Updated from 11:28 a.m. EDT

Stormy market conditions continue to melt away

Duke's

(DUK) - Get Report

sugar-coated earnings promises.

For the second time in as many months, Duke has slashed its earnings guidance because of sharp deterioration in the merchant energy sector. The giant energy concern has managed to escape the worst of an industrywide meltdown. But some observers say the company has been -- and continues to be -- too optimistic for its own good.

"These guys are guiding down for the second time this year," one short-seller said. "And even this time around, they're still not being honest and forthcoming" about what lies ahead.

Following Friday's new earnings forecast, Duke's stock plummeted 11.5% to a morning low of $18.73. Even after regaining some lost ground, punching back towards $20, the stock continues to trade near the bottom of its 52-week range of $18.10 to $41.35.

Sour

As it neared the end of a normally strong quarter, Duke announced Friday that sour market conditions will prevent the company from hitting fresh earnings targets set just two months ago. Duke finally conceded that it has been swept up in the "perfect storm" that's left some once-powerful peers flailing to stay above water.

"We aren't the first to revise earnings guidance in the gales of this perfect storm, and we probably won't be the last," said CEO Richard Priory. But "we're very focused on the prospect of clear skies ahead."

Duke now expects full-year 2002 earnings of $1.95 to $2.05 a share, a 20% cut from July's forecast. The company predicts that 2003 earnings will be flat -- instead of rising to $2.61 -- and even that is dependent on slight market improvements.

In the meantime, Duke reassured investors that it has no plans to scrap, or even cut, its dividend as other energy merchants have done. But some wonder how Duke can fully fund capital expenditures and its dividend without tapping the capital markets.

Duke has promised to "live within its means," operating entirely on its own cash flow, by cutting capital expenditures by nearly one-half next year. But even after those cutbacks, some say, Duke will need almost $4.5 billion to fund capital expenditures and its annual $1.10 dividend.

"They're going to struggle to earn $4 billion in cash flow from operations," one critic said. "So they're going to be free cash flow negative."

Less Rosy

Analysts have already expressed skepticism about Duke's future earnings projections, which are higher than some market conditions imply they should be. The company is expecting its trading division to contribute up to $600 million worth of earnings next year. But some analysts question whether Duke can depend on its trading arm to deliver any profits at all.

"If I project the current environment into the future, ultimately all the earnings go away," one analyst said during a conference call Friday.

Duke's earnings power has been sapped, in part, by its decision to cease construction of three power plants in the western U.S. The plants -- located in Nevada, New Mexico and Washington -- are nearly halfway finished. Costs associated with the construction deferral will result in an immediate third-quarter hit of 19 cents to 23 cents a share.

Short-sellers expect other charges to follow.

"Duke still hasn't taken a mark-to-market loss like everybody else," one said. "They've taken gains instead. How is that even possible?"

Duke assured analysts that it foresees no major charges or writedowns on the horizon. And the company maintained that it's doing its best to keep the investment community properly informed.

"I demand precision of myself and my company," Priory said. "The more you know about our company and our industry, the better you can evaluate us."