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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2000 or
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission file number 1-4928
DUKE ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
56-0205520
North Carolina (I.R.S. Employer Identification
(State or other jurisdiction of No.)
incorporation or organization)
28202-1904
526 South Church Street, Charlotte, (Zip Code)
North Carolina
(Address of principal executive
offices)
704-594-6200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- -----------------------------
Common Stock, without par value New York Stock Exchange, Inc.
6.375% Preferred Stock A, 1993 Series, par value
$25 New York Stock Exchange, Inc.
First and Refunding Mortgage Bonds, 5 7/8% Due
2001 New York Stock Exchange, Inc.
First and Refunding Mortgage Bonds, 5 7/8%
Series C Due 2003 New York Stock Exchange, Inc.
First and Refunding Mortgage Bonds, 6 1/4%
Series B Due 2004 New York Stock Exchange, Inc.
First and Refunding Mortgage Bonds, 6 3/8% Due
2008 New York Stock Exchange, Inc.
First and Refunding Mortgage Bonds, 6 5/8%
Series B Due 2003 New York Stock Exchange, Inc.
First and Refunding Mortgage Bonds, 6 3/4% Due
2025 New York Stock Exchange, Inc.
First and Refunding Mortgage Bonds, 6 7/8%
Series B Due 2023 New York Stock Exchange, Inc.
First and Refunding Mortgage Bonds, 7% Due 2033 New York Stock Exchange, Inc.
First and Refunding Mortgage Bonds, 7 1/2%
Series B Due 2025 New York Stock Exchange, Inc.
First and Refunding Mortgage Bonds, 7 7/8% Due
2024 New York Stock Exchange, Inc.
7.20% Quarterly Income Preferred Securities
issued by Duke Energy Capital Trust I and
guaranteed by Duke Energy Corporation New York Stock Exchange, Inc.
7.20% Trust Preferred Securities issued by Duke
Energy Capital Trust II and guaranteed by Duke
Energy Corporation New York Stock Exchange, Inc.
Preference Stock Purchase Rights New York Stock Exchange, Inc.
Series C 6.60% Senior Notes Due 2038 New York Stock Exchange, Inc.
Corporate Units New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
Title of class
Preferred Stock, par value $100
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
Estimated aggregate market value of the voting stock held by
nonaffiliates of the registrant at February 28, 2001.......... $30,197,000,000
Number of shares of Common Stock, without par value,
outstanding at February 28, 2001.............................. 742,000,590
Documents incorporated by reference:
The registrant is incorporating herein by reference certain sections of
the proxy statement relating to the 2001 annual meeting of shareholders to
provide information required by Part III, Items 10, 11, 12 and 13 of this
annual report.
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DUKE ENERGY CORPORATION
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2000
TABLE OF CONTENTS
Item Page
---- ----
PART I.
1. Business........................................................... 1
General......................................................... 1
Franchised Electric............................................. 3
Natural Gas Transmission........................................ 8
Field Services.................................................. 10
North American Wholesale Energy................................. 11
International Energy............................................ 15
Other Energy Services........................................... 16
Duke Ventures................................................... 16
Environmental Matters........................................... 17
Geographic Regions ............................................. 17
Employees....................................................... 17
Recent Financings............................................... 18
Operating Statistics............................................ 18
Executive Officers of Duke Energy............................... 19
2. Properties......................................................... 20
3. Legal Proceedings.................................................. 22
4. Submission of Matters to a Vote of Security Holders................ 24
PART II.
5. Market for Registrant's Common Equity and Related Stockholder
Matters............................................................ 25
6. Selected Financial Data............................................ 26
7. Management's Discussion and Analysis of Results of Operations and
Financial Condition................................................ 27
7A. Quantitative and Qualitative Disclosures About Market Risk......... 46
8. Financial Statements and Supplementary Data........................ 47
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................... 88
PART III.
10. Directors and Executive Officers of the Registrant................. 88
11. Executive Compensation............................................. 88
12. Security Ownership of Certain Beneficial Owners and Management..... 88
13. Certain Relationships and Related Transactions..................... 88
PART IV.
14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K.... 89
Signatures......................................................... 90
Exhibit Index...................................................... 91
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
From time to time, Duke Energy may make statements regarding its
assumptions, projections, expectations, intentions or beliefs about future
events. These statements are intended as "forward-looking statements" under the
Private Securities Litigation Reform Act of 1995. Duke Energy cautions that
assumptions, projections, expectations, intentions or beliefs about future
events may and often do vary from actual results, and the differences between
assumptions, projections, expectations, intentions or beliefs and actual
results can be material. Accordingly, there can be no assurance that the actual
results will not differ materially from those expressed or implied by the
forward-looking statements. For a discussion of some factors that could cause
actual achievements and events to differ materially from those expressed or
implied in such forward-looking statements, see "Management's Discussion and
Analysis of Results of Operations and Financial Condition, Current Issues --
Forward-Looking Statements."
PART I.
Item 1. Business.
GENERAL
Duke Energy Corporation (collectively with its subsidiaries, "Duke Energy")
is an integrated energy and energy services provider with the ability to offer
physical delivery and management of both electricity and natural gas throughout
the U.S. and abroad. Duke Energy provides these and other services through
seven business segments.
Franchised Electric generates, transmits, distributes and sells electric
energy in central and western North Carolina and the western portion of South
Carolina. Its operations are conducted primarily through Duke Power and
Nantahala Power and Light. These electric operations are subject to the rules
and regulations of the Federal Energy Regulatory Commission (FERC), the North
Carolina Utilities Commission (NCUC) and the Public Service Commission of South
Carolina (PSCSC).
Natural Gas Transmission provides interstate transportation and storage of
natural gas for customers primarily in the Mid-Atlantic, New England and
southeastern states. Its operations are conducted primarily through Duke Energy
Gas Transmission Corporation. The interstate natural gas transmission and
storage operations are subject to the rules and regulations of the FERC.
Field Services gathers, processes, transports, markets and stores natural
gas and produces, transports, markets and stores natural gas liquids (NGLs).
Its operations are conducted primarily through Duke Energy Field Services, LLC
(DEFS), a limited liability company that is approximately 30% owned by Phillips
Petroleum. Field Services operates gathering systems in western Canada and 11
contiguous states that serve major natural gas-producing regions in the Rocky
Mountain, Permian Basin, Mid-Continent, East Texas-Austin Chalk-North
Louisiana, as well as onshore and offshore Gulf Coast areas.
North American Wholesale Energy's (NAWE's) activities include asset
development, operation and management, primarily through Duke Energy North
America, LLC (DENA), and commodity sales and services related to natural gas
and power, primarily through Duke Energy Trading and Marketing, LLC (DETM).
DETM is a limited liability company that is approximately 40% owned by Exxon
Mobil Corporation. NAWE also includes Duke Energy Merchants (DEM), which
develops new business lines in the evolving energy commodity markets. NAWE
conducts its business throughout the U.S. and Canada. The operations of the
previously segregated Trading and Marketing segment were combined by management
into NAWE during 2000.
International Energy conducts its operations through Duke Energy
International, LLC. International Energy's activities include asset
development, operation and management of natural gas and power facilities and
energy trading and marketing of natural gas and electric power. This activity
is targeted in the Latin American, Asia-Pacific and European regions.
Other Energy Services is a combination of businesses that provide
engineering, consulting, construction and integrated energy solutions
worldwide, primarily through Duke Engineering & Services, Inc. (DE&S),
Duke/Fluor Daniel (D/FD) and DukeSolutions, Inc. (DukeSolutions). D/FD is a
50/50 partnership between Duke Energy and Fluor Enterprises, Inc.
Duke Ventures is comprised of other diverse businesses, primarily operating
through Crescent Resources, Inc. (Crescent), DukeNet Communications, LLC
(DukeNet) and Duke Capital Partners (DCP). Crescent develops high-quality
commercial, residential and multi-family real estate projects and manages land
holdings primarily in the southeastern U.S. DukeNet provides fiber optic
networks for industrial, commercial and residential customers. DCP, a newly
formed, wholly owned merchant finance company, provides financing, investment
banking and asset management services to wholesale and commercial energy
markets.
1
Certain terms used to describe Duke Energy's business are explained below.
British Thermal Unit (Btu). A standard unit for measuring thermal energy or
heat commonly used as a gauge for the energy content of natural gas and other
fuels.
Cubic Foot (cf). The most common unit of measurement of gas volume; the
amount of natural gas required to fill a volume of one cubic foot under stated
conditions of temperature, pressure and water vapor.
Distribution. The system of lines, transformers and switches that connect
the electric transmission system to customers.
Federal Energy Regulatory Commission (FERC). The agency that regulates the
transportation of electricity and natural gas in interstate commerce and
authorizes the buying and selling of energy commodities at market-based rates.
Gathering System. Pipeline, processing and related facilities that access
production and other sources of natural gas supplies for delivery to mainline
transmission systems.
Generation. The process of transforming other forms of energy, such as
nuclear or fossil fuels, into electricity. Also, the amount of electric energy
produced, expressed in megawatt-hours.
Greenfield Development. The development of a new power generating facility
on an undeveloped site.
Independent System Operator (ISO). Ensures non-discriminatory access to a
regional transmission system, providing all customers access to the power
exchange and clearing all bilateral contract requests for use of the electric
transmission system. Also responsible for maintaining bulk electric system
reliability.
Liquefied Natural Gas (LNG). Natural gas that has been converted to a liquid
by cooling it to -260 degrees Fahrenheit.
Local Distribution Company (LDC). A company that obtains the major portion
of its revenues from the operations of a retail distribution system for the
delivery of electricity or gas for ultimate consumption.
Natural Gas. A naturally occurring mixture of hydrocarbon and non-
hydrocarbon gases found in porous geological formations beneath the earth's
surface, often in association with petroleum. The principal constituent is
methane.
Natural Gas Liquids (NGLs). Liquid hydrocarbons extracted during the
processing of natural gas. Principal commercial NGLs include butanes, propane,
natural gasoline and ethane.
Peak Load. The amount of electricity required during periods of highest
demand. Peak periods fluctuate by season, generally occurring in the morning
hours in winter and in late afternoon during the summer.
Throughput. The amount of natural gas or natural gas liquids transported
through a pipeline system.
Transmission System (Electric). An interconnected group of electric
transmission lines and related equipment for moving or transferring electric
energy in bulk between points of supply and points at which it is transformed
for delivery over a distribution system to customers, or for delivery to other
electric transmission systems.
Transmission System (Natural Gas). An interconnected group of natural gas
pipelines and associated facilities for transporting natural gas in bulk
between points of supply and delivery points to industrial customers, local
distribution companies, or for delivery to other natural gas transmission
systems.
Watt. A measure of real power production or usage equal to one joule per
second.
A discussion of the current business and operations of each of Duke Energy's
segments follows. For further discussion of the operating outlook of Duke
Energy and its segments, see "Management's Discussion and Analysis of Results
of Operations and Financial Condition, Introduction--Business Strategy." For
financial information concerning Duke Energy's business segments, see Note 3 to
the Consolidated Financial Statements, "Business Segments."
Duke Energy is a North Carolina corporation with its principal executive
offices located at 526 South Church Street, Charlotte, NC 28202-1904. The
telephone number is 704-594-6200.
2
FRANCHISED ELECTRIC
Service Area and Customers
Franchised Electric generates, transmits, distributes and sells electricity
over a service area which covers about 22,000 square miles with an estimated
population of 5.3 million people in central and western portions of North
Carolina and the western portion of South Carolina. Franchised Electric
supplies electric service directly to approximately two million residential,
commercial and industrial customers over 92,000 miles of distribution lines and
a 12,700 mile transmission system. Electricity is sold at wholesale to
incorporated municipalities and to several public and private utilities. In
addition, sales are made through contractual agreements to municipal or
cooperative customers who purchased portions of the Catawba Nuclear Station.
For statistics related to gigawatt-hour sales by customer type, see "Operating
Statistics." For further discussion of the Catawba Nuclear Station joint
ownership, see Note 5 to the Consolidated Financial Statements, "Joint
Ownership of Generating Facilities."
Franchised Electric's service area is undergoing increasingly diversified
industrial and commercial development. The textile industry, machinery and
equipment manufacturing, and chemical and chemical-related industries are of
major significance to the economy of the area. Other industrial activities
include rubber and plastic products, paper and allied products, and various
other light and heavy manufacturing and service businesses. The largest
industry served is the textile industry, which accounted for approximately $419
million of Franchised Electric's revenues for 2000, representing 9% of total
electric revenues and 35% of industrial revenues. Franchised Electric normally
experiences seasonal peak loads in summer and winter.
[MAP]
3
Capacity and Resources of Energy
Electric energy required to supply the needs of Franchised Electric's
customers is primarily generated by three nuclear generating stations with a
combined net capacity of 5,409 megawatts (MW), eight coal-fired stations with a
combined capacity of 7,572 MW, 31 hydroelectric stations with a combined
capacity of 2,693 MW and six combustion turbine stations with a combined
capacity of 2,081 MW. Energy and capacity are also supplied through contracts
with other generators of electricity and purchased on the open market.
Franchised Electric has interconnections and arrangements with its neighboring
utilities, which are considered adequate for planning, emergency assistance,
exchange of capacity and energy and reliability of power supply. Future
increased energy requirements of Franchised Electric's customers are expected
to be supplied through additional construction, purchased power contracts and
open market purchases. For statistics regarding sources of electric energy, see
"Operating Statistics."
Fuel Supply
Franchised Electric presently relies principally on coal and nuclear fuel
for the generation of electric energy. Franchised Electric's reliance on oil
and gas is minimal. Information regarding the utilization of sources of power
and cost of fuels for each of the three years in the period ended December 31,
2000 is set forth in the following table:
Cost of Fuel
per Net
Kilowatt-hour
Generation by Generated
Source (Percent) (Cents)
----------------- --------------
2000 1999 1998 2000 1999 1998
----- ----- ----- ---- ---- ----
Coal........................................... 50.9 50.4 50.7 1.29 1.33 1.32
Nuclear(a)..................................... 48.1 48.0 46.2 0.42 0.43 0.44
Oil and gas(b)................................. 0.5 0.8 1.0 7.32 4.51 4.01
----- ----- -----
All fuels (cost based on weighted
average)(a)................................... 99.5 99.2 97.9 0.91 0.92 0.93
Hydroelectric(c)............................... 0.5 0.8 2.1
----- ----- -----
100.0 100.0 100.0
===== ===== =====
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(a) Statistics related to nuclear generation and all fuels reflect Franchised
Electric's 12.5% ownership interest in the Catawba Nuclear Station.
(b) Cost statistics include amounts for light-off fuel at Franchised Electric's
coal-fired stations.
(c) Generating figures are net of output required to replenish pumped storage
units during off-peak periods.
Coal. Franchised Electric meets its coal demand through purchase supply
contracts and spot agreements. Large amounts of its coal supply are obtained
under supply contracts with mining operators utilizing both underground and
surface mining. Franchised Electric has an adequate supply of coal to fuel its
current operations. Its supply contracts, all of which have price adjustment
provisions, have expiration dates ranging from 2001 to 2003. Duke Energy
believes that it will be able to renew such contracts as they expire or to
enter into similar contractual arrangements with other coal suppliers for the
quantities and qualities of coal required. The coal purchased under these
supply contracts is produced from mines located in eastern Kentucky, southern
West Virginia and southwestern Virginia. Coal requirements not met by supply
contracts have been and are expected to be fulfilled with spot market
purchases.
The average sulfur content of coal being purchased by Franchised Electric is
approximately 1%. Such coal satisfies the current emission limitation for
sulfur dioxide for existing facilities. See also "Management's Discussion and
Analysis of Results of Operations and Financial Condition, Current Issues --
Environmental, Air Quality Control" for additional information regarding
particulate matter.
Nuclear. Generally, the process for developing nuclear generating fuel
supply involves the mining and milling of uranium ore to produce uranium
concentrates, the conversion of uranium concentrates to uranium hexafluoride,
enrichment of that gas and fabrication of the enriched uranium hexafluoride
into usable fuel assemblies. Franchised Electric has contracted for uranium
materials and services required to fuel the Oconee,
4
McGuire and Catawba Nuclear Stations. Based upon current projections, these
contracts will meet Franchised Electric's requirements through the following
years:
Uranium Conversion Enrichment Fabrication
Nuclear Station Material Service Service Service
- --------------- -------- ---------- ---------- -----------
Oconee............................... 2002 2002 2002 2006
McGuire.............................. 2002 2002 2002 2009
Catawba.............................. 2002 2002 2002 2009
Uranium material requirements will be met through various supplier
contracts, with uranium material produced primarily in the U.S. and Canada.
Duke Energy believes that it will be able to renew contracts as they expire or
to enter into similar contractual arrangements with other suppliers of nuclear
fuel materials and services. Requirements not met by long-term supply contracts
have been and are expected to be fulfilled with unfabricated uranium spot
market purchases.
Duke Energy owns and operates the McGuire and Oconee Nuclear Stations with
two and three nuclear reactors, respectively, and operates and has a partial
ownership interest in the Catawba Nuclear Station with two nuclear reactors.
Nuclear insurance coverage is maintained in three program areas: liability
coverage; property, decontamination and decommissioning coverage; and business
interruption and/or extra expense coverage. Certain expenses associated with
nuclear insurance premiums paid by Duke Energy are reimbursed by the other
joint owners of the Catawba Nuclear Station. Pursuant to the Price-Anderson
Act, Duke Energy is required to insure against public liability claims
resulting from nuclear incidents to the full limit of liability of
approximately $9.5 billion. See Note 14 to the Consolidated Financial
Statements, "Commitments and Contingencies -- Nuclear Insurance" for further
information.
Estimated site-specific nuclear decommissioning costs, including the cost of
decommissioning plant components not subject to radioactive contamination,
total approximately $1.9 billion stated in 1999 dollars based on
decommissioning studies completed in 1999. This amount includes Duke Energy's
12.5% ownership in the Catawba Nuclear Station. The other joint owners of
Catawba Nuclear Station are responsible for decommissioning costs related to
their ownership interests in the station. See Note 11 to the Consolidated
Financial Statements, "Nuclear Decommissioning Costs" for further information.
Duke Energy entered into a contract with the Department of Energy (DOE) to
use mixed oxide fuel at its McGuire and Catawba nuclear stations. The mixed
oxide fuel is fabricated from plutonium from the government's surplus and is
similar to conventional uranium fuel. Before using the fuel, Duke Energy must
apply for and receive amendments to the respective facility operating licenses
from the Nuclear Regulatory Commission (NRC). Mixed oxide fuel is scheduled to
be used at McGuire and Catawba nuclear stations in 2007.
After spent fuel is removed from a nuclear reactor, it is placed in
temporary storage for cooling in a spent fuel pool at the nuclear station site.
Under provisions of the Nuclear Waste Policy Act of 1982, Duke Energy has
entered into contracts with the DOE for the disposal of spent nuclear fuel. The
DOE failed to begin accepting the spent nuclear fuel on January 31, 1998, the
date provided by the Nuclear Waste Policy Act and by Duke Energy's contract
with the DOE. On June 8, 1998, Duke Energy filed with the U.S. Court of Federal
Claims a claim against the DOE for damages in excess of $1 billion arising out
of the DOE's failure to begin accepting commercial spent nuclear fuel by
January 31, 1998. Damages claimed in the suit are intended to recover costs
that Duke Energy is incurring and will continue to incur as a result of the
DOE's partial material breach of its contract with Duke Energy, including costs
associated with securing additional spent fuel storage capacity. Duke Energy
will continue to safely manage its spent nuclear fuel until the DOE accepts it.
Competition
Electric industry restructuring is being addressed in all 50 states and in
the District of Columbia, which is resulting in changes in the industry. Duke
Energy continues to monitor progress toward a more competitive environment and
has actively participated in regulatory reform deliberations in North Carolina
and South Carolina. Currently, however, movement toward retail deregulation in
these states seems to be slowing as a consequence of recent developments
related to deregulation of the electric industry in California. For further
discussion, see "Management's Discussion and Analysis of Results of Operations
and Financial Condition, Current Issues --Electric Competition and Current
Issues--California Issues."
5
Franchised Electric is currently subject to competition in some areas from
government owned power systems, municipally owned electric systems, rural
electric cooperatives and, in certain instances, other private utilities.
Currently, statutes in North Carolina and South Carolina provide for the
assignment by the NCUC and the PSCSC, respectively, of all areas outside
municipalities in such States to regulated electric utilities and rural
electric cooperatives. Substantially all of the territory comprising Franchised
Electric's service area has been so assigned. The remaining areas have been
designated as unassigned and in such areas Franchised Electric remains subject
to competition. A decision of the North Carolina Supreme Court limits, in some
instances, the right of North Carolina municipalities to serve customers
outside their corporate limits. In South Carolina there continues to be
competition between municipalities and other electric suppliers outside the
corporate limits of the municipalities, subject, however, to the regulation of
the PSCSC. In addition, Franchised Electric is engaged in continuing
competition with various natural gas providers.
Regulation
The NCUC and the PSCSC approve rates for retail electric sales within their
respective states. The FERC approves Franchised Electric's rates for certain
electric sales to wholesale customers. For further discussion of rate matters,
see Note 4 to the Consolidated Financial Statements, "Regulatory Matters --
Franchised Electric." The FERC, the NCUC and the PSCSC also have authority
over the construction and operation of Franchised Electric's facilities.
Franchised Electric holds certificates of public convenience and necessity
issued by the FERC, the NCUC and the PSCSC, authorizing it to construct and
operate the electric facilities now in operation for which certificates are
required, and to sell electricity to retail and wholesale customers. Prior
approval from the NCUC and the PSCSC is required to issue securities.
The NCUC, PSCSC and FERC have implemented regulations governing access to
regulated electric customer data by non-regulated entities and services
provided between regulated and non-regulated affiliated entities. These
regulations affect the activities of NAWE and Other Energy Services with
Franchised Electric.
The Energy Policy Act of 1992 (EPACT) and the FERC's subsequent rulemaking
activities permit the FERC to order transmission access for third parties to
transmission facilities owned by another entity. EPACT does not, however,
permit the FERC to issue orders requiring transmission access to retail
customers. The FERC has issued orders for third-party transmission service and
a number of rules of general applicability, including Orders 888 and 889.
Pursuant to the FERC's final rules, Franchised Electric obtained from the FERC
open-access rule the rights to sell capacity and energy at market-based rates
from its own assets. For further discussion, see "Management's Discussion and
Analysis of Results of Operations and Financial Condition, Current Issues--
Electric Competition."
On December 20, 1999 and February 25, 2000, the FERC issued its Order 2000
and Order 2000-A regarding Regional Transmission Organizations (RTOs). In these
orders, the FERC stressed the voluntary nature of RTO participation by
utilities and set minimum characteristics and functions that must be met by
utilities that participate in an RTO, including exclusive and independent
authority to propose rates, terms and conditions of transmission service
provided over the facilities it operates. The order provides for an open,
flexible structure for RTOs to meet the needs of the market and provides for
the possibility of incentive ratemaking and other benefits for utilities that
participate in an RTO.
As a result of these rulemakings, on October 16, 2000, Duke Energy and two
other investor-owned utilities, Progress Energy and South Carolina Electric &
Gas, filed with the FERC to establish GridSouth Transco, LLC (GridSouth), as an
RTO. If approved, GridSouth will be a for-profit, independent transmission
company, responsible for operating and planning the companies' combined
transmission systems. The target date for formation of GridSouth is December
15, 2001. However, the actual date that GridSouth becomes operational will
depend upon the resolution of all necessary regulatory approvals and resolving
all technical issues. Management believes that the establishment of GridSouth
will not have a material adverse effect on Duke Energy's future consolidated
results of operations, cash flows or financial position.
6
The Franchised Electric segment is subject to the jurisdiction of the NRC as
to the design, construction and operation of its nuclear stations.
The hydroelectric generating facilities of Franchised Electric are licensed
by the FERC under Part I of the Federal Power Act, with license terms expiring
from 2001 to 2036. The nuclear generating facilities of Franchised Electric are
licensed by the NRC with license terms expiring from 2021 through 2034. The
FERC has authority to grant extensions of hydroelectric generating licenses,
and the NRC has authority to grant extensions of nuclear generating licenses.
During 2000, the NRC renewed the operating license for Duke Energy's three
Oconee nuclear units through 2033 to 2034. Duke Energy also initiated the
license renewal process for the McGuire and Catawba Nuclear Stations in 2000.
Duke Energy has filed a license application for one of its hydroelectric
facilities for which it expects to receive a new license by the end of 2001.
Duke Energy is also in various stages of relicensing other hydroelectric
facilities whose licenses expire between 2005 and 2008.
The Franchised Electric segment is subject to the jurisdiction of the
Environmental Protection Agency (EPA) and state environmental agencies. For a
discussion of environmental regulation, see "Environmental Matters."
7
NATURAL GAS TRANSMISSION
Natural Gas Transmission provides interstate transportation and storage of
natural gas through its operating subsidiaries, which include Texas Eastern
Transmission Corporation (TETCO) and Algonquin Gas Transmission Company
(Algonquin), East Tennessee Natural Gas Company (East Tennessee) and Market Hub
Partners (MHP). East Tennessee and MHP were acquired in March 2000 and
September 2000, respectively. Panhandle Eastern Pipe Line Company and Trunkline
Gas Company, were also a part of Natural Gas Transmission until their sale to
CMS Energy Corporation (CMS) in March 1999. See further discussion of the sale
and acquisitions in Note 2 to the Consolidated Financial Statements, "Business
Acquisitions and Dispositions."
Investments include a 37.5% ownership interest in Maritimes & Northeast
Pipeline, which has a design capacity of 530 million cubic feet per day
(MMcf/d) in Canada and 400 MMcf/d in the U.S. Maritimes & Northeast Pipeline
was placed in service and received the first delivery of natural gas from the
Sable Offshore Energy Project near Nova Scotia in December 1999. Duke Energy
operates the U.S. portion of the Maritimes & Northeast Pipeline.
For 2000, consolidated natural gas deliveries by Natural Gas Transmission's
interstate pipelines totaled 1,717 trillion British thermal units (TBtu),
compared to 1,565 TBtu in 1999, a 10% increase from last year. The pipelines
that were sold to CMS during 1999 also delivered 328 TBtu in 1999 prior to the
sale. A majority of Natural Gas Transmission's contracted volumes are under
long-term firm service agreements with local distribution company (LDC)
customers in the pipelines' market areas. Firm transportation services are also
provided to gas marketers, producers, other pipelines, electric power
generators and a variety of end-users. In addition, the pipelines provide both
firm and interruptible transportation to various customers on a short-term or
seasonal basis. See natural gas deliveries statistics under "Operating
Statistics." Demand for gas transmission on Natural Gas Transmission's
interstate pipeline systems is seasonal, with the highest throughput occurring
during the colder periods in the first and fourth quarters. Natural Gas
Transmission's major pipeline customers are located in Pennsylvania, New
Jersey, Connecticut, Virginia, Tennessee, Rhode Island and New York.
[MAP]
8
Natural Gas Transmission's interstate pipeline systems consist of
approximately 12,000 miles of pipe, which includes 830 miles related to the
partial ownership interest in Maritimes & Northeast Pipeline. The pipeline
systems receive natural gas from many major North American producing regions
for delivery to markets primarily in the Mid-Atlantic, southeastern and New
England states. Consistent with its growth strategy, Duke Energy and The
Williams Companies, Inc. announced the closing on February 1, 2001 of their
joint purchase of Coastal Corporation's Gulfstream Natural Gas System LLC. The
planned 744-mile Gulfstream gas pipeline will originate near Mobile, Alabama,
and cross the Gulf of Mexico to Manatee County, Florida.
MHP owns natural gas salt cavern facilities in south Texas and Louisiana
with a total storage capacity of 23 billion cubic feet (Bcf). Utilizing these
facilities, MHP provides high deliverability firm storage services, real-time
title tracking and other interruptible storage hub services to producers, end-
users, LDCs, pipelines and natural gas marketers. TETCO and East Tennessee also
provide firm and interruptible open-access storage services. Storage is offered
as a stand-alone unbundled service or as part of a no-notice bundled service
with transportation. TETCO's storage services utilize two joint venture storage
facilities in Pennsylvania and one wholly owned and operated storage field in
Maryland. TETCO's certificated working capacity in these three fields is 75
Bcf. East Tennessee's storage services utilize a liquefied natural gas (LNG)
storage facility in Tennessee which has a certificated working capacity of 1.2
Bcf. Algonquin owns no storage fields.
Competition
Duke Energy's interstate pipeline and storage subsidiaries compete with
other interstate and intrastate pipeline and storage facilities in the
transportation and storage of natural gas. The principal elements of
competition are rates, terms of service, and flexibility and reliability of
service.
Natural Gas Transmission competes directly with other interstate pipelines
serving the Mid-Atlantic, northeastern and southeastern states, and various
storage facilities in south Texas and Louisiana.
Natural gas competes with other forms of energy available to Duke Energy's
customers and end-users, including electricity, coal and fuel oils. The primary
competitive factor is price. Changes in the availability or price of natural
gas and other forms of energy, the level of business activity, conservation,
legislation and governmental regulations, the capability to convert to
alternative fuels, and other factors, including weather, affect the demand for
natural gas in the areas served by Duke Energy.
Regulation
The FERC has authority to regulate rates and charges for natural gas
transported in or stored for interstate commerce or sold by a natural gas
company in interstate commerce for resale. For further discussion of rate
matters, see Note 4 to the Consolidated Financial Statements, "Regulatory
Matters--Natural Gas Transmission." The FERC also has authority over the
construction and operation of pipeline and related facilities utilized in the
transportation, storage and sale of natural gas in interstate commerce,
including the extension, enlargement or abandonment of such facilities. TETCO,
Algonquin, East Tennessee and MHP hold certificates of public convenience and
necessity issued by the FERC, authorizing them to construct and operate the
pipelines, facilities and properties now in operation for which such
certificates are required, and to transport and store natural gas in interstate
commerce.
As required by FERC Order 636, Natural Gas Transmission's pipelines operate
as open-access transporters of natural gas, providing unbundled firm and
interruptible transportation and storage services on an equal basis for all gas
supplies, whether purchased from the pipeline or from another gas supplier.
The FERC has implemented regulations governing access to regulated natural
gas transmission customer data by non-regulated entities and services provided
between regulated and non-regulated affiliated entities. These regulations
affect the activities of NAWE with Natural Gas Transmission.
9
Natural Gas Transmission is subject to the jurisdiction of the EPA and state
environmental agencies. For a discussion of environmental regulation, see
"Environmental Matters." Natural Gas Transmission is also subject to the
Natural Gas Pipeline Safety Act of 1968, which regulates gas pipeline and LNG
plant safety requirements, and to the Hazardous Liquid Pipeline Safety Act of
1979, which regulates oil and petroleum pipelines.
FIELD SERVICES
Field Services gathers, processes, transports, markets and stores natural
gas and produces, transports, markets and stores NGLs. Field Services owns and
operates approximately 57,000 miles of natural gas gathering systems, including
intrastate pipelines, and 68 natural gas processing plants in the U.S. and
Canada. Field Services also has ownership interests in 11 other natural gas
processing plants in the U.S.
Field Services gathers natural gas from production wellheads through
gathering systems in western Canada and 11 contiguous states that serve major
gas-producing regions in the Rocky Mountain, Permian Basin, Mid-Continent, East
Texas-Austin Chalk-North Louisiana, as well as onshore and offshore Gulf Coast
areas. Field Services' operations also include several intrastate pipeline
systems and one high-deliverability natural gas storage facility.
The map below includes Field Services' natural gas gathering systems,
intrastate pipelines, region offices and supply areas. The map also shows the
interstate systems of the Natural Gas Transmission segment.
[MAP]
Field Services' NGL processing operations involve the extraction of NGLs
from natural gas and, at certain facilities, the fractionation of the NGLs into
their individual components (ethane, propane, butane and natural
10
gasoline). The natural gas used in Field Services' processing operations is
generally gathered on its own gathering system. NGLs are sold by Field Services
to a variety of customers ranging from large, multi-national petrochemical and
refining companies to small, family-owned retail propane distributors. Most NGL
sales are based upon current market-related prices. Field Services also
produces helium at the National Helium Corporation facility in Liberal, Kansas
and the Ladder Creek facility in Colorado.
Field Services' operating results are significantly impacted by changes in
NGL prices, which increased approximately 56% in 2000 compared to 1999. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition, Quantitative and Qualitative Disclosures About Market Risk" for a
discussion of Field Services' exposure to changes in commodity prices.
In March 2000, Duke Energy, through a wholly owned subsidiary, completed the
approximately $1.7 billion transaction that combined Field Services' gas
gathering and processing business with Phillips Petroleum's Gas Gathering,
Processing and Marketing unit (Phillips) to form a new midstream company, named
DEFS. In addition to this transaction, Duke Energy transferred its interest in
Texas Eastern Products Pipeline Company (TEPPCO), the general partner of TEPPCO
Partners, L.P., to the newly formed company, DEFS. For further discussion of
the Phillips transaction see Note 2 to the Consolidated Financial Statements,
"Business Acquisitions and Dispositions."
On March 31, 1999, Field Services completed the $1.35 billion acquisition of
the natural gas gathering, processing, fractionation and NGL pipeline business
from Union Pacific Resources (UPR), as well as UPR's natural gas and NGL
marketing activities (collectively, "the UPR acquisition"). For further
discussion of the UPR acquisition see Note 2 to the Consolidated Financial
Statements, "Business Acquisitions and Dispositions."
See certain operating statistics of Field Services under "Operating
Statistics." Activities of Field Services can fluctuate in response to the
seasonality affecting natural gas.
Competition
Field Services competes with major integrated oil companies, major
interstate pipelines, national and local natural gas gatherers, brokers,
marketers and distributors for natural gas supplies, in gathering and
processing natural gas and in marketing and transporting natural gas and NGLs.
Competition for natural gas supplies is primarily based on the efficiency and
reliability of operations, the availability of transportation to high demand
markets and the ability to obtain a satisfactory price for the producer's
natural gas. Competition for sales customers is based primarily upon
reliability and price of delivered natural gas and NGLs.
Regulation
The intrastate pipelines owned by Field Services are subject to state
regulation and, to the extent they provide services under Section 311 of the
Natural Gas Policy Act of 1978, are also subject to FERC regulation. However,
the majority of the natural gas gathering activities of Field Services are not
subject to regulation by the FERC.
Field Services is subject to the jurisdiction of the EPA and state
environmental agencies. For a discussion of environmental regulation, see
"Environmental Matters." Certain operations of Field Services are subject to
the jurisdiction of the Department of Transportation and certain similar state
agencies whose regulations have incorporated certain provisions of the Natural
Gas Pipeline Safety Act of 1968, the Hazardous Liquid Pipeline Safety Act of
1979, and subsequent amendments.
NAWE
NAWE's business activities include asset development, operation and
management of merchant generation facilities, primarily through DENA, and
commodity sales and services related to natural gas and power, primarily
through DETM, a limited liability company that is approximately 40% owned by
Exxon Mobil Corporation; NAWE also includes DEM, which develops new business
lines in the evolving energy commodity markets. NAWE conducts its business
throughout the U.S. and Canada.
11
DENA is an integrated energy business that develops, owns and manages a
portfolio of merchant generation facilities. To capture the greatest value,
DENA, through its portfolio management strategy, seeks opportunities to invest
in markets that have capacity needs and to divest assets, in whole or in part,
when significant value can be realized. DENA captures additional value by
combining its project development, commercial and risk management expertise
with the technical and operational skills of other Duke Energy business units
to build and manage its projects with maximum efficiency. DENA also supplies
competitively priced energy, integrated logistics and asset optimization
services, as well as risk management products, to wholesale energy customers.
DENA currently owns, operates or has substantial interests in approximately
6,200 MW of gross operating generation and has approximately 7,300 MW of
projects under construction, which are slated for completion to meet summer
peak demand: 3,200 MW in 2001 and 4,100 MW in 2002. In addition to the
facilities in operation or under construction, DENA has approximately 13,500 MW
in advanced development scheduled to begin operation between 2002 and 2004.
The following map includes DENA's power generation facilities.
[MAP]
12
DETM markets natural gas, electricity and other energy-related products to a
wide range of customers across North America. Duke Energy owns a 60% interest
in DETM's natural gas and electric power trading operations, with Exxon Mobil
Corporation owning a 40% minority interest. Duke Energy and Exxon Mobil
Corporation are in arbitration regarding the ownership of DETM. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition, Current Issues -- "Litigation and Contingencies, Exxon Mobil
Corporation Arbitration" and Note 14 to the Consolidated Financial Statements,
"Commitments and Contingencies -- Litigation."
DETM markets natural gas primarily to LDCs, electric power generators
(including DENA's generation facilities), municipalities, large industrial end-
users and energy marketing companies. DETM markets electricity to investor
owned utilities, municipal power generators and other power marketers. DETM
also provides energy management services, such as supply and market
aggregation, peaking services, dispatching, balancing, transportation, storage,
tolling, contract negotiation and administration, as well as energy commodity
risk management products and services. Operations are primarily in the U.S.
and, to a lesser extent, in Canada, and are serviced through three operating
centers.
Natural gas marketing operations encompass both on-system and off-system
supplies. With respect to on-system supplies, DETM generally purchases natural
gas from producers who are connected to Field Services' facilities and delivers
the gas to an intrastate or interstate pipeline for redelivery to another
customer. Natural Gas Transmission's pipelines are utilized for deliveries when
prudent. With respect to off-system supplies, DETM purchases natural gas from
producers, pipelines and other suppliers not connected with Duke Energy's
facilities for resale to customers. Substantially all of Mobil's U.S. and
Canadian natural gas production is committed to be marketed by DETM through
2006.
With respect to electricity marketing operations, DETM purchases electricity
from third-party suppliers and from DENA's domestic generation facilities for
resale to customers.
DETM has a portfolio of short-term and long-term sales agreements with
customers, the vast majority of which incorporate market-sensitive pricing
terms. Long-term gas purchase agreements with producers, principally entered
into in connection with on-system supplies, also generally include market-
sensitive pricing provisions. Purchase and sales commitments involving
significant price and location risk are generally hedged with offsetting
commitments and commodity futures, swaps and options. For information
concerning DETM's risk-management activities, see "Management's Discussion and
Analysis of Results of Operations and Financial Condition, Quantitative and
Qualitative Disclosures About Market Risk -- Commodity Price Risk" and Note 7
to the Consolidated Financial Statements, "Risk Management and Financial
Instruments -- Commodity Derivatives -- Trading."
DEM conducts physical and financial marketing and trading in evolving global
energy commodity markets, and provides energy, financial and asset management
services to producers, transporters and users of energy commodities and
derivative products. Additionally, DEM invests capital in limited hydrocarbon
exploration and production prospects through non-operating working interests.
See certain operating statistics of NAWE under "Operating Statistics."
Activities of DETM and DEM can fluctuate in response to the seasonality
affecting electricity, natural gas and other energy-related commodities.
Competition
DETM and DEM compete with major integrated oil companies, major interstate
pipelines and their marketing affiliates, brokers, marketers and distributors,
and electric utilities and other electric power marketers for natural gas
supplies and in marketing natural gas, electricity and other energy-related
commodities. Competition in the energy marketing business is driven by the
price of commodities and services delivered, along with the quality and
reliability of services provided.
DENA experiences substantial competition from existing utility companies as
well as other merchant electric generation companies in the U.S.
13
Regulation
The energy marketing activities of NAWE may, in certain circumstances, be
subject to the jurisdiction of the FERC. Current FERC policies permit NAWE's
trading and marketing entities to market natural gas, electricity and other
energy-related commodities at market-based rates, subject to FERC jurisdiction.
Most of DENA's operations are not subject to rate regulation. However, to
the extent that DENA's generating stations in California sell electricity under
"reliability must run" agreements to the California Independent System
Operator, such sales are made at FERC regulated rates.
As described in Note 14 to the Consolidated Financial Statements,
"Commitments and Contingencies -- California Issues," a number of
investigations have commenced to determine the causes of higher wholesale
electric prices in California in 2000. During March 2001, the FERC ordered
several electricity suppliers, including DETM, to (i) refund or offset prices
that were bid for power in California during stage 3 emergencies in January and
February 2001, to the extent such prices exceeded a FERC-approved market-
clearing price or (ii) submit information supporting the prices that were bid.
During the months of January and February 2001, DETM's bids included a
commercially-based credit premium to cover the substantial risk of nonpayment
that existed at the time. The credit premiums were responsible for the bids of
DETM exceeding the FERC-approved market-clearing prices for January and
February 2001. Although DETM believes that the credit premiums were
appropriate, in a compliance filing with the FERC on March 23, 2001, DETM
elected to offset the credit premium amounts against the bid prices, provided
it was paid what it was owed based on the FERC-approved market-clearing price.
Pursuant to such filing, the amount that DETM will offset totals approximately
$20 million in the aggregate. It is expected that the FERC will issue
additional orders with respect to sales in California covering the period from
October 2 through December 31, 2000, and periods following February 2001.
Various parties have expressed differing views on the FERC's actions in this
area, and such actions may be subject to reconsideration or appeal. Although
this matter is in its earliest stage, management believes this matter will not
have a material effect on Duke Energy's consolidated results of operations,
cash flows or financial position.
NAWE is subject to federal, state and local environmental regulations. For a
discussion of environmental regulation, see "Environmental Matters."
14
INTERNATIONAL ENERGY
International Energy develops, owns and operates energy-related facilities
worldwide. These facilities provide natural gas and power development and
operations, as well as energy trading and marketing. International Energy
conducts its operations primarily in Latin America, Asia Pacific and Europe,
through Duke Energy International (DEI).
Liberalization of energy markets abroad is providing substantial opportunities
for International Energy to grow through acquisitions, construction of
greenfield projects and expansion of existing facilities. International Energy
is an active participant in international competitive energy-related markets,
which include natural gas pipelines, power generation, energy trading and
marketing and other services. International Energy owns, operates or has
substantial interests in approximately 5,000 MW of generation and approximately
1,100 miles of pipeline systems.
International Energy continues to focus on its regional target areas in Asia
Pacific, Latin America and Europe for further expansion opportunities. In
January 2000, DEI completed a series of transactions to purchase, for
approximately $1.03 billion, an approximate 95% interest in Companhia de
Geracao de Energia Eletrica Paranapanema (Paranapanema), an electric generating
company in Brazil. From August 1999 through April 2000, DEI acquired Dominion
Resources, Inc.'s portfolio of hydroelectric, natural gas and diesel power
generation businesses in Argentina, Belize, Bolivia and Peru for approximately
$405 million. Also, during 2000, DEI acquired 100% of Mobil Europe Gas Inc.
(MEGAS) from Mobil Corporation. MEGAS is a gas marketing company located in the
Netherlands. For additional information on significant business acquisitions,
see "Management's Discussion and Analysis of Results of Operations and
Financial Condition, Liquidity and Capital Resources -- Investing Cash Flows"
and Note 2 to the Consolidated Financial Statements, "Business Acquisitions and
Dispositions."
The following map illustrates the locations of International Energy's
worldwide energy facilities, including projects under construction or under
contract.
[MAP]
15
Competition and Regulation
International Energy's operations are subject to country and region-specific
market and competition regulations enacted by various regulatory authorities.
Regulatory issues that are commonly addressed in various international regions
include: rules governing open and competitive access to the gas and power
transmission grids, dispatch rules for merchant power plant dispatch and
remuneration, and rules that support the emergence of competitive gas and power
trading and marketing.
International Energy's operations are subject to international environmental
regulations. For a discussion of environmental regulation, see "Environmental
Matters."
OTHER ENERGY SERVICES
Other Energy Services provides engineering, consulting, construction and
integrated energy solutions worldwide, primarily through DE&S, D/FD and
DukeSolutions.
DE&S specializes in energy and environmental projects and provides
comprehensive engineering, quality assurance, project and construction
management and operating and maintenance services for all phases of
hydroelectric, nuclear and renewable power generation, transmission and
distribution projects worldwide.
D/FD, operating through several entities, provides full service siting,
permitting, licensing, engineering, procurement, construction, start-up,
operating and maintenance services for fossil-fired plants, both domestically
and internationally. Subsidiaries of Duke Energy and Fluor Enterprises, Inc.
each own 50% of D/FD.
DukeSolutions provides energy consulting services to large end users of
energy by first identifying and then affecting points in a customer's
operations where energy related costs are incurred, including procurement,
production and disposal. The scope of services involves providing strategic
solutions to reduce costs when customers buy energy, convert it into a usable
form, use it to manufacture products and dispose of any waste.
Other Energy Services experiences substantial competition from utilities and
other independent companies in the U. S. and abroad.
Other Energy Services is subject to the jurisdiction of the EPA and
international, state and local environmental agencies. For a discussion of
environmental regulation, see "Environmental Matters."
DUKE VENTURES
Duke Ventures is comprised of other diverse businesses, primarily operating
through Crescent, DukeNet and DCP.
Crescent develops high quality commercial, residential and multi-family real
estate projects and manages land holdings primarily in the southeastern U.S. At
December 31, 2000, Crescent owned 3.8 million square feet of commercial and
industrial space, with an additional 2.3 million square feet under
construction. This portfolio included 2.9 million square feet of office space,
0.8 million square feet of warehouse space and 0.1 million square feet of
retail space. Crescent's residential developments include high-end, country
club and golf course communities with individual lots sold to custom builders
and tract developments with sales to national builders. In 2000, Crescent began
development of two multi-family communities in Florida. At December 31, 2000,
Crescent also had approximately 175,000 acres of land under its management.
DukeNet provides fiber optic networks for industrial, commercial and
residential customers and plans to enable networks for energy services
applications. It owns and operates a 700-mile fiber optic communications
network centered in the Carolinas that is interconnected with a 15,500-mile
fiber optic communications network, through affiliate agreements with third
parties, that stretches from Maine to Texas. DCP, a merchant finance company,
provides financing, investment banking and asset management services to
wholesale and commercial energy markets. During September 2000, DukeNet sold
its 20% interest in BellSouth Carolina PCS to BellSouth Corporation. See
further discussion of this sale in Note 2 of the Consolidated Financial
Statements, "Business Acquisitions and Dispositions."
16
ENVIRONMENTAL MATTERS
Duke Energy is subject to international, federal, state and local
regulations with regard to air and water quality, hazardous and solid waste
disposal and other environmental matters. Certain environmental regulations
affecting Duke Energy include:
. The Clean Air Act and the 1990 amendments to the Act, as well as state
laws and regulations impacting air emissions that impose
responsibilities on owners, operators or both of air emissions sources
including obtaining permits and annual compliance and reporting
obligations;
. State Implementation Plans, which were issued by the EPA to 22 states,
including North and South Carolina, and the District of Columbia
related to existing and new national ambient air quality standards for
ozone;
. The Federal Water Pollution Control Act Amendments of 1987, which
require permits for facilities that discharge treated wastewater into
the environment; and
. The Comprehensive Environmental Response, Compensation and Liability
Act, which can require any individual or entity which may have owned
or operated a disposal site, as well as transporters or generators of
hazardous wastes which were sent to such site, to share in remediation
costs for the site.
For further discussion of environmental matters involving Duke Energy,
including possible liability and capital costs, see "Item 3--Legal
Proceedings," "Management's Discussion and Analysis of Results of Operations
and Financial Condition, Current Issues -- Environmental" and Note 14 to the
Consolidated Financial Statements, "Commitments and Contingencies --
Environmental." Compliance with international, federal, state and local
provisions' regulating the discharge of materials into the environment, or
otherwise protecting the environment, is not expected to have a material
adverse effect on the competitive position, consolidated results of operations,
cash flows or financial position of Duke Energy.
GEOGRAPHIC REGIONS
Duke Energy's significant geographic regions are as follows:
Latin Other
U.S. Canada America Foreign Consolidated
------- ------ ------- ------- ------------
In millions
2000
Consolidated revenues.............. $43,282 $4,964 $ 512 $ 560 $49,318
Consolidated long-term assets...... 31,074 900 2,823 1,222 36,019
1999
Consolidated revenues.............. $19,336 $2,007 $ 171 $ 252 $21,766
Consolidated long-term assets...... 22,995 250 2,708 901 26,854
1998
Consolidated revenues.............. $16,589 $ 996 $ 31 $ 46 $17,662
Consolidated long-term assets...... 20,982 140 207 632 21,961
For a discussion of Duke Energy's foreign operations and the risks
associated with them, see "Management's Discussion and Analysis of Results of
Operations and Financial Condition, Quantitative and Qualitative Disclosures
About Market Risk -- Foreign Currency Risk" and Notes 3 and 7 to the
Consolidated Financial Statements, "Business Segments" and "Risk Management and
Financial Instruments," respectively.
EMPLOYEES
At December 31, 2000, Duke Energy had approximately 23,000 employees.
Approximately 1,580 operating and maintenance employees are represented by
unions. Of these, approximately 1,400 are represented by the International
Brotherhood of Electrical Workers (IBEW) at two operating units. During 2000, a
new agreement was reached with the IBEW for the larger of these units.
Negotiations are underway with the IBEW for the other unit, with a new contract
anticipated in early 2001. An additional 65 employees are represented by the
United Steelworkers and Rubberworkers of America. Approximately 37 employees
are represented by the Paper, Allied, Chemical and Energy Workers Union (PACE)
and 13 employees are represented by the PACE International Unit. A new labor
agreement was reached with the PACE International Unit in 2000. Approximately
64 employees are represented by the International Union of Operating Engineers.
17
RECENT FINANCINGS
In late March 2001, Duke Energy completed an offering of 25 million shares
of common stock, at a price of $38.98 per share, before underwriting discount
and other offering expenses. In addition, Duke Energy completed an offering of
approximately 31 million units of mandatorily convertible securities (Equity
Units) at a price of $25 per unit before underwriting discount and other
offering expenses. The Equity Units consist of senior notes of Duke Energy's
wholly owned subsidiary, Duke Capital Corporation and purchase contracts
obligating the investors to purchase shares of Duke Energy's common stock in
2004. Also in late March 2001, the underwriters exercised options granted to
them to purchase an additional 3.75 million shares of common stock and 4
million Equity Units at the original issue prices, less underwriting discounts,
to cover over-allotments made during the offerings. Total net proceeds from the
offerings were approximately $1.94 billion and were used to repay short-term
debt and for other corporate purposes.
OPERATING STATISTICS
Years Ended December 31,
-------------------------------------
2000 1999 1998 1997 1996
------- ------- ------ ------ ------
Franchised Electric
Sources of Electric Energy, GWh(a)
Generated--net output:
Coal................................... 43,526 41,306 42,164 45,234 40,649
Nuclear................................ 41,073 39,263 38,366 29,569 33,177
Hydro.................................. 394 638 1,714 1,633 1,802
Oil and gas............................ 459 662 846 301 199
------- ------- ------ ------ ------
Total generation...................... 85,452 81,869 83,090 76,737 75,827
Purchased power and net interchange.... 4,497 3,617 2,659 3,781 3,885
------- ------- ------ ------ ------
Total output.......................... 89,949 85,486 85,749 80,518 79,712
Plus: Purchases from other Catawba
joint owners.......................... 150 1,233 1,656 2,316 2,662
------- ------- ------ ------ ------
Total sources of energy............... 90,099 86,719 87,405 82,834 82,374
Less: Line loss and company usage...... 5,333 5,171 5,394 4,899 4,827
------- ------- ------ ------ ------
Total GWh sales....................... 84,766 81,548 82,011 77,935 77,547
======= ======= ====== ====== ======
Electric Energy Sales, GWh
Residential............................ 22,884 21,897 22,002 20,483 21,484
General service........................ 22,845 21,807 21,093 19,687 19,593
Industrial
Textile............................... 10,819 11,201 11,981 11,955 11,603
Other................................. 18,952 18,704 18,668 18,376 18,131
Other energy and wholesale............. 8,671 7,715 8,933 7,029 6,781
------- ------- ------ ------ ------
Total GWh sales billed................ 84,171 81,324 82,677 77,530 77,592
Unbilled GWh sales................... 595 224 (666) 405 (45)
------- ------- ------ ------ ------
Total GWh sales..................... 84,766 81,548 82,011 77,935 77,547
======= ======= ====== ====== ======
Natural Gas Transmission
Throughput Volumes TBtu(b)(c):.......... 1,717 1,565 1,459 1,641 1,676
Field Services
Natural Gas Gathered and
Processed/Transported, TBtu/d(d)....... 7.6 5.1 3.6 3.4 2.9
NGL Production, MBbl/d(e)............... 358.5 192.4 110.2 108.2 78.5
Average Natural Gas Price per MMBtu(f).. $ 3.89 $ 2.27 $ 2.11 $ 2.59 $ 2.59
Average NGL Price per Gallon............ $ 0.53 $ 0.34 $ 0.26 $ 0.35 $ 0.39
Natural Gas Marketed, TBtu/d............ 0.7 0.5 0.4 0.4 0.5
NAWE
Natural Gas Marketed, TBtu/d............ 11.9 10.5 8.0 6.9 5.5
Electricity Marketed, GWh............... 275,258 109,634 98,991 64,650 4,229
- --------
(a)Gigawatt-hour.
(b)Trillion British thermal units.
(c) Excludes throughput of pipelines sold in March 1999 to CMS Energy: 328 TBtu
(1999); 1,141 TBtu (1998); 1,279 TBtu (1997); 1,319 TBtu (1996).
(d)Trillion British thermal units per day.
(e)Thousand barrels per day.
(f)Million British thermal units.
18
EXECUTIVE OFFICERS OF DUKE ENERGY
Richard B. Priory, 54, Chairman of the Board, President and Chief Executive
Officer. Mr. Priory served as President and Chief Operating Officer from 1994
until he assumed his present position in 1997 following the merger with
PanEnergy Corp (PanEnergy).
William A. Coley, 57, Group President, Duke Power. Mr. Coley served as
President of Duke Energy's Associated Enterprises Group from 1994 to 1997 when
he assumed his present position following the PanEnergy merger.
Fred J. Fowler, 55, Group President, Energy Transmission. Mr. Fowler served
as Group Vice President of PanEnergy from 1996 until the PanEnergy merger, when
he assumed his present position.
Harvey J. Padewer, 53, Group President, Energy Services. Mr. Padewer assumed
his present position on January 1, 1999. From 1995 through 1998, he served as
Senior Vice President and General Manager of Utilicorp Energy Group.
Richard W. Blackburn, 58, Executive Vice President, General Counsel and
Secretary. Mr. Blackburn was named to his present position in 1997. Prior to
joining Duke Energy, he served as President and Group Executive of NYNEX
Corporation's Worldwide Communications and Media Group from 1995 to 1997.
Richard J. Osborne, 50, Executive Vice President and Chief Risk Officer. Mr.
Osborne assumed his present position in May 2000. Prior to his present
position, Mr. Osborne served as Executive Vice President and Chief Financial
Officer from 1997, following the PanEnergy merger. Prior to the merger, Mr.
Osborne was the Senior Vice President and Chief Financial Officer beginning in
1994.
Ruth G. Shaw, 53, Executive Vice President and Chief Administrative Officer.
Ms. Shaw served as Senior Vice President, Corporate Resources, from 1994 until
she assumed her present position following the PanEnergy merger.
Robert P. Brace, 51, Executive Vice President and Chief Financial Officer.
Mr. Brace joined Duke Energy in 2000. He had served as Group Finance Director
of British Telecommunications plc from 1993 until joining Duke Energy.
Michael S. Tuckman, 56, Executive Vice President, Nuclear Generation, Duke
Power. Mr. Tuckman assumed his present position in 1997. He had been Senior
Vice President, Nuclear Generation, Duke Power, since 1993.
Sandra P. Meyer, 46, Senior Vice President and Corporate Controller. Ms.
Meyer assumed her present position in September 1999. Prior to her present
position, Ms. Meyer served as Vice President, Duke Power Planning and Finance
from 1997, following the PanEnergy merger. She served as Vice President and
Controller of PanEnergy in 1994 and was named to the additional position of
Treasurer in October 1996.
David L. Hauser, 49, Senior Vice President and Treasurer. Mr. Hauser held
various positions, including Controller, at Duke Power before being named
Senior Vice President, Global Asset Development, in 1997 and to his current
position in 1998.
Executive officers are elected annually by the Board of Directors and serve
until the first meeting of the Board of Directors following the annual meeting
of shareholders and until their successors are duly elected.
There are no family relationships between any of the executive officers nor
any arrangement or understanding between any executive officer and any other
person pursuant to which the officer was selected.
19
Item 2. Properties.
FRANCHISED ELECTRIC
At December 31, 2000, Franchised Electric operated three nuclear generating
stations with a combined net capacity of 5,409 MW (which includes 12.5%
ownership in the Catawba Nuclear Station), eight coal-fired stations with a
combined capacity of 7,572 MW, 31 hydroelectric stations with a combined
capacity of 2,693 MW and six combustion turbine stations with a combined
capacity of 2,081 MW, all of which are located in North Carolina or South
Carolina.
In addition, Franchised Electric owned, as of December 31, 2000,
approximately 13,000 conductor miles of electric transmission lines, including
600 conductor miles of 525 kilovolts, 2,600 conductor miles of 230 kilovolts,
6,500 conductor miles of 100 kilovolts, and 3,300 conductor miles of 13 to 66
kilovolts. Franchised Electric also owned approximately 92,300 conductor miles
of electric distribution lines, including 62,300 conductor miles of rural
overhead lines, 15,500 conductor miles of urban overhead lines, 7,900 conductor
miles of rural underground lines and 6,600 conductor miles of urban underground
lines. At December 31, 2000, the electric transmission and distribution systems
comprised approximately 1,600 substations.
Substantially all electric plant is mortgaged under the indenture relating
to First and Refunding Mortgage Bonds.
NATURAL GAS TRANSMISSION
TETCO's gas transmission system extends approximately 1,700 miles from
producing fields in the Gulf Coast region of Texas and Louisiana to Ohio,
Pennsylvania, New Jersey and New York. It consists of two parallel systems, one
consisting of three large-diameter parallel pipelines and the other consisting
of from one to three large-diameter pipelines over its length. TETCO's system
consists of approximately 9,000 miles of pipeline and has 70 compressor
stations.
TETCO also owns and operates two offshore Louisiana pipeline systems, which
extend over 100 miles into the Gulf of Mexico and include 469 miles of TETCO's
pipeline system.
Algonquin's transmission system connects with TETCO's facilities in New
Jersey, and extends approximately 250 miles through New Jersey, New York,
Connecticut, Rhode Island and Massachusetts. The system consists of 1,066 miles
of pipeline with six compressor stations.
East Tennessee's transmission system crosses TETCO's system at two points in
Tennessee and consists of two mainline systems totaling 1,100 miles of pipeline
in Tennessee and Virginia with 18 compressor stations.
For additional information and a map concerning natural gas transmission and
storage properties, see "Business, Natural Gas Transmission."
FIELD SERVICES
For information and a map regarding the properties of Field Services, see
"Business, Field Services."
20
NAWE
The DENA generation portfolio includes:
Ownership
Gross Interest
Name MW Fuel Location (percentage)
---- ----- --------------- -------------- ------------
Moss Landing ................. 1,478 Natural gas CA 100
Morro Bay..................... 1,002 Natural gas CA 100
South Bay..................... 700 Natural gas CA 100
Madison....................... 640 Natural gas OH 50
Vermillion.................... 640 Natural gas IN 50
Maine Independence............ 520 Natural gas ME 100
Bridgeport.................... 480 Natural gas CT 67
American Ref-Fuel............. 286 Waste-to-energy CT, MA, NJ, NY 37
St. Francis................... 247 Natural gas MO 50
Oakland....................... 165 Oil CA 100
Fort Drum..................... 50 Coal NY 10
-----
Total......................... 6,208
=====
DENA has approximately 7,300 MW under construction in various high-growth
markets, which are slated for completion to meet summer peak demand: 3,200 MW
in 2001 and 4,100 MW in 2002. In addition to its facilities in operation or
under construction, DENA has approximately 13,500 MW in advanced development
scheduled to begin operation between 2002 and 2004.
For additional information and a map regarding the properties of NAWE, see
"Business, NAWE."
INTERNATIONAL ENERGY
The International Energy generation portfolio in operation includes:
Approximate
Ownership
Gross Interest
Name MW Fuel Location (percentage)
---- ----- ------------- ----------- -----------
Paranapanema...................... 2,307 Hydro Brazil 95
Hidroelectrica Cerros Colorados... 547 Thermal/Hydro Argentina 91
Egenor............................ 529 Hydro/Thermal Peru 90
Acajutla.......................... 400 Thermal El Salvador 88
Puncakjaya Power.................. 389 Thermal Indonesia 43
Western Australia................. 280 Thermal Australia 100
Electroquil....................... 169 Thermal Ecuador 52
Aquaytia.......................... 160 Thermal Peru 22
Empressa Electrica Corani......... 126 Hydro Bolivia 50
New Zealand....................... 112 Thermal New Zealand 100
Mollejon.......................... 25 Hydro Belize 95
-----
Total............................. 5,044
=====
DEI has approximately 562 and 43 gross MWs under construction in Latin
America and Australia, respectively. DEI owns approximately 1,320 miles of
pipeline systems in Australia, including 434 miles under development.
Additionally, DEI has an 11.84% ownership interest in 855 miles of pipeline
systems in Australia and a 21.9% ownership interest in 190 miles of pipeline
systems in Peru. Also as of December 31, 2000, DEI had 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.
21
For additional information and a map regarding the properties of
International Energy, see "Business, International Energy."
DUKE VENTURES
For information regarding the properties of Duke Ventures, see "Business,
Duke Ventures."
OTHER
None of the properties used in connection with Duke Energy's other business
activities are considered material to Duke Energy's operations as a whole.
Item 3. Legal Proceedings.
Duke Energy's subsidiaries, DENA and DETM, have been named among 16
defendants in a class action lawsuit (the Gordon lawsuit) filed against
companies identified as "generators and traders" of electricity in California
markets. DETM also was named as one of numerous defendants in four additional
lawsuits, including two class actions (the Hendricks and Pier 23 Restaurant
lawsuits), filed against generators, marketers and traders and other unnamed
providers of electricity in California markets. These suits were brought either
by or on behalf of electricity consumers in the State of California. The Gordon
and Hendricks class action suits were filed in the Superior Court of the State
of California, San Diego County, in November 2000. The other three suits were
filed in January 2001, one in the Superior Court of the State of California,
San Diego County, and the other two in the Superior Court of the State of
California, County of San Francisco. These suits generally allege that the
defendants manipulated the wholesale electricity markets in violation of state
laws against unfair and unlawful business practices and state antitrust laws.
Plaintiffs in the Gordon suit seek aggregate damages of over $4 billion, and
the plaintiffs in the other suits, to the extent damages are specified, allege
damages in excess of $1 billion. The lawsuits each seek the disgorgement of
alleged unlawfully obtained revenues for sales of electricity and, in three
suits, an award of treble damages. For further information related to this
lawsuit, see Note 14 to the Consolidated Financial Statements, "Commitments and
Contingencies --California Issues," and "Management's Discussion and Analysis
of Results of Operations and Financial Condition, Current Issues -- California
Issues."
On December 22, 2000, the U.S. Justice Department, acting on behalf of the
EPA, filed a complaint against Duke Energy in the U.S. District Court in
Greensboro, North Carolina, for alleged violations of the New Source Review
(NSR) provisions of the Clean Air Act (CAA). The EPA is claiming that 29
projects performed at 25 of Duke Energy's coal-fired units were major
modifications as defined in the CAA and that Duke Energy violated the CAA's NSR
requirements when it undertook those projects without obtaining permits and
installing emission controls for sulfur dioxide, nitrogen oxide and particulate
matter. The complaint requests, among other things, that the court enjoin Duke
Energy from operating the coal-fired units identified in the complaint, and
order Duke Energy to install additional emission controls and pay unspecified
civil penalties. This complaint appears to be part of the EPA's NSR enforcement
initiative, in which the EPA claims that utilities and others have committed
widespread violations of the CAA permitting requirements for the past 25 years.
The EPA has sued or issued notices of violation 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 intends to defend itself
22
vigorously against these alleged violations. However, because these matters are
in a preliminary stage, management cannot estimate the effects of these matters
on Duke Energy's future consolidated results of operations, cash flows or
financial position. The CAA authorizes civil penalties of up to $27,500 per day
per violation at each generating unit. Civil penalties, if ultimately imposed
by the court, and the cost of any required new pollution control equipment, if
the court accepts the EPA's contentions, could be substantial.
For further information related to this lawsuit, see Note 14 to the
Consolidated Financial Statements, "Commitments and Contingencies --
Environmental," and "Management's Discussion and Analysis of Results of
Operations and Financial Condition, Current Issues -- Environmental."
In December 2000, three subsidiaries of Duke Energy initiated binding
arbitration against three subsidiaries of the Exxon Mobil Corporation
(collectively, the "Exxon Mobil entities") concerning the parties' joint
ownership of DETM and certain related affiliates (collectively, the
"Ventures"). At issue is a buy-out right provision in the parties' agreement.
The agreements governing the ownership of the Ventures contain provisions
giving Duke Energy the right to purchase the Exxon Mobil entities' 40% interest
in the Ventures in the event material business disputes arise between the
Ventures' owners. Such disputes have arisen, and consequently, Duke Energy
exercised its right to buy the Exxon Mobil entities' interest. Duke Energy
claims that refusal by the Exxon Mobil entities to honor the exercise is a
breach of the buy-out right provision, and seeks specific performance of the
provision. Duke Energy also complains of the Exxon Mobil entities' lack of use
of, and contributions to, the Ventures.
In January 2001, the Exxon Mobil entities asserted counterclaims in the
arbitration and claims in a separate Texas state court action alleging that
Duke Energy breached its obligations to the Ventures and to the Exxon Mobil
entities. The Exxon Mobil entities also claim that Duke Energy violated a
Guaranty Agreement. While this matter is in its early stages, management
believes that the final disposition of this action will not have a material
adverse effect on Duke Energy's consolidated results of operations, cash flows
or financial position.
The Illinois Environmental Protection Agency has initiated an environmental
enforcement proceeding against a former subsidiary of Duke Energy relating to
alleged air quality permit violations at a natural gas compressor station. Duke
Energy has agreed to indemnify the purchaser of this former subsidiary against
liability for any penalty or fines resulting from these alleged violations.
This proceeding could result in a penalty in excess of $100,000. Management
believes that the resolution of this matter will not have a material adverse
effect on consolidated results of operations, cash flows or financial position.
Duke Energy's subsidiary, DEFS, is presently resolving non-compliance issues
with the Texas Natural Resources Conservation Commission associated with the
timing of air permit annual compliance certifications submitted to the agency
in 1998 and 1999. This matter, the bulk of which was voluntarily self-disclosed
to the agency, involves approximately 115 of DEFS' facilities that did not meet
specific administrative filing deadlines for required air permit paperwork.
Additionally, DEFS is actively resolving, with the New Mexico Environment
Department, alleged non-compliance of various air permit requirements at four
facilities in New Mexico. These matters, the majority of which were also
voluntarily self-disclosed to the agency, generally involve document
preparation and submittal as required by permits, compliance testing
requirements at two facilities and compliance with permit emissions limits at
one facility. DEFS believes that these apparent non-compliance issues being
addressed with Texas and New Mexico agencies, under relevant air programs, will
result in total penalty assessments of less than $500,000. Management believes
that the resolution of this matter will not have a material adverse effect on
consolidated results of operations, cash flows or financial position.
23
Duke Energy's subsidiary, DEFS, has been in discussions with the Colorado
Air Pollution Control Division regarding various asserted non-compliance
issues arising from agency inspections of DEFS' Colorado facilities in 1999
and 2000, as well as non-compliance issues either disclosed to the agency
pursuant to permit requirements or voluntarily disclosed to the agency in
2000. These items relate to various specific and detailed terms of the Title V
Operating Permits at seven gas plants and two compressor stations in Colorado,
including, for example, record keeping requirements, parametric monitoring
requirements, delayed filings, and operations inconsistent with throughput
limits on particular pieces of equipment. As a result of these discussions,
DEFS received from the agency in March 2001 a comprehensive proposed
settlement agreement to resolve all of these various items related to air
permit compliance at the nine facilities. Although DEFS is still discussing
the appropriate resolution of these apparent instances of non-compliance with
the Colorado Air Pollution Control Division, management believes that the
comprehensive resolution for all nine facilities will result in a total
penalty assessment of less than $575,000.
For additional information concerning litigation and other contingencies,
see Note 14 to the Consolidated Financial Statements, "Commitments and
Contingencies," and "Management's Discussion and Analysis of Results of
Operations and Financial Condition, Current Issues -- Environmental and
Current Issues --California Issues and Current Issues -- Litigation and
Contingencies."
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of Duke Energy's security holders
during the last quarter of 2000.
24
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The common stock of Duke Energy is listed for trading on the New York Stock
Exchange. At February 28, 2001, there were approximately 148,000 holders of
record of such common stock.
Common Stock Data by Quarter(a)
2000 1999
----------------------- -----------------------
Stock Price Stock Price
Range Range
Dividends ------------- Dividends -------------
Per Share High Low Per Share High Low
--------- ------ ------ --------- ------ ------
First Quarter................... $0.275 $28.94 $23.19 $0.275 $32.34 $27.41
Second Quarter.................. 0.55 31.25 26.16 0.55 30.59 26.06
Third Quarter................... -- 42.88 28.31 -- 29.25 26.22
Fourth Quarter.................. 0.275 44.97 40.22 0.275 28.44 23.53
- --------
(a) Restated to reflect the two-for-one common stock split effective January
26, 2001.
On December 17, 1998, Duke Energy's Board of Directors adopted a shareholder
rights plan. Under the terms of the plan, one preference stock purchase right
was distributed for each share of common stock outstanding on February 12, 1999
and for each share issued thereafter, subject to adjustment as specified
therein. The distribution was approved by the NCUC and PSCSC. The plan is
intended to assure the fair treatment of all shareholders in the event of a
hostile takeover attempt and to encourage a potential acquirer to negotiate
with the Board of Directors a fair price for all shareholders before attempting
a takeover. The adoption of the plan was not in response to any takeover offer
or threat.
25
Item 6. Selected Financial Data.
2000 1999(a) 1998 1997(b) 1996(b)
------- ------- ------- ------- -------
In millions, except per share amounts
Income Statement
Operating revenues.................. $49,318 $21,766 $17,662 $16,309 $12,302
Operating expenses.................. 45,505 19,947 15,177 14,339 10,143
------- ------- ------- ------- -------
Operating income.................... 3,813 1,819 2,485 1,970 2,159
Other income and expenses........... 201 224 162 138 135
------- ------- ------- ------- -------
Earnings before interest and taxes.. 4,014 2,043 2,647 2,108 2,294
Interest expense.................... 911 601 514 472 499
Minority interest expense........... 307 142 96 23 6
------- ------- ------- ------- -------
Earnings before income taxes........ 2,796 1,300 2,037 1,613 1,789
Income taxes........................ 1,020 453 777 639 698
------- ------- ------- ------- -------
Income before extraordinary item.... 1,776 847 1,260 974 1,091
Extraordinary gain (loss), net of
tax................................ -- 660 (8) -- (17)
------- ------- ------- ------- -------
Net income.......................... 1,776 1,507 1,252 974 1,074
Dividends on preferred and
preference stock................... 19 20 21 72 44
------- ------- ------- ------- -------
Earnings available for common
stockholders....................... $ 1,757 $ 1,487 $ 1,231 $ 902 $ 1,030
======= ======= ======= ======= =======
Common Stock Data(c)
Shares of common stock outstanding
Year-end.......................... 739 733 726 720 718
Weighted average.................. 736 729 722 720 722
Earnings per share (before
extraordinary item)
Basic............................. $ 2.39 $ 1.13 $ 1.72 $ 1.26 $ 1.45
Diluted........................... 2.38 1.13 1.71 1.25 1.44
Earnings per share
Basic............................. $ 2.39 $ 2.04 $ 1.70 $ 1.26 $ 1.43
Diluted........................... 2.38 2.03 1.70 1.25 1.42
Dividends per share................. 1.10 1.10 1.10 0.95 0.79
Balance Sheet
Total assets........................ $58,176 $33,409 $26,806 $24,029 $22,366
Long-term debt, less current
maturities......................... 11,019 8,683 6,272 6,530 5,485
- --------
(a) Financial information reflects a pre-tax $800 million charge for estimated
injury and damages claims. The earnings per share effect of this charge was
$0.67 per share. See Note 14 to the Consolidated Financial Statements,
"Commitments and Contingencies -- Injury and Damages Claims," for
additional information.
(b) Financial information reflects accounting for the 1997 merger with
PanEnergy as a pooling of interests. As a result, the financial information
gives effect to the merger as if it had occurred January 1, 1996.
(c) Restated to reflect the two-for-one common stock split effective January
26, 2001.
26
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
INTRODUCTION
Management's Discussion and Analysis should be read in conjunction with the
Consolidated Financial Statements.
Business Segments. Duke Energy Corporation (collectively with its
subsidiaries, "Duke Energy") is an integrated energy and energy services
provider with the ability to offer physical delivery and management of both
electricity and natural gas throughout the U.S. and abroad. Duke Energy
provides these and other services through seven business segments.
Franchised Electric generates, transmits, distributes and sells electric
energy in central and western North Carolina and the western portion of South
Carolina. Its operations are conducted primarily through Duke Power and
Nantahala Power and Light. These electric operations are subject to the rules
and regulations of the Federal Energy Regulatory Commission (FERC), the North
Carolina Utilities Commission (NCUC) and the Public Service Commission of South
Carolina (PSCSC).
Natural Gas Transmission provides interstate transportation and storage of
natural gas for customers primarily in the Mid-Atlantic, New England and
southeastern states. Its operations are conducted primarily through Duke Energy
Gas Transmission Corporation. The interstate natural gas transmission and
storage operations are subject to the rules and regulations of the FERC.
Field Services gathers, processes, transports, markets and stores natural
gas and produces, transports, markets and stores natural gas liquids (NGLs).
Its operations are conducted primarily through Duke Energy Field Services, LLC
(DEFS), a limited liability company that is approximately 30% owned by Phillips
Petroleum. Field Services operates gathering systems in western Canada and 11
contiguous states that serve major natural gas-producing regions in the Rocky
Mountain, Permian Basin, Mid-Continent, East Texas-Austin Chalk-North
Louisiana, as well as onshore and offshore Gulf Coast areas.
North American Wholesale Energy's (NAWE's) activities include asset
development, operation and management, primarily through Duke Energy North
America, LLC (DENA), and commodity sales and services related to natural gas
and power, primarily through Duke Energy Trading and Marketing, LLC (DETM).
DETM is a limited liability company that is approximately 40% owned by Exxon
Mobil Corporation. NAWE also includes Duke Energy Merchants, which develops new
business lines in the evolving energy commodity markets. NAWE conducts its
business throughout the U.S. and Canada. The operations of the previously
segregated Trading and Marketing segment were combined by management into NAWE
during 2000. Previous periods have been restated to conform to current period
presentation.
International Energy conducts its operations through Duke Energy
International, LLC. International Energy's activities include asset
development, operation and management of natural gas and power facilities and
energy trading and marketing of natural gas and electric power. This activity
is targeted in the Latin American, Asia-Pacific and European regions.
Other Energy Services is a combination of businesses that provide
engineering, consulting, construction and integrated energy solutions
worldwide, primarily through Duke Engineering & Services, Inc. (DE&S),
Duke/Fluor Daniel (D/FD) and DukeSolutions, Inc. (DukeSolutions). D/FD is a
50/50 partnership between Duke Energy and Fluor Enterprises, Inc.
Duke Ventures is comprised of other diverse businesses, primarily operating
through Crescent Resources, Inc. (Crescent), DukeNet Communications, LLC
(DukeNet) and Duke Capital Partners (DCP). Crescent develops high-quality
commercial, residential and multi-family real estate projects and manages land
holdings primarily in the southeastern U.S. DukeNet provides fiber optic
networks for industrial, commercial and residential customers. DCP, a newly
formed, wholly owned merchant finance company, provides financing, investment
banking and asset management services to wholesale and commercial energy
markets.
27
Business Strategy. Duke Energy is one of the world's leading integrated
energy companies. The company's business strategy is to develop integrated
energy businesses in targeted regions where Duke Energy's extensive
capabilities in developing energy assets, operating electric power, natural gas
and NGL plants, optimizing commercial operations and managing risk can provide
comprehensive energy solutions for customers and create superior value for
shareholders. The growth in and restructuring of global energy markets are
providing opportunities for Duke Energy's competitive business segments to
capitalize on their comprehensive capabilities. Domestically, Duke Energy is
aggressively investing in new merchant power plants throughout the U.S.,
expanding its natural gas pipeline infrastructure in the eastern U.S., rapidly
increasing its leading position in natural gas gathering and processing and NGL
marketing, and developing its trading and marketing structured origination
expertise across the energy spectrum. Internationally, Duke Energy is currently
focusing on integrated electric and natural gas opportunities in Latin America,
Asia Pacific and Europe.
Franchised Electric continues to add customers, maintain low costs and
deliver high-quality customer service. Franchised Electric is expected to grow
moderately, consistent with historical trends. Expansion will primarily result
from continued economic growth in its service territory.
Natural Gas Transmission has increased its earnings growth rate by executing
a comprehensive strategy of selected acquisitions and expansions and by
developing expanded services and incremental projects that meet changing
customer needs.
Field Services has developed market-leading size, scope and reliability of
supply in natural gas gathering, processing and NGL marketing. Field Services
plans to make additional investments in gathering, processing and NGL
infrastructure. Field Services' interconnected natural gas processing
operations provide an opportunity to capture fee-based investment opportunities
in certain NGL assets, including pipelines, fractionators and terminals.
NAWE plans to continue increasing earnings through acquisitions,
divestitures, construction of greenfield projects and expansion of existing
facilities as regional opportunities are identified, evaluated and realized
throughout the North American marketplace. To capture the greatest value in the
U.S., DENA, through its portfolio management strategy, seeks opportunities to
invest in energy assets in markets that have capacity needs and to divest other
assets, in whole or in part, when significant value can be realized. Commodity
sales and services related to natural gas and power continue to expand as NAWE
provides energy supply, structured origination, trading and marketing, risk
management and commercial optimization services to large energy customers,
energy aggregators and other wholesale companies.
International Energy plans to continue expanding through acquisitions,
divestitures, construction of greenfield projects and expansion of existing
facilities in selected international regions. International Energy's
combination of assets and capabilities and close working relationships with
other subsidiaries of Duke Energy allow it to efficiently deliver natural gas
pipeline, power generation, energy marketing and other services.
Other Energy Services plans to grow by providing an expanding customer base
with a variety of engineering and energy efficiency services that allow
customers to more effectively deal with rapidly changing conditions in the
energy marketplace.
Duke Ventures plans to expand earnings capabilities in its real estate,
telecommunications and capital financing business units by developing regional
opportunities and by applying extensive experience to new project development.
Duke Energy's business strategy and growth expectations can vary
significantly depending on many factors, including, but not limited to, the
pace and direction of industry restructuring, regulatory constraints,
acquisition opportunities, market volatility and economic trends. However, Duke
Energy's growth expectations do not rely on industry restructuring in North
Carolina and South Carolina.
28
RESULTS OF OPERATIONS
In 2000, earnings available for common stockholders were $1,757 million, or
$2.39 per basic share, including a pre-tax gain of $407 million, or an after-
tax gain of $0.34 per basic share, on the sale of Duke Energy's 20% interest in
BellSouth Carolina PCS (BellSouth PCS). In 1999, earnings available for common
stockholders were $1,487 million, or $2.04 per basic share, including an after-
tax extraordinary gain of $660 million, or $0.91 per basic share resulting from
the sale of the Panhandle Eastern Pipe Line Company (PEPL), Trunkline Gas
Company (Trunkline) and additional storage related to those systems, which
substantially comprised the Midwest Pipelines along with Trunkline LNG Company.
The increase in earnings available for common stockholders in 2000 was
primarily due to a 96% increase in segment earnings as described below,
including the BellSouth PCS gain. Partially offsetting this increase was the
1999 extraordinary gain and higher interest and minority interest expense in
the current year.
Earnings available for common stockholders increased $256 million in 1999
from 1998 earnings of $1,231 million, or $1.70 per basic share. The increase in
earnings available for common stockholders was primarily due to the 1999
extraordinary gain resulting from the sale of the Midwest Pipelines. This gain,
along with the factors described below that affect segment earnings, was
partially offset by a pre-tax $800 million charge for estimated injury and
damages claims (see Note 14 to the Consolidated Financial Statements) and
higher interest and minority interest expense.
Earnings per share information provided above has been restated to reflect
the two-for-one common stock split effective January 26, 2001. See Note 15 to
the Consolidated Financial Statements for additional information.
Operating income for 2000 was $3,813 million compared to $1,819 million in
1999 and $2,485 million in 1998. Earnings before interest and taxes (EBIT) were
$4,014 million, $2,043 million and $2,647 million for 2000, 1999 and 1998,
respectively. Management evaluates each business segment based on an internal
measure of EBIT, after deducting minority interests. Operating income and EBIT
are affected by the same fluctuations for Duke Energy and each of its business
segments. The only notable difference between operating income and EBIT is the
inclusion in EBIT of certain non-operating activities. See Note 3 to the
Consolidated Financial Statements for additional information on business
segments. EBIT is summarized in the following table and is discussed by
business segment thereafter.
EBIT by Business Segment
Years Ended December 31,
----------------------------
2000 1999 1998
-------- -------- --------
In millions
Franchised Electric............................... $ 1,704 $ 856 $ 1,513
Natural Gas Transmission.......................... 534 627 702
Field Services.................................... 296 144 76
North American Wholesale Energy................... 418 209 133
International Energy.............................. 331 42 12
Other Energy Services............................. (61) (94) 10
Duke Ventures..................................... 563 162 122
Other Operations.................................. (2) 5 22
EBIT attributable to minority interests........... 231 92 57
-------- -------- --------
Consolidated EBIT................................. $ 4,014 $ 2,043 $ 2,647
======== ======== ========
Other Operations primarily include certain unallocated corporate costs.
Included in the amounts discussed hereafter are intercompany transactions that
are eliminated in the Consolidated Financial Statements.
29
Franchised Electric
Years Ended December 31,
--------------------------------
2000 1999 1998
---------- ---------- ----------
In millions, except where noted
Operating revenues............................ $ 4,946 $ 4,700 $ 4,626
Operating expenses............................ 3,316 3,966 3,228
---------- ---------- ----------
Operating income.............................. 1,630 734 1,398
Other income, net of expenses................. 74 122 115
---------- ---------- ----------
EBIT.......................................... $ 1,704 $ 856 $ 1,513
========== ========== ==========
Sales--GWh(a)................................. 84,766 81,548 82,011
- --------
(a) Gigawatt-hours.
Franchised Electric's EBIT increased $848 million in 2000 when compared to
1999, primarily due to an $800 million charge in 1999 for estimated injury and
damages claims (see Note 14 to the Consolidated Financial Statements). Overall
favorable weather and growth in customers, partially offset by increased
operating costs, also contributed to this increase in EBIT. The average number
of customers in Franchised Electric's service territory increased 2.5% during
2000. Total gigawatt-hour sales to customers increased by 3.9% for 2000. Sales
to general service and residential customers increased 4.7% and 4.4%,
respectively, while total industrial sales decreased 0.5%.
In 1999, Franchised Electric's EBIT decreased $657 million compared to 1998,
primarily due to the above-mentioned charge for estimated injury and damages
claims. Partially offsetting this decrease was a 2.8% increase in the number of
customers in Franchised Electric's service territory during 1999, and the
absence of 1998 severance and other costs related to closing Franchised
Electric's merchandising business.
Natural Gas Transmission
Years Ended December 31,
--------------------------------
2000 1999 1998
---------- ---------- ----------
In millions, except where noted
Operating revenues............................ $ 1,131 $ 1,230 $ 1,542
Operating expenses............................ 609 615 864
---------- ---------- ----------
Operating income.............................. 522 615 678
Other income, net of expenses................. 12 12 24
---------- ---------- ----------
EBIT.......................................... $ 534 $ 627 $ 702
========== ========== ==========
Throughput--TBtu(a)........................... 1,717 1,893 2,593
- --------
(a) Trillion British thermal units.
In 2000, EBIT for Natural Gas Transmission decreased $93 million compared to
1999, primarily due to $132 million of EBIT in 1999 that did not reoccur in
2000. These items consisted of $70 million of EBIT related to the Midwest
Pipelines, which were sold to CMS Energy Corporation (CMS) in March 1999; a $24
million gain resulting from the sale of Duke Energy's interest in the Alliance
Pipeline project; and benefits totaling $38 million related to the completion
of certain environmental cleanup programs below estimates. These items were
partially offset by increased earnings from market-expansion projects and joint
ventures such as the Maritimes & Northeast Pipeline, which was placed into
service in December 1999, and earnings from East Tennessee Natural Gas Company
and Market Hub Partners (MHP), which were acquired in March and
30
September 2000, respectively. See Note 2 to the Consolidated Financial
Statements for additional information on the sale of the Midwest Pipelines and
the acquisitions of East Tennessee Natural Gas Company and MHP.
EBIT for Natural Gas Transmission decreased $75 million in 1999 compared to
1998. As a result of the sale of the Midwest Pipelines in March 1999, EBIT for
the Midwest Pipelines decreased $156 million compared to 1998's full year of
operation. For the remainder of Natural Gas Transmission, EBIT increased $81
million compared to 1998, primarily as a result of increased earnings from
market-expansion projects and joint ventures, higher throughput and lower
operating expenses. A $24 million gain resulting from the sale of Duke Energy's
interest in the Alliance Pipeline project and benefits totaling $38 million
related to the completion of certain environmental cleanup programs below
estimates also increased EBIT in 1999. Partially offsetting these contributions
to EBIT were the favorable impacts in 1998 in connection with the resolution of
regulatory issues related to natural gas supply realignment costs and a refund
from a state property tax ruling.
Field Services
Years Ended December 31,
---------------------------------
2000 1999 1998
---------- ---------- ----------
In millions, except where noted
Operating revenues......................... $ 9,060 $ 3,590 $ 2,677
Operating expenses......................... 8,635 3,444 2,598
---------- ---------- ----------
Operating income........................... 425 146 79
Other income, net of expenses.............. 6 (2) (3)
Minority interest expense.................. 135 -- --
---------- ---------- ----------
EBIT....................................... $ 296 $ 144 $ 76
========== ========== ==========
Natural gas gathered and
processed/transported, TBtu/d(a).......... 7.6 5.1 3.6
NGL production, MBbl/d(b) 358.5 192.4 110.2
Natural gas marketed, TBtu/d............... 0.7 0.5 0.4
Average natural gas price per MMBtu(c)..... $ 3.89 $ 2.27 $ 2.11
Average NGL price per gallon(d)............ $ 0.53 $ 0.34 $ 0.26
- --------
(a) Trillion British thermal units per day.
(b) Thousand barrels per day.
(c) Million British thermal units.
(d) Does not reflect results of commodity hedges.
Field Services' EBIT increased $152 million in 2000 from 1999. The increase
in EBIT and volume activity was primarily due to the combination of Field
Services' natural gas gathering, processing and marketing business with
Phillips Petroleum's Gas Gathering, Processing and Marketing unit (Phillips) in
March 2000; the acquisition of the natural gas gathering, processing,
fractionation and NGL pipeline business from Union Pacific Resources (UPR)
(collectively, the "UPR acquisition") in April 1999; and other recent
acquisitions and plant expansions. For additional information on the Phillips
combination and the UPR acquisition, see Note 2 to the Consolidated Financial
Statements. Improved average NGL prices, which increased 56% over 1999 prices,
also contributed significantly to the increase in EBIT.
In 1999, Field Services' EBIT increased $68 million compared to 1998. A
significant portion of the increase resulted from earnings from the UPR
acquisition. Improved average NGL prices, which were up 31% from the prior
year, also contributed to the increase in EBIT. Partially offsetting these
increases were $34 million of asset sale gains in 1998.
31
North American Wholesale Energy
Years Ended December 31,
--------------------------------
2000 1999 1998
---------- ---------- ----------
In millions, except where noted
Operating revenues............................. $ 33,874 $ 11,801 $ 8,783
Operating expenses............................. 33,386 11,591 8,619
---------- ---------- ---------
Operating income............................... 488 210 164
Other income, net of expenses.................. 3 60 20
Minority interest expense...................... 73 61 51
---------- ---------- ---------
EBIT........................................... $ 418 $ 209 $ 133
========== ========== =========
Natural gas marketed, TBtu/d................... 11.9 10.5 8.0
Electricity marketed, GWh...................... 275,258 109,634 98,991
Proportional megawatt capacity owned(a)........ 8,984 5,799 5,098
- --------
(a) Includes under construction or under contract.
NAWE's EBIT increased $209 million in 2000 compared to 1999. The increase
was the result of increased earnings from asset positions, increased trading
margins due to price volatility in natural gas and power and a $47 million
increase in income from the sale of interests in generating facilities as a
result of NAWE executing its portfolio management strategy. Operating revenues
and expenses increased as the volumes of natural gas and power marketed
increased 13% and 151%, respectively. These increases were partially offset by
a $110 million charge related to receivables for energy sales in California,
and increased operating and development costs associated with business
expansion. See the Current Issues, California Issues section of Management's
Discussion and Analysis, and Note 14 to the Consolidated Financial Statements
for further information.
In 1999, EBIT for NAWE increased $76 million from 1998. The increase
included $99 million in income from the sale of partial interests in four
generating facilities as a result of NAWE executing its portfolio management
strategy. Partially offsetting these increases were lower natural gas trading
margins, partially offset by higher power trading margins as well as margins
associated with other trading activities and sales of natural gas interests
associated with drilling activities. Higher operating expenses and increased
development costs associated with business expansion also partially offset the
earnings increases.
International Energy
Years Ended December 31,
---------------------------------
2000 1999 1998
----------- ---------- ----------
In millions, except where noted
Operating revenues........................... $ 1,067 $ 357 $ 159
Operating expenses........................... 755 292 145
----------- ---------- ---------
Operating income............................. 312 65 14
Other income, net of expenses................ 42 8 4
Minority interest expense.................... 23 31 6
----------- ---------- ---------
EBIT......................................... $ 331 $ 42 $ 12
=========== ========== =========
Proportional megawatt capacity owned(a)...... 4,876 2,974 943
Proportional maximum pipeline capacity(a),
MMcf/d(b)................................... 416 321 124
- --------
(a) Includes under construction or under contract.
(b) Million cubic feet per day.
32
International Energy's EBIT increased $289 million in 2000 when compared to
1999. The increase was primarily attributable to increased earnings in Latin
America, mainly resulting from new investments (see Note 2 to the Consolidated
Financial Statements for a discussion of significant acquisitions). The
increase also included $54 million from the February 2000 sale of certain
assets relating to the transportation of liquefied natural gas.
In 1999, International Energy's EBIT increased $30 million compared to 1998.
Earnings from new investments in Latin America and Australia contributed $63
million to the increase. Partially offsetting these increases were higher
operating expenses and increased development costs associated with business
expansion.
Other Energy Services
Years Ended December 31,
----------------------------
2000 1999 1998
-------- --------- --------
In millions
Operating revenues.................................. $ 695 $ 989 $ 521
Operating expenses.................................. 756 1,083 511
------- --------- -------
EBIT................................................ $ (61) $ (94) $ 10
======= ========= =======
In 2000, EBIT for Other Energy Services improved $33 million compared to
1999. New business activity and decreased operating expenses at DukeSolutions,
and earnings related to new projects at D/FD were responsible for current year
improved EBIT. The results for 2000 also include Duke Energy's portion of an
estimated project loss recorded by D/FD of approximately $62 million, partially
offset by 1999 charges of $38 million and $35 million at DE&S and
DukeSolutions, respectively. The 1999 charges primarily related to expenses for
severance and office closings associated with repositioning the companies for
growth.
EBIT for Other Energy Services decreased $104 million in 1999 compared to
1998. The decrease was primarily due to the above-mentioned charges of $38
million and $35 million at DE&S and DukeSolutions, respectively. Increased
development costs at DukeSolutions and decreased earnings from projects of DE&S
also contributed to lower EBIT.
Duke Ventures
Years Ended December 31,
--------------------------
2000 1999 1998
-------- -------- --------
In millions
Operating revenues................................... $ 642 $ 232 $ 171
Operating expenses................................... 79 70 49
-------- -------- --------
EBIT................................................. $ 563 $ 162 $ 122
======== ======== ========
EBIT for Duke Ventures increased $401 million in 2000 when compared to 1999.
This increase is primarily attributable to the sale by DukeNet of its 20%
interest in BellSouth PCS to BellSouth Corporation for a pre-tax gain of $407
million. Slightly offsetting this increase in EBIT was a decrease in commercial
project sales and land sales at Crescent.
In 1999, EBIT for Duke Ventures increased $40 million compared to 1998. The
increase was primarily due to Crescent's increased residential developed lot
sales, land sales and commercial project sales, partially offset by decreased
lake lot sales. Increased fiber optic revenues at DukeNet and decreased losses
related to its interest in BellSouth PCS also contributed to increased EBIT.
33
Other Impacts on Earnings Available for Common Stockholders
Interest expense increased $310 million in 2000 compared to 1999, and $87
million in 1999 compared to 1998 due to higher average debt balances
outstanding, resulting from acquisitions and expansion.
Minority interest expense increased $165 million in 2000 compared to 1999
and $46 million in 1999 compared to 1998. Included in minority interest expense
is expense related to regular distributions on issuances of Duke Energy's trust
preferred securities (see Note 12 to the Consolidated Financial Statements).
This expense increased $21 million for 2000 and $43 million for 1999 due to
additional issuances of Duke Energy's trust preferred securities during 1999
and 1998.
In addition, the increase for 2000 includes minority interest expense
related to Field Services' combination with Phillips Petroleum, and increased
minority interest expense at NAWE related to its joint venture with Exxon Mobil
Corporation, partially offset by decreased minority interest expense at
International Energy related to its 1999 and 2000 acquisitions. The 1999
increase in minority interest expense over 1998 related primarily to
International Energy's 1999 investments and NAWE's joint venture with Exxon
Mobil Corporation. For additional information regarding acquisitions and new
joint venture projects, see Notes 2 and 8 to the Consolidated Financial
Statements.
Duke Energy's effective income tax rate was approximately 37%, 35% and 38%
for 2000, 1999 and 1998, respectively. The decrease in 1999 was primarily due
to the favorable resolution of several income tax issues and the utilization of
certain capital loss carryforwards due to the sale of the Midwest Pipelines.
The sale of the Midwest Pipelines to CMS closed in March 1999 and resulted
in a $660 million extraordinary gain, net of income tax of $404 million (see
Note 2 to the Consolidated Financial Statements).
In January 1998, TEPPCO Partners, LP, in which Duke Energy has a 21.1%
ownership interest, redeemed certain First Mortgage Notes. This resulted in a
non-cash extraordinary loss of $8 million, net of income tax of $5 million,
related to Duke Energy's share of costs of the early retirement of debt.
LIQUIDITY AND CAPITAL RESOURCES
Operating Cash Flows
Net cash provided by operations was $2,225 million in 2000, $2,684 million
in 1999 and $2,331 million in 1998. Cash flows from operations decreased in
2000 compared to 1999 primarily due to tax payments made in 2000 related to the
sale of the Midwest Pipelines. The increase in cash flows from operations in
1999 from 1998 was primarily due to net income resulting from business
expansion.
In 1999, Duke Energy established an accrual for estimated injury and damages
claims. During 2000, Duke Energy paid approximately $253 million for the
related insurance premium. Management believes that the long-term cash
requirements of the projected liability will not have a material effect on Duke
Energy's liquidity or cash flows. See Note 14 to the Consolidated Financial
Statements for further discussion.
Investing Cash Flows
Capital and investment expenditures were approximately $5.6 billion in 2000
compared to $5.9 billion in 1999. The primary use of cash in investing
activities for capital and investment expenditures reflects development and
expansion expenditures, upgrades to existing assets and the acquisitions of
various businesses and assets. The change in Natural Gas Transmission's capital
expenditures is primarily due to business expansion related to the
approximately $390 million acquisition of East Tennessee Natural Gas Company
and the approximately $250 million of cash for the acquisition of MHP. In 2000,
NAWE began construction of a number of power generation plants in the U.S. and
continued capital expenditures on projects initiated prior to 2000.
International Energy's business expansion included the completion of a tender
offer to the minority
34
shareholders of Companhia de Geracao de Energia Eletrica Paranapanema
(Paranapanema) for approximately $280 million and the completion of the
approximately $405 million acquisition of Dominion Resources, Inc.'s portfolio
of hydroelectric, natural gas and diesel power generation businesses in Latin
America. Offsetting the capital and investing expenditures were cash proceeds
of $400 million from the 2000 sale of Duke Energy's 20% interest in BellSouth
PCS to BellSouth Corporation. For additional information concerning significant
acquisitions and dispositions, see Note 2 to the Consolidated Financial
Statements.
Capital and Investment Expenditures by Business Segment
Years Ended December 31,
--------------------------
2000 1999 1998
-------- -------- --------
In millions
Franchised Electric................................. $ 661 $ 759 $ 586
Natural Gas Transmission............................ 973 261 290
Field Services...................................... 376 1,630 304
North American Wholesale Energy..................... 1,937 1,028 796
International Energy................................ 980 1,779 239
Other Energy Services............................... 28 94 41
Duke Ventures....................................... 643 382 232
Other Operations.................................... 36 3 12
-------- -------- --------
Total consolidated.................................. $ 5,634 $ 5,936 $ 2,500
======== ======== ========
Capital and investment expenditures in 1999 increased approximately $3.4
billion from 1998 capital and investment expenditures of approximately $2.5
billion. The increase primarily resulted from business expansion for the Field
Services, NAWE and International Energy business segments. Business expansion
for Field Services included the $1.35 billion UPR acquisition. In 1999, NAWE
began construction of multiple power generation plants in the U.S. and
continued capital expenditures on projects initiated prior to 1999.
International Energy's business expansion included $1.7 billion for multiple
acquisitions in Latin America, western Australia and New Zealand. Expenditures
related to these activities were partially funded by $1.9 billion in cash
proceeds from the sale of the Midwest Pipelines. For additional information
concerning significant acquisitions and dispositions, see Note 2 to the
Consolidated Financial Statements.
Projected 2001 capital and investment expenditures for Duke Energy are
approximately $7.9 billion, of which over 75% is planned to be for competitive
business segments which are not subject to state rate regulation. This
projection includes approximately $6.5 billion for acquisitions and other
expansion opportunities and $1.4 billion for existing plant upgrades. Duke
Energy's projected capital expenditures also include $800 million in
expenditures over the next three years for its Gulfstream pipeline project.
All projected capital and investment expenditures are subject to periodic
review and revision and may vary significantly depending on a number of factors
including, but not limited to, industry restructuring, regulatory constraints,
acquisition opportunities, market volatility and economic trends.
Financing Cash Flows
Duke Energy's consolidated capital structure at December 31, 2000, including
short-term debt, was 48% debt, 46% common equity and minority interests, 5%
trust preferred securities and 1% preferred stock. Fixed charges coverage,
calculated using the Securities and Exchange Commission (SEC) method, was 3.8
times, 2.9 times and 4.7 times for 2000, 1999 and 1998, respectively.
Duke Energy's business expansion opportunities, along with dividends, debt
repayments and operating requirements, are expected to be funded by cash from
operations, external financing, common stock issuances and the proceeds from
certain asset sales. Funding requirements met by external financing, common
stock
35
issuances and proceeds from the sale of assets are dependent upon the
opportunities presented and favorable market conditions. Management believes
Duke Energy has adequate financial resources to meet its future needs.
During 2000, Duke Energy issued a total of $550 million of Senior Notes at
rates of approximately 7.250%. The proceeds were used for general corporate
purposes. In April 2000, DEFS issued approximately $2.75 billion of commercial
paper associated with the Phillips combination of which $1.22 billion was
distributed to Phillips Petroleum. In August 2000, DEFS issued $1.7 billion of
notes at rates from 7.50% to 8.125% and reduced the outstanding balance of its
commercial paper. In December 2000, Texas Eastern Transmission Corporation
(TETCO) issued $300 million of 7.30% notes due 2010. For additional information
regarding debt, see Note 10 to the Consolidated Financial Statements.
During 2000, Duke Energy formed Catawba River Associates, LLC, and third-
party, non-controlling, preferred interest holders invested approximately
$1,025 million. The preferred interest receives a preferred return equal to an
adjusted floating reference rate (approximately 7.847% at December 31, 2000).
See Note 2 to the Consolidated Financial Statements for further discussion.
During 2000, Duke Energy repaid $380 million of 8.0% notes, $200 million of
7.0% notes, $200 million of 10.375% notes and made $323 million in scheduled
debt repayments. In addition, Duke Energy made a tender offer for $115 million
of the notes assumed with the acquisition of MHP. As of December 31, 2000,
approximately $88 million of these notes had been retired.
Under its commercial paper facilities and extendible commercial note
programs (ECNs), Duke Energy had the ability to borrow up to $5.7 billion and
$3.3 billion at December 31, 2000 and 1999, respectively. A summary of the
available commercial paper and ECNs as of December 31, 2000, is as follows:
Duke Energy
Duke Duke Capital Field Duke Energy
Energy Corporation(a) Services International Total
------ -------------- ----------- ------------- -----
In billions
Commercial paper.......... $1.25 $1.55 $1.00(b) $0.41(c) $4.21
ECNs...................... 0.50 1.00 -- -- 1.50
----- ----- ----- ----- -----
Total..................... $1.75 $2.55 $1.00 $0.41 $5.71
===== ===== ===== ===== =====
- --------
(a) Duke Capital Corporation is a wholly owned subsidiary of Duke Energy that
provides financing and credit enhancement services for its subsidiaries.
(b) Original availability of $2.8 billion was reduced to $1.0 billion upon
DEFS' issuance of $1.7 billion in notes in August 2000.
(c) Includes ability to issue medium-term notes.
The amount of Duke Energy's bank credit and construction facilities
available at December 31, 2000 and 1999, was approximately $4.2 billion and
$3.7 billion, respectively. Certain of the bank credit facilities support the
issuance of commercial paper; therefore, the issuance of commercial paper
reduces the amount available under these credit facilities. At December 31,
2000, approximately $3.2 billion was outstanding under the commercial paper
facilities and ECNs, and approximately $44 million was outstanding under bank
credit and construction facilities.
As of December 31, 2000, Duke Energy and its subsidiaries had the ability to
issue up to $4.5 billion aggregate public offering price of debt and other
securities under shelf registrations filed with the SEC. Such securities may be
issued as Senior Notes, First and Refunding Mortgage Bonds, Subordinated Notes,
Trust Preferred Securities, Duke Energy Common Stock, Stock Purchase Contracts
or Stock Purchase Units.
On December 20, 2000, Duke Energy announced a two-for-one common stock split
effective January 26, 2001, to shareholders of record on January 3, 2001. All
outstanding share and per-share amounts have been restated to reflect the stock
split.
36
To maintain financial flexibility and reduce the amount of financing needed
for growth opportunities, Duke Energy's Board of Directors adopted a dividend
policy in December 2000 that maintains dividends at the current quarterly rate
of $0.275 per share, subject to declarations from time to time by the Board of
Directors. This policy is consistent with Duke Energy's growth profile and
strikes a balance between providing a competitive dividend yield and ensuring
that cash is available to fund Duke Energy's growth. Duke Energy has paid
quarterly cash dividends for 74 consecutive years. Dividends on common and
preferred stocks in 2001 are expected to be paid on March 16, June 18,
September 17 and December 17, subject to the discretion of the Board of
Directors.
Duke Energy's InvestorDirect Choice Plan, a stock purchase and dividend
reinvestment plan, allows investors to reinvest dividends in new issuances of
common stock and to purchase common stock directly from Duke Energy. Issuances
under this plan were not material in 2000, 1999 or 1998.
Duke Energy used authorized but unissued shares of its common stock to meet
2000 and 1999 employee benefit plan contribution requirements. This practice is
expected to continue in 2001.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Risk Policies
Duke Energy is exposed to market risks associated with interest rates,
commodity prices, equity prices and foreign currency exchange rates.
Comprehensive risk management policies have been established by management to
monitor and manage these market risks. Duke Energy's Policy Committee is
responsible for the overall approval of market risk management policies and the
delegation of approval and authorization levels. The Policy Committee is
comprised of senior executives who receive periodic updates from the Chief Risk
Officer (CRO) on market risk positions, corporate exposures, credit exposures
and overall results of Duke Energy's risk management activities. The CRO has
responsibility for the overall management of interest rate risk, foreign
currency risk, credit risk and energy risk, including monitoring of exposure
limits.
Interest Rate Risk
Duke Energy is exposed to risk resulting from changes in interest rates as a
result of its issuance of variable-rate debt, fixed-rate securities, commercial
paper and auction market preferred stock, as well as interest rate swaps and
interest rate lock agreements. Duke Energy manages its interest rate exposure
by limiting its variable-rate and fixed-rate exposures to certain percentages
of total capitalization, as set by policy, and by monitoring the effects of
market changes in interest rates. Duke Energy may also enter into financial
derivative instruments, including, but not limited to, swaps, options and
treasury lock agreements to manage and mitigate interest rate risk exposure.
See Notes 1, 7, 10, 12 and 13 to the Consolidated Financial Statements for
additional information.
Based on a sensitivity analysis as of December 31, 2000, it was estimated
that if market interest rates average 1% higher (lower) in 2001 than in 2000,
earnings before income taxes would decrease (increase) by approximately $53
million. Comparatively, based on a sensitivity analysis as of December 31,
1999, had interest rates averaged 1% higher (lower) in 2000 than in 1999, it
was estimated that earnings before income taxes would have decreased
(increased) by approximately $24 million. These amounts were determined by
considering the impact of the hypothetical interest rates on the variable-rate
securities outstanding as of December 31, 2000 and 1999. The increase in
interest rate sensitivity is primarily the result of the increase in
outstanding variable-rate commercial paper. In the event of a significant
change in interest rates, management would likely take actions to manage its
exposure to the change. However, due to the uncertainty of the specific actions
that would be taken and their possible effects, the sensitivity analysis
assumes no changes in Duke Energy's financial structure.
37
Commodity Price 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. See Notes 1 and 7 to the Consolidated
Financial Statements for additional information.
The risk in the commodity trading portfolio is measured and monitored on a
daily basis utilizing a Value-at-Risk model to determine the maximum potential
one-day favorable or unfavorable Daily Earnings at Risk (DER). The DER is
monitored daily in comparison to established thresholds. Other measures are
also utilized to limit and monitor the risk in the commodity trading portfolio
on monthly and annual bases.
The DER computations are based on a historical simulation, which utilizes
price movements over a specified period to simulate forward price curves in the
energy markets to estimate the favorable or unfavorable impact of one day's
price movement on the existing portfolio. The historical simulation emphasizes
the most recent market activity, which is considered the most relevant
predictor of immediate future market movements for natural gas, electricity and
other energy-related products. The DER computations utilize several key
assumptions, including a 95% confidence level for the resultant price movement
and the holding period specified for the calculation. Duke Energy's DER
calculation includes commodity derivative instruments held for trading
purposes. Duke Energy's DER amounts are depicted in the table below. The
increase in DER amounts as compared to 1999 is a result of Duke Energy's
expanding portfolio of energy-related products both domestically and
internationally.
Daily Earnings at Risk
Estimated One-Day Estimated One-Day Estimated Average Estimated Average
Operational Impact on EBIT at Impact on EBIT at One-Day Impact on One-Day Impact on
Locations December 31, 2000 December 31, 1999 EBIT for 2000 EBIT for 1999
----------- ----------------- ----------------- ----------------- -----------------
In millions (a)
North American.. $20 $10 $16 $11
Other
international.. 11 -- 2 --
- --------
(a) Changes in markets inconsistent with historical trends could cause actual
results to exceed predicted limits.
Certain subsidiaries of Duke Energy are also exposed to market fluctuations
in the prices of various commodities related to their ongoing power generating,
natural gas gathering, processing and marketing activities. Duke Energy closely
monitors the risks associated with these commodities' price changes on its
future operations, and where appropriate, uses various commodity instruments,
such as electricity, natural gas, crude oil and NGLs to hedge these price
risks. Based on a sensitivity analysis as of December 31, 2000, it was
estimated that if NGL prices average one cent per gallon less in 2001, EBIT
would decrease by approximately $8 million, after considering the effect of
Duke Energy's commodity hedge positions. Comparatively, the same sensitivity
analysis as of December 31, 1999, estimated that EBIT would have decreased by
approximately $6 million. Based on the sensitivity analyses associated with
other commodities' price changes, net of Duke Energy's commodity hedge
positions, the effect on EBIT was not material as of December 31, 2000 or 1999.
Credit Risk
Duke Energy's principal markets for power and natural gas marketing services
are industrial end-users and utilities located throughout the U.S., Canada,
Asia Pacific and Latin America. Duke Energy has concentrations of receivables
from natural gas and electric utilities and their affiliates, as well as
industrial customers throughout these regions. These concentrations of
customers may affect Duke Energy's overall credit risk in that certain
customers may be similarly affected by changes in economic, regulatory or other
factors. On all transactions where Duke Energy is exposed to credit risk, Duke
Energy analyzes the counterparties' financial
38
condition prior to entering into an agreement, establishes credit limits and
monitors the appropriateness of these limits on an ongoing basis. As of
December 31, 2000, Duke Energy had approximately $400 million in receivables
related to energy sales in California. Duke Energy quantified its exposures
with regard to those receivables and recorded a provision of $110 million. See
the Current Issues, California Issues section of Management's Discussion and
Analysis, and Note 14 to the Consolidated Financial Statements for further
information regarding credit exposure.
The change in market value of New York Mercantile Exchange-traded futures
and options contracts requires daily cash settlement in margin accounts with
brokers. Physical forward contracts and financial derivatives are generally
settled at the expiration of the contract term or each delivery period;
however, these transactions are also generally subject to margin agreements
with the majority of Duke Energy's counterparties.
Equity Price Risk
Duke Energy maintains trust funds, as required by the Nuclear Regulatory
Commission, to fund certain costs of nuclear decommissioning (see Note 11 to
the Consolidated Financial Statements). As of December 31, 2000 and 1999, these
funds were invested primarily in domestic and international equity securities,
fixed-rate, fixed-income securities and cash and cash equivalents. Management
believes that its exposure to fluctuations in equity prices or interest rates
will not materially affect consolidated results of operations, cash flows or
financial position. See further discussion in the Current Issues, Nuclear
Decommissioning Costs section of Management's Discussion and Analysis.
Foreign Currency Risk
Duke Energy is exposed to foreign currency risk that arises from investments
in international affiliates and businesses owned and operated in foreign
countries. To mitigate risks associated with foreign currency fluctuations,
when possible, contracts are denominated in or indexed to the U.S. dollar, or
investments may be hedged through debt denominated in the foreign currency.
Duke Energy also uses foreign currency derivatives, where possible, to manage
its risk related to foreign currency fluctuations. To monitor its currency
exchange rate risks, Duke Energy uses sensitivity analysis, which measures the
impact of a devaluation of the foreign currencies to which it has exposure.
At December 31, 2000, Duke Energy's primary foreign currency exchange rate
exposures were the Brazilian real, the Peruvian nuevo sol, the Australian
dollar, the El Salvadoran colon, the Argentine peso, the European euro and the
Canadian dollar. Based on a sensitivity analysis as of December 31, 2000, a 10%
devaluation in the currency exchange rates in Brazil would reduce Duke Energy's
financial position by approximately $91 million and would not significantly
affect Duke Energy's consolidated results of operations, cash flows or
financial position over the next 12 months. Based on a sensitivity analysis as
of December 31, 1999, a 10% devaluation in the Brazilian currency exchange
rates would have reduced Duke Energy's financial position by approximately $65
million. The increase in sensitivity to the Brazilian real is primarily due to
the increased investment in Paranapanema as a result of Duke Energy's tender
offer in 2000. See Note 2 to the Consolidated Financial Statements for further
information. Based on these sensitivity analyses, a 10% devaluation in other
foreign currencies was insignificant to Duke Energy's consolidated results of
operations, cash flows or financial position.
CURRENT ISSUES
Electric Competition. Wholesale Competition. The Energy Policy Act of 1992
and the FERC's subsequent rulemaking activities opened the wholesale energy
market to competition.
Open-access transmission for wholesale customers as defined by the FERC's
final rules provides energy suppliers, including Duke Energy, with
opportunities to sell and deliver capacity and energy at market-based prices.
Franchised Electric obtained from the FERC's open-access rule the rights to
sell capacity and energy at
39
market-based rates from its own assets, which allows Franchised Electric to
purchase, at attractive rates, a portion of its capacity and energy
requirements resulting in lower overall costs to customers. Open access also
provides Franchised Electric's existing wholesale customers with competitive
opportunities to seek other suppliers for their capacity and energy
requirements.
On December 20, 1999 and February 25, 2000, the FERC issued its Order 2000
and Order 2000-A regarding Regional Transmission Organizations (RTOs). In these
orders, the FERC stressed the voluntary nature of RTO participation by
utilities and set minimum characteristics and functions that must be met by
utilities that participate in an RTO, including exclusive and independent
authority to propose rates, terms and conditions of transmission service
provided over the facilities it operates. The order provides for an open,
flexible structure for RTOs to meet the needs of the market and provides for
the possibility of incentive ratemaking and other benefits for utilities that
participate in an RTO.
As a result of these rulemakings, on October 16, 2000, Duke Energy and two
other investor-owned utilities, Progress Energy and South Carolina Electric &
Gas, filed with the FERC to establish GridSouth Transco, LLC (GridSouth), as an
RTO. If approved, GridSouth will be a for-profit, independent transmission
company, responsible for operating and planning the companies' combined
transmission systems. The target date for formation of GridSouth is December
15, 2001. However, the actual date that GridSouth becomes operational will
depend upon the resolution of all necessary regulatory approvals and resolving
all technical issues. Management believes that the establishment of GridSouth
will not have a material adverse effect on Duke Energy's future consolidated
results of operations, cash flows or financial position.
Retail Competition. Currently, Franchised Electric operates as a vertically
integrated, investor-owned utility with exclusive rights to supply electricity
in a franchised service territory -- a 22,000-square-mile service territory in
the Carolinas. In its retail business, the NCUC and the PSCSC regulate
Franchised Electric's service and rates.
Electric industry restructuring is being addressed in all 50 states and in
the District of Columbia. These restructurings will likely impact all entities
owning electric generating assets. The NCUC and the PSCSC are studying the
merits of restructuring the electric utility industry in the Carolinas. During
1999, three electric utility restructuring bills were filed in South Carolina's
House of Representatives. All three bills addressed competition while allowing
utilities to recover stranded costs, and have transition and phase-in periods
ranging from five to six years. A task force formed by the South Carolina
Senate is also examining issues related to deregulation of the state's electric
utility business. Legislators anticipate that legislation is likely to be
introduced during 2001. This task force will prepare a report for review,
discussion and possible legislative action by the state's Senate Judiciary
Committee and General Assembly as a whole.
In May 1997, North Carolina passed a bill that established a study
commission to examine whether competition should be implemented in the state.
Members of this commission include legislators, customers, utilities and a
member of an environmental group. The study commission unanimously approved a
set of recommendations on electric restructuring in April 2000. The
commission's report to the legislature containing these recommendations was
submitted to the General Assembly in May. The report basically recommended
retail deregulation beginning partially in 2005 and fully in 2006. However,
recent events in California's power market have led the study commission to
evaluate whether, and to what extent, proposed legislation should be introduced
in 2001. In general, the commission has expressed interest in ensuring that a
viable wholesale electric market is in place prior to opening the state's
retail electric market.
Currently, the electric utility industry is predominantly regulated on a
basis designed to recover the cost of providing electric power to customers. If
cost-based regulation were to be discontinued in the industry for any reason,
including competitive pressure on the cost-based prices of electricity, profits
could be reduced and electric utilities might be required to reduce their asset
balances to reflect a market basis less than cost. Discontinuance of cost-based
regulation would also require affected utilities to write off their associated
regulatory assets. Duke Energy's regulatory assets are included in the
Consolidated Balance Sheets. The portion
40
of these regulatory assets related to Franchised Electric is approximately $1.2
billion, including primarily purchased capacity costs, deferred debt expense
and deferred taxes related to regulatory assets. Duke Energy is recovering
substantially all of these regulatory assets through its current wholesale and
retail electric rates and may attempt to continue to recover these assets
during a transition to competition. In addition, Duke Energy would seek to
recover the costs of its electric generating facilities in excess of the market
price of power at the time of transition.
Duke Energy supports a properly managed and orderly transition to
competitive generation and retail services in the electric industry. However,
transforming the current regulated industry into efficient, competitive
generation and retail electric markets is a complex undertaking, which will
require a carefully considered transition to a restructured electric industry.
The key to effective retail competition is fairness among customers, service
providers and investors. Duke Energy intends to continue to work with
customers, legislators and regulators to address all the important issues.
Management currently cannot predict the impact, if any, of these competitive
forces on future consolidated results of operations, cash flows or financial
position.
Natural Gas Competition. Wholesale Competition. On February 9, 2000, the
FERC issued Order 637, which sets forth revisions to its regulations governing
short-term natural gas transportation services and policies governing the
regulation of interstate natural gas pipelines. "Short-term" has been defined
as all transactions of less than one year. Among the significant actions taken
are the lifting of the price cap for short-term capacity release by pipeline
customers for an experimental 2 1/2-year period ending September 1, 2002, and
requiring that interstate pipelines file pro forma tariff sheets to (i) provide
for nomination equality between capacity release and primary pipeline capacity;
(ii) implement imbalance management services (for which interstate pipelines
may charge fees) while at the same time reducing the use of operational flow
orders and penalties; and (iii) provide segmentation rights if operationally
feasible. Order 637 also narrows the right of first refusal to remove economic
biases perceived in the current rule. Order 637 imposes significant new
reporting requirements for interstate pipelines that were implemented by Duke
Energy during the third quarter of 2000. Additionally, Order 637 permits
pipelines to propose peak/off-peak rates and term-differentiated rates, and
encourages pipelines to propose experimental capacity auctions. By Order 637-A,
issued in February 2000, the FERC generally denied requests for rehearing and
several parties, including Duke Energy, have filed appeals in the District of
Columbia Court of Appeals seeking court review of various aspects of the Order.
During the third quarter of 2000, Duke Energy's interstate pipelines made the
required pro forma tariff sheet filings. These filings are currently subject to
review and approval by the FERC.
Management does not believe the effects of these matters will have a
material effect on Duke Energy's future consolidated results of operations,
cash flows or financial position.
Retail Competition. Changes in regulation to allow retail competition could
affect Duke Energy's natural gas transportation contracts with local natural
gas distribution companies. Natural gas retail deregulation is in the very
early stages of development and management cannot estimate the effects of this
matter on future consolidated results of operations, cash flows or financial
position.
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. Duke
Energy contributes to an external decommissioning trust fund and maintains an
internal reserve to fund these costs.
The balance of the external fund as of December 31, 2000 and 1999, was $717
million and $703 million, respectively. The balance of the internal reserve as
of December 31, 2000 and 1999, was $231 million and $223 million, respectively,
and is reflected in the Consolidated Balance Sheets as Accumulated Depreciation
and Amortization.
Both the NCUC and the PSCSC have granted Duke Energy recovery of estimated
decommissioning costs through retail rates over the expected remaining service
periods of its nuclear plants. Management believes that
41
funding of the decommissioning costs will not have a material adverse effect on
consolidated results of operations, cash flows or financial position. See Note
11 to the Consolidated Financial Statements for additional information.
The external decommissioning trust fund is invested primarily in domestic
and international equity securities, fixed-rate, fixed-income securities and
cash and cash equivalents. 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.
Nuclear Re-licensing. In May 2000, the Nuclear Regulatory Commission renewed
the operating license for Duke Energy's three Oconee nuclear units through 2033
to 2034. Licenses for Duke Energy's other nuclear units expire between 2021 and
2026 and are also available for renewal.
Environmental. Duke Energy is subject to international, federal, state and
local regulations regarding air and water quality, hazardous and solid waste
disposal and other environmental matters.
Manufactured Gas Plants and Superfund Sites. Duke Energy was an operator of
manufactured gas plants until the early 1950s and has entered into a
cooperative effort with the State of North Carolina and other owners of certain
former manufactured gas plant sites to investigate and, where necessary,
remediate these contaminated sites. Duke Energy is considered by regulators to
be a potentially responsible party and may be subject to future liability at
eight federal Superfund sites and three state Superfund sites. While the cost
of remediation of these sites may be substantial, Duke Energy will share in any
liability associated with remediation of contamination at such sites with other
potentially responsible parties. Management believes that resolution of these
matters will not have a material adverse effect on consolidated results of
operations, cash flows or financial position.
PCB (Polychlorinated Biphenyl) Assessment and Cleanup Programs. In June
1999, the Environmental Protection Agency (EPA) certified that TETCO, a wholly
owned subsidiary of Duke Energy, had completed cleanup of PCB-contaminated
sites under conditions stipulated by a U.S. Consent Decree in 1989. TETCO was
required to continue groundwater monitoring on a number of sites for two years.
This required monitoring was completed as of the end of 2000, pending EPA
concurrence. TETCO will be evaluating and discussing with the EPA, appropriate
state authorities or both the need for additional remediation or monitoring.
Under terms of the sales agreement with CMS discussed in Note 2 to the
Consolidated Financial Statements, Duke Energy is obligated to complete cleanup
of previously identified contamination resulting from the past use of PCB-
containing lubricants and other discontinued practices at certain sites on the
PEPL and Trunkline systems. Based on Duke Energy's experience to date and costs
incurred for cleanup operations, management believes the resolution of matters
relating to the environmental issues discussed above will not have a material
adverse effect on consolidated results of operations, cash flows or financial
position.
Air Quality Control. The Clean Air Act (CAA) Amendments of 1990 required a
two-phase reduction by electric utilities in aggregate annual emissions of
sulfur dioxide and nitrogen oxide by 2000. All projects associated with these
requirements have been completed and Duke Energy currently meets all
requirements of Phase I and Phase II.
In October 1998, the EPA issued a final rule on regional ozone control that
required 22 eastern states and the District of Columbia to revise their State
Implementation Plans (SIPs) to significantly reduce emissions of nitrogen oxide
by May 1, 2003. The EPA's rule was challenged in court by various states,
industry and other interests, including the states of North Carolina and South
Carolina, and Duke Energy. In March 2000, the court upheld most aspects of the
EPA's rule. The same court subsequently issued a decision that extended the
compliance deadline for implementation of emission reductions to May 31, 2004.
In January 2000, the EPA
42
finalized another ozone-related rule under Section 126 of the CAA that has
virtually identical emission control requirements as its October 1998 action,
but with a May 1, 2003 compliance date. The EPA's 2000 rule has been challenged
in court. The court is expected to issue its decision during the spring of
2001.
In response to the EPA's October 1998 rule, both North Carolina and South
Carolina are in the process of finalizing the SIP revisions to implement the
EPA rule's emission reduction requirements. Additionally, North Carolina has
adopted a separate rule that caps nitrogen oxide emissions from coal-fired
power plants in the event the EPA's SIP rule is eventually overturned.
Depending on the resolution of these and related matters, management
anticipates that costs to Duke Energy may range from $500 million to $900
million in capital costs for additional emission controls over an estimated
time period which continues through 2007. Emission control retrofits of this
type are large technical, design and construction projects. These projects will
be managed closely to ensure the continuation of reliable electric service to
Duke Energy's customers throughout the projects and upon their completion.
On December 22, 2000, the U.S. Justice Department, acting on behalf of the
EPA, filed a complaint against Duke Energy in the U.S. District Court in
Greensboro, North Carolina, for alleged violations of the New Source Review
(NSR) provisions of the CAA. The EPA is claiming that 29 projects performed at
25 of Duke Energy's coal-fired units were major modifications as defined in the
CAA and that Duke Energy violated the CAA's NSR requirements when it undertook
those projects without obtaining permits and installing emission controls for
sulfur dioxide, nitrogen oxide and particulate matter. The complaint requests,
among other things, that the court enjoin Duke Energy from operating the coal-
fired units identified in the complaint, and order Duke Energy to install
additional emission controls and pay unspecified civil penalties. This
complaint appears to be part of the EPA's NSR enforcement initiative, in which
the EPA claims that utilities and others have committed widespread violations
of the CAA permitting requirements for the past 25 years. The EPA has sued or
issued notices of violation 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 intends to defend itself vigorously against these
alleged violations. However, because these matters are in a preliminary stage,
management cannot estimate the effects of these matters on Duke Energy's future
consolidated results of operations, cash flows or financial position. The CAA
authorizes civil penalties of up to $27,500 per day per violation at each
generating unit. Civil penalties, if ultimately imposed by the court, and the
cost of any required new pollution control equipment, if the court accepts the
EPA's contentions, could be substantial.
Global Climate Change. In 1997, the United Nations held negotiations in
Kyoto, Japan to determine how to minimize global warming. The resulting Kyoto
Protocol prescribed, among other greenhouse gas emission reduction tactics,
carbon dioxide emission reductions from fossil-fueled electric generating
facilities in the U.S. and other developed nations, as well as methane emission
reductions from natural gas operations. Several subsequent meetings have been
held attempting to resolve operational details to clear the way for
multinational ratification and implementation without resolution. If the Kyoto
Protocol were to be adopted in its current form, it could have far-reaching
implications for Duke Energy and the entire energy industry. However, the
outcome and timing of these implications are highly uncertain, and Duke Energy
cannot estimate the effects on future consolidated results of operations, cash
flows or financial position. Duke Energy remains engaged with those developing
public policy initiatives and continuously assesses the commercial implications
for its markets around the world.
California Issues. California Litigation. Duke Energy's subsidiaries, DENA
and DETM, have been named among 16 defendants in a class action lawsuit (the
Gordon lawsuit) filed against companies identified as "generators and traders"
of electricity in California markets. DETM also was named as one of numerous
43
defendants in four additional lawsuits, including two class actions (the
Hendricks and Pier 23 Restaurant lawsuits), filed against generators, marketers
and traders and other unnamed providers of electricity in California markets.
These suits were brought either by or on behalf of electricity consumers in the
State of California. The Gordon and Hendricks class action suits were filed in
the Superior Court of the State of California, San Diego County, in November
2000. The other three suits were filed in January 2001, one in the Superior
Court of the State of California, San Diego County, and the other two in the
Superior Court of the State of California, County of San Francisco. These suits
generally allege that the defendants manipulated the wholesale electricity
markets in violation of state laws against unfair and unlawful business
practices and state antitrust laws. Plaintiffs in the Gordon suit seek
aggregate damages of over $4 billion, and the plaintiffs in the other suits, to
the extent damages are specified, allege damages in excess of $1 billion. The
lawsuits each seek the disgorgement of alleged unlawfully obtained revenues for
sales of electricity and, in three suits, an award of treble damages.
California Wholesale Electricity Markets. As a result of high prices in the
western U.S. wholesale electricity markets in 2000, several state and federal
regulatory investigations and complaints have commenced to determine the causes
of the prices and potentially to recommend remedial action. The FERC concluded
its investigation by issuing on December 15, 2000, an Order Directing Remedies
in California Wholesale Electricity Markets. In this conclusion, the FERC found
no basis in allegations made by government officials in California that
specific electric generators artificially drove up power prices. This
conclusion is consistent with similar findings by the Compliance Unit of the
California Power Exchange (CalPX) and the Northwest Power Planning Council.
That Order is the subject of numerous rehearing requests.
At the state level, the California Public Utilities Commission, the
California Electricity Oversight Board, the California Bureau of State Audits
and the California Office of the Attorney General all have separate ongoing
investigations into the high prices and their causes. None of those
investigations have been completed and no findings have been made in connection
with any of them.
California Utilities Defaults and Other Proceedings. Two California electric
utilities recently defaulted on many of their obligations to suppliers and
creditors. NAWE supplies electric power to these utilities directly and
indirectly through contracts through the California Independent System Operator
(CAISO) and the CalPX. NAWE also supplies natural gas to these utilities under
direct contracts. With respect to electric power sales through the CAISO and
CalPX, Duke Energy quantified its exposures at December 31, 2000 to these
utilities and recorded a $110 million provision. As a result of these defaults
and certain related government actions, Duke Energy has taken a number of
steps, including initiating court actions, to mitigate its exposure.
While these matters referenced above are in their earliest stages,
management does not believe, based on its analysis to date of the factual
background and the claims asserted in these matters, that their resolution will
have a material adverse effect on Duke Energy's consolidated results of
operations, cash flows or financial position.
Litigation and Contingencies. Exxon Mobil Corporation Arbitration. In
December 2000, three subsidiaries of Duke Energy initiated binding arbitration
against three subsidiaries of the Exxon Mobil Corporation (collectively, the
"Exxon Mobil entities") concerning the parties' joint ownership of DETM and
certain related affiliates (collectively, the "Ventures"). At issue is a buy-
out right provision in the parties' agreement. The agreements governing the
ownership of the Ventures contain provisions giving Duke Energy the right to
purchase the Exxon Mobil entities' 40% interest in the Ventures in the event
material business disputes arise between the Ventures' owners. Such disputes
have arisen, and consequently, Duke Energy exercised its right to buy the Exxon
Mobil entities' interest. Duke Energy claims that refusal by the Exxon Mobil
entities to honor the exercise is a breach of the buy-out right provision, and
seeks specific performance of the provision. Duke Energy also complains of the
Exxon Mobil entities' lack of use of, and contributions to, the Ventures.
44
In January 2001, the Exxon Mobil entities asserted counterclaims in the
arbitration and claims in a separate Texas state court action alleging that
Duke Energy breached its obligations to the Ventures and to the Exxon Mobil
entities. The Exxon Mobil entities also claim that Duke Energy violated a
Guaranty Agreement. While this matter is in its early stages, management
believes that the final disposition of this action will not have a material
adverse effect on Duke Energy's consolidated results of operations, cash flows
or financial position.
For information concerning litigation and other commitments and
contingencies, see Note 14 to the Consolidated Financial Statements.
New Accounting Standard. In June 1998, Statement of Financial Accounting
Standard (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued. Duke Energy was required to adopt this standard by
January 1, 2001. SFAS No. 133 requires that all derivatives be recognized as
either assets or liabilities and measured at fair value, and changes in the
fair value of derivatives are reported in current earnings, unless the
derivative is designated and effective as a hedge. If the intended use of the
derivative is to hedge the exposure to changes in the fair value of an asset, a
liability or a firm commitment, then changes in the fair value of the
derivative instrument will generally be offset in the income statement by
changes in the hedged item's fair value. However, if the intended use of the
derivative is to hedge the exposure to variability in expected future cash
flows, then changes in the fair value of the derivative instrument will
generally be reported in Other Comprehensive Income (OCI). The gains and losses
on the derivative instrument that are reported in OCI will be reclassified to
earnings in the periods in which earnings are impacted by the hedged item.
Duke Energy has determined the effect of implementing SFAS No. 133 and
recorded a net-of-tax cumulative-effect adjustment of $96 million as a
reduction in earnings. The net-of-tax cumulative-effect adjustment reducing OCI
and Common Stockholders' Equity is estimated to be $921 million on January 1,
2001.
Currently, there are ongoing discussions surrounding the implementation and
interpretation of SFAS No. 133 by the Financial Accounting Standards Board's
Derivatives Implementation Group. Duke Energy implemented SFAS No. 133 based on
current rules and guidance in place as of January 1, 2001. However, if the
definition of derivative instruments is altered, this may impact Duke Energy's
transition adjustment amounts and subsequent reported operating results.
Forward-Looking Statements. From time to time, Duke Energy's reports,
filings and other public announcements may include assumptions, projections,
expectations, intentions or beliefs about future events. These statements are
intended as "forward-looking statements" under the Private Securities
Litigation Reform Act of 1995. Duke Energy cautions that assumptions,
projections, expectations, intentions or beliefs about future events may and
often do vary from actual results and the differences between assumptions,
projections, expectations, intentions or beliefs and actual results can be
material. Accordingly, there can be no assurance that actual results will not
differ materially from those expressed or implied by the forward-looking
statements. Some of the factors that could cause actual achievements and events
to differ materially from those expressed or implied in such forward-looking
statements include state, federal and foreign legislative and regulatory
initiatives that affect cost and investment recovery, have an impact on rate
structures and affect the speed and degree at which competition enters the
electric and natural gas industries; industrial, commercial and residential
growth in the service territories of Duke Energy and its subsidiaries; the
weather and other natural phenomena; the timing and extent of changes in
commodity prices, interest rates and foreign currency exchange rates; changes
in environmental and other laws and regulations to which Duke Energy and its
subsidiaries are subject or other external factors over which Duke Energy has
no control; the results of financing efforts, including Duke Energy's ability
to obtain financing on favorable terms, which can be affected by Duke Energy's
credit rating and general economic conditions; growth in opportunities for Duke
Energy's business units; and the effect of accounting policies issued
periodically by accounting standard-setting bodies.
45
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
See "Management's Discussion and Analysis of Results of Operations and
Financial Condition, Quantitative and Qualitative Disclosures About Market
Risk."
46
Item 8. Financial Statements and Supplementary Data.
DUKE ENERGY CORPORATION
Consolidated Statements Of Income
Years Ended December 31,
--------------------------
2000 1999 1998
-------- -------- --------
In millions, except
per share amounts
Operating Revenues
Sales, trading and marketing of natural gas and
petroleum products (Notes 1 and 7)................ $ 28,310 $ 10,922 $ 7,854
Trading and marketing of electricity (Notes 1 and
7)................................................ 13,060 3,610 2,788
Generation, transmission and distribution of
electricity (Notes 1 and 4)....................... 5,315 4,934 4,586
Transportation and storage of natural gas (Notes 1
and 4)............................................ 1,045 1,139 1,450
Gain on sale of equity investment (Notes 2 and 8).. 407 -- --
Other (Note 8)..................................... 1,181 1,161 984
-------- -------- -------
Total operating revenues.......................... 49,318 21,766 17,662
-------- -------- -------
Operating Expenses
Natural gas and petroleum products purchased (Note
1)................................................ 27,670 10,636 7,497
Net interchange and purchased power (Notes 1, 4 and
5)................................................ 12,000 3,507 2,916
Fuel used in electric generation (Notes 1 and 11).. 781 764 767
Other operation and maintenance (Notes 4, 11 and
14)............................................... 3,469 3,701 2,738
Depreciation and amortization (Notes 1 and 5)...... 1,167 968 909
Property and other taxes........................... 418 371 350
-------- -------- -------
Total operating expenses.......................... 45,505 19,947 15,177
-------- -------- -------
Operating Income.................................... 3,813 1,819 2,485
-------- -------- -------
Other Income and Expenses
Deferred returns and allowance for funds used
during construction (Note 1)...................... 63 82 88
Other, net......................................... 138 142 74
-------- -------- -------
Total other income and expenses................... 201 224 162
-------- -------- -------
Earnings Before Interest and Taxes.................. 4,014 2,043 2,647
Interest Expense (Notes 7 and 10)................... 911 601 514
Minority Interest Expense (Notes 2 and 12).......... 307 142 96
-------- -------- -------
Earnings Before Income Taxes........................ 2,796 1,300 2,037
Income Taxes (Notes 1 and 6)........................ 1,020 453 777
-------- -------- -------
Income Before Extraordinary Item.................... 1,776 847 1,260
Extraordinary Gain (Loss), net of tax............... -- 660 (8)
-------- -------- -------
Net Income.......................................... 1,776 1,507 1,252
Dividends on Preferred and Preference Stock (Note
13)................................................ 19 20 21
-------- -------- -------
Earnings Available For Common Stockholders.......... $ 1,757 $ 1,487 $ 1,231
======== ======== =======
Common Stock Data (Note 1)
Weighted average shares outstanding................ 736 729 722
Earnings per share (before extraordinary item)
Basic............................................. $ 2.39 $ 1.13 $ 1.72
Diluted........................................... $ 2.38 $ 1.13 $ 1.71
Earnings per share
Basic............................................. $ 2.39 $ 2.04 $ 1.70
Diluted........................................... $ 2.38 $ 2.03 $ 1.70
Dividends per share................................ $ 1.10 $ 1.10 $ 1.10
See Notes to Consolidated Financial Statements.
47
DUKE ENERGY CORPORATION
Consolidated Statements Of Cash Flows
Years Ended December 31,
----------------------------
2000 1999 1998
-------- -------- --------
In millions
Cash Flows From Operating Activities
Net income...................................... $ 1,776 $ 1,507 $ 1,252
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................... 1,348 1,151 1,055
Net mark-to-market gain......................... (464) (24) (75)
Extraordinary (gain) loss, net of tax........... -- (660) 8
Gain on sale of equity investment............... (407) -- --
Provision on NAWE receivables................... 110 -- --
Injury and damages accrual...................... -- 800 --
Deferred income taxes........................... 152 (210) (35)
Purchased capacity levelization................. 138 104 88
Transition cost recoveries (payments), net...... 82 95 (28)
(Increase) decrease in
Receivables.................................... (4,812) (659) (18)
Inventory...................................... (97) (89) (104)
Other current assets........................... (796) (138) (39)
Increase (decrease) in
Accounts payable............................... 4,509 477 72
Taxes accrued.................................. (439) (57) (6)
Interest accrued............................... 64 32 (2)
Other current liabilities...................... 1,116 73 84
Other, net...................................... (55) 282 79
-------- -------- --------
Net cash provided by operating activities..... 2,225 2,684 2,331
-------- -------- --------
Cash Flows From Investing Activities
Capital and investment expenditures............. (5,634) (5,936) (2,500)
Proceeds from sale of subsidiaries and equity
investment..................................... 400 1,900 --
Decommissioning, retirements and other.......... 204 236 24
-------- -------- --------
Net cash used in investing activities......... (5,030) (3,800) (2,476)
-------- -------- --------
Cash Flows From Financing Activities
Proceeds from the issuance of
Long-term debt.................................. 3,206 3,221 1,357
Guaranteed preferred beneficial interests in
subordinated notes of Duke Energy Corporation
or Subsidiaries................................ -- 484 581
Common stock and stock options.................. 230 162 176
Payments for the redemption of
Long-term debt.................................. (1,191) (1,505) (698)
Preferred and preference stock.................. (33) (20) (180)
Net change in notes payable and commercial
paper.......................................... 1,484 58 (350)
Distributions to minority interests............. (1,216) -- --
Contributions from minority interests........... 1,116 -- --
Dividends paid.................................. (828) (822) (814)
Other........................................... (54) 22 6
-------- -------- --------
Net cash provided by financing activities..... 2,714 1,600 78
-------- -------- --------
Net (decrease) increase in cash and cash
equivalents.................................... (91) 484 (67)
Cash received from business acquisitions........ 100 49 38
Cash and cash equivalents at beginning of
period......................................... 613 80 109
-------- -------- --------
Cash and cash equivalents at end of period...... $ 622 $ 613 $ 80
======== ======== ========
Supplemental Disclosures
Cash paid for interest, net of amount
capitalized.................................... $ 817 $ 541 $ 490
Cash paid for income taxes...................... $ 1,177 $ 732 $ 733
See Notes to Consolidated Financial Statements.
48
DUKE ENERGY CORPORATION
Consolidated Balance Sheets
December 31,
---------------
2000 1999
------- -------
In millions
ASSETS
Current Assets (Note 1)
Cash and cash equivalents (Note 7)............................ $ 622 $ 613
Receivables (Notes 1 and 7)................................... 8,293 3,248
Inventory..................................................... 736 599
Current portion of natural gas transition costs (Note 4)...... -- 81
Current portion of purchased capacity costs (Note 5).......... 149 146
Unrealized gains on mark-to-market transactions (Note 7)...... 11,038 1,131
Other (Note 7)................................................ 1,317 353
------- -------
Total current assets........................................ 22,155 6,171
------- -------
Investments and Other Assets
Investments in affiliates (Notes 8 and 14).................... 1,370 1,299
Nuclear decommissioning trust funds (Note 11)................. 717 703
Pre-funded pension costs (Note 17)............................ 304 315
Goodwill, net (Notes 1 and 2)................................. 1,566 844
Notes receivable.............................................. 462 154
Unrealized gains on mark-to-market transactions (Notes 1 and
7)........................................................... 4,218 690
Other......................................................... 1,445 705
------- -------
Total investments and other assets.......................... 10,082 4,710
------- -------
Property, Plant and Equipment (Notes 1, 5, 9, 10 and 11)
Cost.......................................................... 34,615 30,436
Less accumulated depreciation and amortization................ 10,146 9,441
------- -------
Net property, plant and equipment........................... 24,469 20,995
------- -------
Regulatory Assets and Deferred Debits (Note 1)
Purchased capacity costs (Note 5)............................. 356 497
Deferred debt expense (Note 7)................................ 208 223
Regulatory asset related to income taxes...................... 506 500
Other (Notes 4 and 14)........................................ 400 313
------- -------
Total regulatory assets and deferred debits................. 1,470 1,533
------- -------
Total Assets................................................... $58,176 $33,409
======= =======
See Notes to Consolidated Financial Statements.
49
DUKE ENERGY CORPORATION
Consolidated Balance Sheets -- (Continued)
December 31,
----------------
2000 1999
------- -------
In millions
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable............................................ $ 7,375 $ 2,312
Notes payable and commercial paper (Notes 7 and 10)......... 1,826 267
Taxes accrued (Note 1)...................................... 261 685
Interest accrued............................................ 208 139
Current maturities of long-term debt and preferred stock
(Notes 10 and 13).......................................... 470 515
Unrealized losses on mark-to-market transactions (Notes 1
and 7)..................................................... 11,070 1,241
Other (Notes 1 and 14)...................................... 1,769 717
------- -------
Total current liabilities................................. 22,979 5,876
------- -------
Long-term Debt (Notes 7 and 10).............................. 11,019 8,683
------- -------
Deferred Credits and Other Liabilities (Note 1)
Deferred income taxes (Note 6).............................. 3,851 3,402
Investment tax credit (Note 6).............................. 211 225
Nuclear decommissioning costs externally funded (Note 11)... 717 703
Environmental cleanup liabilities (Note 14)................. 100 101
Unrealized losses on mark-to-market transactions (Note 7)... 3,581 438
Other (Note 14)............................................. 1,574 2,099
------- -------
Total deferred credits and other liabilities.............. 10,034 6,968
------- -------
Commitments and Contingencies (Notes 5, 11 and 14)
Guaranteed Preferred Beneficial Interests in Subordinated
Notes of Duke Energy Corporation or Subsidiaries (Notes 7
and 12).................................................... 1,406 1,404
------- -------
Minority Interests (Note 2).................................. 2,435 1,200
------- -------
Preferred and Preference Stock (Notes 7 and 13)
Preferred and preference stock with sinking fund
requirements............................................... 38 71
Preferred and preference stock without sinking fund
requirements............................................... 209 209
------- -------
Total preferred and preference stock...................... 247 280
------- -------
Common Stockholders' Equity (Notes 1, 15 and 16)
Common stock, no par, 1 billion shares authorized; 739
million and 733 million shares outstanding at December 31,
2000 and 1999, respectively................................ 4,797 4,603
Retained earnings........................................... 5,379 4,397
Accumulated other comprehensive income...................... (120) (2)
------- -------
Total common stockholders' equity......................... 10,056 8,998
------- -------
Total Liabilities and Common Stockholders' Equity............ $58,176 $33,409
======= =======
See Notes to Consolidated Financial Statements.
50
DUKE ENERGY CORPORATION
Consolidated Statements Of Common Stockholders' Equity
And Comprehensive Income
Accumulated
Other Total
Common Retained Comprehensive Comprehensive
Stock Earnings Income Total Income
------ -------- ------------- ------- -------------
In millions
Balance December 31,
1997.................... $4,284 $3,256 $ -- $ 7,540
Net income............... 1,252 1,252 $1,252
------
Total comprehensive
income.............. $1,252
======
Dividend reinvestment and
employee benefits (Note
16)..................... 165 165
Common stock dividends... (794) (794)
Preferred and preference
stock dividends
(Note 13)............... (21) (21)
Other capital stock
transactions, net....... 8 8
------ ------ ----- -------
Balance December 31,
1998.................... $4,449 $3,701 $ -- $ 8,150
------ ------ ----- -------
Net income............... 1,507 1,507 $1,507
Other comprehensive
income:
Foreign currency
translation
adjustments (Note 1).. (2) (2) (2)
------
Total comprehensive
income.............. $1,505
======
Dividend reinvestment and
employee benefits (Note
16)..................... 154 154
Common stock dividends... (802) (802)
Preferred and preference
stock dividends
(Note 13)............... (20) (20)
Other capital stock
transactions, net....... 11 11
------ ------ ----- -------
Balance December 31,
1999.................... $4,603 $4,397 $ (2) $ 8,998
------ ------ ----- -------
Net income............... 1,776 1,776 $1,776
Other comprehensive
income:
Foreign currency
translation
adjustments (Note 1).. (118) (118) (118)
------
Total comprehensive
income.............. $1,658
======
Dividend reinvestment and
employee benefits (Note
16)..................... 194 194
Common stock dividends... (809) (809)
Preferred and preference
stock dividends
(Note 13)............... (19) (19)
Other capital stock
transactions, net....... 34 34
------ ------ ----- -------
Balance December 31,
2000.................... $4,797 $5,379 $(120) $10,056
====== ====== ===== =======
See Notes to Consolidated Financial Statements.
51
DUKE ENERGY CORPORATION
Notes To Consolidated Financial Statements
For the Years Ended December 31, 2000, 1999 and 1998
1. Summary of Significant Accounting Policies
Consolidation. The Consolidated Financial Statements include the accounts of
all of Duke Energy Corporation's majority-owned subsidiaries after the
elimination of significant intercompany transactions and balances. Investments
in other entities that are not controlled by Duke Energy Corporation, but where
it has significant influence over operations, are accounted for using the
equity method.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Although these estimates are based on management's best
available knowledge of current and expected future events, actual results could
differ from those estimates.
"Duke Energy" is used in these Notes as a collective reference to Duke
Energy Corporation and its subsidiaries.
Cash and Cash Equivalents. All liquid investments with maturities at date of
purchase of three months or less are considered cash equivalents.
Inventory. Inventory consists primarily of materials and supplies, natural
gas and natural gas liquid (NGL) products held in storage for transmission,
processing and sales commitments, and coal held for electric generation.
Inventory is recorded at the lower of cost or market, primarily using the
average cost method.
Accounting for Risk Management and Commodity Trading Activities. Commodity
derivatives utilized for trading purposes are accounted for using the mark-to-
market method. Under this methodology, these instruments are adjusted to market
value, and the unrealized gains and losses are recognized in current period
income and are included in the Consolidated Statements of Income as Natural Gas
and Petroleum Products Purchased or Net Interchange and Purchased Power, and in
the Consolidated Balance Sheets as Unrealized Gains or Losses on Mark-to-Market
Transactions.
Commodity derivatives such as futures, forwards, over-the-counter swap
agreements and options are also utilized for non-trading purposes to hedge the
impact of market fluctuations in the price of natural gas, electricity and
other energy-related products. To qualify as a hedge, the price movements in
the commodity derivatives must be highly correlated with the underlying hedged
commodity. Under the deferral method of accounting, gains and losses related to
commodity derivatives that qualify as hedges are recognized in income when the
underlying hedged physical transaction closes and are included in the
Consolidated Statements of Income as Natural Gas and Petroleum Products
Purchased, or Net Interchange and Purchased Power. If the commodity derivative
is no longer sufficiently correlated to the underlying commodity, or if the
underlying commodity transaction closes earlier than anticipated, the deferred
gains or losses are recognized in income.
Duke Energy periodically uses interest rate swaps, accounted for under the
accrual method, to manage the interest rate characteristics associated with
outstanding debt. Interest rate differentials to be paid or received as
interest rates change are accrued and recognized as an adjustment to interest
expense. The amount accrued as either a payable to or a receivable from
counterparties is included in the Consolidated Balance Sheets as Deferred Debt
Expense.
Duke Energy also periodically utilizes interest rate lock agreements to
hedge interest rate risk associated with new debt issuances. Under the deferral
method of accounting, gains or losses on such agreements, when settled, are
deferred in the Consolidated Balance Sheets as Long-Term Debt and are amortized
in the Consolidated Statements of Income as an adjustment to Interest Expense.
52
DUKE ENERGY CORPORATION
Notes To Consolidated Financial Statements -- Continued
Duke Energy is exposed to foreign currency risk from investments in
international affiliates and businesses owned and operated in foreign
countries. To mitigate risks associated with foreign currency fluctuations,
when possible, contracts are denominated in or indexed to the U.S. dollar or
investments may be hedged through debt denominated in the foreign currency.
Duke Energy also uses foreign currency derivatives, where possible, to hedge
its risk related to foreign currency fluctuations. To qualify as a hedge, there
must be a high degree of correlation between price movements in the derivative
and the item designated as being hedged.
Duke Energy also enters into foreign currency swap agreements to manage
foreign currency risks associated with energy contracts denominated in foreign
currencies. These agreements are accounted for under the mark-to-market method
previously described.
Goodwill. Goodwill represents the excess of acquisition costs over the fair
value of the net assets of an acquired business. The goodwill created by Duke
Energy's acquisitions is amortized on a straight-line basis over the useful
lives of the assets, ranging from 10 to 40 years. The amount of goodwill
reported on the Consolidated Balance Sheets as of December 31, 2000 and 1999,
was $1,566 million and $844 million, net of accumulated amortization of $291
million and $218 million, respectively. See Note 2 to the Consolidated
Financial Statements for information on significant goodwill additions.
Property, Plant and Equipment. Property, plant and equipment are stated at
original cost. Duke Energy capitalizes all construction-related direct labor
and material costs, as well as indirect construction costs. Indirect costs
include general engineering, taxes and the cost of money. The cost of renewals
and betterments that extend the useful life of property, plant and equipment is
also capitalized. The cost of repairs and replacements is charged to expense as
incurred. Depreciation is generally computed using the straight-line method.
The composite weighted-average depreciation rates, excluding nuclear fuel, were
3.97%, 3.73% and 3.82% for 2000, 1999 and 1998, respectively.
When property, plant and equipment maintained by Duke Energy's regulated
operations are retired, the original cost plus the cost of retirement, less
salvage, is charged to accumulated depreciation and amortization. When entire
regulated operating units are sold or non-regulated properties are retired or
sold, the property and related accumulated depreciation and amortization
accounts are reduced, and any gain or loss is recorded in income, unless
otherwise required by the Federal Energy Regulatory Commission (FERC).
Impairment of Long-Lived Assets. The recoverability of long-lived assets and
intangible assets are reviewed whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable. Such
evaluation is based on various analyses, including undiscounted cash flow
projections.
Unamortized Debt Premium, Discount and Expense. Premiums, discounts and
expenses incurred in connection with the issuance of currently outstanding
long-term debt are amortized over the terms of the respective issues. Any call
premiums or unamortized expenses associated with refinancing higher-cost debt
obligations used to finance regulated assets and operations are amortized
consistent with regulatory treatment of those items.
Environmental Expenditures. Environmental expenditures that relate to an
existing condition caused by past operations and do not contribute to current
or future revenue generation are expensed. Environmental expenditures relating
to current or future revenues are expensed or capitalized as appropriate.
Liabilities are recorded when environmental assessments and/or cleanups are
probable and the costs can be reasonably estimated.
Cost-Based Regulation. Duke Energy's regulated operations are subject to the
provisions of Statement of Financial Accounting Standards (SFAS) No. 71,
"Accounting for the Effects of Certain Types of Regulation."
53
DUKE ENERGY CORPORATION
Notes To Consolidated Financial Statements -- Continued
Accordingly, certain assets and liabilities that result from the regulated
ratemaking process are recorded that would not be recorded under generally
accepted accounting principles for non-regulated entities. These regulatory
assets and liabilities are classified in the Consolidated Balance Sheets as
Regulatory Assets and Deferred Debits, and Deferred Credits and Other
Liabilities, respectively. The applicability of SFAS No. 71 is routinely
evaluated, and factors such as regulatory changes and the impact of competition
are considered. Discontinuing cost-based regulation or increasing competition
might require companies to reduce their asset balances to reflect a market
basis less than cost and to write off their associated regulatory assets.
Management cannot predict the potential impact, if any, of discontinuing cost-
based regulation or increasing competition on future consolidated results of
operations, cash flows or financial position. However, Duke Energy continues to
position itself to effectively meet these challenges by maintaining competitive
prices.
Common Stock Options. Duke Energy accounts for stock-based compensation
using the intrinsic method of accounting. Under this method, compensation cost,
if any, is measured as the excess of the quoted market price of Duke Energy's
stock at the date of the grant over the amount an employee must pay to acquire
the stock. Restricted stock grants and Company Performance Awards are recorded
as compensation cost over the requisite vesting period based on the market
value on the date of the grant. Pro forma disclosures utilizing the fair value
accounting method are included in Note 16 to the Consolidated Financial
Statements. All outstanding common stock amounts and compensation awards have
been adjusted to reflect the two-for-one common stock split effective January
26, 2001. See Note 15 to the Consolidated Financial Statements for additional
information on the stock split.
Revenues. Revenues on sales of electricity and transportation and storage of
natural gas are recognized as service is provided. Revenues on sales of natural
gas and petroleum products, as well as electricity, gas and other energy
products marketed, are recognized in the period of delivery. The allowance for
doubtful accounts was approximately $200 million and $43 million as of December
31, 2000 and 1999, respectively. Receivables on the Consolidated Balance Sheets
included $244 million and $207 million as of December 31, 2000 and 1999,
respectively, for electric service that has been provided but not yet billed to
customers. When rate cases are pending final approval, a portion of the
revenues is subject to possible refund. Reserves are established where required
for such cases. During 2000, Duke Energy adopted the provisions of Staff
Accounting Bulletin (SAB) 101 issued by the Securities and Exchange Commission.
The impact of adopting SAB 101 was not material to Duke Energy.
Nuclear Fuel. Amortization of nuclear fuel is included in the Consolidated
Statements of Income as Fuel Used in Electric Generation. The amortization is
recorded using the units-of-production method.
Deferred Returns and Allowance for Funds Used During Construction (AFUDC).
Deferred returns represent the estimated financing costs associated with
funding certain regulatory assets. These regulatory assets primarily arose from
the funding of purchased capacity costs above levels collected in rates.
Deferred returns are non-cash items and are primarily recognized as an addition
to Purchased Capacity Costs with an offsetting credit to Other Income and
Expenses.
AFUDC represents the estimated debt and equity costs of capital funds
necessary to finance the construction of new regulated facilities. AFUDC is a
non-cash item and is recognized as a cost of Property, Plant and Equipment,
with offsetting credits to Other Income and Expenses and to Interest Expense.
After construction is completed, Duke Energy is permitted to recover these
costs, including a fair return, through their inclusion in rate base and in the
provision for depreciation.
Rates used for capitalization of deferred returns and AFUDC by Duke Energy's
regulated operations are calculated in compliance with FERC rules.
54
DUKE ENERGY CORPORATION
Notes To Consolidated Financial Statements -- Continued
Foreign Currency Translation. Assets and liabilities of Duke Energy's
international operations, where the local currency is the functional currency,
have been translated at year-end exchange rates, and revenues and expenses have
been translated using average exchange rates prevailing during the year.
Adjustments resulting from translation are included in the Consolidated
Statements of Common Stockholders' Equity and Comprehensive Income as Foreign
Currency Translation Adjustments. The financial statements of international
operations, where the U.S. dollar is the functional currency, reflect certain
transactions denominated in the local currency that have been remeasured in
U.S. dollars. The remeasurement of local currencies into U.S. dollars resulting
from foreign currency gains and losses is included in consolidated net income.
Income Taxes. Duke Energy and its subsidiaries file a consolidated federal
income tax return. Deferred income taxes have been provided for temporary
differences. Temporary differences occur when events and transactions
recognized for financial reporting result in taxable or tax-deductible amounts
in different periods. Investment tax credits have been deferred and are being
amortized over the estimated useful lives of the related properties.
Earnings Per Common Share. Basic earnings per share is based on a simple
weighted average of common shares outstanding. Diluted earnings per share
reflects the potential dilution that could occur if securities or other
agreements to issue common stock, such as stock options, were exercised or
converted into common stock. The numerator for the calculation of basic and
diluted earnings per share is earnings available for common stockholders.
Denominator for Earnings per Share
2000 1999 1998
----- ----- -----
In millions
Denominator for basic earnings per share (weighted-
average shares outstanding)............................ 735.7 729.3 722.0
Assumed exercise of diluted stock options............... 3.7 1.6 2.4
----- ----- -----
Denominator for diluted earnings per share.............. 739.4 730.9 724.4
===== ===== =====
All common stock amounts have been adjusted to reflect the two-for-one
common stock split effective January 26, 2001. See Note 15 to the Consolidated
Financial Statements for additional information on the stock split.
Extraordinary Items. In 1999, Duke Energy realized an extraordinary gain of
$660 million after tax, or $0.91 per share, relating to the sale of certain
pipeline companies. See Note 2 to the Consolidated Financial Statements for
additional information on the extraordinary item.
In January 1998, TEPPCO Partners, LP (TEPPCO), in which Duke Energy has a
21.1% ownership interest, redeemed certain First Mortgage Notes. A non-cash
extraordinary loss of $8 million, net of income tax of $5 million, was recorded
related to costs of the early retirement of debt. Earnings per common share for
1998 were reduced by $0.01 as a result of this charge.
New Accounting Standard. In June 1998, SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," was issued. Duke Energy was
required to adopt this standard by January 1, 2001. SFAS No. 133 requires that
all derivatives be recognized as either assets or liabilities and measured at
fair value, and changes in the fair value of derivatives are reported in
current earnings, unless the derivative is designated and effective as a hedge.
If the intended use of the derivative is to hedge the exposure to changes in
the fair value of an asset, a liability or a firm commitment, then changes in
the fair value of the derivative
55
DUKE ENERGY CORPORATION
Notes To Consolidated Financial Statements -- Continued
instrument will generally be offset in the income statement by changes in the
hedged item's fair value. However, if the intended use of the derivative is to
hedge the exposure to variability in expected future cash flows, then changes
in the fair value of the derivative instrument will generally be reported in
Other Comprehensive Income (OCI). The gains and losses on the derivative
instrument that are reported in OCI will be reclassified to earnings in the
periods in which earnings are impacted by the hedged item.
Duke Energy has determined the effect of implementing SFAS No. 133 and
recorded a net-of-tax cumulative-effect adjustment of $96 million as a
reduction in earnings. The net-of-tax cumulative-effect adjustment reducing OCI
and Common Stockholders' Equity is estimated to be $921 million on January 1,
2001.
Currently, there are ongoing discussions surrounding the implementation and
interpretation of SFAS No. 133 by the Financial Accounting Standards Board's
Derivatives Implementation Group. Duke Energy implemented SFAS No. 133 based on
current rules and guidance in place as of January 1, 2001. However, if the
definition of derivative instruments is altered, this may impact Duke Energy's
transition adjustment amounts and subsequent reported operating results.
Reclassifications. Certain prior period amounts have been reclassified in
the Consolidated Financial Statements to conform to the current presentation.
2. Business Acquisitions and Dispositions
Business Acquisitions: For acquisitions accounted for using the purchase
method, assets and liabilities have been consolidated as of the purchase date
and earnings from the acquisitions have been included in consolidated earnings
of Duke Energy subsequent to the purchase date. Assets acquired and liabilities
assumed are recorded at their estimated fair values, and the excess of the
purchase price over the estimated fair value of the net identifiable assets and
liabilities acquired is recorded as goodwill. Purchase price allocations are
subject to adjustment when additional information concerning asset and
liability valuations becomes available within one year after the acquisition.
Market Hub Partners (MHP). In September 2000, Duke Energy, through a wholly
owned subsidiary, completed the approximately $400 million acquisition of MHP
from subsidiaries of NiSource Inc. for approximately $250 million in cash and
the assumption of $150 million in debt. MHP provides natural gas storage
services in Louisiana and Texas with a current capacity of 23 billion cubic
feet with significant expansion capabilities. Approximately $159 million of
goodwill was recorded in the transaction and is being amortized on a straight-
line basis over 35 years. In association with the acquisition of MHP, a tender
offer was made for $115 million of the assumed debt as required by the debt
agreements. As of December 31, 2000, approximately $88 million of this debt was
retired.
Phillips Petroleum's Gas Gathering, Processing and Marketing Unit
(Phillips). In March 2000, Duke Energy, through a wholly owned subsidiary,
completed the approximately $1.7 billion transaction that combined Field
Services' and Phillips' gas gathering, processing and marketing business to
form a new midstream company, named Duke Energy Field Services, LLC (DEFS). In
connection with the combination, DEFS issued approximately $2.75 billion of
commercial paper in April 2000. The proceeds were used to make one-time cash
distributions of approximately $1.53 billion to Duke Energy and $1.22 billion
to Phillips Petroleum. Duke Energy owns approximately 70% of DEFS and Phillips
Petroleum owns approximately 30%. Goodwill of approximately $429 million was
recorded in connection with the transaction and is being amortized on a
straight-line basis over 20 years.
East Tennessee Natural Gas Company. In March 2000, Duke Energy, through a
wholly owned subsidiary, completed the approximately $390 million acquisition
of East Tennessee Natural Gas Company from El Paso
56
DUKE ENERGY CORPORATION
Notes To Consolidated Financial Statements -- Continued
Energy. East Tennessee Natural Gas Company owns a 1,100-mile interstate natural
gas pipeline system that crosses Duke Energy's Texas Eastern Transmission
Corporation's (TETCO's) pipeline and serves the southeastern region of the U.S.
Dominion Resources' Hydroelectric, Natural Gas and Diesel Power Generation
Businesses. In August 1999, Duke Energy, through its wholly owned subsidiary
Duke Energy International, LLC (DEI), reached a definitive agreement to acquire
Dominion Resources Inc.'s 1,200-megawatt portfolio of hydroelectric, natural
gas and diesel power generation businesses in Latin America (collectively, the
"Dominion acquisitions") for approximately $405 million. The Dominion
acquisitions were completed in April 2000, and total goodwill related to these
purchases was $109 million and is being amortized on a straight-line basis over
40 years.
Companhia de Geracao de Energia Eletrica Paranapanema (Paranapanema). In
January 2000, Duke Energy, through its wholly owned subsidiary DEI, completed a
series of transactions to purchase for approximately $1.03 billion an
approximate 95% interest in Paranapanema, an electric generating company in
Brazil. Goodwill of approximately $134 million was recorded in relation to this
acquisition and is being amortized on a straight-line basis over 40 years.
Union Pacific Resources' Gathering, Processing and Marketing Operations. In
March 1999, Duke Energy through its wholly owned subsidiary, Duke Energy Field
Services, Inc., completed the $1.35 billion acquisition of the natural gas
gathering, processing, fractionation and NGL pipeline business from Union
Pacific Resources (UPR), as well as UPR's NGL marketing activities. Goodwill of
$135 million has been recorded and is being amortized on a straight-line basis
over 15 to 20 years.
Dispositions: BellSouth Carolina PCS (BellSouth PCS). In September 2000,
Duke Energy, through its wholly owned subsidiary DukeNet Communications, LLC
(DukeNet), sold its 20% interest in BellSouth PCS for approximately $400
million to BellSouth Corporation. Operating revenues includes the resulting
pre-tax gain of $407 million, or an after-tax gain of $0.34 per basic share.
Catawba River Associates, LLC (Catawba River). During 2000, Duke Energy
formed Catawba River, and third-party, non-controlling, preferred interest
holders invested $1,025 million. Catawba River is a limited liability company
with separate existence and identity from its members, and the assets of
Catawba River are separate and legally distinct from Duke Energy. The preferred
interest receives a preferred return equal to an adjusted floating reference
rate (approximately 7.847% at December 31, 2000). The results of operations,
cash flows and financial position of Catawba River are consolidated with Duke
Energy. The preferred interest and the expense attributable to this interest
are included in Minority Interests and Minority Interest Expense, respectively,
on the Consolidated Financial Statements.
PEPL Companies and Trunkline LNG. In March 1999, wholly owned subsidiaries
of Duke Energy sold Panhandle Eastern Pipe Line Company (PEPL), Trunkline Gas
Company (Trunkline) and additional storage related to those systems, which
substantially comprised the Midwest Pipelines, along with Trunkline LNG Company
to CMS Energy Corporation (CMS). The sales price of $2.2 billion involved cash
proceeds of $1.9 billion and CMS' assumption of existing PEPL debt of
approximately $300 million. The sale resulted in an extraordinary gain of $660
million, net of income tax of $404 million, and an increase in earnings per
basic share of $0.91. In 1999 and 1998, earnings before interest and taxes
(EBIT) of $70 million and $156 million, respectively, relating to the Midwest
Pipelines was included in Duke Energy's operating results. Under the terms of
the sales agreement with CMS, Duke Energy retained certain assets and
liabilities, which will not have a material adverse effect on consolidated
results of operations, cash flows or financial position.
The pro forma results of operations for acquisitions and dispositions do not
materially differ from reported results.
57
DUKE ENERGY CORPORATION
Notes To Consolidated Financial Statements -- Continued
3. Business Segments
Duke Energy is an integrated energy and energy services provider with the
ability to offer physical delivery and management of both electricity and
natural gas throughout the U.S. and abroad. Duke Energy provides these and
other services through seven business segments.
Franchised Electric generates, transmits, distributes and sells electric
energy in central and western North Carolina and the western portion of South
Carolina. Its operations are conducted primarily through Duke Power and
Nantahala Power and Light. These electric operations are subject to the rules
and regulations of the FERC, the North Carolina Utilities Commission (NCUC) and
the Public Service Commission of South Carolina (PSCSC).
Natural Gas Transmission provides interstate transportation and storage of
natural gas for customers primarily in the Mid-Atlantic, New England and
southeastern states. Its operations are conducted primarily through Duke Energy
Gas Transmission Corporation. The interstate natural gas transmission and
storage operations are subject to the rules and regulations of the FERC.
Field Services gathers, processes, transports, markets and stores natural
gas and produces, transports, markets and stores NGLs. Its operations are
conducted primarily through DEFS, a limited liability company that is
approximately 30% owned by Phillips Petroleum. Field Services operates
gathering systems in western Canada and 11 contiguous states that serve major
natural gas-producing regions in the Rocky Mountain, Permian Basin, Mid-
Continent, East Texas-Austin Chalk-North Louisiana, as well as onshore and
offshore Gulf Coast areas.
North American Wholesale Energy's (NAWE's) activities include asset
development, operation and management, primarily through Duke Energy North
America, LLC (DENA), and commodity sales and services related to natural gas
and power, primarily through Duke Energy Trading and Marketing, LLC (DETM).
DETM is a limited liability company that is approximately 40% owned by Exxon
Mobil Corporation. NAWE also includes Duke Energy Merchants, which develops new
business lines in the evolving energy commodity markets. NAWE conducts its
business throughout the U.S. and Canada. The operations of the previously
segregated Trading and Marketing segment were combined by management into NAWE
during 2000. Previous periods have been restated to conform to current period
presentation.
International Energy conducts its operations through DEI. International
Energy's activities include asset development, operation and management of
natural gas and power facilities and energy trading and marketing of natural
gas and electric power. This activity is targeted in the Latin American, Asia-
Pacific and European regions.
Other Energy Services is a combination of businesses that provide
engineering, consulting, construction and integrated energy solutions
worldwide, primarily through Duke Engineering & Services, Inc., Duke/Fluor
Daniel (D/FD) and DukeSolutions, Inc. D/FD is a 50/50 partnership between Duke
Energy and Fluor Enterprises, Inc.
Duke Ventures is comprised of other diverse businesses, primarily operating
through Crescent Resources, Inc. (Crescent), DukeNet and Duke Capital Partners
(DCP). Crescent develops high-quality commercial, residential and multi-family
real estate projects and manages land holdings primarily in the southeastern
U.S. DukeNet provides fiber optic networks for industrial, commercial and
residential customers. DCP, a newly formed, wholly owned merchant finance
company, provides financing, investment banking and asset management services
to wholesale and commercial energy markets.
58
DUKE ENERGY CORPORATION
Notes To Consolidated Financial Statements -- Continued
Duke Energy's reportable segments are strategic business units that offer
different products and services and are each managed separately. The accounting
policies for the segments are the same as those described in Note 1 to the
Consolidated Financial Statements. Management evaluates segment performance
based on EBIT after deducting minority interests. EBIT presented in the
accompanying table includes intersegment sales accounted for at prices
representative of unaffiliated party transactions. Segment assets are provided
as additional information in the accompanying table and are net of intercompany
advances, intercompany notes receivable and investments in subsidiaries.
Other Operations primarily include certain unallocated corporate items.
Business Segment Data
Depreciation Capital and
Unaffiliated Intersegment Total and Investment Segment
Revenues Revenues Revenues EBIT Amortization Expenditures Assets
------------ ------------ -------- ------ ------------ ------------ -------
In millions
Year Ended December 31,
2000
Franchised Electric..... $ 4,946 $ -- $ 4,946 $1,704 $ 565 $ 661 $12,819
Natural Gas
Transmission........... 998 133 1,131 534 131 973 4,995
Field Services.......... 7,601 1,459 9,060 296 240 376 6,266
North American Wholesale
Energy................. 33,590 284 33,874 418 75 1,937 28,213
International Energy.... 1,060 7 1,067 331 97 980 4,551
Other Energy Services... 528 167 695 (61) 13 28 543
Duke Ventures........... 642 -- 642 563 17 643 1,967
Other Operations........ (47) 68 21 (2) 29 36 2,749
Eliminations and
minority interests..... -- (2,118) (2,118) 231 -- -- (3,927)
------- -------- ------- ------ ------ ------ -------
Total consolidated..... $49,318 $ -- $49,318 $4,014 $1,167 $5,634 $58,176
======= ======== ======= ====== ====== ====== =======
Year Ended December 31,
1999
Franchised Electric..... $ 4,700 $ -- $ 4,700 $ 856 $ 542 $ 759 $13,133
Natural Gas
Transmission........... 1,124 106 1,230 627 126 261 3,897
Field Services.......... 2,883 707 3,590 144 131 1,630 3,565
North American Wholesale
Energy................. 11,623 178 11,801 209 57 1,028 6,268
International Energy.... 323 34 357 42 58 1,779 4,459
Other Energy Services... 886 103 989 (94) 14 94 612
Duke Ventures........... 232 -- 232 162 13 382 1,031
Other Operations........ (5) 44 39 5 27 3 1,250
Eliminations and
minority interests..... -- (1,172) (1,172) 92 -- -- (806)
------- -------- ------- ------ ------ ------ -------
Total consolidated..... $21,766 $ -- $21,766 $2,043 $ 968 $5,936 $33,409
======= ======== ======= ====== ====== ====== =======
Year Ended December 31,
1998
Franchised Electric..... $ 4,626 $ -- $ 4,626 $1,513 $ 522 $ 586 $12,953
Natural Gas
Transmission........... 1,440 102 1,542 702 215 290 4,996
Field Services.......... 2,132 545 2,677 76 80 304 1,893
North American Wholesale
Energy................. 8,727 56 8,783 133 27 796 4,394
International Energy.... 125 34 159 12 15 239 900
Other Energy Services... 436 85 521 10 12 41 376
Duke Ventures........... 171 -- 171 122 10 232 818
Other Operations........ 5 26 31 22 28 12 874
Eliminations and
minority interests..... -- (848) (848) 57 -- -- (398)
------- -------- ------- ------ ------ ------ -------
Total consolidated..... $17,662 $ -- $17,662 $2,647 $ 909 $2,500 $26,806
======= ======== ======= ====== ====== ====== =======
59
DUKE ENERGY CORPORATION
Notes To Consolidated Financial Statements -- Continued
Geographic Data
Latin Other
U.S. Canada America Foreign Consolidated
------- ------ ------- ------- ------------
In millions
2000
Consolidated revenues........... $43,282 $4,964 $ 512 $ 560 $49,318
Consolidated long-term assets... 31,074 900 2,823 1,222 36,019
1999
Consolidated revenues........... $19,336 $2,007 $ 171 $ 252 $21,766
Consolidated long-term assets... 22,995 250 2,708 901 26,854
1998
Consolidated revenues........... $16,589 $ 996 $ 31 $ 46 $17,662
Consolidated long-term assets... 20,982 140 207 632 21,961
4. Regulatory Matters
Franchised Electric. The NCUC and the PSCSC approve rates for retail
electric sales within their respective states. The FERC approves Franchised
Electric's rates for electric sales to wholesale customers. Electric sales to
the other joint owners of the Catawba Nuclear Station, which represent a
majority of Franchised Electric's wholesale revenues, are set through
contractual agreements.
Fuel costs are reviewed semiannually in the wholesale jurisdiction and
annually in the South Carolina retail jurisdiction, with provisions for
reviewing such costs in base rates. In the North Carolina retail jurisdiction,
a review of fuel costs in rates is required annually and during general rate
case proceedings. All jurisdictions allow Duke Energy to adjust electric rates
for past over- or under-recovery of fuel costs. Therefore, the difference
between actual fuel costs incurred for electric operations and fuel costs
recovered through rates is reflected in revenues.
On December 20, 1999 and February 25, 2000, the FERC issued its Order 2000
and Order 2000-A regarding Regional Transmission Organizations (RTOs). In these
orders, the FERC stressed the voluntary nature of RTO participation by
utilities and set minimum characteristics and functions that must be met by
utilities that participate in an RTO, including exclusive and independent
authority to propose rates, terms and conditions of transmission service
provided over the facilities it operates. The order provides for an open,
flexible structure for RTOs to meet the needs of the market and provides for
the possibility of incentive ratemaking and other benefits for utilities that
participate in an RTO.
As a result of these rulemakings, on October 16, 2000, Duke Energy and two
other investor-owned utilities, Progress Energy and South Carolina Electric &
Gas, filed with the FERC to establish GridSouth Transco, LLC (GridSouth), as an
RTO. If approved, GridSouth will be a for-profit, independent transmission
company, responsible for operating and planning the companies' combined
transmission systems. The target date for formation of GridSouth is December
15, 2001. However, the actual date that GridSouth becomes operational will
depend upon the resolution of all necessary regulatory approvals and resolving
all technical issues. Management believes that the establishment of GridSouth
will not have a material adverse effect on future consolidated results of
operations, cash flows or financial position.
Natural Gas Transmission. On February 9, 2000, the FERC issued Order 637,
which sets forth revisions to its regulations governing short-term natural gas
transportation services and policies governing the regulation of interstate
natural gas pipelines. "Short-term" has been defined as all transactions of
less than one year.
60
DUKE ENERGY CORPORATION
Notes To Consolidated Financial Statements -- Continued
Among the significant actions taken are the lifting of the price cap for short-
term capacity release by pipeline customers for an experimental 2 1/2-year
period ending September 1, 2002, and requiring that interstate pipelines file
pro forma tariff sheets to (i) provide for nomination equality between capacity
release and primary pipeline capacity; (ii) implement imbalance management
services (for which interstate pipelines may charge fees) while at the same
time reducing the use of operational flow orders and penalties; and (iii)
provide segmentation rights if operationally feasible. Order 637 also narrows
the right of first refusal to remove economic biases perceived in the current
rule. Order 637 imposes significant new reporting requirements for interstate
pipelines that were implemented by Duke Energy during the third quarter of
2000. Additionally, Order 637 permits pipelines to propose peak/off-peak rates
and term-differentiated rates, and encourages pipelines to propose experimental
capacity auctions. By Order 637-A, issued in February 2000, the FERC generally
denied requests for rehearing and several parties, including Duke Energy, have
filed appeals in the District of Columbia Court of Appeals seeking court review
of various aspects of the Order. During the third quarter of 2000, Duke
Energy's interstate pipelines made the required pro forma tariff sheet filings.
These filings are currently subject to review and approval by the FERC.
Management does not believe the effects of these matters will have a
material effect on Duke Energy's future consolidated results of operations,
cash flows or financial position.
5. Joint Ownership of Generating Facilities
Joint Ownership of Catawba Nuclear Station
Ownership
Owner Interest
----- ---------
North Carolina Municipal Power Agency Number 1 (NCMPA)................... 37.5%
North Carolina Electric Membership Corporation (NCEMC)................... 28.1%
Duke Energy Corporation.................................................. 12.5%
Piedmont Municipal Power Agency (PMPA)................................... 12.5%
Saluda River Electric Cooperative, Inc. (Saluda River)................... 9.4%
------
100.0%
======
As of December 31, 2000, $525 million of property, plant and equipment and
$268 million of accumulated depreciation and amortization represented Duke
Energy's investment in Catawba Nuclear Station Units 1 and 2. Duke Energy's
share of operating costs is included in the Consolidated Statements of Income.
Duke Energy entered into contractual interconnection agreements with the
other joint owners of Catawba Nuclear Station to purchase declining percentages
of the generating capacity and energy from the station, which expired during
2000.
The portion of purchased capacity costs subject to levelization in rates was
deferred. As of December 31, 2000 and 1999, $505 million and $643 million,
respectively, associated with the cost of capacity purchased but not reflected
in current rates have been accumulated in the Consolidated Balance Sheets as
Purchased Capacity Costs and Current Portion of Purchased Capacity Costs. Duke
Energy is recovering the accumulated balance, including returns on the deferred
balance, over a period expected to end in 2004. Jurisdictional levelizations
are intended to recover total costs, including deferred returns, and are
subject to adjustments, including final true-ups. For the years ended December
31, 2000, 1999 and 1998, purchased capacity and energy costs from the other
joint owners were approximately $7 million, $62 million and $88 million,
respectively. These amounts, after adjustments for amounts in current rates,
are included in the Consolidated Statements of Income as Net Interchange and
Purchased Power.
61
DUKE ENERGY CORPORATION
Notes To Consolidated Financial Statements -- Continued
The interconnection agreements also provide for supplemental power sales by
Duke Energy to the other joint owners of Catawba Nuclear Station to satisfy
their capacity and energy needs beyond the capacity and energy which they
retain from the station or potentially acquire in the form of other resources.
The agreements further provide the other joint owners the ability to secure
such supplemental requirements outside of these contractual agreements
following an appropriate notice period. NCEMC, Saluda River and NCMPA have
given such appropriate notice effective January 1, 2001. PMPA will continue to
receive supplemental power sales from Duke Energy through December 31, 2005. As
the other joint owners retain more capacity and energy from the station, or
obtain additional capacity and energy from a third party, supplemental power
sales are expected to decline. Management believes this will not have a
material adverse effect on consolidated results of operations, cash flows or
financial position.
6. Income Taxes
Income Tax Expense
For the Years
Ended
December 31,
-------------------
2000 1999 1998
------ ----- ----
In millions
Current income taxes
Federal.............................................. $ 679 $ 525 $673
State................................................ 109 138 138
Foreign.............................................. 18 1 --
------ ----- ----
Total current income taxes......................... 806 664 811
------ ----- ----
Deferred income taxes, net
Federal.............................................. 187 (126) (15)
State................................................ 13 (65) (4)
Foreign.............................................. 29 (1) --
------ ----- ----
Total deferred income taxes, net................... 229 (192) (19)
------ ----- ----
Investment tax credit amortization..................... (15) (19) (15)
------ ----- ----
Total income tax expense............................... $1,020 $ 453 $777
====== ===== ====
Income Tax Expense Reconciliation to Statutory Rate
For the Years
Ended
December 31,
-------------------
2000 1999 1998
------ ----- ----
In millions
Income tax, computed at the statutory rate of 35%...... $ 979 $ 455 $713
Adjustments resulting from:
State income tax, net of federal income tax effect... 75 47 90
Favorable resolution of federal tax issues........... (18) (30) --
Other items, net..................................... (16) (19) (26)
------ ----- ----
Total income tax expense........................... $1,020 $ 453 $777
------ ----- ----
Effective tax rate..................................... 36.5% 34.9% 38.1%
====== ===== ====
62
DUKE ENERGY CORPORATION
Notes To Consolidated Financial Statements -- Continued
Net Deferred Income Tax Liability Components
December 31,
----------------
2000 1999
------- -------
In millions
Deferred credits and other liabilities.................... $ 429 $ 500
International property, plant, & equipment................ 153 --
Other..................................................... 10 8
------- -------
Total deferred income tax assets........................ 592 508
Valuation allowance....................................... (9) (6)
------- -------
Net deferred income tax assets.......................... 583 502
------- -------
Investments and other assets.............................. (320) (245)
Property, plant and equipment............................. (2,707) (2,483)
Regulatory assets and deferred debits..................... (326) (427)
Regulatory asset related to restating to pre-tax basis.... (429) (432)
------- -------
Total deferred income tax liability..................... (3,782) (3,587)
------- -------
State deferred income tax, net of federal tax effect...... (320) (340)
------- -------
Total net deferred income tax liability................. $(3,519) $(3,425)
======= =======
7. Risk Management and Financial Instruments
Commodity Derivatives -- Trading. Duke Energy provides risk management
services to its customers through forward contracts, futures, over-the-counter
swap agreements and options (collectively, "commodity derivatives"). Duke
Energy engages in the trading of commodity derivatives, and therefore
experiences net open positions, which are managed with strict policies that
limit its exposure to market risk and require daily reporting to management of
potential financial exposure. These policies include statistical risk tolerance
limits using historical price movements to calculate a daily earnings at risk
measurement. The weighted-average life of Duke Energy's commodity trading
portfolio was approximately 25 months at December 31, 2000.
Net Gains Recognized from Trading Activities
2000 1999 1998
---- ---- ----
In millions
Natural gas................................................... $212 $83 $114
Electricity................................................... 368 41 14
Other(a)...................................................... 46 -- --
--------
(a) Other includes refined products, fertilizer, crude oil and other
miscellaneous commodities.
Absolute Notional Contract Quantity of Commodity Derivatives Held for
Trading Purposes
December 31,
---------------
2000 1999
------- -------
Natural gas, in billion cubic feet........................... 39,716 17,248
Electricity, in gigawatt hours............................... 289,109 185,536
Fertilizer contracts, in thousands of tonnes................. 141,619 --
Refined products, in thousands of barrels.................... 451,133 --
63
DUKE ENERGY CORPORATION
Notes To Consolidated Financial Statements -- Continued
Fair Values of Commodity Derivatives -- Trading
2000 1999
-------------------- -------------------
Assets Liabilities Assets Liabilities
------- ----------- ------ -----------
In millions
Fair values at December 31,
Natural gas...................... $45,423 $45,104 $2,966 $2,855
Electricity...................... 9,436 9,254 1,302 1,271
Fertilizer contracts............. 5,886 5,850 -- --
Refined products................. 1,192 1,159 -- --
Other(a)......................... 303 268 -- --
Eliminations..................... (46,984) (46,984) (2,447) (2,447)
------- ------- ------ ------
Total fair values.............. $15,256 $14,651 $1,821 $1,679
======= ======= ====== ======
Average fair values for the year
Natural gas...................... 20,150 19,801 2,401 2,269
Electricity...................... 6,650 6,558 962 900
Fertilizer contracts............. 3,002 2,974 -- --
Refined products................. 1,345 1,309 -- --
Other(a)......................... 437 427 -- --
--------
(a) Other includes crude oil and other miscellaneous commodities.
Commodity Derivatives -- Non-Trading. Duke Energy also manages its exposure
to risk from existing assets, liabilities and commitments by hedging the impact
of market fluctuations. At December 31, 2000 and 1999, Duke Energy held or
issued several commodity derivatives, primarily in the form of swaps, that
reduce exposure to market price fluctuations for certain power and NGL
production facilities. At December 31, 2000, these commodity derivatives
extended for periods up to 10 years and generally contain margin requirements.
The gains, losses and costs related to non-trading commodity derivatives are
not recognized until the underlying physical transaction closes. At December
31, 2000 and 1999, Duke Energy had unrealized net losses of $1,642 million and
$120 million, respectively, related to non-trading commodity derivatives. These
unrealized losses partially offset the unrealized market value gains related to
future cash flows from underlying asset positions.
Absolute Notional Contract Quantity of Commodity Derivatives Held for Non-
Trading Purposes
December 31,
-------------
2000 1999
------ ------
Natural gas, in billion cubic feet............................. 401 592
Electricity, in gigawatt hours................................. 75,932 45,877
Power capacity, in megawatt months............................. 35,325 25,950
Crude oil, in thousands of barrels............................. 43,991 32,764
Interest Rate Derivatives. Duke Energy periodically enters into financial
derivative instruments including, but not limited to, swaps, options and
interest rate locks to manage and mitigate interest rate risk related to
existing and anticipated borrowings. The notional amounts shown in the
following table serve solely as a basis for the calculation of payment streams
to be exchanged. These notional amounts are not a measure of Duke Energy's
exposure through its use of derivatives. Fair values shown in the following
table represent estimated amounts that Duke Energy would have received (paid)
if the swaps had been settled at current market rates on the respective dates.
64
DUKE ENERGY CORPORATION
Notes To Consolidated Financial Statements -- Continued
Interest Rate Derivatives
December 31,
-------------------------------------------------
2000 1999
------------------------ ------------------------
Notional Fair Contracts Notional Fair Contracts
Amounts Value Expire Amounts Value Expire
-------- ----- --------- -------- ----- ---------
Dollars in millions
Fixed-to-floating rate
swaps................... $275 $27 2009 $100 $ 1 2000
Cancelable fixed-to-
floating rate swaps..... 630 20 2004-2022 -- -- --
CP(a) floating-to-fixed
rate swaps.............. 100 (1) 2001 500 1 2000
Interest rate locks...... 275 (9) 2011 -- -- --
--------
(a) Commercial paper.
Gains and losses that have been deferred in anticipation of planned
financing transactions on interest rate swap derivatives have been capitalized
and are being amortized over the life of the underlying debt. These deferred
gains and losses were not material in 2000 or 1999. As a result of the interest
rate swap contracts, interest expense for the relative notional amount is
recognized at the weighted-average rates as depicted in the following table.
Weighted-Average Rates for Interest Rate Swaps
For the Years Ended
December 31,
----------------------
2000 1999 1998
------ ------ ------
Fixed-to-floating rate swaps......................... 6.50% 5.71% 6.04%
Cancelable fixed-to-floating rate swaps.............. 5.09% -- --
Commercial paper swaps............................... 6.11% 4.95% --
Foreign Currency Derivatives. NAWE enters into foreign currency swap
agreements to manage foreign currency risks associated with energy contracts
denominated in foreign currencies, primarily in the Canadian dollar. As of
December 31, 2000, the agreements had a notional contract amount of
approximately $1,396 million, beginning in the year 2001 and extending through
the year 2005, and had a weighted-average fixed exchange rate of 1.4672
Canadian dollars to one U.S. dollar. As of December 31, 1999, the agreements
had a notional contract amount of approximately $762 million, beginning in the
year 2000 and extending to the year 2005, and had a weighted-average fixed
exchange rate of 1.470 Canadian dollars to one U.S. dollar. The fair value of
foreign currency swap agreements was not material at December 31, 2000 or 1999.
Market and Credit Risk. Duke Energy's principal markets for power and
natural gas marketing services are industrial end-users and utilities located
throughout the U.S., Canada, Asia Pacific and Latin America. Duke Energy has
concentrations of receivables from natural gas and electric utilities and their
affiliates, as well as industrial customers throughout these regions. These
concentrations of customers may affect Duke Energy's overall credit risk in
that certain customers may be similarly affected by changes in economic,
regulatory or other factors. On all transactions where Duke Energy is exposed
to credit risk, Duke Energy analyzes the counterparties' financial condition
prior to entering into an agreement, establishes credit limits and monitors the
appropriateness of these limits on an ongoing basis. As of December 31, 2000,
Duke Energy had approximately $400 million in receivables related to energy
sales in California. Duke Energy quantified its exposures with regard to those
receivables and recorded a provision of $110 million. See Note 14 to the
Consolidated Financial Statements for further information regarding credit
exposure.
65
DUKE ENERGY CORPORATION
Notes To Consolidated Financial Statements -- Continued
The change in market value of New York Mercantile Exchange-traded futures
and options contracts requires daily cash settlement in margin accounts with
brokers. Physical forward contracts and financial derivatives are generally
settled at the expiration of the contract term or each delivery period;
however, these transactions are also generally subject to margin agreements
with the majority of Duke Energy's counterparties.
Financial Instruments. The fair value of financial instruments is summarized
in the following table. Judgment is required in interpreting market data to
develop the estimates of fair value. Accordingly, the estimates determined as
of December 31, 2000 and 1999, are not necessarily indicative of the amounts
Duke Energy could have realized in current markets. The majority of the
estimated fair value amounts were obtained from independent parties.
Financial Instruments
2000 1999
------------------- ------------------
Book Approximate Book Approximate
Value Fair Value Value Fair Value
------- ----------- ------ -----------
In millions
Long-term debt(a)................... $11,456 $12,198 $9,165 $8,891
Guaranteed preferred beneficial
interests in subordinated notes of
Duke Energy or subsidiaries........ 1,406 1,389 1,404 1,207
Preferred stock(a).................. 280 275 313 303
--------
(a) Includes current maturities.
The fair value of cash and cash equivalents, notes receivable, notes payable
and commercial paper are not materially different from their carrying amounts
because of the short-term nature of these instruments or because the stated
rates approximate market rates.
Guarantees made on behalf of affiliates or recourse provisions from
affiliates have no book value associated with them, and there are no fair
values readily determinable since quoted market prices are not available.
8. Investment in Affiliates
Investments in domestic and international affiliates that are not controlled
by Duke Energy but where Duke Energy has significant influence over operations
are accounted for by the equity method. These investments include undistributed
earnings of $70 million and $6 million in 2000 and 1999, respectively. Duke
Energy's share of net income from these affiliates is reflected in the
Consolidated Statements of Income as Other Operating Revenues.
Natural Gas Transmission. Investments primarily include ownership interests
in natural gas pipeline joint ventures which transport natural gas to the U.S.
from Canada. Investments include a 37.5% ownership interest in Maritimes &
Northeast Pipeline, LLC.
Field Services. Investments primarily include a 37% interest in a
partnership which owns natural gas gathering systems in the Gulf of Mexico
(Dauphin Island Gathering Partners) and a 21.1% ownership interest in TEPPCO.
North American Wholesale Energy. Significant investments include a 50%
indirect interest in VMC Generating Company, a merchant electric generating
company, a 32.5% indirect interest in American Ref-Fuel, LLC and a 50% interest
in Southwest Power Partners.
66
DUKE ENERGY CORPORATION
Notes To Consolidated Financial Statements -- Continued
International Energy. International Energy has investments in various
natural gas and electric generation and transmission facilities in its targeted
geographic areas. Significant investments include a 25% indirect interest in
National Methanol Company, which owns and operates a methanol and MTBE (methyl
tertiary butyl ether) business in Jubail, Saudi Arabia.
Other Energy Services. Investments include the participation in various
construction and support activities for fossil-fueled generating plants.
Duke Ventures. Significant investments include various real estate
development projects and a 20% interest in the BellSouth PCS joint venture
until its sale in 2000.
Investment in Affiliates
December 31, 2000 December 31, 1999 December 31, 1998
----------------------------- ----------------------------- ----------------------------
Domestic International Total Domestic International Total Domestic International Total
-------- ------------- ------ -------- ------------- ------ -------- ------------- -----
In millions
Natural Gas
Transmission........... $ 82 $ 88 $ 170 $ 67 $ 83 $ 150 $104 $ 37 $141
Field Services.......... 373 -- 373 439 -- 439 303 -- 303
North American Wholesale
Energy................. 635 9 644 425 -- 425 171 -- 171
International Energy.... -- 154 154 -- 224 224 -- 223 223
Other Energy Services... 11 7 18 51 6 57 19 23 42
Duke Ventures........... 23 -- 23 10 -- 10 24 -- 24
Other Operations........ (12) -- (12) (6) -- (6) (2) -- (2)
------ ---- ------ ---- ---- ------ ---- ---- ----
Total.................. $1,112 $258 $1,370 $986 $313 $1,299 $619 $283 $902
====== ==== ====== ==== ==== ====== ==== ==== ====
Equity in Earnings of Investment
For the years ended:
----------------------------------------------------------------------------------------
December 31, 2000 December 31, 1999 December 31, 1998
---------------------------- ---------------------------- ----------------------------
Domestic International Total Domestic International Total Domestic International Total
-------- ------------- ----- -------- ------------- ----- -------- ------------- -----
In millions
Natural Gas
Transmission........... $ 13 $ 4 $ 17 $ 16 $ 9 $ 25 $ 14 $ 3 $ 17
Field Services.......... 39 -- 39 44 -- 44 9 -- 9
North American Wholesale
Energy................. 36 -- 36 47 -- 47 50 -- 50
International Energy.... -- 43 43 -- 10 10 -- 18 18
Other Energy Services... (13) -- (13) 10 3 13 1 13 14
Duke Ventures........... (9) -- (9) (22) -- (22) (29) -- (29)
Other Operations........ (10) -- (10) (5) -- (5) -- -- --
---- ---- ---- ---- ---- ---- ---- ---- ----
Total.................. $ 56 $ 47 $103 $ 90 $ 22 $112 $ 45 $ 34 $ 79
==== ==== ==== ==== ==== ==== ==== ==== ====
67
DUKE ENERGY CORPORATION
Notes To Consolidated Financial Statements -- Continued
Summarized Combined Financial Information of Unconsolidated Affiliates
December 31,
--------------------
2000 1999 1998
------ ------ ------
In millions
Balance Sheet
Current assets....................................... $1,242 $1,544 $ 848
Noncurrent assets.................................... 6,588 7,826 7,340
Current liabilities.................................. 888 1,155 1,084
Noncurrent liabilities............................... 4,404 4,727 3,884
------ ------ ------
Net assets........................................... $2,538 $3,488 $3,220
====== ====== ======
Income Statement
Operating revenues................................... $4,617 $3,510 $1,667
Operating expenses................................... 4,039 3,104 1,166
Net income........................................... 440 193 263
Duke Energy had outstanding notes receivable from certain affiliates of $70
million and $72 million at December 31, 2000 and 1999, respectively.
9. Net Property, Plant and Equipment
December 31,
-----------------
2000 1999
-------- -------
In millions
Land...................................................... $ 36 $ 25
Plant:
Electric generation and transmission.................... 11,734 11,717
Natural gas transmission................................ 11,281 10,290
Gathering and processing facilities..................... 4,434 2,466
Other buildings and improvements........................ 1,339 1,310
Leasehold improvements.................................. 14 8
Nuclear fuel.............................................. 761 741
Equipment................................................. 92 83
Vehicles.................................................. 36 37
Construction in process................................... 2,209 1,220
Other..................................................... 2,679 2,539
-------- -------
Total property, plant and equipment................... 34,615 30,436
Total accumulated depreciation(a)..................... (10,146) (9,441)
-------- -------
Total net property, plant and equipment............... $ 24,469 $20,995
======== =======
--------
(a) Includes amortization of nuclear fuel: 2000--$503 million; 1999--$444
million.
Capitalized interest of $67 million, $52 million and $28 million is included
in the Consolidated Statements of Income for the years ended December 31, 2000,
1999 and 1998, respectively.
68
DUKE ENERGY CORPORATION
Notes To Consolidated Financial Statements -- Continued
10. Debt and Credit Facilities
Long-term Debt
December 31,
-------------
Year Due 2000 1999
---------- ------ ------
In millions
Duke Energy
First and refunding mortgage bonds:(a)
5.875%--6.375%...................................... 2001--2008 $ 625 $ 625
6.750%--8.30%....................................... 2023--2025 661 661
7.0%--8.950%........................................ 2027--2033 165 165
Pollution control debt, 3.850%--5.80%................. 2012--2017 172 172
Notes:
5.375%--9.210%...................................... 2009--2016 811 264
6.0%--6.60%......................................... 2028--2038 500 500
Commercial paper, 6.510% and 5.840% weighted-average
rate at December 31, 2000 and 1999, respectively(b).. 1,256 1,184
Other debt............................................ 18 21
Notes matured during 2000............................. -- 200
Duke Capital Corporation
Senior notes:
6.250%--7.50%....................................... 2004--2009 1,400 1,250
6.750%--8.50%....................................... 2018--2019 650 650
Commercial paper, 6.660% and 5.910% weighted-average
rate at December 31, 2000 and 1999,
respectively(b).................................... 1,378 535
Note payable to affiliate 6.140% and 5.030% weighted-
average rate at December 31, 2000 and 1999,
respectively......................................... 141 86
PanEnergy Corp
Bonds:
7.750%.............................................. 2022 328 328
8.625% Debentures................................... 2025 100 100
Notes:
7.0%--9.90%, maturing serially...................... 2003--2006 384 395
TETCO
Notes:
7.30%--10.375% 2001--2010 600 500
Medium-term, Series A, 7.640%--9.070%............... 2001--2012 51 51
Algonquin Gas Transmission Company
9.130% Notes.......................................... 2003 100 100
DEFS
Notes, 7.50%--8.125%.................................. 2005--2030 1,700 --
Commercial paper, 7.390% weighted-average rate at
December 31, 2000.................................... 346 --
DENA
Bonds, 7.50%--10.0%................................... 2010--2030 302 --
Capital leases........................................ 2009--2028 272 207
Notes matured during 2000............................. -- 380
69
DUKE ENERGY CORPORATION
Notes To Consolidated Financial Statements -- Continued
December 31,
---------------
Year Due 2000 1999
---------- ------- ------
In millions
DEI
Medium-term note, 7.250%.......................... 2004 139 162
Notes:
4.50%--18.0%.................................... 2001--2024 222 107
7.90%........................................... 2004--2013 138 161
6.0%--10.0%(c).................................. 2013--2017 477 485
Credit facilities, 6.130% and 6.010% weighted-
average rate at December 31, 2000 and 1999,
respectively..................................... 44 80
Commercial paper, 6.40% and 5.510% weighted-
average at December 31, 2000 and 1999,
respectively..................................... 223 49
Crescent(d)
Construction and mortgage loans, 6.30%--9.50%..... 2001--2010 67 46
Other debt of subsidiaries........................ 103 34
Unamortized debt discount and premium, net........ (91) (66)
------- ------
Total long-term debt.............................. 13,282 9,432
Current maturities of long-term debt.............. (437) (482)
Short-term notes payable and commercial paper..... (1,826) (267)
------- ------
Total long-term portion........................... $11,019 $8,683
======= ======
- --------
(a) Substantially all of Franchised Electric's plant was mortgaged.
(b) Extendible commercial notes are included in the 2000 amounts.
(c) Paranapanema (Brazil) debt, principal is indexed annually to inflation.
(d) Substantial amounts of Crescent's real estate development projects, land
and buildings were pledged as collateral.
The weighted-average interest rate on outstanding short-term notes payable
and commercial paper at December 31, 2000 and 1999, was 6.80% and 5.720%,
respectively.
Annual Maturities
In millions
-----------
2001............................................................. $ 437
2002............................................................. 263
2003............................................................. 475
2004............................................................. 956
2005............................................................. 922
Thereafter....................................................... 8,403
-------
Total long-term debt............................................. $11,456
=======
Included in the annual maturities after 2005 is $1,536 million of long-term
debt that has call options whereby Duke Energy has the option to repay the debt
early. Based on the years in which Duke Energy may first exercise its
redemption options, $95 million could potentially be repaid in 2001, $1,114
million in 2002, $227 million in 2003 and $100 million in 2005.
70
DUKE ENERGY CORPORATION
Notes To Consolidated Financial Statements -- Continued
Credit Facilities
December 31, 2000 December 31, 1999
---------------------- ----------------------
Credit Credit
Facilities Outstanding Facilities Outstanding
---------- ----------- ---------- -----------
In millions
364-day facilities(a)........ $1,796 $ -- $ 823 $ 10
Three-year revolving
facilities.................. 84 44 565 450
Four-year revolving
facilities.................. 125 -- 125 --
Five-year revolving
facilities(a)............... 2,200 -- 2,200 --
------ ----- ------ ----
Total consolidated......... $4,205 $ 44 $3,713 $460
====== ===== ====== ====
--------
(a) Supported commercial paper facilities.
11. Nuclear Decommissioning Costs
Nuclear Decommissioning Costs. Estimated site-specific nuclear
decommissioning costs, including the cost of decommissioning plant components
not subject to radioactive contamination, total approximately $1.9 billion
stated in 1999 dollars based on decommissioning studies completed in 1999. This
amount includes Duke Energy's 12.5% ownership in the Catawba Nuclear Station.
The other joint owners of Catawba Nuclear Station are responsible for
decommissioning costs related to their ownership interests in the station. Both
the NCUC and the PSCSC have granted Duke Energy recovery of estimated
decommissioning costs through retail rates over the expected remaining service
periods of Duke Energy's nuclear stations. The operating licenses for Duke
Energy's nuclear units are subject to extension. On May 23, 2000, Duke Energy
was granted a license renewal for Oconee. The current operating licenses for
Duke Energy's nuclear units are as follows:
Operating Licenses for Nuclear Units
Unit Year
---- ----
McGuire 1............................................................. 2021
McGuire 2............................................................. 2023
Catawba 1............................................................. 2024
Catawba 2............................................................. 2026
Oconee 1 and 2........................................................ 2033
Oconee 3.............................................................. 2034
During 2000 and 1999, Duke Energy expensed approximately $57 million, which
was contributed to the external funds for decommissioning costs, and accrued an
additional $8 million to the internal reserve. Nuclear units are depreciated at
an annual rate of 4.7%, of which 1.61% is for decommissioning. The balance of
the external funds as of December 31, 2000 and 1999, was $717 million and $703
million, respectively. The balance of the internal reserve as of December 31,
2000 and 1999, was $231 million and $223 million, respectively, and is
reflected in the Consolidated Balance Sheets as Accumulated Depreciation and
Amortization. Management believes that the decommissioning costs being
recovered through rates, when coupled with expected fund earnings, are
currently sufficient to provide for the cost of decommissioning.
A provision in the Energy Policy Act of 1992 established a fund for the
decontamination and decommissioning of the Department of Energy's (DOE) uranium
enrichment plants (the D&D Fund). Licensees are subject to an annual assessment
for 15 years based on their pro rata share of past enrichment services. On June
12, 1998, Duke Energy and 21 other utilities filed a lawsuit challenging the
constitutionality of the D&D Fund and seeking an injunction that prohibits the
government from collecting the assessment and a refund of all
71
DUKE ENERGY CORPORATION
Notes To Consolidated Financial Statements -- Continued
assessments paid. The annual assessment is recorded in the Consolidated
Statements of Income as Fuel Used in Electric Generation. Duke Energy paid $10
million during 2000 and has paid $85 million cumulatively related to its
ownership interests in nuclear plants. The remaining liability and regulatory
assets of $62 million and $70 million at December 31, 2000 and 1999,
respectively, are reflected in the Consolidated Balance Sheets as Deferred
Credits and Other Liabilities, and Regulatory Assets and Deferred Debits,
respectively.
Spent Nuclear Fuel. Under provisions of the Nuclear Waste Policy Act of
1982, Duke Energy has entered into contracts with the DOE for the disposal of
spent nuclear fuel. The DOE failed to begin accepting the spent nuclear fuel on
January 31, 1998, the date provided by the Nuclear Waste Policy Act and by
Duke Energy's contract with the DOE. On June 8, 1998, Duke Energy filed with
the U.S. Court of Federal Claims a claim against the DOE for damages in excess
of $1 billion arising out of the DOE's failure to begin accepting commercial
spent nuclear fuel by January 31, 1998. Damages claimed in the suit are
intended to recover costs that Duke Energy is incurring and will continue to
incur as a result of the DOE's partial material breach of its contract with
Duke Energy, including costs associated with securing additional spent fuel
storage capacity. Duke Energy will continue to safely manage its spent nuclear
fuel until the DOE accepts it. Payments made to the DOE for disposal costs are
based on nuclear output and are included in the Consolidated Statements of
Income as Fuel Used in Electric Generation.
12. Guaranteed Preferred Beneficial Interests in Subordinated Notes of Duke
Energy or Subsidiaries
Duke Energy and certain subsidiaries have each formed business trusts for
which they own all the respective common securities. The trusts issue and sell
preferred securities and invest the gross proceeds in junior subordinated notes
issued by the respective parent companies.
Trust Preferred Securities
December 31,
--------------
Issued Rate Due 2000 1999
------ ------ ---- ------ ------
In millions
1997............................................ 7.20% 2037 $ 350 $ 350
1998............................................ 7.375% 2038 350 350
1998............................................ 7.375% 2038 250 250
1999............................................ 8.375% 2029 250 250
1999............................................ 7.20% 2039 250 250
Unamortized debt discount....................... (44) (46)
------ ------
$1,406 $1,404
====== ======
These trust preferred securities represent preferred undivided beneficial
interests in the assets of the respective trusts. Payment of distributions on
these preferred securities is guaranteed by the respective parent company, but
only to the extent the trusts have funds legally and immediately available to
make such distributions. Dividends of $108 million, $87 million and $44 million
related to the trust preferred securities have been included in the
Consolidated Statements of Income as Minority Interest Expense for the years
ended December 31, 2000, 1999 and 1998, respectively.
72
DUKE ENERGY CORPORATION
Notes To Consolidated Financial Statements -- Continued
13. Preferred and Preference Stock
Authorized Shares of Stock as of December 31, 2000 and 1999
Par Value Shares
--------- -----------
In millions
Preferred Stock........................................ $100 12.5
Preferred Stock A...................................... $ 25 10.0
Preference Stock....................................... $100 1.5
As of December 31, 2000 and 1999, there were no shares of preference stock
outstanding.
Preferred Stock with Sinking Fund Requirements
Shares
Outstanding December 31,
Year At December 31, ---------------------
Rate/Series Issued 2000 2000 1999
----------- ------ --------------- ---- ----------
Dollars in millions
6.20% D (Preferred Stock A)..... 1992 800,000 $ 20 $ 20
6.30% U......................... 1992 130,000 13 13
6.40% V......................... 1992 130,000 13 13
6.75% X......................... 1993 250,000 25 25
6.10% C (Preferred Stock A)(a).. 1992 -- -- 20
6.20% T(a)...................... 1992 -- -- 13
--------- ----------
Total........................... $ 71 $ 104
========= ==========
- --------
(a) Preferred stock series C and T redeemed in September and December,
2000, respectively.
The annual sinking fund requirements for 2001 through 2005 are $33 million,
$13 million, $2 million, $2 million and $2 million, respectively. Some
additional redemptions are permitted at Duke Energy's option.
Preferred Stock without Sinking Fund Requirements
Shares
Outstanding December 31,
Year At December 31, -------------
Rate/Series Issued 2000 2000 1999
----------- ------ --------------- ------ ------
Dollars in millions
4.50% C.................... 1964 175,000 $ 18 $ 18
7.85% S.................... 1992 300,000 30 30
7.00% W.................... 1993 249,989 25 25
7.04% Y.................... 1993 299,995 30 30
6.375% (Preferred Stock
A)........................ 1993 1,257,185 31 31
Auction Series A........... 1990 750,000 75 75
------ ------
Total...................... $ 209 $ 209
====== ======
The call provisions for the outstanding preferred stock specify various
redemption prices not exceeding 104% of par value, plus accumulated dividends
to the redemption date.
14. Commitments and Contingencies
Nuclear Insurance. Duke Energy owns and operates the McGuire and Oconee
Nuclear Stations with two and three nuclear reactors, respectively, and
operates and has a partial ownership interest in the Catawba
73
DUKE ENERGY CORPORATION
Notes To Consolidated Financial Statements -- Continued
Nuclear Station with two nuclear reactors. Nuclear insurance coverage is
maintained in three program areas: liability coverage; property,
decontamination and decommissioning coverage; and business interruption and/or
extra expense coverage. Certain expenses associated with nuclear insurance
premiums paid by Duke Energy are reimbursed by the other joint owners of the
Catawba Nuclear Station.
Pursuant to the Price-Anderson Act, Duke Energy is required to insure
against public liability claims resulting from nuclear incidents to the full
limit of liability of approximately $9.5 billion.
Primary Liability Insurance. The maximum required private primary liability
insurance of $200 million has been purchased along with a like amount to cover
certain worker tort claims.
Excess Liability Insurance. This policy currently provides approximately
$9.3 billion of coverage through the Price-Anderson Act's mandatory industry-
wide excess secondary insurance program of risk pooling. The $9.3 billion of
coverage is the sum of the current potential cumulative retrospective premium
assessments of $88 million per licensed commercial nuclear reactor. This $9.3
billion will be increased by $88 million as each additional commercial nuclear
reactor is licensed, or reduced by $88 million for certain nuclear reactors
that are no longer operational and may be exempted from the risk pooling
insurance program. Under this program, licensees could be assessed
retrospective premiums to compensate for damages in the event of a nuclear
incident at any licensed facility in the nation. If such an incident occurs and
public liability damages exceed primary insurances, licensees may be assessed
up to $88 million for each of their licensed reactors, payable at a rate not to
exceed $10 million a year per licensed reactor for each incident. The $88
million amount is subject to indexing for inflation and may be subject to state
premium taxes.
Duke Energy is a member of Nuclear Electric Insurance Limited (NEIL), which
provides property and business interruption insurance coverage for Duke
Energy's nuclear facilities under the following three policy programs:
Primary Property Insurance. This policy provides $500 million in primary
property damage coverage for each of Duke Energy's nuclear facilities.
Excess Property Insurance. This policy provides excess property,
decontamination and decommissioning liability insurance in the following
amounts: $2.25 billion for the Catawba Nuclear Station and $1.5 billion each
for the Oconee and McGuire Nuclear Stations.
Business Interruption Insurance. This policy provides business interruption
and/or extra expense coverage resulting from an accidental outage of a nuclear
unit. Each unit of the McGuire and Catawba Nuclear Stations is insured for up
to approximately $4 million per week and the Oconee Nuclear Station units are
insured for up to approximately $3 million per week. Coverage amounts per unit
decline if more than one unit is involved in an accidental outage. Initial
coverage begins after a 12-week deductible period and continues at 100% for 52
weeks and 80% for the next 110 weeks.
If NEIL's losses ever exceed its reserves for any of the above three
programs, Duke Energy will be liable for assessments of up to five times its
annual premiums. The current potential maximum assessments are as follows:
Primary Property Insurance -- $18 million; Excess Property Insurance -- $18
million; Business Interruption Insurance -- $15 million.
The other joint owners of the Catawba Nuclear Station are obligated to
assume their pro rata share of any liabilities for retrospective premiums and
other premium assessments resulting from the Price-Anderson Act's excess
secondary insurance program of risk pooling or the NEIL policies.
Environmental. Duke Energy is subject to international, federal, state and
local regulations regarding air and water quality, hazardous and solid waste
disposal and other environmental matters.
74
DUKE ENERGY CORPORATION
Notes To Consolidated Financial Statements -- Continued
Manufactured Gas Plants and Superfund Sites. Duke Energy was an operator of
manufactured gas plants until the early 1950s and has entered into a
cooperative effort with the State of North Carolina and other owners of certain
former manufactured gas plant sites to investigate and, where necessary,
remediate these contaminated sites. Duke Energy is considered by regulators to
be a potentially responsible party and may be subject to future liability at
eight federal Superfund sites and three state Superfund sites. While the cost
of remediation of these sites may be substantial, Duke Energy will share in any
liability associated with remediation of contamination at such sites with other
potentially responsible parties. Management believes that resolution of these
matters will not have a material adverse effect on consolidated results of
operations, cash flows or financial position.
PCB (Polychlorinated Biphenyl) Assessment and Cleanup Programs. In June
1999, the Environmental Protection Agency (EPA) certified that TETCO, a wholly
owned subsidiary of Duke Energy, had completed cleanup of PCB-contaminated
sites under conditions stipulated by a U.S. Consent Decree in 1989. TETCO was
required to continue groundwater monitoring on a number of sites for two years.
This required monitoring was completed as of the end of 2000, pending EPA
concurrence. TETCO will be evaluating and discussing with the EPA, appropriate
state authorities or both the need for additional remediation or monitoring.
Under terms of the sales agreement with CMS discussed in Note 2 to the
Consolidated Financial Statements, Duke Energy is obligated to complete cleanup
of previously identified contamination resulting from the past use of PCB-
containing lubricants and other discontinued practices at certain sites on the
PEPL and Trunkline systems. Based on Duke Energy's experience to date and costs
incurred for cleanup operations, management believes the resolution of matters
relating to the environmental issues discussed above will not have a material
adverse effect on consolidated results of operations, cash flows or financial
position.
Air Quality Control. In October 1998, the EPA issued a final rule on
regional ozone control that required 22 eastern states and the District of
Columbia to revise their State Implementation Plans (SIPs) to significantly
reduce emissions of nitrogen oxide by May 1, 2003. The EPA's rule was
challenged in court by various states, industry and other interests, including
the states of North Carolina and South Carolina, and Duke Energy. In March
2000, the court upheld most aspects of the EPA's rule. The same court
subsequently issued a decision that extended the compliance deadline for
implementation of emission reductions to May 31, 2004. In January 2000, the EPA
finalized another ozone-related rule under Section 126 of the Clean Air Act
(CAA) that has virtually identical emission control requirements as its October
1998 action, but with a May 1, 2003 compliance date. The EPA's 2000 rule has
been challenged in court. The court is expected to issue its decision during
the spring of 2001.
In response to the EPA's October 1998 rule, both North Carolina and South
Carolina are in the process of finalizing the SIP revisions to implement the
EPA rule's emission reduction requirements. Additionally, North Carolina has
adopted a separate rule that caps nitrogen oxide emissions from coal-fired
power plants in the event the EPA's SIP rule is eventually overturned.
Depending on the resolution of these and related matters, management
anticipates that costs to Duke Energy may range from $500 million to $900
million in capital costs for additional emission controls over an estimated
time period which continues through 2007. Emission control retrofits of this
type are large technical, design and construction projects. These projects will
be managed closely to ensure the continuation of reliable electric service to
Duke Energy's customers throughout the projects and upon their completion.
On December 22, 2000, the U.S. Justice Department, acting on behalf of the
EPA, filed a complaint against Duke Energy in the U.S. District Court in
Greensboro, North Carolina, for alleged violations of the New Source Review
(NSR) provisions of the CAA. The EPA is claiming that 29 projects performed at
25 of Duke Energy's coal-fired units were major modifications as defined in the
CAA and that Duke Energy violated
75
DUKE ENERGY CORPORATION
Notes To Consolidated Financial Statements -- Continued
the CAA's NSR requirements when it undertook those projects without obtaining
permits and installing emission controls for sulfur dioxide, nitrogen oxide and
particulate matter. The complaint requests, among other things, that the court
enjoin Duke Energy from operating the coal-fired units identified in the
complaint, and order Duke Energy to install additional emission controls and
pay unspecified civil penalties. This complaint appears to be part of the EPA's
NSR enforcement initiative, in which the EPA claims that utilities and others
have committed widespread violations of the CAA permitting requirements for the
past 25 years. The EPA has sued or issued notices of violation or investigative
information requests, to at least 48 other electric utilities and cooperatives.
The EPA's allegations run counter to previous EPA guidance regarding the
applicability of the NSR permitting requirements. Duke Energy, along with other
utilities, has routinely undertaken the type of repair, replacement, and
maintenance projects that the EPA now claims are illegal. Duke Energy believes
that all of its electric generation units are properly permitted and have been
properly maintained, and intends to defend itself vigorously against these
alleged violations. However, because these matters are in a preliminary stage,
management cannot estimate the effects of these matters on Duke Energy's future
consolidated results of operations, cash flows or financial position. The CAA
authorizes civil penalties of up to $27,500 per day per violation at each
generating unit. Civil penalties, if ultimately imposed by the court, and the
cost of any required new pollution control equipment, if the court accepts the
EPA's contentions, could be substantial.
Injury and Damages Claims. Duke Energy has experienced numerous claims
relating to damages for personal injury alleged to have arisen from the
exposure to or use of asbestos in connection with construction and maintenance
activities conducted by Duke Energy on its electric generation plants during
the 1960s and 1970s. During 1999, Duke Energy experienced a significant
increase in the number of these claims. This increase, coupled with its
cumulative experience in claims received, prompted Duke Energy to conduct a
comprehensive review which was completed in late 1999 and to record an $800
million accrual, which is included in Other Deferred Credits and Other
Liabilities in the Consolidated Balance Sheets, to reflect the purchase of a
third-party insurance policy as well as estimated amounts for future claims not
recoverable under such policy. The insurance policy, combined with amounts
covered by self-insurance reserves, provides for claims paid up to an aggregate
of $1.6 billion. Duke Energy currently believes the estimated claims relating
to this exposure will not exceed such amount. While Duke Energy is uncertain as
to the timing of when claims will be received, portions of the estimated claims
may not be received and paid for 30 or more years.
While Duke Energy has recorded an accrual related to this estimated
liability, such estimates cannot be made with certainty. Factors, such as the
frequency and magnitude of claims, could result in changes in the estimates of
the injury and damages liability and insurance recoveries. Such changes could
result in, over time, a difference from the amount currently reflected in the
financial statements. However, due to Duke Energy's insurance program relating
to this liability, management believes that any changes in the estimates would
not have a material adverse effect on consolidated results of operations, cash
flows or financial position.
California Issues. California Litigation. Duke Energy's subsidiaries, DENA
and DETM, have been named among 16 defendants in a class action lawsuit (the
Gordon lawsuit) filed against companies identified as "generators and traders"
of electricity in California markets. DETM also was named as one of numerous
defendants in four additional lawsuits, including two class actions (the
Hendricks and Pier 23 Restaurant lawsuits), filed against generators, marketers
and traders and other unnamed providers of electricity in California markets.
These suits were brought either by or on behalf of electricity consumers in the
State of California. The Gordon and Hendricks class action suits were filed in
the Superior Court of the State of California, San Diego County, in November
2000. The other three suits were filed in January 2001, one in the Superior
Court of the State of California, San Diego County, and the other two in the
Superior Court of the State of California, County of San Francisco. These suits
generally allege that the defendants manipulated the
76
DUKE ENERGY CORPORATION
Notes To Consolidated Financial Statements -- Continued
wholesale electricity markets in violation of state laws against unfair and
unlawful business practices and state antitrust laws. Plaintiffs in the Gordon
suit seek aggregate damages of over $4 billion, and the plaintiffs in the other
suits, to the extent damages are specified, allege damages in excess of $1
billion. The lawsuits each seek the disgorgement of alleged unlawfully obtained
revenues for sales of electricity and, in three suits, an award of treble
damages.
California Wholesale Electricity Markets. As a result of high prices in the
western U.S. wholesale electricity markets in 2000, several state and federal
regulatory investigations and complaints have commenced to determine the causes
of the prices and potentially to recommend remedial action. The FERC concluded
its investigation by issuing on December 15, 2000, an Order Directing Remedies
in California Wholesale Electricity Markets. In this conclusion, the FERC found
no basis in allegations made by government officials in California that
specific electric generators artificially drove up power prices. This
conclusion is consistent with similar findings by the Compliance Unit of the
California Power Exchange (CalPX) and the Northwest Power Planning Council.
That Order is the subject of numerous rehearing requests.
At the state level, the California Public Utilities Commission, the
California Electricity Oversight Board, the California Bureau of State Audits
and the California Office of the Attorney General all have separate ongoing
investigations into the high prices and their causes. None of those
investigations have been completed and no findings have been made in connection
with any of them.
California Utilities Defaults and Other Proceedings. Two California electric
utilities recently defaulted on many of their obligations to suppliers and
creditors. NAWE supplies electric power to these utilities directly and
indirectly through contracts through the California Independent System Operator
(CAISO) and the CalPX. NAWE also supplies natural gas to these utilities under
direct contracts. With respect to electric power sales through the CAISO and
CalPX, Duke Energy quantified its exposures at December 31, 2000 to these
utilities and recorded a $110 million provision. As a result of these defaults
and certain related government actions, Duke Energy has taken a number of
steps, including initiating court actions, to mitigate its exposure.
While these matters referenced above are in their earliest stages,
management does not believe, based on its analysis to date of the factual
background and the claims asserted in these matters, that their resolution will
have a material adverse effect on Duke Energy's consolidated results of
operations, cash flows or financial position.
Litigation. Exxon Mobil Corporation Arbitration. In December 2000, three
subsidiaries of Duke Energy initiated binding arbitration against three
subsidiaries of the Exxon Mobil Corporation (collectively, the "Exxon Mobil
entities") concerning the parties' joint ownership of DETM and certain related
affiliates (collectively, the "Ventures"). At issue is a buy-out right
provision in the parties' agreement. The agreements governing the ownership of
the Ventures contain provisions giving Duke Energy the right to purchase the
Exxon Mobil entities' 40% interest in the Ventures in the event material
business disputes arise between the Ventures' owners. Such disputes have
arisen, and consequently, Duke Energy exercised its right to buy the Exxon
Mobil entities' interest. Duke Energy claims that refusal by the Exxon Mobil
entities to honor the exercise is a breach of the buy-out right provision, and
seeks specific performance of the provision. Duke Energy also complains of the
Exxon Mobil entities' lack of use of, and contributions to, the Ventures.
In January 2001, the Exxon Mobil entities asserted counterclaims in the
arbitration and claims in a separate Texas state court action alleging that
Duke Energy breached its obligations to the Ventures and to the Exxon Mobil
entities. The Exxon Mobil entities also claim that Duke Energy violated a
Guaranty Agreement. While this matter is in its early stages, management
believes that the final disposition of this action will not have a material
adverse effect on Duke Energy's consolidated results of operations, cash flows
or financial position.
77
DUKE ENERGY CORPORATION
Notes To Consolidated Financial Statements -- Continued
Other Commitments and Contingencies. Financial Guarantees. Certain
subsidiaries of Duke Energy have guaranteed debt agreements of affiliates and
have provided surety bonds and letters of credit, all of which totaled
approximately $1.9 billion and $853 million as of December 31, 2000 and 1999,
respectively. The increase in the amount of these obligations is primarily due
to increasing support for margin deposits and power exchange participation.
Leases. Duke Energy utilizes assets under operating leases in several areas
of operations. Consolidated rental expense amounted to $90 million, $87 million
and $80 million in 2000, 1999 and 1998, respectively. Future minimum rental
payments under Duke Energy's various operating leases for the years 2001
through 2005 are $74 million, $60 million, $51 million, $44 million and $38
million, respectively.
15. Common Stock
On December 20, 2000, Duke Energy announced a two-for-one common stock split
effective January 26, 2001, to shareholders of record on January 3, 2001. All
outstanding share and per share amounts have been restated to reflect the stock
split, and appropriate adjustments have been made in the exercise price and
number of shares subject to stock options along with appropriate adjustments to
stock amounts and other employee benefit programs. Effective with the stock
split, the quarterly cash dividend rate on common stock is $0.275 per share,
subject to declaration from time to time by the Board of Directors.
At its December 20, 2000 meeting, the Board of Directors approved a proposal
to increase the number of authorized shares of common stock from one billion to
two billion. Such an increase is subject to shareholder approval at the Duke
Energy Corporation Annual Meeting of Shareholders to be held on April 26, 2001.
16. Stock-Based Compensation
All of the following information regarding outstanding common stock shares
and options has been restated to reflect the two-for-one common stock split
discussed in Note 15 to the Consolidated Financial Statements.
Under Duke Energy's 1998 Long-term Incentive Plan (the 1998 Plan), stock
options for up to 30 million shares of common stock may be granted to key
employees. Under the 1998 Plan, the exercise price of each option granted is
required to be no less than the market price of Duke Energy's common stock on
the date of grant. Vesting periods range from one to five years with a maximum
term of 10 years. An amendment to the 1998 Plan, subject to shareholder
approval at the Duke Energy Corporation Annual Meeting of Shareholders to be
held on April 26, 2001, will increase the number of shares of common stock
available under the 1998 Plan to 60 million shares.
78
DUKE ENERGY CORPORATION
Notes To Consolidated Financial Statements -- Continued
Stock Option Activity
Weighted-
Average
Exercise
Options Price
------------ ---------
In thousands
Outstanding at December 31, 1997...................... 5,459 $12
Granted............................................. 7,096 29
Exercised........................................... (1,896) 11
Forfeited........................................... (1,736) 29
------
Outstanding at December 31, 1998...................... 8,923 23
Granted............................................. 10,308 27
Exercised........................................... (856) 12
Forfeited........................................... (750) 29
------
Outstanding at December 31, 1999...................... 17,625 25
Granted............................................. 7,594 41
Exercised........................................... (2,047) 21
Forfeited........................................... (666) 27
------
Outstanding at December 31, 2000...................... 22,506 31
======
Stock Options at December 31, 2000
Outstanding Exercisable
----------------------------------- ----------------------
Weighted- Weighted- Weighted-
Range of Average Average Average
Exercise Remaining Exercise Exercise
Prices Number Life Price Number Price
-------- ------------- --------- --------- ------------ ---------
(in thousands) (in years) In thousands
$5 to $7 7 1.3 $ 7 7 $ 7
$8 to $10 944 3.1 10 944 10
$11 to $12 203 3.3 12 203 12
$13 to $16 220 5.1 14 220 14
$21 to $25 6,115 8.9 25 1,532 24
$26 to $30 7,726 7.7 29 2,111 29
$31 to $34 578 8.0 32 185 33
> $34 6,713 10.0 43 -- --
------ -----
Total 22,506 5,202 $23
====== =====
Duke Energy had 3.6 million and 3.0 million options exercisable at
December 31, 1999 and 1998, with weighted-average exercise prices of $17
and $11 per option, respectively.
The weighted-average fair value of options granted was $10, $5 and $4
per option during 2000, 1999 and 1998, respectively. The fair value of each
option grant was estimated on the date of grant using the Black-Scholes
option-pricing model.
79
DUKE ENERGY CORPORATION
Notes To Consolidated Financial Statements -- Continued
Weighted-Average Assumptions for Option-Pricing
2000 1999 1998
------- ------- -------
Stock dividend yield................................. 3.7% 4.1% 4.2%
Expected stock price volatility...................... 25.1% 18.8% 15.1%
Risk-free interest rates............................. 5.3% 5.9% 5.6%
Expected option lives................................ 7 years 7 years 7 years
Had compensation expense for stock-based compensation been determined based
on the fair value at the grant dates, 2000 net income would have been $1,764
million, or $2.37 per basic share; 1999 net income would have been $1,498
million, or $2.03 per basic share; and 1998 net income would have been $1,250
million, or $1.70 per basic share.
Under Duke Energy's 1996 Stock Incentive Plan (the 1996 Plan), four million
shares of common stock were reserved for awards to employees. Restricted stock
grants made under the 1996 Plan vest over periods ranging from one to five
years. Duke Energy awarded 294,526 restricted shares (fair value at grant dates
of approximately $8 million) in 2000 and 131,700 restricted shares (fair value
at grant dates of approximately $4 million) in 1999. Compensation expense for
the grants is charged to earnings over the restriction period and amounted to
$4 million in 2000 and was not material in 1999 or 1998.
Duke Energy granted Company Performance Awards under the 1998 Plan, under
which 30 million shares of common stock have been reserved for employee and
outside director awards. These share grants under the 1998 Plan vest over
periods ranging between one and seven years. Duke Energy awarded 225,000 of
these shares (fair value at grant dates of $7 million) in 2000 and 986,400 of
these shares (fair value at grant dates of $26 million) in 1999. Compensation
expense for the stock grants is charged to earnings over the vesting period,
and amounted to $7 million in 2000, $3 million in 1999 and zero in 1998.
17. Employee Benefit Plans
Retirement Plans. Duke Energy and its subsidiaries maintain a non-
contributory defined benefit retirement plan covering most employees with
minimum service requirements using a cash balance formula. Under a cash balance
formula, a plan participant accumulates a retirement benefit based upon a
percentage, which may vary with age and years of service, of current eligible
earnings and current interest credits.
On December 31, 1998, all defined benefit retirement plans maintained by
Duke Energy and its subsidiaries, except for the PanEnergy retirement plan,
were merged to form the Duke Energy Retirement Cash Balance Plan (the Duke
Energy Plan). The plan merger changed the benefit for certain participants,
from a formula based primarily on benefit accrual service and highest average
earnings, to a cash balance formula.
Through December 31, 1998, the PanEnergy retirement plan provided retirement
benefits (i) for eligible employees of certain subsidiaries that are generally
based on an employee's years of benefit accrual service and highest average
eligible earnings, and (ii) for eligible employees of certain other
subsidiaries under a cash balance formula. In 1998, a significant amount of
lump sum payouts were made from the PanEnergy plan resulting in a settlement
gain of $10 million. Effective January 1, 1999, the benefit formula under the
PanEnergy plan, for all eligible employees, was changed to a cash balance
formula.
In connection with the 1999 sale of the Midwest Pipelines to CMS, benefit
accruals under the PanEnergy plan were frozen on December 31, 1998, for all
participants who, as a result of the sale, became employees of CMS and its
subsidiaries. Once the transfer of the benefit obligation and related assets of
the affected participants to CMS was completed, the PanEnergy plan was merged
into the Duke Energy Plan.
80
DUKE ENERGY CORPORATION
Notes To Consolidated Financial Statements -- Continued
Duke Energy's policy is to fund amounts, as necessary, on an actuarial basis
to provide assets sufficient to meet benefits to be paid to plan participants.
No contributions to the Duke Energy Plan were necessary in 2000 or 1999. The
net unrecognized transition asset, resulting from the implementation of accrual
accounting, is being amortized over approximately 20 years.
Components of Net Periodic Pension Costs
For the Years Ended
December 31,
----------------------
2000 1999 1998
------ ------ ------
In millions
Service cost benefit earned during the year.......... $ 70 $ 72 $ 63
Interest cost on projected benefit obligation........ 184 165 169
Expected return on plan assets....................... (244) (224) (218)
Amortization of prior service cost................... (3) (3) (4)
Amortization of net transition asset................. (4) (4) (4)
Recognized net actuarial loss........................ -- 12 10
Settlement gain...................................... -- -- (10)
------ ------ ------
Net periodic pension costs........................... $ 3 $ 18 $ 6
====== ====== ======
Reconciliation of Funded Status to Pre-funded Pension Costs
December 31,
--------------
2000 1999
------ ------
In millions
Change in Benefit Obligation
Benefit obligation at beginning of year...................... $2,446 $2,540
Service cost................................................. 70 72
Interest cost................................................ 184 165
Actuarial (gain) loss........................................ 16 (41)
Transfer to CMS.............................................. -- (85)
Benefits paid................................................ (130) (205)
------ ------
Benefit obligation at end of year............................ $2,586 $2,446
------ ------
Change in Plan Assets
Fair value of plan assets at beginning of year(a)............ $3,121 $2,920
Actual return on plan assets................................. 47 491
Transfer to CMS.............................................. -- (85)
Benefits paid................................................ (130) (205)
------ ------
Fair value of plan assets at end of year(a).................. $3,038 $3,121
------ ------
Funded status................................................ $ 452 $ 675
Unrecognized net experience gain............................. (110) (315)
Unrecognized prior service cost reduction.................... (22) (24)
Unrecognized net transition asset............................ (16) (21)
------ ------
Pre-funded pension costs..................................... $ 304 $ 315
====== ======
--------
(a) Principally equity and fixed-income securities.
81
DUKE ENERGY CORPORATION
Notes To Consolidated Financial Statements -- Continued
Assumptions Used for Pension Benefits Accounting(a)
2000 1999 1998
---- ---- ----
Percent
Discount rate................................................. 7.50 7.50 6.75
Salary increase............................................... 4.53 4.50 4.67
Expected long-term rate of return on plan assets.............. 9.25 9.25 9.25
--------
(a) Reflects weighted averages across all plans.
Duke Energy also sponsors employee savings plans that cover substantially
all employees. Employer matching contributions of $66 million, $68 million and
$53 million were expensed in 2000, 1999 and 1998, respectively.
Other Postretirement Benefits. Duke Energy and most of its subsidiaries
provide certain health care and life insurance benefits for retired employees
on a contributory and non-contributory basis. Employees become eligible for
these benefits if they have met certain age and service requirements at
retirement, as defined in the plans. Under plan amendments effective late 1998
and early 1999, health care benefits for future retirees were changed to limit
employer contributions and medical coverage.
Such benefit costs are accrued over the active service period of employees
to the date of full eligibility for the benefits. The net unrecognized
transition obligation, resulting from the implementation of accrual accounting,
is being amortized over approximately 20 years.
Components of Net Periodic Postretirement Benefit Costs
For the Years
Ended
December 31,
----------------
2000 1999 1998
---- ---- ----
In millions
Service cost benefit earned during the year.............. $ 5 $ 7 $ 10
Interest cost on accumulated postretirement benefit
obligation.............................................. 43 40 43
Expected return on plan assets........................... (23) (21) (18)
Amortization of prior service cost....................... 1 1 7
Amortization of net transition obligation................ 18 18 16
Recognized net actuarial (gain) loss..................... -- (1) 1
---- ---- ----
Net periodic postretirement benefit costs................ $ 44 $ 44 $ 59
==== ==== ====
82
DUKE ENERGY CORPORATION
Notes To Consolidated Financial Statements -- Continued
Reconciliation of Funded Status to Accrued Postretirement Benefit Costs
December 31,
--------------
2000 1999
------ ------
In millions
Change in Benefit Obligation
Accumulated postretirement benefit obligation at beginning
of year................................................... $ 562 $ 625
Service cost............................................... 5 7
Interest cost.............................................. 43 40
Plan participants' contributions........................... 7 7
Actuarial (gain) loss...................................... 39 (68)
Benefits paid.............................................. (42) (49)
------ ------
Accumulated postretirement benefit obligation at end of
year...................................................... $ 614 $ 562
------ ------
Change in Plan Assets
Fair value of plan assets at beginning of year(a).......... $ 327 $ 305
Actual return on plan assets............................... 8 41
Employer contributions..................................... 25 23
Plan participants' contributions........................... 7 7
Benefits paid.............................................. (42) (49)
------ ------
Fair market value of plan assets at end of year(a)......... $ 325 $ 327
------ ------
Funded status.............................................. $ (289) $ (235)
Unrecognized net experience gain........................... (47) (110)
Unrecognized prior service cost............................ 5 8
Unrecognized transition obligation......................... 214 229
------ ------
Accrued postretirement benefit costs....................... $ (117) $ (108)
====== ======
--------
(a) Principally equity and fixed-income securities.
Assumptions Used for Postretirement Benefits Accounting(a)
2000 1999 1998
----- ----- -----
Percent
Discount rate.............................................. 7.50 7.50 6.75
Salary increase............................................ 4.53 4.50 4.67
Expected long-term rate of return on assets................ 9.25 9.25 9.25
Assumed tax rate(b)........................................ 39.60 39.60 39.60
--------
(a) Reflects weighted averages across all plans.
(b) Applicable to the health care portion of funded postretirement
benefits.
For measurement purposes, a 6% average annual rate of increase in the per
capita cost of covered health care benefits was assumed for 2000 and beyond.
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans.
83
DUKE ENERGY CORPORATION
Notes To Consolidated Financial Statements -- Continued
Sensitivity to Changes in Assumed Health Care Cost Trend Rates
1-Percentage- 1-Percentage-
Point Increase Point Decrease
-------------- --------------
In millions
Effect on total service and interest costs.... $ 2 $ (2)
Effect on postretirement benefit obligation... 27 (25)
18. Quarterly Financial Data (Unaudited)
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -------
In millions, except per share data
2000
Operating revenues................ $7,290 $10,926 $15,691 $15,411 $49,318
Operating income.................. 812 794 1,501 706 3,813
EBIT.............................. 859 837 1,556 762 4,014
Net income........................ 393 329 770 284 1,776
Earnings per share(a)
Basic........................... $ 0.53 $ 0.44 $ 1.04 $ 0.38 $ 2.39
Diluted......................... $ 0.53 $ 0.44 $ 1.03 $ 0.38 $ 2.38
1999
Operating revenues................ $4,178 $ 4,691 $ 6,676 $ 6,221 $21,766
Operating income.................. 645 531 866 (223) 1,819
EBIT.............................. 683 568 908 (116) 2,043
Income before extraordinary item.. 307 288 441 (189) 847
Net income........................ 967 288 441 (189) 1,507
Earnings per share (before
extraordinary item)(a)
Basic........................... $ 0.41 $ 0.39 $ 0.60 $ (0.27) $ 1.13
Diluted......................... $ 0.41 $ 0.39 $ 0.60 $ (0.27) $ 1.13
Earnings per share(a)
Basic........................... $ 1.32 $ 0.39 $ 0.60 $ (0.27) $ 2.04
Diluted......................... $ 1.32 $ 0.39 $ 0.60 $ (0.27) $ 2.03
--------
(a) Restated to reflect the two-for-one common stock split effective
January 26, 2001.
84
DUKE ENERGY CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Additions
---------------------
Balance at Charged to Balance at
Beginning Charged to Other End
of Period Expense Accounts Deductions of Period
---------- ---------- ---------- ---------- ----------
In millions
December 31, 2000:
Injuries and Damages.. $ 902 $ 18 $ 2 $391 $ 531
Allowance for Doubtful
Accounts............. 43 165 8 16 200
Other(a).............. 317 40 60 40 377
------ ------ --- ---- ------
$1,262 $ 223 $70(b) $447 $1,108
December 31, 1999:
Injuries and Damages.. $ 113 $ 900 $-- $111 $ 902
Allowance for Doubtful
Accounts............. 29 16 6 8 43
Other(a).............. 225 134 54 96 317
------ ------ --- ---- ------
$ 367 $1,050 $60(b) $215 $1,262
December 31, 1998(c).... $ 367
(a) Principally consists of property insurance reserves and litigation and
other contingency reserves which are included in "Other Current
Liabilities" or "Deferred Credits and Other Liabilities" in the
Consolidated Balance Sheets.
(b) Principally litigation and other contingency reserves assumed in business
acquisitions.
(c) Principally consists of injury and damages reserves, property insurance
reserves and litigation and other contingency reserves which are included
in "Other Current Liabilities" or "Deferred Credits and Other Liabilities"
in the Consolidated Balance Sheets.
85
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Duke Energy Corporation:
We have audited the accompanying consolidated balance sheets of Duke Energy
Corporation and subsidiaries (Duke Energy) as of December 31, 2000 and 1999,
and the related consolidated statements of income, common stockholders' equity
and comprehensive income, and cash flows for each of the three years in the
period ended December 31, 2000. Our audits also included the consolidated
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,
2000 and 1999, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America. 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.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Charlotte, North Carolina
January 18, 2001
86
RESPONSIBILITY FOR FINANCIAL STATEMENTS
The financial statements of Duke Energy Corporation (Duke Energy) are
prepared by management, who are responsible for their integrity and
objectivity. The statements are prepared in conformity with generally accepted
accounting principles in all material respects and necessarily include
judgments and estimates of the expected effects of events and transactions that
are currently being reported.
Duke Energy's system of internal accounting control is designed to provide
reasonable assurance that assets are safeguarded and transactions are executed
according to management's authorization. Internal accounting controls also
provide reasonable assurance that transactions are recorded properly, so that
financial statements can be prepared according to generally accepted accounting
principles. In addition, accounting controls provide reasonable assurance that
errors or irregularities which could be material to the financial statements
are prevented or are detected by employees within a timely period as they
perform their assigned functions. Duke Energy's accounting controls are
continually reviewed for effectiveness. In addition, written policies,
standards and procedures, and a strong internal audit program augment Duke
Energy's accounting controls.
The Board of Directors pursues its oversight role for the financial
statements through the audit committee, which is composed entirely of
independent directors who are not employees of Duke Energy. The audit committee
meets with management and internal auditors periodically to review accounting
control issues and to monitor each group's discharge of its responsibilities.
The audit committee also meets periodically with Duke Energy's independent
auditors, Deloitte & Touche LLP. The independent auditors have free access to
the audit committee and the Board of Directors to discuss internal accounting
control, auditing and financial reporting matters without the presence of
management.
/s/ Sandra P. Meyer
Sandra P. Meyer
Senior Vice President and Corporate Controller
87
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III.
Item 10. Directors and Executive Officers of the Registrant.
Reference is made to "Executive Officers of Duke Energy" included in "Item
1. Business" of this report. See "The Board of Directors," "Information on the
Board of Directors" and "Other Information" in the proxy statement relating to
Duke Energy's 2001 annual meeting of shareholders (the Proxy Statement),
incorporated herein by reference.
Item 11. Executive Compensation.
See "Compensation" and "Information on the Board of Directors--Compensation
of Directors" in the Proxy Statement, incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
See "Beneficial Ownership" in the Proxy Statement, incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions.
None.
88
PART IV.
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K.
(a) Consolidated Financial Statements, Supplemental Financial Data and
Supplemental Schedule included in Part II of this annual report are as
follows:
Consolidated Financial Statements
Consolidated Statements of Income for the Years Ended December 31,
2000, 1999 and 1998
Consolidated Statements of Cash Flows for the Years Ended December
31, 2000, 1999 and 1998
Consolidated Balance Sheets as of December 31, 2000 and 1999
Consolidated Statements of Common Stockholders' Equity and
Comprehensive Income for the Years Ended December 31, 2000, 1999 and
1998
Notes to Consolidated Financial Statements
Quarterly Financial Data (unaudited) (included in Note 18 to the
Consolidated Financial Statements)
Consolidated Financial Statement Schedule II -- Valuation and Qualifying
Accounts and Reserves for the Years Ended December 31, 2000, 1999 and 1998
Independent Auditors' Report
All other schedules are omitted because of the absence of the conditions
under which they are required or because the required information is
included in the financial statements or notes thereto.
(b) Reports on Form 8-K
A Current Report on Form 8-K filed on December 19, 2000 contained
disclosures under Item 5, Other Events.
(c) Exhibits -- See Exhibit Index immediately following the signature page.
89
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date: March 30, 2001
DUKE ENERGY CORPORATION
(Registrant)
Richard B. Priory
By: _________________________________
Richard B. Priory
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
(i) Principal executive officer:
Richard B. Priory
Chairman of the Board, President and Chief Executive Officer
(ii) Principal financial officer:
Robert P. Brace
Executive Vice President and Chief Financial Officer
(iii) Principal accounting officer:
Sandra P. Meyer
Senior Vice President and Corporate Controller
(iv) All of the Directors:
Richard B. Priory
G. Alex Bernhardt, Sr.
Robert J. Brown
William A. Coley
William T. Esrey
Ann Maynard Gray
Dennis R. Hendrix
Harold S. Hook
George Dean Johnson, Jr.
Max Lennon
Leo E. Linbeck, Jr.
James G. Martin
Date: March 30 , 2001
Robert P. Brace, by signing his name hereto, does hereby sign this document
on behalf of the registrant and on behalf of each of the above-named persons
pursuant to a power of attorney duly executed by the registrant and such
persons, filed with the Securities and Exchange Commission as an exhibit
hereto.
/s/ Robert P. Brace
By: _________________________________
Attorney-In-Fact
90
EXHIBIT INDEX
Exhibits filed herewith are designated by an asterisk (*). All exhibits not
so designated are incorporated by reference to a prior filing, as indicated.
Items constituting management contracts or compensatory plans or arrangements
are designated by a double asterisk (**).
Exhibit
Number
-------
2 Agreement and Plan of Merger, dated as of November 24, 1996, as
amended and restated as of March 10, 1997, among registrant, Duke
Transaction Corporation and PanEnergy Corp (filed with Form 8-K dated
March 20, 1997, File No. 1-4928, as Exhibit 2(a)).
3-A Restated Articles of Incorporation of registrant, dated June 18, 1997
(filed with Form S-8, No. 333-29563, effective June 19, 1997, as
Exhibit 4(G)).
3-B Articles of Amendment to Restated Articles of Incorporation of
registrant (filed with Form 10-K of the registrant for the year ended
December 31, 1999, as Exhibit 3-A).
3-C By-Laws of registrant, as amended (filed with Form S-3, File No. 333-
52204, as Exhibit 4(B)).
4 Rights Agreement, dated as of December 17, 1998, between the
registrant and The Bank of New York, as Rights Agent (filed with Form
8-K dated February 11, 1999).
10-A Agreement, dated March 6, 1978, between the registrant and the North
Carolina Municipal Power Agency No. 1 (filed with Form 8-K for the
month of March 1978, File No. 1-4928).
10-B Agreement, dated August 1, 1980, between the registrant and Piedmont
Municipal Power Agency (filed with Form 8-K for the month of August
1980, File No. 1-4928).
10-C Agreement, dated October 14, 1980, between the registrant and North
Carolina Electric Membership Corporation (filed with Form 10-Q for
the quarter ended September 30, 1980, File No. 1-4928).
10-D Agreement, dated October 14, 1980, between the registrant and Saluda
River Electric Cooperative, Inc. (filed with Form 10-Q for the
quarter ended September 30, 1980, File No. 1-4928).
10-E** Directors' Charitable Giving Program (filed with Form 10-K for the
year ended December 31, 1992, File No. 1-4928, as Exhibit 10-P).
10-F** Estate Conservation Plan (filed with Form 10-K for the year ended
December 31, 1992, File No. 1-4928, as Exhibit 10-R).
10-G** Duke Power Company Stock Incentive Plan (filed as Appendix A to
Schedule 14A of registrant, March 18, 1996, File No. 1-4928).
10-H $1,250,000,000 Five-Year Credit Agreement dated as of August 25,
1997, among registrant, the banks listed therein and Morgan Guaranty
Trust Company of New York, as Administrative Agent (filed with Form
10-K for the year ended December 31, 1997, as Exhibit 10-R).
10-I $950,000,000 Five-Year Credit Agreement dated as of August 25, 1997,
among Duke Capital Corporation, the banks listed therein and The
Chase Manhattan Bank, as Administrative Agent (filed with Form 10-K
for the year ended December 31, 1997, as Exhibit 10-S).
*10-J $600,000,000 364-Day Credit Agreement dated as of August 1, 2000,
among Duke Capital Corporation, the banks listed therein and The
Chase Manhattan Bank, as Administrative Agent.
10-K Formation Agreement between PanEnergy Trading and Market Services,
Inc. and Mobil Natural Gas, Inc. dated May 29, 1996 (filed with Form
10-Q of PanEnergy Corp for the quarter ended June 30, 1996, File No.
1-8157, as Exhibit 2).
91
Exhibit
Number
-------
10-L** Duke Energy Corporation Long-Term Incentive Plan, as amended (filed as
Exhibit A to Schedule 14A of the registrant, March 16, 1998).
10-M** Duke Energy Corporation Policy Committee Short-Term Incentive Plan
(filed as Appendix B to Schedule 14A of the registrant, March 16,
1998).
10-N Stock Purchase Agreement between PanEnergy Corp, Texas Eastern
Corporation and CMS Energy Corporation, dated as of October 31, 1998
(filed as Exhibit 10 to Form 8-K of the registrant, File No. 1-4928,
filed November 5, 1998).
10-O Merger and Purchase Agreement among Union Pacific Resources Company,
Union Pacific Fuels, Inc., Duke Energy Field Services, Inc. and DEFS
Merger Sub Corp., dated as of November 20, 1998 (filed as Exhibit 10
to Form 8-K of the registrant, File No. 1-4928, filed December 1,
1998).
10-P** Duke Energy Corporation Executive Savings Plan (filed with Form 10-K
Report of TEPPCO Partners, LP, File No. 1-10403, for the year ended
December 31, 1999, as Exhibit 10.7).
10-Q** Duke Energy Corporation Executive Cash Balance Plan (filed with Form
10-K Report of TEPPCO Partners, LP, File No. 1-10403, for the year
ended December 31, 1999, as Exhibit 10.8).
10-R** Duke Energy Corporation Retirement Benefit Equalization Plan (filed
with Form 10-K Report of TEPPCO Partners, LP, File No. 1-10403, for
the year ended December 31, 1999, as Exhibit 10.9).
10-S** Form of Key Employee Severance Agreement and Release between the
registrant and certain key executives (filed with Form 10-K of the
registrant for the year ended December 31, 1999, as Exhibit 10-BB).
10-T** Form of Change in Control Agreement between the registrant and certain
key executives (filed with Form 10-K of the registrant for the year
ended December 31, 1999, as Exhibit 10-CC).
10-U Contribution Agreement by and among Phillips Petroleum Company, Duke
Energy Corporation and Duke Energy Field Services L.L.C., dated as of
December 16, 1999 (filed as Exhibit 2.1 to Form 8-K of the registrant,
filed December 30, 1999).
10-V Governance Agreement by and among Phillips Petroleum Company, Duke
Energy Corporation and Duke Energy Field Services L.L.C., dated as of
December 16, 1999 (filed as Exhibit 2.2 to Form 8-K of the registrant,
filed December 30, 1999).
10-W First Amendment to Contribution and Governance Agreement dated as of
March 23, 2000 among Phillips Petroleum Company, Duke Energy
Corporation and Duke Energy Field Services, LLC (incorporated by
reference to Exhibit 10.7 (b) to Registration Statement on Form S-1/A
(Registration No. 333-32502) of Duke Energy Field Services
Corporation, filed on March 27, 2000).
10-X Parent Company Agreement dated as of March 31, 2000 among Phillips
Petroleum Company, Duke Energy Corporation, Duke Energy Field
Services, LLC and Duke Energy Field Services Corporation (incorporated
by reference to Exhibit 10.10 to Registration Statement on Form S-1/A
(Registration No. 333-32502) of Duke Energy Field Services
Corporation, filed on May 4, 2000).
10-Y Amended and Restated Limited Liability Company Agreement of Duke
Energy Field Services, LLC by and between Phillips Gas Company and
Duke Energy Field Services Corporation, dated as of March 31, 2000
(filed as Exhibit 3.1 to Form 10 of Duke Energy Field Services LLC,
File No. 000-31095, filed July 20, 2000).
10-Z First Amendment to the Parent Company Agreement dated as of May 25,
2000 among Phillips Petroleum Company, Duke Energy Corporation, Duke
Energy Field Services, LLC and Duke Energy Field Services Corporation
(filed as Exhibit 10.8 (b) to Form 10 of Duke Energy Field Services
LLC, File No. 000-31095, filed July 20, 2000).
92
Exhibit
Number
-------
*12 Computation of Ratio of Earnings to Fixed Charges.
*21 List of Subsidiaries.
*23(a) Independent Auditors' Consent.
*24(a) Power of attorney authorizing Robert P. Brace and others to sign the
annual report on behalf of the registrant and certain of its directors
and officers.
*24(b) Certified copy of resolution of the Board of Directors of the
registrant authorizing power of attorney.
The total amount of securities of the registrant or its subsidiaries
authorized under any instrument with respect to long-term debt not filed as an
exhibit does not exceed 10% of the total assets of the registrant and its
subsidiaries on a consolidated basis. The registrant agrees, upon request of
the Securities and Exchange Commission, to furnish copies of any or all of such
instruments.
93