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Crescent stake cuts into robust profits for Duke

Real estate woes lead to a $108 million hit, but electricity's high cost propels company to higher-than-expected profits

By Christopher D. Kirkpatrick
ckirkpatrick@charlotteobserver.com

The nation's real estate crisis ripped into Duke Energy Corp.'s big profits last quarter, with the utility taking a $108 million hit from its stake in Crescent Resources, a high-end land development company responsible for several Lake Norman communities.

But the high price of electricity more than made up for the real estate troubles and pushed the Charlotte-based utility to a profit in a second quarter that exceeded analysts' expectations. Duke, because it uses a variety of fuels to power its plants, has been able to navigate the high price of some fuels to turn big profits as the population in the Carolinas expands and demand hits new highs.

Crescent, which Duke owned but sold more than half of in 2006, liquidated properties in Arizona, Florida and Texas at a loss as part of restructuring debt, said David Hauser, Duke's chief financial officer. Duke shared in that loss, he said.

The three states – which saw land prices surge in the past decade – have been among the hardest hit from the nation's mortgage and real estate meltdown.

Owned jointly by Duke and Morgan Stanley Real Estate, Crescent develops upscale homes, condos, townhomes and mixed-use developments in Charlotte and other cities around the Southeast and Southwest. Crescent is responsible for several area high-end developments, including The Peninsula at Lake Norman and Springfield Village in Fort Mill.

Duke's loss in Crescent compares with $17 million the utility made from its investment during the same quarter last year.

Charlotte-based Crescent didn't return calls to the Observer.A few months after Duke completed its merger with Ohio-based Cinergy Corp. in April 2006, new Duke CEO Jim Rogers sold 49 percent of Crescent to Morgan Stanley Real Estate and 2 percent to Crescent's then-CEO Art Fields. The utility still owns 49 percent.

Rogers said at the time that Duke wanted to limit its exposure to real estate and concentrate on selling electricity. That part of the business reported stellar earnings Tuesday in all of its units.

Overall net income was $351 million, or 28 cents a share, for the second quarter ended June 30. That compares with $293 million, or 23 cents per share, for the same quarter last year. Revenue rose to $3.23 billion in the quarter from $2.93 billion a year ago.

Excluding one-time charges, the company reported 27 cents per share. Analysts polled by Thompson had expected 25 cents per share.

Earnings were especially strong in Duke's unregulated Commercial Power unit, which sells wholesale electricity produced from coal-fired and natural gas plants on the open market.

Power on the wholesale market has been expensive, resulting in higher profits from less production, Hauser said. Duke Energy International also posted a gain over the same quarter last year because of high demand and favorable exchange rates, the company said. Duke produces and sells hydroelectric power in Latin America.

The nation's real estate crisis ripped into Duke Energy Corp.'s big profits last quarter, with the utility taking a $108 million hit from its stake in Crescent Resources, a high-end land development company responsible for several Lake Norman communities.

But the high price of electricity more than made up for the real estate troubles and pushed the Charlotte-based utility to a profit in a second quarter that exceeded analysts' expectations. Duke, because it uses a variety of fuels to power its plants, has been able to navigate the high price of some fuels to turn big profits as the population in the Carolinas expands and demand hits new highs.

Crescent, which Duke owned but sold more than half of in 2006, liquidated properties in Arizona, Florida and Texas at a loss as part of restructuring debt, said David Hauser, Duke's chief financial officer. Duke shared in that loss, he said.

The three states – which saw land prices surge in the past decade – have been among the hardest hit from the nation's mortgage and real estate meltdown.

Owned jointly by Duke and Morgan Stanley Real Estate, Crescent develops upscale homes, condos, townhomes and mixed-use developments in Charlotte and other cities around the Southeast and Southwest. Crescent is responsible for several area high-end developments, including The Peninsula at Lake Norman and Springfield Village in Fort Mill.

Duke's loss in Crescent compares with $17 million the utility made from its investment during the same quarter last year.

Charlotte-based Crescent didn't return calls to the Observer.A few months after Duke completed its merger with Ohio-based Cinergy Corp. in April 2006, new Duke CEO Jim Rogers sold 49 percent of Crescent to Morgan Stanley Real Estate and 2 percent to Crescent's then-CEO Art Fields. The utility still owns 49 percent.

Rogers said at the time that Duke wanted to limit its exposure to real estate and concentrate on selling electricity. That part of the business reported stellar earnings Tuesday in all of its units.

Overall net income was $351 million, or 28 cents a share, for the second quarter ended June 30. That compares with $293 million, or 23 cents per share, for the same quarter last year. Revenue rose to $3.23 billion in the quarter from $2.93 billion a year ago.

Excluding one-time charges, the company reported 27 cents per share. Analysts polled by Thompson had expected 25 cents per share.

Earnings were especially strong in Duke's unregulated Commercial Power unit, which sells wholesale electricity produced from coal-fired and natural gas plants on the open market.

Power on the wholesale market has been expensive, resulting in higher profits from less production, Hauser said. Duke Energy International also posted a gain over the same quarter last year because of high demand and favorable exchange rates, the company said. Duke produces and sells hydroelectric power in Latin America.

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