Duke Energy Corp and El Paso Corp received subpoenas for trading records as authorities widened probes of sham transactions in natural gas and power markets. Duke shares fell 11 percent, their biggest drop in almost 15 years.
The requests for documents came from the US Attorney's Office in Houston, as part of a grand jury investigation, and from the Commodity Futures Trading Commission, Duke said in a statement. Prosecutors have previously sought trading records from Dynegy Inc, Reliant Energy Inc and CMS Energy Corp.
Duke, like some rivals, has admitted engaging in so-called "round-trip" trades. It included about US$1.1 billion of such trades, which have no economic benefit, in its financial statements over three years. In California, allegations of manipulation of the energy market led Governor Gray Davis to demand Duke and other power suppliers refund US$8.9 billion.
"Any day you receive a subpoena from a federal prosecutor is not going to be a good day for your stock," said Timothy O'Brien, who has been selling Duke shares from the US$245 million he manages in the Evergreen Utility and Telecommunications Fund since April.
"Duke is one of the largest and most successful energy traders in the country, and they've caught the gangrene of the trading scandal."
Shares of the utility fell US$3.20, or 12 percent, to US$24.75, the biggest decline since October 1987. The stock had declined 37 percent this year.
El Paso, operator of the largest US natural-gas pipeline network, disclosed its subpoena after the close of trading. The company denied it had used round-trip trades to inflate volume or revenue, and that it hadn't used them to manipulate prices. El Paso said it will cooperate with the investigation.
Energy producers and traders have come under increased scrutiny since the collapse of Enron Corp, and disclosures of phony trades and accounting mistakes.
"We don't know" the scope of the grand jury probe or who the investigation is targeting, Duke spokesman Terry Francisco said. "We were just told to provide information on trading, and specifically the round-trip trades."
The company is cooperating with the request, he said.
Michael Shelby, US attorney for Houston, declined in a statement to discuss the scope of the grand jury's investigation.
The grand jury is based in Houston, spokeswoman Keesha Handy said.
"Round-trip" or "wash" transactions, which have been disclosed by companies such as Reliant Resources Inc and CMS Energy, involve identical amounts of power being purchased and sold at the same time and price, boosting the appearance of sales but creating no profit.
Duke, the No. 2 US utility, has said such trades nationwide accounted for less than 1 percent of its US$107.4 billion of energy trading and marketing revenue from 1999 to 2001. The transactions were used to "validate real-time prices," not to increase revenue, the company said.
Duke, at the request of a third party, did three "round-trip" natural-gas transactions out of more than 30,000 in the West, the company said as part of its response to a probe of 150 companies by the Federal Energy Regulatory Commission.
The subpoena by the Commodity Futures Trading Commission also is focused on round-trip trades, Francisco said.
Northwest utility owner Avista Corp and Portland General Electric, an Oregon subsidiary of Enron, both received subpoenas from the commission last month regarding wash trades.
Enron fallout
Energy traders have come under increasing scrutiny by investors, lenders and regulators since the collapse of Enron Corp late last year. Companies have disclosed accounting errors and California officials accused some of withholding energy supplies during the state's energy crisis to send prices higher.
"The market seems to be very sensitive to anything to do with marketing and trading,'' said Bern Fleming, who manages the US$1.5 billion AXP Utilities Income Fund, which owns shares of Duke.
"This is a company with good assets, but it's been a tough stock to own this year."
While many energy companies have had their credit ratings cut, Duke's has an A1 rating by Moody's Investors Service and A-plus by Standard & Poor's. Rivals such as Dynegy, CMS, Calpine and Mirant have been lowered to junk levels by one or more of the agencies.
"Duke will come out smelling like a rose in the long run because their balance sheet is so strong and they'll probably take market share from other traders," said Richard Calvert, who manages the US$550 million AmSouth Value Fund, which holds 375,000 shares of Duke.
Earnings generator
Duke's North American power generation and marketing units provided 31 percent of the company's US$4.32 billion in earnings before interest and taxes last year. The company's regulated electric businesses, comprised of utilities and transmission wires, accounted for 38 percent.
Duke shares are down 40 percent in the past year. Today, Dynegy's shares fell US$0.21 to US$6.30 and Reliant fell US$0.85 to US$14.95. Both companies are based in Houston. Dearborn, Michigan-based CMS's shares were unchanged at US$10.25.
Earlier this week, President George W. Bush announced the creation of an inter-agency task force to investigate and prosecute corporate wrongdoing.
The task force, which includes FBI Director Robert Mueller, Securities and Exchange Chairman Harvey Pitt, Commodity Futures Trading Commission James Newsome and Houston US Attorney Shelby, met for the first time today in Washington. The task force met with Bush at the White House this afternoon.
Grand juries have also been convened in the Justice Department's probe of Enron, from which Shelby and his office have been recused because of "family relationships with individuals who are arguably affected by the Enron bankruptcy."
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