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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 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 (IRS Employer Identification No.)
of Incorporation)
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 July 31,
2001............774,956,820
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DUKE ENERGY CORPORATION
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2001
INDEX
Item Page
- ---- ----
PART I. FINANCIAL INFORMATION
1. Financial Statements................................................................. 1
Consolidated Statements of Income for the Three and Six Months Ended
June 30, 2001 and 2000............................................................. 1
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2001 and 2000............................................................. 2
Consolidated Balance Sheets as of June 30, 2001 and December 31, 2000.............. 3
Consolidated Statements of Comprehensive Income for the Three and Six Months
Ended June 30, 2001 and 2000..................................................... 5
Notes to Consolidated Financial Statements......................................... 6
2. Management's Discussion and Analysis of Results of Operations and Financial Condition 16
PART II. OTHER INFORMATION
1. Legal Proceedings.................................................................... 28
4. Submission of Matters to a Vote of Security Holders ................................. 28
6. Exhibits and Reports on Form 8-K..................................................... 29
Signatures........................................................................... 30
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 Six Months Ended
June 30, June 30,
---------------------- ---------------------
2001 2000 2001 2000
---------- -------- -------- ---------
Operating Revenues
Sales, trading and marketing of natural gas
and petroleum products $ 7,809 $ 6,549 $ 19,260 $ 10,836
Trading and marketing of electricity 5,250 2,542 8,508 3,753
Generation, transmission and distribution of electricity 1,853 1,277 3,158 2,515
Transportation and storage of natural gas 233 267 479 526
Other 435 291 666 586
--------- --------- --------- ----------
Total operating revenues 15,580 10,926 32,071 18,216
--------- --------- --------- ----------
Operating Expenses
Natural gas and petroleum products purchased 7,599 6,246 18,679 10,309
Net interchange and purchased power 5,484 2,380 8,163 3,586
Fuel used in electric generation 223 188 465 368
Other operation and maintenance 964 912 1,841 1,579
Depreciation and amortization 326 304 642 564
Property and other taxes 104 102 219 204
--------- --------- --------- ----------
Total operating expenses 14,700 10,132 30,009 16,610
--------- --------- --------- ----------
Operating Income 880 794 2,062 1,606
Other Income and Expenses 37 43 124 90
Interest Expense 217 228 445 413
Minority Interests 45 89 205 120
--------- --------- --------- ----------
Earnings Before Income Taxes 655 520 1,536 1,163
Income Taxes 236 191 563 441
--------- --------- --------- ----------
Income Before Cumulative Effect of Change in Accounting Principle 419 329 973 722
Cumulative Effect of Change in Accounting Principle, Net of Tax - - (96) -
--------- --------- --------- ----------
Net Income 419 329 877 722
Preferred and Preference Stock Dividends 4 5 8 10
--------- --------- --------- ----------
Earnings Available For Common Stockholders $ 415 $ 324 $ 869 $ 712
========= ========= ========= ==========
Common Stock Data
Weighted average shares outstanding 773 735 759 734
Earnings per share (before cumulative effect of change
in accounting principle)
Basic $ 0.54 $ 0.44 $ 1.27 $ 0.97
Diluted $ 0.53 $ 0.44 $ 1.26 $ 0.97
Earnings per share
Basic $ 0.54 $ 0.44 $ 1.14 $ 0.97
Diluted $ 0.53 $ 0.44 $ 1.13 $ 0.97
Dividends per share $ 0.550 $ 0.550 $ 0.825 $ 0.825
See Notes to Consolidated Financial Statements.
1
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
Six Months Ended
June 30,
----------------------
2001 2000
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES $ 2,211 $ 696
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures, net of cash acquired (2,364) (2,283)
Investment expenditures (629) (536)
Other 720 (35)
------- -------
Net cash used in investing activities (2,273) (2,854)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from
Long-term debt issuances 1,664 552
Common stock issuances and stock option exercises 1,338 87
Payments for the redemption of long-term debt (461) (294)
Net change in notes payable and commercial paper (1,417) 3,256
Distributions to minority interests - (1,217)
Dividends paid (419) (413)
Other (24) (11)
------- -------
Net cash provided by financing activities 681 1,960
------- -------
Net increase (decrease) in cash and cash equivalents 619 (198)
Cash and cash equivalents at beginning of period 622 613
------- -------
Cash and cash equivalents at end of period $ 1,241 $ 415
======= =======
Supplemental Disclosures
Cash paid for interest, net of amount capitalized $ 387 $ 392
Cash paid for income taxes $ 111 $ 749
See Notes to Consolidated Financial Statements.
2
CONSOLIDATED BALANCE SHEETS
(In millions)
June 30,
2001 December 31,
(Unaudited) 2000
------------- ----------
ASSETS
Current Assets
Cash and cash equivalents $ 1,241 $ 622
Receivables, net of allowance for doubtful accounts 8,310 8,293
Inventory 875 736
Unrealized gains on trading and hedging transactions 3,080 11,038
Other 1,052 1,466
-------- -------
Total current assets 14,558 22,155
-------- -------
Investments and Other Assets
Investments in affiliates 1,477 1,370
Nuclear decommissioning trust funds 689 717
Pre-funded pension costs 310 304
Goodwill, net 1,597 1,566
Notes receivable 485 462
Unrealized gains on trading and hedging transactions 2,709 4,218
Other 1,533 1,445
-------- -------
Total investments and other assets 8,800 10,082
-------- -------
Property, Plant and Equipment
Cost 36,137 34,615
Less accumulated depreciation and amortization 10,576 10,146
-------- -------
Net property, plant and equipment 25,561 24,469
-------- -------
Regulatory Assets and Deferred Debits 1,300 1,470
-------- -------
Total Assets $50,219 $58,176
======== =======
See Notes to Consolidated Financial Statements.
3
CONSOLIDATED BALANCE SHEETS
(In millions)
June 30,
2001 December 31,
(Unaudited) 2000
------------------- ----------------
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 7,294 $ 7,375
Notes payable and commercial paper 456 1,826
Taxes accrued 389 261
Interest accrued 254 208
Current maturities of long-term debt and preferred stock 298 470
Unrealized losses on trading and hedging transactions 2,411 11,070
Other 2,459 1,769
--------- --------
Total current liabilities 13,561 22,979
--------- --------
Long-term Debt 12,365 11,019
--------- --------
Deferred Credits and Other Liabilities
Deferred income taxes 4,554 3,851
Nuclear decommissioning costs externally funded 689 717
Unrealized losses on trading and hedging transactions 1,038 3,581
Other 1,804 1,885
--------- --------
Total deferred credits and other liabilities 8,085 10,034
--------- --------
Commitments and Contingencies
Guaranteed Preferred Beneficial Interests in Subordinated
Notes of Duke Energy Corporation or Subsidiaries 1,406 1,406
--------- --------
Minority Interests 2,462 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, 2 billion shares authorized; 775 million and 739 million
shares outstanding at June 30, 2001 and December 31, 2000, respectively 6,132 4,797
Retained earnings 5,558 5,379
Accumulated other comprehensive income (loss) 403 (120)
--------- --------
Total common stockholders' equity 12,093 10,056
--------- --------
Total Liabilities and Common Stockholders' Equity $ 50,219 $58,176
========= ========
See Notes to Consolidated Financial Statements.
4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In millions)
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -----------------
2001 2000 2001 2000
---- ---- ---- ----
Net Income $ 419 $ 329 $ 877 $ 722
Other Comprehensive Income (Loss), Net of Tax
Cumulative effect of change in accounting principle - - (921) -
Foreign currency translation adjustment (47) (47) (188) (48)
Net unrealized gains on cash flow hedges 1,509 - 1,153 -
Reclassification into earnings 301 - 479 -
------- ----- ------- -----
Total other comprehensive income (loss) 1,763 (47) 523 (48)
------- ----- ------- -----
Total Comprehensive Income $ 2,182 $ 282 $ 1,400 $ 674
======= ===== ======= =====
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 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.
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 Six Months Ended
June 30, June 30,
--------------------------------------------------
2001 2000 2001 2000
--------------------------------------------------
Denominator for basic earnings per share
(weighted average shares outstanding) 773.0 735.2 759.2 734.2
Assumed exercise of dilutive stock options 6.1 2.2 5.7 1.8
----- ----- ----- -----
Denominator for diluted earnings per share 779.1 737.4 764.9 736.0
===== ===== ===== =====
Prior year common stock amounts and per share data 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 swaps, 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 or 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 $2 million was excluded in the
assessment of hedge effectiveness for the three months ended June 30, 2001.
Duke Energy occasionally enters into derivatives as fair value hedges of an
asset, liability or firm commitment. For the six months ended June 30, 2001,
these transactions were 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 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. For income statement purposes, the contract is treated as a
pure financial instrument, so financial settlement has no effect on the
Consolidated Statements of Income.
7
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 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 Statements 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 in current-period earnings.
Fair Value Hedges. Duke Energy enters into interest-rate swaps to convert some
of its fixed-rate long-term debt to floating rate debt. All components of each
derivative gain or loss are included in the assessment of hedge effectiveness,
unless otherwise noted.
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 six
months ended June 30, 2001, Duke Energy reclassified as earnings $204 million of
losses from OCI for derivatives included in the transition adjustment related to
hedge transactions that settled. The amount reclassified out of OCI will be
different from the amount included in the transition adjustment due to market
price changes since January 1, 2001.
Currently, there are ongoing discussions surrounding the implementation and
interpretation of SFAS No. 133 by the Financial Accounting Standards Board's
(FASB) Derivative Implementation Group. In June 2001, the FASB approved Issue
C15, "Scope Exceptions: Normal Purchases and Normal Sales Exception for Option-
Type Contracts and Forwards Contracts in Electricity." Under the guidance of
Issue C15, buyers and sellers of electricity are not required to mark-to-market
contracts meeting certain criteria. Option-type contracts include capacity
contracts that allow the electric industry to meet volatile demand by providing
the option to purchase electricity as needed. The FASB concluded if such
contracts meet the criteria outlined in Issue C15, they could qualify as normal
under SFAS No. 133. This new SFAS No. 133 implementation guidance becomes
effective July 1, 2001. Duke Energy will treat the change as a de-designation
under SFAS No. 133, and the fair value for each qualifying contract on July 1
shall become the contract's net carrying amount.
In June 2001, the FASB also cleared Issue C10, "Scope Exceptions: Can Option
Contracts and Forward Contracts with Optionality Features Qualify for the Normal
Purchases and Normal Sales Exception." Issue C10 states that normal purchases
and normal sales exception applies only to contracts that provide for the
purchase or sale of items (other than a financial instrument or derivative
instrument) that will be delivered in quantities expected to be used or sold
over a reasonable period, in the normal course of business.
Duke Energy does not believe that the adoption of Issue C10 or Issue C15 will
have a significant impact on its consolidated results of operations, cash flows
or financial position.
New Accounting Standards. In June 2001, the FASB issued SFAS No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets."
SFAS No. 141 requires all business combinations initiated (as defined by the
standard) after June 30, 2001 to be accounted for using the purchase method.
Companies may no longer use the pooling method for future combinations.
8
SFAS No. 142 is effective for fiscal years beginning after December 15, 2001 and
will be adopted by Duke Energy as of January 1, 2002. SFAS No. 142 requires that
goodwill no longer be amortized over an estimated useful life, as previously
required. Instead, goodwill amounts will be subject to a fair-value-based annual
impairment assessment. The standard also requires acquired intangible assets to
be recognized separately and amortized as appropriate. Duke Energy expects that
the adoption of SFAS No. 142 will have an impact on future financial statements
due to the discontinuation of goodwill amortization expense. For the six months
ended June 30, 2001 amortization expense for goodwill was $51 million. Duke
Energy is preparing to implement the new standard and has not yet determined the
impact on its consolidated results of operations, cash flows or financial
position.
In July 2001, the FASB issued SFAS No. 143, "Accounting for Obligations
Associated with the Retirement of Long-Lived Assets." SFAS No. 143 provides the
accounting requirements for retirement obligations associated with tangible
long-lived assets. SFAS No. 143 is effective for fiscal years beginning after
June 15, 2002, and early adoption is permitted. Duke Energy is currently
assessing the new standard and has not yet determined the impact on its
consolidated results of operations, cash flows or financial position.
Reclassifications. Certain prior period amounts have been reclassified in the
Consolidated Financial Statements and in Note 4 to conform to the current
presentation.
Excise and Other Pass Through Taxes. Duke Energy generally presents revenues net
of pass through taxes on the Consolidated Statements of Income.
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 price variability of these commodities is 12 years.
For the six months ended June 30, 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 June 30, 2001, $220
million of after-tax deferred net losses on derivative instruments accumulated
in OCI are expected to be reclassified to earnings during the next six months as
the hedged transactions occur. These losses will generally be more than offset
by the related sales and generation revenues. However, due 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 (Fair Value or 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 six months ended June 30, 2001, Duke Energy's
existing interest rate derivative
9
instruments and related ineffectiveness was 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 six months ended June 30, 2001, the impact of
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, Europe 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. Where 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 June 30, 2001, Duke Energy had a pre-tax provision of $90
million related to energy sales in California. See Note 7 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.
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 Six Months Ended
June 30, June 30,
----------------------------------------------------------
2001 2000 2001 2000
----------------------------------------------------------
Operating income $ 880 $ 794 $2,062 $1,606
Plus: Other income and expenses 37 43 124 90
----------------------------------------------------------
EBIT $ 917 $ 837 $2,186 $1,696
- ----------------------------------------------------------------------------------------------------
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. Duke Energy's 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 June 30, 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/c/
--------------------------------------------------------------------------------------------
Three Months Ended
June 30, 2001
Franchised Electric $ 1,154 $ - $ 1,154 $361 $146 $ 275
Natural Gas Transmission 229 35 264 142 36 207
Field Services 2,255 283 2,538 84 70 261
NAWE 11,370 136 11,506 251 34 847
International Energy 399 - 399 68 23 135
Other Energy Services 75 57 132 9 4 3
Duke Ventures 98 - 98 36 5 189
Other Operations /b/ - 30 30 (58) 8 34
Eliminations and (541)
Minority interests - (541) 24 - -
------------------------------------------------------------------------------------------
Total consolidated $15,580 $ - $15,580 $917 $326 $1,951
- -------------------------------------------------------------------------------------------------------------------------
Three Months Ended
June 30, 2000
Franchised Electric $ 1,158 $ - $ 1,158 $395 $141 $ 114
Natural Gas Transmission 249 32 281 128 32 39
Field Services 1,870 285 2,155 72 71 87
NAWE 7,280 50 7,330 110 19 491
International Energy 249 - 249 87 27 383
Other Energy Services 86 52 138 10 3 5
Duke Ventures 34 - 34 15 4 100
Other Operations /b/ - (8) (8) (57) 7 42
Eliminations and
Minority interests - (411) (411) 77 - -
------------------------------------------------------------------------------------------
Total consolidated $10,926 $ - $10,926 $837 $304 $1,261
- -------------------------------------------------------------------------------------------------------------------------
/a/EBIT includes intersegment sales accounted for at prices representative of
unaffiliated party transactions.
/b/Includes certain unallocated corporate items.
/c/Capital and Investment Expenditures are gross of cash received from
acquisitions.
11
- ---------------------------------------------------------------------------------------------------------------------------
Business Segment Data (In millions)
- ---------------------------------------------------------------------------------------------------------------------------
Depreciation Capital and
Unaffiliated Intersegment Total and Investment
Revenues Revenues Revenues EBIT/a/ Amortization Expenditures/c/
--------------------------------------------------------------------------------------------
Six Months Ended
June 30, 2001
Franchised Electric $ 2,311 $ - $ 2,311 $ 821 $292 $ 452
Natural Gas Transmission 474 72 546 317 71 286
Field Services 4,871 1,065 5,936 207 138 307
NAWE 23,228 293 23,521 599 61 1,365
International Energy 896 5 901 144 48 158
Other Energy Services 156 94 250 13 7 8
Duke Ventures 135 - 135 43 9 363
Other Operations /b/ - 121 121 (113) 16 59
Eliminations and
Minority interests - (1,650) (1,650) 155 - -
------------------------------------------------------------------------------------------
Total consolidated $32,071 $ - $32,071 $2,186 $642 $2,998
- -------------------------------------------------------------------------------------------------------------------------
Six Months Ended
June 30, 2000
Franchised Electric $ 2,273 $ - $ 2,273 $ 860 $282 $ 291
Natural Gas Transmission 501 66 567 286 61 467
Field Services 3,144 477 3,621 144 109 215
NAWE 11,443 192 11,635 192 35 826
International Energy 455 2 457 191 49 830
Other Energy Services 329 84 413 17 6 16
Duke Ventures 71 - 71 33 8 164
Other Operations /b/ - 10 10 (110) 14 100
Eliminations and
Minority interests - (831) (831) 83 - -
------------------------------------------------------------------------------------------
Total consolidated $18,216 $ - $18,216 $1,696 $564 $2,909
- ---------------------------------------------------------------------------------------------------------------------------
/a/EBIT includes intersegment sales accounted for at prices representative of
unaffiliated party transactions.
/b/Includes certain unallocated corporate items.
/c/Capital and Investment Expenditures are gross of cash received from
acquisitions.
Segment assets in the accompanying table are net of intercompany advances,
intercompany notes receivable and investments in subsidiaries.
- ---------------------------------------------------------------------------------------
Segment Assets (In millions)
- ---------------------------------------------------------------------------------------
June 30, December 31,
2001 2000
------------------------------------------
Franchised Electric $12,888 $12,819
Natural Gas Transmission 4,821 4,995
Field Services 6,725 6,266
NAWE 18,269 28,213
International Energy 4,364 4,551
Other Energy Services 317 543
Duke Ventures 1,837 1,967
Other Operations and eliminations/a/ 998 (1,178)
------------------------------------------
Total consolidated $50,219 $58,176
- ---------------------------------------------------------------------------------------
/a/Includes certain unallocated corporate items.
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.
12
In July 2001, Duke Energy redeemed seven issues of first and refunding mortgage
bonds. The redemption was completed to take advantage of the general decline in
interest rates. The total face value of the redeemed bonds was $386 million with
interest rates ranging from 5.875% to 8.30%.
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. In October 1998, the Environmental Protection Agency
(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 Duke Energy and the states of North Carolina and South
Carolina. 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 that has virtually identical emission control requirements
as its October 1998 action, but with a May 1, 2003 compliance date. This rule
was challenged in court and on May 14, 2001 the US Court of Appeals for the DC
Circuit issued its decision. The court sided with the EPA on all issues except
the electric generating unit (EGU) growth rate factor determinations used to
establish each state's emission cap. Because the EPA has yet to act on the
court's remand order, a group of utilities, including Duke Energy, has filed a
motion with the court. The motion requests the court to reconsider its decision
not to vacate the EGU portion of the rule, or to suspend the May 1, 2003
compliance date until the EPA acts in accordance with the court's remand order.
It is not known at this time how the EPA will respond or if the May 1, 2003
compliance date will be changed as a result of the court's decision. Management
estimates that Duke Energy will spend from $500 million to $900 million in
capital costs for additional emission controls through 2007 to comply with the
new EPA rules.
In response to the EPA's October 1998 rule, both North Carolina and South
Carolina have revised their SIPs and are awaiting legislative and EPA approval.
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. The provisions of the final
legislation, if passed into law, could be significantly different from the
proposal.
Emission control retrofits needed to comply with the new rules 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.
13
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, certain of its subsidiaries 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. While these
matters referenced above are in their earliest stages, management believes,
based on its analysis to date of the factual background and the claims asserted
in these matters, that their resolution will not have a material adverse effect
on Duke Energy's consolidated results of operations, cash flows or financial
position.
In addition to the lawsuits described in the preceding paragraph, several
investigations and regulatory proceedings have commenced at the state and
federal levels into the causes of the high wholesale electricity prices in the
western U.S. At the federal level, there are numerous proceedings before the
FERC. Some parties to those proceedings have made claims for billions of dollars
of refunds from sellers of wholesale electricity, including DETM. Some parties
have also sought to revoke the authority of DETM and other DENA-affiliated
electricity marketers to sell electricity at market-based rates. The FERC is
also conducting its own investigation to determine the causes of the high
wholesale electricity prices. As a result of these proceedings, the FERC has
ordered some sellers, including DETM, to refund, or offset against outstanding
accounts receivable, certain amounts billed for sales of electricity in excess
of a FERC established proxy price. The proxy price is intended to represent what
the FERC believes would have been the market-clearing price in a perfectly
competitive market. In June 2001, DETM offset approximately $20 million against
amounts owed to it by the California Independent System Operator and the
California Power Exchange for sales of electricity during January and February
2001. This offset reduced the $110 million reserve established in the fourth
quarter of 2000 to $90 million. Proceedings are ongoing to determine, among
other things, the amount of any refunds or offsets for periods prior to January
2001 and the method to be used to determine the proxy price in future months.
At the state level, the California Public Utilities Commission has formal and
informal investigations in place primarily to determine if power plant operators
in California, including DENA, have improperly "withheld," either economically
or physically, generation output from the market to manipulate market prices.
In addition, the California State Senate formed a Select Committee to
Investigate Price Manipulation of the Wholesale Energy Market (Select
Committee). The Select Committee has served a subpoena on several Duke Energy
subsidiaries seeking data concerning their California market activities. The
Select Committee has heard testimony from several witnesses but no one
from Duke Energy has been called to testify to date.
The California Attorney General also has an investigation under way to determine
if any market participants engaged in illegal activity, including antitrust
activity, in the course of their sales of electricity into the
14
wholesale markets in the western U.S. The Attorneys General of Washington and
Oregon have joined the California Attorney General in a joint investigation of
the electricity markets.
The California Attorney General has also convened a grand jury to determine
whether criminal charges should be brought against any market participants. To
date, no Duke Energy employee has been called to testify before the grand jury
nor have any criminal charges been filed against Duke Energy or any of its
officers, directors or employees in connection with the wholesale electricity
markets in the western U.S.
Throughout 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 and managing the output
limitations on its power plants imposed by applicable permits and laws. Since
December 31, 2000, Duke Energy has closely managed the balance of questionable
receivables, and believes that the current pre-tax provision of $90 million is
appropriate. No additional provisions for California receivables have been
recorded in 2001. While these matters referenced above are in their earliest
stages, management believes, based on its analysis to date of the factual
background and the claims asserted in these matters, that their resolution will
not 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 in the Ventures. 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 has also asserted
various additional claims against the Exxon Mobil entities for breach of the
agreements governing 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.
To date, the Exxon Mobil entities have not sought to challenge this order in an
appellate court and a hearing before an arbitration panel has been scheduled for
early October 2001. At this hearing, the arbitration panel will hear evidence on
all of the claims between the parties and a decision from the arbitration panel
is expected within 30 days following the conclusion of the hearing. 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 other 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.
15
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 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 quarter ended June 30, 2001, earnings available for common stockholders
were $415 million, or $0.54 per basic share. For the comparable 2000 period,
earnings available for common stockholders were $324 million, or $0.44 per basic
share. The increase was primarily due to earnings from business expansion and
continued growth that occurred during 2001, and decreased interest and minority
interest expense. Earnings per share information for 2000 has been restated to
reflect the two-for-one common stock split that was effective January 26, 2001.
For the six months ended June 30, 2001, earnings available for common
stockholders were $869 million, or $1.14 per basic share. For the comparable
2000 period, earnings available for common stockholders were $712 million, or
$0.97 per basic share. The increase was primarily due to earnings 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. This one-time charge was 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."
Operating income increased $86 million to $880 million for the quarter, and
increased $456 million to $2,062 million for the six months ended June 30, 2001.
Earnings before interest and taxes (EBIT) increased $80 million to $917 million
for the quarter, and increased $490 million to $2,186 million for the six months
ended June 30, 2001. 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 have been restated to conform to the current year
presentation of corporate cost allocations. See Note 4 for additional
information on business segments.
EBIT is calculated as follows:
- ------------------------------------------------------------------------------------------
Reconciliation of Operating Income to EBIT (In millions)
- ------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------------------------
2001 2000 2001 2000
------------------------------------------------------
Operating income $ 880 $ 794 $2,062 $1,606
Plus: Other income and expenses 37 43 124 90
------------------------------------------------------
EBIT $ 917 $ 837 $2,186 $1,696
- ------------------------------------------------------------------------------------------
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. Duke Energy's EBIT is not necessarily comparable to a similarly
titled measure of another company.
16
Business segment EBIT is summarized in the following table and is discussed
thereafter.
- ---------------------------------------------------------------------------------------------------------
EBIT by Business Segment (In millions)
- ---------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------------------------------------
2001 2000 2001 2000
----------------------------------------------------------------
Franchised Electric $ 361 $ 395 $ 821 $ 860
Natural Gas Transmission 142 128 317 286
Field Services 84 72 207 144
North American Wholesale Energy 251 110 599 192
International Energy 68 87 144 191
Other Energy Services 9 10 13 17
Duke Ventures 36 15 43 33
Other Operations (58) (57) (113) (110)
EBIT attributable to minority interests 24 77 155 83
----------------------------------------------------------------
Consolidated EBIT $ 917 $ 837 $2,186 $1,696
- ---------------------------------------------------------------------------------------------------------
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 Six Months Ended
June 30, June 30,
---------------------------------------------------------
(In millions, except where noted) 2001 2000 2001 2000
- ---------------------------------------------------------------------------------------------------------
Operating revenues $ 1,154 $ 1,158 $ 2,311 $ 2,273
Operating expenses 779 783 1,527 1,452
---------------------------------------------------------
Operating income 375 375 784 821
Other income, net of expenses (14) 20 37 39
---------------------------------------------------------
EBIT $ 361 $ 395 $ 821 $ 860
=========================================================
Sales - GWh /a/ 20,221 20,661 39,583 41,215
- ---------------------------------------------------------------------------------------------------------
/a/Gigawatt-hours.
Franchised Electric's EBIT decreased $34 million for the quarter and $39 million
for the six months ended June 30, 2001, compared to the same periods in 2000.
Decreased sales to industrial customers and increased operating costs, resulting
primarily from increased nuclear outage costs, affected both the quarter and
six-month periods. These decreases were partially offset by growth in sales to
general service and residential customers due mainly to an increase in the
average number of customers in Franchised Electric's service territory. The
following table details the changes in GWh sales and average number of customers
compared to the prior year.
- --------------------------------------------------------------------------------------
Increase (decrease) over prior year Three Months Ended Six Months Ended
- --------------------------------------------------------------------------------------
Residential sales 1.6% 5.4%
General service sales 1.7% 3.4%
Industrial sales (10.0)% (7.9)%
Total Franchised Electric sales (2.1)% (4.0)%
Average number of customers 1.9% 2.1%
- --------------------------------------------------------------------------------------
17
Natural Gas Transmission
- -----------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------------------------------
(In millions, except where noted) 2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------------------------
Operating revenues $ 264 $ 281 $ 546 $ 567
Operating expenses 125 155 232 295
--------------------------------------------------------------
Operating income 139 126 314 272
Other income, net of expenses 3 2 3 14
--------------------------------------------------------------
EBIT $ 142 $ 128 $ 317 $ 286
--------------------------------------------------------------
Throughput - TBtu /a/ 334 372 845 877
- -----------------------------------------------------------------------------------------------------------------
/a/Trillion British thermal units.
For the quarter and six months ended June 30, 2001, EBIT for Natural Gas
Transmission increased $14 million and $31 million, respectively, compared to
the same periods in 2000. The quarterly results benefited from earnings at
Market Hub Partners, which was acquired in September 2000, and increased
earnings from Maritimes & Northeast Pipeline. Earnings from Market Hub Partners
also contributed to the increase in EBIT for the six-month period as did
earnings from East Tennessee Natural Gas Company (East Tennessee), which was
acquired in March 2000. For both periods, the decrease in operating revenues,
which is offset by a decrease in operating costs, resulted from reduced rates
effective in December 2000 that reflect lower recovery requirements for
operating costs at Texas Eastern Transmission, LP, primarily system fuel and
Federal Energy Regulatory Commission (FERC) Order 636 transition costs. For both
periods, the decrease in throughput resulted from a decrease in usage due to
the increased natural gas prices.
Field Services
- -----------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------------------------------
(In millions, except where noted) 2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------------------------
Operating revenues $2,538 $2,155 $5,936 $3,621
Operating expenses 2,406 2,040 5,625 3,430
--------------------------------------------------------------
Operating income 132 115 311 191
Other income, net of expenses - - - (4)
Minority interest expense 48 43 104 43
--------------------------------------------------------------
EBIT $ 84 $ 72 $ 207 $ 144
--------------------------------------------------------------
Natural gas gathered and
Processed/transported, TBtu/d /a/ 8.5 8.0 8.4 7.0
Natural gas liquids (NGL)
Production, MBbl/d /b/ 406.7 401.5 388.9 316.3
Natural gas marketed, TBtu/d 1.6 0.5 1.6 0.5
Average natural gas price per MMBtu /c/ $ 4.67 $ 3.47 $ 5.88 $ 2.99
Average NGL price per gallon /d/ $ 0.48 $ 0.47 $ 0.54 $ 0.49
- -----------------------------------------------------------------------------------------------------------------
/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 $12 million for the quarter ended June 30,
2001, compared to the same period in 2000. Commodity prices were the main factor
contributing to higher revenues during the second quarter of 2001. The increase
in operating expenses for the three months ended June 30, 2001 was primarily
18
due to the interaction of natural gas and NGL purchase contracts with higher
natural gas prices. EBIT also increased due to higher cost reduction efforts and
plant consolidation.
Field Services' EBIT increased $63 million for the six months ended June 30,
2001, compared to the same period in 2000. The increase in EBIT was primarily
due to the addition of the Phillips Petroleum's Gas Gathering, Processing and
Marketing unit's (Phillips) midstream natural gas business and an increase in
average NGL prices. This was partially offset by an increase in natural gas
prices and hedging losses.
Average NGL prices increased 2% for the quarter and 10% for the six months.
North American Wholesale Energy (NAWE)
- ----------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------------------------------------
(In millions, except where noted) 2001 2000 2001 2000
- ----------------------------------------------------------------------------------------------------------------
Operating revenues $11,506 $ 7,330 $ 23,521 $ 11,635
Operating expenses 11,303 7,184 22,892 11,410
-------------------------------------------------------------
Operating income 203 146 629 225
Other income, net of expenses 18 (8) 8 (4)
Minority interest (benefit) expense (30) 28 38 29
-------------------------------------------------------------
EBIT $ 251 $ 110 $ 599 $ 192
-------------------------------------------------------------
Natural gas marketed, TBtu/d 11.2 11.2 12.4 11.6
Electricity marketed and traded, GWh 66,225 58,198 110,842 108,551
Proportional megawatt capacity in operation 6,846 5,143
Proportional megawatt capacity owned /a/ 13,231 8,473
- ----------------------------------------------------------------------------------------------------------------
/a/ Includes under construction or under contract at period end.
For the quarter and six months ended June 30, 2001, EBIT for NAWE increased $141
million and $407 million, respectively, compared with the same periods in 2000.
The increases are due to increased earnings from generation assets, resulting
primarily from a 33% increase in proportional megawatt capacity in operation; as
well as enhanced performance in natural gas and electricity trading and
services. In addition, when compared to the prior year, EBIT increased $88
million for the quarter and $18 million for the six months from the sale of
interests in generating facilities as a result of NAWE executing its portfolio
management strategy.
Losses at Duke Energy Trading and Marketing, LLC (DETM) resulted in a minority
interest benefit for the quarter ended June 30, 2001 while year-to-date earnings
resulted in a $9 million increase in minority interest expense when compared to
the prior year.
19
International Energy
- -----------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------------------------
(In millions, except where noted) 2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------------------
Operating revenues $ 399 $ 249 $ 901 $ 457
Operating expenses 334 170 762 283
--------------------------------------------------------
Operating income 65 79 139 174
Other income, net of expenses 9 14 18 28
Minority interest expense 6 6 13 11
--------------------------------------------------------
EBIT $ 68 $ 87 $ 144 $ 191
--------------------------------------------------------
Proportional megawatt capacity in operation 4,241 4,205
Proportional megawatt capacity owned /a/ 4,844 4,370
Proportional maximum pipeline
Capacity /a/, MMcf/d /b/ 363 321
- -----------------------------------------------------------------------------------------------------------
/a/Includes under construction or under contract at period end.
/b/Million cubic feet per day.
International Energy's EBIT decreased $19 million for the quarter and $47
million for the six months ended June 30, 2001, compared to the same periods in
2000. The decrease for the quarter includes the effects of water rationing in
Brazil, which started during the second quarter of 2001, and the negative impact
of foreign currency translation on the earnings of the Latin American
operations. The decrease in results for the six months is due primarily to a $54
million gain recognized in the first quarter of 2000 from the sale of liquefied
natural gas ships. The year-to-date effect of water rationing in Brazil and the
foreign currency translation related to Latin America was partially offset by
stronger operational results from Latin America, Asia Pacific and Europe.
Other Energy Services
- -----------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------------------------
(In millions) 2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------------------
Operating revenues $ 132 $ 138 $ 250 $ 413
Operating expenses 123 128 237 396
--------------------------------------------------------
EBIT $ 9 $ 10 $ 13 $ 17
- -----------------------------------------------------------------------------------------------------------
For the quarter and six months ended June 30, 2001, EBIT for Other Energy
Services decreased $1 million and $4 million, compared to the same periods in
2000. Operating revenues and expenses decreased compared to the same periods in
2000 due to previous retail commodity trading activity at DukeSolutions, Inc.
20
Duke Ventures
- -----------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------------------------
(In millions) 2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------------------
Operating revenues $ 98 $ 34 $ 135 $ 71
Operating expenses 62 19 92 38
--------------------------------------------------------
EBIT $ 36 $ 15 $ 43 $ 33
- -----------------------------------------------------------------------------------------------------------
EBIT for Duke Ventures increased $21 million for the quarter and $10 million for
the six months ended June 30, 2001, compared with the same periods in 2000. The
increase in operating revenues and expenses, when compared with the prior year,
resulted from Duke Capital Partners, which commenced operations in 2000. The
increase in EBIT for the quarter was primarily due to increased land management
sales and trades, and increased commercial project sales by Crescent Resources,
LLC. The increase in EBIT for the six months was primarily due to the absence of
losses related to DukeNet Communications' BellSouth PCS investment, which was
sold during the third quarter of 2000.
Other Impacts on Earnings Available for Common Stockholders
For the quarter ended June 30, 2001, interest expense decreased $11 million
compared to the prior year due to lower interest rates, and the retirement of
debt. For the six months ended June 30, 2001, interest expense increased $32
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 decreased $44 million for the quarter and increased
$85 million for the six months ended June 30, 2001 compared to the same periods
in 2000. Minority interest expense related to joint ventures decreased $58
million for the quarter and increased $52 million for the six-month period. The
change for the quarter is primarily attributable to losses incurred by DETM,
which resulted in a minority interest benefit. The increase for the six-month
period is attributable to increased minority interest expense resulting from
Field Services' joint venture and DETM. Minority interest expense also increased
$14 million for the quarter and $33 million for the six-month period 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 for further discussion.
LIQUIDITY AND CAPITAL RESOURCES
Operating Cash Flows
During the six months ended June 30, 2001 cash flows from operating activities
increased $1,515 million over the same period in 2000. Operating cash flows for
the first half of 2000 were lower due in large part to tax payments made in 2000
related to the 1999 sale of the midwest pipelines. There were also increased
demands for margin call deposits last year when compared with the first half of
2001. Additional cash was generated by higher levels of income during 2001, as
well as increased amounts of net payables and other current liabilities related
to growth in business.
21
Investing Cash Flows
Net cash used in investing activities was $2,273 million for the six months
ended June 30, 2001 compared to $2,854 million for the same period in 2000. The
reduction in investing activities is due primarily to the $390 million
acquisition of East Tennessee and the $280 million tender offer for Companhia de
Geracao de Energia Eletrica Paranapanema in 2000. These reductions were mostly
offset by proceeds from the sale of NAWE generating facilities.
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 June 30, 2001, including short-
term debt, was 45% debt, 49% 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 3.9 times and 3.5
times for the six months ended June 30, 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.
In July 2001, Duke Energy redeemed seven issues of first and refunding mortgage
bonds. The redemption was completed to take advantage of the general decline in
interest rates. The total face value of the redeemed bonds was $386 million with
interest rates ranging from 5.875% to 8.30%.
Under its commercial paper facilities and extendable commercial notes programs
(ECNs), Duke Energy had the ability to borrow up to $6.4 billion and $5.7
billion at June 30, 2001 and December 31, 2000, respectively.
22
A summary of the available commercial paper and ECNs as of June 30, 2001 is as
follows:
- -----------------------------------------------------------------------------------------------------------------
Duke Capital Duke Energy Duke Energy
(In billions) Duke Energy Corporation /a/ Field Services International Total
- -----------------------------------------------------------------------------------------------------------------
Commercial Paper $1.25 $2.63 $0.68 $0.38 /b/ $4.94
ECNs 0.50 1.00 - - 1.50
---------------------------------------------------------------------------------
Total $1.75 $3.63 $0.68 $0.38 $6.44
- -----------------------------------------------------------------------------------------------------------------
/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.
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 a $1.075 billion unsecured bank credit
facility that allows it to issue letters of credit in lieu of actual cash
deposits to meet margin requirements.
The total amount of Duke Energy's bank credit and construction facilities
available at June 30, 2001 and December 31, 2000, was approximately $4.8 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 June 30, 2001,
approximately $2.0 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. Duke Energy's credit facilities are not
subject to minimum cash requirements.
As of June 30, 2001, Duke Energy and its subsidiaries had effective SEC shelf
registrations for up to $5.3 billion in gross proceeds from debt and other
securities. 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.
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 exposure limits. There have been no material changes in Duke
Energy's market risk since December 31, 2000.
CURRENT ISSUES
Electric Retail Competition. In 1999 and 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.
23
As a result of these rulemakings, Duke Energy and two other investor-owned
utilities, Carolina Power & Light Company and South Carolina Electric & Gas,
planned to establish GridSouth Transco, LLC (GridSouth), as a for-profit,
independent transmission company (or RTO), responsible for operating and
planning the companies' combined transmission systems. In March 2001, GridSouth
received provisional approval from the FERC. However, in July of 2001, the FERC
issued orders recommending that utilities throughout the U.S. combine their
transmission systems to create four large independent regional operators, one
each in the Northeast, Southeast, Midwest and West. The FERC ordered GridSouth
and other utilities in the Southeast to join in 45 days of mediation to
negotiate terms of a Southeast RTO. Those negotiations are currently in
progress. The target date for formation of GridSouth continues to be December
15, 2001. However, the actual structure of GridSouth and the date that it will
become operational depends upon the outcome of the mediation and resolution of
all necessary regulatory approvals and technical issues. Management believes
that the end result of this process, and the establishment and operation of
GridSouth or an alternative combined transmission system structure will not have
a material adverse effect on Duke Energy's future consolidated results of
operations, cash flows or financial position.
Environmental Matters. In October 1998, the Environmental Protection Agency
(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 Duke Energy and the states of North Carolina and South
Carolina. 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 that has virtually identical emission control requirements
as its October 1998 action, but with a May 1, 2003 compliance date. This rule
was challenged in court and on May 14, 2001 the US Court of Appeals for the DC
Circuit issued its decision. The court sided with the EPA on all issues except
the electric generating unit (EGU) growth rate factor determinations used to
establish each state's emission cap. Because the EPA has yet to act on the
court's remand order, a group of utilities, including Duke Energy, has filed a
motion with the court. The motion asks the court to reconsider its decision not
to vacate the EGU portion of the rule, or to suspend the May 1, 2003 compliance
date until the EPA acts in accordance with the court's remand order. It is not
known at this time how the EPA will respond or if the May 1, 2003 compliance
date will be changed as a result of the court decision. Management estimates
that Duke Energy will spend from $500 million to $900 million in capital costs
for additional emission controls through 2007 to comply with the new EPA rules.
In response to the EPA's October 1998 rule, both North Carolina and South
Carolina have revised their SIPs and are awaiting legislative and EPA approval.
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. The provisions of the final
legislation, if passed into law, could be significantly different from the
proposal.
Emission control retrofits needed to comply with the new rules 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.
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
DETM have been named among 16 defendants in a
24
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, certain of its subsidiaries 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. While these matters
referenced above are in their earliest stages, management believes, based on its
analysis to date of the factual background and the claims asserted in these
matters, that their resolution will not have a material adverse effect on Duke
Energy's consolidated results of operations, cash flows or financial position.
In addition to the lawsuits described in the preceding paragraph, several
investigations and regulatory proceedings have commenced at the state and
federal levels into the causes of the high wholesale electricity prices in the
western U.S. At the federal level, there are numerous proceedings before the
FERC. Some parties to those proceedings have made claims for billions of dollars
of refunds from sellers of wholesale electricity, including DETM. Some parties
have also sought to revoke the authority of DETM and other DENA-affiliated
electricity marketers to sell electricity at market-based rates. The FERC is
also conducting its own investigation to determine the causes of the high
wholesale electricity prices. As a result of these proceedings, the FERC has
ordered some sellers, including DETM, to refund, or offset against outstanding
accounts receivable, certain amounts billed for sales of electricity in excess
of a FERC established proxy price. The proxy price is intended to represent what
the FERC believes would have been the market- clearing price in a perfectly
competitive market. In June 2001, DETM offset approximately $20 million against
amounts owed to it by the California Independent System Operator and the
California Power Exchange for sales of electricity during January and February
2001. This offset reduced the $110 million reserve established in the fourth
quarter of 2000 to $90 million. Proceedings are ongoing to determine, among
other things, the amount of any refunds or offsets for periods prior to January
2001 and the method to be used to determine the proxy price in future months.
At the state level, the California Public Utilities Commission has formal and
informal investigations in place primarily to determine if power plant operators
in California, including DENA, have improperly "withheld," either economically
or physically, generation output from the market to manipulate market prices. In
addition, the California State Senate formed a Select Committee to Investigate
Price Manipulation of the Wholesale Energy Market (Select Committee). The Select
Committee has served a subpoena on several Duke Energy subsidiaries seeking data
concerning their California market activities. The Select Committee has heard
testimony from several witnesses but no one from Duke Energy has been called to
testify to date.
The California Attorney General also has an investigation under way to determine
if any market participants engaged in illegal activity, including antitrust
activity, in the course of their sales of electricity into the wholesale markets
in the western U.S. The Attorneys General of Washington and Oregon have joined
the California Attorney General in a joint investigation of the electricity
markets.
The California Attorney General has also convened a grand jury to determine
whether criminal charges should be brought against any market participants. To
date, no Duke Energy employee has been called to
25
testify before the grand jury nor have any criminal charges been filed against
Duke Energy or any of its officers, directors or employees in connection with
the wholesale electricity markets in the western U.S.
Throughout 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 and managing the output
limitations on its power plants imposed by applicable permits and laws. Since
December 31, 2000, Duke Energy has closely managed the balance of questionable
receivables, and believes that the current pre-tax provision of $90 million is
appropriate. No additional provisions for California receivables have been
recorded in 2001. While these matters referenced above are in their earliest
stages, management believes, based on its analysis to date of the factual
background and the claims asserted in these matters, that their resolution will
not 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 in the Ventures. 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 has also asserted
various additional claims against the Exxon Mobil entities for breach of the
agreements governing 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.
To date, the Exxon Mobil entities have not sought to challenge this order in an
appellate court and a hearing before an arbitration panel has been scheduled for
early October 2001. At this hearing, the arbitration panel will hear evidence on
all of the claims between the parties and a decision from the arbitration panel
is expected within 30 days following the conclusion of the hearing. 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 other 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.
New Accounting Standards. In June 2001, the Financial Accounting Standards Board
(FASB) issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill
and Other Intangible Assets."
SFAS No. 141 requires all business combinations initiated (as defined by the
standard) after June 30, 2001 to be accounted for using the purchase method.
Companies may no longer use the pooling method for future combinations.
SFAS No. 142 is effective for fiscal years beginning after December 15, 2001 and
will be adopted by Duke Energy as of January 1, 2002. SFAS No. 142 requires that
goodwill no longer be amortized over an estimated useful life, as previously
required. Instead, goodwill amounts will be subject to a fair-value-based annual
impairment assessment. The standard also requires acquired intangible assets to
be recognized separately and amortized as appropriate. Duke Energy expects that
the adoption of SFAS No. 142 will have
26
an impact on future financial statements due to the discontinuation of goodwill
amortization expense. For the six months ended June 30, 2001 amortization
expense for goodwill was $51 million. Duke Energy is preparing to implement the
new standard and has not yet determined the impact on its consolidated results
of operations, cash flows or financial position.
In July 2001, the FASB issued SFAS No. 143, "Accounting for Obligations
Associated with the Retirement of Long-Lived Assets." SFAS No. 143 provides the
accounting requirements for retirement obligations associated with tangible
long-lived assets. SFAS No. 143 is effective for fiscal years beginning after
June 15, 2002, and early adoption is permitted. Duke Energy is currently
assessing the new standard and has not yet determined the impact on its
consolidated results of operations, cash flows or financial position.
27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Duke Energy's subsidiary, Duke Energy Field Services, LLC (DEFS) has resolved
non-compliance issues with the Texas Natural Resources Conservation Commission
associated with the timing of air permit annual compliance certifications
submitted to the agency in 1998 and 1999. This matter, a large portion of which
was voluntarily self-disclosed to the agency, involved approximately 120 of
DEFS' facilities that did not meet specific administrative filing deadlines for
required air permit paperwork. In addition, DEFS resolved with the New Mexico
Environment Department (NMED) alleged non-compliance with various air permit
requirements at four facilities in New Mexico. These matters, the majority of
which were also voluntarily self-disclosed to the agency, generally involved
document preparation and submittal as required by permits, compliance testing
requirements at two facilities, and compliance with permit emissions limits at
one facility. These issues with the Texas and New Mexico agencies under relevant
air programs resulted in total penalty settlements of approximately $470,000.
In June 2001, DEFS received two administrative Compliance Orders from NMED
seeking civil penalties primarily for historic air permit matters. One order
alleges specific permit non-compliance at eleven facilities that occurred
periodically between 1996 and 1999. Allegations under this order relate
primarily to emissions from certain compressor engines in excess of what were
then new operating permit limits. The other order alleges numerous unexcused
excursions from an hourly permit limit arising from upset events at one
facility's sulfur recovery unit between 1997 and 2001. NMED applied its civil
penalty policy to the alleged violations and calculated the penalties to be
approximately $10 million in the aggregate. NMED has initiated settlement
discussions and offered to resolve these matters for an amount lower than the
calculated penalties. DEFS will continue to negotiate with NMED to resolve all
issues relating to the alleged violations.
For additional 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.
At the Duke Energy Corporation Annual Meeting of Shareholders held April 26,
2001, the shareholders elected Ann Maynard Gray, Dennis R. Hendrix and Harold S.
Hook to serve as Class I directors with terms expiring in 2004. The shareholders
also voted to ratify the selection of Deloitte & Touche LLP to act as
independent auditors to make an examination of Duke Energy's accounts for the
year 2001. The shareholders approved the proposal to increase the number of
shares of authorized Common Stock from one billion to two billion shares, with
552,160,160 shares voted for the proposal, 44,104,667 shares voted against the
proposal and 4,049,524 shares abstained. The shareholders also approved the
amendment of the Duke Energy 1998 Long-Term Incentive Plan, with 542,552,530
shares voted for the amendment, 51,461,456 shares voted against the amendment
and 6,300,361 shares abstained. The shareholders did not approve the two
shareholder proposals presented in the proxy statement for the meeting. With
respect to the proposal for contributions to political movements and entities,
21,488,653 shares voted for the proposal, 468,986,721 shares voted against the
proposal and 23,419,045 shares abstained. With respect to the proposal to invest
in alternative energy sources, 20,960,670 shares voted for the proposal,
479,045,068 shares voted against the proposal and 13,888,685 shares abstained.
28
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
None.
(b) Reports on Form 8-K
Duke Energy filed no reports on Form 8-K during the second quarter of 2001.
29
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
August 10, 2001 /s/ Robert P. Brace
------------------------------------
Robert P. Brace
Executive Vice President and
Chief Financial Officer
August 10, 2001 /s/ Sandra P. Meyer
-------------------------------------
Sandra P. Meyer
Senior Vice President and
Controller
30