8. Investment in Unconsolidated Affiliates and Related Party Transactions

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Investments in domestic and international affiliates that are not controlled by Duke Energy, but over which it has significant influence, are accounted for using the equity method. Those investments include undistributed earnings of $108 million in 2002 and $166 million in 2001. Duke Energy received distributions of $369 million in 2002, $158 million in 2001 and $138 million in 2000 from those investments. Duke Energy’s share of net income from these unconsolidated affiliates is reflected in the Consolidated Statements of Income as Equity in Earnings of Unconsolidated Affiliates.

Natural Gas Transmission. Investments primarily include a 50% interest in Gulfstream Natural Gas System, LLC (Gulfstream), a 23.6% interest in Alliance Pipeline and a 30% interest in Vector Pipeline. Gulfstream is an interstate natural gas pipeline that extends from Mississippi and Alabama across the Gulf of Mexico to Florida. Although Duke Energy owns a significant portion of Gulfstream, it is not consolidated as Duke Energy does not hold a majority of voting control or bear a majority of the risk of loss or return. Alliance Pipeline is an interstate natural gas pipeline that extends from eastern Canada to the Chicago, Illinois area. Vector Pipeline is a joint interstate natural gas pipeline that extends from the Chicago, Illinois area through Indiana and Michigan and into Ontario, Canada.

Field Services. Investments primarily include a 21.1% ownership interest in TEPPCO Partners, LP, a publicly traded limited partnership which owns and operates a network of pipelines for refined products and crude oil.

Duke Energy North America. Significant investments include a 50% interest in American Ref-Fuel Company, LLC and a 50% interest in Southwest Power Partners, LLC. American Ref-Fuel Company, LLC owns and operates facilities that convert waste to energy. Southwest Power Partners, LLC is a gas-fired combined-cycle facility in Arizona that serves markets in Arizona, Nevada and California. Although Duke Energy owns a significant portion of these investments, they are not consolidated as it was determined that control was not present.

International Energy. Significant investments include a 25% indirect interest in National Methanol Company, which owns and operates a methanol and MTBE (methyl tertiary butyl ether) business in Jubail, Saudi Arabia.

Other Energy Services. Investments include participation in various construction and support activities for fossil-fueled generating plants through D/FD.

Duke Ventures. Significant investments include various real estate development projects through Crescent.

		Summarized Combined Financial Information of Unconsolidated Affiliates		December 31,
				2002					2001					2000
				(in millions)
		Balance Sheet
		Current assets		$	2,286				$	1,239				$	1,242
		Noncurrent assets			14,888					8,199					6,588
		Current liabilities			(1,711	)				(1,202	)				(888	)
		Noncurrent liabilities			(8,666	)				(4,400	)				(4,404	)
		Net assets		$	6,797				$	3,836				$	2,538
		Income Statement
		Operating revenues		$	6,101				$	5,202				$	4,617
		Operating expenses			5,094					4,525					4,039
		Net income			859					499					440

Related Party Transactions. Outstanding notes receivable from unconsolidated affiliates were $113 million as of December 31, 2002 and $25 million as of December 31, 2001. Of the notes outstanding as of December 31, 2002, $104 million related to a note from partners in a project in which International Energy had a 30% ownership and the remaining $9 million related to notes that Crescent had with partners in two of its joint ventures. These outstanding notes receivables had interest rates at or above current market rates.

In 2002, Duke Energy’s Natural Gas Transmission segment recognized $28 million in earnings for a construction fee received from an unconsolidated affiliate related to the successful completion of Gulfstream. (See project description in the Natural Gas Transmission section of this footnote.)

As a result of the Westcoast acquisition in 2002, Duke Energy became a partner in the Alliance Pipeline and Vector Pipeline (see project descriptions in the Natural Gas Transmission section of this footnote). As a result of commitments required of Westcoast related to its original investment in these projects, Duke Energy also acquired commitments to pay for firm capacity on these pipelines. Payments for the year ended December 31, 2002 totaled $30 million.

Duke Energy and Fluor Enterprises, Inc. formed the D/FD 50/50 partnership in 1989. The partnership provides full-service siting, permitting, licensing, engineering, procurement, construction, start-up, operating and maintenance services for fossil-fired plants in the U.S. and internationally. D/FD is the primary builder of DENA’s merchant generation plants currently under construction. D/FD also builds some plants for Duke Power. Fifty percent of the profit earned by D/FD for the construction of DENA’s merchant generation plants, which is associated with Duke Energy’s ownership, is deferred in consolidation until the plant is sold as part of DENA’s portfolio management strategy. Or, once the plant becomes operational, the deferred profit is amortized over the plant’s useful life. Fifty percent of the profit earned by D/FD for operating and maintenance services, which is associated with Duke Energy’s ownership, is eliminated in consolidation. For the year ended December 31, 2002, Duke Energy deferred profit of $159 million for D/FD construction contracts and eliminated profit of $3 million for operating and maintenance services. For the year ended December 31, 2001, Duke Energy deferred profit of $54 million for construction contracts and eliminated profit of $9 million for operating and maintenance services. For the year ended December 31, 2000, Duke Energy deferred profit of $16 million for construction contracts; there was no profit from operating and maintenance services to be eliminated in 2000. In addition, as part of the D/FD partnership agreement, excess cash is loaned at current market rates to Duke Energy and Fluor Enterprises, Inc. (See Note 11.)

In the normal course of business, Duke Energy’s consolidated subsidiaries enter into energy trading contracts or other derivatives with one another. On a separate company basis, each subsidiary accounts for such contracts as if it were transacted with a third party and records the contract using mark-to-market or accrual accounting, as applicable. For example, DETM may enter into a contract to purchase natural gas storage from DEFS. DEFS may record this contract using accrual accounting, while DETM may mark the contract to market through its current earnings. In the consolidation process, the effects of this intercompany contract are eliminated, and not reflected in Duke Energy’s Consolidated Financial Statements. In all cases, energy trading contracts (and any resulting mark-to-market gains or losses) between consolidated subsidiaries are eliminated in the consolidation process.

Also see Note 14, Minority Interest, and Note 17, Guarantees and Indemnifications, for additional related party information.

©Copyright 2003

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