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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 2001 Commission File Number 1-4928
DUKE ENERGY CORPORATION
(Exact name of Registrant as Specified in its Charter)
North Carolina 56-0205520
(State or Other Jurisdiction of Incorporation) (IRS Employer Identification No.)
526 South Church Street
Charlotte, NC 28202-1904
(Address of Principal Executive Offices)
(Zip code)
704-594-6200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Number of shares of Common Stock, without par value, outstanding at
April 27, 2001......771,920,862
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DUKE ENERGY CORPORATION
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2001
INDEX
Item Page
- ---- ----
PART I. FINANCIAL INFORMATION
1. Financial Statements......................................................1
Consolidated Statements of Income for the Three Months Ended
March 31, 2001 and 2000..........................................1
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 2001 and 2000..........................................2
Consolidated Balance Sheets as of March 31, 2001 and
December 31, 2000................................................3
Consolidated Statements of Comprehensive Income (Loss) for the
Three Months Ended March 31, 2001 and 2000.......................5
Notes to Consolidated Financial Statements............................6
2. Management's Discussion and Analysis of Results of Operations and
Financial Condition..................................................14
PART II. OTHER INFORMATION
1. Legal Proceedings........................................................22
4. Submission of Matters to a Vote of Security Holders......................22
6. Exhibits and Reports on Form 8-K.........................................22
Signatures...............................................................23
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
From time to time, Duke Energy's reports, filings and other public announcements
may include assumptions, projections, expectations, intentions or beliefs about
future events. These statements are intended as "forward-looking statements"
under the Private Securities Litigation Reform Act of 1995. Duke Energy cautions
that assumptions, projections, expectations, intentions or beliefs about future
events may and often do vary from actual results and the differences between
assumptions, projections, expectations, intentions or beliefs and actual results
can be material. Accordingly, there can be no assurance that actual results will
not differ materially from those expressed or implied by the forward-looking
statements. Some of the factors that could cause actual achievements and events
to differ materially from those expressed or implied in such forward-looking
statements include state, federal and foreign legislative and regulatory
initiatives that affect cost and investment recovery, have an impact on rate
structures and affect the speed and degree at which competition enters the
electric and natural gas industries; industrial, commercial and residential
growth in the service territories of Duke Energy and its subsidiaries; the
weather and other natural phenomena; the timing and extent of changes in
commodity prices, interest rates and foreign currency exchange rates; changes in
environmental and other laws and regulations to which Duke Energy and its
subsidiaries are subject or other external factors over which Duke Energy has no
control; the results of financing efforts, including Duke Energy's ability to
obtain financing on favorable terms, which can be affected by Duke Energy's
credit rating and general economic conditions; growth in opportunities for Duke
Energy's business units; and the effect of accounting policies issued
periodically by accounting standard-setting bodies.
i
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In millions, except per share amounts)
Three Months Ended
March 31,
-------------------------------------
2001 2000
----------------- -----------------
Operating Revenues
Sales, trading and marketing of natural gas
and petroleum products $11,451 $ 4,287
Trading and marketing of electricity 3,258 1,211
Generation, transmission and distribution of electricity 1,305 1,238
Transportation and storage of natural gas 246 259
Other 231 295
----------------- -----------------
Total operating revenues 16,491 7,290
----------------- -----------------
Operating Expenses
Natural gas and petroleum products purchased 11,080 4,063
Net interchange and purchased power 2,679 1,206
Fuel used in electric generation 242 180
Other operation and maintenance 877 667
Depreciation and amortization 316 260
Property and other taxes 115 102
----------------- -----------------
Total operating expenses 15,309 6,478
----------------- -----------------
Operating Income 1,182 812
Other Income and Expenses 87 47
Interest Expense 228 185
Minority Interests 160 31
----------------- -----------------
Earnings Before Income Taxes 881 643
Income Taxes 327 250
----------------- -----------------
Income Before Cumulative Effect of Change in Accounting Principle 554 393
Cumulative Effect of Change in Accounting Principle, net of tax (96) -
----------------- -----------------
Net Income 458 393
Dividends and Premiums on Redemptions of
Preferred and Preference Stock 4 5
----------------- -----------------
Earnings Available For Common Stockholders $ 454 $ 388
================= =================
Common Stock Data
Weighted average shares outstanding 745 733
Earnings per share (before cumulative effect of change in accounting principle)
Basic $ 0.74 $ 0.53
Diluted $ 0.73 $ 0.53
Earnings per share
Basic $ 0.61 $ 0.53
Diluted $ 0.60 $ 0.53
Dividends per share $ 0.275 $ 0.275
See Notes to Consolidated Financial Statements.
1
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
Three Months Ended
March 31,
------------------------
2001 2000
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income before cumulative effect of change in accounting principle $ 554 $ 393
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 357 303
Net mark-to-market gain (609) (103)
Deferred income taxes 214 89
Purchased capacity levelization 38 34
Transition cost recoveries, net - 24
(Increase) decrease in
Receivables (112) (1)
Inventory 103 18
Other current assets (486) (39)
Increase (decrease) in
Accounts payable 178 112
Taxes accrued (27) (413)
Interest accrued 7 25
Other current liabilities (161) (153)
Other, assets 83 39
Other, liabilities (120) (140)
------- -------
Net cash provided by operating activities 19 188
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures, net of cash acquired (723) (1,406)
Investment expenditures (324) (236)
Decommissioning and retirements 117 101
------- -------
Net cash used in investing activities (930) (1,541)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from
Long-term debt issuances 1,339 438
Common stock issuances and stock option exercises 1,193 60
Payments for the redemption of long-term debt (64) (173)
Net change in notes payable and commercial paper (1,415) 997
Dividends paid (208) (206)
Other (67) (1)
------- -------
Net cash provided by financing activities 778 1,115
------- -------
Net decrease in cash and cash equivalents (133) (238)
Cash and cash equivalents at beginning of period 622 613
------- -------
Cash and cash equivalents at end of period $ 489 $ 375
======= =======
Supplemental Disclosures
Cash paid for interest, net of amount capitalized $ 204 $ 151
Cash paid for income taxes $ 105 $ 568
See Notes to Consolidated Financial Statements.
2
CONSOLIDATED BALANCE SHEETS
(In millions)
March 31, December 31,
2001 2000
(Unaudited)
------------------ -------------------
ASSETS
Current Assets
Cash and cash equivalents $ 489 $ 622
Receivables, net of allowance for doubtful accounts 8,194 8,293
Inventory 657 736
Current portion of purchased capacity costs 152 149
Unrealized gains on trading and hedging transactions 3,881 11,038
Other 1,719 1,317
------------------ -------------------
Total current assets 15,092 22,155
------------------ -------------------
Investments and Other Assets
Investments in affiliates 1,341 1,370
Nuclear decommissioning trust funds 669 717
Pre-funded pension costs 307 304
Goodwill, net 1,514 1,566
Notes receivable 396 462
Unrealized gains on trading and hedging transactions 3,876 4,218
Other 1,975 1,445
------------------ -------------------
Total investments and other assets 10,078 10,082
------------------ -------------------
Property, Plant and Equipment
Cost 34,860 34,615
Less accumulated depreciation and amortization 10,426 10,146
------------------ -------------------
Net property, plant and equipment 24,434 24,469
------------------ -------------------
Regulatory Assets and Deferred Debits
Purchased capacity costs 315 356
Deferred debt expense 200 208
Regulatory asset related to income taxes 503 506
Other 343 400
------------------ -------------------
Total regulatory assets and deferred debits 1,361 1,470
------------------ -------------------
Total Assets $ 50,965 $ 58,176
================== ===================
See Notes to Consolidated Financial Statements.
3
CONSOLIDATED BALANCE SHEETS
(In millions)
March 31, December 31,
2001 2000
(Unaudited)
----------- ------------
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 7,602 $ 7,375
Notes payable and commercial paper 390 1,826
Taxes accrued 239 261
Interest accrued 215 208
Current maturities of long-term debt and preferred stock 460 470
Unrealized losses on trading and hedging transactions 4,597 11,070
Other 1,679 1,769
----------- ------------
Total current liabilities 15,182 22,979
----------- ------------
Long-term Debt 12,273 11,019
----------- ------------
Deferred Credits and Other Liabilities
Deferred income taxes 3,369 3,851
Investment tax credit 207 211
Nuclear decommissioning costs externally funded 669 717
Environmental cleanup liabilities 96 100
Unrealized losses on trading and hedging transactions 3,338 3,581
Other 1,550 1,574
----------- ------------
Total deferred credits and other liabilities 9,229 10,034
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Commitments and Contingencies
Guaranteed Preferred Beneficial Interests in Subordinated
Notes of Duke Energy Corporation or Subsidiaries 1,406 1,406
----------- ------------
Minority Interests 2,421 2,435
----------- ------------
Preferred and Preference Stock
Preferred and preference stock with sinking fund requirements 38 38
Preferred and preference stock without sinking fund requirements 209 209
----------- ------------
Total preferred and preference stock 247 247
----------- ------------
Common Stockholders' Equity
Common stock, no par, 1 billion shares authorized; 771 million and 739 million
shares outstanding at March 31, 2001 and December 31, 2000, respectively 5,998 4,797
Retained earnings 5,569 5,379
Accumulated other comprehensive income (1,360) (120)
----------- ------------
Total common stockholders' equity 10,207 10,056
----------- ------------
Total Liabilities and Common Stockholders' Equity $ 50,965 $ 58,176
=========== ============
See Notes to Consolidated Financial Statements.
4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In millions)
Three Months Ended
March 31,
-------------------------
2001 2000
------- -----
Net Income $ 458 $ 393
Other comprehensive income, net of tax
Cumulative effect of change in accounting principle (921) -
Foreign currency translation adjustment (141) (1)
Net unrealized losses on cash flow hedges (356) -
Reclassification into earnings 178 -
------- -----
Total other comprehensive income (1,240) (1)
------- -----
Total Comprehensive Income (Loss) $ (782) $ 392
======= =====
See Notes to Consolidated Financial Statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General
Duke Energy Corporation (collectively with its subsidiaries, "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 Federal Energy Regulatory Commission (FERC), the North Carolina Utilities
Commission and the Public Service Commission of South Carolina.
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 natural gas liquids (NGLs). Its
operations are conducted primarily through Duke Energy Field Services, LLC
(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.
International Energy conducts its operations through Duke Energy International,
LLC. 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, LLC (Crescent), DukeNet Communications, LLC
(DukeNet) and Duke Capital Partners, LLC (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.
6
2. Summary of Significant Accounting Policies
Consolidation. The Consolidated Financial Statements include the accounts of
Duke Energy and all majority-owned subsidiaries after the elimination of
significant intercompany transactions and balances. These Consolidated Financial
Statements reflect all normal recurring adjustments that are, in the opinion of
management, necessary to present fairly the financial position and results of
operations for the respective periods. Amounts reported in the Consolidated
Statements of Income are not necessarily indicative of amounts expected for the
respective annual periods due to the effects of seasonal temperature variations
on energy consumption and the timing of maintenance of certain electric
generating units.
Excise and Other Pass Through Taxes. Duke Energy generally presents pass through
taxes net on the Consolidated Statements of Income.
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 (In millions)
- -------------------------------------------------------------------------
Three Months Ended
March 31,
----------------------
2001 2000
----------------------
Denominator for basic earnings per share
(weighted average shares outstanding) 745.3 733.4
Assumed exercise of diluted stock options 6.7 1.4
----------------------
Denominator for diluted earnings per share 752.0 734.8
- ----------------------------------------------- ----------------------
Prior year common stock amounts have been adjusted to reflect the two-for-one
common stock split effective January 26, 2001.
Accounting for Hedges and Commodity Trading Activities. All derivatives are
recognized on the Consolidated Balance Sheets at their fair value as Unrealized
Gains or Unrealized Losses on Trading and Hedging Transactions, as appropriate.
On the date swap, futures, forwards or option contracts are entered into, Duke
Energy designates the derivative as either held for trading (trading
instruments), as a hedge of a forecasted transaction or future cash flows (cash
flow hedges), or as a normal purchase and sale contract.
Duke Energy also formally assesses, both at the hedge's inception and on an
ongoing basis, whether the derivatives that are used in hedging transactions are
highly effective in offsetting changes in fair values or cash flows of hedged
items. The extrinsic value of options of $1 million was excluded in the
assessment of hedge effectiveness for the three months ended March 31, 2001.
Duke Energy occasionally enters into derivatives as fair value hedges of an
asset, liability or firm commitment and as cash flow hedges of weather risks.
These transactions are not material to its consolidated results of operations,
cash flows, or financial position.
Commodity Trading. Prior to settlement of any energy contract held for trading
purposes, favorable or unfavorable price movement is reported as Natural Gas and
Petroleum Products Purchased or Net Interchange and Purchased Power, as
appropriate, in the Consolidated Statements of Income. An offsetting amount is
recorded on the Consolidated Balance Sheets as Unrealized Gains or Unrealized
Losses on Trading and Hedging Transactions. When a contract to sell energy is
physically settled, the fair value entries are reversed and the
7
gross amount invoiced to the customer is included as Sales, Trading and
Marketing of Natural Gas and Petroleum Products or Trading and Marketing of
Electricity, as appropriate, in the Consolidated Statements of Income.
Similarly, when a contract to purchase energy is physically settled, the
purchase price is included as Natural Gas and Petroleum Products Purchased or
Net Interchange and Purchased Power, as appropriate, in the Consolidated
Statements of Income. If a contract is not physically settled, the unrealized
gain or loss on the Consolidated Balance Sheets is reversed and reclassified to
a receivable or payable account.
Cash Flow Hedges. Changes in the fair value of a derivative that is designated
and qualifies as a cash flow hedge are included in the Consolidated Statements
of Comprehensive Income (Loss) as Other Comprehensive Income (OCI) until
earnings are affected by the hedged item. Settlement amounts and ineffective
portions of cash flow hedges are removed from OCI and recorded in the
Consolidated Statement of Income in the same accounts as the item being hedged.
Duke Energy discontinues hedge accounting prospectively when it is determined
that the derivative no longer qualifies as an effective hedge, or when it is no
longer probable that the hedged transaction will occur. When hedge accounting is
discontinued, the derivative will continue to be carried on the Consolidated
Balance Sheets at its fair value with subsequent changes in its fair value
recognized in current-period earnings. Gains and losses related to discontinued
hedges that were accumulated in OCI will remain in OCI until earnings are
affected by the hedged item, unless it is no longer probable that the hedged
transaction will occur. Under these circumstances, gains and losses that were
accumulated in OCI will be recognized immediately in earnings. For income
statement purposes, the contract is treated as a pure financial instrument, so
there is no effect on the Consolidated Statements of Income.
Cumulative Effect of Change in Accounting Principle. Duke Energy adopted
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," on January 1, 2001. In
accordance with the transition provisions of SFAS No. 133, Duke Energy recorded
a net-of-tax cumulative effect adjustment of $96 million, or $0.13 per basic
share, as a reduction in earnings. The net-of-tax cumulative effect adjustment
reducing OCI and Common Stockholders' Equity was $921 million. For the three
months ended March 31, 2001, Duke Energy reclassified as earnings $180 million
of losses from OCI into earnings for derivatives included in the transition
adjustment related to hedge transactions that settled.
Currently, there are ongoing discussions surrounding the implementation and
interpretation of SFAS No. 133 by the Financial Accounting Standards Board's
Derivative Implementation Group. 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 and in Note 4 to the Consolidated Financial
Statements to conform to the current presentation.
3. Derivative Instruments, Hedging Activities and Credit Risk
Commodity Cash Flow Hedges. Certain subsidiaries of Duke Energy are exposed to
market fluctuations in the prices of various commodities related to their
ongoing power generating and natural gas gathering, processing and marketing
activities. Duke Energy closely monitors the potential impacts of commodity
price changes, and where appropriate, uses various instruments to lock in
margins for a portion of its future sales and generation revenues. These
commodity instruments, consisting of swaps, futures, forwards and collared
options, serve as cash flow hedges for natural gas, electricity and NGL
transactions. The maximum term over which Duke Energy is hedging exposures to
the variability of these commodities is ten years.
For the three months ended March 31, 2001, the ineffective portion of commodity
cash flow hedges and the amount recognized for transactions that no longer
qualified as cash flow hedges were not material. As of March 31, 2001, $791
million of after-tax deferred net losses on derivative instruments accumulated
in OCI are expected to be reclassified to earnings during the next 12 months as
the hedged transactions occur. These losses will generally be more than offset
by the related sales and generation revenues. However, due
8
to the volatility of the commodities markets, the value of the derivative
instrument is subject to change prior to its reclassification into earnings.
Energy Trading Contracts. Duke Energy provides energy supply, structured
origination, trading and marketing, risk management and commercial optimization
services to large energy customers, energy aggregators and other wholesale
companies. These services require Duke Energy to utilize natural gas,
electricity, NGL and transportation derivatives and contracts that expose it to
a variety of market risks. Duke Energy manages its trading exposure with strict
policies that limit its 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.
Interest Rate Cash Flow Hedges. Duke Energy is exposed to risk resulting from
changes in interest rates as a result of its issuance of variable-rate debt,
fixed-rate securities, commercial paper and auction market preferred stock, as
well as interest rate swaps and interest rate lock agreements. Duke Energy
manages its interest rate exposure by limiting its variable-rate and fixed-rate
exposures to certain percentages of total capitalization, as set by policy, and
by monitoring the effects of market changes in interest rates. For the three
months ended March 31, 2001, Duke Energy's existing interest rate derivative
instruments were not material to its results of operations, cash flows or
financial position.
Foreign Currency (Fair Value or Cash Flow) Hedges. Duke Energy is exposed to
foreign currency risk that arises 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 manage its risk related to foreign
currency fluctuations. For the three months ended March 31, 2001, Duke Energy's
existing foreign currency derivative instruments were not material to its
results of operations, cash flows or financial position.
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. In December 2000, Duke Energy recorded a pre-tax
provision of $110 million related to energy sales in California. See Note 7 to
the Consolidated Financial Statements for further information regarding credit
exposure.
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.
9
4. Business Segments
Duke Energy's reportable segments are strategic business units that offer
different products and services and are each managed separately. Management
evaluates segment performance based on earnings before interest and taxes (EBIT)
after deducting minority interests. EBIT is calculated as follows:
- ------------------------------------------------------------------------
Reconciliation of Operating Income to EBIT (In millions)
- ------------------------------------------------------------------------
Three Months Ended
March 31,
--------------------------
2001 2000
--------------------------
Operating income $1,182 $812
Plus: Other income and expenses 87 47
--------------------------
EBIT $1,269 $859
- ------------------------------------------------------------------------
EBIT should not be considered as an alternative to, or more meaningful than, net
income or cash flow as determined in accordance with generally accepted
accounting principles as an indicator of Duke Energy's operating performance or
liquidity. EBIT is not necessarily comparable to a similarly titled measure of
another company.
Beginning January 1, 2001, Duke Energy discontinued allocating certain corporate
costs for its business segment analysis. Certain reclassifications have been
made to information for the period ended March 1, 2000 to conform to the current
year presentation.
10
- --------------------------------------------------------------------------------------------------------------------
Business Segment Data (In millions)
- --------------------------------------------------------------------------------------------------------------------
Depreciation Capital and
Unaffiliated Intersegment Total and Investment
Revenues Revenues Revenues EBIT (a) Amortization Expenditures
---------------------------------------------------------------------------------
Three Months Ended
March 31, 2001
Franchised Electric $ 1,157 $ - $ 1,157 $ 460 $146 $ 177
Natural Gas Transmission 245 37 282 175 35 79
Field Services 2,616 782 3,398 123 68 46
NAWE 11,858 157 12,015 348 27 518
International Energy 497 5 502 76 25 23
Other Energy Services 81 37 118 4 3 5
Duke Ventures 37 - 37 7 4 174
Other Operations (b) - 91 91 (55) 8 25
Eliminations and
minority interests - (1,109) (1,109) 131 - -
---------------------------------------------------------------------------------
Total consolidated $16,491 $ - $16,491 $1,269 $316 $1,047
- --------------------------------------------------------------------------------------------------------------------
Three Months Ended
March 31, 2000
Franchised Electric $ 1,115 $ - $ 1,115 $ 465 $141 $ 177
Natural Gas Transmission 252 34 286 158 29 428
Field Services 1,274 192 1,466 72 38 128
NAWE 4,163 142 4,305 82 16 335
International Energy 206 2 208 104 22 447
Other Energy Services 246 29 275 7 3 11
Duke Ventures 34 - 34 18 4 64
Other Operations (b) - 21 21 (53) 7 58
Eliminations and
minority interests - (420) (420) 6 - -
---------------------------------------------------------------------------------
Total consolidated $ 7,290 $ - $ 7,290 $ 859 $260 $1,648
- --------------------------------------------------------------------------------------------------------------------
(a) EBIT includes intersegment sales accounted for at prices representative of unaffiliated party transactions.
(b) Includes certain unallocated corporate items.
Segment assets in the accompanying table are net of intercompany advances,
intercompany notes receivable and investments in subsidiaries.
- ----------------------------------------------------------------------------
Segment Assets (In millions)
- ----------------------------------------------------------------------------
March 31, December 31,
2001 2000
------------------------------------
Franchised Electric $12,780 $12,819
Natural Gas Transmission 4,695 4,995
Field Services 6,325 6,266
NAWE 20,983 28,213
International Energy 4,339 4,551
Other Energy Services 328 543
Duke Ventures 1,836 1,967
Other Operations and eliminations (a) (321) (1,178)
------------------------------------
Total consolidated $50,965 $58,176
- ----------------------------------------------------------------------------
(a) Includes certain unallocated corporate items.
11
5. Debt
In February 2001, DEFS issued $250 million of 6.875% Senior Unsecured Notes due
2011. The proceeds were used to repay DEFS' remaining balance of commercial
paper that was issued in connection with the March 2000 combination of Field
Services' natural gas gathering, processing and marketing business with Phillips
Petroleum's Gas Gathering, Processing and Marketing unit.
6. Equity Offerings
In March 2001, Duke Energy completed an offering of 25 million shares of common
stock, at a price of $38.98 per share, before underwriting discount and other
offering expenses. In addition, Duke Energy completed an offering of
approximately 31 million units of mandatorily convertible securities (Equity
Units) at a price of $25 per unit before underwriting discount and other
offering expenses. The Equity Units consist of senior notes of Duke Energy's
wholly owned subsidiary, Duke Capital Corporation, and purchase contracts
obligating the investors to purchase shares of Duke Energy's common stock in
2004. Also in March 2001, the underwriters exercised options granted to them to
purchase an additional 3.75 million shares of common stock and four million
Equity Units at the original issue prices, less underwriting discounts, to cover
over-allotments made during the offerings. Total net proceeds from the offerings
were approximately $1.94 billion and were used to repay short-term debt and for
other corporate purposes.
7. Commitments and Contingencies
Environmental Matters. Legislation was recently introduced in the North Carolina
General Assembly that would require North Carolina electric utilities, including
Duke Energy, to make significant reductions in emissions of sulfur dioxide and
nitrogen oxides from its coal-fired power plants over the next eight to 12
years. Management estimates the cost to Duke Energy of achieving the specified
emission reductions in the proposed legislation to be approximately $1.5
billion. The proposed North Carolina legislation includes a provision that
allows Duke Energy to recover some or all of these costs from customers. Costs
to comply with this legislative proposal are in addition to the $500 million to
$900 million that Duke Energy management estimates it will spend on pollution
controls through 2007 to comply with new Environmental Protection Agency rules.
The provisions of the final legislation, if passed into law, could be
significantly different from the proposal.
California Issues. Duke Energy, certain of its subsidiaries, and three current
or former executives have been named as defendants, among numerous other
corporate and individual defendants, in one or more of a total of six lawsuits
brought by or on behalf of electricity consumers in the State of California who
seek damages as a result of the defendants' alleged unlawful manipulation of the
California wholesale electricity markets. DENA and DETM have been named among 16
defendants in a class action lawsuit (the Gordon lawsuit) filed against
companies identified as "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. A sixth lawsuit (the Bustamante
lawsuit), was brought by the Lieutenant Governor of the State of California and
a State Assemblywoman, and includes Duke Energy, DENA, DETM, Duke Energy Morro
Bay, Duke Energy Moss Landing, Duke Energy South Bay, Duke Energy Oakland, and
three current or former executives of Duke Energy among the numerous other
corporate and individual defendants. The Gordon and Hendricks class action
lawsuits were filed in the Superior Court of the State of California, San Diego
County, in November 2000. Three other lawsuits were filed in January 2001, one
in Superior Court, San Diego County, and the other two in Superior Court, County
of San Francisco. The Bustamante lawsuit was filed in May 2001 in Superior
Court, Los Angeles County. These lawsuits 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
these lawsuits seek aggregate damages of billions of dollars. The lawsuits each
seek the disgorgement of alleged unlawfully obtained revenues for sales of
electricity and, in four lawsuits, an award of treble damages. Management
believes that the final disposition of these actions will not have a material
adverse effect on Duke Energy's consolidated results of operations, cash flows
or financial position.
12
Throughout the first quarter of 2001, Duke Energy has conducted its business in
California to supply the maximum possible electricity to meet the needs of the
state while limiting its exposure to non-creditworthy counterparties. Since
December 31, 2000, Duke Energy has managed the balance of questionable
receivables to a lower level, and is confident that the pre-tax provision of
$110 million recorded in the fourth quarter of 2000 is appropriate. No
additional provisions for California receivables were recorded in the first
quarter of 2001.
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 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.
In April 2001, the state court entered an order staying the state court action,
and compelling the Exxon Mobil entities to arbitrate their state court claims.
The Exxon Mobil entities have not filed a writ of mandamus challenging this
order in an appellate court, but may do so at any time. 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.
Duke Energy and its subsidiaries are involved in legal, tax and regulatory
proceedings before various courts, regulatory commissions and governmental
agencies regarding performance, contracts and other matters arising in the
ordinary course of business, some of which involve substantial amounts.
Management believes that the final disposition of these proceedings will not
have a material adverse effect on consolidated results of operations, cash flows
or financial position.
13
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
INTRODUCTION
Duke Energy Corporation (collectively with its subsidiaries, "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. See Note 1 to the Consolidated Financial Statements for
descriptions of Duke Energy's business segments.
Management's Discussion and Analysis should be read in conjunction with the
Consolidated Financial Statements.
RESULTS OF OPERATIONS
For the three months ended March 31, 2001, earnings available for common
stockholders were $454 million, or $0.61 per basic share. For the comparable
2000 period, earnings available for common stockholders were $388 million, or
$0.53 per basic share. The increase was primarily due to earnings resulting from
business expansion and continued growth that occurred during 2001, partially
offset by higher interest and minority interest expense and a one time
net-of-tax charge of $96 million, or $0.13 per basic share, related to the
cumulative effect of a change in accounting principle for the January 1, 2001
adoption of Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities." Earnings per
share information for 2000 has been restated to reflect the two-for-one common
stock split effective January 26, 2001.
Operating income and earnings before interest and taxes (EBIT) for the three
months ended March 31, 2001 were $1,182 million and $1,269 million,
respectively, compared to $812 million and $859 million, respectively, for the
same period in 2000. Operating income and EBIT are affected by the same
fluctuations for Duke Energy and each of its business segments. Prior year
business segment EBIT amounts discussed hereafter have been restated to conform
to the current year presentation of corporate cost allocations. See Note 4 to
the Consolidated Financial Statements for additional information on business
segments.
EBIT is calculated as follows:
- ------------------------------------------------------------------------
Reconciliation of Operating Income to EBIT (In millions)
- ------------------------------------------------------------------------
Three Months Ended
March 31,
--------------------------
2001 2000
--------------------------
Operating income $1,182 $812
Plus: Other income and expenses 87 47
--------------------------
EBIT $1,269 $859
- ------------------------------------------------------------------------
EBIT should not be considered as an alternative to, or more meaningful than, net
income or cash flow as determined in accordance with generally accepted
accounting principles as an indicator of Duke Energy's operating performance or
liquidity. EBIT is not necessarily comparable to a similarly titled measure of
another company.
14
Business segment EBIT is summarized in the following table and is discussed
thereafter.
- -----------------------------------------------------------------------
EBIT by Business Segment (In millions)
- -----------------------------------------------------------------------
Three Months Ended
March 31,
-----------------------------
2001 2000
-----------------------------
Franchised Electric $ 460 $465
Natural Gas Transmission 175 158
Field Services 123 72
North American Wholesale Energy 348 82
International Energy 76 104
Other Energy Services 4 7
Duke Ventures 7 18
Other Operations (55) (53)
EBIT attributable to minority interests 131 6
-----------------------------
Consolidated EBIT $1,269 $859
- -----------------------------------------------------------------------
Other Operations primarily include certain unallocated corporate costs. Included
in the amounts discussed hereafter are intercompany transactions that are
eliminated in the Consolidated Financial Statements.
Franchised Electric
- -------------------------------------------------------------------------
Three Months Ended
March 31,
-----------------------------
(In millions, except where noted) 2001 2000
- -------------------------------------------------------------------------
Operating revenues $1,157 $1,115
Operating expenses 748 669
-----------------------------
Operating income 409 446
Other income, net of expenses 51 19
-----------------------------
EBIT $ 460 $ 465
=============================
Sales - GWh (a) 19,362 20,554
- -------------------------------------------------------------------------
(a) Gigawatt-hours.
Franchised Electric's EBIT decreased $5 million for the three months ended March
31, 2001 compared to the same period in 2000. The decrease was primarily due to
decreased sales to industrial customers and increased operating costs, primarily
due to increased nuclear outage costs. This decrease was partially offset by
growth in sales to general service and residential customers. Sales to
industrial customers decreased 5.6%, while sales to general service and
residential customers increased 5.3% and 8.5%, respectively. The average number
of customers in Franchised Electric's service territory increased 2.3% for this
year's first quarter.
15
Natural Gas Transmission
- -----------------------------------------------------------------
Three Months Ended
March 31,
-----------------------------
(In millions, except where noted) 2001 2000
- -----------------------------------------------------------------
Operating revenues $282 $286
Operating expenses 107 140
-----------------------------
Operating income 175 146
Other income, net of expenses - 12
-----------------------------
EBIT $175 $158
=============================
Throughput - TBtu (a) 511 505
- -----------------------------------------------------------------
(a) Trillion British thermal units.
For the three months ended March 31, 2001, EBIT for Natural Gas Transmission
increased $17 million compared to the same period in 2000. This increase
primarily resulted from earnings from East Tennessee Natural Gas Company (East
Tennessee) and Market Hub Partners, which were acquired in March and September
2000, respectively. The decrease in operating revenues, which is offset by a
decrease in operating costs, was the result of reduced rates effective in
December 2000 that reflect lower recovery requirements for operating costs at
Texas Eastern Transmission, LP, primarily system fuel and Order 636 transition
costs.
Field Services
- -----------------------------------------------------------------------------------------
Three Months Ended
March 31,
-----------------------------
(In millions, except where noted) 2001 2000
- -----------------------------------------------------------------------------------------
Operating revenues $3,398 $1,466
Operating expenses 3,219 1,390
-----------------------------
Operating income 179 76
Other income, net of expenses - (4)
Minority interest expense 56 -
-----------------------------
EBIT $ 123 $ 72
=============================
Natural gas gathered and processed/transported, TBtu/d (a) 8.2 6.0
Natural gas liquid (NGL) production, MBbl/d (b) 371.1 231.2
Natural gas marketed, TBtu/d 1.6 0.5
Average natural gas price per MMBtu (c) $7.09 $2.52
Average NGL price per gallon (d) $0.60 $0.50
- -----------------------------------------------------------------------------------------
(a) Trillion British thermal units per day.
(b) Thousand barrels per day.
(c) Million British thermal units.
(d) Does not reflect results of commodity hedges.
EBIT for Field Services increased $51 million for the three months ended March
31, 2001 compared to the same period in 2000. The increases in EBIT and volume
of activity for the current period were primarily due to growth resulting from
the combination of Field Services' gas gathering, processing and marketing
business with Phillips Petroleum's Gas Gathering, Processing and Marketing unit
(Phillips) in March 2000. Higher average natural gas and NGL prices, which
increased 181% and 20%, respectively from the prior year, also contributed
significantly to the increase in EBIT.
16
North American Wholesale Energy (NAWE)
- ---------------------------------------------------------------------------
Three Months Ended
March 31,
-----------------------------
(In millions, except where noted) 2001 2000
- ---------------------------------------------------------------------------
Operating revenues $12,015 $4,305
Operating expenses 11,589 4,226
-----------------------------
Operating income 426 79
Other income, net of expenses (10) 4
Minority interest expense 68 1
-----------------------------
EBIT $ 348 $ 82
=============================
Natural gas marketed, TBtu/d 13.6 12.0
Electricity marketed and traded, GWh 60,685 50,353
Proportional megawatt capacity in operation 5,064 3,532
Proportional megawatt capacity owned (a) 10,054 6,889
- ---------------------------------------------------------------------------
(a) Includes under construction or under contract at period end.
For the three months ended March 31, 2001, EBIT for NAWE increased $266 million
compared with the same period in 2000. The increase was attributable to
increased earnings from generation assets and higher trading margins due to
price volatility in natural gas and power. In addition, NAWE increased its
volumes of natural gas and power marketed by 13% and 21%, respectively.
Partially offsetting the increase in EBIT were increased operating and
development costs, the absence of $63 million in EBIT related to the sale of an
interest in a generating facility in 2000 and increased minority interest
expense due to higher trading margins at Duke Energy Trading and Marketing, LLC.
International Energy
- ---------------------------------------------------------------------------------
Three Months Ended
March 31,
--------------------------
(In millions, except where noted) 2001 2000
- ---------------------------------------------------------------------------------
Operating revenues $502 $208
Operating expenses 428 113
--------------------------
Operating income 74 95
Other income, net of expenses 9 14
Minority interest expense 7 5
--------------------------
EBIT $ 76 $104
==========================
Proportional megawatt capacity in operation 4,199 4,205
Proportional megawatt capacity owned (a) 4,847 4,205
Proportional maximum pipeline capacity (a), MMcf/d (b) 363 332
- ---------------------------------------------------------------------------------
(a) Includes under construction or under contract at period end.
(b) Million cubic feet per day.
International Energy's EBIT decreased $28 million for the three months ended
March 31, 2001 compared to the same period in 2000, primarily due to a $54
million gain recognized in the first quarter of 2000 from the sale of liquefied
natural gas ships. Partially offsetting the decrease were earnings of $26
million from improved performance from investments in Latin America and trading
operations in Europe.
17
Other Energy Services
- -----------------------------------------------------------------------------
Three Months Ended
March 31,
-----------------------------
(In millions) 2001 2000
- -----------------------------------------------------------------------------
Operating revenues $118 $275
Operating expenses 114 268
-----------------------------
EBIT $ 4 $ 7
- -----------------------------------------------------------------------------
For the three months ended March 31, 2001, EBIT for Other Energy Services
decreased $3 million compared to the same period in 2000. Current period
operating revenues and expenses decreased compared to the same period in 2000
due to commodity trading activity at DukeSolutions, Inc. in 2000. Excluding the
commodity trading activity, EBIT decreased due to higher operating costs.
Duke Ventures
- -------------------------------------------------------------------------------
Three Months Ended
March 31,
-----------------------------
(In millions) 2001 2000
- -------------------------------------------------------------------------------
Operating revenues $ 37 $ 34
Operating expenses 30 16
-----------------------------
EBIT $ 7 $ 18
- -------------------------------------------------------------------------------
EBIT for Duke Ventures decreased $11 million for the three months ended March
31, 2001 compared with the same period in 2000. The decrease in EBIT is
primarily attributable to decreased land management sales and trades by Crescent
Resources, LLC, and increased operating expenses due to increased infrastructure
costs for business development and growth.
Other Impacts on Earnings Available for Common Stockholders
For the three months ended March 31, 2001, interest expense increased $43
million compared to the same period in 2000, due to higher average debt balances
outstanding, resulting primarily from acquisitions and business expansion that
occurred during 2000.
Minority interest expense increased $129 million for the three months ended
March 31, 2001 compared to the same period in 2000. Minority interest expense
related to joint ventures, including interest and income tax expenses, increased
$110 million for the current period. This increase is attributable to increased
minority interest expense resulting from Field Services' joint venture with
Phillips Petroleum, NAWE's joint venture with Exxon Mobil Corporation and
International Energy's investments in Latin America. Minority interest expense
also increased $19 million due to the formation of Catawba River Associates, LLC
in September 2000.
During the first quarter of 2001, Duke Energy recorded a one time net-of-tax
charge of $96 million related to the cumulative effect of change in accounting
principle for the January 1, 2001 adoption of SFAS No. 133. This charge related
to contracts that either did not meet the definition of a derivative under
previous accounting guidance or do not qualify as hedges under new accounting
requirements. See Note 3 to the Consolidated Financial Statements for further
discussion.
18
LIQUIDITY AND CAPITAL RESOURCES
Operating Cash Flows
Net cash provided by operations was $19 million for the three months ended March
31, 2001 compared to $188 million for the same period in 2000. The decrease in
cash provided by operations was primarily due to additional cash deposits on
margin accounts which will be met in the future by the line of credit
established in April 2001, discussed below. This decrease was partially offset
by income tax payments in 2000 for gains related to the Midwest Pipelines sale.
Investing Cash Flows
Net cash used in investing activities was $930 million for the three months
ended March 31, 2001 compared to $1,541 million for the same period in 2000. The
decline in capital expenditures resulted from the $390 million acquisition of
East Tennessee and the $280 million tender offer for Companhia de Geracao de
Energia Eletrica Paranapanema in 2000. The use of cash in investing activities
primarily related to $723 million for capital expenditures, which includes
expansion expenditures and refurbishment and upgrades to existing assets. In
addition, Duke Energy expended $324 million primarily on investments in
development projects.
In February 2001, Duke Energy and The Williams Companies, Inc. completed their
purchase of Gulfstream Natural Gas System, LLC from Coastal Corporation. The
proposed Gulfstream pipeline will be able to deliver approximately 1.1 billion
cubic feet of natural gas per day and will extend from Mobile, Alabama, across
the Gulf of Mexico and into Florida. The target in-service date for the $1.6
billion project, of which Duke Energy owns half, is June 2002.
Financing Cash Flows
Duke Energy's consolidated capital structure at March 31, 2001, including
short-term debt, was 48% debt, 46% common equity and minority interests, 5%
trust preferred securities and 1% preferred stock. Fixed charges coverage,
calculated using the Securities and Exchange Commission (SEC) method, was 4.3
times and 4.2 times for the three months ended March 31, 2001 and 2000,
respectively.
Duke Energy's growth opportunities, along with dividends, debt repayments and
operating requirements, are expected to be funded by cash from operations,
external financing, common stock issuances and the proceeds from certain asset
sales. Growth opportunities are dependent upon favorable market conditions.
Management believes Duke Energy has adequate financial resources to meet its
future needs.
In February 2001, Duke Energy Field Services, LLC (DEFS) issued $250 million of
6.875% Senior Unsecured Notes due 2011. The proceeds were used to repay DEFS'
remaining balance of commercial paper that was issued in connection with the
March 2000 combination of Field Services' natural gas gathering, processing and
marketing business and Phillips.
In March 2001, Duke Energy completed an offering of 25 million shares of common
stock, at a price of $38.98 per share, before underwriting discount and other
offering expenses. In addition, Duke Energy completed an offering of
approximately 31 million units of mandatorily convertible securities (Equity
Units) at a price of $25 per unit before underwriting discount and other
offering expenses. The Equity Units consist of senior notes of Duke Energy's
wholly owned subsidiary, Duke Capital Corporation, and purchase contracts
obligating the investors to purchase shares of Duke Energy's common stock in
2004. Also in March 2001, the underwriters exercised options granted to them to
purchase an additional 3.75 million shares of common stock and four million
Equity Units at the original issue prices, less underwriting discounts, to cover
over-allotments made during the offerings. Total net proceeds from the offerings
were approximately $1.94 billion and were used to repay short-term debt and for
other corporate purposes.
19
Under its commercial paper facilities and extendable commercial notes programs
(ECNs), Duke Energy had the ability to borrow up to $5.3 billion and $5.7
billion at March 31, 2001 and December 31, 2000, respectively.
A summary of the available commercial paper and ECNs as of March 31, 2001 is as
follows:
- ------------------------------------------------------------------------------------------------------------
(In billions) Duke Capital Duke Energy Duke Energy
Duke Energy Corporation (a) Field Services International Total
- ------------------------------------------------------------------------------------------------------------
Commercial Paper $1.25 $1.55 $0.68 $0.37 (b) $3.85
ECNs 0.50 1.00 - - 1.50
------------------------------------------------------------------------------------
Total $1.75 $2.55 $0.68 $0.37 $5.35
- ------------------------------------------------------------------------------------------------------------
(a) Duke Capital Corporation is a wholly owned subsidiary of Duke Energy that
provides financing and credit enhancement services for its subsidiaries.
(b) Includes ability to issue medium term notes.
The amount of Duke Energy's bank credit and construction facilities available at
March 31, 2001 and December 31, 2000, was approximately $3.7 billion and $4.2
billion, respectively. Certain of the credit facilities support the issuance of
commercial paper; therefore, the issuance of commercial paper reduces the amount
available under these credit facilities. At March 31, 2001, approximately $1.9
billion was outstanding under the commercial paper and ECN programs, and
approximately $40 million of borrowings were outstanding under the bank credit
and construction facilities.
Severe price movement in the energy markets for trading and hedging activities
may result in a rapid change in the availability of cash. To meet these demands,
in April 2001, Duke Energy entered into an additional $1.075 billion unsecured
credit facility that allows it to issue letters of credit in lieu of actual cash
deposits to meet margin requirements. Duke Energy's credit facilities are not
subject to minimum cash requirements.
As of March 31, 2001, Duke Energy and its subsidiaries had the ability to issue
up to $1.4 billion in gross proceeds from debt and other securities under shelf
registrations filed with the SEC. Such securities may be issued as Senior Notes,
First and Refunding Mortgage Bonds, Subordinated Notes, Trust Preferred
Securities, Duke Energy Common Stock, Stock Purchase Contracts or Stock Purchase
Units.
In April 2001 and May 2001, Duke Energy and Duke Capital Corporation,
respectively, filed shelf registration statements increasing their ability to
issue securities to $2 billion each.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Risk Policies
Duke Energy is exposed to market risks associated with interest rates, commodity
prices, equity prices, counterparty credit and foreign currency exchange rates.
Management has established comprehensive risk management policies to monitor and
manage these market risks. Duke Energy's Policy Committee is responsible for the
overall approval of market risk management policies and the delegation of
approval and authorization levels. The Policy Committee is comprised of senior
executives who receive periodic updates from the Chief Risk Officer (CRO) on
market risk positions, corporate exposures, credit exposures and overall results
of Duke Energy's risk management activities. The CRO has responsibility for the
overall management of interest rate risk, foreign currency risk, credit risk and
energy risk, including monitoring of
20
exposure limits. There have been no material changes in Duke Energy's market
risk since December 31, 2000.
CURRENT ISSUES
Environmental Matters. Legislation was recently introduced in the North Carolina
General Assembly that would require North Carolina electric utilities, including
Duke Energy, to make significant reductions in emissions of sulfur dioxide and
nitrogen oxides from its coal-fired power plants over the next eight to 12
years. Management estimates the cost to Duke Energy of achieving the specified
emission reductions in the proposed legislation to be approximately $1.5
billion. The proposed North Carolina legislation includes a provision that
allows Duke Energy to recover some or all of these costs from customers. Costs
to comply with this legislative proposal are in addition to the $500 million to
$900 million that Duke Energy management estimates it will spend on pollution
controls through 2007 to comply with new Environmental Protection Agency rules.
The provisions of the final legislation, if passed into law, could be
significantly different from the proposal.
California Issues. Duke Energy, certain of its subsidiaries, and three current
or former executives have been named as defendants, among numerous other
corporate and individual defendants, in one or more of a total of six lawsuits
brought by or on behalf of electricity consumers in the State of California who
seek damages as a result of the defendants' alleged unlawful manipulation of the
California wholesale electricity markets. Duke Energy North America (DENA) and
Duke Energy Trading and Marketing (DETM) have been named among 16 defendants in
a class action lawsuit (the Gordon lawsuit) filed against companies identified
as "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. A sixth lawsuit (the Bustamante lawsuit), was brought by the
Lieutenant Governor of the State of California and a State Assemblywoman, and
includes Duke Energy, DENA, DETM, Duke Energy Morro Bay, Duke Energy Moss
Landing, Duke Energy South Bay, Duke Energy Oakland, and three current or former
executives of Duke Energy among the numerous other corporate and individual
defendants. The Gordon and Hendricks class action lawsuits were filed in the
Superior Court of the State of California, San Diego County, in November 2000.
Three other lawsuits were filed in January 2001, one in Superior Court, San
Diego County, and the other two in Superior Court, County of San Francisco. The
Bustamante lawsuit was filed in May 2001 in Superior Court, Los Angeles County.
These lawsuits 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 these lawsuits seek
aggregate damages of billions of dollars. The lawsuits each seek the
disgorgement of alleged unlawfully obtained revenues for sales of electricity
and, in four lawsuits, an award of treble damages. Management believes that the
final dispositon of these actions will not have a material adverse effect on
Duke Energy's consolidated results of operations, cash flows or financial
position.
Throughout the first quarter of 2001, Duke Energy has conducted its business in
California to supply the maximum possible electricity to meet the needs of the
state while limiting its exposure to non-creditworthy counterparties. Since
December 31, 2000, Duke Energy has managed the balance of questionable
receivables to a lower level, and is confident that the pre-tax provision of
$110 million recorded in the fourth quarter of 2000 is appropriate. No
additional provisions for California receivables were recorded in the first
quarter of 2001.
21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
For information concerning litigation and other contingencies, see Note 7 to the
Consolidated Financial Statements, "Commitments and Contingencies," and Item 3,
"Legal Proceedings," included in Duke Energy's Form 10-K for December 31, 2000,
which are incorporated herein by reference.
Management believes that the resolution of these matters discussed and referred
to above will not have a material adverse effect on consolidated results of
operations, cash flows or financial position.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of the security holders of Duke Energy
during the first quarter of 2001.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
None.
(b) Reports on Form 8-K
A Current Report on Form 8-K filed on March 5, 2001 contained
disclosures under Item 7, Financial Statements and Exhibits.
A Current Report on Form 8-K filed on March 13, 2001 contained
disclosures under Item 5, Other Events, and Item 7, Financial Statements and
Exhibits.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DUKE ENERGY CORPORATION
May 14, 2001 /s/ Robert P. Brace
------------------------------------
Robert P. Brace
Executive Vice President and
Chief Financial Officer
May 14, 2001 /s/ Sandra P. Meyer
------------------------------------
Sandra P. Meyer
Senior Vice President and
Controller
23