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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, 2001 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)
North Carolina 56-0205520
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
526 South Church Street, 28202-1904
Charlotte, North Carolina
(Address of principal (Zip Code)
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, 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.
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,
2002....................................................................................................... $27,435,000,000
Number of shares of Common Stock, without par value, outstanding at February 28, 2002....................... 778,199,474
Documents incorporated by reference:
The registrant is incorporating herein by reference certain sections of the
proxy statement relating to the 2002 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, 2001
TABLE OF CONTENTS
Item Page
- ---- ----
PART I.
1. Business............................................................................. 1
General............................................................................. 1
Franchised Electric................................................................. 4
Natural Gas Transmission............................................................ 8
Field Services...................................................................... 11
North American Wholesale Energy..................................................... 13
International Energy................................................................ 16
Other Energy Services............................................................... 17
Duke Ventures....................................................................... 17
Environmental Matters............................................................... 18
Geographic Regions.................................................................. 19
Employees........................................................................... 19
Operating Statistics................................................................ 20
Executive Officers of Duke Energy................................................... 21
2. Properties........................................................................... 22
3. Legal Proceedings.................................................................... 24
4. Submission of Matters to a Vote of Security Holders.................................. 26
PART II.
5. Market for Registrant's Common Equity and Related Stockholder Matters................ 27
6. Selected Financial Data.............................................................. 28
7. Management's Discussion and Analysis of Results of Operations and Financial Condition 29
7A. Quantitative and Qualitative Disclosures About Market Risk........................... 61
8. Financial Statements and Supplementary Data.......................................... 62
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 111
PART III.
10. Directors and Executive Officers of the Registrant................................... 111
11. Executive Compensation............................................................... 111
12. Security Ownership of Certain Beneficial Owners and Management....................... 111
13. Certain Relationships and Related Transactions....................................... 111
PART IV.
14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K...................... 112
Signatures........................................................................... 113
Exhibit Index........................................................................ 114
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Duke Energy's reports, filings and other public announcements may include
statements that reflect 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.
Generally, the words "may," "could," "project," "believe," "anticipate,"
"expect," "estimate," "plan," "forecast," "intend" and similar words identify
forward-looking statements, which generally are not historical in nature. All
such statements (other than statements of historical facts), including
statements regarding operating performance, financial position, business
strategy, budgets, projected costs, plans and objectives of management for
future operations and events or developments that we expect or anticipate will
occur in the future, are forward looking. Forward-looking statements are
subject to certain risks and uncertainties that could, and often do, cause
actual results to differ from Duke Energy's historical experience and our
present expectations or projections. Accordingly, there can be no assurance
that actual results will not differ materially from those expressed or implied
by the forward-looking statements. Caution should be taken not to place undue
reliance on any such forward-looking statements. For a discussion of some
factors that could cause results 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."
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PART I.
Item 1. Business.
GENERAL
Duke Energy Corporation (collectively with its subsidiaries, Duke Energy),
an integrated provider of energy and energy services, offers physical delivery
and management of both electricity and natural gas throughout the U.S. and
abroad. Duke Energy provides these and other services through seven business
segments.
Franchised Electric generates, transmits, distributes and sells electricity
in central and western North Carolina and western South Carolina. It conducts
operations 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).
Throughout 2001, Natural Gas Transmission provided transportation and
storage of natural gas for customers throughout North America, primarily in the
Mid-Atlantic, New England and southeastern states. It conducted operations
primarily through Duke Energy Gas Transmission Corporation. Through the
acquisition of Westcoast Energy Inc. (Westcoast) on March 14, 2002, Natural Gas
Transmission added a significant network of mostly Canadian-based natural gas
assets, including transmission pipeline, storage capacity and distribution
systems. (See "Natural Gas Transmission" in this section for additional
information.) Interstate natural gas transmission and storage operations are
subject to the FERC's rules and regulations.
Field Services gathers, processes, transports, markets and stores natural
gas and produces, transports, markets and stores natural gas liquids (NGLs). It
conducts operations primarily through Duke Energy Field Services, LLC (DEFS),
which is approximately 30% owned by Phillips Petroleum. Field Services operates
gathering systems in western Canada and 11 contiguous states in the U.S. Those
systems serve major natural gas-producing regions in the Rocky Mountain,
Permian Basin, Mid-Continent, East Texas-Austin Chalk-North Louisiana, and
onshore and offshore Gulf Coast areas.
North American Wholesale Energy (NAWE) develops, operates and manages
merchant generation facilities and engages in commodity sales and services
related to natural gas and electric power. NAWE conducts these operations
primarily through Duke Energy North America, LLC (DENA) and Duke Energy Trading
and Marketing, LLC (DETM). DETM is approximately 40% owned by Exxon Mobil
Corporation. NAWE also includes Duke Energy Merchants Holdings, LLC (DEM),
which develops new business lines in the evolving energy commodity markets
other than natural gas and power. NAWE conducts business primarily throughout
the U.S. and Canada.
International Energy develops, operates and manages natural gas
transportation and power generation facilities and engages in energy trading
and marketing of natural gas and electric power. It conducts operations
primarily through Duke Energy International, LLC (DEI) and its activities
target the Latin American, Asia-Pacific and European regions.
Other Energy Services is a combination of businesses that provide
engineering, consulting, construction and integrated energy solutions
worldwide, primarily through Duke Engineering & Services, Inc. (DE&S),
Duke/Fluor Daniel (D/FD) and DukeSolutions, Inc. (DukeSolutions). D/FD is a
50/50 partnership between Duke Energy and Fluor Enterprises, Inc., a wholly
owned subsidiary of Fluor Corporation. (See Note 8 to the Consolidated
Financial Statements, "Investment in Affiliates and Related Party
Transactions.") On January 31, 2002, Duke Energy announced the planned sale of
DE&S to Framatome ANP, Inc. and, on March 13, 2002,
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Duke Energy announced the planned sale of DukeSolutions to Ameresco, Inc. (See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition, Current Issues -- Subsequent Events.")
Duke Ventures is composed of other diverse businesses, operating primarily
through Crescent Resources, LLC (Crescent), DukeNet Communications, LLC
(DukeNet) and Duke Capital Partners, LLC (DCP). Crescent develops high-quality
commercial, residential and multi-family real estate projects and manages land
holdings primarily in the southeastern and southwestern U.S. DukeNet provides
fiber optic networks for industrial, commercial and residential customers. DCP,
a wholly owned merchant banking company, provides debt and equity capital and
financial advisory services to the energy industry.
Duke Energy is a North Carolina corporation. Its principal executive offices
are located at 526 South Church Street, Charlotte, NC 28202-1803. The telephone
number is 704-594-6200.
Certain terms used to describe Duke Energy's business are explained below.
Asset Optimization. The process of maximizing the returns on a portfolio of
assets through the use of hedging strategies involving energy contracts.
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). An entity that 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.
Liquid Market. A market in which selling and buying can be accomplished with
minimal price change; such a market has a high level of trading activity and
open interest.
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.
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Logistics & Optimization. The act of maximizing physical positions through
arbitrage, especially on contractual assets such as storage, transportation,
generation and transmission.
Mark-to-Market. The process whereby derivatives or energy trading contracts
are adjusted to market value, and the unrealized gain or loss is recognized in
current earnings and on the balance sheet.
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.
Origination. Identification and execution of physical energy related
transactions throughout the value chain.
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.
Tolling. Process whereby a party moves fuel to a power generator and
receives kilowatt hours in return for a pre-established fee.
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.
Volatility. An annualized measure of the fluctuation in the price of an
energy contract. Implied volatility is a measure of what the market values
volatility to be, as reflected in the option's price.
Watt. A measure of power production or usage equal to one joule per second.
The following sections describe the business and operations of each of Duke
Energy's segments. (For more information on 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 on Duke Energy's business segments, see Note 3 to the
Consolidated Financial Statements, "Business Segments.")
3
FRANCHISED ELECTRIC
Service Area and Customers
Franchised Electric generates, transmits, distributes and sells electricity.
Its service area covers about 22,000 square miles with an estimated population
of 5.7 million in central and western North Carolina and western South
Carolina. Franchised Electric supplies electric service 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
wholesale to incorporated municipalities and to public and private utilities.
In addition, municipal and cooperative customers who purchased portions of the
Catawba Nuclear Station buy power through contractual agreements. (For
statistics related to gigawatt-hour sales by customer type, see "Operating
Statistics" in this section. For more information on the Catawba Nuclear
Station joint ownership, see Note 5 to the Consolidated Financial Statements,
"Joint Ownership of Generating Facilities.")
Industrial and commercial development in Franchised Electric's service area
is highly diversified. The textile industry, machinery and equipment
manufacturing, and chemical industries are of major significance to the area's
economy. Other industries operating in the area include rubber and plastic
products, paper and related products, and other manufacturing and service
businesses. The textile industry, the largest industry served by Franchised
Electric, accounted for approximately $353 million of Franchised Electric's
revenues for 2001, representing 8% of total electric revenues and 32% of
industrial revenues. Franchised Electric normally experiences seasonal peak
loads in summer and winter.
[MAP OF SERVICE AREA]
4
Energy Capacity and Resources
Electric energy for Franchised Electric's customers is generated by three
nuclear generating stations with a combined net capacity of 5,409 megawatts
(MW) (including 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 2,791 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 and purchased on the open
market. Franchised Electric has interconnections and arrangements with its
neighboring utilities to facilitate planning, emergency assistance, exchange of
capacity and energy, and reliability of power supply. Franchised Electric
expects that additional construction, purchased power contracts and open market
purchases will meet customers' energy needs in the future. (For statistics on
sources of electric energy, see "Operating Statistics" in this section.)
Fuel Supply
Franchised Electric relies principally on coal and nuclear fuel for its
generation of electric energy. The following table lists Franchised Electric's
sources of power and fuel costs for the three years ending December 31, 2001.
Cost of Fuel per Net
Generation by Source Kilowatt-hour
(Percent) Generated (Cents)
-------------------- --------------------
2001 2000 1999 2001 2000 1999
----- ----- ----- ----- ---- ----
Coal............................. 50.9 50.9 50.4 1.48 1.29 1.33
Nuclear(a)....................... 48.6 48.1 48.0 0.42 0.42 0.43
Oil and gas(b)................... 0.2 0.5 0.8 11.48 7.32 4.51
----- ----- -----
All fuels (cost based on weighted
average)(a).................... 99.7 99.5 99.2 0.98 0.91 0.92
Hydroelectric(c)................. 0.3 0.5 0.8
----- ----- -----
100.0 100.0 100.0
===== ===== =====
- --------
(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 coal are obtained under supply
contracts with mining operators who mine both underground and at the surface.
Franchised Electric has an adequate supply of coal to fuel its current
operations. Expiration dates for its supply contracts, which have price
adjustment provisions, range from 2002 to 2003. Duke Energy expects to renew
these contracts or enter into similar contracts with other suppliers for the
quantities and quality of coal required. The coal purchased under these
contracts is produced from mines in eastern Kentucky, southern West Virginia
and southwestern Virginia. Franchised Electric uses spot market purchases to
meet coal requirements not met by supply contracts.
The average sulfur content of coal purchased by Franchised Electric is
approximately 1%. This satisfies the current emission limitation for sulfur
dioxide for existing facilities. (See "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. Developing nuclear generating fuel generally involves the mining
and milling of uranium ore to produce uranium concentrates, the conversion of
uranium concentrates to uranium hexafluoride gas, enrichment of that gas, and
then the fabrication of the enriched uranium hexafluoride into usable fuel
assemblies.
5
Franchised Electric has contracted for uranium materials and services
required to fuel the Oconee, McGuire and Catawba Nuclear Stations. Uranium
concentrates, conversion services and enrichment services are primarily met
through a diversified portfolio of long-term supply contracts. The contracts
are diversified by supplier, country of origin and pricing. Franchised Electric
staggers its contracting so that its portfolio of long-term contracts covers
the majority of its fuel requirements at Oconee, McGuire, and Catawba in the
near term, but so that its level of coverage decreases each year into the
future. Due to the technical complexities of changing suppliers of fuel
fabrication services, Franchised Electric generally sole sources these services
to domestic suppliers on a plant by plant basis using multi-year contracts.
Based upon current projections, Franchised Electric's existing portfolio of
contracts will meet the requirements of Oconee, McGuire, and Catawba Nuclear
Stations through the following years:
Uranium Conversion Enrichment Fabrication
Nuclear Station Material Service Service Service
--------------- -------- ---------- ---------- -----------
Oconee..... 2003 2003 2005 2006
McGuire.... 2003 2003 2005 2009
Catawba.... 2003 2003 2005 2009
After the years indicated above, a portion of the fuel requirements at
Oconee, McGuire, and Catawba are covered by long-term contracts. For
requirements not covered under long-term contracts, Duke Energy believes it
will be able to renew contracts as they expire or enter into similar
contractual arrangements with other suppliers of nuclear fuel materials and
services. Near-term requirements not met by long-term supply contracts have
been and are expected to be fulfilled with uranium spot market purchases.
Duke Energy owns and operates the McGuire and Oconee Nuclear Stations and
operates and has a partial ownership interest in the Catawba Nuclear Station.
The McGuire and Catawba Nuclear Stations have two nuclear reactors each and
Oconee has three nuclear 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. The other joint owners of the Catawba Nuclear Station reimburse Duke
Energy for certain expenses associated with nuclear insurance premiums. The
Price-Anderson Act requires Duke Energy to insure against public liability
claims resulting from nuclear incidents to the full limit of liability,
approximately $9.5 billion. (See Note 15 to the Consolidated Financial
Statements, "Commitments and Contingencies--Nuclear Insurance," for more
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 (studies are completed every five
years). This includes costs related to Duke Energy's 12.5% ownership in the
Catawba Nuclear Station. The other joint owners of the Catawba Nuclear Station
are responsible for decommissioning costs related to their ownership interests
in the station. (See Note 11 to the Consolidated Financial Statements, "Nuclear
Decommissioning Costs," for more 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. Mixed oxide
fuel is fabricated from plutonium from the government's surplus plutonium and
is similar to conventional uranium fuel. Before using the fuel, Duke Energy
must apply for and obtain amendments to the facilities' operating licenses from
the Nuclear Regulatory Commission (NRC). Mixed oxide fuel is scheduled to be
used at McGuire and Catawba Nuclear Stations no earlier than 2007.
After spent fuel is removed from a nuclear reactor, it is cooled in a spent
fuel pool at the nuclear station. Under provisions of the Nuclear Waste Policy
Act of 1982, Duke Energy contracted with the DOE for the disposal of spent
nuclear fuel. The DOE failed to begin accepting spent nuclear fuel on January
31, 1998, the date specified by the Nuclear Waste Policy Act and in Duke
Energy's contract with the DOE. In 1998, Duke Energy filed a claim with the
U.S. Court of Federal Claims against the DOE related to the DOE's failure to
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accept commercial spent nuclear fuel by the required date. Damages claimed in
the lawsuit are based upon Duke Energy's costs incurred as a result of the
DOE's partial material breach of its contract, including the cost of securing
additional spent fuel storage capacity. Duke Energy will continue to safely
manage its spent nuclear fuel until the DOE accepts it.
Competition
Electric industry restructuring is changing the industry. Duke Energy is
monitoring progress toward a more competitive environment and actively
participates in regulatory reform deliberations in North Carolina and South
Carolina. However, movement toward retail deregulation in these and other
states has slowed due to recent deregulation developments in California. (For
more information, see "Management's Discussion and Analysis of Results of
Operations and Financial Condition, Current Issues--Electric Competition and
Current Issues--California Issues.")
Franchised Electric competes in some areas with government-owned power
systems, municipally owned electric systems, rural electric cooperatives and
other private utilities. By statute, the NCUC and the PSCSC assign all service
areas outside municipalities in North Carolina and South Carolina to regulated
electric utilities and rural electric cooperatives. Substantially all of the
territory comprising Franchised Electric's service area has been assigned in
this manner. In unassigned areas, Franchised Electric's business 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, competition
continues between municipalities and other electric suppliers outside the
municipalities' corporate limits, subject to the regulation of the PSCSC. In
addition, Franchised Electric continues to compete with 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 some
electric sales to wholesale customers. (For more information on 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. Certificates of public convenience and necessity issued by the
FERC, the NCUC and the PSCSC authorize Franchised Electric to construct and
operate its electric facilities, and to sell electricity to retail and
wholesale customers. Prior approval from the NCUC and the PSCSC is required to
issue securities.
NCUC, PSCSC and FERC regulations govern access to regulated electric
customer data by non-regulated entities, and services provided between
regulated and non-regulated affiliated entities. These regulations affect
NAWE's and Other Energy Services' activities with Franchised Electric.
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 rules, provides
energy suppliers, including Duke Energy, with opportunities to sell and deliver
capacity and energy at market-based prices. From the FERC's open-access rule,
Franchised Electric obtained the rights to sell capacity and energy at
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 opportunities
to seek other competitive suppliers for their capacity and energy requirements.
In 1999 and 2000, the FERC issued its Order 2000 and Order 2000-A regarding
Regional Transmission Organizations (RTOs). These orders set minimum
characteristics and functions RTOs must meet, including independent authority
to establish the terms and conditions of transmission service over the
facilities they control. The orders provide for an open and flexible RTO
structure to meet the needs of the market, and for the possibility of incentive
ratemaking and other benefits for transmission owners that participate.
7
As a result of these rulemakings, Duke Energy and two other investor-owned
utilities, Carolina Power & Light Company and South Carolina Electric & Gas
Company, planned to establish GridSouth Transco, LLC (GridSouth), as an RTO
responsible for the control of the companies' combined transmission systems. In
March 2001, GridSouth received provisional approval from the FERC. However, in
July 2001, the FERC issued orders recommending that utilities throughout the
U.S. combine their transmission systems to create four large independent
regional operators, one each in the Northeast, Southeast, Midwest and West. The
FERC ordered GridSouth and other utilities in the Southeast to join in 45 days
of mediation to negotiate terms of a Southeast RTO. The FERC has not issued an
order specifically based on those proceedings.
Duke Energy, Carolina Power & Light Company and South Carolina Electric &
Gas Company remain committed to the GridSouth RTO, but due to regulatory
uncertainties in the RTO arena, the companies have withdrawn their applications
to the PSCSC and NCUC to transfer functional control of their electric
transmission assets to GridSouth. The companies intend to file new applications
before the state commissions in the near future, including a revised GridSouth
structure designed to meet the needs of customers and regulators. Also, in
January of 2002, GridSouth signed a memorandum of understanding with the
representatives of SeTrans Grid Company (SeTrans), a group of investor-owned
utilities and public power entities in several southeastern states seeking to
form an RTO, to cooperate in discussing potential operational relationships
between GridSouth and SeTrans and the structure of wholesale electric markets
in the southeast U.S.
The actual structure of GridSouth or an alternative combined transmission
structure and the date it will become operational depend upon the resolution of
all regulatory approvals and technical issues. Management believes that the
result of this process, and the establishment and operation of GridSouth or an
alternative combined transmission system structure, will have no material
adverse effect on Duke Energy's future consolidated results of operations, cash
flows or financial position.
Franchised Electric is subject to the NRC jurisdiction for the design,
construction and operation of its nuclear generating facilities. In 2000, the
NRC renewed the operating license for Duke Energy's three Oconee nuclear units
through 2033 and 2034. Applications to renew the operating licenses for Duke
Energy's Catawba and McGuire nuclear units were filed with the NRC in June
2001. These operating licenses currently expire between 2021 and 2026.
Franchised Electric's hydroelectric generating facilities are licensed by the
FERC under Part I of the Federal Power Act, with license terms expiring from
2002 to 2036.
The FERC has authority to extend hydroelectric generating licenses. Duke
Energy expects to receive a new license for one of its hydroelectric facilities
by the end of 2002. Other hydroelectric facilities whose licenses expire
between 2005 and 2008 are in various stages of relicensing.
Franchised Electric is subject to the jurisdiction of the Environmental
Protection Agency (EPA) and state environmental agencies. (For a discussion of
environmental regulation, see "Environmental Matters" in this section.)
NATURAL GAS TRANSMISSION
During 2001, Natural Gas Transmission provided transportation and storage of
natural gas for customers primarily in the Mid-Atlantic, New England and
southeastern states of the U.S. It conducted operations primarily through Texas
Eastern Transmission, LP (Texas Eastern), Algonquin Gas Transmission Company
(Algonquin), East Tennessee Natural Gas Company (ETNG) and Market Hub Partners
(MHP). Through the acquisition of Westcoast on March 14, 2002, Natural Gas
Transmission added a significant network of mostly Canadian-based natural gas
assets, including transmission and gathering pipelines, storage capacity and
distribution systems. (For more information on the Westcoast acquisition, see
Note 2 to the Consolidated Financial Statements, "Business Acquisitions and
Dispositions.")
8
Investments in 2001 included a 37.5% ownership interest in the Maritimes &
Northeast Pipeline (Maritimes & Northeast), which has a design capacity of 530
million cubic feet per day (MMcf/d) in Canada and 422 MMcf/d in the U.S.
Maritimes & Northeast was placed in service and received the first delivery of
natural gas from the Sable Offshore Energy Project near Nova Scotia in December
1999. During 2001, Duke Energy operated the U.S. portion of Maritimes &
Northeast. Natural gas deliveries by Maritimes & Northeast were 166 trillion
British thermal units (TBtu) in 2001 and 145 TBtu in 2000. As part of the
Westcoast acquisition, Duke Energy's ownership interest in Maritimes &
Northeast increased to 75%.
On February 1, 2001, Duke Energy and The Williams Companies, Inc. (Williams)
jointly purchased Gulfstream Natural Gas System, LLC from the Coastal
Corporation. When completed, the approximately 750-mile Gulfstream gas pipeline
will originate near Mobile, Alabama, and cross the Gulf of Mexico to deliver
natural gas to the growing Florida electric generation market. Construction
began during mid-2001 and the system is expected to be in-service in two
phases, in mid-2002 and mid-2003. Duke Energy and Williams will jointly operate
the pipeline.
For 2001, Natural Gas Transmission's proportional throughput for its
pipelines totaled 1,710 TBtu, compared to 1,771 TBtu in 2000, a 3% decrease.
This includes throughput on Natural Gas Transmission's wholly-owned interstate
pipelines and its proportional share of throughput on equity investment
pipelines. (See natural gas delivery statistics under "Operating Statistics" in
this section.) 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. Demand on Natural Gas Transmission's interstate pipeline
systems is seasonal, with the highest throughput occurring during 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 OF SERVICE AREA]
9
Prior to the acquisition of Westcoast on March 14, 2002, Natural Gas
Transmission's interstate pipeline systems consisted of approximately 12,000
miles of pipe, including 830 miles related to Duke Energy's ownership interest
in Maritimes & Northeast. The pipeline systems received natural gas from major
North American producing regions for delivery to markets primarily in the
Mid-Atlantic, southeastern and New England states.
MHP owns natural gas salt cavern facilities in south Texas and Louisiana
with a total storage capacity of approximately 26 billion cubic feet (Bcf). 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. Texas Eastern and ETNG 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. Texas Eastern has two joint-venture storage facilities in
Pennsylvania and one wholly owned and operated storage field in Maryland. Texas
Eastern's certificated working capacity in these three fields is 75 Bcf. ETNG
has a liquefied natural gas storage facility in Tennessee with a certificated
working capacity of 1.2 Bcf. Algonquin owns no storage fields.
The acquisition of Westcoast on March 14, 2002, added approximately 9,800
miles of transmission pipeline, approximately 2,400 miles of gathering pipeline
and approximately 19,700 miles of distribution pipeline to Natural Gas
Transmission's systems. This includes proportional ownership interest in all
pipelines that are not wholly owned. The Westcoast acquisition also added
approximately 150 Bcf of natural gas storage capacity. The assets acquired in
the Westcoast acquisition are primarily located in western Canada, Ontario and
along Canada's Atlantic Coast. The U.S. assets acquired in the Westcoast
acquisition are primarily located around the Great Lakes and the Northeast U.S.
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. Natural Gas Transmission competes
directly with other interstate pipelines serving the Mid-Atlantic, northeastern
and southeastern states, and storage facilities in south Texas and Louisiana.
With the acquisition of Westcoast, Natural Gas Transmission will also compete
directly with other Canadian based pipelines and storage facilities. The
principal elements of competition are rates, terms of service, and flexibility
and reliability of service.
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, governmental regulations, the capability to convert to alternative
fuels, weather and other factors 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 via interstate commerce for resale. (For more information on 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 pipelines and related facilities used in the
transportation, storage and sale of natural gas in interstate commerce,
including the extension, enlargement or abandonment of such facilities. Texas
Eastern, Algonquin, ETNG, MHP and Maritimes & Northeast hold certificates of
public convenience and necessity issued by the FERC, authorizing them to
construct and operate pipelines, facilities and related properties, and to
transport and store natural gas via 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.
10
The FERC regulations govern access to regulated natural gas transmission
customer data by non-regulated entities and to services provided between
regulated and non-regulated affiliated entities. These regulations affect the
activities of NAWE with Natural Gas Transmission.
Natural Gas Transmission is subject to the jurisdiction of the EPA and state
environmental agencies. (For a discussion of environmental regulation, see
"Environmental Matters" in this section.) Natural Gas Transmission is also
subject to the Natural Gas Pipeline Safety Act of 1968, which regulates gas
pipeline and liquefied natural gas plant safety requirements.
The Canadian assets acquired through the Westcoast acquisition are subject
to regulation by the National Energy Board and provincial agencies within
Canada, such as the Ontario Energy Board and the British Columbia Utilities
Commission.
FIELD SERVICES
Field Services gathers, processes, transports, markets and stores natural
gas and produces, transports, markets and stores NGLs. Field Services gathers
natural gas from production wellheads in western Canada and 11 contiguous
states in the U.S. Those systems serve major gas-producing regions in the Rocky
Mountain, Permian Basin, Mid-Continent, East Texas-Austin Chalk-North Louisiana
areas, as well as onshore and offshore Gulf Coast areas. Field Services owns
and operates approximately 57,000 miles of natural gas gathering systems with
approximately 40,000 active receipt points. Field Services conducts its
operations primarily through DEFS, which is approximately 30% owned by Phillips
Petroleum.
Field Services' natural gas processing operations separate raw natural gas
that has been gathered on its systems and third-party systems into NGLs and
residue gas. Field Services processes the raw natural gas at the 64 natural gas
processing facilities that it owns and operates and at 12 third-party operated
facilities in which it has an equity interest.
The NGLs separated from the raw natural gas are either sold and transported
as NGL raw mix or further separated through a process known as fractionation
into their individual components (ethane, propane, butanes and natural
gasoline) and then sold as components. Field Services fractionates NGL raw mix
at 12 processing facilities that it owns and operates and at two third-party
operated fractionators in which it has an equity interest. Field Services sells
NGLs to a variety of customers ranging from large, multi-national petrochemical
and refining companies to small regional retail propane distributors.
Substantially all of its NGL sales are made at market-based prices. At four
plants, Field Services also extracts helium from the residue gas stream.
The residue gas separated from the raw natural gas is sold at market-based
prices to marketers or end-users, including large industrial customers and
natural gas and electric utilities serving individual consumers. Field Services
markets residue gas through its wholly-owned gas marketing company. Field
Services also stores residue gas at its nine billion cubic foot natural gas
storage facility.
The following map includes Field Services' natural gas gathering systems,
intrastate pipelines, regional offices and supply areas. The map also shows
Natural Gas Transmission's interstate pipeline systems.
11
[MAP OF SERVICE AREA]
Field Services also owns Texas Eastern Products Pipeline Company (TEPPCO),
the general partner of TEPPCO Partners, L.P., a publicly traded limited
partnership which owns and operates a network of pipelines for refined products
and crude oil. TEPPCO is responsible for the management and operations of
TEPPCO Partners, L.P.
Field Services' operating results are significantly impacted by changes in
NGL prices, which decreased approximately 15% in 2001 compared to 2000. (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.)
Field Services' activities can fluctuate in response to seasonal demand for
natural gas. (See Field Services' "Operating Statistics" in this section.)
Competition
Field Services competes with major integrated oil companies, major
interstate and intrastate pipelines, national and local natural gas gatherers,
and 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 based primarily on the
reputation, efficiency and reliability of operations, the availability of
gathering and transportation to high demand markets, the pricing arrangement
offered by the gatherer/processor and the ability of the gatherer/processor to
obtain a satisfactory price for the producer's residue gas and extracted NGLs.
Competition for sales customers is based primarily upon reliability and price
of delivered natural gas and NGLs.
12
Regulation
The intrastate pipelines owned by Field Services are subject to state
regulation. To the extent they provide services under Section 311 of the
Natural Gas Policy Act of 1978, they are also subject to FERC regulation.
However, most of Field Services' natural gas gathering activities are not
subject to FERC regulation.
Field Services is subject to the jurisdiction of the EPA and state
environmental agencies. (For more information, see "Environmental Matters" in
this section.) Some Field Services' operations are subject to the jurisdiction
of the Department of Transportation and state transportation agencies. Their
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.
Field Services' Canadian assets are regulated by the Alberta Energy and
Utilities Board and the National Energy Board.
NORTH AMERICAN WHOLESALE ENERGY
NAWE develops, operates and manages merchant generation facilities and
engages in commodity sales and services related to natural gas and electric
power. NAWE conducts these operations primarily through DENA and DETM. DETM is
approximately 40% owned by Exxon Mobil Corporation. NAWE also includes DEM,
which develops new business lines in the evolving energy commodity markets
other than natural gas and power. NAWE conducts business primarily throughout
the U.S. and Canada.
DENA is an integrated energy business that develops, owns and manages a
portfolio of merchant generation facilities. Through its portfolio management
strategy, DENA invests in markets that have capacity needs and divests its
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 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
7,406 MW of gross operating generation and has approximately 9,070 MW of
projects under construction, which are slated for completion to meet summer
peak demand (6,620 MW in 2002 and 2,450 MW in 2003). In addition, DENA has
approximately 13,000 MW in advanced development scheduled to begin operation
between 2003 and 2005.
13
The following map shows DENA's power generation facilities.
[MAP OF SERVICE AREA]
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 DETM ownership. (See "Management's
Discussion and Analysis of Results of Operations and Financial Condition,
Current Issues--Litigation and Contingencies, Exxon Mobil Corporation
Arbitration" and Note 15 to the Consolidated Financial Statements, "Commitments
and Contingencies--Litigation and Contingencies.")
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. On-system, DETM generally purchases natural gas from producers
connected to Field Services' facilities and delivers the gas to an intrastate
or interstate pipeline for redelivery to another customer, using Natural Gas
Transmission's pipelines when prudent. Off-system, DETM purchases natural gas
from producers, pipelines and other suppliers not connected with Duke Energy's
facilities for resale to customers. DETM is committed to market substantially
all of Exxon Mobil's U.S. and Canadian natural gas production through 2006.
DETM's electricity marketing operations involve purchasing electricity from
third-party suppliers and from DENA's domestic generation facilities for resale
to customers.
14
The vast majority of DETM's portfolio of short-term and long-term sales
agreements incorporate market-sensitive pricing terms. Long-term gas purchase
agreements with producers, principally related to 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" and Note 7 to the
Consolidated Financial Statements, "Derivative Instruments, Hedging Activities
and Credit Risk.")
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. DEM also invests capital in limited hydrocarbon
exploration and production prospects through non-operating working interests.
DETM's and DEM's activities can fluctuate in response to seasonal demand for
electricity, natural gas and other energy-related commodities. (See "Operating
Statistics" in this section.)
Competition
DETM competes for natural gas supplies and in marketing natural gas,
electricity and other energy-related commodities. DEM competes for other
energy-related commodities. Competitors include major integrated oil companies,
major interstate pipelines and their marketing affiliates, brokers, marketers
and distributors, electric utilities and other electric power marketers. The
price of commodities and services delivered, along with the quality and
reliability of services provided, drive competition in the energy marketing
business.
DENA experiences substantial competition from utilities as well as other
merchant electric generation companies in the U.S.
Regulation
NAWE's energy marketing activities may, in some 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 to the California
Independent System Operator electricity under "reliability must run"
agreements, those sales are made at the FERC regulated rates.
As described in Note 15 to the Consolidated Financial Statements,
"Commitments and Contingencies--California Issues," the causes of higher
wholesale electric prices in California in 2000 are under investigation. During
March 2001, the FERC ordered several electricity suppliers, including DETM, to
(i) refund or offset prices bid for power in California during Stage 3
emergencies in January and February 2001, to the extent such prices exceeded a
FERC-established proxy 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. As a result, the DETM bids exceeded the FERC-established proxy
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 collected payments based on the FERC-established proxy price. In
June 2001, DETM offset approximately $20 million against amounts owed by the
California Independent System Operator and the California Power Exchange for
electricity sales during January and February 2001. It is expected that the
FERC will issue additional orders with respect to sales in California from
October 2 through December 31, 2000, and periods following February 2001. Any
such actions are subject to reconsideration or appeal. Management
15
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" in this
section.)
INTERNATIONAL ENERGY
International Energy develops, operates and manages natural gas and power
generation facilities and engages in energy trading and marketing of natural
gas and electric power. It conducts operations primarily through DEI and its
activities target the Latin American, Asia-Pacific and European regions.
Liberalization of energy markets abroad and privatization of energy
infrastructure are providing substantial growth opportunities for International
Energy. In Latin America, the Asia-Pacific region and Europe, International
Energy is building and managing integrated energy businesses by building,
through development or acquisition, regional energy portfolios that include the
control and operation of natural gas and power facilities, and energy trading
and marketing businesses. From this platform, International Energy provides
customers with energy supply at competitive prices, manages the logistics
associated with natural gas and power delivery, and offers a number of services
that allow customers to improve energy efficiency and hedge their commodity
price exposure. International Energy's customers include retail distributors,
electric utilities, independent power producers, large industrial companies,
governments, gas and oil producers and mining operations. International Energy
is committed to building integrated regional businesses that provide customers
with a full range of innovative and competitively priced energy services.
International Energy owns, operates or has substantial interests in
approximately 5,200 MW of generation facilities and 1,100 miles of pipeline
systems. The following map shows the locations of International Energy's
worldwide energy facilities, including projects under construction or under
contract.
[MAP OF SERVICE AREA]
16
Competition and Regulation
International Energy's operations are subject to country and region-specific
market and competition regulations. Commonly addressed regulatory issues
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. On January 31, 2002, Duke Energy announced the
planned sale of DE&S to Framatome ANP, Inc. (For more information, see
"Management's Discussion and Analysis of Results of Operations and Financial
Condition, Current Issues--Subsequent Events.")
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 identifying and affecting points in a customer's operations where
energy-related costs are incurred, including procurement, production and
disposal. DukeSolutions provides strategic solutions to reduce costs when
customers buy energy, convert it into a usable form, use it to manufacture
products and dispose of waste. On March 13, 2002, Duke Energy announced the
planned sale of DukeSolutions to Ameresco, Inc. (For more information see
"Management's Discussion and Analysis of Results of Operations and Financial
Condition, Current Issues--Subsequent Events.")
Other Energy Services competes with utilities and independent energy
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" in this section.)
DUKE VENTURES
Duke Ventures is composed 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 in the southeastern and southwestern
U.S. On December 31, 2001, Crescent owned 3.0 million square feet of
commercial, industrial and retail space, with an additional 1.5 million square
feet under construction. This portfolio included 2.3 million square feet of
office space, 1.5 million square feet of warehouse space and .7 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 2001,
Crescent had three multi-family communities in Florida. On December 31, 2001,
Crescent also had approximately 140,000 acres of land under its management.
17
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 1,230-mile fiber optic communications
network centered in the Carolinas and interconnected, through affiliate
agreements with third parties, with a 18,500-mile fiber optic communications
network, that stretches from Maine to Texas. DCP, a merchant finance company,
provides financing, investment banking and asset management services to
wholesale and commercial markets in the energy, real estate and
telecommunications industries.
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. Environmental regulations affecting
Duke Energy include:
. The Clean Air Act (CAA) and the 1990 amendments to the Act, as well as
state laws and regulations impacting air emissions, including State
Implementation Plans related to existing and new national ambient air
quality standards for ozone. Owners and/or operators of air emissions
sources are responsible for obtaining permits and for annual compliance
and reporting.
. The Federal Water Pollution Control Act which requires permits for
facilities that discharge treated wastewater into the environment.
. The Comprehensive Environmental Response, Compensation and Liability Act,
which can require any individual or entity that may have owned or operated
a disposal site, as well as transporters or generators of hazardous wastes
sent to such site, to share in remediation costs.
. The Solid Waste Disposal Act, as amended by the Resource Conservation and
Recovery Act, which requires certain solid wastes, including hazardous
wastes, to be managed pursuant to a comprehensive regulatory regime.
. The National Environmental Policy Act, which requires consideration of
potential environmental impacts by federal agencies in their decisions,
including siting approvals.
(For more information on 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 15 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.
18
GEOGRAPHIC REGIONS
Duke Energy's significant geographic regions are as follows:
Latin Other
U.S. Canada America Foreign Consolidated
------- ------ ------- ------- ------------
In millions
2001
Consolidated revenues........ $51,723 $5,690 $ 628 $1,462 $59,503
Consolidated long-term assets 34,150 516 2,573 1,594 38,833
2000
Consolidated revenues........ $43,282 $4,964 $ 512 $ 560 $49,318
Consolidated long-term assets 30,772 900 2,823 1,222 35,717
1999
Consolidated revenues........ $19,336 $2,007 $ 171 $ 252 $21,766
Consolidated long-term assets 22,995 250 2,708 901 26,854
(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 "Derivative Instruments, Hedging
Activities and Credit Risk.")
EMPLOYEES
On December 31, 2001, Duke Energy had approximately 24,000 employees. A
total of 1,583 operating and maintenance employees were represented by unions.
Of these, 1,392 were represented by the International Brotherhood of Electrical
Workers at two operating units. An additional 73 employees were represented by
the United Steelworkers and Rubberworkers of America. Fifty-six employees were
represented by the Paper, Allied, Chemical and Energy Workers Union and 62
employees were represented by the International Union of Operating Engineers.
19
OPERATING STATISTICS
Years Ended December 31,
--------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- ------- -------
Franchised Electric
Sources of Electric Energy, GWh(a)
Generated--net output:
Coal........................................... 41,796 43,526 41,306 42,164 45,234
Nuclear........................................ 39,922 41,073 39,263 38,366 29,569
Hydro.......................................... 224 394 638 1,714 1,633
Oil and gas.................................... 139 459 662 846 301
-------- -------- -------- ------- -------
Total generation............................. 82,081 85,452 81,869 83,090 76,737
Purchased power and net interchange............ 3,050 4,497 3,617 2,659 3,781
-------- -------- -------- ------- -------
Total output................................. 85,131 89,949 85,486 85,749 80,518
Plus: Purchases from other Catawba joint owners -- 150 1,233 1,656 2,316
-------- -------- -------- ------- -------
Total sources of energy...................... 85,131 90,099 86,719 87,405 82,834
Less: Line loss and company usage.............. 5,446 5,333 5,171 5,394 4,899
-------- -------- -------- ------- -------
Total GWh sales.............................. 79,685 84,766 81,548 82,011 77,935
======== ======== ======== ======= =======
Electric Energy Sales, GWh
Residential.................................... 23,272 22,884 21,897 22,002 20,483
General service................................ 23,666 22,845 21,807 21,093 19,687
Industrial
Textile...................................... 8,829 10,819 11,201 11,981 11,955
Other........................................ 18,074 18,952 18,704 18,668 18,376
Other energy and wholesale..................... 6,979 8,671 7,715 8,933 7,029
-------- -------- -------- ------- -------
Total GWh sales billed....................... 80,820 84,171 81,324 82,677 77,530
Unbilled GWh sales......................... (1,135) 595 224 (666) 405
-------- -------- -------- ------- -------
Total GWh sales.......................... 79,685 84,766 81,548 82,011 77,935
======== ======== ======== ======= =======
Natural Gas Transmission
Proportional Throughput Volumes, TBtu(b)(c)..... 1,710 1,771 1,893 1,459 1,641
Field Services
Natural Gas Gathered and
Processed/Transported, TBtu/d(d).............. 8.6 7.6 5.1 3.6 3.4
NGL Production, MBbl/d(e)....................... 397.2 358.5 192.4 110.2 108.2
Average Natural Gas Price per MMBtu(f).......... $ 4.27 $ 3.89 $ 2.27 $ 2.11 $ 2.59
Average NGL Price per Gallon.................... $ 0.45 $ 0.53 $ 0.34 $ 0.26 $ 0.35
Natural Gas Marketed,TBtu/d..................... 1.6 0.7 0.5 0.4 0.4
NAWE
Natural Gas Marketed,TBtu/d..................... 12.4 11.9 10.5 8.0 6.9
Electricity Marketed and Traded, GWh............ 335,210 275,258 109,634 98,991 64,650
- --------
(a) Gigawatt-hour
(b) Trillion British thermal units
(c) Excludes throughput of pipelines sold in March 1999: 328 TBtu (1999); 1,141
TBtu (1998); 1,279 TBtu (1997)
(d) Trillion British thermal units per day
(e) Thousand barrels per day
(f) Million British thermal units
20
EXECUTIVE OFFICERS OF DUKE ENERGY
RICHARD B. PRIORY, 55, 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 Duke Energy's merger
with PanEnergy Corp (PanEnergy).
RICHARD W. BLACKBURN, 59, 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.
ROBERT P. BRACE, 52, Executive Vice President and Chief Financial Officer.
Mr. Brace joined Duke Energy in 2000. Previously, he served as Group Finance
Director of British Telecommunications plc starting in 1993.
KEITH G. BUTLER, 41, Senior Vice President and Controller. Mr. Butler
assumed his present position in August 2001. Mr. Butler held various positions
at Duke Power before being named Senior Vice President and Chief Financial
Officer of Duke Energy Global and its affiliated companies in February 1998;
Senior Vice President and Chief Financial Officer of Duke Energy North America
in July 1998; and Chief Operating Officer, DukeSolutions, in September 1999.
WILLIAM A. COLEY, 58, 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, 56, 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.
DAVID L. HAUSER, 50, 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. He was appointed to
his current position in 1998.
RICHARD J. OSBORNE, 51, Executive Vice President and Chief Risk Officer. Mr.
Osborne assumed his present position in May 2000. He previously served as
Executive Vice President and Chief Financial Officer following the PanEnergy
merger. Prior to the merger, beginning in 1994, Mr. Osborne was Senior Vice
President and Chief Financial Officer.
HARVEY J. PADEWER, 54, Group President, Energy Services. Mr. Padewer assumed
his present position in 1999. From 1995 through 1998, he served as Senior Vice
President and General Manager of Utilicorp Energy Group.
RUTH G. SHAW, 54, Executive Vice President and Chief Administrative Officer.
Ms. Shaw served as Senior Vice President, Corporate Resources, from 1994 until
the PanEnergy merger, when she assumed her present position.
Executive officers are elected annually by the Board of Directors. They
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 involved in officer selection.
21
Item 2. Properties.
FRANCHISED ELECTRIC
As of December 31, 2001, Franchised Electric operated three nuclear
generating stations with a combined net capacity of 5,409 MW (including 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 2,791 MW and six combustion turbine stations with a combined
capacity of 2,081 MW. All of the stations are located in North Carolina or
South Carolina.
In addition, Franchised Electric owned, as of December 31, 2001,
approximately 13,000 conductor miles of electric transmission lines, including
600 miles of 525 kilovolts, 2,600 miles of 230 kilovolts, 6,500 miles of 100 to
161 kilovolts, and 3,300 miles of 13 to 66 kilovolts. Franchised Electric also
owned approximately 93,600 conductor miles of electric distribution lines,
including 62,700 miles of rural overhead lines, 15,700 miles of urban overhead
lines, 8,300 miles of rural underground lines and 6,900 miles of urban
underground lines. As of December 31, 2001, the electric transmission and
distribution systems had approximately 1,600 substations.
Part of the electric plant is mortgaged under the indenture relating to Duke
Energy's various series of First and Refunding Mortgage Bonds.
NATURAL GAS TRANSMISSION
Texas Eastern'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
with three large-diameter parallel pipelines and the other with one to three
large-diameter pipelines. Texas Eastern's system consists of approximately
8,600 miles of pipeline and 72 compressor stations.
Texas Eastern's also owns and operates two offshore Louisiana pipeline
systems, which extend over 100 miles into the Gulf of Mexico and include 467
miles of Texas Eastern's pipelines.
Algonquin's transmission system connects with Texas Eastern'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.
ETNG's transmission system crosses Texas Eastern's system at two points in
Tennessee and consists of two mainline systems totaling 1,100 miles of pipeline
in Tennessee and Virginia, with 17 compressor stations.
(For a map showing natural gas transmission and storage properties, see
"Business, Natural Gas Transmission" earlier in this section. Also see that
section for additional information on Natural Gas Transmission's properties,
including additions due to the Westcoast acquisition.)
FIELD SERVICES
(For information and a map showing Field Services' properties, see
"Business, Field Services" earlier in this section.)
22
NORTH AMERICAN WHOLESALE ENERGY
As of December 31, 2001, DENA's generation portfolio in operation included:
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
Vermillion........ 648 Natural gas IN 100
Lee............... 640 Natural gas MS 100
Hinds............. 520 Natural gas IL 100
Maine Independence 520 Natural gas ME 100
Bridgeport........ 510 Natural gas CT 67
St. Francis....... 494 Natural gas MO 50
American Ref-Fuel. 380 Waste-to-energy CT, MA, NJ, NY 50
New Albany Energy. 349 Natural gas MS 100
Oakland........... 165 Oil CA 100
-----
Total............. 7,406
=====
DENA had approximately 9,070 gross MW under construction in various
high-growth markets slated for completion to meet summer peak demands: 6,620 MW
in 2002 and 2,450 MW in 2003. In addition to facilities in operation or under
construction, DENA had approximately 13,000 gross MW in advanced development
scheduled to begin operation between 2003 and 2005.
For additional information and a map showing NAWE's properties, see
"Business, North American Wholesale Energy" earlier in this section.
INTERNATIONAL ENERGY
As of December 31, 2001, International Energy's generation portfolio in
operation included:
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 100
Puncakjaya Power............... 383 Thermal Indonesia 43
Acajutla....................... 381 Thermal El Salvador 90
Western Australia.............. 280 Thermal Australia 100
Electroquil.................... 180 Thermal Ecuador 69
Constellation.................. 168 Oil Guatemala 100
Aquaytia....................... 160 Thermal Peru 38
Empressa Electrica Corani...... 126 Hydro Bolivia 50
New Zealand.................... 112 Thermal New Zealand 100
Bairnsdale..................... 43 Natural Gas Australia 100
-----
Total.......................... 5,216
=====
23
DEI had approximately 853 gross MW under construction in Latin America and
43 gross MW in Australia. As of December 31, 2001, DEI also owned approximately
1,346 miles of pipeline systems in Australia, including 463 miles under
development. Additionally, DEI had an 11.84% ownership interest in 855 miles of
pipeline systems in Australia and a 37.83% ownership interest in 190 miles of
pipeline systems in Peru. Also, as of December 31, 2001, 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.
(For additional information and a map showing International Energy's
properties, see "Business, International Energy" earlier in this section.)
DUKE VENTURES
(For information regarding Duke Ventures' properties, see "Business, Duke
Ventures" earlier in this section.)
OTHER
None of the properties used in Duke Energy's other business activities are
considered material to Duke Energy's operations as a whole.
Item 3. Legal Proceedings.
Duke Energy, some of its subsidiaries and three current or former executives
have been named as defendants, among other corporate and individual defendants,
in one or more of a total of six lawsuits brought by or on behalf of
electricity consumers in the State of California. The plaintiffs seek damages
as a result of the defendants' alleged unlawful manipulation of the California
wholesale electricity markets. DENA and DETM are among 16 defendants in a
class-action lawsuit (the Gordon lawsuit) filed against generators and traders
of electricity in California markets. DETM was also named as one of numerous
defendants in four additional lawsuits, including two class actions (the
Hendricks and Pier 23 Restaurant lawsuits), filed against generators,
marketers, traders and other unnamed providers of electricity in California
markets. A sixth lawsuit (the Bustamante lawsuit) was brought by the Lieutenant
Governor of the State of California and a State Assemblywoman, on their own
behalf as citizens and on behalf of the general public, and includes Duke
Energy, some of its subsidiaries and three current or former executives of Duke
Energy among other corporate and individual defendants. The Gordon and
Hendricks class-action lawsuits were filed in the Superior Court of the State
of California, San Diego County, in November 2000. Three other lawsuits were
filed in January 2001, one in Superior Court, San Diego County, and the other
two in Superior Court, County of San Francisco. The Bustamante lawsuit was
filed in May 2001 in Superior Court, Los Angeles County. These lawsuits
generally allege that the defendants manipulated the wholesale electricity
markets in violation of state laws against unfair and unlawful business
practices and state antitrust laws. The plaintiffs seek aggregate damages of
billions of dollars. The lawsuits seek the refund of alleged unlawfully
obtained revenues for electricity sales and, in four lawsuits, an award of
treble damages. These suits have been consolidated before a state court judge
in San Diego. While these matters are in their earliest stages, management
believes, based on its analysis of the facts and the asserted claims, that
their resolution will have no material adverse effect on Duke Energy's
consolidated results of operations, cash flows or financial position. (See Note
15 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.")
In 2000, the U.S. Justice Department, acting on behalf of the EPA, filed a
complaint against Duke Energy in the U.S. District Court in Greensboro, North
Carolina, for alleged violations of the New Source Review (NSR) provisions of
the CAA. The EPA claims that 29 projects performed at 25 of Duke Energy's
coal-fired units were major modifications, as defined in the CAA, and that Duke
Energy violated the CAA's NSR requirements when it undertook those projects
without obtaining permits and installing emission controls for sulfur dioxide,
nitrogen
24
oxide and particulate matter. The complaint asks the court to order Duke Energy
to stop operating the coal-fired units identified in the complaint, install
additional emission controls and pay unspecified civil penalties. This
complaint is part of the EPA's NSR enforcement initiative, in which the EPA
claims that utilities and others have committed widespread violations of the
CAA permitting requirements for the past 25 years. The EPA has sued or issued
notices of violation of investigative information requests to at least 48 other
electric utilities and cooperatives.
The EPA's allegations run counter to previous EPA guidance regarding the
applicability of the NSR permitting requirements. Duke Energy, along with other
utilities, has routinely undertaken the type of repair, replacement and
maintenance projects that the EPA now claims are illegal. Duke Energy believes
that all of its electric generation units are properly permitted and have been
properly maintained, and is defending itself vigorously against these alleged
violations. The U.S. Vice President's National Energy Policy Development Group
has ordered the EPA to review its NSR rules and has ordered the Department of
Justice to review the appropriateness of the enforcement cases. The EPA review
was scheduled to be completed by August 2001, but has not yet been concluded.
In January 2002, the Department of Justice released a report concluding that it
was not improper for the Department of Justice to initiate the enforcement
cases brought on behalf of the EPA. It specifically declined to address whether
the EPA's enforcement actions are wise as a matter of national energy policy.
Because these matters are in a preliminary stage, management cannot estimate
the effects of these matters on Duke Energy's future consolidated results of
operations, cash flows or financial position. The CAA authorizes civil
penalties of up to $27,500 per day per violation at each generating unit. Civil
penalties, if ultimately imposed by the court, and the cost of any required new
pollution control equipment, if the court accepts the EPA's contentions, could
be substantial. (See Note 15 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 2000, three Duke Energy subsidiaries initiated binding arbitration
against three Exxon Mobil Corporation subsidiaries (the Exxon Mobil entities)
concerning the parties' joint ownership of DETM and related affiliates (the
Ventures). At issue is a buy-out right provision under the joint venture
agreements for these entities. If there is a material business dispute between
the parties, which Duke Energy alleges has occurred, the buy-out provision
gives Duke Energy the right to purchase Exxon Mobil's 40% interest in DETM.
Exxon Mobil does not have a similar right under the joint venture agreements
and once Duke Energy exercises the buy-out right, each party has the right to
"unwind" the buy-out under certain specific circumstances. In December 2000,
Duke Energy exercised its right to buy the Exxon Mobil entities' interest in
the Ventures. Duke Energy claims that refusal by the Exxon Mobil entities to
honor the exercise is a breach of the buy-out right provision, and seeks
specific performance of the provision. Duke Energy has also made additional
claims against the Exxon Mobil entities for breach of the agreements governing
the Ventures.
In January 2001, the Exxon Mobil entities made counterclaims in the
arbitration and, in a separate Texas state court action, alleged that Duke
Energy breached its obligations to the Ventures and to the Exxon Mobil
entities. In April 2001, the state court stayed its action, compelling the
Exxon Mobil entities to arbitrate their claims. The Exxon Mobil entities
proceeded with the arbitration of their claims and have not challenged this
order in an appellate court. In early October 2001, the arbitration panel
convened an evidentiary hearing regarding the buy-out right provision and Duke
Energy's and Exxon Mobil's claims against each other. The panel has not yet
ruled but Duke Energy expects a final decision from the panel in early 2002.
Management believes that the final disposition of this action will have no
material adverse effect on Duke Energy's consolidated results of operations or
financial position.
On November 15, 2001, the Illinois Pollution Control Board imposed a penalty
of $850,000 plus assessed attorney fees in an environmental enforcement
proceeding against a former subsidiary of Duke Energy relating to
25
air quality permit violations at a natural gas compressor station. Duke Energy
has resolved its indemnity obligation to the purchaser of this former
subsidiary for the penalty resulting from these violations.
In June 2001, Duke Energy's subsidiary, DEFS, received two administrative
Compliance Orders from the New Mexico Environment Department (NMED) seeking
civil penalties for primarily historic air permit matters. One order alleges
specific permit non-compliance at 11 facilities that occurred periodically
between 1996 and 1999. Allegations under this order relate primarily to
emissions from certain compressor engines in excess of what were then new
operating permit limits. The other order alleges numerous unexcused excursions
from an hourly permit limit arising from upset events at one facility's sulfur
recovery unit between 1997 and 2001. The NMED applied its civil penalty policy
to the alleged violations and calculated the penalties to be $10 million in the
aggregate. The NMED has initiated settlement discussions and offered to resolve
these matters for an amount lower than the calculated penalties. DEFS is
continuing its discussions with the NMED and anticipates that it will resolve
all issues relating to the alleged violations.
In September 2001, DEFS received a Proposed Agreed Order from the Texas
Natural Resource Conservation Commission (Commission) to settle allegations
reflected in a June 2001 notice from the Commission relating to DEFS' Port
Arthur natural gas processing plant. The Proposed Agreed Order sought penalties
of $278,000 for various items of alleged-noncompliance relating to the
facility's air permit and state air regulations, including valve monitoring and
repair requirements under 40 CFR 60, subpart KKK. DEFS has reached a settlement
with the staff of the Commission for a monetary penalty in the amount of
$39,832 and a Supplemental Environmental Project in the amount of $39,832,
subject to the approval of the Commission.
DEFS received a Consolidated Compliance Order and Notice of Potential
Penalty from the Louisiana Department of Environmental Quality (LDEQ) in the
spring of 2001 enabling DEFS to discharge certain wastewater streams from its
Minden Gas Processing Plant until a new discharge permit is issued by the LDEQ.
The Compliance Order authorized certain discharges, and otherwise addressed
various historic and recent deviations from Clean Water Act regulatory
requirements, including the lapse of the facility's discharge permit. The
Compliance Order also contemplates final resolution of these matters including
the LDEQ issuing a penalty assessment. DEFS and LDEQ are now in discussions to
resolve all issues relating to this matter.
DEFS is in discussion with the Oklahoma Department of Environmental Quality
(ODEQ) regarding apparent non-compliance issues relating to DEFS' Title V Clean
Air Act Operating permits at its Oklahoma facilities, primarily consisting of
compliance issues disclosed to the ODEQ pursuant to permit requirements or
otherwise voluntarily disclosed to the ODEQ in 2001. These non-compliance
issues relate to various specific and detailed terms of the Title V permits,
including separate filing requirements, engine testing procedural requirements,
certification requirements, and quarterly emissions testing obligations. As a
result of these discussions, DEFS anticipates that a comprehensive settlement
agreement will be entered into to resolve these various items.
Duke Energy and its subsidiaries are involved in other legal, tax and
regulatory proceedings before various courts, regulatory commissions and
governmental agencies regarding performance, contracts and other matters
arising in the ordinary course of business, some of which involve substantial
amounts. Management believes that the final disposition of these proceedings
will have no material adverse effect on Duke Energy's consolidated results of
operations, cash flows or financial position. (See Note 15 to the Consolidated
Financial Statements, "Commitments and Contingencies--Litigation and
Contingencies," and "Management's Discussion and Analysis of Results of
Operations and Financial Condition, 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 fourth quarter of 2001.
26
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Duke Energy's common stock is listed for trading on the New York Stock
Exchange. At February 28, 2002, there were approximately 149,051 common
stockholders of record.
Common Stock Data by Quarter
2001(a) 2000(b)
--------------------------- ---------------------------
Stock Price Range Stock Price Range
Dividends ----------------- Dividends -----------------
Per Share High Low Per Share High Low
--------- ------ ------ --------- ------ ------
First Quarter. $0.275 $43.50 $32.41 $0.275 $28.94 $23.19
Second Quarter 0.55 47.74 38.40 0.55 31.25 26.16
Third Quarter. -- 42.85 34.39 -- 42.88 28.31
Fourth Quarter 0.275 41.35 32.22 0.275 44.97 40.22
- --------
(a) The 2001 stock prices represent the intra-day high and low stock price.
(b) The 2000 amounts were 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 NCUC and PSCSC approved this distribution. The plan is intended to
ensure 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.
27
Item 6. Selected Financial Data.
2001 2000 1999(a) 1998 1997(b)
------- ------- ------- ------- -------
In millions, except per share amounts
Income Statement
Operating revenues......................................... $59,503 $49,318 $21,766 $17,662 $16,309
Operating expenses......................................... 55,403 45,505 19,947 15,177 14,339
------- ------- ------- ------- -------
Operating income........................................... 4,100 3,813 1,819 2,485 1,970
Other income and expenses.................................. 156 201 224 162 138
Interest expense........................................... 785 911 601 514 472
Minority interest expense.................................. 327 307 142 96 23
------- ------- ------- ------- -------
Earnings before income taxes............................... 3,144 2,796 1,300 2,037 1,613
Income taxes............................................... 1,150 1,020 453 777 639
------- ------- ------- ------- -------
Income before extraordinary item and cumulative effect of
change in accounting principle........................... 1,994 1,776 847 1,260 974
Extraordinary gain (loss), net of tax...................... -- -- 660 (8) --
Cumulative effect of change in accounting principle, net of
tax...................................................... (96) -- -- -- --
------- ------- ------- ------- -------
Net income................................................. 1,898 1,776 1,507 1,252 974
Preferred and preference stock dividends................... 14 19 20 21 72
------- ------- ------- ------- -------
Earnings available for common stockholders................. $ 1,884 $ 1,757 $ 1,487 $ 1,231 $ 902
======= ======= ======= ======= =======
Common Stock Data (c)
Shares of common stock outstanding
Year-end................................................ 777 739 733 726 720
Weighted average........................................ 767 736 729 722 720
Earnings per share (before extraordinary item and
cumulative effect of change in accounting principle)
Basic................................................... $ 2.58 $ 2.39 $ 1.13 $ 1.72 $ 1.26
Diluted................................................. 2.56 2.38 1.13 1.71 1.25
Earnings per share
Basic................................................... $ 2.45 $ 2.39 $ 2.04 $ 1.70 $ 1.26
Diluted................................................. 2.44 2.38 2.03 1.70 1.25
Dividends per share........................................ 1.10 1.10 1.10 1.10 0.95
Balance Sheet
Total assets............................................... $48,375 $58,232 $33,409 $26,806 $24,029
Long-term debt, less current maturities.................... 12,321 10,717 8,683 6,272 6,530
- --------
(a) Financial information reflects a pre-tax $800 million charge for estimated
injuries and damages claims. The earnings-per-share effect of this charge
was $0.67 per share.
(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, 1997.
(c) Amounts prior to 2001 were restated to reflect the two-for-one common stock
split effective January 26, 2001.
28
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
INTRODUCTION
Management's Discussion and Analysis should be read with the Consolidated
Financial Statements.
Business Segments. Duke Energy Corporation (collectively with its
subsidiaries, Duke Energy), an integrated provider of energy and energy
services, offers physical delivery and management of both electricity and
natural gas throughout the U.S. and abroad. Duke Energy provides these and
other services through seven business segments.
Franchised Electric generates, transmits, distributes and sells electricity
in central and western North Carolina and western South Carolina. It conducts
operations primarily through Duke Power and Nantahala Power and Light. These
electric operations are subject to the rules and regulations of the Federal
Energy Regulatory Commission (FERC), the North Carolina Utilities Commission
(NCUC) and the Public Service Commission of South Carolina (PSCSC).
Natural Gas Transmission provides transportation and storage of natural gas
for customers throughout North America, primarily in the Mid-Atlantic, New
England and southeastern states. It conducts operations primarily through Duke
Energy Gas Transmission Corporation. Interstate natural gas transmission and
storage operations are subject to the FERC's rules and regulations.
Field Services gathers, processes, transports, markets and stores natural
gas and produces, transports, markets and stores natural gas liquids (NGLs). It
conducts operations primarily through Duke Energy Field Services, LLC (DEFS),
which is approximately 30% owned by Phillips Petroleum. Field Services operates
gathering systems in western Canada and 11 contiguous states in the U.S. Those
systems serve major natural gas-producing regions in the Rocky Mountain,
Permian Basin, Mid-Continent, East Texas-Austin Chalk-North Louisiana, and
onshore and offshore Gulf Coast areas.
North American Wholesale Energy (NAWE) develops, operates and manages
merchant generation facilities and engages in commodity sales and services
related to natural gas and electric power. NAWE conducts these operations
primarily through Duke Energy North America, LLC (DENA) and Duke Energy Trading
and Marketing, LLC (DETM). DETM is approximately 40% owned by Exxon Mobil
Corporation. NAWE also includes Duke Energy Merchants Holdings, LLC, which
develops new business lines in the evolving energy commodity markets other than
natural gas and power. NAWE conducts business primarily throughout the U.S. and
Canada.
International Energy develops, operates and manages natural gas
transportation and power generation facilities and engages in energy trading
and marketing of natural gas and electric power. It conducts operations
primarily through Duke Energy International, LLC and its activities target the
Latin American, Asia-Pacific and European regions.
Other Energy Services is a combination of businesses that provide
engineering, consulting, construction and integrated energy solutions
worldwide, primarily through Duke Engineering & Services, Inc. (DE&S),
Duke/Fluor Daniel (D/FD) and DukeSolutions, Inc. (DukeSolutions). D/FD is a
50/50 partnership between Duke Energy and Fluor Enterprises, Inc., a wholly
owned subsidiary of Fluor Corporation. (See Note 8 to the Consolidated
Financial Statements.) On January 31, 2002, Duke Energy announced the planned
sale of DE&S to Framatome ANP, Inc. and, on March 13, 2002, Duke Energy
announced the planned sale of DukeSolutions to Ameresco, Inc. (See Current
Issues--Subsequent Events.)
29
Duke Ventures is composed of other diverse businesses, operating primarily
through Crescent Resources, LLC (Crescent), DukeNet Communications, LLC
(DukeNet) and Duke Capital Partners, LLC (DCP). Crescent develops high-quality
commercial, residential and multi-family real estate projects and manages land
holdings primarily in the southeastern U.S. DukeNet provides fiber optic
networks for industrial, commercial and residential customers. DCP, a wholly
owned merchant banking company, provides debt and equity capital and financial
advisory services to the energy industry.
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 electricity, 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 extensive capabilities. Domestically, Duke Energy is
investing as opportunities arise in new merchant power plants throughout the
U.S., expanding its natural gas pipeline infrastructure, advancing 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. Planned expansion for 2002 includes the acquisition of
Westcoast Energy Inc. (Westcoast) for approximately $8 billion, including the
assumption of debt. Westcoast, headquartered in Vancouver, British Columbia, is
a North American energy company with interests in natural gas gathering,
processing, transmission, storage and distribution, as well as power generation
and international energy businesses. (See Current Issues-- Subsequent Events.)
Internationally, Duke Energy is currently focusing on electric and natural gas
opportunities in Latin America, Asia Pacific and Europe.
Franchised Electric continues to increase its customer base, maintain low
costs and deliver high-quality customer service in the Piedmont Carolinas.
Franchised Electric is expected to grow moderately. Expansion will primarily
result from continued growth in the residential and general service sectors,
partially offset by a continuing decline in the textile industry.
Natural Gas Transmission plans to continue 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 significant size and scope in natural gas
gathering and 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. DENA, through its portfolio
management strategy, seeks opportunities to invest in energy assets in U.S.
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.
30
Other Energy Services' growth opportunities will be primarily related to
D/FD. Other Energy Services plans to grow by providing an expanding customer
base with a variety of engineering, operating, procurement and construction
services in areas related to energy assets.
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 may 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 progress in industry restructuring
in North Carolina and South Carolina.
RESULTS OF OPERATIONS
In 2001, earnings available for common stockholders were $1,884 million, or
$2.45 per basic share, compared to $1,757 million, or $2.39 per basic share, in
2000. The increase was due primarily to a 6% increase in earnings before
interest and taxes (EBIT), as described below. Current-year EBIT increases on a
comparative basis were partially offset by the prior year's pre-tax gain of
$407 million (an after-tax gain of $0.34 per basic share) on the sale of Duke
Energy's 20% interest in BellSouth Carolina PCS, and a current-year, one-time
net-of-tax charge of $96 million (or $0.13 per basic share). This one-time
charge was the cumulative effect of a change in accounting principle for the
January 1, 2001 adoption of Statement of Financial Accounting Standards (SFAS)
No. 133, "Accounting for Derivative Instruments and Hedging Activities." (See
Note 1 to the Consolidated Financial Statements.)
Earnings available for common stockholders increased $270 million in 2000,
from 1999 earnings of $1,487 million, or $2.04 per basic share. The increase
was due primarily to a 96% increase in EBIT, as described below, including the
BellSouth Carolina PCS gain. Partially offsetting the increase in EBIT on a
comparative basis was a 1999 after-tax extraordinary gain of $660 million, or
$0.91 per basic share. This gain was from the sale of Panhandle Eastern Pipe
Line Company (PEPL), Trunkline Gas Company (Trunkline) and additional storage
related to those systems, along with Trunkline LNG Company. Higher interest and
minority interest expense in 2000 also partially offset the increase in EBIT.
Earnings per share information provided above has been restated to reflect
the two-for-one common stock split effective January 26, 2001. (See Note 16 to
the Consolidated Financial Statements.)
Operating income for 2001 was $4,100 million, compared to $3,813 million in
2000 and $1,819 million in 1999. EBIT was $4,256 million in 2001, $4,014
million in 2000 and $2,043 million in 1999. Operating income and EBIT are
affected by the same fluctuations for Duke Energy and each of its business
segments as described above. Beginning January 1, 2001, Duke Energy
discontinued allocating corporate governance costs for its business segment
analysis. Prior-year business segment EBIT amounts have been restated to
conform to the current-year presentation of corporate cost allocations. (See
Note 3 to the Consolidated Financial Statements for more information on
business segments.) The following table shows the components of EBIT and a
reconciliation from EBIT to net income.
31
Reconciliation Of Operating Income To Net Income
Years Ended December 31,
------------------------
2001 2000 1999
------ ------ ------
In millions
Operating income.............................................................. $4,100 $3,813 $1,819
Other income and expenses..................................................... 156 201 224
------ ------ ------
EBIT.......................................................................... 4,256 4,014 2,043
Interest expense.............................................................. 785 911 601
Minority interest expense..................................................... 327 307 142
------ ------ ------
Earnings before income taxes.................................................. 3,144 2,796 1,300
Income taxes.................................................................. 1,150 1,020 453
------ ------ ------
Income before extraordinary item and cumulative effect of change in accounting
principle................................................................... 1,994 1,776 847
Extraordinary gain, net of tax................................................ -- -- 660
Cumulative effect of change in accounting principle, net of tax............... (96) -- --
------ ------ ------
Net income.................................................................... $1,898 $1,776 $1,507
====== ====== ======
EBIT is the main performance measure used by management to evaluate segment
performance. As an indicator of Duke Energy's operating performance or
liquidity, EBIT should not be considered an alternative to, or more meaningful
than, net income or cash flow as determined in accordance with generally
accepted accounting principles. Duke Energy's EBIT may not be comparable to a
similarly titled measure of another company. Business segment EBIT is
summarized in the following table, and detailed discussions follow.
EBIT by Business Segment
Years Ended D