9. Asset Impairments and Other Charges

Print

Duke Energy evaluates its long-lived assets, excluding goodwill, for impairment under SFAS No. 144 (see Note 1). SFAS No. 144 requires long-term assets to be reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. In 2002, the merchant energy portion of Duke Energy’s business portfolio suffered from oversupply of merchant generation, low commodity pricing and volatility, and a steep decline in trading and marketing activity. These market challenges are continuing in 2003. As a result of the 2002 market conditions, Duke Energy suspended certain projects and abandoned others in this sector. The culmination of these events caused Duke Energy to evaluate the carrying values of certain of its long-lived assets at DENA and International Energy.

This analysis resulted in a $31 million impairment charge at one of DENA’s merchant power facilities. Additionally, charges of approximately $242 million were also recorded in 2002 to write-off site development costs in California and Brazil and to partially write-down uninstalled turbines, as well as, the termination of other turbines on order. A two-step process was performed in testing the assets for impairment. The impairment loss recorded was equal to the amount by which the carrying value exceeded the fair value of the assets. Fair value was based on prices for similar assets and a discounted cash flow analysis.

In 2002, a decision was made to abandon an information technology system at DENA resulting in the write-off of approximately $24 million of previously capitalized software and related costs.

During the fourth quarter of 2002, Field Services recorded impairments of approximately $40 million ($28 million at Duke Energy’s 70% share) related to certain gas plants and gathering systems that have recently generated cash flow losses. Field Services determined that the carrying value of these assets was impaired and, accordingly, wrote them down to their fair value. Fair value was determined based on estimates of sales value and/or cash flow models.

Duke Energy evaluates its goodwill for impairment under SFAS No. 142 (see Note 1). In 2002, Duke Energy recorded a goodwill impairment loss of $194 million related to International Energy’s European trading and marketing business. Significant changes in the European market and recent operating results have adversely affected Duke Energy’s outlook for this business unit. The exit of key market participants and a tightening of credit requirements are the primary drivers of this revised outlook. The fair value of the European reporting unit was estimated using the present value of expected future cash flows.

These impairments were recorded as charges to Operating Income in the Consolidated Statements of Income.

During 2002, Duke Energy reduced its workforce to align the business with current market conditions. Duke Energy recorded charges totaling approximately $100 million related to these reductions. The charges were recorded consistent with applicable accounting rules including EITF Issue No. 94-3 and SFAS No. 112, “Employers’ Accounting for Postemployment Benefits—An Amendment of FASB Statements No. 5 and 43.” Substantially all of these charges will be paid in 2003.

©Copyright 2003

back topnext