EXHIBIT 99(A)
INDEX TO FINANCIAL STATEMENTS
Duke Energy Corporation
Independent Auditors' Report............................................... F-2
Consolidated Statements of Income for the years ended December 31, 2000,
1999 and 1998............................................................. F-3
Consolidated Statements of Cash Flows for the years ended December 31,
2000, 1999 and 1998....................................................... F-4
Consolidated Balance Sheets as of December 31, 2000 and 1999............... F-5
Consolidated Statements of Common Stockholders' Equity and Comprehensive
Income for the years ended December 31, 2000, 1999 and 1998............... F-7
Notes to Consolidated Financial Statements................................. F-8
F-1
Independent Auditors' Report
To the Board of Directors and Stockholders of Duke Energy Corporation
We have audited the accompanying consolidated balance sheets of Duke Energy
Corporation and subsidiaries (Duke Energy) as of December 31, 2000 and 1999,
and the related consolidated statements of income, common stockholders' equity
and comprehensive income, and cash flows for each of the three years in the
period ended December 31, 2000. These financial statements are the
responsibility of Duke Energy's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Duke Energy as of December 31,
2000 and 1999, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America.
Deloitte & Touche LLP
Charlotte, North Carolina
January 18, 2001
F-2
DUKE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December
31,
----------------------
2000 1999 1998
------- ------- ------
(in millions, except
per share amounts)
Operating Revenues
Sales, trading and marketing of natural gas and
petroleum products (Notes 1 and 7).................. $28,310 $10,922 $7,854
Trading and marketing of electricity (Notes 1 and
7).................................................. 13,060 3,610 2,788
Generation, transmission and distribution of
electricity (Notes 1 and 4)......................... 5,315 4,934 4,586
Transportation and storage of natural gas (Notes 1
and 4).............................................. 1,045 1,139 1,450
Gain on sale of equity investment (Notes 2 and 8).... 407 -- --
Other (Note 8)....................................... 1,181 1,161 984
------- ------- ------
Total operating revenues........................... 49,318 21,766 17,662
------- ------- ------
Operating Expenses
Natural gas and petroleum products purchased (Note
1).................................................. 27,670 10,636 7,497
Net interchange and purchased power (Notes 1, 4 and
5).................................................. 12,000 3,507 2,916
Fuel used in electric generation (Notes 1 and 11).... 781 764 767
Other operation and maintenance (Notes 4, 11 and
14)................................................. 3,469 3,701 2,738
Depreciation and amortization (Notes 1 and 5)........ 1,167 968 909
Property and other taxes............................. 418 371 350
------- ------- ------
Total operating expenses........................... 45,505 19,947 15,177
------- ------- ------
Operating Income....................................... 3,813 1,819 2,485
------- ------- ------
Other Income and Expenses
Deferred returns and allowance for funds used during
construction (Note 1)............................... 63 82 88
Other, net........................................... 138 142 74
------- ------- ------
Total other income and expenses.................... 201 224 162
------- ------- ------
Earnings Before Interest and Taxes..................... 4,014 2,043 2,647
Interest Expense (Notes 7 and 10)...................... 911 601 514
Minority Interest Expense (Notes 2 and 12)............. 307 142 96
------- ------- ------
Earnings Before Income Taxes........................... 2,796 1,300 2,037
Income Taxes (Notes 1 and 6)........................... 1,020 453 777
------- ------- ------
Income Before Extraordinary Item....................... 1,776 847 1,260
Extraordinary Gain (Loss), net of tax.................. -- 660 (8)
------- ------- ------
Net Income............................................. 1,776 1,507 1,252
Dividends on Preferred and Preference Stock (Note 13).. 19 20 21
------- ------- ------
Earnings Available For Common Stockholders............. $ 1,757 $ 1,487 $1,231
======= ======= ======
Common Stock Data (Note 1)
Weighted average shares outstanding.................. 736 729 722
Earnings per share (before extraordinary item)
Basic.............................................. $ 2.39 $ 1.13 $ 1.72
Diluted............................................ $ 2.38 $ 1.13 $ 1.71
Earnings per share
Basic.............................................. $ 2.39 $ 2.04 $ 1.70
Diluted............................................ $ 2.38 $ 2.03 $ 1.70
Dividends per share.................................. $ 1.10 $ 1.10 $ 1.10
See Notes to Consolidated Financial Statements.
F-3
DUKE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December
31,
----------------------
2000 1999 1998
------ ------ ------
(in millions)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................ $1,776 $1,507 $1,252
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization......................... 1,348 1,151 1,055
Net mark-to-market gain............................... (464) (24) (75)
Extraordinary (gain) loss, net of tax................. -- (660) 8
Gain on sale of equity investment..................... (407) -- --
Provision on NAWE receivables......................... 110 -- --
Injury and damages accrual............................ -- 800 --
Deferred income taxes................................. 152 (210) (35)
Purchased capacity levelization....................... 138 104 88
Transition cost recoveries (payments), net............ 82 95 (28)
(Increase) decrease in
Receivables.......................................... (4,812) (659) (18)
Inventory............................................ (97) (89) (104)
Other current assets................................. (796) (138) (39)
Increase (decrease) in
Accounts payable..................................... 4,509 477 72
Taxes accrued........................................ (439) (57) (6)
Interest accrued..................................... 64 32 (2)
Other current liabilities............................ 1,116 73 84
Other, net............................................ (55) 282 79
------ ------ ------
Net cash provided by operating activities........... 2,225 2,684 2,331
------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital and investment expenditures................... (5,634) (5,936) (2,500)
Proceeds from sale of subsidiaries and equity
investment........................................... 400 1,900 --
Decommissioning, retirements and other................ 204 236 24
------ ------ ------
Net cash used in investing activities............... (5,030) (3,800) (2,476)
------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issuance of
Long-term debt........................................ 3,206 3,221 1,357
Guaranteed preferred beneficial interests in
subordinated notes of Duke Energy Corporation or
Subsidiaries......................................... -- 484 581
Common stock and stock options........................ 230 162 176
Payments for the redemption of
Long-term debt........................................ (1,191) (1,505) (698)
Preferred and preference stock........................ (33) (20) (180)
Net change in notes payable and commercial paper...... 1,484 58 (350)
Distributions to minority interests................... (1,216) -- --
Contributions from minority interests................. 1,116 -- --
Dividends paid........................................ (828) (822) (814)
Other................................................. (54) 22 6
------ ------ ------
Net cash provided by financing activities........... 2,714 1,600 78
------ ------ ------
Net (decrease) increase in cash and cash equivalents.. (91) 484 (67)
Cash received from business acquisitions.............. 100 49 38
Cash and cash equivalents at beginning of period...... 613 80 109
------ ------ ------
Cash and cash equivalents at end of period............ $ 622 $ 613 $ 80
====== ====== ======
Supplemental Disclosures
Cash paid for interest, net of amount capitalized..... $ 817 $ 541 $ 490
Cash paid for income taxes............................ $1,177 $ 732 $ 733
See Notes to Consolidated Financial Statements.
F-4
DUKE ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31,
---------------
2000 1999
------- -------
(in millions)
ASSETS
------
Current Assets (Note 1)
Cash and cash equivalents (Note 7)........................... $ 622 $ 613
Receivables (Notes 1 and 7).................................. 8,293 3,248
Inventory.................................................... 736 599
Current portion of natural gas transition costs (Note 4)..... -- 81
Current portion of purchased capacity costs (Note 5)......... 149 146
Unrealized gains on mark-to-market transactions (Note 7)..... 11,038 1,131
Other (Note 7)............................................... 1,317 353
------- -------
Total current assets....................................... 22,155 6,171
------- -------
Investments and Other Assets
Investments in affiliates (Notes 8 and 14)................... 1,370 1,299
Nuclear decommissioning trust funds (Note 11)................ 717 703
Pre-funded pension costs (Note 17)........................... 304 315
Goodwill, net (Notes 1 and 2)................................ 1,566 844
Notes receivable............................................. 462 154
Unrealized gains on mark-to-market transactions (Notes 1 and
7).......................................................... 4,218 690
Other........................................................ 1,445 705
------- -------
Total investments and other assets......................... 10,028 4,710
------- -------
Property, Plant and Equipment (Notes 1, 5, 9, 10 and 11)
Cost......................................................... 34,615 30,436
Less accumulated depreciation and amortization............... 10,146 9,441
------- -------
Net property, plant and equipment.......................... 24,469 20,995
------- -------
Regulatory Assets and Deferred Debits (Note 1)
Purchased capacity costs (Note 5)............................ 356 497
Deferred debt expense (Note 7)............................... 208 223
Regulatory asset related to income taxes..................... 506 500
Other (Notes 4 and 14)....................................... 400 313
------- -------
Total regulatory assets and deferred debits................ 1,470 1,533
------- -------
Total Assets............................................... $58,176 $33,409
======= =======
See Notes to Consolidated Financial Statements.
F-5
DUKE ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS--(Continued)
December 31,
----------------
2000 1999
------- -------
(in millions)
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
-------------------------------------------
Current Liabilities
Accounts payable........................................... $ 7,375 $ 2,312
Notes payable and commercial paper (Notes 7 and 10)........ 1,826 267
Taxes accrued (Note 1)..................................... 261 685
Interest accrued........................................... 208 139
Current maturities of long-term debt and preferred stock
(Notes 10 and 13)......................................... 470 515
Unrealized losses on mark-to-market transactions (Notes 1
and 7).................................................... 11,070 1,241
Other (Notes 1 and 14)..................................... 1,769 717
------- -------
Total current liabilities................................ 22,979 5,876
------- -------
Long-term Debt (Notes 7 and 10).............................. 11,019 8,683
------- -------
Deferred Credits and Other Liabilities (Note 1)
Deferred income taxes (Note 6)............................. 3,851 3,402
Investment tax credit (Note 6)............................. 211 225
Nuclear decommissioning costs externally funded (Note 11).. 717 703
Environmental cleanup liabilities (Note 14)................ 100 101
Unrealized losses on mark-to-market transactions (Note 7).. 3,581 438
Other (Note 14)............................................ 1,574 2,099
------- -------
Total deferred credits and other liabilities............. 10,034 6,968
------- -------
Commitments and Contingencies (Notes 5, 11 and 14)
Guaranteed Preferred Beneficial Interests in Subordinated
Notes of Duke Energy Corporation or Subsidiaries (Notes 7
and 12)................................................... 1,406 1,404
------- -------
Minority Interests (Note 2).................................. 2,435 1,200
------- -------
Preferred and Preference Stock (Notes 7 and 13)
Preferred and preference stock with sinking fund
requirements.............................................. 38 71
Preferred and preference stock without sinking fund
requirements.............................................. 209 209
------- -------
Total preferred and preference stock..................... 247 280
------- -------
Common Stockholders' Equity (Notes 1, 15 and 16)
Common stock, no par, 1 billion shares authorized; 739
million and 733 million shares outstanding at December 31,
2000 and 1999, respectively............................... 4,797 4,603
Retained earnings.......................................... 5,379 4,397
Accumulated other comprehensive income..................... (120) (2)
------- -------
Total common stockholders' equity........................ 10,056 8,998
------- -------
Total Liabilities and Common Stockholders' Equity........ $58,176 $33,409
======= =======
See Notes to Consolidated Financial Statements.
F-6
DUKE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Accumulated
Other Total
Common Retained Comprehensive Comprehensive
Stock Earnings Income Total Income
------ -------- ------------- ------- -------------
(in millions)
Balance December 31,
1997.................... $4,284 $3,256 $ -- $ 7,540
Net income............... 1,252 1,252 $1,252
------
Total comprehensive
income.............. $1,252
======
Dividend reinvestment and
employee benefits (Note
16)..................... 165 165
Common stock dividends... (794) (794)
Preferred and preference
stock dividends
(Note 13)............... (21) (21)
Other capital stock
transactions, net....... 8 8
------ ------ ----- -------
Balance December 31,
1998.................... $4,449 $3,701 $ -- $ 8,150
------ ------ ----- -------
Net income............... 1,507 1,507 $1,507
Other comprehensive
income:
Foreign currency
translation
adjustments (Note 1).. (2) (2) (2)
------
Total comprehensive
income.............. $1,505
======
Dividend reinvestment and
employee benefits (Note
16)..................... 154 154
Common stock dividends... (802) (802)
Preferred and preference
stock dividends
(Note 13)............... (20) (20)
Other capital stock
transactions, net....... 11 11
------ ------ ----- -------
Balance December 31,
1999.................... $4,603 $4,397 $ (2) $ 8,998
------ ------ ----- -------
Net income............... 1,776 1,776 $1,776
Other comprehensive
income:
Foreign currency
translation
adjustments (Note 1).. (118) (118) (118)
------
Total comprehensive
income.............. $1,658
======
Dividend reinvestment and
employee benefits (Note
16)..................... 194 194
Common stock dividends... (809) (809)
Preferred and preference
stock dividends
(Note 13)............... (19) (19)
Other capital stock
transactions, net....... 34 34
------ ------ ----- -------
Balance December 31,
2000.................... $4,797 $5,379 $(120) $10,056
====== ====== ===== =======
See Notes to Consolidated Financial Statements.
F-7
DUKE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2000, 1999 and 1998
1. Summary of Significant Accounting Policies
Consolidation. The Consolidated Financial Statements include the accounts of
all of Duke Energy Corporation's majority-owned subsidiaries after the
elimination of significant intercompany transactions and balances. Investments
in other entities that are not controlled by Duke Energy Corporation, but where
it has significant influence over operations, are accounted for using the
equity method.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Although these estimates are based on management's best
available knowledge of current and expected future events, actual results could
differ from those estimates.
"Duke Energy" is used in these Notes as a collective reference to Duke
Energy Corporation and its subsidiaries.
Cash and Cash Equivalents. All liquid investments with maturities at date of
purchase of three months or less are considered cash equivalents.
Inventory. Inventory consists primarily of materials and supplies, natural
gas and natural gas liquid (NGL) products held in storage for transmission,
processing and sales commitments, and coal held for electric generation.
Inventory is recorded at the lower of cost or market, primarily using the
average cost method.
Accounting for Risk Management and Commodity Trading Activities. Commodity
derivatives utilized for trading purposes are accounted for using the mark-to-
market method. Under this methodology, these instruments are adjusted to market
value, and the unrealized gains and losses are recognized in current period
income and are included in the Consolidated Statements of Income as Natural Gas
and Petroleum Products Purchased or Net Interchange and Purchased Power, and in
the Consolidated Balance Sheets as Unrealized Gains or Losses on Mark-to-Market
Transactions.
Commodity derivatives such as futures, forwards, over-the-counter swap
agreements and options are also utilized for non-trading purposes to hedge the
impact of market fluctuations in the price of natural gas, electricity and
other energy-related products. To qualify as a hedge, the price movements in
the commodity derivatives must be highly correlated with the underlying hedged
commodity. Under the deferral method of accounting, gains and losses related to
commodity derivatives that qualify as hedges are recognized in income when the
underlying hedged physical transaction closes and are included in the
Consolidated Statements of Income as Natural Gas and Petroleum Products
Purchased, or Net Interchange and Purchased Power. If the commodity derivative
is no longer sufficiently correlated to the underlying commodity, or if the
underlying commodity transaction closes earlier than anticipated, the deferred
gains or losses are recognized in income.
Duke Energy periodically uses interest rate swaps, accounted for under the
accrual method, to manage the interest rate characteristics associated with
outstanding debt. Interest rate differentials to be paid or received as
interest rates change are accrued and recognized as an adjustment to interest
expense. The amount accrued as either a payable to or a receivable from
counterparties is included in the Consolidated Balance Sheets as Deferred Debt
Expense.
Duke Energy also periodically utilizes interest rate lock agreements to
hedge interest rate risk associated with new debt issuances. Under the deferral
method of accounting, gains or losses on such agreements, when settled, are
deferred in the Consolidated Balance Sheets as Long-Term Debt and are amortized
in the Consolidated Statements of Income as an adjustment to Interest Expense.
F-8
DUKE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Duke Energy is exposed to foreign currency risk from investments in
international affiliates and businesses owned and operated in foreign
countries. To mitigate risks associated with foreign currency fluctuations,
when possible, contracts are denominated in or indexed to the U.S. dollar or
investments may be hedged through debt denominated in the foreign currency.
Duke Energy also uses foreign currency derivatives, where possible, to hedge
its risk related to foreign currency fluctuations. To qualify as a hedge, there
must be a high degree of correlation between price movements in the derivative
and the item designated as being hedged.
Duke Energy also enters into foreign currency swap agreements to manage
foreign currency risks associated with energy contracts denominated in foreign
currencies. These agreements are accounted for under the mark-to-market method
previously described.
Goodwill. Goodwill represents the excess of acquisition costs over the fair
value of the net assets of an acquired business. The goodwill created by Duke
Energy's acquisitions is amortized on a straight-line basis over the useful
lives of the assets, ranging from 10 to 40 years. The amount of goodwill
reported on the Consolidated Balance Sheets as of December 31, 2000 and 1999,
was $1,566 million and $844 million, net of accumulated amortization of $291
million and $218 million, respectively. See Note 2 to the Consolidated
Financial Statements for information on significant goodwill additions.
Property, Plant and Equipment. Property, plant and equipment are stated at
original cost. Duke Energy capitalizes all construction-related direct labor
and material costs, as well as indirect construction costs. Indirect costs
include general engineering, taxes and the cost of money. The cost of renewals
and betterments that extend the useful life of property, plant and equipment is
also capitalized. The cost of repairs and replacements is charged to expense as
incurred. Depreciation is generally computed using the straight-line method.
The composite weighted-average depreciation rates, excluding nuclear fuel, were
3.97%, 3.73% and 3.82% for 2000, 1999 and 1998, respectively.
When property, plant and equipment maintained by Duke Energy's regulated
operations are retired, the original cost plus the cost of retirement, less
salvage, is charged to accumulated depreciation and amortization. When entire
regulated operating units are sold or non-regulated properties are retired or
sold, the property and related accumulated depreciation and amortization
accounts are reduced, and any gain or loss is recorded in income, unless
otherwise required by the Federal Energy Regulatory Commission (FERC).
Impairment of Long-Lived Assets. The recoverability of long-lived assets and
intangible assets are reviewed whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable. Such
evaluation is based on various analyses, including undiscounted cash flow
projections.
Unamortized Debt Premium, Discount and Expense. Premiums, discounts and
expenses incurred in connection with the issuance of currently outstanding
long-term debt are amortized over the terms of the respective issues. Any call
premiums or unamortized expenses associated with refinancing higher-cost debt
obligations used to finance regulated assets and operations are amortized
consistent with regulatory treatment of those items.
Environmental Expenditures. Environmental expenditures that relate to an
existing condition caused by past operations and do not contribute to current
or future revenue generation are expensed. Environmental expenditures relating
to current or future revenues are expensed or capitalized as appropriate.
Liabilities are recorded when environmental assessments and/or cleanups are
probable and the costs can be reasonably estimated.
Cost-Based Regulation. Duke Energy's regulated operations are subject to the
provisions of Statement of Financial Accounting Standards (SFAS) No. 71,
"Accounting for the Effects of Certain Types of
F-9
DUKE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Regulation." Accordingly, certain assets and liabilities that result from the
regulated ratemaking process are recorded that would not be recorded under
generally accepted accounting principles for non-regulated entities. These
regulatory assets and liabilities are classified in the Consolidated Balance
Sheets as Regulatory Assets and Deferred Debits, and Deferred Credits and Other
Liabilities, respectively. The applicability of SFAS No. 71 is routinely
evaluated, and factors such as regulatory changes and the impact of competition
are considered. Discontinuing cost-based regulation or increasing competition
might require companies to reduce their asset balances to reflect a market
basis less than cost and to write off their associated regulatory assets.
Management cannot predict the potential impact, if any, of discontinuing cost-
based regulation or increasing competition on future consolidated results of
operations, cash flows or financial position. However, Duke Energy continues to
position itself to effectively meet these challenges by maintaining competitive
prices.
Common Stock Options. Duke Energy accounts for stock-based compensation
using the intrinsic method of accounting. Under this method, compensation cost,
if any, is measured as the excess of the quoted market price of Duke Energy's
stock at the date of the grant over the amount an employee must pay to acquire
the stock. Restricted stock grants and Company Performance Awards are recorded
as compensation cost over the requisite vesting period based on the market
value on the date of the grant. Pro forma disclosures utilizing the fair value
accounting method are included in Note 16 to the Consolidated Financial
Statements. All outstanding common stock amounts and compensation awards have
been adjusted to reflect the two-for-one common stock split effective January
26, 2001. See Note 15 to the Consolidated Financial Statements for additional
information on the stock split.
Revenues. Revenues on sales of electricity and transportation and storage of
natural gas are recognized as service is provided. Revenues on sales of natural
gas and petroleum products, as well as electricity, gas and other energy
products marketed, are recognized in the period of delivery. The allowance for
doubtful accounts was approximately $200 million and $43 million as of December
31, 2000 and 1999, respectively. Receivables on the Consolidated Balance Sheets
included $244 million and $207 million as of December 31, 2000 and 1999,
respectively, for electric service that has been provided but not yet billed to
customers. When rate cases are pending final approval, a portion of the
revenues is subject to possible refund. Reserves are established where required
for such cases. During 2000, Duke Energy adopted the provisions of Staff
Accounting Bulletin (SAB) 101 issued by the Securities and Exchange Commission.
The impact of adopting SAB 101 was not material to Duke Energy.
Nuclear Fuel. Amortization of nuclear fuel is included in the Consolidated
Statements of Income as Fuel Used in Electric Generation. The amortization is
recorded using the units-of-production method.
Deferred Returns and Allowance for Funds Used During Construction
(AFUDC). Deferred returns represent the estimated financing costs associated
with funding certain regulatory assets. These regulatory assets primarily arose
from the funding of purchased capacity costs above levels collected in rates.
Deferred returns are non-cash items and are primarily recognized as an addition
to Purchased Capacity Costs with an offsetting credit to Other Income and
Expenses.
AFUDC represents the estimated debt and equity costs of capital funds
necessary to finance the construction of new regulated facilities. AFUDC is a
non-cash item and is recognized as a cost of Property, Plant and Equipment,
with offsetting credits to Other Income and Expenses and to Interest Expense.
After construction is completed, Duke Energy is permitted to recover these
costs, including a fair return, through their inclusion in rate base and in the
provision for depreciation.
Rates used for capitalization of deferred returns and AFUDC by Duke Energy's
regulated operations are calculated in compliance with FERC rules.
F-10
DUKE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Foreign Currency Translation. Assets and liabilities of Duke Energy's
international operations, where the local currency is the functional currency,
have been translated at year-end exchange rates, and revenues and expenses have
been translated using average exchange rates prevailing during the year.
Adjustments resulting from translation are included in the Consolidated
Statements of Common Stockholders' Equity and Comprehensive Income as Foreign
Currency Translation Adjustments. The financial statements of international
operations, where the U.S. dollar is the functional currency, reflect certain
transactions denominated in the local currency that have been remeasured in
U.S. dollars. The remeasurement of local currencies into U.S. dollars resulting
from foreign currency gains and losses is included in consolidated net income.
Income Taxes. Duke Energy and its subsidiaries file a consolidated federal
income tax return. Deferred income taxes have been provided for temporary
differences. Temporary differences occur when events and transactions
recognized for financial reporting result in taxable or tax-deductible amounts
in different periods. Investment tax credits have been deferred and are being
amortized over the estimated useful lives of the related properties.
Earnings Per Common Share. Basic earnings per share is based on a simple
weighted average of common shares outstanding. Diluted earnings per share
reflects the potential dilution that could occur if securities or other
agreements to issue common stock, such as stock options, were exercised or
converted into common stock. The numerator for the calculation of basic and
diluted earnings per share is earnings available for common stockholders.
Denominator for Earnings per Share
2000 1999 1998
----- ----- -----
(in millions)
Denominator for basic earnings per share (weighted-
average shares outstanding)............................ 735.7 729.3 722.0
Assumed exercise of diluted stock options............... 3.7 1.6 2.4
----- ----- -----
Denominator for diluted earnings per share.............. 739.4 730.9 724.4
===== ===== =====
All common stock amounts have been adjusted to reflect the two-for-one
common stock split effective January 26, 2001. See Note 15 to the Consolidated
Financial Statements for additional information on the stock split.
Extraordinary Items. In 1999, Duke Energy realized an extraordinary gain of
$660 million after tax, or $0.91 per share, relating to the sale of certain
pipeline companies. See Note 2 to the Consolidated Financial Statements for
additional information on the extraordinary item.
In January 1998, TEPPCO Partners, LP (TEPPCO), in which Duke Energy has a
21.1% ownership interest, redeemed certain First Mortgage Notes. A non-cash
extraordinary loss of $8 million, net of income tax of $5 million, was recorded
related to costs of the early retirement of debt. Earnings per common share for
1998 were reduced by $0.01 as a result of this charge.
New Accounting Standard. In June 1998, SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," was issued. Duke Energy was
required to adopt this standard by January 1, 2001. SFAS No. 133 requires that
all derivatives be recognized as either assets or liabilities and measured at
fair value, and changes in the fair value of derivatives are reported in
current earnings, unless the derivative is designated and effective as a hedge.
If the intended use of the derivative is to hedge the exposure to changes in
the fair value of an asset, a liability or a firm commitment, then changes in
the fair value of the derivative
F-11
DUKE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
instrument will generally be offset in the income statement by changes in the
hedged item's fair value. However, if the intended use of the derivative is to
hedge the exposure to variability in expected future cash flows, then changes
in the fair value of the derivative instrument will generally be reported in
Other Comprehensive Income (OCI). The gains and losses on the derivative
instrument that are reported in OCI will be reclassified to earnings in the
periods in which earnings are impacted by the hedged item.
Duke Energy has determined the effect of implementing SFAS No. 133 and
recorded a net-of-tax cumulative-effect adjustment of $96 million as a
reduction in earnings. The net-of-tax cumulative-effect adjustment reducing OCI
and Common Stockholders' Equity is estimated to be $921 million on January 1,
2001.
Currently, there are ongoing discussions surrounding the implementation and
interpretation of SFAS No. 133 by the Financial Accounting Standards Board's
Derivatives Implementation Group. Duke Energy implemented SFAS No. 133 based on
current rules and guidance in place as of January 1, 2001. However, if the
definition of derivative instruments is altered, this may impact Duke Energy's
transition adjustment amounts and subsequent reported operating results.
Reclassifications. Certain prior period amounts have been reclassified in
the Consolidated Financial Statements to conform to the current presentation.
2. Business Acquisitions and Dispositions
Business Acquisitions: For acquisitions accounted for using the purchase
method, assets and liabilities have been consolidated as of the purchase date
and earnings from the acquisitions have been included in consolidated earnings
of Duke Energy subsequent to the purchase date. Assets acquired and liabilities
assumed are recorded at their estimated fair values, and the excess of the
purchase price over the estimated fair value of the net identifiable assets and
liabilities acquired is recorded as goodwill. Purchase price allocations are
subject to adjustment when additional information concerning asset and
liability valuations becomes available within one year after the acquisition.
Market Hub Partners (MHP). In September 2000, Duke Energy, through a wholly
owned subsidiary, completed the approximately $400 million acquisition of MHP
from subsidiaries of NiSource Inc. for approximately $250 million in cash and
the assumption of $150 million in debt. MHP provides natural gas storage
services in Louisiana and Texas with a current capacity of 23 billion cubic
feet with significant expansion capabilities. Approximately $159 million of
goodwill was recorded in the transaction and is being amortized on a straight-
line basis over 35 years. In association with the acquisition of MHP, a tender
offer was made for $115 million of the assumed debt as required by the debt
agreements. As of December 31, 2000, approximately $88 million of this debt was
retired.
Phillips Petroleum's Gas Gathering, Processing and Marketing Unit
(Phillips). In March 2000, Duke Energy, through a wholly owned subsidiary,
completed the approximately $1.7 billion transaction that combined Field
Services' and Phillips' gas gathering, processing and marketing business to
form a new midstream company, named Duke Energy Field Services, LLC (DEFS). In
connection with the combination, DEFS issued approximately $2.75 billion of
commercial paper in April 2000. The proceeds were used to make one-time cash
distributions of approximately $1.53 billion to Duke Energy and $1.22 billion
to Phillips Petroleum. Duke Energy owns approximately 70% of DEFS and Phillips
Petroleum owns approximately 30%. Goodwill of approximately $429 million was
recorded in connection with the transaction and is being amortized on a
straight-line basis over 20 years.
F-12
DUKE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
East Tennessee Natural Gas Company. In March 2000, Duke Energy, through a
wholly owned subsidiary, completed the approximately $390 million acquisition
of East Tennessee Natural Gas Company from El Paso Energy. East Tennessee
Natural Gas Company owns a 1,100-mile interstate natural gas pipeline system
that crosses Duke Energy's Texas Eastern Transmission Corporation's (TETCO's)
pipeline and serves the southeastern region of the U.S.
Dominion Resources' Hydroelectric, Natural Gas and Diesel Power Generation
Businesses. In August 1999, Duke Energy, through its wholly owned subsidiary
Duke Energy International, LLC (DEI), reached a definitive agreement to acquire
Dominion Resources Inc.'s 1,200-megawatt portfolio of hydroelectric, natural
gas and diesel power generation businesses in Latin America (collectively, the
"Dominion acquisitions") for approximately $405 million. The Dominion
acquisitions were completed in April 2000, and total goodwill related to these
purchases was $109 million and is being amortized on a straight-line basis over
40 years.
Companhia de Geracao de Energia Eletrica Paranapanema (Paranapanema). In
January 2000, Duke Energy, through its wholly owned subsidiary DEI, completed a
series of transactions to purchase for approximately $1.03 billion an
approximate 95% interest in Paranapanema, an electric generating company in
Brazil. Goodwill of approximately $134 million was recorded in relation to this
acquisition and is being amortized on a straight-line basis over 40 years.
Union Pacific Resources' Gathering, Processing and Marketing Operations. In
March 1999, Duke Energy through its wholly owned subsidiary, Duke Energy Field
Services, Inc., completed the $1.35 billion acquisition of the natural gas
gathering, processing, fractionation and NGL pipeline business from Union
Pacific Resources (UPR), as well as UPR's NGL marketing activities. Goodwill of
$135 million has been recorded and is being amortized on a straight-line basis
over 15 to 20 years.
Dispositions: BellSouth Carolina PCS (BellSouth PCS). In September 2000,
Duke Energy, through its wholly owned subsidiary DukeNet Communications, LLC
(DukeNet), sold its 20% interest in BellSouth PCS for approximately $400
million to BellSouth Corporation. Operating revenues includes the resulting
pre-tax gain of $407 million, or an after-tax gain of $0.34 per basic share.
Catawba River Associates, LLC (Catawba River). During 2000, Duke Energy
formed Catawba River, and third-party, non-controlling, preferred interest
holders invested $1,025 million. Catawba River is a limited liability company
with separate existence and identity from its members, and the assets of
Catawba River are separate and legally distinct from Duke Energy. The preferred
interest receives a preferred return equal to an adjusted floating reference
rate (approximately 7.847% at December 31, 2000). The results of operations,
cash flows and financial position of Catawba River are consolidated with Duke
Energy. The preferred interest and the expense attributable to this interest
are included in Minority Interests and Minority Interest Expense, respectively,
on the Consolidated Financial Statements.
PEPL Companies and Trunkline LNG. In March 1999, wholly owned subsidiaries
of Duke Energy sold Panhandle Eastern Pipe Line Company (PEPL), Trunkline Gas
Company (Trunkline) and additional storage related to those systems, which
substantially comprised the Midwest Pipelines, along with Trunkline LNG Company
to CMS Energy Corporation (CMS). The sales price of $2.2 billion involved cash
proceeds of $1.9 billion and CMS' assumption of existing PEPL debt of
approximately $300 million. The sale resulted in an extraordinary gain of $660
million, net of income tax of $404 million, and an increase in earnings per
basic share of $0.91. In 1999 and 1998, earnings before interest and taxes
(EBIT) of $70 million and $156 million, respectively, relating to the Midwest
Pipelines was included in Duke Energy's operating results. Under the terms of
the sales agreement with CMS, Duke Energy retained certain assets and
liabilities, which will not have a material adverse effect on consolidated
results of operations, cash flows or financial position.
F-13
DUKE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The pro forma results of operations for acquisitions and dispositions do not
materially differ from reported results.
3. Business Segments
Duke Energy is an integrated energy and energy services provider with the
ability to offer physical delivery and management of both electricity and
natural gas throughout the U.S. and abroad. Duke Energy provides these and
other services through seven business segments.
Franchised Electric generates, transmits, distributes and sells electric
energy in central and western North Carolina and the western portion of South
Carolina. Its operations are conducted primarily through Duke Power and
Nantahala Power and Light. These electric operations are subject to the rules
and regulations of the FERC, the North Carolina Utilities Commission (NCUC) and
the Public Service Commission of South Carolina (PSCSC).
Natural Gas Transmission provides interstate transportation and storage of
natural gas for customers primarily in the Mid-Atlantic, New England and
southeastern states. Its operations are conducted primarily through Duke Energy
Gas Transmission Corporation. The interstate natural gas transmission and
storage operations are subject to the rules and regulations of the FERC.
Field Services gathers, processes, transports, markets and stores natural
gas and produces, transports, markets and stores NGLs. Its operations are
conducted primarily through DEFS, a limited liability company that is
approximately 30% owned by Phillips Petroleum. Field Services operates
gathering systems in western Canada and 11 contiguous states that serve major
natural gas-producing regions in the Rocky Mountain, Permian Basin, Mid-
Continent, East Texas-Austin Chalk-North Louisiana, as well as onshore and
offshore Gulf Coast areas.
North American Wholesale Energy's (NAWE's) activities include asset
development, operation and management, primarily through Duke Energy North
America, LLC (DENA), and commodity sales and services related to natural gas
and power, primarily through Duke Energy Trading and Marketing, LLC (DETM).
DETM is a limited liability company that is approximately 40% owned by Exxon
Mobil Corporation. NAWE also includes Duke Energy Merchants, which develops new
business lines in the evolving energy commodity markets. NAWE conducts its
business throughout the U.S. and Canada. The operations of the previously
segregated Trading and Marketing segment were combined by management into NAWE
during 2000. Previous periods have been restated to conform to current period
presentation.
International Energy conducts its operations through DEI. International
Energy's activities include asset development, operation and management of
natural gas and power facilities and energy trading and marketing of natural
gas and electric power. This activity is targeted in the Latin American, Asia-
Pacific and European regions.
Other Energy Services is a combination of businesses that provide
engineering, consulting, construction and integrated energy solutions
worldwide, primarily through Duke Engineering & Services, Inc., Duke/Fluor
Daniel (D/FD) and DukeSolutions, Inc. D/FD is a 50/50 partnership between Duke
Energy and Fluor Enterprises, Inc.
Duke Ventures is comprised of other diverse businesses, primarily operating
through Crescent Resources, Inc. (Crescent), DukeNet and Duke Capital Partners
(DCP). Crescent develops high-quality commercial, residential and multi-family
real estate projects and manages land holdings primarily in the southeastern
U.S. DukeNet provides fiber optic networks for industrial, commercial and
residential customers. DCP, a newly formed, wholly owned merchant finance
company, provides financing, investment banking and asset management services
to wholesale and commercial energy markets.
F-14
DUKE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Duke Energy's reportable segments are strategic business units that offer
different products and services and are each managed separately. The accounting
policies for the segments are the same as those described in Note 1 to the
Consolidated Financial Statements. Management evaluates segment performance
based on EBIT after deducting minority interests. EBIT presented in the
accompanying table includes intersegment sales accounted for at prices
representative of unaffiliated party transactions. Segment assets are provided
as additional information in the accompanying table and are net of intercompany
advances, intercompany notes receivable and investments in subsidiaries.
Other Operations primarily include certain unallocated corporate items.
Business Segment Data
Depreciation Capital and
Unaffiliated Intersegment Total and Investment Segment
Revenues Revenues Revenues EBIT Amortization Expenditures Assets
------------ ------------ -------- ------ ------------ ------------ -------
(in millions)
Year Ended December 31,
2000
Franchised Electric..... $ 4,946 $ -- $ 4,946 $1,704 $ 565 $ 661 $12,819
Natural Gas
Transmission........... 998 133 1,131 534 131 973 4,995
Field Services.......... 7,601 1,459 9,060 296 240 376 6,266
North American Wholesale
Energy................. 33,590 284 33,874 418 75 1,937 28,213
International Energy.... 1,060 7 1,067 331 97 980 4,551
Other Energy Services... 528 167 695 (61) 13 28 543
Duke Ventures........... 642 -- 642 563 17 643 1,967
Other Operations........ (47) 68 21 (2) 29 36 2,749
Eliminations and
minority interests..... -- (2,118) (2,118) 231 -- -- (3,927)
------- -------- ------- ------ ------ ------ -------
Total consolidated..... $49,318 $ -- $49,318 $4,014 $1,167 $5,634 $58,176
======= ======== ======= ====== ====== ====== =======
Year Ended December 31,
1999
Franchised Electric..... $ 4,700 $ -- $ 4,700 $ 856 $ 542 $ 759 $13,133
Natural Gas
Transmission........... 1,124 106 1,230 627 126 261 3,897
Field Services.......... 2,883 707 3,590 144 131 1,630 3,565
North American Wholesale
Energy................. 11,623 178 11,801 209 57 1,028 6,268
International Energy.... 323 34 357 42 58 1,779 4,459
Other Energy Services... 886 103 989 (94) 14 94 612
Duke Ventures........... 232 -- 232 162 13 382 1,031
Other Operations........ (5) 44 39 5 27 3 1,250
Eliminations and
minority interests..... -- (1,172) (1,172) 92 -- -- (806)
------- -------- ------- ------ ------ ------ -------
Total consolidated..... $21,766 $ -- $21,766 $2,043 $ 968 $5,936 $33,409
======= ======== ======= ====== ====== ====== =======
Year Ended December 31,
1998
Franchised Electric..... $ 4,626 $ -- $ 4,626 $1,513 $ 522 $ 586 $12,953
Natural Gas
Transmission........... 1,440 102 1,542 702 215 290 4,996
Field Services.......... 2,132 545 2,677 76 80 304 1,893
North American Wholesale
Energy................. 8,727 56 8,783 133 27 796 4,394
International Energy.... 125 34 159 12 15 239 900
Other Energy Services... 436 85 521 10 12 41 376
Duke Ventures........... 171 -- 171 122 10 232 818
Other Operations........ 5 26 31 22 28 12 874
Eliminations and
minority interests..... -- (848) (848) 57 -- -- (398)
------- -------- ------- ------ ------ ------ -------
Total consolidated..... $17,662 $ -- $17,662 $2,647 $ 909 $2,500 $26,806
======= ======== ======= ====== ====== ====== =======
F-15
DUKE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Geographic Data
Latin Other
U.S. Canada America Foreign Consolidated
------- ------ ------- ------- ------------
(in millions)
2000
Consolidated revenues.............. $43,282 $4,964 $ 512 $ 560 $49,318
Consolidated long-term assets...... 31,074 900 2,823 1,222 36,019
1999
Consolidated revenues.............. $19,336 $2,007 $ 171 $ 252 $21,766
Consolidated long-term assets...... 22,995 250 2,708 901 26,854
1998
Consolidated revenues.............. $16,589 $ 996 $ 31 $ 46 $17,662
Consolidated long-term assets...... 20,982 140 207 632 21,961
4. Regulatory Matters
Franchised Electric. The NCUC and the PSCSC approve rates for retail
electric sales within their respective states. The FERC approves Franchised
Electric's rates for electric sales to wholesale customers. Electric sales to
the other joint owners of the Catawba Nuclear Station, which represent a
majority of Franchised Electric's wholesale revenues, are set through
contractual agreements.
Fuel costs are reviewed semiannually in the wholesale jurisdiction and
annually in the South Carolina retail jurisdiction, with provisions for
reviewing such costs in base rates. In the North Carolina retail jurisdiction,
a review of fuel costs in rates is required annually and during general rate
case proceedings. All jurisdictions allow Duke Energy to adjust electric rates
for past over- or under-recovery of fuel costs. Therefore, the difference
between actual fuel costs incurred for electric operations and fuel costs
recovered through rates is reflected in revenues.
On December 20, 1999 and February 25, 2000, the FERC issued its Order 2000
and Order 2000-A regarding Regional Transmission Organizations (RTOs). In these
orders, the FERC stressed the voluntary nature of RTO participation by
utilities and set minimum characteristics and functions that must be met by
utilities that participate in an RTO, including exclusive and independent
authority to propose rates, terms and conditions of transmission service
provided over the facilities it operates. The order provides for an open,
flexible structure for RTOs to meet the needs of the market and provides for
the possibility of incentive ratemaking and other benefits for utilities that
participate in an RTO.
As a result of these rulemakings, on October 16, 2000, Duke Energy and two
other investor-owned utilities, Progress Energy and South Carolina Electric &
Gas, filed with the FERC to establish GridSouth Transco, LLC (GridSouth), as an
RTO. If approved, GridSouth will be a for-profit, independent transmission
company, responsible for operating and planning the companies' combined
transmission systems. The target date for formation of GridSouth is December
15, 2001. However, the actual date that GridSouth becomes operational will
depend upon the resolution of all necessary regulatory approvals and resolving
all technical issues. Management believes that the establishment of GridSouth
will not have a material adverse effect on future consolidated results of
operations, cash flows or financial position.
Natural Gas Transmission. On February 9, 2000, the FERC issued Order 637,
which sets forth revisions to its regulations governing short-term natural gas
transportation services and policies governing the regulation of interstate
natural gas pipelines. "Short-term" has been defined as all transactions of
less than one year.
F-16
DUKE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Among the significant actions taken are the lifting of the price cap for short-
term capacity release by pipeline customers for an experimental 2 1/2-year
period ending September 1, 2002, and requiring that interstate pipelines file
pro forma tariff sheets to (i) provide for nomination equality between capacity
release and primary pipeline capacity; (ii) implement imbalance management
services (for which interstate pipelines may charge fees) while at the same
time reducing the use of operational flow orders and penalties; and (iii)
provide segmentation rights if operationally feasible. Order 637 also narrows
the right of first refusal to remove economic biases perceived in the current
rule. Order 637 imposes significant new reporting requirements for interstate
pipelines that were implemented by Duke Energy during the third quarter of
2000. Additionally, Order 637 permits pipelines to propose peak/off-peak rates
and term-differentiated rates, and encourages pipelines to propose experimental
capacity auctions. By Order 637-A, issued in February 2000, the FERC generally
denied requests for rehearing and several parties, including Duke Energy, have
filed appeals in the District of Columbia Court of Appeals seeking court review
of various aspects of the Order. During the third quarter of 2000, Duke
Energy's interstate pipelines made the required pro forma tariff sheet filings.
These filings are currently subject to review and approval by the FERC.
Management does not believe the effects of these matters will have a
material effect on Duke Energy's future consolidated results of operations,
cash flows or financial position.
5. Joint Ownership of Generating Facilities
Joint Ownership of Catawba Nuclear Station
Ownership
Owner Interest
----- ---------
North Carolina Municipal Power Agency Number 1 (NCMPA)................... 37.5%
North Carolina Electric Membership Corporation (NCEMC)................... 28.1%
Duke Energy Corporation.................................................. 12.5%
Piedmont Municipal Power Agency (PMPA)................................... 12.5%
Saluda River Electric Cooperative, Inc. (Saluda River)................... 9.4%
-----
100.0%
=====
As of December 31, 2000, $525 million of property, plant and equipment and
$268 million of accumulated depreciation and amortization represented Duke
Energy's investment in Catawba Nuclear Station Units 1 and 2. Duke Energy's
share of operating costs is included in the Consolidated Statements of Income.
Duke Energy entered into contractual interconnection agreements with the
other joint owners of Catawba Nuclear Station to purchase declining percentages
of the generating capacity and energy from the station, which expired during
2000.
The portion of purchased capacity costs subject to levelization in rates was
deferred. As of December 31, 2000 and 1999, $505 million and $643 million,
respectively, associated with the cost of capacity purchased but not reflected
in current rates have been accumulated in the Consolidated Balance Sheets as
Purchased Capacity Costs and Current Portion of Purchased Capacity Costs. Duke
Energy is recovering the accumulated balance, including returns on the deferred
balance, over a period expected to end in 2004. Jurisdictional levelizations
are intended to recover total costs, including deferred returns, and are
subject to adjustments, including final true-ups. For the years ended December
31, 2000, 1999 and 1998, purchased capacity and energy costs from the other
joint owners were approximately $7 million, $62 million and $88 million,
respectively. These amounts, after adjustments for amounts in current rates,
are included in the Consolidated Statements of Income as Net Interchange and
Purchased Power.
F-17
DUKE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The interconnection agreements also provide for supplemental power sales by
Duke Energy to the other joint owners of Catawba Nuclear Station to satisfy
their capacity and energy needs beyond the capacity and energy which they
retain from the station or potentially acquire in the form of other resources.
The agreements further provide the other joint owners the ability to secure
such supplemental requirements outside of these contractual agreements
following an appropriate notice period. NCEMC, Saluda River and NCMPA have
given such appropriate notice effective January 1, 2001. PMPA will continue to
receive supplemental power sales from Duke Energy through December 31, 2005. As
the other joint owners retain more capacity and energy from the station, or
obtain additional capacity and energy from a third party, supplemental power
sales are expected to decline. Management believes this will not have a
material adverse effect on consolidated results of operations, cash flows or
financial position.
6. Income Taxes
Income Tax Expense
For the Years
Ended
December 31,
-------------------
2000 1999 1998
------ ----- ----
(in millions)
Current income taxes
Federal.................................................. $ 679 $ 525 $673
State.................................................... 109 138 138
Foreign.................................................. 18 1 --
------ ----- ----
Total current income taxes............................. 806 664 811
------ ----- ----
Deferred income taxes, net
Federal.................................................. 187 (126) (15)
State.................................................... 13 (65) (4)
Foreign.................................................. 29 (1) --
------ ----- ----
Total deferred income taxes, net....................... 229 (192) (19)
------ ----- ----
Investment tax credit amortization......................... (15) (19) (15)
------ ----- ----
Total income tax expense............................... $1,020 $ 453 $777
====== ===== ====
Income Tax Expense Reconciliation to Statutory Rate
For the Years
Ended
December 31,
-------------------
2000 1999 1998
------ ----- ----
(in millions)
Income tax, computed at the statutory rate of 35%.......... $ 979 $ 455 $713
Adjustments resulting from:
State income tax, net of federal income tax effect....... 75 47 90
Favorable resolution of federal tax issues............... (18) (30) --
Other items, net......................................... (16) (19) (26)
------ ----- ----
Total income tax expense............................... $1,020 $ 453 $777
------ ----- ----
Effective tax rate......................................... 36.5% 34.9% 38.1%
====== ===== ====
F-18
DUKE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Net Deferred Income Tax Liability Components
December 31,
----------------
2000 1999
------- -------
(in millions)
Deferred credits and other liabilities.................... $ 429 $ 500
International property, plant, & equipment................ 153 --
Other..................................................... 10 8
------- -------
Total deferred income tax assets...................... 592 508
Valuation allowance....................................... (9) (6)
------- -------
Net deferred income tax assets.......................... 583 502
------- -------
Investments and other assets.............................. (320) (245)
Property, plant and equipment............................. (2,707) (2,483)
Regulatory assets and deferred debits..................... (326) (427)
Regulatory asset related to restating to pre-tax basis.... (429) (432)
------- -------
Total deferred income tax liability................... (3,782) (3,587)
------- -------
State deferred income tax, net of federal tax effect...... (320) (340)
------- -------
Total net deferred income tax liability............... $(3,519) $(3,425)
======= =======
7. Risk Management and Financial Instruments
Commodity Derivatives--Trading. Duke Energy provides risk management
services to its customers through forward contracts, futures, over-the-counter
swap agreements and options (collectively, "commodity derivatives"). Duke
Energy engages in the trading of commodity derivatives, and therefore
experiences net open positions, which are managed with strict policies that
limit its exposure to market risk and require daily reporting to management of
potential financial exposure. These policies include statistical risk tolerance
limits using historical price movements to calculate a daily earnings at risk
measurement. The weighted-average life of Duke Energy's commodity trading
portfolio was approximately 25 months at December 31, 2000.
Net Gains Recognized from Trading Activities
2000 1999 1998
---- ---- ----
(in millions)
Natural gas................................................... $212 $83 $114
Electricity................................................... 368 41 14
Other(a)...................................................... 46 -- --
- --------
(a) Other includes refined products, fertilizer, crude oil and other
miscellaneous commodities.
Absolute Notional Contract Quantity of Commodity Derivatives Held for Trading
Purposes
December 31,
---------------
2000 1999
------- -------
Natural gas, in billion cubic feet........................... 39,716 17,248
Electricity, in gigawatt hours............................... 289,109 185,536
Fertilizer contracts, in thousands of tonnes................. 141,619 --
Refined products, in thousands of barrels.................... 451,133 --
F-19
DUKE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fair Values of Commodity Derivatives--Trading
2000 1999
-------------------- -------------------
Assets Liabilities Assets Liabilities
------- ----------- ------ -----------
(in millions)
Fair values at December 31,
Natural gas.......................... $45,423 $45,104 $2,966 $2,855
Electricity.......................... 9,436 9,254 1,302 1,271
Fertilizer contracts................. 5,886 5,850 -- --
Refined products..................... 1,192 1,159 -- --
Other(a)............................. 303 268 -- --
Eliminations......................... (46,984) (46,984) (2,447) (2,447)
------- ------- ------ ------
Total fair values.................. $15,256 $14,651 $1,821 $1,679
======= ======= ====== ======
Average fair values for the year
Natural gas.......................... 20,150 19,801 2,401 2,269
Electricity.......................... 6,650 6,558 962 900
Fertilizer contracts................. 3,002 2,974 -- --
Refined products..................... 1,345 1,309 -- --
Other(a)............................. 437 427 -- --
- --------
(a) Other includes crude oil and other miscellaneous commodities.
Commodity Derivatives--Non-Trading. Duke Energy also manages its exposure to
risk from existing assets, liabilities and commitments by hedging the impact of
market fluctuations. At December 31, 2000 and 1999, Duke Energy held or issued
several commodity derivatives, primarily in the form of swaps, that reduce
exposure to market price fluctuations for certain power and NGL production
facilities. At December 31, 2000, these commodity derivatives extended for
periods up to 10 years and generally contain margin requirements. The gains,
losses and costs related to non-trading commodity derivatives are not
recognized until the underlying physical transaction closes. At December 31,
2000 and 1999, Duke Energy had unrealized net losses of $1,642 million and $120
million, respectively, related to non-trading commodity derivatives. These
unrealized losses partially offset the unrealized market value gains related to
future cash flows from underlying asset positions.
Absolute Notional Contract Quantity of Commodity Derivatives Held for Non-
Trading Purposes
December 31,
-------------
2000 1999
------ ------
Natural gas, in billion cubic feet............................. 401 592
Electricity, in gigawatt hours................................. 75,932 45,877
Power capacity, in megawatt months............................. 35,325 25,950
Crude oil, in thousands of barrels............................. 43,991 32,764
Interest Rate Derivatives. Duke Energy periodically enters into financial
derivative instruments including, but not limited to, swaps, options and
interest rate locks to manage and mitigate interest rate risk related to
existing and anticipated borrowings. The notional amounts shown in the
following table serve solely as a basis for the calculation of payment streams
to be exchanged. These notional amounts are not a measure of Duke Energy's
exposure through its use of derivatives. Fair values shown in the following
table represent estimated amounts that Duke Energy would have received (paid)
if the swaps had been settled at current market rates on the respective dates.
F-20
DUKE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Interest Rate Derivatives
December 31,
-------------------------------------------------
2000 1999
------------------------ ------------------------
Notional Fair Contracts Notional Fair Contracts
Amounts Value Expire Amounts Value Expire
-------- ----- --------- -------- ----- ---------
(dollars in millions)
Fixed-to-floating rate
swaps...................... $275 $27 2009 $100 $ 1 2000
Cancelable fixed-to-floating
rate swaps................. 630 20 2004-2022 -- -- --
CP(a) floating-to-fixed rate
swaps...................... 100 (1) 2001 500 1 2000
Interest rate locks......... 275 (9) 2011 -- -- --
- --------
(a) Commercial paper.
Gains and losses that have been deferred in anticipation of planned
financing transactions on interest rate swap derivatives have been capitalized
and are being amortized over the life of the underlying debt. These deferred
gains and losses were not material in 2000 or 1999. As a result of the interest
rate swap contracts, interest expense for the relative notional amount is
recognized at the weighted-average rates as depicted in the following table.
Weighted-Average Rates for Interest Rate Swaps
For the Years
Ended December
31,
----------------
2000 1999 1998
---- ---- ----
Fixed-to-floating rate swaps.................................. 6.50% 5.71% 6.04%
Cancelable fixed-to-floating rate swaps....................... 5.09% -- --
Commercial paper swaps........................................ 6.11% 4.95% --
Foreign Currency Derivatives. NAWE enters into foreign currency swap
agreements to manage foreign currency risks associated with energy contracts
denominated in foreign currencies, primarily in the Canadian dollar. As of
December 31, 2000, the agreements had a notional contract amount of
approximately $1,396 million, beginning in the year 2001 and extending through
the year 2005, and had a weighted-average fixed exchange rate of 1.4672
Canadian dollars to one U.S. dollar. As of December 31, 1999, the agreements
had a notional contract amount of approximately $762 million, beginning in the
year 2000 and extending to the year 2005, and had a weighted-average fixed
exchange rate of 1.470 Canadian dollars to one U.S. dollar. The fair value of
foreign currency swap agreements was not material at December 31, 2000 or 1999.
Market and Credit Risk. Duke Energy's principal markets for power and
natural gas marketing services are industrial end-users and utilities located
throughout the U.S., Canada, Asia Pacific and Latin America. Duke Energy has
concentrations of receivables from natural gas and electric utilities and their
affiliates, as well as industrial customers throughout these regions. These
concentrations of customers may affect Duke Energy's overall credit risk in
that certain customers may be similarly affected by changes in economic,
regulatory or other factors. On all transactions where Duke Energy is exposed
to credit risk, Duke Energy analyzes the counterparties' financial condition
prior to entering into an agreement, establishes credit limits and monitors the
appropriateness of these limits on an ongoing basis. As of December 31, 2000,
Duke Energy had approximately $400 million in receivables related to energy
sales in California. Duke Energy quantified its exposures with regard to those
receivables and recorded a provision of $110 million. See Note 14 to the
Consolidated Financial Statements for further information regarding credit
exposure.
F-21
DUKE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The change in market value of New York Mercantile Exchange-traded futures
and options contracts requires daily cash settlement in margin accounts with
brokers. Physical forward contracts and financial derivatives are generally
settled at the expiration of the contract term or each delivery period;
however, these transactions are also generally subject to margin agreements
with the majority of Duke Energy's counterparties.
Financial Instruments. The fair value of financial instruments is summarized
in the following table. Judgment is required in interpreting market data to
develop the estimates of fair value. Accordingly, the estimates determined as
of December 31, 2000 and 1999, are not necessarily indicative of the amounts
Duke Energy could have realized in current markets. The majority of the
estimated fair value amounts were obtained from independent parties.
Financial Instruments
2000 1999
------------------- ------------------
Book Approximate Book Approximate
Value Fair Value Value Fair Value
------- ----------- ------ -----------
(in millions)
Long-term debt(a)....................... $11,456 $12,198 $9,165 $8,891
Guaranteed preferred beneficial
interests in subordinated notes of Duke
Energy or subsidiaries................. 1,406 1,389 1,404 1,207
Preferred stock(a)...................... 280 275 313 303
- --------
(a) Includes current maturities.
The fair value of cash and cash equivalents, notes receivable, notes payable
and commercial paper are not materially different from their carrying amounts
because of the short-term nature of these instruments or because the stated
rates approximate market rates.
Guarantees made on behalf of affiliates or recourse provisions from
affiliates have no book value associated with them, and there are no fair
values readily determinable since quoted market prices are not available.
8. Investment in Affiliates
Investments in domestic and international affiliates that are not controlled
by Duke Energy but where Duke Energy has significant influence over operations
are accounted for by the equity method. These investments include undistributed
earnings of $70 million and $6 million in 2000 and 1999, respectively. Duke
Energy's share of net income from these affiliates is reflected in the
Consolidated Statements of Income as Other Operating Revenues.
Natural Gas Transmission. Investments primarily include ownership interests
in natural gas pipeline joint ventures which transport natural gas to the U.S.
from Canada. Investments include a 37.5% ownership interest in Maritimes &
Northeast Pipeline, LLC.
Field Services. Investments primarily include a 37% interest in a
partnership which owns natural gas gathering systems in the Gulf of Mexico
(Dauphin Island Gathering Partners) and a 21.1% ownership interest in TEPPCO.
North American Wholesale Energy. Significant investments include a 50%
indirect interest in VMC Generating Company, a merchant electric generating
company, a 32.5% indirect interest in American Ref-Fuel, LLC and a 50% interest
in Southwest Power Partners.
F-22
DUKE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
International Energy. International Energy has investments in various
natural gas and electric generation and transmission facilities in its targeted
geographic areas. Significant investments include a 25% indirect interest in
National Methanol Company, which owns and operates a methanol and MTBE (methyl
tertiary butyl ether) business in Jubail, Saudi Arabia.
Other Energy Services. Investments include the participation in various
construction and support activities for fossil-fueled generating plants.
Duke Ventures. Significant investments include various real estate
development projects and a 20% interest in the BellSouth PCS joint venture
until its sale in 2000.
Investment in Affiliates
December 31, 2000 December 31, 1999 December 31, 1998
----------------------------- ----------------------------- ----------------------------
Domestic International Total Domestic International Total Domestic International Total
-------- ------------- ------ -------- ------------- ------ -------- ------------- -----
(in millions)
Natural Gas
Transmission........... $ 82 $ 88 $ 170 $ 67 $ 83 $ 150 $104 $ 37 $141
Field Services.......... 373 -- 373 439 -- 439 303 -- 303
North American Wholesale
Energy................. 635 9 644 425 -- 425 171 -- 171
International Energy.... -- 154 154 -- 224 224 -- 223 223
Other Energy Services... 11 7 18 51 6 57 19 23 42
Duke Ventures........... 23 -- 23 10 -- 10 24 -- 24
Other Operations........ (12) -- (12) (6) -- (6) (2) -- (2)
------ ---- ------ ---- ---- ------ ---- ---- ----
Total.................. $1,112 $258 $1,370 $986 $313 $1,299 $619 $283 $902
====== ==== ====== ==== ==== ====== ==== ==== ====
Equity in Earnings of Investment
For the years ended:
----------------------------------------------------------------------------------------
December 31, 2000 December 31, 1999 December 31, 1998
---------------------------- ---------------------------- ----------------------------
Domestic International Total Domestic International Total Domestic International Total
-------- ------------- ----- -------- ------------- ----- -------- ------------- -----
(in millions)
Natural Gas
Transmission........... $ 13 $ 4 $ 17 $ 16 $ 9 $ 25 $ 14 $ 3 $ 17
Field Services.......... 39 -- 39 44 -- 44 9 -- 9
North American Wholesale
Energy................. 36 -- 36 47 -- 47 50 -- 50
International Energy.... -- 43 43 -- 10 10 -- 18 18
Other Energy Services... (13) -- (13) 10 3 13 1 13 14
Duke Ventures........... (9) -- (9) (22) -- (22) (29) -- (29)
Other Operations........ (10) -- (10) (5) -- (5) -- -- --
---- ---- ---- ---- ---- ---- ---- ---- ----
Total.................. $ 56 $ 47 $103 $ 90 $ 22 $112 $ 45 $ 34 $ 79
==== ==== ==== ==== ==== ==== ==== ==== ====
F-23
DUKE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Summarized Combined Financial Information of Unconsolidated Affiliates
December 31,
--------------------
2000 1999 1998
------ ------ ------
(in millions)
Balance Sheet
Current assets........................................... $1,242 $1,544 $ 848
Noncurrent assets........................................ 6,588 7,826 7,340
Current liabilities...................................... 888 1,155 1,084
Noncurrent liabilities................................... 4,404 4,727 3,884
------ ------ ------
Net assets............................................... $2,538 $3,488 $3,220
====== ====== ======
Income Statement
Operating revenues....................................... $4,617 $3,510 $1,667
Operating expenses....................................... 4,039 3,104 1,166
------ ------ ------
Net income............................................... 440 193 263
====== ====== ======
Duke Energy had outstanding notes receivable from certain affiliates of $70
million and $72 million at December 31, 2000 and 1999, respectively.
9. Net Property, Plant and Equipment
December 31,
-----------------
2000 1999
-------- -------
(in millions)
Land...................................................... $ 36 $ 25
Plant:
Electric generation and transmission.................... 11,734 11,717
Natural gas transmission................................ 11,281 10,290
Gathering and processing facilities..................... 4,434 2,466
Other buildings and improvements........................ 1,339 1,310
Leasehold improvements.................................. 14 8
Nuclear fuel.............................................. 761 741
Equipment................................................. 92 83
Vehicles.................................................. 36 37
Construction in process................................... 2,209 1,220
Other..................................................... 2,679 2,539
-------- -------
Total property, plant and equipment................... 34,615 30,436
Total accumulated depreciation(a)..................... (10,146) (9,441)
-------- -------
Total net property, plant and equipment............... $ 24,469 $20,995
======== =======
- --------
(a) Includes amortization of nuclear fuel: 2000--$503 million; 1999--$444
million.
Capitalized interest of $67 million, $52 million and $28 million is included
in the Consolidated Statements of Income for the years ended December 31, 2000,
1999 and 1998, respectively.
F-24
DUKE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Debt and Credit Facilities
Long-term Debt
December
31,
-----------
Year Due 2000 1999
---------- ----- -----
(in
millions)
Duke Energy
First and refunding mortgage bonds:(a)
5.875%--6.375%........................................ 2001--2008 $ 625 $ 625
6.750%--8.30%......................................... 2023--2025 661 661
7.0%--8.950%.......................................... 2027--2033 165 165
Pollution control debt, 3.850%--5.80%................... 2012--2017 172 172
Notes:
5.375%--9.210%........................................ 2009--2016 811 264
6.0%--6.60%........................................... 2028--2038 500 500
Commercial paper, 6.510% and 5.840% weighted-average
rate at December 31, 2000 and 1999, respectively(b).... 1,256 1,184
Other debt.............................................. 18 21
Notes matured during 2000............................... -- 200
Duke Capital Corporation
Senior notes:
6.250%--7.50%......................................... 2004--2009 1,400 1,250
6.750%--8.50%......................................... 2018--2019 650 650
Commercial paper, 6.660% and 5.910% weighted-average
rate at December 31, 2000 and 1999, respectively(b).. 1,378 535
Note payable to affiliate 6.140% and 5.030% weighted-
average rate at December 31, 2000 and 1999,
respectively........................................... 141 86
PanEnergy Corp
Bonds:
7.750%................................................ 2022 328 328
8.625% Debentures..................................... 2025 100 100
Notes:
7.0%--9.90%, maturing serially........................ 2003--2006 384 395
TETCO
Notes:
7.30%--10.375%........................................ 2001--2010 600 500
Medium-term, Series A, 7.640%--9.070%................. 2001--2012 51 51
Algonquin Gas Transmission Company
9.130% Notes............................................ 2003 100 100
DEFS
Notes, 7.50%--8.125%.................................... 2005--2030 1,700 --
Commercial paper, 7.390% weighted-average rate at
December 31, 2000...................................... 346 --
DENA
Bonds, 7.50%--10.0%..................................... 2010--2030 302 --
Capital leases.......................................... 2009--2028 272 207
Notes matured during 2000............................... -- 380
F-25
DUKE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31,
---------------
Year Due 2000 1999
---------- ------- ------
(in millions)
DEI
Medium-term note, 7.250%.......................... 2004 139 162
Notes:
4.50%--18.0%.................................... 2001--2024 222 107
7.90%........................................... 2004--2013 138 161
6.0%--10.0%(c).................................. 2013--2017 477 485
Credit facilities, 6.130% and 6.010% weighted-
average rate at December 31, 2000 and 1999,
respectively..................................... 44 80
Commercial paper, 6.40% and 5.510% weighted-
average at December 31, 2000 and 1999,
respectively..................................... 223 49
Crescent(d)
Construction and mortgage loans, 6.30%--9.50%..... 2001--2010 67 46
Other debt of subsidiaries........................ 103 34
Unamortized debt discount and premium, net........ (91) (66)
------- ------
Total long-term debt.............................. 13,282 9,432
Current maturities of long-term debt.............. (437) (482)
Short-term notes payable and commercial paper..... (1,826) (267)
------- ------
Total long-term portion........................... $11,019 $8,683
======= ======
- --------
(a) Substantially all of Franchised Electric's plant was mortgaged.
(b) Extendible commercial notes are included in the 2000 amounts.
(c) Paranapanema (Brazil) debt, principal is indexed annually to inflation.
(d) Substantial amounts of Crescent's real estate development projects, land
and buildings were pledged as collateral.
The weighted-average interest rate on outstanding short-term notes payable
and commercial paper at December 31, 2000 and 1999, was 6.80% and 5.720%,
respectively.
Annual Maturities
(in millions)
-------------
2001........................................................... $ 437
2002........................................................... 263
2003........................................................... 475
2004........................................................... 956
2005........................................................... 922
Thereafter..................................................... 8,403
-------
Total long-term debt....................................... $11,456
=======
Included in the annual maturities after 2005 is $1,536 million of long-term
debt that has call options whereby Duke Energy has the option to repay the debt
early. Based on the years in which Duke Energy may first exercise its
redemption options, $95 million could potentially be repaid in 2001, $1,114
million in 2002, $227 million in 2003 and $100 million in 2005.
F-26
DUKE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Credit Facilities
December 31, 2000 December 31, 1999
---------------------- ----------------------
Credit Credit
Facilities Outstanding Facilities Outstanding
---------- ----------- ---------- -----------
(in millions)
364-day facilities(a)........... $1,796 $ -- $ 823 $ 10
Three-year revolving
facilities..................... 84 44 565 450
Four-year revolving facilities.. 125 -- 125 --
Five-year revolving
facilities(a).................. 2,200 -- 2,200 --
------ ----- ------ ----
Total consolidated.......... $4,205 $ 44 $3,713 $460
====== ===== ====== ====
- --------
(a) Supported commercial paper facilities.
11. Nuclear Decommissioning Costs
Nuclear Decommissioning Costs. Estimated site-specific nuclear
decommissioning costs, including the cost of decommissioning plant components
not subject to radioactive contamination, total approximately $1.9 billion
stated in 1999 dollars based on decommissioning studies completed in 1999. This
amount includes Duke Energy's 12.5% ownership in the Catawba Nuclear Station.
The other joint owners of Catawba Nuclear Station are responsible for
decommissioning costs related to their ownership interests in the station. Both
the NCUC and the PSCSC have granted Duke Energy recovery of estimated
decommissioning costs through retail rates over the expected remaining service
periods of Duke Energy's nuclear stations. The operating licenses for Duke
Energy's nuclear units are subject to extension. On May 23, 2000, Duke Energy
was granted a license renewal for Oconee. The current operating licenses for
Duke Energy's nuclear units are as follows:
Operating Licenses for Nuclear Units
Unit Year
---- ----
McGuire 1............................................................... 2021
McGuire 2............................................................... 2023
Catawba 1............................................................... 2024
Catawba 2............................................................... 2026
Oconee 1 and 2.......................................................... 2033
Oconee 3................................................................ 2034
During 2000 and 1999, Duke Energy expensed approximately $57 million, which
was contributed to the external funds for decommissioning costs, and accrued an
additional $8 million to the internal reserve. Nuclear units are depreciated at
an annual rate of 4.7%, of which 1.61% is for decommissioning. The balance of
the external funds as of December 31, 2000 and 1999, was $717 million and $703
million, respectively. The balance of the internal reserve as of December 31,
2000 and 1999, was $231 million and $223 million, respectively, and is
reflected in the Consolidated Balance Sheets as Accumulated Depreciation and
Amortization. Management believes that the decommissioning costs being
recovered through rates, when coupled with expected fund earnings, are
currently sufficient to provide for the cost of decommissioning.
A provision in the Energy Policy Act of 1992 established a fund for the
decontamination and decommissioning of the Department of Energy's (DOE) uranium
enrichment plants (the D&D Fund). Licensees are subject to an annual assessment
for 15 years based on their pro rata share of past enrichment services. On June
12, 1998, Duke Energy and 21 other utilities filed a lawsuit challenging the
constitutionality of the D&D Fund and seeking an injunction that prohibits the
government from collecting the assessment and a refund of all
F-27
DUKE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
assessments paid. The annual assessment is recorded in the Consolidated
Statements of Income as Fuel Used in Electric Generation. Duke Energy paid $10
million during 2000 and has paid $85 million cumulatively related to its
ownership interests in nuclear plants. The remaining liability and regulatory
assets of $62 million and $70 million at December 31, 2000 and 1999,
respectively, are reflected in the Consolidated Balance Sheets as Deferred
Credits and Other Liabilities, and Regulatory Assets and Deferred Debits,
respectively.
Spent Nuclear Fuel. Under provisions of the Nuclear Waste Policy Act of
1982, Duke Energy has entered into contracts with the DOE for the disposal of
spent nuclear fuel. The DOE failed to begin accepting the spent nuclear fuel on
January 31, 1998, the date provided by the Nuclear Waste Policy Act and by
Duke Energy's contract with the DOE. On June 8, 1998, Duke Energy filed with
the U.S. Court of Federal Claims a claim against the DOE for damages in excess
of $1 billion arising out of the DOE's failure to begin accepting commercial
spent nuclear fuel by January 31, 1998. Damages claimed in the suit are
intended to recover costs that Duke Energy is incurring and will continue to
incur as a result of the DOE's partial material breach of its contract with
Duke Energy, including costs associated with securing additional spent fuel
storage capacity. Duke Energy will continue to safely manage its spent nuclear
fuel until the DOE accepts it. Payments made to the DOE for disposal costs are
based on nuclear output and are included in the Consolidated Statements of
Income as Fuel Used in Electric Generation.
12. Guaranteed Preferred Beneficial Interests in Subordinated Notes of Duke
Energy or Subsidiaries
Duke Energy and certain subsidiaries have each formed business trusts for
which they own all the respective common securities. The trusts issue and sell
preferred securities and invest the gross proceeds in junior subordinated notes
issued by the respective parent companies.
Trust Preferred Securities
December 31,
--------------
Issued Rate Due 2000 1999
------ ------ ---- ---- ------
(in millions)
1997............................................... 7.20% 2037 $ 350 $ 350
1998............................................... 7.375% 2038 350 350
1998............................................... 7.375% 2038 250 250
1999............................................... 8.375% 2029 250 250
1999............................................... 7.20% 2039 250 250
Unamortized debt discount.......................... (44) (46)
------ ------
$1,406 $1,404
====== ======
These trust preferred securities represent preferred undivided beneficial
interests in the assets of the respective trusts. Payment of distributions on
these preferred securities is guaranteed by the respective parent company, but
only to the extent the trusts have funds legally and immediately available to
make such distributions. Dividends of $108 million, $87 million and $44 million
related to the trust preferred securities have been included in the
Consolidated Statements of Income as Minority Interest Expense for the years
ended December 31, 2000, 1999 and 1998, respectively.
F-28
DUKE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. Preferred and Preference Stock
Authorized Shares of Stock as of December 31, 2000 and 1999
Par Value Shares
--------- ------------
(in millions)
Preferred Stock...................................... $100 12.5
Preferred Stock A.................................... $ 25 10.0
Preference Stock..................................... $100 1.5
As of December 31, 2000 and 1999, there were no shares of preference stock
outstanding.
Preferred Stock with Sinking Fund Requirements
Shares
Outstanding December 31,
Year At December 31, -----------------------
Rate/Series Issued 2000 2000 1999
----------- ------ --------------- ---- -----------
(dollars in millions)
6.20% D (Preferred Stock A)...... 1992 800,000 $ 20 $ 20
6.30% U.......................... 1992 130,000 13 13
6.40% V.......................... 1992 130,000 13 13
6.75% X.......................... 1993 250,000 25 25
6.10% C (Preferred Stock A)(a)... 1992 -- -- 20
6.20% T(a)....................... 1992 -- -- 13
---------- -----------
Total........................ $ 71 $ 104
========== ===========
- --------
(a) Preferred stock series C and T redeemed in September and December, 2000,
respectively.
The annual sinking fund requirements for 2001 through 2005 are $33 million,
$13 million, $2 million, $2 million and $2 million, respectively. Some
additional redemptions are permitted at Duke Energy's option.
Preferred Stock without Sinking Fund Requirements
Shares
Outstanding December 31,
Year At December 31, ---------------------
Rate/Series Issued 2000 2000 1999
----------- ------ --------------- ---- ----------
(dollars in millions)
4.50% C........................... 1964 175,000 $ 18 $ 18
7.85% S........................... 1992 300,000 30 30
7.00% W........................... 1993 249,989 25 25
7.04% Y........................... 1993 299,995 30 30
6.375% (Preferred Stock A)........ 1993 1,257,185 31 31
Auction Series A.................. 1990 750,000 75 75
---------- ----------
Total......................... $ 209 $ 209
========== ==========
The call provisions for the outstanding preferred stock specify various
redemption prices not exceeding 104% of par value, plus accumulated dividends
to the redemption date.
F-29
DUKE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. Commitments and Contingencies
Nuclear Insurance. Duke Energy owns and operates the McGuire and Oconee
Nuclear Stations with two and three nuclear reactors, respectively, and
operates and has a partial ownership interest in the Catawba Nuclear Station
with two nuclear reactors. Nuclear insurance coverage is maintained in three
program areas: liability coverage; property, decontamination and
decommissioning coverage; and business interruption and/or extra expense
coverage. Certain expenses associated with nuclear insurance premiums paid by
Duke Energy are reimbursed by the other joint owners of the Catawba Nuclear
Station.
Pursuant to the Price-Anderson Act, Duke Energy is required to insure
against public liability claims resulting from nuclear incidents to the full
limit of liability of approximately $9.5 billion.
Primary Liability Insurance. The maximum required private primary liability
insurance of $200 million has been purchased along with a like amount to cover
certain worker tort claims.
Excess Liability Insurance. This policy currently provides approximately
$9.3 billion of coverage through the Price-Anderson Act's mandatory industry-
wide excess secondary insurance program of risk pooling. The $9.3 billion of
coverage is the sum of the current potential cumulative retrospective premium
assessments of $88 million per licensed commercial nuclear reactor. This $9.3
billion will be increased by $88 million as each additional commercial nuclear
reactor is licensed, or reduced by $88 million for certain nuclear reactors
that are no longer operational and may be exempted from the risk pooling
insurance program. Under this program, licensees could be assessed
retrospective premiums to compensate for damages in the event of a nuclear
incident at any licensed facility in the nation. If such an incident occurs and
public liability damages exceed primary insurances, licensees may be assessed
up to $88 million for each of their licensed reactors, payable at a rate not to
exceed $10 million a year per licensed reactor for each incident. The $88
million amount is subject to indexing for inflation and may be subject to state
premium taxes.
Duke Energy is a member of Nuclear Electric Insurance Limited (NEIL), which
provides property and business interruption insurance coverage for Duke
Energy's nuclear facilities under the following three policy programs:
Primary Property Insurance. This policy provides $500 million in primary
property damage coverage for each of Duke Energy's nuclear facilities.
Excess Property Insurance. This policy provides excess property,
decontamination and decommissioning liability insurance in the following
amounts: $2.25 billion for the Catawba Nuclear Station and $1.5 billion each
for the Oconee and McGuire Nuclear Stations.
Business Interruption Insurance. This policy provides business interruption
and/or extra expense coverage resulting from an accidental outage of a nuclear
unit. Each unit of the McGuire and Catawba Nuclear Stations is insured for up
to approximately $4 million per week and the Oconee Nuclear Station units are
insured for up to approximately $3 million per week. Coverage amounts per unit
decline if more than one unit is involved in an accidental outage. Initial
coverage begins after a 12-week deductible period and continues at 100% for 52
weeks and 80% for the next 110 weeks.
If NEIL's losses ever exceed its reserves for any of the above three
programs, Duke Energy will be liable for assessments of up to five times its
annual premiums. The current potential maximum assessments are as follows:
Primary Property Insurance--$18 million; Excess Property Insurance--$18
million; Business Interruption Insurance--$15 million.
F-30
DUKE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The other joint owners of the Catawba Nuclear Station are obligated to
assume their pro rata share of any liabilities for retrospective premiums and
other premium assessments resulting from the Price-Anderson Act's excess
secondary insurance program of risk pooling or the NEIL policies.
Environmental. Duke Energy is subject to international, federal, state and
local regulations regarding air and water quality, hazardous and solid waste
disposal and other environmental matters.
Manufactured Gas Plants and Superfund Sites. Duke Energy was an operator of
manufactured gas plants until the early 1950s and has entered into a
cooperative effort with the State of North Carolina and other owners of certain
former manufactured gas plant sites to investigate and, where necessary,
remediate these contaminated sites. Duke Energy is considered by regulators to
be a potentially responsible party and may be subject to future liability at
eight federal Superfund sites and three state Superfund sites. While the cost
of remediation of these sites may be substantial, Duke Energy will share in any
liability associated with remediation of contamination at such sites with other
potentially responsible parties. Management believes that resolution of these
matters will not have a material adverse effect on consolidated results of
operations, cash flows or financial position.
PCB (Polychlorinated Biphenyl) Assessment and Cleanup Programs. In June
1999, the Environmental Protection Agency (EPA) certified that TETCO, a wholly
owned subsidiary of Duke Energy, had completed cleanup of PCB-contaminated
sites under conditions stipulated by a U.S. Consent Decree in 1989. TETCO was
required to continue groundwater monitoring on a number of sites for two years.
This required monitoring was completed as of the end of 2000, pending EPA
concurrence. TETCO will be evaluating and discussing with the EPA, appropriate
state authorities or both the need for additional remediation or monitoring.
Under terms of the sales agreement with CMS discussed in Note 2 to the
Consolidated Financial Statements, Duke Energy is obligated to complete cleanup
of previously identified contamination resulting from the past use of PCB-
containing lubricants and other discontinued practices at certain sites on the
PEPL and Trunkline systems. Based on Duke Energy's experience to date and costs
incurred for cleanup operations, management believes the resolution of matters
relating to the environmental issues discussed above will not have a material
adverse effect on consolidated results of operations, cash flows or financial
position.
Air Quality Control. In October 1998, the EPA issued a final rule on
regional ozone control that required 22 eastern states and the District of
Columbia to revise their State Implementation Plans (SIPs) to significantly
reduce emissions of nitrogen oxide by May 1, 2003. The EPA's rule was
challenged in court by various states, industry and other interests, including
the states of North Carolina and South Carolina, and Duke Energy. In March
2000, the court upheld most aspects of the EPA's rule. The same court
subsequently issued a decision that extended the compliance deadline for
implementation of emission reductions to May 31, 2004. In January 2000, the EPA
finalized another ozone-related rule under Section 126 of the Clean Air Act
(CAA) that has virtually identical emission control requirements as its October
1998 action, but with a May 1, 2003 compliance date. The EPA's 2000 rule has
been challenged in court. The court is expected to issue its decision during
the spring of 2001.
In response to the EPA's October 1998 rule, both North Carolina and South
Carolina are in the process of finalizing the SIP revisions to implement the
EPA rule's emission reduction requirements. Additionally, North Carolina has
adopted a separate rule that caps nitrogen oxide emissions from coal-fired
power plants in the event the EPA's SIP rule is eventually overturned.
Depending on the resolution of these and related matters, management
anticipates that costs to Duke Energy may range from $500 million to $900
million in capital costs for additional emission controls over an
F-31
DUKE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
estimated time period which continues through 2007. Emission control retrofits
of this type are large technical, design and construction projects. These
projects will be managed closely to ensure the continuation of reliable
electric service to Duke Energy's customers throughout the projects and upon
their completion.
On December 22, 2000, the U.S. Justice Department, acting on behalf of the
EPA, filed a complaint against Duke Energy in the U.S. District Court in
Greensboro, North Carolina, for alleged violations of the New Source Review
(NSR) provisions of the CAA. The EPA is claiming that 29 projects performed at
25 of Duke Energy's coal-fired units were major modifications as defined in the
CAA and that Duke Energy violated the CAA's NSR requirements when it undertook
those projects without obtaining permits and installing emission controls for
sulfur dioxide, nitrogen oxide and particulate matter. The complaint requests,
among other things, that the court enjoin Duke Energy from operating the coal-
fired units identified in the complaint, and order Duke Energy to install
additional emission controls and pay unspecified civil penalties. This
complaint appears to be part of the EPA's NSR enforcement initiative, in which
the EPA claims that utilities and others have committed widespread violations
of the CAA permitting requirements for the past 25 years. The EPA has sued or
issued notices of violation or investigative information requests, to at least
48 other electric utilities and cooperatives.
The EPA's allegations run counter to previous EPA guidance regarding the
applicability of the NSR permitting requirements. Duke Energy, along with other
utilities, has routinely undertaken the type of repair, replacement, and
maintenance projects that the EPA now claims are illegal. Duke Energy believes
that all of its electric generation units are properly permitted and have been
properly maintained, and intends to defend itself vigorously against these
alleged violations. However, because these matters are in a preliminary stage,
management cannot estimate the effects of these matters on Duke Energy's future
consolidated results of operations, cash flows or financial position. The CAA
authorizes civil penalties of up to $27,500 per day per violation at each
generating unit. Civil penalties, if ultimately imposed by the court, and the
cost of any required new pollution control equipment, if the court accepts the
EPA's contentions, could be substantial.
Injury and Damages Claims. Duke Energy has experienced numerous claims
relating to damages for personal injury alleged to have arisen from the
exposure to or use of asbestos in connection with construction and maintenance
activities conducted by Duke Energy on its electric generation plants during
the 1960s and 1970s. During 1999, Duke Energy experienced a significant
increase in the number of these claims. This increase, coupled with its
cumulative experience in claims received, prompted Duke Energy to conduct a
comprehensive review which was completed in late 1999 and to record an $800
million accrual, which is included in Other Deferred Credits and Other
Liabilities in the Consolidated Balance Sheets, to reflect the purchase of a
third-party insurance policy as well as estimated amounts for future claims not
recoverable under such policy. The insurance policy, combined with amounts
covered by self-insurance reserves, provides for claims paid up to an aggregate
of $1.6 billion. Duke Energy currently believes the estimated claims relating
to this exposure will not exceed such amount. While Duke Energy is uncertain as
to the timing of when claims will be received, portions of the estimated claims
may not be received and paid for 30 or more years.
While Duke Energy has recorded an accrual related to this estimated
liability, such estimates cannot be made with certainty. Factors, such as the
frequency and magnitude of claims, could result in changes in the estimates of
the injury and damages liability and insurance recoveries. Such changes could
result in, over time, a difference from the amount currently reflected in the
financial statements. However, due to Duke Energy's insurance program relating
to this liability, management believes that any changes in the estimates would
not have a material adverse effect on consolidated results of operations, cash
flows or financial position.
California Issues. California Litigation. Duke Energy's subsidiaries, DENA
and DETM, have been named among 16 defendants in a class action lawsuit (the
Gordon lawsuit) filed against companies identified as
F-32
DUKE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
"generators and traders" of electricity in California markets. DETM also was
named as one of numerous defendants in four additional lawsuits, including two
class actions (the Hendricks and Pier 23 Restaurant lawsuits), filed against
generators, marketers and traders and other unnamed providers of electricity in
California markets. These suits were brought either by or on behalf of
electricity consumers in the State of California. The Gordon and Hendricks
class action suits were filed in the Superior Court of the State of California,
San Diego County, in November 2000. The other three suits were filed in January
2001, one in the Superior Court of the State of California, San Diego County,
and the other two in the Superior Court of the State of California, County of
San Francisco. These suits generally allege that the defendants manipulated the
wholesale electricity markets in violation of state laws against unfair and
unlawful business practices and state antitrust laws. Plaintiffs in the Gordon
suit seek aggregate damages of over $4 billion, and the plaintiffs in the other
suits, to the extent damages are specified, allege damages in excess of $1
billion. The lawsuits each seek the disgorgement of alleged unlawfully obtained
revenues for sales of electricity and, in three suits, an award of treble
damages.
California Wholesale Electricity Markets. As a result of high prices in the
western U.S. wholesale electricity markets in 2000, several state and federal
regulatory investigations and complaints have commenced to determine the causes
of the prices and potentially to recommend remedial action. The FERC concluded
its investigation by issuing on December 15, 2000, an Order Directing Remedies
in California Wholesale Electricity Markets. In this conclusion, the FERC found
no basis in allegations made by government officials in California that
specific electric generators artificially drove up power prices. This
conclusion is consistent with similar findings by the Compliance Unit of the
California Power Exchange (CalPX) and the Northwest Power Planning Council.
That Order is the subject of numerous rehearing requests.
At the state level, the California Public Utilities Commission, the
California Electricity Oversight Board, the California Bureau of State Audits
and the California Office of the Attorney General all have separate ongoing
investigations into the high prices and their causes. None of those
investigations have been completed and no findings have been made in connection
with any of them.
California Utilities Defaults and Other Proceedings. Two California electric
utilities recently defaulted on many of their obligations to suppliers and
creditors. NAWE supplies electric power to these utilities directly and
indirectly through contracts through the California Independent System Operator
(CAISO) and the CalPX. NAWE also supplies natural gas to these utilities under
direct contracts. With respect to electric power sales through the CAISO and
CalPX, Duke Energy quantified its exposures at December 31, 2000 to these
utilities and recorded a $110 million provision. As a result of these defaults
and certain related government actions, Duke Energy has taken a number of
steps, including initiating court actions, to mitigate its exposure.
While these matters referenced above are in their earliest stages,
management does not believe, based on its analysis to date of the factual
background and the claims asserted in these matters, that their resolution will
have a material adverse effect on Duke Energy's consolidated results of
operations, cash flows or financial position.
Litigation. Exxon Mobil Corporation Arbitration. In December 2000, three
subsidiaries of Duke Energy initiated binding arbitration against three
subsidiaries of the Exxon Mobil Corporation (collectively, the "Exxon Mobil
entities") concerning the parties' joint ownership of DETM and certain related
affiliates (collectively, the "Ventures"). At issue is a buy-out right
provision in the parties' agreement. The agreements governing the ownership of
the Ventures contain provisions giving Duke Energy the right to purchase the
Exxon Mobil entities' 40% interest in the Ventures in the event material
business disputes arise between the Ventures' owners. Such disputes have
arisen, and consequently, Duke Energy exercised its right to buy the Exxon
Mobil entities' interest. Duke Energy claims that refusal by the Exxon Mobil
entities to honor the
F-33
DUKE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
exercise is a breach of the buy-out right provision, and seeks specific
performance of the provision. Duke Energy also complains of the Exxon Mobil
entities' lack of use of, and contributions to, the Ventures.
In January 2001, the Exxon Mobil entities asserted counterclaims in the
arbitration and claims in a separate Texas state court action alleging that
Duke Energy breached its obligations to the Ventures and to the Exxon Mobil
entities. The Exxon Mobil entities also claim that Duke Energy violated a
Guaranty Agreement. While this matter is in its early stages, management
believes that the final disposition of this action will not have a material
adverse effect on Duke Energy's consolidated results of operations, cash flows
or financial position.
Other Commitments and Contingencies. Financial Guarantees. Certain
subsidiaries of Duke Energy have guaranteed debt agreements of affiliates and
have provided surety bonds and letters of credit, all of which totaled
approximately $1.9 billion and $853 million as of December 31, 2000 and 1999,
respectively. The increase in the amount of these obligations is primarily due
to increasing support for margin deposits and power exchange participation.
Leases. Duke Energy utilizes assets under operating leases in several areas
of operations. Consolidated rental expense amounted to $90 million, $87 million
and $80 million in 2000, 1999 and 1998, respectively. Future minimum rental
payments under Duke Energy's various operating leases for the years 2001
through 2005 are $74 million, $60 million, $51 million, $44 million and $38
million, respectively.
15. Common Stock
On December 20, 2000, Duke Energy announced a two-for-one common stock split
effective January 26, 2001, to shareholders of record on January 3, 2001. All
outstanding share and per share amounts have been restated to reflect the stock
split, and appropriate adjustments have been made in the exercise price and
number of shares subject to stock options along with appropriate adjustments to
stock amounts and other employee benefit programs. Effective with the stock
split, the quarterly cash dividend rate on common stock is $0.275 per share,
subject to declaration from time to time by the Board of Directors.
At its December 20, 2000 meeting, the Board of Directors approved a proposal
to increase the number of authorized shares of common stock from one billion to
two billion. Such an increase is subject to shareholder approval at the Duke
Energy Corporation Annual Meeting of Shareholders to be held on April 26, 2001.
16. Stock-Based Compensation
All of the following information regarding outstanding common stock shares
and options has been restated to reflect the two-for-one common stock split
discussed in Note 15 to the Consolidated Financial Statements.
Under Duke Energy's 1998 Long-term Incentive Plan (the 1998 Plan), stock
options for up to 30 million shares of common stock may be granted to key
employees. Under the 1998 Plan, the exercise price of each option granted is
required to be no less than the market price of Duke Energy's common stock on
the date of grant. Vesting periods range from one to five years with a maximum
term of 10 years. An amendment to the 1998 Plan, subject to shareholder
approval at the Duke Energy Corporation Annual Meeting of Shareholders to be
held on April 26, 2001, will increase the number of shares of common stock
available under the 1998 Plan to 60 million shares.
F-34
DUKE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock Option Activity
Weighted-
Average
Exercise
Options Price
-------------- ---------
(in thousands)
Outstanding at December 31, 1997....................... 5,459 $12
Granted.............................................. 7,096 29
Exercised............................................ (1,896) 11
Forfeited............................................ (1,736) 29
------
Outstanding at December 31, 1998....................... 8,923 23
Granted.............................................. 10,308 27
Exercised............................................ (856) 12
Forfeited............................................ (750) 29
------
Outstanding at December 31, 1999....................... 17,625 25
Granted.............................................. 7,594 41
Exercised............................................ (2,047) 21
Forfeited............................................ (666) 27
------
Outstanding at December 31, 2000....................... 22,506 31
======
Stock Options at December 31, 2000
Outstanding Exercisable
----------------------------------- ------------------------
Weighted- Weighted- Weighted-
Range of Average Average Average
Exercise Remaining Exercise Exercise
Prices Number Life Price Number Price
-------- ------ --------- --------- ------ ---------
(in thousands) (in years) (in thousands)
$5 to $7 7 1.3 $ 7 7 $ 7
$8 to $10 944 3.1 10 944 10
$11 to $12 203 3.3 12 203 12
$13 to $16 220 5.1 14 220 14
$21 to $25 6,115 8.9 25 1,532 24
$26 to $30 7,726 7.7 29 2,111 29
$31 to $34 578 8.0 32 185 33
> $34 6,713 10.0 43 -- --
------ -----
Total 22,506 5,202 $23
====== =====
Duke Energy had 3.6 million and 3.0 million options exercisable at December
31, 1999 and 1998, with weighted-average exercise prices of $17 and $11 per
option, respectively.
The weighted-average fair value of options granted was $10, $5 and $4 per
option during 2000, 1999 and 1998, respectively. The fair value of each option
grant was estimated on the date of grant using the Black-Scholes option-pricing
model.
F-35
DUKE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Weighted-Average Assumptions for Option-Pricing
2000 1999 1998
------- ------- -------
Stock dividend yield.................................... 3.7% 4.1% 4.2%
Expected stock price volatility......................... 25.1% 18.8% 15.1%
Risk-free interest rates................................ 5.3% 5.9% 5.6%
Expected option lives................................... 7 years 7 years 7 years
Had compensation expense for stock-based compensation been determined based
on the fair value at the grant dates, 2000 net income would have been $1,764
million, or $2.37 per basic share; 1999 net income would have been $1,498
million, or $2.03 per basic share; and 1998 net income would have been $1,250
million, or $1.70 per basic share.
Under Duke Energy's 1996 Stock Incentive Plan (the 1996 Plan), four million
shares of common stock were reserved for awards to employees. Restricted stock
grants made under the 1996 Plan vest over periods ranging from one to five
years. Duke Energy awarded 294,526 restricted shares (fair value at grant dates
of approximately $8 million) in 2000 and 131,700 restricted shares (fair value
at grant dates of approximately $4 million) in 1999. Compensation expense for
the grants is charged to earnings over the restriction period and amounted to
$4 million in 2000 and was not material in 1999 or 1998.
Duke Energy granted Company Performance Awards under the 1998 Plan, under
which 30 million shares of common stock have been reserved for employee and
outside director awards. These share grants under the 1998 Plan vest over
periods ranging between one and seven years. Duke Energy awarded 225,000 of
these shares (fair value at grant dates of $7 million) in 2000 and 986,400 of
these shares (fair value at grant dates of $26 million) in 1999. Compensation
expense for the stock grants is charged to earnings over the vesting period,
and amounted to $7 million in 2000, $3 million in 1999 and zero in 1998.
17. Employee Benefit Plans
Retirement Plans. Duke Energy and its subsidiaries maintain a non-
contributory defined benefit retirement plan covering most employees with
minimum service requirements using a cash balance formula. Under a cash balance
formula, a plan participant accumulates a retirement benefit based upon a
percentage, which may vary with age and years of service, of current eligible
earnings and current interest credits.
On December 31, 1998, all defined benefit retirement plans maintained by
Duke Energy and its subsidiaries, except for the PanEnergy retirement plan,
were merged to form the Duke Energy Retirement Cash Balance Plan (the Duke
Energy Plan). The plan merger changed the benefit for certain participants,
from a formula based primarily on benefit accrual service and highest average
earnings, to a cash balance formula.
Through December 31, 1998, the PanEnergy retirement plan provided retirement
benefits (i) for eligible employees of certain subsidiaries that are generally
based on an employee's years of benefit accrual service and highest average
eligible earnings, and (ii) for eligible employees of certain other
subsidiaries under a cash balance formula. In 1998, a significant amount of
lump sum payouts were made from the PanEnergy plan resulting in a settlement
gain of $10 million. Effective January 1, 1999, the benefit formula under the
PanEnergy plan, for all eligible employees, was changed to a cash balance
formula.
In connection with the 1999 sale of the Midwest Pipelines to CMS, benefit
accruals under the PanEnergy plan were frozen on December 31, 1998, for all
participants who, as a result of the sale, became employees of CMS and its
subsidiaries. Once the transfer of the benefit obligation and related assets of
the affected participants to CMS was completed, the PanEnergy plan was merged
into the Duke Energy Plan.
F-36
DUKE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Duke Energy's policy is to fund amounts, as necessary, on an actuarial basis
to provide assets sufficient to meet benefits to be paid to plan participants.
No contributions to the Duke Energy Plan were necessary in 2000 or 1999. The
net unrecognized transition asset, resulting from the implementation of accrual
accounting, is being amortized over approximately 20 years.
Components of Net Periodic Pension Costs
For the Years Ended
December 31,
----------------------
2000 1999 1998
------ ------ ------
(in millions)
Service cost benefit earned during the year............. $ 70 $ 72 $ 63
Interest cost on projected benefit obligation........... 184 165 169
Expected return on plan assets.......................... (244) (224) (218)
Amortization of prior service cost...................... (3) (3) (4)
Amortization of net transition asset.................... (4) (4) (4)
Recognized net actuarial loss........................... -- 12 10
Settlement gain......................................... -- -- (10)
------ ------ ------
Net periodic pension costs.............................. $ 3 $ 18 $ 6
====== ====== ======
Reconciliation of Funded Status to Pre-funded Pension Costs
December 31,
--------------
2000 1999
------ ------
(in millions)
Change in Benefit Obligation
Benefit obligation at beginning of year...................... $2,446 $2,540
Service cost................................................. 70 72
Interest cost................................................ 184 165
Actuarial (gain) loss........................................ 16 (41)
Transfer to CMS.............................................. -- (85)
Benefits paid................................................ (130) (205)
------ ------
Benefit obligation at end of year............................ $2,586 $2,446
------ ------
Change in Plan Assets
Fair value of plan assets at beginning of year(a)............ $3,121 $2,920
Actual return on plan assets................................. 47 491
Transfer to CMS.............................................. -- (85)
Benefits paid................................................ (130) (205)
------ ------
Fair value of plan assets at end of year(a).................. $3,038 $3,121
------ ------
Funded status................................................ $ 452 $ 675
Unrecognized net experience gain............................. (110) (315)
Unrecognized prior service cost reduction.................... (22) (24)
Unrecognized net transition asset............................ (16) (21)
------ ------
Pre-funded pension costs..................................... $ 304 $ 315
====== ======
- --------
(a) Principally equity and fixed-income securities.
F-37
DUKE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Assumptions Used for Pension Benefits Accounting(a)
2000 1999 1998
---- ---- ----
(percent)
Discount rate.................................................... 7.50 7.50 6.75
Salary increase.................................................. 4.53 4.50 4.67
Expected long-term rate of return on plan assets................. 9.25 9.25 9.25
- --------
(a) Reflects weighted averages across all plans.
Duke Energy also sponsors employee savings plans that cover substantially
all employees. Employer matching contributions of $66 million, $68 million and
$53 million were expensed in 2000, 1999 and 1998, respectively.
Other Postretirement Benefits. Duke Energy and most of its subsidiaries
provide certain health care and life insurance benefits for retired employees
on a contributory and non-contributory basis. Employees become eligible for
these benefits if they have met certain age and service requirements at
retirement, as defined in the plans. Under plan amendments effective late 1998
and early 1999, health care benefits for future retirees were changed to limit
employer contributions and medical coverage.
Such benefit costs are accrued over the active service period of employees
to the date of full eligibility for the benefits. The net unrecognized
transition obligation, resulting from the implementation of accrual accounting,
is being amortized over approximately 20 years.
Components of Net Periodic Postretirement Benefit Costs
For the Years
Ended
December 31,
----------------
2000 1999 1998
---- ---- ----
(in millions)
Service cost benefit earned during the year................. $ 5 $ 7 $ 10
Interest cost on accumulated postretirement benefit
obligation................................................. 43 40 43
Expected return on plan assets.............................. (23) (21) (18)
Amortization of prior service cost.......................... 1 1 7
Amortization of net transition obligation................... 18 18 16
Recognized net actuarial (gain) loss........................ -- (1) 1
---- ---- ----
Net periodic postretirement benefit costs................... $ 44 $ 44 $ 59
==== ==== ====
F-38
DUKE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Reconciliation of Funded Status to Accrued Postretirement Benefit Costs
December
31,
------------
2000 1999
----- -----
(in
millions)
Change in Benefit Obligation
Accumulated postretirement benefit obligation at beginning of
year........................................................ $ 562 $ 625
Service cost................................................. 5 7
Interest cost................................................ 43 40
Plan participants' contributions............................. 7 7
Actuarial (gain) loss........................................ 39 (68)
Benefits paid................................................ (42) (49)
----- -----
Accumulated postretirement benefit obligation at end of
year........................................................ $ 614 $ 562
----- -----
Change in Plan Assets
Fair value of plan assets at beginning of year(a)............ $ 327 $ 305
Actual return on plan assets................................. 8 41
Employer contributions....................................... 25 23
Plan participants' contributions............................. 7 7
Benefits paid................................................ (42) (49)
----- -----
Fair market value of plan assets at end of year(a)........... $ 325 $ 327
----- -----
Funded status................................................ $(289) $(235)
Unrecognized net experience gain............................. (47) (110)
Unrecognized prior service cost.............................. 5 8
Unrecognized transition obligation........................... 214 229
----- -----
Accrued postretirement benefit costs......................... $(117) $(108)
===== =====
- --------
(a) Principally equity and fixed-income securities.
Assumptions Used for Postretirement Benefits Accounting(a)
2000 1999 1998
----- ----- -----
(percent)
Discount rate................................................. 7.50 7.50 6.75
Salary increase............................................... 4.53 4.50 4.67
Expected long-term rate of return on assets................... 9.25 9.25 9.25
Assumed tax rate(b)........................................... 39.60 39.60 39.60
- --------
(a) Reflects weighted averages across all plans.
(b) Applicable to the health care portion of funded postretirement benefits.
For measurement purposes, a 6% average annual rate of increase in the per
capita cost of covered health care benefits was assumed for 2000 and beyond.
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans.
F-39
DUKE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Sensitivity to Changes in Assumed Health Care Cost Trend Rates
1-Percentage- 1-Percentage-
Point Increase Point Decrease
-------------- --------------
(in millions)
Effect on total service and interest costs.... $ 2 $ (2)
Effect on postretirement benefit obligation... 27 (25)
18. Quarterly Financial Data (Unaudited)
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -------
(in millions, except per share data)
2000
Operating revenues................... $7,290 $10,926 $15,691 $15,411 $49,318
Operating income..................... 812 794 1,501 706 3,813
EBIT................................. 859 837 1,556 762 4,014
Net income........................... 393 329 770 284 1,776
Earnings per share(a)
Basic.............................. $ 0.53 $ 0.44 $ 1.04 $ 0.38 $ 2.39
Diluted............................ $ 0.53 $ 0.44 $ 1.03 $ 0.38 $ 2.38
1999
Operating revenues................... $4,178 $ 4,691 $ 6,676 $ 6,221 $21,766
Operating income..................... 645 531 866 (223) 1,819
EBIT................................. 683 568 908 (116) 2,043
Income before extraordinary item..... 307 288 441 (189) 847
Net income........................... 967 288 441 (189) 1,507
Earnings per share (before
Extraordinary item)(a)
Basic.............................. $ 0.41 $ 0.39 $ 0.60 $ (0.27) $ 1.13
Diluted............................ $ 0.41 $ 0.39 $ 0.60 $ (0.27) $ 1.13
Earnings per share(a)
Basic.............................. $ 1.32 $ 0.39 $ 0.60 $ (0.27) $ 2.04
Diluted............................ $ 1.32 $ 0.39 $ 0.60 $ (0.27) $ 2.03
- --------
(a) Restated to reflect the two-for-one common stock split effective January
26, 2001.
F-40