Exhibit 99(c)
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Duke Energy Corporation:
We have audited the accompanying consolidated balance sheets of Duke Energy
Corporation and subsidiaries (Duke Energy) as of December 31, 2001 and 2000, and
the related consolidated statements of income, common stockholders' equity and
comprehensive income, and cash flows for each of the three years in the period
ended December 31, 2001. Our audits also included the financial statement
schedule listed in the Index at Item 14. These financial statements and
financial statement schedule are the responsibility of Duke Energy's management.
Our responsibility is to express an opinion on the financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Duke Energy as of December 31, 2001
and 2000, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, in 2002 Duke
Energy adopted the June 2002 consensus of EITF Issue No. 02-03, "Accounting for
Contracts Involved in Energy Trading and Risk Management Activities," that
required all mark-to-market gains and losses on energy trading contracts to be
shown net in the income statement whether or not settled physically.
/s/ Deloitte & Touche LLP
- -------------------------
Charlotte, North Carolina
February 19, 2002
(March 14, 2002 as to the acquisition of Westcoast Energy, Inc. described in
Note 2 and as to the planned sale of DukeSolutions, Inc. described in Notes 3
and 20)
(January 27, 2003 as to the adoption on January 1, 2002 of Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets,
discussed in Note 1, the reclassification of revenues to a net basis of
reporting, discussed in Note 1 and the impact of restating the business segments
to conform to the presentation adopted during the year ended December 31, 2002
discussed in Note 3)
Item 8. Financial Statements and Supplementary Data.
DUKE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per-share amounts)
Years Ended December 31,
-----------------------------------
2001 2000 1999
-------- -------- ---------
Operating Revenues
Sales of natural gas and petroleum products (Notes 1 and 7) $ 6,193 $ 4,881 $ 2,018
Generation, transmission and distribution of electricity (Notes 1 and 4) 7,195 7,489 5,336
Transportation and storage of natural gas (Notes 1 and 4) 994 1,045 1,139
Trading and marketing net margin (Notes 1 and 7) 2,435 2,302 725
Gain on sale of equity investment (Note 2) - 407 -
Other (Note 8) 1,749 1,181 1,161
-------- -------- ---------
Total operating revenues 18,566 17,305 10,379
-------- -------- ---------
Operating Expenses
Natural gas and petroleum products purchased (Note 1) 6,530 6,089 2,271
Net interchange and purchased power (Notes 1, 4 and 5) 451 406 239
Fuel used in electric generation (Notes 1 and 11) 1,583 1,943 1,008
Other operation and maintenance (Notes 4 and 11) 4,135 3,469 3,703
Depreciation and amortization (Notes 1 and 5) 1,336 1,167 968
Property and other taxes 431 418 371
-------- -------- ---------
Total operating expenses 14,466 13,492 8,560
-------- -------- ---------
Operating Income 4,100 3,813 1,819
Other Income and Expenses 156 201 224
Interest Expense (Notes 7 and 10) 785 911 601
Minority Interest Expense (Notes 2, 12 and 13) 327 307 142
-------- -------- ---------
Earnings Before Income Taxes 3,144 2,796 1,300
Income Taxes (Notes 1 and 6) 1,150 1,020 453
-------- -------- ---------
Income Before Extraordinary Item and Cumulative Effect
of Change in Accounting Principle 1,994 1,776 847
Extraordinary Gain, net of tax (Note 1) - - 660
Cumulative Effect of Change in Accounting Principle, net of tax (Note 1) (96) - -
-------- -------- ---------
Net Income 1,898 1,776 1,507
Preferred and Preference Stock Dividends (Note 14) 14 19 20
-------- -------- ---------
Earnings Available For Common Stockholders $ 1,884 $ 1,757 $ 1,487
======== ======== =========
Common Stock Data (Note 1)
Weighted-average shares outstanding 767 736 729
Earnings per share (before extraordinary item and cumulative effect
of change in accounting principle)
Basic $ 2.58 $ 2.39 $ 1.13
Diluted $ 2.56 $ 2.38 $ 1.13
Earnings per share
Basic $ 2.45 $ 2.39 $ 2.04
Diluted $ 2.44 $ 2.38 $ 2.03
Dividends per share $ 1.10 $ 1.10 $ 1.10
See Notes to Consolidated Financial Statements.
DUKE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Years Ended December 31,
-----------------------------------------
2001 2000 1999
-------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,898 $ 1,776 $ 1,507
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization 1,450 1,348 1,151
Cumulative effect of change in accounting principle 96 - -
Extraordinary gain, net of tax - - (660)
Gain on sale of equity investment - (407) -
Provision on NAWE's California receivables - 110 -
Impairment charges 36 - -
Injuries and damages accrual - - 800
Deferred income taxes 129 152 (210)
Purchased capacity levelization 156 138 104
Transition cost recoveries, net - 82 95
(Increase) decrease in
Net unrealized mark-to-market and hedging transactions 91 (464) (24)
Receivables 3,166 (5,167) (659)
Inventory (192) (100) (89)
Other current assets 694 (796) (138)
Increase (decrease) in
Accounts payable (3,545) 4,867 477
Taxes accrued 183 (439) (57)
Interest accrued 28 64 32
Other current liabilities 297 1,116 73
Other, assets 351 175 221
Other, liabilities (243) (230) 61
-------- --------- ---------
Net cash provided by operating activities 4,595 2,225 2,684
-------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures, net of cash acquired (5,930) (4,568) (5,291)
Investment expenditures (1,093) (966) (596)
Proceeds from sale of subsidiaries and equity investment - 400 1,900
Notes receivable 201 (158) 83
Other 541 362 153
-------- --------- ---------
Net cash used in investing activities (6,281) (4,930) (3,751)
-------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issuance of
Long-term debt 2,673 3,206 3,221
Guaranteed preferred beneficial interests in subordinated notes of
Duke Energy Corporation or subsidiaries - - 484
Common stock and stock options 1,432 230 162
Payments for the redemption of
Long-term debt (1,298) (1,191) (1,505)
Preferred and preference stock (33) (33) (20)
Net change in notes payable and commercial paper (246) 1,484 58
Distributions to minority interests (329) (1,216) -
Contributions from minority interests - 1,116 -
Dividends paid (871) (828) (822)
Other 26 (54) 22
-------- --------- ---------
Net cash provided by financing activities 1,354 2,714 1,600
-------- --------- ---------
Net (decrease) increase in cash and cash equivalents (332) 9 533
Cash and cash equivalents at beginning of period 622 613 80
-------- --------- ---------
Cash and cash equivalents at end of period $ 290 $ 622 $ 613
======== ========= =========
Supplemental Disclosures
Cash paid for interest, net of amount capitalized $ 733 $ 817 $ 541
Cash paid for income taxes $ 770 $ 1,177 $ 732
See Notes to Consolidated Financial Statements.
DUKE ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions)
December 31,
-----------------------------------
2001 2000
---------------- ----------------
ASSETS
Current Assets (Note 1)
Cash and cash equivalents (Note 7) $ 290 $ 622
Receivables (Notes 1 and 7) 5,301 8,648
Inventory (Note 1) 1,017 739
Current portion of purchased capacity costs (Note 5) 160 149
Unrealized gains on mark-to-market and hedging transactions (Notes 1 and 7) 2,326 11,038
Other 451 1,317
---------------- ----------------
Total current assets 9,545 22,513
---------------- ----------------
Investments and Other Assets
Investments in affiliates (Note 8) 1,480 1,387
Nuclear decommissioning trust funds (Note 11) 716 717
Pre-funded pension costs (Note 18) 313 304
Goodwill, net of accumulated amortization (Notes 1 and 2) 1,730 1,566
Notes receivable 576 462
Unrealized gains on mark-to-market and hedging transactions (Notes 1 and 7) 3,117 4,218
Other 1,299 1,143
---------------- ----------------
Total investments and other assets 9,231 9,797
---------------- ----------------
Property, Plant and Equipment (Notes 1, 5, 9, 10 and 11)
Cost 39,464 34,598
Less accumulated depreciation and amortization 11,049 10,146
---------------- ----------------
Net property, plant and equipment 28,415 24,452
---------------- ----------------
Regulatory Assets and Deferred Debits (Notes 1 and 4)
Purchased capacity costs (Note 5) 189 356
Deferred debt expense 203 208
Regulatory asset related to income taxes 510 506
Other (Notes 4 and 15) 282 400
---------------- ----------------
Total regulatory assets and deferred debits 1,184 1,470
---------------- ----------------
Total Assets $ 48,375 $ 58,232
================ ================
See Notes to Consolidated Financial Statements.
DUKE ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions)
December 31,
-----------------------------------
2001 2000
---------------- ----------------
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 4,231 $ 7,733
Notes payable and commercial paper (Notes 7 and 10) 1,603 1,826
Taxes accrued (Note 1) 443 261
Interest accrued 239 208
Current maturities of long-term debt and preferred stock (Notes 10 and 14) 274 470
Unrealized losses on mark-to-market and hedging transactions (Notes 1 and 7) 1,519 11,070
Other (Notes 1 and 15) 2,118 1,769
---------------- ----------------
Total current liabilities 10,427 23,337
---------------- ----------------
Long-term Debt (Notes 7 and 10) 12,321 10,717
---------------- ----------------
Deferred Credits and Other Liabilities (Note 1)
Deferred income taxes (Note 6) 4,307 3,851
Investment tax credit (Note 6) 189 211
Nuclear decommissioning costs externally funded (Note 11) 716 717
Environmental cleanup liabilities (Note 15) 85 100
Unrealized losses on mark-to-market and hedging transactions (Notes 1 and 7) 2,212 3,581
Other (Notes 4 and 15) 1,542 1,574
---------------- ----------------
Total deferred credits and other liabilities 9,051 10,034
---------------- ----------------
Commitments and Contingencies (Notes 5, 11, 15 and 21)
Guaranteed Preferred Beneficial Interests in Subordinated
Notes of Duke Energy Corporation or Subsidiaries (Notes 7 and 12) 1,407 1,406
---------------- ----------------
Minority Interest in Financing Subsidiary (Notes 13 and 21) 1,025 1,025
---------------- ----------------
Minority Interests (Note 2) 1,221 1,410
---------------- ----------------
Preferred and Preference Stock (Notes 7 and 14)
Preferred and preference stock with sinking fund requirements 25 38
Preferred and preference stock without sinking fund requirements 209 209
---------------- ----------------
Total preferred and preference stock 234 247
---------------- ----------------
Common Stockholders' Equity (Notes 1, 16 and 17)
Common stock, no par, 2 billion shares authorized; 777 million and 739 million
shares outstanding at December 31, 2001 and 2000, respectively 6,217 4,797
Retained earnings 6,292 5,379
Accumulated other comprehensive income (loss) 180 (120)
---------------- ----------------
Total common stockholders' equity 12,689 10,056
---------------- ----------------
Total Liabilities and Common Stockholders' Equity $ 48,375 $ 58,232
================ ================
See Notes to Consolidated Financial Statements.
DUKE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(In millions)
Accumulated
Other Total
Common Retained Comprehensive Comprehensive
Stock Earnings Income (Loss) Total Income
- ------------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1998 $ 4,449 $ 3,701 $ - $ 8,150
- ---------------------------------------------------------------------------------------------------------------------
Net income - 1,507 - 1,507 $ 1,507
Other comprehensive income
Foreign currency translation adjustments (Note 1) - - (2) (2) (2)
-------------
Total comprehensive income $ 1,505
=============
Dividend reinvestment and employee benefits (Note 17) 154 - - 154
Common stock dividends - (802) - (802)
Preferred and preference stock dividends (Note 14) - (20) - (20)
Other capital stock transactions, net - 11 - 11
- ---------------------------------------------------------------------------------------------------------------------
Balance December 31, 1999 $ 4,603 $ 4,397 $ (2) $ 8,998
=====================================================================================================================
Net income - 1,776 - 1,776 $ 1,776
Other comprehensive income
Foreign currency translation adjustments (Note 1) - - (118) (118) (118)
-------------
Total comprehensive income $ 1,658
=============
Dividend reinvestment and employee benefits (Note 17) 194 - - 194
Common stock dividends - (809) - (809)
Preferred and preference stock dividends (Note 14) - (19) - (19)
Other capital stock transactions, net - 34 - 34
- ---------------------------------------------------------------------------------------------------------------------
Balance December 31, 2000 $ 4,797 $ 5,379 $ (120) $ 10,056)
=====================================================================================================================
Net income - 1,898 - 1,898 $ 1,898
Other Comprehensive Income /a/
Cumulative effect of change in accounting principle (Note 1) - - (921) (921) (921)
Foreign currency translation adjustments (Note 1) - - (187) (187) (187)
Net unrealized gains on cash flow hedges (Notes 1 and 7) - - 1,324 1,324 1,324
Reclassification into earnings (Notes 1 and 7) - - 84 84 84
-------------
Total comprehensive income $ 2,198
=============
Dividend reinvestment and employee benefits (Note 17) 329 - - 329
Equity offering (Note 16) 1,091 - - 1,091
Common stock dividends, including equity units contract
adjustment (Note 16) - (973) - (973)
Preferred and preference stock dividends (Note 14) - (14) - (14)
Other capital stock transactions, net - 2 - 2
- ---------------------------------------------------------------------------------------------------------------------
Balance December 31, 2001 $ 6,217 $ 6,292 $ 180 $ 12,689
=====================================================================================================================
/a/ Other Comprehensive Income amounts are net of tax, except for foreign
currency translation.
See Notes to Consolidated Financial Statements.
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2001, 2000 and 1999
1. Summary of Significant Accounting Policies
Consolidation. The Consolidated Financial Statements include the accounts of
Duke Energy Corporation and all majority-owned subsidiaries, after eliminating
significant intercompany transactions and balances. Investments in businesses
not controlled by Duke Energy Corporation, but over which it has significant
influence, are accounted for using the equity method.
Conformity with generally accepted accounting principles (GAAP) requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and notes. Although these estimates are based on
management's best available knowledge of current and expected future events,
actual results could be different from those estimates.
In these Notes, "Duke Energy" refers to Duke Energy Corporation and its
subsidiaries.
Cash and Cash Equivalents. All liquid investments with maturities of three
months or less at the date of purchase are considered cash equivalents.
Inventory. Inventory, excluding inventory held for trading, consists primarily
of materials and supplies, natural gas and natural gas liquid (NGL) products
held in storage for transmission, processing and sales commitments, and coal
held for electric generation. This inventory is recorded at the lower of cost or
market value, primarily using the average cost method. Inventory held for
trading is marked to market.
Accounting for Hedges and Trading Activities. All derivatives not qualifying for
the normal purchases and sales exemption under Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities," are recorded on the Consolidated Balance Sheets at their fair value
as Unrealized Gains or Unrealized Losses on Mark-to-Market and Hedging
Transactions. On the date that swaps, futures, forwards or option contracts are
entered into, Duke Energy designates the derivative as either held for trading
(trading instrument); as a hedge of a forecasted transaction or future cash
flows (cash flow hedge); as a hedge of a recognized asset, liability or firm
commitment (fair value hedge); as a normal purchase or sale contract; or leaves
the derivative undesignated and marks it to market.
For hedge contracts, Duke Energy formally assesses, both at the hedge contract's
inception and on an ongoing basis, whether the hedge contract is highly
effective in offsetting changes in fair values or cash flows of hedged items.
The time value of options of $1 million was excluded in the assessment and
measurement of hedge effectiveness for the year ended December 31, 2001.
When available, quoted market prices or prices obtained through external sources
are used to verify a contract's fair value. For contracts with a delivery
location or duration for which quoted market prices are not available, fair
value is determined based on pricing models developed primarily from historical
and expected correlations with quoted market prices.
Values are adjusted to reflect the potential impact of liquidating the positions
held in an orderly manner over a reasonable time period under current
conditions. Changes in market price and management estimates directly affect the
estimated fair value of these contracts. Accordingly, it is reasonably possible
that such estimates may change in the near term.
Trading. Prior to settlement of any energy contract held for trading purposes, a
favorable or unfavorable price movement is reported as Trading and Marketing Net
Margin in the Consolidated Statements of Income. An offsetting amount is
recorded on the Consolidated Balance Sheets as Unrealized Gains or Unrealized
Losses on Mark-to-Market and Hedging Transactions. When a contract to sell or
buy is physically settled, the fair value entries are reversed and the gross
amounts invoiced to the customer or due
44
to the counterparty are included as Trading and Marketing Net Margin in the
Consolidated Statements of Income. For financial settlement, the effect on the
Consolidated Statements of Income is the same as physical transactions. For all
contracts, the unrealized gain or loss on the Consolidated Balance Sheets is
reversed and classified as a receivable or payable account until collected. See
the "New Accounting Standards" section below for a discussion of the
implications of the Financial Accounting Standards Board's (FASB) Emerging
Issues Task Force (EITF) Issue 02-03, "Issues Involved in Accounting for
Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy
Trading and Risk Management Activities," on the accounting for trading
activities prospectively.
Cash Flow Hedges. Changes in the fair value of a derivative designated and
qualified as a cash flow hedge are included in the Consolidated Statements of
Common Stockholders' Equity and 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 because the derivative no longer qualifies as an
effective hedge, the derivative continues 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 previously 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. Gains and losses that were accumulated in OCI will be
immediately 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 long-term debt and designates
such interest rate swaps as fair value hedges. Duke Energy also enters into
electricity derivative instruments such as swaps, futures and forwards to manage
the fair value risk associated with some of its unrecognized firm commitments to
sell generated power due to changes in the market price of power. Upon
designation of such derivatives as fair value hedges, prospective changes in the
fair value of the derivative and the hedged item are recognized in current
earnings in a manner consistent with the earnings effect of the hedged risk. All
components of each derivative gain or loss are included in the assessment of
hedge effectiveness, unless otherwise noted.
Goodwill. Goodwill is the cost of an acquisition less the fair value of the net
assets of the acquired business. Prior to January 1, 2002, Duke Energy amortized
goodwill on a straight-line basis over the useful lives of the acquired assets,
ranging from 10 to 40 years. The amount of goodwill reported on the Consolidated
Balance Sheets as of December 31, 2001 was $1,730 million, net of accumulated
amortization of $388 million. The amount of goodwill as of December 31, 2000 was
$1,566 million, net of accumulated amortization of $291 million. Duke Energy has
implemented SFAS No. 142, "Goodwill and Other Intangible Assets" as of January
1, 2002. For information on the impact of SFAS No. 142 on goodwill and goodwill
amortization, see the New Accounting Standards section of this footnote. (See
Note 2 for information on significant goodwill additions.)
Property, Plant and Equipment. Property, plant and equipment are stated at
historical cost less accumulated depreciation. Duke Energy capitalizes all
construction-related direct labor and material costs, as well as indirect
construction costs. Indirect costs include general engineering, taxes and the
cost of funds used during construction. The cost of renewals and betterments
that extend the useful life of property, plant and equipment is also
capitalized. The cost of repairs, replacements and major maintenance projects is
expensed as it is incurred. Depreciation is generally computed using the
straight-line method. The composite weighted-average depreciation rates,
excluding nuclear fuel, were 4.01% for 2001, 3.97% for 2000 and 3.73% for 1999.
When Duke Energy retires its regulated property, plant and equipment, it charges
the original cost plus the cost of retirement, less salvage, to accumulated
depreciation and amortization. When it sells entire regulated operating units,
or retires or sells non-regulated properties, the property and related
accumulated
45
depreciation and amortization accounts are reduced. Any gain or loss is recorded
as income, unless otherwise required by the Federal Energy Regulatory Commission
(FERC).
Impairment of Long-Lived Assets. Duke Energy reviews the recoverability of
long-lived and intangible assets when circumstances indicate that the carrying
amount of the asset may not be recoverable. This evaluation is based on various
analyses, including undiscounted cash flow projections.
Unamortized Debt Premium, Discount and Expense. Premiums, discounts and expenses
incurred with the issuance of outstanding long-term debt are amortized over the
terms of the debt issues. Any call premiums or unamortized expenses associated
with refinancing higher-cost debt obligations used to finance regulated assets
and operations are amortized consistent with regulatory treatment of those
items, where appropriate.
Environmental Expenditures. Duke Energy expenses environmental expenditures that
relate to conditions caused by past operations that do not generate current or
future revenues. Environmental expenditures related to operations that generate
current or future revenues are expensed or capitalized, as appropriate.
Liabilities are recorded when environmental assessments and/or cleanups are
probable and the costs can be reasonably estimated.
Cost-Based Regulation. Duke Energy's regulated operations are subject to SFAS
No. 71, "Accounting for the Effects of Certain Types of Regulation." The
economic effects of regulation can result in a regulated company recording costs
that have been or are expected to be allowed in the rate-setting process in a
period different from the period in which the costs would be charged to expense
by an unregulated enterprise. Accordingly, Duke Energy records assets and
liabilities that result from the regulated ratemaking process that would not be
recorded under GAAP for non-regulated entities. These regulatory assets and
liabilities are classified in the Consolidated Balance Sheets as Regulatory
Assets and Deferred Debits, and Deferred Credits and Other Liabilities. (See
Note 4.) Duke Energy periodically evaluates the applicability of SFAS No. 71,
and considers factors such as regulatory changes and the impact of competition.
If cost-based regulation ends or competition increases, companies may have to
reduce their asset balances to reflect a market basis less than cost, and write
off their associated regulatory assets.
Stock-Based Compensation. Duke Energy accounts for stock-based compensation
under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees," by which compensation cost is the quoted market price of Duke
Energy stock on the date of the grant minus the amount an employee must pay to
acquire the stock. Restricted stock grants and company performance awards are
recorded over the required vesting period as compensation cost, based on the
market value on the date of the grant. (See Note 17 for pro forma disclosures
using the fair value accounting method.) All outstanding common stock amounts
and compensation awards have been adjusted to reflect the two-for-one common
stock split effective January 26, 2001. (See Note 16 for more information on the
stock split.)
Revenues. Revenues on sales of electricity and on natural gas transportation and
storage are recognized when the service is provided. Revenues on sales of
natural gas and petroleum products, as well as electricity, natural gas and
other energy products marketed, are recognized in the delivery period. The
allowance for doubtful accounts was $265 million as of December 31, 2001 and
$200 million as of December 31, 2000. Receivables on the Consolidated Balance
Sheets included $177 million as of December 31, 2001 and $244 million as of
December 31, 2000 for electric service provided but not yet billed. The amount
for 2001 includes a $36 million reduction in unbilled revenue receivables,
resulting from a refinement in the estimates used to calculate unbilled
kilowatt-hour sales. Pending final approval of rate cases, a portion of revenues
is subject to possible refund, and reserves are established where required.
Long-term contracts, primarily in the Other Energy Services segment, are
accounted for using the percentage-of-completion method. Under the
percentage-of-completion method, sales and gross profit are recognized as the
work is performed based on the relationship between costs incurred and total
estimated costs at completion. Sales and gross profit are adjusted prospectively
for revisions in estimated total
46
contract costs and contract values. When the current estimates of total contract
revenue and contract cost indicate a loss, a provision for the entire loss on
the contract is recorded in that period. The provision for the loss arises
because estimated cost for the contract exceeds estimated revenue.
See "Accounting for Hedges and Trading Activities - Trading" for discussion of
accounting policies for the recognition of revenues related to trading
activities.
Nuclear Fuel. Amortization of nuclear fuel is included in the Consolidated
Statements of Income as Fuel Used in Electric Generation. The amortization is
recorded using the units-of-production method.
Deferred Returns and Allowance for Funds Used During Construction (AFUDC).
Deferred returns, recorded in accordance with SFAS No. 71, represent the
estimated financing costs associated with funding regulatory assets that
primarily arise from the funding of purchased capacity costs above levels
collected in rates. Deferred returns are non-cash items and are primarily
recognized as an addition to Purchased Capacity Costs, with an offsetting credit
to Other Income and Expenses. The amount of deferred returns included in Other
Income and Expenses was $43 million in 2001, $50 million in 2000 and $67 million
in 1999.
AFUDC represents the estimated debt and equity costs of capital funds necessary
to finance the construction of new regulated facilities. AFUDC is a non-cash
item and is recognized as a Property, Plant and Equipment cost, with offsetting
credits to Other Income and Expenses and to Interest Expense. After construction
is completed, Duke Energy is permitted to recover these costs, including a fair
return, by including them in the rate base and in the depreciation provision.
The total amount of AFUDC included in Other Income and Expenses and Interest
Expense was $39 million in 2001, $20 million in 2000 and $23 million in 1999.
Rates used for capitalization of deferred returns and AFUDC by Duke Energy's
regulated operations are calculated in compliance with GAAP rules.
Foreign Currency Translation. Duke Energy translates assets and liabilities for
its international operations, where the local currency is the functional
currency, at year-end exchange rates. Revenues and expenses are translated using
average exchange rates during the year. Foreign Currency Translation Adjustments
are included in the Consolidated Statements of Common Stockholders' Equity and
Comprehensive Income. In the financial statements for international operations,
where the U.S. dollar is the functional currency, transactions denominated in
the local currency have been remeasured in U.S. dollars. Remeasurement resulting
from foreign currency gains and losses is included in consolidated net income.
Income Taxes. Duke Energy and its subsidiaries file a consolidated federal
income tax return. Deferred income taxes have been provided for temporary
differences. These occur when there are differences between the GAAP and tax
carrying amounts of assets and liabilities. These differences create taxable or
tax-deductible amounts for future periods. Investment tax credits have been
deferred and are being amortized over the estimated useful lives of the related
properties.
Excise and Other Pass-Through Taxes. Duke Energy generally presents revenues net
of pass-through taxes on the Consolidated Statements of Income.
47
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 and equity units, were
exercised or converted into common stock. The numerator for the calculation of
both basic and diluted earnings per share is earnings available for common
stockholders. The following table shows the denominator for basic and diluted
earnings per share.
-------------------------------------------------------------------------------------
Denominator for Earnings per Share (in millions)
-------------------------------------------------------------------------------------
2001 2000 1999
-------------------------------------
Denominator for basic earnings per share
(weighted-average shares outstanding) 767.5 735.7 729.3
Assumed exercise of diluted stock equivalents 5.4 3.7 1.6
-------------------------------------
Denominator for diluted earnings per share 772.9 739.4 730.9
-------------------------------------------------------------------------------------
Prior years' common stock amounts have been adjusted to reflect the two-for-one
common stock split effective January 26, 2001. (See Note 16.)
Options to purchase approximately 6.0 million shares of common stock as of
December 31, 2001, 3.3 million shares as of December 31, 2000 and 4.7 million
shares as of December 31, 1999 were not included in the computation of diluted
earnings per share because the option exercise prices were greater than the
average market price of the common shares during the periods.
Cumulative Effect of Change in Accounting Principle. Duke Energy adopted SFAS
No. 133 as amended and interpreted 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 12 months ended
December 31, 2001, Duke Energy reclassified as earnings $222 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.
The Financial Accounting Standards Board's (FASB) Derivative Implementation
Group (DIG), while no longer an active group, was active during 2001. In
December 2001, the DIG issued a final revision to 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, if certain
electricity contracts meet the criteria, they could qualify as a normal purchase
or sale under SFAS No. 133. This new guidance will be effective April 1, 2002.
The original wording of Issue C15, which was effective beginning July 1, 2001,
will apply through the first quarter of 2002. For contracts previously
designated as hedges, Duke Energy treated the change as a de-designation under
SFAS No. 133, and the fair value for each qualifying contract on July 1, 2001
became the contract's net carrying amount. Duke Energy is continuing to
determine the impact of the revision on its future consolidated results of
operations, cash flows and financial position.
Extraordinary Items. In 1999, Duke Energy realized an extraordinary after-tax
gain of $660 million, or $0.91 per share, from the sale of Panhandle Eastern
Pipe Line Company (PEPL), Trunkline Gas Company (Trunkline) and additional
storage related to those systems, along with Trunkline LNG Company, to CMS
Energy Corporation (CMS).
New Accounting Standards. In June 2001, the FASB issued SFAS No. 141, "Business
Combinations," and SFAS No. 142.
48
SFAS No. 141 requires that all business combinations initiated (as defined by
the standard) after June 30, 2001 be accounted for using the purchase method.
Companies may no longer use the pooling method of accounting for future
combinations.
Duke Energy adopted SFAS No. 142, "Goodwill and Other Intangible Assets," 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 are
subject to a fair-value-based annual impairment assessment. Duke Energy did not
recognize any material impairment due to the implementation of SFAS No. 142. The
standard also requires certain identifiable intangible assets to be recognized
separately and amortized as appropriate upon reassessment. No adjustments to
intangibles were identified by Duke Energy at transition.
The following table shows what net income and earnings per share would have been
if amortization (including any related tax effects) related to goodwill that is
no longer being amortized had been excluded from prior periods.
- ----------------------------------------------------------------------------------------------------
Goodwill - Adoption of SFAS No. 142 (in millions, except per share amounts)
- ----------------------------------------------------------------------------------------------------
For the years ended December 31,
--------------------------------------------
2001 2000 1999
--------------------------------------------
Earnings Available for Common Stockholders
Earnings Available for Common Stockholders
Before Extraordinary Item and Cumulative
Effect of Change in Accounting Principle $ 1,980 $ 1,757 $ 827
Extraordinary Gain, net of tax - - 660
Cumulative Effect of Change in Accounting
Principle, net of tax (96) - -
--------------------------------------------
Reported Earnings available for Common Stockholders 1,884 1,757 1,487
Add back: Goodwill amortization, net of tax 75 56 39
--------------------------------------------
Adjusted Earnings Available for Common Stockholders $ 1,959 $ 1,813 $ 1,526
--------------------------------------------
Basic earnings per share (before extraordinary
item and cumulative effect of change in
accounting principle)
Reported earnings per share $ 2.58 $ 2.39 $ 1.13
Goodwill Amortization 0.10 0.07 0.05
--------------------------------------------
Adjusted earnings per share $ 2.68 $ 2.46 $ 1.18
Diluted earnings per share (before extraordinary
item and cumulative effect of change in
accounting principle)
Reported earnings per share $ 2.56 $ 2.38 $ 1.13
Goodwill Amortization 0.10 0.07 0.05
--------------------------------------------
Adjusted earnings per share $ 2.66 $ 2.45 $ 1.18
Basic earnings per share
Reported earnings per share $ 2.45 $ 2.39 $ 2.04
Goodwill amortization 0.10 0.07 0.05
--------------------------------------------
Adjusted earnings per share $ 2.55 $ 2.46 $ 2.09
Diluted earnings per share
Reported earnings per share $ 2.44 $ 2.38 $ 2.03
Goodwill amortization 0.10 0.07 0.05
--------------------------------------------
Adjusted earnings per share $ 2.54 $ 2.45 $ 2.08
- ----------------------------------------------------------------------------------------------------
49
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 provides the accounting requirements for retirement
obligations associated with tangible long-lived assets. It 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 or financial position.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." The new rules supersede SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." The new rules retain many of the fundamental recognition and
measurement provisions, but significantly change the criteria for classifying an
asset as held-for-sale. SFAS No. 144 is effective for fiscal years beginning
after December 15, 2001. Duke Energy has evaluated the new standard, and
management believes that it will have no material adverse effect on Duke
Energy's consolidated results of operations or financial position.
In June 2002, the FASB's EITF reached a partial consensus on Issue No. 02-03,
"Issues Involved in Accounting for Derivative Contracts Held for Trading
Purposes and Contracts Involved in Energy Trading and Risk Management
Activities." The EITF concluded that, effective for periods ending after July
15, 2002, mark-to-market gains and losses on energy trading contracts (including
those to be physically settled) must be shown on a net basis in the Consolidated
Statements of Income. Duke Energy had previously chosen to report certain of its
energy trading contracts on a gross basis, as sales in operating revenues and
the associated costs recorded in operating expenses, in accordance with
prevailing industry practice. The amounts in the comparative Consolidated
Statements of Income have been reclassified to conform to the 2002 presentation.
The following table shows the impact of changing from gross to net presentation
for energy trading activities on Duke Energy's revenues (offsetting adjustments
were made to operating expenses resulting in no impact on net income or cash
flow from operations). In the derivation of net revenues, Duke Energy has
continued to enhance its methodologies around the application of this complex
accounting literature since the third quarter of 2002, when these trading
revenues were first reported on a net basis.
- --------------------------------------------------------------------------------------------------
Revenues - Implementation of Gross vs. Net Presentation in EITF Issue No. 02-03 (in millions)
- --------------------------------------------------------------------------------------------------
For the years ended December
---------------------------------------------------
2001 2000 1999
-----------------------------------------------
Total revenues before adjustment $ 59,503 $ 49,318 $ 21,766
Adjustment (40,974) (32,030) (11,387)
-----------------------------------------------
Revenues as reported $ 18,529 $ 17,288 $ 10,379
- ----------------------------------------------------------------------------------------------
Reclassifications. Certain amounts reported in prior periods have been
reclassified in the Consolidated Financial Statements to conform to current
classifications.
2. Business Acquisitions and Dispositions
Business Acquisitions. Using the purchase method for acquisitions, Duke Energy
consolidates assets and liabilities as of the purchase date, and includes
earnings from acquisitions in consolidated earnings after the purchase date.
Assets acquired and liabilities assumed are recorded at estimated fair values on
the date of acquisition. The purchase price minus the estimated fair value of
the acquired assets and liabilities is recorded as goodwill. In accordance with
SFAS No. 142, goodwill is subject to a fair-value-based annual impairment
assessment beginning January 1, 2002. The allocation of the purchase price may
be adjusted if additional information on asset and liability valuations becomes
available within one year after the acquisition.
Market Hub Partners (MHP). In September 2000, Duke Energy, through a wholly
owned subsidiary, completed the acquisition of MHP from subsidiaries of NiSource
Inc. for approximately $250 million in cash and the assumption of $150 million
in debt. MHP provides natural gas storage services in Louisiana and Texas.
Approximately $228 million of goodwill was recorded in the transaction. MHP debt
agreements required a tender offer for $115 million of the assumed debt. As of
December 31, 2001, approximately $88 million of this debt was retired.
50
Phillips Petroleum's Gas Gathering, Processing and Marketing Unit. In March
2000, Duke Energy, through a wholly owned subsidiary, completed the
approximately $1.7 billion transaction that combined Field Services' and
Phillips Petroleum's gas gathering, processing and marketing business to form a
new midstream company, Duke Energy Field Services, LLC (DEFS). In connection
with the combination, DEFS issued approximately $2.75 billion of commercial
paper in April 2000 and used the proceeds to make one-time cash distributions of
approximately $1.53 billion to Duke Energy and $1.22 billion to Phillips
Petroleum. Duke Energy owns approximately 70% of DEFS and Phillips Petroleum
owns approximately 30%. Goodwill of approximately $432 million was recorded in
the transaction.
East Tennessee Natural Gas Company (ETNG). In March 2000, Duke Energy, through a
wholly owned subsidiary, completed the approximately $390 million acquisition of
ETNG from El Paso Energy. ETNG owns a 1,100-mile interstate natural gas pipeline
system that crosses Duke Energy's Texas Eastern Transmission, LP's pipeline and
serves the southeastern region of the U.S. Goodwill of approximately $125
million was recorded in the transaction.
Dominion Resources' Hydroelectric, Natural Gas and Diesel Power Generation
Businesses. In April 2000, Duke Energy, through its wholly owned subsidiary Duke
Energy International, LLC (DEI), completed the acquisition (which began, and
parts of which had already closed, in 1999) of Dominion Resources Inc.'s
1,200-megawatt portfolio of hydroelectric, natural gas and diesel power
generation businesses in Latin America. The total purchase price was
approximately $405 million. Goodwill totaling $109 million was recorded in the
transaction.
Companhia de Geracao de Energia Eletrica Paranapanema (Paranapanema). In January
2000, Duke Energy, through its wholly owned subsidiary DEI, completed a series
of transactions to purchase for approximately $1.03 billion an approximate 95%
interest in Paranapanema, an electric generating company in Brazil. Goodwill of
approximately $134 million was recorded in the transaction.
Acquisition of Westcoast Energy Inc. (Westcoast). On March 14, 2002, Duke Energy
acquired Westcoast for approximately $8 billion, including the assumption of
debt. Westcoast, headquartered in Vancouver, British Columbia, is a North
American energy company with interests in natural gas gathering, processing,
transmission, storage and distribution, as well as power generation and
international energy businesses. In the transaction, a Duke Energy subsidiary
acquired all of the outstanding common shares of Westcoast in exchange for
approximately 49.9 million shares of Duke Energy common stock (including
exchangeable shares of a Duke Energy Canadian subsidiary that are substantially
equivalent to and exchangeable on a one-for-one basis for Duke Energy common
stock), and approximately $1.8 billion in cash. Under proration provisions that
ensure that approximately 50% of the total consideration is paid in cash and 50%
in stock, each common share of Westcoast entitled the holder to elect to receive
$43.80 in cash (Canadian), .7711 of a share of Duke Energy common stock or of an
exchangeable share of a Duke Energy Canadian subsidiary, or a combination
thereof. The cash portion of the consideration was funded with the proceeds from
the issuance of $750 million in mandatory convertible securities (Equity Units)
in November 2001 (See Note 16) along with incremental commercial paper. Duke
Energy plans to retire the commercial paper later in 2002 and replace it with
permanent capital in the form of mandatory convertible equity. The timing for
the mandatory convertible equity will be dependent on the opportunities
presented and favorable market conditions. The Westcoast acquisition was
accounted for using the purchase method of accounting.
Dispositions. BellSouth Carolina PCS. In September 2000, Duke Energy, through
its wholly owned subsidiary DukeNet Communications, LLC (DukeNet), sold its 20%
interest in BellSouth Carolina PCS for approximately $400 million to BellSouth
Corporation. Operating revenues in 2000 include the resulting pre-tax gain of
$407 million, or an after-tax gain of $0.34 per basic share.
The pro forma results of operations for acquisitions and dispositions do not
materially differ from reported results.
51
3. Business Segments
Duke Energy, an integrated provider of energy and energy services, offers
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. During 2002, management combined Duke Energy Merchants
Holdings, LLC (DEM) with Other Energy Services. Previously, DEM had been
combined with the Duke Energy North America (DENA) business segment to form a
segment called North American Wholesale Energy. Prior years have been
reclassified to conform to the current years presentation.
Franchised Electric generates, transmits, distributes and sells electricity in
central and western North Carolina and western South Carolina. It conducts
operations primarily through Duke Power and Nantahala Power and Light. These
electric operations are subject to the rules and regulations of the FERC, the
North Carolina Utilities Commission (NCUC) and the Public Service Commission of
South Carolina (PSCSC).
Natural Gas Transmission provides transportation and storage of natural gas for
customers throughout North America, primarily in the Mid-Atlantic, New England
and southeastern states. It conducts operations primarily through Duke Energy
Gas Transmission Corporation. Interstate natural gas transmission and storage
operations are subject to the FERC's rules and regulations.
Field Services gathers, processes, transports, markets and stores natural gas
and produces, transports, markets and stores NGLs. It conducts operations
primarily through DEFS, which is approximately 30% owned by Phillips Petroleum.
Field Services operates gathering systems in western Canada and 11 contiguous
states in the U.S. Those systems serve major natural gas-producing regions in
the Rocky Mountain, Permian Basin, Mid-Continent, East Texas-Austin Chalk-North
Louisiana, and onshore and offshore Gulf Coast areas.
DENA develops, operates and manages merchant generation facilities and engages
in commodity sales and services related to natural gas and electric power. DENA
conducts these operations primarily through Duke Energy North America, LLC and
Duke Energy Trading and Marketing, LLC (DETM). DETM is approximately 40% owned
by Exxon Mobil Corporation. DENA conducts business primarily throughout the U.S.
and Canada.
International Energy develops, operates and manages natural gas transportation
and power generation facilities and engages in energy trading and marketing of
natural gas and electric power. It conducts operations primarily through DEI and
its activities target 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. (DE&S), Duke/Fluor Daniel (D/FD) and
DukeSolutions, Inc. (DukeSolutions). Other Energy Services also includes DEM,
which develops new business lines in the evolving energy commodity markets other
than natural gas and power. D/FD is a 50/50 partnership between Duke Energy and
Fluor Enterprises, Inc., a wholly owned subsidiary of Fluor Corporation. (See
Note 8.) On January 31, 2002, Duke Energy announced the planned sale of DE&S to
Framatome ANP, Inc. and, on March 13, 2002, Duke Energy announced the planned
sale of DukeSolutions to Ameresco, Inc. (See Note 20.)
Duke Ventures is composed of other diverse businesses, operating primarily
through Crescent Resources, LLC (Crescent), 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 banking
company, provides debt and equity capital and financial advisory services to the
energy industry.
52
Duke Energy's reportable segments offer different products and services and are
managed separately as strategic business units. Their accounting policies are
the same as those described in Note 1. 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)
- ------------------------------------------------------------------------------------------------
Years Ended December 31,
--------------------------------------------------
2001 2000 1999
--------------------------------------------------
Operating income $4,100 $3,813 $1,819
Other income and expenses 156 201 224
--------------------------------------------------
EBIT $4,256 $4,014 $2,043
- ------------------------------------------------------------------------------------------------
EBIT is the main performance measure used by management to evaluate segment
performance. As an indicator of Duke Energy's operating performance or
liquidity, EBIT should not be considered an alternative to, or more meaningful
than, net income or cash flow as determined in accordance with GAAP. Duke
Energy's EBIT may not be comparable to a similarly titled measure of another
company.
Beginning January 1, 2001, Duke Energy discontinued allocating corporate
governance costs for its business segment analysis. Information for the 2000 and
1999 periods has been reclassified to conform to the current-year presentation.
Other Operations primarily includes certain unallocated corporate costs.
53
In the accompanying table, EBIT includes intersegment sales at prices
representative of unaffiliated party transactions. Capital and investment
expenditures are gross of cash received from acquisitions. The table also
provides information on segment assets, net of intercompany advances,
intercompany notes receivable, intercompany current assets, intercompany
derivative assets and investments in subsidiaries.
- ------------------------------------------------------------------------------------------------------------------------------------
Business Segment Data (in millions)
- ------------------------------------------------------------------------------------------------------------------------------------
Depreciation Capital and
Unaffiliated Intersegment Total and Investment Segment
Revenues Revenues Revenues EBIT Amortization Expenditures Assets
------------------------------------------------------------------------------------------------
Year Ended December 31, 2001
Franchised Electric $ 4,737 $ 9 $ 4,746 $ 1,631 $ 588 $ 1,115 $ 12,964
Natural Gas Transmission 967 138 1,105 608 141 748 5,027
Field Services 6,461 1,617 8,078 336 285 587 7,113
Duke Energy North America 4,845 (1,548) 3,297 1,487 103 3,213 14,107
International Energy 814 16 830 286 97 442 5,115
Other Energy Services 96 438 534 (149) 71 72 1,139
Duke Ventures 646 - 646 183 20 773 1,926
Other Operations - 62 62 (357) 31 90 1,830
Eliminations and minority
interests - (732) (732) 231 - - (846)
------------------------------------------------------------------------------------------------
Total consolidated $ 18,566 $ - $ 18,566 $ 4,256 $ 1,336 $ 7,040 $ 48,375
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 2000
Franchised Electric $ 4,946 $ - $ 4,946 $ 1,820 $ 565 $ 661 $ 12,819
Natural Gas Transmission 998 133 1,131 562 131 973 4,995
Field Services 5,962 1,442 7,404 311 240 376 6,624
Duke Energy North America 3,372 (1,250) 2,122 382 70 1,735 26,664
International Energy 798 7 805 341 97 980 4,551
Other Energy Services 432 529 961 (7) 18 230 2,092
Duke Ventures 797 - 797 568 17 643 1,967
Other Operations - (134) (134) (194) 29 36 2,749
Eliminations and minority
interests - (727) (727) 231 - - (4,229)
------------------------------------------------------------------------------------------------
Total consolidated $ 17,305 $ - $ 17,305 $ 4,014 $ 1,167 $ 5,634 $ 58,232
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1999
Franchised Electric $ 4,700 $ - $ 4,700 $ 942 $ 542 $ 759 $ 13,133
Natural Gas Transmission 1,124 106 1,230 656 126 261 3,897
Field Services 1,694 707 2,401 156 131 1,630 3,565
Duke Energy North America 1,425 (595) 830 219 57 1,028 6,268
International Energy 323 34 357 44 58 1,779 4,459
Other Energy Services 680 309 989 (86) 14 94 612
Duke Ventures 433 - 433 165 13 382 1,031
Other Operations - (162) (162) (145) 27 3 1,250
Eliminations and minority
interests - (399) (399) 92 - - (806)
------------------------------------------------------------------------------------------------
Total consolidated $ 10,379 $ - $ 10,379 $ 2,043 $ 968 $ 5,936 $ 33,409
- ------------------------------------------------------------------------------------------------------------------------------------
54
- -----------------------------------------------------------------------------------------------------------
Geographic Data (in millions)
- -----------------------------------------------------------------------------------------------------------
Latin Other
U.S. Canada America Foreign Consolidated
- -----------------------------------------------------------------------------------------------------------
2001
Consolidated revenues $16,139 $1,775 $ 196 $ 456 $18,566
Consolidated long-term assets 34,150 516 2,573 1,594 38,833
- -----------------------------------------------------------------------------------------------------------
2000
Consolidated revenues $15,187 $1,742 $ 180 $ 196 $17,305
Consolidated long-term assets 30,772 900 2,823 1,222 35,717
- -----------------------------------------------------------------------------------------------------------
1999
Consolidated revenues $ 9,220 $ 957 $ 82 $ 120 $10,379
Consolidated long-term assets 22,995 250 2,708 901 26,854
- -----------------------------------------------------------------------------------------------------------
4. Regulatory Matters
Regulatory Assets and Liabilities
Duke Energy's regulated operations are subject to SFAS No. 71. Accordingly, Duke
Energy records assets and liabilities that result from the regulated ratemaking
process that would not be recorded under GAAP for non-regulated entities. (See
Note 1.) The following table details Duke Energy's regulatory assets and
liabilities.
- -----------------------------------------------------------------------------------------------
Regulatory Assets and Liabilities (in millions)
- -----------------------------------------------------------------------------------------------
December 31,
- -----------------------------------------------------------------------------------------------
Assets (Liabilities) 2001 2000
- -----------------------------------------------------------------------------------------------
Purchased capacity costs (see Note 5) $ 349 $ 505
Deferred debt expense 203 208
Regulatory asset related to income taxes 510 506
Department of Energy (DOE) assessment fee /a/ 53 62
Emission allowance control /a/ 10 14
Demand-side management costs /a/ 57 71
Environmental cleanup costs /a/ 29 28
Nuclear property and liability reserves /b/ (100) (100)
Fuel cost liabilities /b/ (17) (45)
- -----------------------------------------------------------------------------------------------
/a/ Included in Other Regulatory Assets and Deferred Debits on the Consolidated
Balance Sheets
/b/ Included in Other Deferred Credits and Other Liabilities on the
Consolidated Balance Sheets
Franchised Electric. The NCUC and the PSCSC approve rates for retail electric
sales within their states. The FERC approves Franchised Electric's rates for
electric sales to wholesale customers, excluding the other joint owners of the
Catawba Nuclear Station. Electric sales to the other joint owners of the Catawba
Nuclear Station are set through contractual agreements. (See Note 5 for
ownership interests in Catawba Nuclear Station.)
Fuel costs are reviewed semiannually by the FERC and annually by the PSCSC, with
provisions for reviewing those costs in base rates. The NCUC reviews fuel costs
in rates annually and during general rate case proceedings. All jurisdictions
allow Duke Energy to adjust electric rates for past over- or under-recovery of
fuel costs. The difference between actual fuel costs incurred for electric
operations and fuel costs recovered through rates is reflected in revenues.
In 1999 and 2000, the FERC issued its Order 2000 and Order 2000-A regarding
Regional Transmission Organizations (RTOs). These orders set minimum
characteristics and functions RTOs must meet, including independent authority to
establish the terms and conditions of transmission service over the facilities
they
55
control. The orders provide for an open and flexible RTO structure to meet the
needs of the market, and for the possibility of incentive ratemaking and other
benefits for transmission owners that participate.
As a result of these rulemakings, Duke Energy and two other investor-owned
utilities, Carolina Power & Light Company and South Carolina Electric & Gas
Company, planned to establish GridSouth Transco, LLC (GridSouth), as an RTO
responsible for the control of the companies' combined transmission systems. In
March 2001, GridSouth received provisional approval from the FERC. However, in
July 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. The FERC has not issued an
order specifically based on those proceedings.
Duke Energy, Carolina Power & Light Company and South Carolina Electric & Gas
Company remain committed to the GridSouth RTO, but due to regulatory
uncertainties in the RTO arena, the companies have withdrawn their applications
to the PSCSC and NCUC to transfer functional control of their electric
transmission assets to GridSouth. The companies intend to file new applications
before the state commissions in the near future, including a revised GridSouth
structure designed to meet the needs of customers and regulators. Also, in
January of 2002, GridSouth signed a memorandum of understanding with the
representatives of SeTrans Grid Company (SeTrans), a group of investor-owned
utilities and public power entities in several southeastern states seeking to
form an RTO, to cooperate in discussing potential operational relationships
between GridSouth and SeTrans and the structure of wholesale electric markets in
the southeast U.S.
The actual structure of GridSouth or an alternative combined transmission
structure and the date it will become operational depend upon the resolution of
all regulatory approvals and technical issues. Management believes that the
result of this process, and the establishment and operation of GridSouth or an
alternative combined transmission system structure, will have no material
adverse effect on Duke Energy's future consolidated results of operations, cash
flows or financial position.
In 2001, the NCUC and PSCSC began a joint investigation, along with the Public
Staff of the NCUC, regarding certain Duke Power regulatory accounting entries
for 1998. In its internal review of the 14 entries in question, Duke Energy
concluded that nine items were correctly classified for regulatory accounting.
Four items were incorrectly classified for regulatory purposes for 1998 only,
and did not recur. The classification of the remaining item, distributions from
a mutual insurance company, is subject to differing regulatory interpretations.
Duke Energy believes this item was appropriately classified, but is evaluating
its classification for future years. As part of their investigation, the NCUC
and PSCSC have jointly engaged an independent firm to conduct an audit of Duke
Power's accounting records for reporting periods from 1998 through June 30,
2001. Duke Energy continues to fully cooperate with the commissions in their
investigation. As requested by the NCUC, Duke Energy has recorded the 2001
mutual insurance distribution, approximately $33 million, in a deferred credit
account on the Consolidated Balance Sheets, pending final outcome of the
independent audit.
Natural Gas Transmission. In 2000, the FERC issued Order 637, which sets forth
revisions to its regulations governing short-term natural gas transportation
services and policies governing the regulation of interstate natural gas
pipelines. "Short-term" has been defined as all transactions of less than one
year. Among the significant actions taken are the lifting of the price cap for
short-term capacity release by pipeline customers for an experimental 2 1/2-year
period ending September 1, 2002, and requiring interstate pipelines to file pro
forma tariff sheets to (i) provide for nomination equality between capacity
release and primary pipeline capacity; (ii) implement imbalance management
services (for which interstate pipelines may charge fees) while at the same time
reducing the use of operational flow orders and penalties; and (iii) provide
segmentation rights if operationally feasible. Order 637 also narrows the right
of first refusal to remove economic biases perceived in the current rule. Order
637 imposes significant new reporting requirements for interstate pipelines that
were implemented by Duke Energy during 2000. Additionally, Order 637 permits
pipelines to propose peak/off-peak rates and term-differentiated rates, and
encourages pipelines to propose experimental capacity auctions. By Order
56
637-A, issued in 2000, the FERC generally denied requests for rehearing and
several parties, including Duke Energy, have filed appeals in the District of
Columbia Court of Appeals seeking court review of various aspects of the Order.
During the third quarter of 2001, Duke Energy's interstate pipelines submitted
revised pro forma tariff sheets to update the filings originally submitted in
2000. These filings are currently subject to review and approval by the FERC.
Management believes that the effects of these matters will have no material
adverse effect on Duke Energy's future consolidated results of operations, cash
flows or financial position.
Notice of Proposed Rulemaking (NOPR). On September 27, 2001, the FERC issued a
NOPR announcing that it is considering new regulations regarding standards of
conduct that would apply uniformly to natural gas pipelines and electric
transmitting public utilities that are currently subject to different gas or
electric standards. The proposed standards would change how companies and their
affiliates interact and share information by broadening the definition of
"affiliate" covered by the standards of conduct, from the more narrow definition
in the existing regulations. The NOPR also seeks comment on whether the
standards of conduct should be broadened to include the separation of those
involved in the bundled retail electric sales function from those in the
transmission function, as the current standards apply only to those involved in
wholesale activities. Various entities filed comments on the NOPR with the FERC,
including Duke Energy which filed on December 20, 2001. The FERC has indicated
that they appreciate the complexity of the issues and that they would prefer
having a technical conference before entering directly into a final rulemaking.
No notice of a technical conference has been given at this time.
See Note 21 to the Consolidated Financial Statements for information regarding
subsequent events related to regulatory matters.
5. Joint Ownership of Generating Facilities
- -----------------------------------------------------------------------------------------
Joint Ownership of Catawba Nuclear Station /a/
- -----------------------------------------------------------------------------------------
Owner Ownership Interest
- -----------------------------------------------------------------------------------------
North Carolina Municipal Power Agency Number 1 (NCMPA) 37.5%
North Carolina Electric Membership Corporation (NCEMC) 28.1%
Duke Energy Corporation 12.5%
Piedmont Municipal Power Agency (PMPA) 12.5%
Saluda River Electric Cooperative, Inc. (Saluda River) 9.4%
---------------------
100.0%
- -----------------------------------------------------------------------------------------
/a/ Facility operated by Duke Energy
As of December 31, 2001, $536 million of property, plant and equipment and $296
million of accumulated depreciation and amortization represented Duke Energy's
undivided interest in Catawba Nuclear Station Units 1 and 2. Duke Energy's share
of operating costs is included in the Consolidated Statements of Income.
Contractual agreements to purchase declining percentages of the generating
capacity and energy from the station through the year 2000 resulted in purchased
capacity costs subject to rate levelization and deferral. The cost of capacity
purchased but not reflected in current rates is reported in the Consolidated
Balance Sheets as Current Portion of Purchased Capacity Costs and Purchased
Capacity Costs. Those costs were $349 million as of December 31, 2001 and $505
million as of December 31, 2000. Duke Energy expects to recover the accumulated
balance, including returns on the deferred balance, through 2004. The amounts
levelized in rates are intended to recover total costs, including deferred
returns, and are subject to adjustments, including final true-ups. Purchased
capacity and energy costs from the other joint owners were not material for
2001, but were approximately $7 million for 2000 and $62 million for 1999. After
adjustments for current rates, these amounts are included in the Consolidated
Statements of Income as Net Interchange and Purchased Power.
57
The interconnection agreements also provide for supplemental power sales by Duke
Energy to the other joint owners of Catawba Nuclear Station, to satisfy their
capacity and energy needs beyond what they retain from the station or acquire
elsewhere. NCEMC, Saluda River and NCMPA have elected to buy power outside of
these contractual agreements effective January 1, 2001. Management believes this
will have no material adverse effect on Duke Energy's consolidated results of
operations, cash flows or financial position. PMPA will continue to receive
supplemental power sales from Duke Energy through December 31, 2005.
6. Income Taxes
- ----------------------------------------------------------------------------------------------------------------------
Income Tax Expense (in millions)
- ----------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31,
-------------------------------------------
2001 2000 1999
-------------------------------------------
Current income taxes
Federal $ 826 $ 679 $ 525
State 106 109 138
Foreign 24 18 1
-------------------------------------------
Total current income taxes 956 806 664
-------------------------------------------
Deferred income taxes, net
Federal 165 187 (126)
State 9 13 (65)
Foreign 33 29 (1)
-------------------------------------------
Total deferred income taxes, net 207 229 (192)
-------------------------------------------
Investment tax credit amortization /c/ (13) (15) (19)
-------------------------------------------
Total income tax expense $1,150 /a/ $1,020 $ 453 /b/
- ----------------------------------------------------------------------------------------------------------------------
/a/ Excludes $59 million of deferred federal and state tax benefits related to
the cumulative effect of change in accounting principle recorded net of tax.
(See Note 1.)
/b/ Excludes $404 million of current federal and state tax expense related to
the extraordinary item recorded net of tax. (See Note 1.)
/c/ Unamortized investment tax credit was $189 million at December 31, 2001.
- --------------------------------------------------------------------------------------------------------------------
Income Tax Expense Reconciliation to Statutory Rate (in millions)
- --------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31,
-----------------------------------------
2001 2000 1999
-----------------------------------------
Income tax, computed at the statutory rate of 35% $1,100 $ 979 $ 455
Adjustments resulting from
State income tax, net of federal income tax effect 74 75 47
Favorable resolution of federal tax issues (11) (18) (30)
Other items, net (13) (16) (19)
-----------------------------------------
Total income tax expense $1,150 $1,020 $ 453
- --------------------------------------------------------------------------------------------------------------------
Effective tax rate 36.6% 36.5% 34.9%
- --------------------------------------------------------------------------------------------------------------------
58
- --------------------------------------------------------------------------------------------------------
Net Deferred Income Tax Liability Components (in millions)
- --------------------------------------------------------------------------------------------------------
December 31,
--------------------------
2001 2000
--------------------------
Deferred credits and other liabilities $ 507 $ 429
International property, plant and equipment 109 153
Other 58 10
----------------------
Total deferred income tax assets 674 592
Valuation allowance (17) (9)
----------------------
Net deferred income tax assets 657 583
----------------------
Investments and other assets (711) (320)
Accelerated depreciation rates (2,885) (2,707)
Regulatory assets and deferred debits (290) (326)
Regulatory asset related to restating to pre-tax basis (465) (429)
----------------------
Total deferred income tax liability (4,351) (3,782)
----------------------
State deferred income tax, net of federal tax effect (333) (320)
----------------------
Total net deferred income tax liability $(4,027) $ (3,519)
- ----------------------------------------------------------------------------------------------------
7. Derivative Instruments, Hedging Activities and Credit Risk
Duke Energy, substantially through its subsidiaries, is exposed to the impact of
market fluctuations in the price of natural gas, electricity and other
energy-related products marketed and purchased. Duke Energy employs established
policies and procedures to manage its risks associated with these market
fluctuations using various commodity derivatives, including forward contracts,
futures, swaps and options for trading purposes and for activity other than
trading activity (primarily hedge strategies). The following table shows the
fair value of Duke Energy's derivative portfolio as of December 31, 2001.
- -------------------------------------------------------------------------------------------------------------
Fair Value of Contracts as of December 31, 2001 (in millions)
------------------------------------------------------------------------
Maturity in
Type of Contract Maturity in Maturity in Maturity in 2005 and Total Fair
2002 2003 2004 Thereafter Value
- -------------------------------------------------------------------------------------------------------------
Trading contracts $353 $164 $137 $415 $1,069
Hedge contracts 454 156 71 (38) 643
- ---------------------------------------------------------------------------------------------------------
Total $807 $320 $208 $377 $1,712
- ---------------------------------------------------------------------------------------------------------
Commodity Cash Flow Hedges. Some Duke Energy subsidiaries 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, enters into contracts to protect margins for a portion of
future sales and generation revenues. Duke Energy uses commodity instruments,
consisting of swaps, futures, forwards and collared options, as cash flow hedges
for natural gas, electricity and NGL transactions. Duke Energy is hedging
exposures to the price variability of these commodities for a maximum of nine
years.
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
in 2001. As of December 31, 2001, $323 million of after-tax deferred net gains
on derivative instruments accumulated in OCI are expected to be recognized in
earnings during the next 12 months as the hedged transactions occur. However,
due to the volatility of the commodities markets, the corresponding value in OCI
is subject to change prior to its reclassification into earnings.
Commodity Fair Value Hedges. Some Duke Energy subsidiaries are exposed to
changes in the fair value of unrecognized firm commitments to sell generated
power or natural gas due to market fluctuations in the
59
underlying commodity prices. Duke Energy actively evaluates changes in the fair
value of such unrecognized firm commitments due to commodity price changes and,
where appropriate, uses various instruments to hedge its market risk. These
commodity instruments, consisting of swaps, futures and forwards, serve as fair
value hedges for the firm commitments associated with generated power and
natural gas sales. Duke Energy is hedging exposures to the market risk of such
items for a maximum of 13 years. For 2001, the ineffective portion of commodity
fair value hedges was not material.
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 use 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 of potential financial exposure to
management. 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. Changes in interest rates expose
Duke Energy to risk as a result of its issuance of variable-rate debt,
fixed-to-floating interest rate swaps, commercial paper and auction market
preferred stock. 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. Duke Energy also enters into financial derivative
instruments, including, but not limited to, interest rate swaps, options,
swaptions and lock agreements to manage and mitigate interest rate risk
exposure. Duke Energy's existing interest rate derivative instruments and
related ineffectiveness were not material to its consolidated results of
operations, cash flows or financial position in 2001.
- -----------------------------------------------------------------------------------------------------------
Interest Rate Derivatives (dollars in millions)
- -----------------------------------------------------------------------------------------------------------
December 31,
--------------------------------------------------------------------------------
2001 2000
-------------------------------------- -----------------------------------------
Notional Fair Contracts Notional Fair Contracts
Amounts Value Expire Amounts Value Expire
------------ ---------- -------------- -------------- --------- ----------------
Fixed-to-floating rate
swaps $875 $20 2003 - 2019 $275 $27 2009
Cancelable fixed-to-
floating rate swaps 455 7 2014 - 2025 630 20 2004 - 2022
CP /a/ floating-to-fixed
rate swaps - - - 100 (1) 2001
Interest rate locks - - - 275 (9) 2011
- -------------------------- ------------ ---------- -------------- -------------- --------- ----------------
/a/ Commercial paper
Gains and losses deferred in anticipation of planned financing transactions on
interest rate swap derivatives are included in OCI and amortized over the life
of the underlying debt once issued. These deferred gains and losses were not
material in 2001 or 2000. As a result of the interest rate swap contracts,
interest expense for the relative notional amount is recognized at the
weighted-average rates as depicted in the following table.
- --------------------------------------------------------------------------------------------------
Weighted-Average Rates for Interest Rate Swaps
- -------------------------------------------- -----------------------------------------------------
For the Years Ended December 31,
-----------------------------------------------------
2001 2000 1999
- -------------------------------------------- ----------------- ----------------- -----------------
Fixed-to-floating rate swaps 3.92% 6.50% 5.71%
Cancelable fixed-to-floating rate swaps 3.23% 5.09% -
Commercial paper swaps - 6.11% 4.95%
- -------------------------------------------- ----------------- ----------------- -----------------
Foreign Currency (Fair Value or Cash Flow) Hedges. Duke Energy is exposed to
foreign currency risk from investments in international affiliates and
businesses owned and operated in foreign countries. To
60
mitigate risks associated with foreign currency fluctuations, when possible,
transactions are denominated in or indexed to the U.S. dollar and/or local
inflation rates, or investments may be hedged through debt denominated or issued
in the foreign currency. Duke Energy also uses foreign currency derivatives,
where possible, to manage its risk related to foreign currency fluctuations. In
2001, the impact of Duke Energy's foreign currency derivative instruments was
not material to its consolidated results of operations, cash flows or financial
position.
Financial Instruments. The fair value of financial instruments not currently
carried at market value is summarized in the following table. Judgment is
required in interpreting market data to develop the estimates of fair value.
Accordingly, the estimates determined as of December 31, 2001 and 2000, are not
necessarily indicative of the amounts Duke Energy could have realized in current
markets.
- -----------------------------------------------------------------------------------------------------------------
Financial Instruments (in millions)
- -----------------------------------------------------------------------------------------------------------------
2001 2000
---------------------------------------------------------------------
Approximate Approximate
Book Value Fair Value Book Value Fair Value
---------------------------------------------------------------------
Long-term debt /a/ $12,582 $13,239 $11,154 $11,896
Guaranteed preferred beneficial interests
in subordinated notes of Duke Energy or
subsidiaries 1,407 1,440 1,406 1,389
Preferred stock /a/ 247 242 280 275
- -----------------------------------------------------------------------------------------------------------------
/a/ Includes current maturities
The fair value of cash and cash equivalents, notes receivable, notes payable and
commercial paper are not materially different from their carrying amounts
because of the short-term nature of these instruments or because the stated
rates approximate market rates.
Credit Risk. Duke Energy's principal customers 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 those limits on an
ongoing basis. Duke Energy frequently uses master collateral agreements to
mitigate credit exposure. The collateral agreement provides for a counterparty
to post cash or letters of credit for exposure in excess of the established
threshold. The threshold amount represents an open credit limit, determined in
accordance with the corporate credit policy. The collateral agreement also
provides that the inability to post collateral is sufficient cause to terminate
a contract and liquidate all positions.
The change in market value of New York Mercantile Exchange-traded futures and
options contracts requires daily cash settlement in margin accounts with
brokers. Financial derivatives are generally cash settled periodically
throughout the contract term. However, these transactions are also generally
subject to margin agreements with many of Duke Energy's counterparties.
As of December 31, 2001, Duke Energy had a pre-tax bad debt provision of $90
million related to receivables for energy sales in California. (See Note 15 for
further information regarding market and credit exposure.) Following the
bankruptcy of Enron Corporation, Duke Energy terminated substantially all
contracts with Enron Corporation and its affiliated companies (collectively,
Enron). As a result, Duke Energy recorded, as a charge, a non-collateralized
accounting exposure of $43 million. The $43 million non-collateralized
accounting exposure is comprised of charges of $24 million at Other Energy
Services, $12 million at DENA, $3 million at International Energy, $3 million at
Field Services and $1 million at
61
Natural Gas Transmission. These amounts are stated on a pre-tax basis as charges
against the reporting segment's earnings.
The transactions between Enron and Duke Energy consisted of the following:
.. DENA and Other Energy Services - forward contracts, swaps, options and
physical contracts used to trade natural gas, power, crude oil, liquefied
petroleum gas and coal
.. International Energy - forward contracts and options used to trade and
hedge natural gas, power and oil
.. Field Services - physical purchase/sale contracts for natural gas and NGLs;
forward contracts, swaps and options used to trade natural gas and NGLs;
transportation and storage
.. Natural Gas Transmission - forward financial sales of NGLs
The $43 million charge was a direct reduction to earnings before income taxes
and was a result of charging the full amount of unsettled mark-to-market
earnings previously recognized, and all derivative assets and accounts
receivable that became impaired due to Enron's financial deterioration. All
assets written off or reserved for were net of the margin (cash collateral)
posted by Enron of $330 million and applied by Duke Energy in connection with
transactions between the companies.
Duke Energy's determination of its bankruptcy claims against Enron is still
under review, and its claims made in the bankruptcy case are likely to exceed
$43 million. Any bankruptcy claims that exceed this amount would primarily
relate to termination and settlement rights under contracts and transactions
with Enron that would have been recognized in future periods, and not in the
historical periods covered by the financial statements to which the $43 million
charge relates.
Substantially all contracts with Enron were completed or terminated prior to
December 31, 2001. Duke Energy has continuing contractual relationships with
certain Enron affiliates, which are not in bankruptcy. In Brazil, a power
purchase agreement between a Duke Energy affiliate, Paranapanema, and Elektro
Eletricidade e Servicos S/A (Elektro), a distribution company 40% owned by
Enron, will expire December 31, 2005. The contract was executed by Duke Energy's
predecessor in interest in Paranapanema, and obligates Paranapanema to provide
energy to Elektro on an irrevocable basis for the contract period. In addition,
a purchase/sale agreement expiring September 1, 2005 between a Duke Energy
affiliate and Citrus Trading Corporation (Citrus), a 50/50 joint venture between
Enron and El Paso Corporation, continues to be in effect. The contract requires
the Duke Energy affiliate to provide liquefied natural gas to Citrus. Citrus has
provided a letter of credit in favor of Duke Energy to cover its exposure.
8. Investment in Affiliates and Related Party Transactions
Investments in domestic and international affiliates that are not controlled by
Duke Energy, but over which it has significant influence, are accounted for by
the equity method. These investments include undistributed earnings of $166
million in 2001 and $70 million in 2000. Duke Energy received distributions of
$158 million in 2001, $138 million in 2000 and $111 million in 1999 from these
investments. Duke Energy's share of net income from these affiliates is
reflected in the Consolidated Statements of Income as Other Operating Revenues.
Natural Gas Transmission. Investments primarily include a 37.5% interest in the
Maritimes & Northeast Pipeline and a 50% interest in Gulfstream Natural Gas
System, LLC. The Maritimes & Northeast Pipeline is composed of Canadian and U.S.
natural gas pipeline joint ventures that together transport natural gas into the
U.S. from Canada. Gulfstream Natural Gas System, LLC is a joint interstate
natural gas pipeline development that will extend from Mississippi and Alabama
across the Gulf of Mexico to Florida.
Field Services. Investments primarily include a 21.1% ownership interest in
TEPPCO Partners, LP, a publicly traded limited partnership which owns and
operates a network of pipelines for refined products and crude oil.
62
Duke Energy North America. Significant investments include a 50% interest in
American Ref-Fuel Company, LLC and a 50% interest in Southwest Power Partners,
LLC. American Ref-Fuel Company, LLC owns and operates facilities that convert
waste to energy. Southwest Power Partners, LLC is a gas-fired combined-cycle
facility under construction in Arizona. Once completed, this facility will serve
markets in Arizona, Nevada and California.
International Energy. Significant investments include a 25% indirect interest in
National Methanol Company, which owns and operates a methanol and MTBE (methyl
tertiary butyl ether) business in Jubail, Saudi Arabia.
Other Energy Services. Investments include participation in various construction
and support activities for fossil-fueled generating plants.
Duke Ventures. Significant investments include various real estate development
projects.
- ---------------------------------------------------------------------------------------------------------------------------
Investment in Affiliates (in millions)
- ---------------------------------------------------------------------------------------------------------------------------
December 31, 2001 December 31, 2000 December 31, 1999
-----------------------------------------------------------------------------------------------------
Domestic International Total Domestic International Total Domestic International Total
- ---------------------------------------------------------------------------------------------------------------------------
Natural Gas
Transmission $ 565 $ 88 $ 653 $ 82 $ 88 $ 170 $ 67 $ 83 $ 150
Field Services 252 - 252 373 - 373 439 - 439
Duke Energy North
America 315 - 315 610 - 610 425 - 425
International
Energy - 165 165 - 154 154 - 224 224
Other Energy
Services 53 7 60 36 16 52 51 6 57
Duke Ventures 30 - 30 23 - 23 10 - 10
Other Operations 5 - 5 5 - 5 - - -
-----------------------------------------------------------------------------------------------------
Total $1,220 $ 260 $ 1,480 $ 1,129 $ 258 $ 1,387 $ 992 $313 $ 1,305
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Equity in Earnings of Investment (in millions)
- ---------------------------------------------------------------------------------------------------------------------------
For the years ended:
December 31, 2001 December 31, 2000 December 31, 1999
-----------------------------------------------------------------------------------------------------
Domestic International Total Domestic International Total Domestic International Total
- ---------------------------------------------------------------------------------------------------------------------------
Natural Gas
Transmission $ 38 $ 7 $ 45 $ 13 $ 4 $ 17 $ 16 $ 9 $ 25
Field Services 45 - 45 39 - 39 44 - 44
Duke Energy North
America 35 - 35 45 - 45 47 - 47
International
Energy - 39 39 - 43 43 - 10 10
Other Energy
Services 49 - 49 (22) - (22) 10 3 13
Duke Ventures 2 - 2 (9) - (9) (22) - (22)
Other Operations (47) - (47) (10) - (10) (5) - (5)
-----------------------------------------------------------------------------------------------------
Total $ 122 $ 46 $ 168 $ 56 $ 47 $ 103 $ 90 $ 22 $ 112
- ---------------------------------------------------------------------------------------------------------------------------
63
- --------------------------------------------------------------------------------
Summarized Combined Financial Information of Unconsolidated Affiliates
(in millions)
- --------------------------------------------------------------------------------
December 31,
-----------------------------------------
2001 2000 1999
-----------------------------------------
Balance Sheet
Current assets $1,239 $1,242 $1,544
Noncurrent assets 8,199 6,588 7,826
Current liabilities 1,202 888 1,155
Noncurrent liabilities 4,400 4,404 4,727
-----------------------------------------
Net assets $3,836 $2,538 $3,488
================================================================================
Income Statement
Operating revenues $5,202 $4,617 $3,510
Operating expenses 4,525 4,039 3,104
Net income 499 440 193
- --------------------------------------------------------------------------------
Related Party Transactions. Outstanding notes receivable from affiliates were
$25 million as of December 31, 2001 and $70 million as of December 31, 2000.
Duke Energy and Fluor Enterprises, Inc. formed the D/FD 50/50 partnership in
1989. The partnership provides full-service siting, permitting, licensing,
engineering, procurement, construction, start-up, operating and maintenance
services for fossil-fired plants in the U.S. and internationally. D/FD is the
primary builder for DENA's merchant generation plants currently under
construction. Fifty percent of the profit earned by D/FD for the construction of
DENA's merchant generation plants, which is associated with Duke Energy's
ownership, is deferred in consolidation until the plant is sold as part of
DENA's portfolio management strategy, or once the plant becomes operational it
is amortized over the plant's useful life. Fifty percent of the profit earned by
D/FD for operating and maintenance services, which is associated with Duke
Energy's ownership, is eliminated in consolidation. For the year ended December
31, 2001, Duke Energy deferred profit of $54 million for D/FD construction
contracts, and eliminated profit of $9 million for operating and maintenance
services. For the year ended December 31, 2000, Duke Energy deferred profit of
$16 million for construction contracts. There was no profit from operating and
maintenance services to be eliminated in 2000. For the year ended December 31,
1999, Duke Energy deferred profit of $6 million for construction contracts.
There was no profit from operating and maintenance services to be eliminated in
1999. In addition, as part of the D/FD partnership agreement, excess cash is
loaned at current market rates to Duke Energy and Fluor Enterprises, Inc. (See
Note 10.)
In the normal course of business, Duke Energy's consolidated subsidiaries enter
into energy trading contracts with one another. On a stand-alone basis, the
accounting for such contracts may differ by counterparty. For example, DETM, an
energy-trading subsidiary within the scope of EITF Issue No. 98-10, "Accounting
for Energy Trading and Risk Management Activities," may enter into a contract to
purchase natural gas storage from DEFS. DEFS may treat this contract as a hedge
position, and DETM may mark to market the contract through its current earnings.
In the consolidation process, the effects of this contract are eliminated, and
not reflected in Duke Energy's Consolidated Financial Statements. In all cases,
energy trading contracts (and any resulting mark-to-market gains or losses)
between consolidated subsidiaries are eliminated in the consolidation process.
Also see Note 13, Minority Interest Financing, for additional related party
information.
64
9. Property, Plant and Equipment
- ---------------------------------------------------------------------------
Net Property, Plant and Equipment (in millions)
- ---------------------------------------------------------------------------
December 31,
---------------------------
2001 2000
---------------------------
Land $ 49 $ 36
Plant
Electric generation, distribution and
transmission 19,792 18,669
Natural gas transmission 6,200 5,449
Gathering and processing facilities 4,106 4,470
Other buildings and improvements 1,346 1,339
Leasehold improvements 4 14
Nuclear fuel 788 761
Equipment 251 108
Vehicles 69 36
Construction in process 5,068 2,192
Other 1,791 1,524
---------------------------
Total property, plant and equipment 39,464 34,598
Total accumulated depreciation /a/ (11,049) (10,146)
---------------------------
Total net property, plant and equipment $28,415 $24,452
===========================================================================
/a/ Includes accumulated amortization of nuclear fuel: 2001 - $546 million;
2000 - $503 million
Capitalized interest of $167 million for 2001, $67 million for 2000 and $52
million for 1999 is included in the Consolidated Statements of Income.
10. Debt and Credit Facilities
- -----------------------------------------------------------------------------------------------------------------
Debt (in millions)
- -----------------------------------------------------------------------------------------------------------------
December 31,
-----------------------------
Year Due 2001 2000
- -----------------------------------------------------------------------------------------------------------------
Duke Energy
- -----------
First and refunding mortgage bonds
6.125% - 6.625% 2003 $ 175 $ 175
6.75% - 7.5% 2023 - 2025 450 450
7.0% - 8.95% 2027 - 2033 165 165
Pollution control debt, 3.85% - 5.8% 2012 - 2017 172 172
Notes
5.375% - 9.21% 2009 - 2016 809 811
6.0% - 6.6% 2028 - 2038 500 500
Commercial paper, 1.93% and 6.52% weighted-average rate at
December 31, 2001 and 2000, respectively /a/ 1,087 1,256
Other debt 19 18
Fair value hedge carrying value adjustment 2010 - 2014 (10) -
Notes matured during 2001 - 661
65
Duke Capital Corporation/b/
- ---------------------------
Senior notes
4.73% - 7.5% 2003 - 2009 1,400 1,400
6.75% - 8.5% 2018 - 2019 650 650
4.32%/c/ 2006 750 -
5.87%/c/ 2006 875 -
Commercial paper, 2.16% and 6.71% weighted-average rate at
December 31, 2001 and 2000, respectively/a/ 1,456 1,378
Note payable to D/FD, 4.05% and 6.14% weighted-average
rate at December 31, 2001 and 2000, respectively 568 141
Fair value hedge carrying value adjustment 2009 - 2025 30
-
Subsidiary Debt Guaranteed by Duke Capital Corporation
- ------------------------------------------------------
Duke Energy Australia Pty Ltd.
Medium-term note, 7.25%/d/ 2004 128 139
Credit facilities, 6.41% and 6.13% weighted-average rate at
December 31, 2001 and 2000, respectively 38 44
Commercial paper, 5.96% and 6.4% weighted-average rate at
December 31, 2001 and 2000, respectively/d/ 231 223
Hidroelectrica Cerros Colorados S.A.
Notes, 3.8% 2002 68 95
Duke Energy South Bay, LLC
Capital leases 2009 94 272
PanEnergy Corp
- --------------
Bonds
7.75% 2022 328 328
8.625% debentures 2025 100 100
Notes, 7.0% - 9.9%, maturing serially 2003 - 2006 372 384
Fair value hedge carrying value adjustment 7 -
Texas Eastern Transmission, LP
- ------------------------------
Notes
7.3% - 8.25% 2002 - 2010 500 500
Medium-term, Series A, 7.92% - 9.07% 2004 - 2012 35 51
Notes matured during 2001 - 100
Algonquin Gas Transmission Company
- ----------------------------------
Notes, 9.13% 2002 - 2003 67 100
Duke Energy Field Services, LLC
- -------------------------------
Notes
7.5% - 8.125% 2005 - 2030 1,700 1,700
5.75% - 6.875% 2006 - 2011 550 -
Commercial paper, 2.53% and 7.39% weighted-average rate at
December 31, 2001 and 2000, respectively 213 346
Capital leases 3 -
Fair value hedge carrying value adjustment 2009 - 2025 (5) -
Crescent, LLC/e/
- -------------
Construction and mortgage loans, 2.73% - 10.0% 2002 - 2005 73 67
Other Debt of Subsidiaries
- --------------------------
Duke Energy Western Australia Holdings
Notes, 5.35%/d/ 2004 - 2013 124 138
Paranapanema
Notes, 6.0% - 10.0%/f/ 2002 - 2017 427 477
Duke Energy Vermillion
Notes, 6.8% 2002 5 -
Other international debt of subsidiaries 76 127
Other domestic debt of subsidiaries 61 103
Unamortized debt discount and premium, net (106) (91)
------------------
Total debt 14,185 12,980
Current maturities of long-term debt (261) (437)
Short-term notes payable and commercial paper (1,603) (1,826)
------------------
Total long-term debt $12,321 $10,717
- -----------------------------------------------------------------------------
/a/ Amounts include extendible commercial notes.
/b/ Duke Capital Corporation is a wholly owned subsidiary of Duke Energy that
provides financing and credit enhancement services for its subsidiaries.
/c/ Component of Equity Units (See Note 16.)
/d/ Debt denominated in Australian dollars
/e/ A portion of Crescent's real estate development projects, land and
buildings are pledged as collateral.
/f/ Debt denominated in Brazilian reais and principal is indexed annually to
inflation
In January 2002, Duke Energy issued $750 million of 6.25% senior unsecured bonds
due in 2012 and $250 million of floating rate (based on the three-month London
Interbank Offered Rate (LIBOR) plus 0.35%) senior unsecured bonds due in 2005.
The proceeds from these issuances were used to manage working capital needs.
In February 2002, Duke Capital Corporation issued $500 million of 6.25% senior
unsecured bonds due in 2013 and $250 million of 6.75% senior unsecured bonds due
in 2032. In addition, Duke Capital Corporation, through a private placement
transaction, issued $500 million of floating rate (based on the one-month LIBOR
plus 0.65%) senior unsecured bonds due in 2003.
The weighted-average interest rate on outstanding short-term notes payable and
commercial paper was 3.13% as of December 31, 2001 and 6.8% as of December 31,
2000.
- ---------------------------------------------------------
Annual Maturities (in millions)
- ---------------------------------------------------------
2002 $ 261
2003 576
2004 883
2005 1,016
2006 2,101
Thereafter 7,745
-----------
Total long-term debt $12,582
- ---------------------------------------------------------
Annual maturities after 2006 include $1,360 million of long-term debt with call
options, meaning Duke Energy has the option to repay the debt early. Based on
the years in which Duke Energy may first exercise its redemption options, it
could potentially repay $1,033 million in 2002, $227 million in 2003 and $100
million in 2005.
67
In 2000, Duke Energy issued $250 million 7.125% senior unsecured bonds due in
2012 with a put option that gives investors the choice to put the bond to Duke
Energy at par value in September 2002 or extend the maturity until 2012. If
extended, the bonds would be recouponed at 5.7% plus the Duke Energy 10-year
credit spread on the extension date. Also in 2000, Duke Capital Corporation
issued $150 million senior unsecured bonds due in 2003 that become due and
payable if Duke Capital Corporation's debt ratings fall below BBB.
- ---------------------------------------------------------------------------------------------
Credit Facilities (in millions)
- ---------------------------------------------------------------------------------------------
December 31, 2001 December 31, 2000
---------------------------------------------------------
Credit Credit
Facilities Outstanding Facilities Outstanding
- ---------------------------------------------------------------------------------------------
Bridge facility $ 250 $ - $ - $ -
364-day facilities/a/ 2,716 - 1,796 -
Three-year revolving facilities/a/ 1,640 38 84 44
Four-year revolving facilities - - 125 -
Five-year revolving facilities/a/ - - 2,200 -
---------------------------------------------------------
Total consolidated $ 4,606 $ 38 $ 4,205 $ 44
- ---------------------------------------------------------------------------------------------
/a/ Majority of facilities support commercial paper facilities
The credit facilities expire from 2002 to 2004 and are not subject to minimum
cash requirements; however, borrowings and issuances of letters of credit under
approximately $1,100 million of these facilities are subject to and dependent on
the senior unsecured debt ratings of Duke Capital Corporation (currently rated
A3/A/A). Ratings of Baa2, BBB or the equivalent by at least two of Moody's
Investors Service, Standard & Poor's and Fitch, Inc. must be maintained to
obtain additional borrowings and issuances of letters of credit. Any outstanding
borrowings would not become due and payable.
See Note 21 to the Consolidated Financial Statements for information regarding
subsequent events related to debt and credit facilities.
11. Nuclear Decommissioning Costs
Nuclear Decommissioning Costs. Estimated site-specific nuclear decommissioning
costs, including the cost of decommissioning plant components not subject to
radioactive contamination, total approximately $1.9 billion stated in 1999
dollars based on decommissioning studies completed in 1999 (studies are
completed every five years). This includes costs related to Duke Energy's 12.5%
ownership in the Catawba Nuclear Station. The other joint owners of the Catawba
Nuclear Station are responsible for decommissioning costs related to their
ownership interests in the station. Both the NCUC and the PSCSC have allowed
Duke Energy to recover estimated decommissioning costs through retail rates over
the expected remaining service periods of Duke Energy's nuclear stations. The
operating licenses for Duke Energy's nuclear units are subject to extension. In
2000, Duke Energy was granted a license renewal for the Oconee Nuclear Station.
Applications to renew the operating licenses for Duke Energy's other nuclear
units were filed with the Nuclear Regulatory Commission (NRC) in June 2001. Duke
Energy's nuclear units are currently licensed as follows:
- -------------------------------------------------
Operating Licenses for Nuclear Units
- -------------------------------------------------
Unit Year
- -------------------------------------------------
McGuire 1 2021
McGuire 2 2023
Catawba 1 2024
Catawba 2 2026
Oconee 1 and 2 2033
Oconee 3 2034
- -------------------------------------------------
68
During 2001 and 2000, Duke Energy expensed approximately $57 million, and a
corresponding amount of cash was contributed to external funds for
decommissioning costs, and accrued an additional $8 million to the internal
reserve. Nuclear units are depreciated at an annual rate of 4.7%, of which 1.61%
is for decommissioning. The balance of the external funds was $716 million as of
December 31, 2001 and $717 million as of December 31, 2000, and is reflected in
the Consolidated Balance Sheets as Nuclear Decommissioning Trust Funds (asset)
and Nuclear Decommissioning Costs Externally Funded (liability). The balance of
the internal reserve was $239 million as of December 31, 2001 and $231 million
as of December 31, 2000, and is reflected in the Consolidated Balance Sheets as
Accumulated Depreciation and Amortization. The external decommissioning trust
fund is invested primarily in domestic and international equity securities,
fixed-rate, fixed-income securities and cash and cash equivalents. Duke Energy
has an agreement with the NRC that these funds will only be used for activities
relating to nuclear decommissioning. These investments are exposed to price
fluctuations in equity markets and changes in interest rates. Because the
accounting for nuclear decommissioning recognizes that costs are recovered
through Franchised Electric's rates, fluctuations in equity prices or interest
rates do not affect consolidated results of operations, cash flows or financial
position. Management believes that the decommissioning costs being recovered
through rates, when coupled with expected fund earnings, are sufficient to
provide for the cost of decommissioning.
A provision in the Energy Policy Act of 1992 established a fund for the
decontamination and decommissioning of the DOE's uranium enrichment plants (the
D&D Fund). Licensees are subject to an annual assessment for 15 years based on
their pro rata share of past enrichment services. In 1998, Duke Energy and 21
other utilities filed a lawsuit challenging the constitutionality of the D&D
Fund and seeking an injunction that prohibits the government from collecting the
assessment and refunds all assessments paid. The annual assessment is recorded
in the Consolidated Statements of Income as Fuel Used in Electric Generation.
Duke Energy has paid $96 million into the fund, including $11 million during
2001. The remaining liability and regulatory assets of $53 million as of
December 31, 2001 and $62 million as of December 31, 2000 are reflected in the
Consolidated Balance Sheets as Deferred Credits and Other Liabilities, and
Regulatory Assets and Deferred Debits.
Spent Nuclear Fuel. Under provisions of the Nuclear Waste Policy Act of 1982,
Duke Energy has entered into contracts with the DOE for the disposal of spent
nuclear fuel. The DOE failed to begin accepting spent nuclear fuel on January
31, 1998, the date specified by the Nuclear Waste Policy Act and in Duke
Energy's contract with the DOE. In 1998, Duke Energy filed a claim with the U.S.
Court of Federal Claims against the DOE related to the DOE's failure to accept
commercial spent nuclear fuel by the required date. Damages claimed in the
lawsuit are based upon Duke Energy's costs incurred as a result of the DOE's
partial material breach of its contract, including the cost of securing
additional spent fuel storage capacity. Duke Energy will continue to safely
manage its spent nuclear fuel until the DOE accepts it. Payments made to the DOE
for disposal costs are based on nuclear output and are included in the
Consolidated Statements of Income as Fuel Used in Electric Generation.
12. Guaranteed Preferred Beneficial Interests in Subordinated Notes of Duke
Energy or Subsidiaries
Duke Energy and one of its subsidiaries have formed business trusts for which
they own all the common securities. The trusts issue and sell preferred
securities and invest the gross proceeds in junior subordinated notes issued by
the respective parent companies.
69
- ------------------------------------------------------------------------
Trust Preferred Securities (in millions)
- ------------------------------------------------------------------------
December 31,
--------------------------
Issued Rate Due 2001 2000
- ------------------------------------------------------------------------
1997 7.20% 2037 $ 350 $ 350
1998 7.375% 2038 350 350
1998 7.375% 2038 250 250
1999 8.375% 2029 250 250
1999 7.20% 2039 250 250
Unamortized debt discount (43) (44)
--------------------------
$ 1,407 $ 1,406
========================================================================
These trust preferred securities represent preferred undivided beneficial
interests in the assets of the respective trusts. Distribution payments on these
preferred securities are guaranteed by the respective parent companies, but only
to the extent that the trusts have funds legally and immediately available to
make distributions. Dividends related to the trust preferred securities were
$108 million for 2001, $108 million for 2000 and $87 million for 1999, and have
been included in the Consolidated Statements of Income as Minority Interest
Expense.
13. Minority Interest Financing
In 2000, Catawba River Associates, LLC (Catawba), a fully consolidated financing
entity managed by a subsidiary of Duke Energy, issued $1,025 million of
preferred member interests to a third-party investor. Catawba subsequently
advanced the proceeds from the sale to DE Power Generation, LLC (DEPG), a wholly
owned subsidiary of Duke Energy, which indirectly owns or leases six merchant
power generation facilities located in California, Maine and Indiana. Catawba is
a limited liability company with a separate existence and identity from its
preferred members, and the assets of Catawba are separate and legally distinct
from Duke Energy. The preferred member interests receive quarterly a preferred
return equal to an adjusted floating reference rate (approximately 5.20% for the
full year ended December 31, 2001).
The purpose of the transaction was to reimburse Duke Energy for a portion of its
prior investment in the DEPG assets in a separate venture financing with
third-party investors not requiring direct recourse to the credit of Duke
Energy. The results of operations, cash flows and financial position of Catawba
are consolidated with Duke Energy for financial reporting purposes. The
preferred member interests are included in Minority Interest in Financing
Subsidiary on the Consolidated Balance Sheets, and the payments made with
respect to the preferred return are included in Minority Interest Expense on the
Consolidated Statements of Income of Duke Energy.
The initial term of the financing ends in September 2005, at which time Catawba
must either (a) reset the preferred rate as agreed by the existing preferred
investors, (b) re-market the preferred member interests to other preferred
investors, (c) redeem the outstanding preferred member interests, in whole or in
part, plus any accrued and unpaid return, or (d) commence an orderly liquidation
of DEPG and Catawba. This could impact Duke Energy's liquidity at the time if it
were to elect to redeem the preferred member interests or, alternatively, result
in the loss of the future associated earnings contribution to Duke Energy of the
assets of DEPG in the event of an orderly liquidation.
Duke Energy and Catawba have the right to redeem the preferred member interests
at any time, and the holder of the preferred member interests may require an
early liquidation of the assets of DEPG and Catawba and a redemption of the
preferred member interests from the available liquidation proceeds upon the
occurrence of specified events (such as failure to make required payments or to
perform other obligations).
Duke Capital Corporation has the right to borrow certain amounts from DEPG and
Catawba as demand loans. If Duke Capital Corporation's credit rating (currently
A3/A) declines below investment grade
70
(Baa3/BBB-), the preferred members may and will likely require that these loans
be repaid. In addition, if there were such a downgrade, the preferred investor
could cause an increase in the quarterly payments and a recharacterization of
the preferred member interests as a debt obligation on the Consolidated
Financial Statements of Duke Energy.
See Note 21 to the Consolidated Financial Statements for information regarding
subsequent events related to minority interest financing.
14. Preferred and Preference Stock
============================================================
Authorized Shares of Stock as of December 31, 2001 and 2000
- ------------------------------------------------------------
Shares
Par Value (in millions)
- ------------------------------------------------------------
Preferred Stock $100 12.5
Preferred Stock A $ 25 10.0
Preference Stock $100 1.5
============================================================
As of December 31, 2001 and 2000, there were no shares of preference stock
outstanding.
===============================================================================================
Preferred Stock with Sinking Fund Requirements (dollars in millions)
- -----------------------------------------------------------------------------------------------
Shares Outstanding December 31,
-----------------------
Rate/Series Year Issued at December 31, 2001 2001 2000
- -----------------------------------------------------------------------------------------------
6.20% D (Preferred Stock A) 1992 - $ - $20
6.30% U 1992 - - 13
6.40% V 1992 130,000 13 13
6.75% X 1993 250,000 25 25
-----------------------
Total $38 $71
===============================================================================================
The annual sinking fund requirements are $13 million for 2002 and $2 million
each year for 2003 through 2006. Additional redemptions are permitted at Duke
Energy's option.
===============================================================================================
Preferred Stock without Sinking Fund Requirements (dollars in millions)
- -----------------------------------------------------------------------------------------------
Shares Outstanding December 31,
---------------------
Rate/Series Year Issued at December 31, 2001 2001 2000
- -----------------------------------------------------------------------------------------------
4.50% C 1964 175,000 $ 18 $ 18
7.85% S 1992 300,000 30 30
7.00% W 1993 249,989 25 25
7.04% Y 1993 299,995 30 30
6.375% (Preferred Stock A) 1993 1,257,185 31 31
Auction Series A 1990 750,000 75 75
---------------------
Total $209 $209
===============================================================================================
The call provisions for outstanding preferred stock specify redemption prices
not exceeding 104% of par value, plus accumulated dividends to the redemption
date.
See Note 21 to the Consolidated Financial Statements for information regarding
subsequent events related to preferred and preference stock.
71
15. Commitments and Contingencies
Nuclear Insurance. Duke Energy owns and operates the McGuire and Oconee Nuclear
Stations and operates and has a partial ownership interest in the Catawba
Nuclear Station. The McGuire and Catawba Nuclear Stations have two nuclear
reactors each and Oconee has three. Nuclear insurance includes: liability
coverage; property, decontamination and decommissioning coverage; and business
interruption and/or extra expense coverage. The other joint owners of the
Catawba Nuclear Station reimburse Duke Energy for certain expenses associated
with nuclear insurance premiums.
The Price-Anderson Act requires Duke Energy to insure against public liability
claims resulting from nuclear incidents to the full limit of liability,
approximately $9.5 billion.
Primary Liability Insurance. Duke Energy has purchased the maximum required
private primary liability insurance, $200 million, along with a like amount to
cover certain worker tort claims.
Excess Liability Insurance. This policy currently provides approximately $9.3
billion of coverage through the Price-Anderson Act's mandatory industry-wide
excess secondary insurance program of risk pooling. The $9.3 billion is the sum
of the current potential cumulative retrospective premium assessments of $88
million per licensed commercial nuclear reactor. This would be increased by $88
million for each additional commercial nuclear reactor licensed, or reduced by
$88 million for nuclear reactors no longer operational and may be exempted from
the risk pooling insurance program. Under this program, licensees could be
assessed retrospective premiums to compensate for damages in the event of a
nuclear incident at any licensed facility in the U.S. If such an incident should
occur and public liability damages exceed primary insurances, licensees may be
assessed up to $88 million for each of their licensed reactors, payable at a
rate not to exceed $10 million a year per licensed reactor for each incident.
The $88 million is subject to indexing for inflation and may be subject to state
premium taxes.
Duke Energy is a member of Nuclear Electric Insurance Limited (NEIL), which
provides property and business interruption insurance coverage for Duke Energy's
nuclear facilities under three policy programs:
Primary Property Insurance. This policy provides $500 million of primary
property damage coverage for each of Duke Energy's nuclear facilities.
Excess Property Insurance. This policy provides excess property, decontamination
and decommissioning liability insurance: $2.25 billion for the Catawba Nuclear
Station and $1.5 billion each for the Oconee and McGuire Nuclear Stations.
Business Interruption Insurance. This policy provides business interruption
and/or extra expense coverage resulting from an accidental outage of a nuclear
unit. Each McGuire and Catawba unit is insured for up to approximately $4
million per week, and the Oconee units are insured for up to approximately $3
million per week. Coverage amounts decline if more than one unit is involved in
an accidental outage. Initial coverage begins after a 12-week deductible period
and continues at 100% for 52 weeks and 80% for the next 110 weeks.
If NEIL's losses exceed its reserves for any of the above three programs, Duke
Energy is liable for assessments of up to 10 times its annual premiums. The
current potential maximum assessments are: Primary Property Insurance - $31
million, Excess Property Insurance - $36 million and Business Interruption
Insurance - $29 million.
The other joint owners of the Catawba Nuclear Station are obligated to assume
their pro rata share of liability for retrospective premiums and other premium
assessments resulting from the Price-Anderson Act's excess secondary insurance
program of risk pooling, or the NEIL policies.
Environmental. Duke Energy is subject to international, federal, state and local
regulations regarding air and water quality, hazardous and solid waste disposal
and other environmental matters.
72
Manufactured Gas Plants and Superfund Sites. Duke Energy operated manufactured
gas plants until the early 1950s and has entered into a cooperative effort with
the State of North Carolina and other owners of former manufactured gas plant
sites to investigate and, where necessary, remediate those contaminated sites.
Regulators consider Duke Energy to be a potentially responsible party, possibly
subject to future liability at six federal and two state Superfund sites. While
remediation costs may be substantial, Duke Energy will share in any liability
associated with contamination at these sites with other potentially responsible
parties. Management believes that resolution of these matters will have no
material adverse effect on consolidated results of operations, cash flows or
financial position.
PCB (Polychlorinated Biphenyl) Assessment and Cleanup Programs. In 2001, Texas
Eastern Transmission, LP, a wholly owned subsidiary of Duke Energy, completed
the remaining requirements of a 1989 U.S. Consent Decree regarding the cleanup
of PCB-contaminated sites. The Environmental Protection Agency (EPA) certified
the completion of all work under the Consent Decree in January 2002. Monitoring
of groundwater and remediation at certain sites may continue as required by
various state authorities.
In March 1999, Duke Energy sold PEPL and Trunkline to CMS. (See Note 1 for more
information on the sale of the pipelines.) Under the terms of the sales
agreement with CMS, Duke Energy is obligated to complete cleanup of previously
identified contamination resulting from the past use of PCB-containing
lubricants and other discontinued practices at certain sites on the PEPL and
Trunkline systems.
Based on Duke Energy's experience to date and costs incurred for cleanup,
management believes the resolution of matters relating to the environmental
issues discussed above will have no material adverse effect on consolidated
results of operations, cash flows or financial position.
Air Quality Control. In 1998, the EPA issued a final rule on regional ozone
control that required 22 eastern states and the District of Columbia to revise
their State Implementation Plans (SIPs) to significantly reduce emissions of
nitrogen oxide by May 1, 2003. The EPA 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 2000, the court upheld most aspects of the
EPA rule. The same court subsequently extended the compliance deadline for
implementation of emission reductions to May 31, 2004.
In 2000, the EPA finalized another ozone-related rule under Section 126 of the
Clean Air Act (CAA). Section 126 of the CAA has virtually identical emission
control requirements as the 1998 action, and specified a May 1, 2003 compliance
date. While the emission reduction requirements of the rule have been upheld in
court, the implementation date for the rule has been revised to May 2004 as a
result of a legal challenge and the resulting court order.
Both North Carolina and South Carolina have revised their SIPs in response to
the EPA's 1998 rule, and are awaiting EPA approval. Legislation was introduced
in the North Carolina General Assembly in 2001 and passed by the state Senate
that would require North Carolina electric utilities, including Duke Energy, to
make significant reductions in emissions of sulfur dioxide and nitrogen oxides
from coal-fired power plants over the next seven to 11 years. A provision in the
proposed North Carolina legislation allows Duke Energy to recover costs of
achieving the proposed emission reductions from customers through an
environmental compliance expenditure-recovery factor that is separate from the
electric utility's base rates. If passed into law, the final provisions 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.
In 2000, the U.S. Justice Department, acting on behalf of the EPA, filed a
complaint against Duke Energy in the U.S. District Court in Greensboro, North
Carolina, for alleged violations of the New Source Review (NSR) provisions of
the CAA. The EPA claims that 29 projects performed at 25 of Duke Energy's
coal-fired units were major modifications, as defined in the CAA, and that Duke
Energy violated the CAA's
73
NSR requirements when it undertook those projects without obtaining permits and
installing emission controls for sulfur dioxide, nitrogen oxide and particulate
matter. The complaint asks the court to order Duke Energy to stop operating the
coal-fired units identified in the complaint, install additional emission
controls and pay unspecified civil penalties. This complaint is part of the
EPA's NSR enforcement initiative, in which the EPA claims that utilities and
others have committed widespread violations of the CAA permitting requirements
for the past 25 years. The EPA has sued or issued notices of violation of
investigative information requests to at least 48 other electric utilities and
cooperatives.
The EPA's allegations run counter to previous EPA guidance regarding the
applicability of the NSR permitting requirements. Duke Energy, along with other
utilities, has routinely undertaken the type of repair, replacement and
maintenance projects that the EPA now claims are illegal. Duke Energy believes
that all of its electric generation units are properly permitted and have been
properly maintained, and is defending itself vigorously against these alleged
violations. The U.S. Vice President's National Energy Policy Development Group
has ordered the EPA to review its NSR rules and has ordered the Department of
Justice to review the appropriateness of the enforcement cases. The EPA review
was scheduled to be completed by August 2001, but has not yet been concluded. In
January 2002, the Department of Justice released a report concluding that it was
not improper for the Department of Justice to initiate the enforcement cases
brought on behalf of the EPA. It specifically declined to address whether the
EPA's enforcement actions are wise as a matter of national energy policy.
Because these matters are in a preliminary stage, management cannot estimate the
effects of these matters on Duke Energy's future consolidated results of
operations, cash flows or financial position. The CAA authorizes civil penalties
of up to $27,500 per day per violation at each generating unit. Civil penalties,
if ultimately imposed by the court, and the cost of any required new pollution
control equipment, if the court accepts the EPA's contentions, could be
substantial.
California Issues. Duke Energy, some of its subsidiaries and three current or
former executives have been named as defendants, among 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. The plaintiffs
seek damages as a result of the defendants' alleged unlawful manipulation of the
California wholesale electricity markets. DENA and DETM are among 16 defendants
in a class-action lawsuit (the Gordon lawsuit) filed against generators and
traders of electricity in California markets. DETM was also 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, 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, on their own
behalf as citizens and on behalf of the general public, and includes Duke
Energy, some of its subsidiaries and three current or former executives of Duke
Energy among 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. The plaintiffs seek aggregate damages of billions of dollars. The lawsuits
seek the refund of alleged unlawfully obtained revenues for electricity sales
and, in four lawsuits, an award of treble damages. These suits have been
consolidated before a state court judge in San Diego. While these matters are in
their earliest stages, management believes, based on its analysis of the facts
and the asserted claims, that their resolution will have no material adverse
effect on Duke Energy's consolidated results of operations, cash flows or
financial position.
In addition to the lawsuits, several investigations and regulatory proceedings
at the state and federal levels are looking into the causes of high wholesale
electricity prices in the western U.S. At the federal level, numerous
proceedings are 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
74
at market-based rates. The FERC is also conducting its own wholesale pricing
investigation. As a result, the FERC has ordered some sellers, including DETM,
to refund, or to offset against outstanding accounts receivable, amounts billed
for electricity sales in excess of a FERC-established proxy price. The proxy
price represents 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 by the California Independent System Operator
and the California Power Exchange for electricity sales during January and
February 2001. This offset reduced the $110 million reserve established in 2000
to $90 million. Proceedings are ongoing to determine, among other issues, 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 is conducting
formal and informal investigations to determine if power plant operators in
California, including some Duke Energy entities, 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 Duke
Energy and some of its subsidiaries seeking data concerning their California
market activities. The Select Committee has heard testimony from several
witnesses but no one from Duke Energy has yet been subpoenaed to testify.
The California Attorney General is also conducting an investigation to determine
if any market participants engaged in illegal activity, including antitrust
violations, in the course of their electricity sales into wholesale markets in
the western U.S. The Attorneys General of Washington and Oregon are
participating in the California Attorney General's investigation. The San Diego
District Attorney is conducting a separate investigation into market activities
and has issued subpoenas to DETM and a DENA subsidiary.
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 states of the western U.S.
Throughout 2001, Duke Energy conducted its business in California to supply the
maximum possible electricity to meet the needs of the state, limit its exposure
to non-creditworthy counterparties and manage 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 doubtful receivables, and
believes that the current pre-tax bad debt provision of $90 million is
appropriate. No additional provisions for California receivables were recorded
in 2001. Management believes, based on its analysis of the facts and the
asserted claims, that the resolution of these matters will have no material
adverse effect on Duke Energy's consolidated results of operations, cash flows
or financial position.
Litigation and Contingencies. Exxon Mobil Corporation Arbitration. In 2000,
three Duke Energy subsidiaries initiated binding arbitration against three Exxon
Mobil Corporation subsidiaries (the Exxon Mobil entities) concerning the
parties' joint ownership of DETM and related affiliates (the Ventures). At issue
is a buy-out right provision under the joint venture agreements for these
entities. If there is a material business dispute between the parties, which
Duke Energy alleges has occurred, the buy-out provision gives Duke Energy the
right to purchase Exxon Mobil's 40% interest in DETM. Exxon Mobil does not have
a similar right under the joint venture agreements and once Duke Energy
exercises the buy-out right, each party has the right to "unwind" the buy-out
under certain specific circumstances. In December 2000, 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 made additional claims against the Exxon Mobil
entities for breach of the agreements governing the Ventures.
75
In January 2001, the Exxon Mobil entities made counterclaims in the arbitration
and, in a separate Texas state court action, alleged that Duke Energy breached
its obligations to the Ventures and to the Exxon Mobil entities. In April 2001,
the state court stayed its action, compelling the Exxon Mobil entities to
arbitrate their claims. The Exxon Mobil entities proceeded with the arbitration
of their claims and have not challenged this order in an appellate court. In
early October 2001, the arbitration panel convened an evidentiary hearing
regarding the buy-out right provision and Duke Energy's and Exxon Mobil's claims
against each other. The panel has not yet ruled but Duke Energy expects a final
decision from the panel in early 2002. Management believes that the final
disposition of this action will have no material adverse effect on Duke Energy's
consolidated results of operations 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 have no
material adverse effect on consolidated results of operations, cash flows or
financial position.
Injuries and Damages Claims. Duke Energy has experienced numerous claims
relating to damages for personal injuries alleged to have arisen from the
exposure to or use of asbestos in connection with construction and maintenance
activities conducted by Duke Energy on its electric generation plants during the
1960s and 1970s. During 1999, Duke Energy experienced a significant increase in
the number of these claims. This increase, coupled with its cumulative
experience in claims received, prompted Duke Energy to conduct a comprehensive
review which was completed in late 1999 and to record an $800 million accrual,
to reflect the purchase of a third-party insurance policy as well as estimated
amounts for future claims not recoverable under such policy. The insurance
policy, combined with amounts covered by self-insurance reserves, provides for
claims paid up to an aggregate of $1.6 billion. Duke Energy currently believes
the estimated claims relating to this exposure will not exceed such amount.
While Duke Energy is uncertain as to the timing of when claims will be received,
portions of the estimated claims may not be received and paid for 30 or more
years.
While Duke Energy has recorded an accrual related to this estimated liability,
such estimates cannot be made with certainty. Factors, such as the frequency and
magnitude of claims, could result in changes in the estimates of the injuries
and damages liability and insurance recoveries. Such changes could result in,
over time, a difference from the amount currently reflected in the financial
statements. However, due to Duke Energy's insurance program relating to this
liability, management believes that any changes in the estimates would not have
a material adverse effect on consolidated results of operations, cash flows or
financial position.
Other Commitments and Contingencies. As part of its normal business, Duke Energy
is a party to various financial guarantees, performance guarantees and other
contractual commitments to extend guarantees of credit and other assistance to
various subsidiaries, investees and other third parties. These arrangements are
largely entered into by Duke Capital Corporation. To varying degrees, these
guarantees involve elements of performance and credit risk, which are not
included on the Consolidated Balance Sheets. The possibility of Duke Energy
having to honor its contingencies is largely dependent upon future operations of
various subsidiaries, investees and other third parties, or the occurrence of
certain future events. Duke Energy would record a reserve if events occurred
that required that one be established.
In addition, Duke Energy enters into various fixed-price, non-cancelable
commitments to purchase or sell power (tolling arrangements or power purchase
contracts), take-or-pay arrangements, transportation or throughput agreements
and other contracts that may or may not be recognized on the Consolidated
Balance Sheets. Some of these arrangements may be recognized at market value on
the Consolidated Balance Sheets as trading contracts or qualifying hedge
positions included in Unrealized Gains or Losses on Mark-to-Market and Hedging
Transactions.
Financial Guarantees. Some Duke Energy subsidiaries have guaranteed affiliates'
debt agreements and have provided surety bonds and letters of credit, totaling
approximately $579 million as of December 31,
76
2001 and $1.9 billion as of December 31, 2000. The decrease in these obligations
is due primarily to decreasing support for margin deposits and power exchange
participation.
Leases. Duke Energy leases assets in several areas of its operations.
Consolidated rental expense for operating leases was $114 million in 2001, $90
million in 2000 and $87 million in 1999. Future minimum rental payments under
operating leases for the years 2002 through 2006 are $87 million, $70 million,
$57 million, $43 million and $34 million, respectively.
See Note 21 to the Consolidated Financial Statements for information regarding
subsequent events related to commitments and contingencies.
16. Common Stock and Equity Offerings
In March 2001, Duke Energy completed an offering of 25 million shares of common
stock, priced at $38.98 per share, before underwriting discount and other
offering expenses. In addition, Duke Energy completed an offering of
approximately 31 million units of Equity Units, at $25 per unit, before
underwriting discount and other offering expenses. The Equity Units consist of
senior notes of Duke Capital Corporation, and purchase contracts obligating the
investors to purchase shares of Duke Energy's common stock in 2004. The number
of shares to be issued in 2004 will be based on the price of the common stock at
conversion. 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, approximately $1.9 billion, were used to repay short-term debt and
for other corporate purposes.
In November 2001, Duke Energy completed an offering of 30 million Equity Units,
at $25 per unit, before underwriting discount and other offering expenses. The
Equity Units consist of senior notes of Duke Capital Corporation, and purchase
contracts obligating the investors to purchase shares of Duke Energy's common
stock in 2004. The number of shares to be issued in 2004 will be based on the
price of the common stock at conversion. The net proceeds from the offering were
approximately $731 million.
The Duke Capital Corporation senior notes that are part of the Equity Units are
included in Long-term Debt on the Consolidated Balance Sheets. (See Note 10.)
The value of the forward purchase contracts associated with the Equity Units
were assumed to be zero at inception as the offerings were done at market
prices. The return on the Equity Units consists of interest on the debt
component and a contract adjustment payment. The contract adjustment was
recorded as a declared dividend and its present value was recorded in Other
Current and Noncurrent Liabilities on the Consolidated Balance Sheets.
At Duke Energy's Annual Meeting of Shareholders held on April 26, 2001,
shareholders approved an amendment to the Articles of Incorporation to increase
the authorized common stock from one billion to two billion shares.
On December 20, 2000, Duke Energy announced a two-for-one common stock split
effective January 26, 2001, to shareholders of record on January 3, 2001. All
2000 and 1999 outstanding share and per share amounts have been restated to
reflect the stock split. Appropriate adjustments have been made in the exercise
price and number of shares subject to stock options, as well as in stock amounts
and other employee benefit programs. Effective with the stock split, the
quarterly cash dividend rate on common stock is $0.275 per share.
See Note 21 to the Consolidated Financial Statements for information regarding
subsequent events related to common stock and equity offerings.
77
17. Stock-Based Compensation
The following information regarding outstanding common stock shares and options
reflects the two-for-one common stock split discussed in Note 16.
Duke Energy's 1998 Long-term Incentive Plan, as amended (the 1998 Plan),
reserved 60 million shares of common stock for company performance awards to
employees and outside directors. Incentive stock options may only be granted to
key employees. Under the 1998 Plan, the exercise price of each option granted
cannot be less than the market price of Duke Energy's common stock on the date
of grant. Vesting periods range from one to five years with a maximum term of 10
years.
- -----------------------------------------------------------------------------
Stock Option Activity
- -----------------------------------------------------------------------------
Options Weighted-Average
(in thousands) Exercise Price
----------------------------------------
Outstanding at December 31, 1998 8,923 $23
Granted 10,308 27
Exercised (856) 12
Forfeited (750) 29
-----------
Outstanding at December 31, 1999 17,625 25
Granted 7,594 41
Exercised (2,047) 21
Forfeited (666) 27
-----------
Outstanding at December 31, 2000 22,506 31
Granted 7,090 37
Exercised (2,285) 25
Forfeited (905) 33
-----------
Outstanding at December 31, 2001 26,406 33
- -----------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
Stock Options at December 31, 2001
- ----------------------------------------------------------------------------------------------
Outstanding Exercisable
-------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Range of Average Average Average
Exercise Number Remaining Life Exercise Number Exercise
Prices (in thousands) (in years) Price (in thousands) Price
- ----------------------------------------------------------------------------------------------
$ 5 to $8 21 2.2 $ 8 21 $ 8
$ 9 to $12 784 2.4 10 784 10
$13 to $16 168 4.1 14 168 14
$17 to $22 186 5.1 22 186 22
$23 to $27 5,278 8.0 25 2,317 25
$28 to $33 6,565 6.7 29 3,049 29
$34 to $39 7,236 9.9 38 - -
**$39 6,168 9.0 43 1,412 43
-------- ----------
Total 26,406 7,937 28
- ----------------------------------------------------------------------------------------------
On December 31, 2000, Duke Energy had 5.2 million exercisable options with a $23
weighted-average exercise price. On December 31, 1999, Duke Energy had 3.6
million exercisable options with a $17 weighted-average exercise price.
** denotes greater than
78
The weighted-average fair value per option granted was $10 during 2001, $10
during 2000 and $5 during 1999. The fair value of each option grant was
estimated on the date of grant using the Black-Scholes option-pricing model.
- --------------------------------------------------------------------------------
Weighted-Average Assumptions for Option-Pricing
- --------------------------------------------------------------------------------
2001 2000 1999
-------------------------------------
Stock dividend yield 3.4% 3.7% 4.1%
Expected stock price volatility 29.5% 25.1% 18.8%
Risk-free interest rates 5.0% 5.3% 5.9%
Expected option lives 7 years 7 years 7 years
- --------------------------------------------------------------------------------
Duke Energy's net income for 2001 would have been $1,876 million, or $2.42 per
basic share, had compensation expense for stock-based compensation been based on
the fair value at the grant dates. Net income for 2000 would have been $1,764
million, or $2.37 per basic share, and 1999 net income would have been $1,498
million, or $2.03 per basic share.
The 1998 Plan allows for a maximum of six million shares of common stock to be
issued under restricted stock awards, performance awards and phantom stock
awards. Performance awards granted under the 1998 Plan vest over periods from
one to seven years. Duke Energy awarded 24,000 shares (fair value of
approximately $1 million at grant dates) in 2001, 225,000 shares (fair value of
approximately $7 million at grant dates) in 2000 and 986,400 shares (fair value
of approximately $26 million at grant dates) in 1999. Compensation expense for
the stock grants is charged to earnings over the vesting period, and totaled $6
million in 2001, $7 million in 2000 and $3 million in 1999.
Phantom stock awards granted under the 1998 Plan vest over periods from one to
four years. Duke Energy awarded 457,700 shares (fair value of approximately $17
million at grant dates) in 2001 and 168,500 shares (fair value of approximately
$7 million at grant dates) in 2000. No phantom stock awards were granted in
1999. Compensation expense for the stock grants is charged to earnings over the
vesting period, and totaled $4 million in 2001, and was less than $1 million in
2000. There was no compensation expense for stock grants in 1999.
Duke Energy's 1996 Stock Incentive Plan (the 1996 Plan) reserved four million
shares of common stock for awards to employees. Restricted stock grants under
the 1996 Plan vest over periods ranging from one to five years. Duke Energy
awarded 124,005 restricted shares (fair value of approximately $5 million at
grant dates) in 2001, 294,526 restricted shares (fair value of approximately $8
million at grant dates) in 2000 and 131,700 restricted shares (fair value of
approximately $4 million at grant dates) in 1999. Compensation expense for the
grants is charged to earnings over the restriction period and totaled $4 million
in 2001, $4 million in 2000, and $1 million in 1999.
18. Employee Benefit Plans
Retirement Plans. Duke Energy and its subsidiaries maintain a non-contributory
defined benefit retirement plan. It covers most employees with minimum service
requirements using a cash balance formula. Under a cash balance formula, a plan
participant accumulates a retirement benefit based upon a percentage (which may
vary with age and years of service) of current eligible earnings and current
interest credits.
Duke Energy's policy is to fund amounts on an actuarial basis to provide assets
sufficient to meet benefits to be paid to plan participants. No contributions to
the Duke Energy plan were necessary in 2001 or 2000. The net unrecognized
transition asset, resulting from the implementation of accrual accounting, is
amortized over approximately 20 years. Investment gains or losses are amortized
over five years.
79
- --------------------------------------------------------------------------------------------
Components of Net Periodic Pension Costs (in millions)
- --------------------------------------------------------------------------------------------
For the Years Ended December 31,
--------------------------------------------
2001 2000 1999
--------------------------------------------
Service cost benefit earned during the year $ 74 $ 70 $ 72
Interest cost on projected benefit obligation 188 184 165
Expected return on plan assets (264) (244) (224)
Amortization of prior service cost (3) (3) (3)
Amortization of net transition asset (4) (4) (4)
Recognized net actuarial loss - - 12
--------------------------------------------
Net periodic pension costs $ (9) $ 3 $ 18
============================================================================================
- --------------------------------------------------------------------------------
Reconciliation of Funded Status to Pre-funded Pension Costs
- --------------------------------------------------------------------------------
December 31,
-----------------------
(in millions) 2001 2000
- --------------------------------------------------------------------------------
Change in Benefit Obligation
Benefit obligation at beginning of year $ 2,586 $ 2,446
Service cost 74 70
Interest cost 188 184
Actuarial (gain) loss (147) 16
Plan amendments 1 -
Benefits paid (174) (130)
-----------------------
Benefit obligation at end of year $ 2,528 $ 2,586
-----------------------
Change in Plan Assets
Fair value of plan assets at beginning of year /a/ $ 3,038 $ 3,121
Actual return on plan assets (394) 47
Benefits paid (174) (130)
-----------------------
Fair value of plan assets at end of year /a/ $ 2,470 $ 3,038
-----------------------
Funded status $ (58) $ 452
Unrecognized net experience loss (gain) 400 (110)
Unrecognized prior service cost reduction (17) (22)
Unrecognized net transition asset (12) (16)
-----------------------
Pre-funded pension costs $ 313 $ 304
================================================================================
/a/ Principally equity and fixed-income securities. For measurement purposes,
plans assets were valued as of September 30.
- --------------------------------------------------------------------------------
Assumptions Used for Pension Benefits Accounting /a/
- --------------------------------------------------------------------------------
(percent) 2001 2000 1999
- --------------------------------------------------------------------------------
Discount rate 7.25 7.50 7.50
Salary increase 4.94 4.53 4.50
Expected long-term rate of return on plan assets 9.25 9.25 9.25
================================================================================
/a/ Reflects weighted averages across all plans
Duke Energy also sponsors employee savings plans that cover substantially all
employees. Duke Energy expensed employer matching contributions of $69 million
in 2001, $66 million in 2000 and $68 million in 1999.
Other Post-Retirement Benefits. Duke Energy and most of its subsidiaries provide
some health care and life insurance benefits for retired employees on a
contributory and non-contributory basis. Employees are eligible for these
benefits if they have met age and service requirements at retirement, as defined
in the
80
plans. Under plan amendments effective late 1998 and early 1999, health care
benefits for future retirees were changed to limit employer contributions and
medical coverage.
These benefit costs are accrued over an employee's active service period to the
date of full benefits eligibility. The net unrecognized transition obligation,
resulting from accrual accounting, is amortized over approximately 20 years.
- --------------------------------------------------------------------------------------------------------
Components of Net Periodic Post-Retirement Benefit Costs (in millions)
- --------------------------------------------------------------------------------------------------------
For the Years Ended December 31,
-------------------------------------
2001 2000 1999
-------------------------------------
Service cost benefit earned during the year $ 5 $ 5 $ 7
Interest cost on accumulated post-retirement benefit
Obligation 44 43 40
Expected return on plan assets (24) (23) (21)
Amortization of prior service cost 1 1 1
Amortization of net transition obligation 18 18 18
Recognized net actuarial gain - - (1)
Plan curtailments (3) - -
-------------------------------------
Net periodic post-retirement benefit costs $ 41 $ 44 $ 44
========================================================================================================
- --------------------------------------------------------------------------------
Reconciliation of Funded Status to Accrued Post-Retirement Benefit Costs
- --------------------------------------------------------------------------------
December 31,
---------------------
(in millions) 2001 2000
- --------------------------------------------------------------------------------
Change in Benefit Obligation
Accumulated post-retirement benefit obligation
at beginning of year $ 614 $ 562
Service cost 5 5
Interest cost 44 43
Plan participants' contributions 9 7
Actuarial loss 104 39
Benefits paid (61) (42)
Plan curtailments (3) -
---------------------
Accumulated post-retirement benefit obligation at
end of year $ 712 $ 614
---------------------
Change in Plan Assets
Fair value of plan assets at beginning of year /a/ $ 325 $ 327
Actual return on plan assets (40) 8
Employer contributions 32 25
Plan participants' contributions 9 7
Benefits paid (61) (42)
---------------------
Fair market value of plan assets at end of year /a/ $ 265 $ 325
---------------------
Funded status $(447) $(289)
Employer contributions 11 9
Unrecognized net experience loss (gain) 111 (56)
Unrecognized prior service cost 4 5
Unrecognized transition obligation 196 214
---------------------
Accrued post-retirement benefit costs $(125) $(117)
================================================================================
/a/ Principally equity and fixed-income securities. For measurement purposes,
plan assets were valued as of September 30.
81
- -------------------------------------------------------------------------------------
Assumptions Used for Post-Retirement Benefits Accounting /a/
- -------------------------------------------------------------------------------------
(percent) 2001 2000 1999
- -------------------------------------------------------------------------------------
Discount rate 7.25 7.50 7.50
Salary increase 4.94 4.53 4.50
Expected long-term rate of return on assets 9.25 9.25 9.25
Assumed tax rate /b/ 39.60 39.60 39.60
- -------------------------------------------------------------------------------------
/a/ Reflects weighted averages across all plans
/b/ Applicable to the health care portion of funded post-retirement benefits
For measurement purposes, the net per capita cost of covered health care
benefits for employees who have not retired are assumed to have an initial
annual rate of increase of 11.5% in 2002 that will gradually decrease to 6% in
2008. For employees that have retired, an initial annual rate of increase of
14.5% in 2002 will gradually decrease to 6% in 2011. Assumed health care cost
trend rates have a significant effect on the amounts reported for the health
care plans.
- ------------------------------------------------------------------------------------------------------
Sensitivity to Changes in Assumed Health Care Cost Trend Rates (in millions)
- ------------------------------------------------------------------------------------------------------
1-Percentage- 1-Percentage-
Point Increase Point Decrease
--------------------------------------------
Effect on total service and interest costs $ 2 $ (2)
Effect on post-retirement benefit obligation 47 (40)
- ------------------------------------------------------------------------------------------------------
19. Quarterly Financial Data (Unaudited)
- ---------------------------------------------------------------------------------------------------------
First Second Third Fourth
(In millions, except per share data) Quarter Quarter Quarter Quarter Total
- ---------------------------------------------------------------------------------------------------------
2001
Operating revenues $5,552 $4,294 $4,734 $3,986 $18,566
Operating income 1,182 880 1,492 546 4,100
EBIT 1,254 902 1,529 571 4,256
Income before cumulative effect of
change in accounting principle 554 419 796 225 1,994
Net income 458 419 796 225 1,898
Earnings per share (before cumulative
effect of change in accounting principle)
Basic $ 0.74 $ 0.54 $ 1.02 $ 0.29 $ 2.58
Diluted $ 0.73 $ 0.53 $ 1.01 $ 0.28 $ 2.56
Earnings per share
Basic $ 0.61 $ 0.54 $ 1.02 $ 0.29 $ 2.45
Diluted $ 0.60 $ 0.53 $ 1.01 $ 0.28 $ 2.44
2000
Operating revenues $3,216 $3,930 $5,178 $4,981 $17,305
Operating income 812 794 1,501 706 3,813
EBIT 859 837 1,556 762 4,014
Net income 393 329 770 284 1,776
Earnings per share /a/
Basic $ 0.53 $ 0.44 $ 1.04 $ 0.38 $ 2.39
Diluted $ 0.53 $ 0.44 $ 1.03 $ 0.38 $ 2.38
- ---------------------------------------------------------------------------------------------------------
/a/ Restated to reflect the two-for-one common stock split effective
January 26, 2001
During the fourth quarter of 2001, Duke Energy recorded a $43 million provision
for non-collateralized accounting exposure to Enron, as well as a $36 million
reduction in unbilled revenue receivables, resulting from a refinement in the
estimates used to calculate unbilled kilowatt-hour sales.
82
20. Subsequent Events
On January 31, 2002, Duke Energy announced the planned sale of its DE&S business
unit to Framatome ANP, Inc. (a nuclear supplier) for approximately $84 million.
Two components of DE&S are not part of the sale. Duke Energy will establish Duke
Energy - Energy Delivery Services, formed by the power delivery services
component of DE&S, which will continue to supply power delivery solutions to
customers. Leadership of the U.S. Department of Energy Mixed Oxide Fuel project
will also remain with Duke Energy. The transaction will require a Hart Scott
Rodino filing and is expected to close in the second quarter of 2002.
On March 13, 2002, Duke Energy announced the planned sale of DukeSolutions to
Ameresco, Inc. Duke Energy expects to close the transaction during the second
quarter of 2002, and record a loss of approximately $20 million.
21. Subsequent Events (Unaudited)
Debt
During 2002, Duke Energy issued $2,110 million of senior unsecured notes: $750
million of 6.25% senior unsecured notes due in 2012, $250 million of floating
rate (based on the three-month LIBOR plus 0.35%) senior unsecured notes due in
2005, $250 million of 6.60% retail senior unsecured notes due in 2022 (swapped
to floating rate based on the three-month LIBOR), $350 million of 6.45% senior
unsecured notes due in 2032, $110 million of 4.61% senior unsecured notes due in
2007 and $400 million of 5.625% senior unsecured notes due in 2012. In addition,
Duke Energy refinanced $250 million of senior unsecured debt with a short-term
private debt securities offering. The proceeds from these issuances were used
primarily for general corporate purposes, to repay the $250 million of private
debt securities, to redeem $100 million of Duke Energy's 7.5% Series B First and
Refunding Mortgage Bonds due in 2025, to retire $250 million of senior unsecured
debt, and to repay commercial paper. Related to the repayment of the $250
million of private debt securities, Duke Energy paid approximately $43 million
to buy back a remarketing option, the cost of which will be amortized over the
life of the $350 million of 6.45% senior unsecured notes.
In 2002, Duke Capital Corporation issued $500 million of 6.25% senior unsecured
notes due in 2013 and $250 million of 6.75% senior unsecured notes due in 2032.
In addition, Duke Capital Corporation, through private placement transactions,
issued $500 million of floating rate (based on the one-month LIBOR plus 0.65%)
senior unsecured notes due in 2003 and $100 million of floating rate (based on
the one-month LIBOR plus 0.85%) senior unsecured notes due in 2004. The proceeds
from these issuances were used for general corporate purposes and to repay
commercial paper. Additionally, Duke Capital Corporation decreased its note
payable to D/FD by $286 million, to $282 million as of December 31, 2002. The
weighted-average interest rate on this note for 2002 was 2.5%. (See Notes 8 and
10.)
In 2002, a wholly owned subsidiary of Duke Energy, Duke Australia Pipeline
Finance Pty Ltd., closed a syndicated bank debt facility for $450 million with
various banks to fund its pipeline and power businesses in Australia. The
facility is split between a Duke Capital Corporation-guaranteed tranche and a
non-recourse project finance tranche that is secured by liens over existing
Australian pipeline assets. Proceeds from the project finance tranche were used
to repay intercompany loans.
During 2002, Texas Eastern Transmission, LP, issued $300 million of 5.25% senior
unsecured notes due in 2007 and $450 million of 7.0% senior unsecured notes due
in 2032. The proceeds from these issuances were used for general corporate
purposes, including the repayment of debt which matured in July 2002, and for
pipeline expansion and maintenance projects.
In 2002, Algonquin Gas Transmission Company, a wholly owned subsidiary of Duke
Energy, through a private placement transaction, issued $300 million of 5.69%
senior unsecured notes due in 2012. The proceeds from this issuance are to be
used for general corporate purposes, including repayment of maturing debt
and for pipeline expansion and maintenance projects.
83
In 2002, East Tennessee Natural Gas Company, a wholly owned subsidiary of Duke
Energy, through a private placement transaction issued $150 million of 5.71%
senior unsecured notes due in 2012. The proceeds from this issuance were used
for general corporate purposes, including the repayment of maturing corporate
debt, and for pipeline expansion and maintenance projects.
During 2002, Union Gas Limited, a wholly owned subsidiary of Duke Energy and
Westcoast, issued 200 million Canadian dollars of 5.19% debentures due in 2007.
The proceeds from this issuance were used for general corporate purposes,
including the repayment of maturing debt, the repayment of commercial paper and
funding of capital expenditures.
In 2000, Catawba, a consolidated entity of Duke Energy, issued $1,025 million of
preferred member interests to a third-party investor. The proceeds from the
non-controlling investor were reflected on the Consolidated Balance Sheets as
Minority Interest in Financing Subsidiary and were subsequently advanced to
DEPG, a wholly owned subsidiary of Duke Energy. In September 2002, Catawba
distributed the receivable from DEPG to the preferred member, which
simultaneously withdrew its interest. As a result, the $1,025 million that DEPG
previously owed to Catawba became an obligation to the third-party investor and
was reclassified on the September 30, 2002 Consolidated Balance Sheet to
Long-term Debt. In October 2002, Duke Energy purchased the equity interests in
the third party investor and effectively reduced the debt to $994 million.
Additionally, Duke Capital Corporation financially guaranteed the $994 million
in return for certain modifications to the terms of the credit agreement.
On March 14, 2002, Duke Energy acquired Westcoast for approximately $8 billion,
including the assumption of $4.7 billion of debt. The assumed debt consists of
debt of Westcoast, Union Gas Limited (a wholly-owned subsidiary of Westcoast)
and various project entities that are wholly owned or consolidated by Duke
Energy. The interest rates on the assumed debt range from 1.8% to 15.0%, with
maturity dates ranging from 2002 through 2031.
Preferred and Preference Stock
In 2002, Duke Energy redeemed all of its Auction Series A preferred stock. The
total redemption price was approximately $75 million.
Equity Offering
In October 2002, Duke Energy issued 54.5 million shares of common stock at
$18.35 in a public offering. The proceeds from the offering were approximately
$1.0 billion, before underwriting commissions and other offering expenses, and
are being used to repay commercial paper previously issued to fund a portion of
the consideration for the Westcoast acquisition.
Regulatory Matters
In 2001, the NCUC and the PSCSC began a joint investigation, along with the
Public Staff of the NCUC, regarding certain Duke Power regulatory accounting
entries for 1998, including the classification of nuclear insurance
distributions. As part of their investigation, the NCUC and PSCSC jointly
engaged an independent firm to conduct an accounting investigation of Duke
Power's accounting records for reporting periods from 1998 through June 30,
2001. In the fourth quarter of 2002, Duke Power entered into a settlement
agreement with the NCUC and PSCSC, in which the parties agreed to changes
primarily related to nuclear insurance distributions, a one-time $25 million
credit to Duke Power's deferred fuels account for the benefit of North Carolina
and South Carolina customers, and the reclassification of $52 million of $58
million held in a suspense account to a nuclear insurance operation reserve
account. The remaining $6 million would be credited to income, which resulted in
a net $19 million pre-tax charge in fourth quarter 2002. The Carolina Utilities
Customer Association, a group that represents industrial customers in regulatory
proceedings before the NCUC, has appealed the decision to the North Carolina
court of appeals. In February 2003, Duke Energy received a Western District of
North Carolina Grand Jury subpoena for documents related to the audit by the
NCUC and the PSCSC of Duke Power regulatory reporting from 1998 to 2000. Duke
Energy intends to fully cooperate with the government in connection with this
investigation.
In October 2002, Duke Energy entered into a $240 million stock purchase
agreement with National Fuel Gas Company pursuant to which National Fuel will
acquire Duke Energy's Empire State Pipeline. The
84
Empire State Pipeline, a natural gas pipeline that originates at the U.S./Canada
border and extends into New York, was acquired by Duke Energy as part of the
Westcoast acquisition in March 2002 (See Note 2). The transaction, which was
subject to a number of conditions including certain regulatory approvals, is
was finalized in February 2003.
Commitments and Contingencies
Western Power Disputes. California Litigation. Duke Energy, some of its
subsidiaries and three current or former executives have been named as
defendants, along with numerous other corporate and individual defendants, in
one or more of a total of 15 lawsuits, filed in California on behalf of
purchasers of electricity in the State of California, with one suit filed on
behalf of a Washington State electricity purchaser. Most of these lawsuits seek
class action certification and damages, and other relief, as a result of the
defendants' alleged unlawful manipulation of the California wholesale
electricity markets. These lawsuits generally allege that the defendants
manipulated the wholesale electricity markets in violation of state laws against
unfair and unlawful business practices and, in some suits, in violation of state
antitrust laws. Plaintiffs in these lawsuits seek aggregate damages of billions
of dollars. The lawsuits seek the restitution and/or disgorgement of alleged
unlawfully obtained revenues for sales of electricity and, in some lawsuits, an
award of treble damages for alleged violations of state antitrust laws.
The first six of these lawsuits were filed in late 2000 through mid-2001 and
were consolidated before a single judge in San Diego. The plaintiffs in the six
lawsuits filed a joint Master Amended Complaint in March 2002, which added
additional defendants. The claims against the additional defendants are similar
to those in the original complaints. In April 2002, some defendants, including
Duke Energy, filed cross-complaints against various market participants not
named as defendants in the plaintiffs' original and amended complaints. In May
2002, certain cross-defendants removed these actions to federal court in San
Diego.
The other nine of these 15 suits were filed in mid- to late 2002. The state
court suits have been removed to federal court, and all suits have been
transferred to federal court in San Diego for pre-trial consolidation with the
previously filed six lawsuits. Various motions are pending before the courts,
including motions concerning the jurisdiction of the courts and motions to
dismiss claims of the parties. In December 2002, the court ordered the remand of
the original six suits, and certain defendants and cross-defendants have
appealed that ruling.
On January 6, 2003, the federal court in San Diego granted the motion of the
defendants to dismiss the suit filed by the Washington state plaintiff. The
court ruled that the plaintiff's state law claims, including alleged violations
of the California antitrust and unfair business practices laws, were barred on
filed rate and federal preemption grounds.
Related Oregon and Washington Litigation. On December 16 and December 20, 2002,
respectively, plaintiffs filed class action suits against Duke Energy and
numerous other energy companies in state court in Oregon and in federal court in
Washington making allegations similar to those in the California suits.
Plaintiffs allege they paid unreasonably high prices for electricity and/or
natural gas during the time period from January 2000 to the present as a result
of defendants' activities which were fraudulent, negligent, and in violation of
each state's business practices laws. Among other things, they seek damages, an
order from the court prohibiting the defendants from engaging in the alleged
unlawful acts complained of, and an accounting of the transactions entered into
for the purchase and sale of wholesale energy.
Trade publications. On November 20, 2002, the Lieutenant Governor of the State
of California, on behalf of himself, the general public and taxpayers of
California, filed a class action suit against the publisher of natural gas trade
publications and numerous other defendants, including seven Duke Energy
entities, in state court in Los Angeles alleging that the defendants engaged in
various unlawful acts, including artificially inflating the index prices of
natural gas reported in industry publications through collusive
85
behavior, and have thereby violated state business practices laws. The
plaintiffs seek an order prohibiting the defendants from engaging in the acts
complained of, restitution, disgorgement of profits acquired through defendants'
alleged unlawful acts, an award of civil fines, compensatory and punitive
damages in unspecified amounts, and other appropriate relief.
Other proceedings. In addition to the lawsuits, several investigations and
regulatory proceedings at the state and federal levels are looking into the
causes of high wholesale electricity prices in the western U.S during 2000 and
2001. At the federal level, numerous proceedings are before the FERC. Some
parties to those proceedings have made claims for billions of dollars of refunds
from sellers of wholesale electricity, including Duke Energy Trading and
Marketing, L.L.C. (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 wholesale pricing
investigation. As a result, the FERC has ordered some sellers, including DETM,
to refund, or to offset against outstanding accounts receivable, amounts billed
for electricity sales in excess of a FERC-established proxy price. The proxy
price represents 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 by the California Independent System Operator
(CAISO) and the California Power Exchange (CalPX) for electricity sales during
January and February 2001. This offset reduced the $110 million reserve
established in 2000 to $90 million. Since December 31, 2000, Duke Energy has
closely managed the balance of doubtful receivables, and believes that the
current pre-tax bad debt provision of $90 million is appropriate. No additional
provisions for California receivables were recorded in 2001 or 2002.
In December 2002, the presiding administrative law judge in the FERC refund
proceedings issued his proposed findings with respect to the mitigated market
clearing price, including his preliminary determinations of the refund liability
of each seller of electricity in the CAISO and CalPX. These proposed findings
estimate that DETM has refund liability of approximately $95 million in the
aggregate to both the CAISO and CalPX,. This would be offset against the
remaining receivables still owed to DETM by the CAISO and CalPX. The proposed
findings are the presiding judge's estimates only and are still subject to
further recalculation and adoption by the FERC in connection with its ongoing
wholesale pricing investigation.
At the state level, the California Public Utilities Commission is conducting
formal and informal investigations to determine if power plant operators in
California, including some Duke Energy entities, 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 served a subpoena on Duke Energy
and some of its subsidiaries seeking data concerning their California market
activities. The Select Committee heard testimony from several witnesses but no
one from Duke Energy has been subpoenaed to testify.
The California Attorney General is also conducting an investigation to determine
if any market participants engaged in illegal activity, including antitrust
violations, in the course of their electricity sales into wholesale markets in
the western U.S. The Attorneys General of Washington and Oregon are
participating in the California Attorney General's investigation. The San Diego
District Attorney is conducting a separate investigation into market activities
and issued subpoenas to DETM and a DENA subsidiary.
The U.S. Attorney's Office in San Francisco served a grand jury subpoena on Duke
Energy in November 2002 seeking, in general, information relating to possible
manipulation of the electricity markets in California, including potential
antitrust violations. As with the other ongoing investigations related to the
California electricity markets, Duke Energy is cooperating with the U.S.
Attorney's Office in connection with its investigation.
Sacramento Municipal Utility District (SMUD) and City of Burbank, California
FERC Complaints. On July 24, 2002 and August 12, 2002, respectively, the
Sacramento Municipal Utility District and the City of
86
Burbank, California filed complaints with the FERC against DETM and other
providers of wholesale energy requesting that the FERC mitigate alleged unjust
and unreasonable prices in sales contracts entered into between DETM and the
complainants in the first quarter of 2001. The complainants, alleging that DETM
had the ability to exercise market power, claim that the contract prices are
unjust and unreasonable because they were entered into during a period that the
FERC determined the western markets to be dysfunctional and uncompetitive and
that the western markets influenced their price. In support of their request to
mitigate the contract price, the complainants rely on the fact that the contract
prices are higher than prices in the West following implementation of the FERC's
June 2001 price mitigation plan. The complainants request the FERC to set "just
and reasonable" contract rates and to promptly set a refund effective date. On
September 18, 2002, the FERC issued an order in the Sacramento matter setting
forth, in part, that the matter be set for an evidentiary hearing to be held in
abeyance until the parties engage in settlement negotiations, that the parties
be required to participate in settlement negotiations, and that a refund
effective date of September 22, 2002 be established. DETM participated in
settlement proceedings and reached a settlement with SMUD in early February
2003. On February 7, 2003, SMUD filed to withdraw its FERC complaint against
DETM. The FERC has not yet issued an order in the City of Burbank proceeding.
Colorado River Commission of Nevada (CRCN) /Pioneer Companies (Pioneer). The
State of Nevada, through the CRCN, filed an "interpleader" complaint in federal
court in Nevada on July 9, 2002, against Pioneer and 13 vendors, including DETM,
who entered into power transactions with the CRCN between January 1998 and the
filing date of the suit. The CRCN alleges that it purchased power on behalf of
Pioneer but that Pioneer has disavowed its contractual liability to pay for
certain of those power transactions. The CRCN asserts that DETM and the other
vendors may have claims for the value of their contracts with the CRCN in excess
of $100 million. The CRCN asks the court to assess the competing claims of the
parties and distribute the assets which it seeks to deposit into the registry of
the court (cash assets of approximately $35 million allegedly held for Pioneer's
behalf as well as the value of electric power delivered or to be delivered on
Pioneer's behalf) and issue other appropriate orders to resolve the claims while
prohibiting the institution or prosecution of other proceedings affecting the
claims at issue. DETM and certain other parties have filed motions to dismiss
the complaint on various grounds.
Management believes, based on its analysis of the facts and the asserted claims,
that the resolution of these Western Power Disputes will have no material
adverse effect on Duke Energy's consolidated results of operations, cash flows
or financial position.
Exxon Mobil Corporation Arbitration. In 2000, three Duke Energy subsidiaries
initiated binding arbitration against three Exxon Mobil Corporation subsidiaries
(the Exxon Mobil entities) concerning the parties' joint ownership of DETM and
related affiliates (the Ventures). At issue was a buy-out right provision under
the joint venture agreements for these entities. If there is a material business
dispute between the parties, which Duke Energy alleged had occurred, the buy-out
provision gives Duke Energy the right to purchase Exxon Mobil's 40% interest in
DETM. Exxon Mobil does not have a similar right under the joint venture
agreements and once Duke Energy exercises the buy-out right, each party has the
right to "unwind" the buy-out under certain specific circumstances. In December
2000, Duke Energy exercised its right to buy the Exxon Mobil entities' interest
in the Ventures. Duke Energy claimed that refusal by the Exxon Mobil entities to
honor the exercise was a breach of the buy-out right provision, and sought
specific performance of the provision. Duke Energy also made additional claims
against the Exxon Mobil entities for breach of the agreements governing the
Ventures. Exxon Mobil also asserted breach of contract claims against Duke
Energy.
In December 2002, an arbitration panel issued a binding ruling against Exxon
Mobil on its claims against Duke Energy and granted Duke Energy favorable
declaratory relief. Duke Energy has terminated the previously exercised buy-out
provision.
Trading Matters. Since April 2002, 17 shareholder class action lawsuits have
been filed against Duke Energy: 13 in the United States District Court for the
Southern District of New York and four in the United States District Court for
the Western District of North Carolina. The 13 lawsuits pending in New York
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were consolidated into one action and included as co-defendants Duke Energy
executives and two investment banking firms. In December 2002, the New York
court granted in all respects the defendants' motion to dismiss the plaintiffs'
claims. The four lawsuits pending in North Carolina name as co-defendants Duke
Energy executives. Two of the four North Carolina suits have been consolidated
and involve claims under the Employee Retirement Income and Security Act
relating to the Company's Retirement Savings Plan. This consolidated action
names Duke Energy board members as co-defendants. In addition, Duke Energy has
received three shareholder's derivative notices demanding that it commence
litigation against named executives and directors of Duke Energy for alleged
breaches of fiduciary duties and insider trading. Duke Energy's response to the
derivative demands is not required until 90 days after receipt of written notice
requesting a response.
The class action lawsuits and the threatened shareholder derivative claims arise
out of allegations that Duke Energy improperly engaged in so-called "round-trip"
trades which resulted in an alleged overstatement of revenues over a three-year
period of approximately $1 billion. The plaintiffs seek recovery of an unstated
amount of compensatory damages, attorneys' fees and costs for alleged violations
of securities laws. In one of the lawsuits, the plaintiffs assert a common law
fraud claim and seek, in addition to compensatory damages, disgorgement and
punitive damages. Duke Energy intends to vigorously defend itself and its named
executives and board members.
In 2002, Duke Energy responded to information requests and subpoenas from the
FERC, the SEC, and the Commodity Futures Trading Commission (CFTC), and to grand
jury subpoenas issued by the U.S. Attorney's office in Houston, Texas. All
information requests and subpoenas seek documents and information related to
trading activities, including so-called "round-trip" trading. Duke Energy
received notice in mid-October that the SEC formalized its investigation
regarding "round-trip" trading. Duke Energy is cooperating with the respective
governmental agencies.
Duke Energy submitted a final report to the SEC based on a review of
approximately 750,000 trades made by various Duke Energy subsidiaries between
January 1, 1999 and June 30, 2002. Outside counsel conducted an extensive review
of trading, accounting, and other records, with the assistance of Duke Energy
senior legal, corporate risk management and accounting personnel. Duke Energy
identified 28 "round-trip" transactions done for the apparent purpose of
increasing volumes on the Intercontinental Exchange and 61 "round-trip"
transactions done at the direction of one of Duke Energy's traders that did not
have a legitimate business purpose and were contrary to corporate policy.
As a result of the trading review, Duke Energy has taken appropriate
disciplinary action and put in place additional risk management procedures to
improve and strengthen the oversight and controls of its trading operations.
Duke Energy has also reconfirmed to employees that engaging in simultaneous or
prearranged transactions that lack a legitimate business purpose, or any trading
activities that lack a legitimate business purpose, is against company policy.
As a result of Duke Energy's findings in the course of its investigation related
to the SEC inquiry on "round-trip" trades, DENA identified accounting issues
that justified adjustments which reduced its EBIT by $11 million during 2002. An
additional $2 million charge was recorded in other Duke Energy business segments
related to these findings. Duke Energy completed its analysis of such round trip
trades in 2002.
On October 25, 2002, the FERC issued a data request to the "Largest North
American Gas Marketers, As Measured by 2001 Physical Sales Volumes (Bcf/d),"
including DETM. In general, the data request asks for information concerning
natural gas price data that was submitted by the gas marketers to entities that
publish natural gas price indices. DETM responded to the FERC's data request and
also is responding to requests that the CFTC has made for similar information.
Sonatrach. Duke Energy LNG Sales, Inc. (Duke LNG) initiated arbitration
proceedings against Sonatrach, the Algerian state-owned energy company, alleging
that Sonatrach had breached its obligations by its failure to provide shipping
under certain LNG Purchase and Transportation Agreements (the Sonatrach
Agreements) relating to Duke LNG's purchase of liquefied natural gas (LNG) from
Algeria and its transportation by LNG tanker to Lake Charles, Louisiana. In
response to Duke LNG's claims, Sonatrach, together with its LNG sales and
marketing subsidiary, Sonatrading Amsterdam B.V. (Sonatrading), have claimed
that Duke LNG repudiated the Sonatrach Agreements as a result of, among other
things, Duke LNG's alleged failure to diligently seek commitments from
customers, and to submit offers to Sonatrading based on such commitments, for
the purchase of LNG from Sonatrading. By virtue of Duke LNG's alleged breaches,
Sonatrach and Sonatrading seek to terminate the Sonatrach Agreements and to
recover damages from Duke LNG. The final evidentiary hearing in the liability
phase of this arbitration was concluded in January 2003 in London. Briefing and
oral argument on this phase will be completed in March 2003, and a ruling from
the panel on issues of liability is expected by late summer 2003. The damages
phase for this proceeding will be scheduled following the panel's liability
ruling.
Enron Bankruptcy. On December 2, 2001, Enron Corporation and certain of its
affiliates filed for relief pursuant to Chapter 11 of the United States
Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of New
York. Additional affiliates have filed for bankruptcy since that date. Certain
affiliates of Duke Energy engaged in transactions with various Enron entities
prior to the bankruptcy filings. DETM was a member of the Official Committee of
Unsecured Creditors in the bankruptcy cases which are being jointly
administered but, as of February 2003, DETM resigned from the Offical Committee
of Unsecured Creditors in the Enron bankruptcy case. Duke Energy has taken a
reserve to offset its exposure to Enron.
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In mid-November 2002, various Enron trading entities demanded payment from DETM
and Duke Energy Merchants, L.L.C. (DEM) for certain energy commodity sales
transactions without regard to the set off rights of DETM and DEM and demanded
that DETM detail balances due under certain master trading agreements without
regard to the set-off rights of DETM. On December 13, 2002, DETM and DEM filed
an adversary proceeding against Enron Corporation and certain of its affiliates
(collectively Enron), seeking, among other things, a declaration affirming each
plaintiff's right to set off its respective debts to Enron. The complaint
alleges that the Enron affiliates were operated by Enron Corporation as its
alter ego and as components of a single trading enterprise and that DETM and DEM
should be permitted to exercise their respective rights of mutual set-off
against the Enron trading enterprise under the Bankruptcy Code. The complaint
also seeks the imposition of a constructive trust so that any claims by Enron
against DETM or DEM are subject to the respective set off rights of DETM and
DEM. Enron's has filed its response asserting that DETM and DEM are not entitled
to the requested relief.
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, royalty disputes, mismeasurement and
mispayment claims (some of which are brought as class actions), 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 have no material adverse effect on consolidated results of
operations, cash flows or financial position.
Impairment Charges and Other Matters
In response to the downturn in the energy merchant sector, and overall sluggish
economy in 2002, Duke Energy has taken steps to cut costs and downsize our
business. Duke Energy recorded asset impairment charges in 2002 of almost $500
million in our energy services businesses due to our revised outlook of the
markets and Duke Energy's decision to abandon certain projects and suspend
others. These charges included goodwill impairment, site development cost
write-offs, technology system write-off, plant impairment and turbine write-offs
and were calculated applying generally accepted accounting principles, primarily
SFAS 142 and SFAS 144.
During 2002, Field Services also recorded, as part of its internal review of
balance sheet accounts, approximately $52 million of charges in the following
five categories: operating expense accruals; gas inventory adjustments; gas
imbalances; joint venture and investment account reconciliation; and other
balance sheet accounts. Approximately $37 million of these charges are
corrections of errors from prior years which are immaterial to Duke Energy's
reported results. This review of balance sheet accounts is complete.
Additionally, Field Services recorded impairment charges of $28 million for
certain operating assets in accordance with SFAS 144.
During 2002, Duke Energy reduced its workforce to align the business with
current market conditions. Duke Energy recorded charges totaling approximately
$100 million related to these reductions. The charges were recorded consistent
with applicable accounting rules including EITF 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(Including Certain Cost Incurred in a Restructuring)" and SFAS No. 112,
"Employers' Accounting for Postemployment Benefits - An Amendment of FASB
Statements No. 5 and 43)."
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