion. We then say we have a around a billion dollars for dividends which takes us down to $3.5 billion, and our current estimate that we've given for capex in 2003 is about $3.5 billion. So, on that basis that capex would be covered by the cash flow generated before sales of other businesses, and every year in the past we have sold some businesses. We actively manage our portfolio and we've sold in the past we've sold plants from Deena, we've sold elements from gas transmission, we've sold various other businesses. So to the extent we do sell other businesses in 2003, that would be positive on the cash over and above that.

And what does that assume in the way of bond refinancing?

Well, that calculation itself doesn't assume anything in respect of bond financing. What we have, we have a borrowing requirement, a refinancing requirement in 2003 of $1.2 billion. We don't have to do any bond financing because I explained earlier we have current facilities that are greater than that. But we would be opportunistic in the market and I think you probably will find us in a borrowing some money in 2003.

Thank you.

Thank you.

Moving on to [inaudible] with Merrill Lynch.

Good morning. Quick question, fellows. Most of my clients don't do stock primarily primarily for the dividend. They're quite concerned if there's a reduction in the dividend, not only will they lose on that end; there will likely be a deterioration in the stock obviously. When I called in on the last conference call, I was told the dividend would be in fact sound, I believe was the quote. Is that still the case?

We have no plans to reduce the dividend. and clearly it's at the discretion of the directors and I can't bind their hands, but we think the business can adequately and properly support a dividend of $1.10 per share and we have to plans to change that and there is no change in the information you were given by our chairman and CEO [inaudible] a month or so ago.

Thank you very much.

And Robert Haas with Elliott Associates has our next question.

I'm sorry, my question has been answered. Thank you.

Moving on to Rebecca [inaudible] with Howard Weil [phonetic].

Good morning. Are there any inquiries or investigations by any regulatory bodies such as the FTC or SEC on prices submitted to trade publications?

No, not specifically.

Are you still submitting prices to those trade publications?

I mean, my understanding of the situation is in the past there has been a rather ad hoc affair where various trade publications people bring up people they've known in the company in an informal way and ask them for information and in a friendly informal way people have given that information and we're no different from other people in that respect in that we responded in a friendly way and gave some information. and going forward given that some people in other companies have said they supplied some false information, we have tightened up our processes and procedures so that we will react to these things going forward in a much more formal way and that you know if any of these trade publications ask for information and we give it, it will be given in a good housekeeping sealable approval with people behind it and the information will be verified and checked by our risk management organization before it's submitted.

Thanks. and then back to the question on economic output, again, like the other question there, I'm just confused about it's hard for us to model and determine really forecast for earnings with us not knowing what is the economic output. and if you could get that for us, that would certainly help.

Okay. It is part of the disclosures that we are discussing with the committee of risk offices that we along with some others set up and it would be the hope that we would move as well as others to produce - publish this information on a consistent basis for '03 ask maybe even some in Quarter 3. We do appreciate how difficult it is for you to model the business. It's difficult for to us model the business and we have more information than you do.

Thank you.

Thank you.

[inaudible] with [inaudible] Capital has our next question.

My question has actually been asked and answered. Thank you.

We'll now hear from Josh Fischer with Raymouth Capital [phonetic].

Good morning. I had a question about [inaudible] asset sales going forward as it relates to cash flow for next year. Just trying to understand if there's some double counting here. Because if you're talking about earnings and cash flow for next year, but then you also talk about selling assets, then presumably those assets it will be - if you sold those assets you're not getting the cash flows from them. Or are you saying that those assets right now are cash flow negative items or simply not cash flow contributors and -

I wasn't double counting. We don't have any plans to sell assets that are really significant. In the past in terms of the earnings, I mean obviously if we sold off a large portion of the business the $2 earnings would change. In the past we sold assets of $50 million, $100 million, that's what I'm talking about. Obviously if we sold something in the billions of dollars then you're going to get an earnings hit as well,. In the calculation I did, I didn't count those thousand assets. So I didn't double count them.

But then in other words, then, realistically, asset sales are not going to be of a material impact on leverage levels? I mean if they're only 25 or $50 million, they're just a drop in the bucket. It wouldn't have a negative effect on earnings, but it wouldn't have a positive effect on delevering either.

I'm not arguing that [inaudible]. But in the past we have sold four or five $100 million a year of assets, over and above the present. This year it will be probably slightly less because the market for merchant tile plants is pretty weak, so we won't sell into that weak market. But I'm not argue the case. I'm just saying that whatever it is, it will be over and above. I believe it will be positive. You know, a few 100 million maybe. I think it's - we won't know until we get there, but in the past it's been 3, 400 million, maybe next year it's nothing, maybe it's 3 or 400 million.

But then from a cost of capital basis, if there are even 250 million of assets, ready to be filled or sitting idle or they're not contributing, then from a cost of capital basis does that enter into your consideration what to do with those? Are -

It certainly entered our consideration but I'll not saying they're not contributing. We look at the [inaudible] and see what somebody is prepared to pay us whether they're contributed or not.

Are you looking at that value in relation to your original cost, replacement cost of the PP and E or just in terms of the ongoing cash flows? I mean -

What we look at, if we want to sell an asset, - I mean first of all we decide whether it's, you know, strategically, you know, good fit for the business or not, and there are some assets we really wouldn't want to sell because they have good benefits across the corporation. But if we're going to sell something, we look at what we think we'll get out of it in terms of, you know, cash flows over the, you know, over the future years. We look at the market value and we look what we think somebody is likely to pay us for it. and if somebody is prepared to, you know, pay us more than we think it's worth to us, we'll sell it. It's I pretty analytical process. It's not an emotional one.

What would in terms of merchant energy, what would make - what are the considerations that would make you say that some merchant energy asset is worth keeping at the moment as opposed to selling?

It depends what price you get for it. It depends on your view of the future outlook. I mean, we are not adding to our merchant portfolio at the moment because we can't be reduced returns available. So we have stopped building three power plants. Two we judged it was worth completing them. We will complete those two for coming on line in '03. We have no plans to add to our merchant energy portfolio until such time as the returns improve.

I mean I guess it might be fair if you did have an offer to purchase merchant energy assets, that was simply at an original cost considering those assets are now selling in the general market below original cost for most players, that might be an offer you'd take. It just seems there are no buyers right now who want to buy significant merchant energy assets simply at original cost.

Yes. I'm not sure what your question was.

Well, in other words, if you could sell something, just take a round number, say $500,000 a megawatt and that was the original cost, presumably there aren't any buyers who are willing to buy a relatively new power plant at that rate, basically you'd have to sell those at a discount to original cost just to get rid of them. It may be moot but anyone who has merchant had energy asset or generation asset.

There certainly isn't a market at the moment.

In the corollary simply to that is the market is sort of saying there isn't going to be a turn^around at all in 2003 or if anything it might be slightly weaker. I mean that's sort of the message of the market is that essentially other - no one in the industry is saying let me go long merchant energy, let me go long generation so that when you say the company's earnings book would be even if the markets stay where they are or have a slight uptick, that might be viewed as being a little optimistic compared to what the message of the markets are saying in terms of prices for stocks and bonds of merchant energy companies or [inaudible] spreads, etc.

Okay.

We have time for one more question.

Okay. and our last question will come from Raymond miles with Salomon Smith Barney.

Good morning. Thank you. One question. A lot of my questions have been asked and answered already, but one, can you go into some detail about what appears to be the lengthening in the accrual book? Just looking from second quarter to third quarter, you know, higher proportion of the book is due to be realized in 2005.

On the accrual book?

Yes.

Well, a couple of things have happened there. the one thing that happened, you know, you get a quarter rolls on and a quarter rolls off, which is mooted. the other thing that's happened is we have taken out the - we have the effectively plants that we've deferred, the three plants that we've deferred. and that has the effect of moving it a bit as well.

But should that lengthen the proportion, that's due to be realized in 2005, it went from 40 percent to 60 percent?

Well, what it did was it reduced the amount that was - it reduced the early years. and where we deferred the plants.

Okay.

And so, you know, as a consequence it tends to push it out.

Okay. and then just another thing, just - any thoughts in terms of, you know, rating agency, change in perspective or views on being involved in the energy trading business? Do you see that the pressure has changed, stepped up at all? Just related to that, could you review with us, you know, any change in collateral that you'd have to post if there were a credit downgrade?

Let me ask David [inaudible] our corporate treasurer to address that. [inaudible].

Hello, Ray.

Hi there.

I've been working with the rating agencies, and S and P and Fitch have taken their actions and we're pretty solid with them. We've had a lot of communications with them. We've also had a lot of communications with Moody's. We're currently under review for downgrade at Moody's. We would expect Moody's to make whatever set of decisions they're going to make in the next couple of weeks. So we're having a steady interaction. We have spent a lot of hours with all three agencies having our trading experts meeting with them and explaining the business to them and I think that went very, very well. So that's our status with all the agencies.

It's just in terms of collateral, any thoughts on that? Were you to get down graded by Moody's?

As I recall - well, keep in mind that the rating of trading floor is related to S and P, not to Moody's. So S and P has us on a stable outlook.

So there would be no effect from a Moody's action?

That's correct.

Okay. Thank you.

Thank you, Ray. and thanks to all of you for jointing us today. If you have any follow-up questions, feel free to give us a call. Thanks and goods by.

And that concludes today's conference. On behalf of Duke Energy and premiere conferencing we'd like to thank you for your participation.