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In 2002, earnings available for common stockholders were $1,021 million, or $1.22 per basic share, compared to $1,884 million, or $2.45 per basic share, in 2001. The decrease was due primarily to a 33% decrease in earnings before interest and taxes (EBIT), as described below, and a $325 million increase in interest expense due primarily to the debt assumed in the acquisition of Westcoast. These changes were partially offset by the prior year’s one-time net-of-tax charge of $96 million, or $0.13 per basic share, related to 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). Also offsetting the decrease in earnings available for common stockholders was a $220 million decrease in minority interest expense in 2002, as discussed in the following sections. Earnings available for common stockholders increased $127 million in 2001 to $1,884 million, or $2.45 per basic share, from 2000 earnings of $1,757 million, or $2.39 per basic share. The increase was due primarily to a 6% increase in EBIT, as described below. Earnings-per-share information provided above has been restated to reflect the two-for-one common stock split effective January 26, 2001. (See Note 18 to the Consolidated Financial Statements.) Operating income for 2002 was $2,500 million, compared to $3,941 million in 2001 and $3,303 million in 2000. EBIT was $2,869 million in 2002, $4,256 million in 2001 and $4,014 million in 2000. Operating income and EBIT are affected by the same fluctuations for Duke Energy and each of its business segments. (See Note 3 to the Consolidated Financial Statements for more information on business segments.) The following table shows the components of EBIT and reconciles EBIT to operating and net income. Reconciliation of Operating Income and EBIT to Net Income (in millions)
Total operating revenues for the year ended December 31, 2002 decreased $2,534 million to $15,663 million from $18,197 for the year ended December 31, 2001. The decrease was due primarily to decreased trading and marketing net margins as a result of the negative impacts of a prolonged economic weakness, low commodity prices, continued low volatility levels, reduced spark spreads and decreased market liquidity. The decrease was also a result of decreased revenues on the sale of natural gas, NGLs and other petroleum products. The decrease was partially offset by increased transportation, storage and distribution revenue from assets acquired or consolidated as part of the Westcoast acquisition in March 2002. Total operating expenses for the year ended December 31, 2002 decreased $1,282 million to $13,212 million from $14,494 million for the year ended December 31, 2001. The decrease was due primarily to a reduction in expenses related to the purchases of natural gas, NGLs and other petroleum products. The decrease was partially offset by increased operating expenses from assets acquired or consolidated as part of the Westcoast acquisition in March 2002, and various asset impairment and severance charges related to current market conditions and strategic actions taken by management. EBIT for the year ended December 31, 2002 decreased $1,387 million to $2,869 million from $4,256 million for the year ended December 31, 2001. This decrease was due primarily to decreased trading and marketing results. The decrease in EBIT was also impacted by various charges at several business units, such as asset impairments and severance costs, related to current market conditions and strategic actions taken by management. The decrease in EBIT was also attributable to a decline in the average price realized for electricity generated by Duke Energy’s merchant plants. These decreases were partially offset by increased transportation, storage and distribution revenues from assets acquired or consolidated as a part of the acquisition of Westcoast in March 2002. EBIT for the year ended December 31, 2001 increased $242 million to $4,256 million from $4,014 million for the year ended December 31, 2000. This increase was due primarily to increased trading and marketing margins due to significant volatility in the marketplace during 2001. This increase was also attributable to increased gains on the sales of Duke Energy’s interests in several generating facilities at DENA. The increase was impacted, to a lesser extent, by increased earnings resulting from reporting a full year of operations in 2001 as compared to 2000 for several operating facilities. The increase in EBIT was partially offset by decreased earnings from electric revenues due to milder weather in the latter part of 2001 and decreased sales to industrial customers as a result of the slowing economy in 2001. For a more detailed discussion of EBIT, see segment discussions below. EBIT is the primary performance measure used by management to evaluate segment performance. On a segment basis, it includes all profits (both operating and non-operating) before deducting interest and taxes, and is net of the minority interest expense related to those profits. Management believes EBIT is a good indicator of each segment’s operating performance. As an indicator of Duke Energy’s operating performance, 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 (GAAP). Duke Energy’s EBIT may not be comparable to a similarly titled measure of another company. Management views the sale of operating assets and equity earnings from operating assets as important sources of revenue for Duke Energy and its subsidiaries. Therefore, for internal management purposes, these items are reflected in segment revenues. For external reporting purposes, these items are excluded from revenues and appropriately reflected in separate captions on the Consolidated Statements of Income. Prior to April 1, 2002, the DENA business segment was combined with DEM to form a segment called North American Wholesale Energy. During 2002, management combined DEM with the Other Energy Services segment. Previous periods have been restated to conform to the current presentation. Business segment EBIT is summarized in the following table, and detailed discussions follow. EBIT by Business Segment (in millions)
Other Operations primarily includes certain unallocated corporate costs and elimination of intersegment profits. The amounts discussed below include intercompany transactions that are eliminated in the Consolidated Financial Statements. Franchised Electric
Year Ended December 31, 2002 as Compared to December 31, 2001 Operating Revenues. Operating revenues for the year ended December 31, 2002 increased $142 million to $4,888 million from $4,746 million for the year ended December 31, 2001. The increase resulted primarily from increased GWh sales to retail customers, driven by favorable weather in the latter half of 2002, which contributed $130 million and continued growth in the average number of residential and general service customers in Franchised Electric’s service territory, which contributed $40 million, with continued growth expected in 2003. Also contributing to the revenue growth was a $36 million reduction in 2001 revenues resulting from a refinement in the estimates used to calculate unbilled kilowatt-hour sales. (See Note 1 to the Consolidated Financial Statements.) These revenue increases were partially offset by a decrease of $45 million in off-system market rate sales, primarily driven by lower prices in 2002, and decreased GWh sales to industrial customers as a result of a slow economy, which resulted in a $35 million reduction in operating revenues. Sales to industrial customers are expected to continue to decline in future periods, negatively impacting revenues. The following table shows the changes in GWh sales and average number of customers for the past two years.
Operating Expenses. Operating expenses for the year ended December 31, 2002 increased $144 million to $3,329 million from $3,185 million for the year ended December 31, 2001. As a result of the increase in electric sales, fuel costs increased by $54 million. Additionally, the increase was due to expenses totaling $89 million associated with an ice storm in December 2002 and a $36 million charge in 2002 for severance costs related to workforce reductions. These costs were partially offset by lower operating and maintenance expenses of $20 million at Duke Power’s generating plants. Other Income, Net of Expenses. Other income, net of expenses decreased $21 million in 2002 compared to 2001 due primarily to a $19 million charge, net of an $8 million credit for property insurance, resulting from the settlement agreements reached with the NCUC and the PSCSC. (See Note 4 to the Consolidated Financial Statements.) EBIT. EBIT for the year ended December 31, 2002 decreased $23 million to $1,608 million from $1,631 million for the year ended December 31, 2001 primarily as a result of increased operating expenses, including costs associated with an ice storm in December 2002, severance costs related to workforce reductions and charges resulting from the settlement agreements reached by Duke Energy with the NCUC and the PSCSC. The increase in operating expenses was offset by increases in revenues as discussed above. New Legislation. In June 2002, the state of North Carolina passed new clean air legislation that includes provisions that freeze electric utility rates from June 20, 2002 (the effective date of the statute) to December 31, 2007 (rate freeze period), subject to certain conditions, in order for North Carolina electric utilities, including Duke Energy, to make significant reductions in emissions of sulfur dioxide and nitrogen oxides from the state’s coal-fired power plants over the next ten years. (See Note 16 to the Consolidated Financial Statements.) Management estimates Duke Energy’s cost of achieving the proposed emission reductions over the next ten years to be approximately $1.5 billion in total. Included in the legislation are provisions that allow electric utilities, including Duke Energy, to accelerate the recovery of these compliance costs by amortizing them over seven years. Year Ended December 31, 2001 as Compared to December 31, 2000 Operating Revenues. Operating revenues for the year ended December 31, 2001 decreased $200 million to $4,746 million from $4,946 million for the year ended December 31, 2000. The decrease resulted primarily from milder weather in Franchised Electric’s service territory during the latter part of 2001, which reduced operating revenues by $80 million, decreased sales to industrial customers as a result of the slowing economy which reduced operating revenues by $60 million and reduced contractual sales to non-native load customers which reduced operating revenue by $75 million. The 2001 results also included a $36 million reduction in unbilled revenue receivables, resulting from a refinement in the estimates used to calculate unbilled kilowatt-hour sales. (See Note 1 to the Consolidated Financial Statements.) These decreases to operating revenues were slightly offset by continued growth in the average number of residential and general service customers in Franchised Electric’s service territory, which contributed $50 million. Operating Expenses. Operating expenses for the year ended December 31, 2001 decreased slightly to $3,185 million from $3,200 million for the year ended December 31, 2000. This decrease was due primarily to reduced storm costs incurred in 2001 as compared to 2000 combined with an overall decrease in power delivery operation and maintenance expenses, partially offset by increased costs for nuclear and fossil-fueled plant outages for repairs and maintenance. EBIT. EBIT for the year ended December 31, 2001 decreased $189 million to $1,631 million from $1,820 million for the year ended December 31, 2000, due primarily to decreased operating revenues. The primary drivers of the reduced revenues were mild weather in Franchised Electric’s service territory during the latter part of 2001, decreased sales to industrial customers, which were a result of the slowing economy, and a reduction in unbilled revenue receivables, resulting from a refinement in the estimates used to calculate unbilled kilowatt-hour sales (see Note 1 to the Consolidated Financial Statements). Natural Gas Transmission
Year Ended December 31, 2002 as Compared to December 31, 2001 Operating Revenues. Operating revenues for the year ended December 31, 2002 increased $1,497 million to $2,602 million from $1,105 million for the year ended December 31, 2001. This increase resulted primarily from increased transportation, storage, and distribution revenue of $1,419 million from assets acquired or consolidated as a part of the Westcoast acquisition in March 2002. (See Note 2 to the Consolidated Financial Statements.) Revenues also increased $35 million due to business expansion projects. Operating revenues for 2002 also included a $28 million construction fee from an unconsolidated affiliate related to the successful completion of Gulfstream Natural Gas System, LLC (Gulfstream), a 581-mile pipeline system, 50% owned by Duke Energy which went into service in May 2002. Also contributing to the increase in operating revenues for 2002 was a $32 million gain on the sale of a portion of Natural Gas Transmission’s limited partnership units in Northern Border Partners, LP. Operating Expenses. Operating expenses for the year ended December 31, 2002 increased $916 million to $1,420 million from $504 million for the year ended December 31, 2001. This increase was due primarily to incremental operating expenses of $877 million related to the gas transmission, storage and distribution assets acquired or consolidated in the Westcoast acquisition in March 2002. Operating expenses were impacted, to a lesser extent, as a result of severance costs of $9 million associated with a workforce reduction in 2002 and incremental operating expenses associated with business expansion projects. Partially offsetting the increase in operating expenses were the reversal of reserves of $25 million related to certain environmental issues that were resolved in 2002 and reduced goodwill amortization of $14 million in 2002 as a result of the implementation of SFAS No. 142, “Goodwill and Other Intangible Assets.” Other Income, Net of Expenses. Other income, net of expenses increased $16 million in 2002 compared to 2001 due in part to an increase in allowance for funds used during construction related to capital projects. Minority Interest Expense. Minority interest expense for 2002 results from consolidating less than 100% owned subsidiaries acquired in the March 2002 acquisition of Westcoast. EBIT. EBIT for the year ended December 31, 2002 increased $566 million to $1,174 million from $608 million for the year ended December 31, 2001. As discussed above, this increase resulted primarily from incremental EBIT related to assets acquired or consolidated as part of the acquisition of Westcoast in March 2002. EBIT was also impacted by a construction fee from an unconsolidated affiliate related to the successful completion of Gulfstream, and incremental earnings from Gulfstream which went into service in May 2002. EBIT was impacted, to a lesser extent, by the reversal of reserves as a result of the resolution of certain environmental issues during 2002 and the implementation of SFAS No. 142 resulting in the elimination of goodwill amortization. Year Ended December 31, 2001 as Compared to December 31, 2000 Operating Revenues. Operating revenues for the year ended December 31, 2001 decreased slightly to $1,105 million from $1,131 million for the year ended December 31, 2000. This decrease resulted primarily from reduced revenues of $112 million resulting from rate reductions, which became effective in December 2000 at Texas Eastern Transmission, LP (Texas Eastern) to reflect lower recovery requirements for operating costs, primarily system fuel and FERC Order 636 transition costs. These rate reductions are offset in reduced operating expenses. The decrease in revenues was partially offset by $57 million of incremental revenues from East Tennessee Natural Gas Company (ETNG) and Market Hub Partners (MHP) (acquired in March 2000 and September 2000, respectively), as a result of reporting an entire year of operations in 2001 as compared to 2000 and pre-operational earnings related to allowance for funds used during construction of $18 million from the Gulfstream project. Operating Expenses. Operating expenses for the year ended December 31, 2001 decreased $77 million to $504 million from $581 million for the year ended December 31, 2000. This decrease was due primarily to lower operating costs of $112 million at Texas Eastern which related to the reduced rates described above. This reduction was partially offset by increased expenses of $33 million related to a full year of operations of ETNG and MHP in 2001. EBIT. EBIT for the year ended December 31, 2001 increased $46 million to $608 million from $562 million for the year ended December 31, 2000. As discussed above, this increase resulted primarily from increased earnings at ETNG and MHP as a result of reporting an entire year of operations in 2001 as compared to 2000, and earnings from allowance for funds used during construction from the Gulfstream project. Field Services
Year Ended December 31, 2002 as Compared to December 31, 2001 Operating Revenues. Operating revenues for the year ended December 31, 2002 decreased $2,552 million to $5,526 million from $8,078 million for the year ended December 31, 2001. The decrease was due primarily to a $2,509 million reduction in revenues on the sale of natural gas, natural gas liquids and other petroleum products, resulting primarily from a $1.05 per MMBtu decrease in natural gas price and a decrease in average NGL prices of approximately $0.07 per gallon. Other factors contributing to lower operating revenues were reduced levels of natural gas gathered and processed/transported (throughput) of 0.3 TBtu per day, and a decreased trading and marketing net margin as a result of market conditions. Operating Expenses. Operating expenses for the year ended December 31, 2002 decreased $2,216 million to $5,365 million from $7,581 million for the year ended December 31, 2001. The decrease was due primarily to a $2,301 million reduction in expenses related to purchases of natural gas, natural liquids and other petroleum products resulting primarily from a decrease in average natural gas prices of $1.05 per MMBtu, a $0.07 per gallon decrease in average NGL prices and lower throughput levels. Partially offsetting these decreases were increases in operating and maintenance costs and general administrative costs of $113 million, resulting from increased maintenance on equipment, pipeline integrity and core business process improvements. Additionally, Field Services recorded a $40 million charge ($28 million at Duke Energy’s 70% share) for asset impairments in the fourth quarter of 2002 as a result of periodic asset performance evaluations as required by the guidance of SFAS No.144, “Accounting for the Impairment or Disposal of Long-Term Assets.” (See Note 9 to the Consolidated Financial Statements for additional information on asset impairment.) It was estimated in December 2002 that certain gas plants and gathering systems will continue to generate minimal or negative cash flows in future years. Based on the results of these analyses, Field Services determined that the carrying value of these assets was impaired and, accordingly, recorded a charge to reduce the carrying value to fair value. Field Services also recorded, as part of its internal review of balance sheet accounts, approximately $53 million of charges ($37 million at Duke Energy’s 70% share) in 2002, which may be related to corrections of accounting errors in prior periods. These adjustments were made in the following five categories: operating expense accruals; gas inventory valuations; gas imbalances; joint venture and investment account reconciliations; and other balance sheet accounts and are immaterial to Duke Energy’s reported results. Minority Interest Expense. Minority interest at Field Services decreased $126 million in 2002 compared to 2001 due primarily to decreased earnings from DEFS, Duke Energy’s joint venture with ConocoPhillips. EBIT. EBIT for the year ended December 31, 2002 decreased $210 million to $126 million from $336 million for the year ended December 31, 2001. This decrease was due primarily to the changes in commodity prices, increases in operating and general and administrative costs, and asset impairment charges. Field Services revenues and expenses are significantly dependent on commodity prices such as NGL’s and natural gas. Past and current trends in the price changes of these commodities may not be indicative of future trends. If negative market conditions persist over time and estimated cash flows over the lives of Field Services’ individual assets do not exceed the carrying value of those individual assets, asset impairments may occur in the future under existing accounting rules. Furthermore, a change in management’s intent about the use of individual assets (held for use versus held for sale) could also impact an impairment analysis. At December 31, 2002, Field Services had goodwill of $481 million and net property, plant and equipment of $4,642 million. Duke Energy and ConocoPhillips are currently in discussions regarding possible changes to DEFS’ ownership. Member interests in DEFS are currently held approximately 70% by Duke Energy and approximately 30% by ConocoPhillips. The discussions are focused on a possible change in the ownership structure that would be driven by the possible contribution by ConocoPhillips of certain midstream natural gas assets to DEFS. There is no certainty that these discussions will lead to a transaction in which ConocoPhillips would contribute these assets to DEFS or what might be the terms of such a transaction. Year Ended December 31, 2001 as Compared to December 31, 2000 Operating Revenues. Operating revenues for the year ended December 31, 2001 increased $1,913 million to $8,078 million from $6,165 million for the year ended December 31, 2000. The increase was due primarily to recognizing a full year of the results of the combination of Field Services’ natural gas gathering, processing and marketing business with Phillips (now ConocoPhillips, the Phillips combination) in March 2000, which contributed operating revenues of $1,064 million. Additional increases were attributable to increases in natural gas prices, other acquisitions, net trading margin and results of hedging activity. These increases were partially offset by lower average NGL prices that decreased $0.08 per gallon from 2000. Operating Expenses. Operating expenses for the year ended December 31, 2001 increased $1,856 million to $7,581 million from $5,725 million for the year ended December 31, 2000. The increase was due primarily to the Phillips combination, which resulted in additional purchases of natural gas, natural gas liquids and petroleum products of $881 million. Additional increases resulted from other acquisitions and the effect of higher average natural gas prices, offset by lower NGL prices on our natural gas and NGL purchase contracts. Operating and maintenance and general administrative cost reduction efforts of $36 million offset increases due to the Phillips combination. Increased depreciation expense as a result of the Phillips combination also contributed $44 million to the increase in operating expenses. Minority Interest Expense. Minority interest at Field Services increased $27 million in 2001 compared to 2000 due primarily to increased income from DEFS, as a result of the Phillips combination. EBIT. EBIT for the year ended December 31, 2001 increased $25 million to $336 million from $311 million for the year ended December 31, 2000. This increase was due primarily to recognizing a full year of operating results of the Phillips combination in March 2000, which was partially offset by lower average NGL prices from 2000. The increase in EBIT was also a result of savings from cost reduction efforts and plant consolidations. Duke Energy North America
Year Ended December 31, 2002 as Compared to December 31, 2001 Operating Revenues. Operating revenues for the year ended December 31, 2002 decreased $1,701 million to $1,596 million from $3,297 million for the year ended December 31, 2001. Significant increases in the megawatt capacity of generation assets in operation were more than offset by decreases in the average price realized for electricity generated, resulting in a reduction in operating revenue of $415 million. In addition, revenues decreased $1,017 million as a result of a decrease in the trading and marketing net margin. DENA’s results reflect the negative impacts of a prolonged economic weakness, low commodity prices, continued low volatility levels (measures of the fluctuation in the prices of energy commodities or products), reduced spark spreads (the difference between the value of electricity and the value of the gas required to generate the electricity), and decreased market liquidity. These negative trends are expected to continue in 2003. Also contributing to the decrease in revenues were net gains of $229 million in 2001 from the sale of interests in generating facilities. Operating Expenses. Operating expenses for the year ended December 31, 2002 decreased $261 million to $1,507 million from $1,768 million for the year ended December 31, 2001. The decrease was due primarily to lower incentive compensation expense of $300 million primarily related to trading activities, decreased bad debt expense of $123 million, lower fuel costs of $88 million, and demolition reserves recorded in 2001 of $65 million. Partially offsetting the decreases were higher depreciation expense of $89 million related to the commencement of operations of nine generation facilities by mid-year 2002. Also offsetting the decreases were asset impairment, severance, and other charges of $248 million related to current market conditions and strategic actions taken by management. These charges included provisions for the termination of certain turbines on order and the write-down of other uninstalled turbines of $121 million, the write-off of site development costs (primarily in California) of $31 million, partial impairment of a merchant plant of $31 million, demobilization costs related to the deferral of three merchant power projects of $22 million, a charge of $24 million for the write-off of an information technology system, and severance costs of $19 million associated with work force reductions. (See Note 9 to the Consolidated Financial Statements for additional information on asset impairment.) Other Income, Net of Expenses. Other income, net of expenses, increased $31 million in 2002 compared to 2001. The increase was due primarily to settlements received on disputed items at two generating facilities and interest income related to a note receivable associated with the sale of an interest in a generating facility. Minority Interest (Benefit) Expense. Increased losses at DETM, DENA’s joint venture with Exxon Mobil Corporation, resulted in an $87 million decrease in minority interest expense in 2002 as compared to 2001. EBIT. EBIT for the year ended December 31, 2002 decreased $1,322 million to $165 million from $1,487 million for the year ended December 31, 2001. The decrease was due primarily to those factors discussed above: decreased trading margins, a decrease in the average price realized on electric generation, a decrease in the number of generation facilities sold in 2002, and certain charges taken as a result of current market conditions and strategic actions taken by management. As a result of Duke Energy’s findings in the course of its investigation related to the Securities and Exchange Commission’s (SEC) inquiry on “round trip” trades (see Note 16 to the Consolidated Financial Statements—Commitments and Contingencies—Litigation, Trading Matters for additional information), DENA identified accounting issues that justified adjustments which reduced its EBIT by $11 million during 2002. An additional $2 million charge was recorded in other Duke Energy business segments related to these findings. If negative market conditions persist over time and estimated cash flows over the lives of DENA’s individual assets do not exceed the carrying value of those individual assets, asset impairments may occur in the future under existing accounting rules. Furthermore, a change in management’s intent about the use of individual assets (held for use versus held for sale) could also impact an impairment analysis. At December 31, 2002, DENA had $254 million of goodwill ($154 million recorded at Other Operations) and $7,118 million in net property, plant and equipment. Other Matters Impacting Future DENA Results. On October 31, 2002, the FERC imposed a soft price cap for the sale of energy throughout the Western Electricity Coordinating Council of $250 per megawatt hour. DETM was previously committed to market substantially all of Mobil’s U.S. and Canadian natural gas production through 2006. However, Duke Energy and ExxonMobil subsidiaries have reached an agreement to modify DETM’s gas supply from the ExxonMobil subsidiaries, so that a substantial amount of the gas will be released to ExxonMobil beginning in March 2003. Year Ended December 31, 2001 as Compared to December 31, 2000 Operating Revenues. Operating revenues for the year ended December 31, 2001 increased $1,064 million to $3,297 million from $2,233 million for the year ended December 31, 2000. The increase was due primarily to increased trading and marketing net margin of $1,154 million as a result of significant increases in volatility in the marketplace during 2001. The increase in operating revenue was also impacted by $63 million of incremental gains in 2001 over 2000 due to the sale of DENA’s interest in several generating facilities. The increase was partially offset by a decrease of $127 million in operating revenues as a result of lower average prices realized for increased volumes of electricity generated and sold. Operating Expenses. Operating expenses for the year ended December 31, 2001 decreased $10 million to $1,768 million from $1,778 million for the year ended December 31, 2000. The decrease was primarily the result of lower fuel costs of $439 million in 2001 and a $110 million charge in 2000 related to receivables for energy sales in California. These decreases were partially offset by increased compensation expense of $100 million, primarily related to trading activities, demolition reserves of $65 million, and higher depreciation and operating expenses of $101 million at existing plants and additional plants in operation in 2001. The decrease in operating expenses were further offset by increased operating expenses related to increased bad debts of $84 million, and increased costs associated with other trading and development activities of $167 million. Minority Interest (Benefit) Expense. Increased losses at DETM, and increases in the ownership percentage of DENA’s waste-to-energy plants resulted in a $29 million decrease in minority interest expense in 2001 as compared to 2000. EBIT. EBIT for the year ended December 31, 2001 increased $1,105 million to $1,487 million from $382 million for the year ended December 31, 2000. The increase was due primarily to those factors discussed above: increased trading margins and gains on sales of generating facilities during 2001. International Energy
Year Ended December 31, 2002 as Compared to December 31, 2001 Operating Revenues. Operating revenues for the year ended December 31, 2002 increased $107 million to $937 million from $830 million for the year ended December 31, 2001. The increase was primarily a result of the combination of increased prices, and GWh’s sold at International Energy’s Latin American operating facilities, which resulted in increased revenues of $50 million. Additionally, revenues increased $65 million due to the operating assets acquired and fully consolidated in Duke Energy’s financial statements as a result of the Westcoast acquisition in March 2002. Assets acquired in Guatemala during 2001 contributed additional revenues of $36 million in 2002 as a result of reporting a full year of operations in 2002 compared to only two months in 2001. These increases were partially offset by decreased revenues of $34 million from International Energy’s European operations, which were negatively affected by lower trading margins and liquidity, and decreased revenues of $15 million as a result of lower sales volumes and commodity prices at International Energy’s liquid natural gas business. Operating Expenses. Operating expenses for the year ended December 31, 2002 increased $524 million to $1,081 million from $557 million for the year ended December 31, 2001. This increase was due partly to operating expenses generated from certain assets as a result of the Westcoast acquisition in March 2002, which contributed $22 million of operating expenses. These assets were fully consolidated in the accompanying financial statements subsequent to the acquisition date of March 14, 2002. In 2001, these assets were accounted for under the equity method of accounting. The increase was also a result of $39 million of operating expenses related to increased fuel and transmission charges at the Latin American operating facilities and the effect of reporting a full year of operations in 2002 for assets acquired in Guatemala during 2001, compared to only two months in 2001. The increase in operating expenses was further impacted by a $194 million charge for impairment of goodwill for International Energy’s European trading and marketing business. The goodwill was originally recorded in connection with International Energy’s acquisition of Mobile Europe Gas Inc in 2000. The impairment was a result of Duke Energy’s revised market outlook for the European power and natural gas trading markets. International Energy took additional impairment charges in 2002 of $109 million related to the write-off of project and site development costs in Brazil and International Energy’s Asia Pacific businesses, along with the write-down of uninstalled turbines and office relocation charges in Australia. The increase in operating expenses was further impacted by $75 million as a result of reserve reversals related to the Brazilian operations in 2001: the establishment of settlement provisions in 2002, primarily related to rationing of water and power generation in Brazil: and various reserves related to International Energy’s liquefied natural gas contracts and Peru based businesses. Other Income, Net of Expenses. Other income, net of expenses increased $21 million in 2002 compared to 2001. The increase was primarily the result of an increase in interest income in International Energy’s Latin American operations as a result of higher cash and cash equivalents balances. EBIT. EBIT for the year ended December 31, 2002 decreased $388 million to a loss of $102 million from income of $286 million for the year ended December 31, 2001. This decrease was due primarily to various impairment charges related to International Energy’s revised market outlook for its European power and natural gas trading markets, poor performance of its trading and marketing business in the weakened European power and gas markets, and charges recorded as a result of the write-off of site development costs and the write-down of uninstalled turbines, primarily related to planned energy plants in Brazil. The decrease in EBIT was partially offset by the positive effect of the Westcoast and Guatemala acquisitions. If negative market conditions persist over time and estimated cash flows over the lives of International Energy’s individual assets do not exceed the carrying value of those individual assets, asset impairments may occur in the future under existing accounting rules. Furthermore, a change in management’s intent about the use of individual assets (held for use versus held for sale) could also impact an impairment analysis. At December 31, 2002, International Energy had $246 million in goodwill and $2,715 million in net property, plant and equipment. Other Matters Impacting Future International Energy Results. EBIT results for International Energy are sensitive to short term translation impacts from fluctuations in exchange rates, most notably the Brazilian real, the Mexican peso, the Argentine peso, the European euro, the Australian dollar and the Peruvian nuevo sol. Certain of International Energy’s long-term sales contracts contain inflation adjustment clauses. Following the recent devaluation of the Brazilian currency, inflation rates in Brazil are on the rise. While this is favorable to revenue in the long run, as International Energy’s contract prices are adjusted, there is an unfavorable impact on interest expense as a result of revaluation of International Energy’s outstanding local debt. At the current levels of inflation, this could have a significant impact on interest expense at International Energy for the year ended December 31, 2003. Year Ended December 31, 2001 as Compared to December 31, 2000 Operating Revenues. Operating revenues for the year ended December 31, 2001 increased $25 million to $830 million from $805 million for the year ended December 31, 2000. The increase was primarily a result of stronger operational results in the Latin American businesses and inflation adjustment clauses in certain power purchases agreements of $72 million. Additionally, reporting a full year of operations in 2001 for the Eastern Gas Pipeline constructed in Australia, compared to only four months in 2000 contributed $13 million in revenues. This increase was partially offset by a $54 million gain recognized in 2000 from the sale of liquefied natural gas ships. Operating Expenses. Operating expenses for the year ended December 31, 2001 increased $74 million to $557 million from $483 million for the year ended December 31, 2000. This increase was due primarily to increases in reserves of $21 million for spot purchases and spot purchase expense of electricity due to power and water rationing in Brazil. The increase in operating expenses also resulted from increases in general and administrative expenses of $31 million in International Energy’s Asia Pacific, Latin American and corporate offices. In addition, reporting a full year of operations in 2001 for the Eastern Gas Pipeline as compared to four months in 2000 contributed operating costs of $10 million. EBIT. EBIT for the year ended December 31, 2001 decreased $55 million to $286 million from $341 million for the year ended December 31, 2001. The decrease was due primarily to a gain recognized in 2000 from the sale of liquefied natural gas ships, and the impact in 2001 of foreign currency devaluation on the earnings of international operations. This decrease was offset by inflation adjustment clauses in certain power purchase agreements and stronger Latin American operational results. Other Energy Services
Year Ended December 31, 2002 as Compared to December 31, 2001 Operating Revenues. Operating revenues for the year ended December 31, 2002 decreased $129 million to $405 million from $534 million for the year ended December 31, 2001. The decrease was due primarily to the sale of DE&S and DukeSolutions in 2002, resulting in a partial year of revenues compared to a full year in 2001. The sale of these entities resulted in a decrease of $339 million of operating revenues. The sale of DE&S to Framatome ANP, Inc. was completed on May 1, 2002, and the sale of DukeSolutions to Ameresco, Inc was completed on May 1, 2002. (See Note 2 to the Consolidated Financial Statements.) Partially offsetting the decreases in revenues as a result of the sale transactions was increased equity earnings from D/FD of $75 million, as a result of D/FD completing a number of energy plants. Most of the plants were constructed for DENA or Duke Power and therefore the related intercompany profit has been eliminated within the Other Operations segment. (See Note 8 to the Consolidated Financial Statements for more information on equity earnings and D/FD’s related party transactions.) EDS was formed in the second quarter of 2002, and contributed $92 million in revenues. Revenues also increased by $39 million at DEM as a result of increased trading and marketing net margins in 2002, and the write-offs for Enron Corporation (Enron) and Agrifos in 2001. Operating Expenses. Operating expenses for the year ended December 31, 2002 decreased $329 million to $359 million from $688 million for the year ended December 31, 2001. The decrease was due primarily to the sale of DE&S and DukeSolutions in 2002, resulting in a partial year of expenses. The sale of these entities resulted in a decrease of $364 million in operating expenses. The decrease in operating expenses was partially offset by a $77 million increase in operating expenses as a result of the formation of EDS in the second quarter of 2002, and $17 million of severance charges in 2002 at D/FD due to the downturn in the domestic power industry. EBIT. EBIT for the year ended December 31, 2002 increased $212 million to $63 million from a loss of $149 million for the year ended December 31, 2001. The increase was due primarily to the sale of portions of the DE&S and DukeSolutions entities in 2002, increased equity in earnings at D/FD, earnings generated from EDS and the DEM write-off for Enron and Agrifos in 2001. Year Ended December 31, 2001 as Compared to December 31, 2000 Operating Revenues. Operating revenues for the year ended December 31, 2001 decreased $316 million to $534 million from $850 million for the year ended December 31, 2000. The decrease was due primarily to decreased revenues at Duke Solutions of $307 million due to decreased volumes and the cessation of retail commodity trading. The decrease in revenues was also a result of decreased trading and marketing net revenues at DEM of $186 million due to the write-offs for Enron and Agrifos in 2001, and DEM’s ownership interest in Canadian 88 Energy Corp. The decreases in revenues were partially offset by an increase in revenues of $110 million at DE&S due primarily to increased business activity and a $62 million loss in 2000 related to a D/FD project. Operating Expenses. Operating expenses for the year ended December 31, 2001 decreased $172 million to $688 million from $860 million for the year ended December 31, 2000. The decrease was due primarily to decreased expenses at DukeSolutions of $273 million due to the cessation of retail commodity trading. The decrease in expenses was partially offset by an increase in operating expenses of $57 million as a result of increased business activity at DE&S, and charges at DE&S and DukeSolutions of $36 million for goodwill impairment. EBIT. EBIT for the year ended December 31, 2001 decreased $142 million compared to the year ended December 31, 2000. The decrease was due primarily to the cessation of retail commodity trading at Duke Solutions, decreased trading and marketing net margins at DEM, and charges taken at DE&S and DukeSolutions for goodwill impairment. The decrease was partially offset by increased earnings at DE&S as a result of new business activity. Duke Ventures
Year Ended December 31, 2002 as Compared to December 31, 2001 Operating Revenues. Operating revenues for the year ended December 31, 2002 decreased $99 million to $547 million from $646 million for the year ended December 31, 2001. The decrease was primarily a result of decreased commercial project sales of $184 million and reduced rental revenue of $19 million in 2002 at Crescent due to current soft market conditions. These decreases were partially offset by an increase in residential developed lot sales in 2002 of $29 million at Crescent due to the addition of several high-end communities and an increase in surplus land sales in 2002 of $29 million. Additionally, the sale of Duke Energy’s remaining water operations in 2002 resulted in a gain of $33 million. Operating Expenses. Operating expenses for the year ended December 31, 2002 decreased $115 million to $346 million from $461 million for the year ended December 31, 2001. This decrease was due primarily to decreased costs of $155 million associated with a decrease in commercial project sales at Crescent in 2002. This decrease was partially offset by an increase in the cost of developed lot sales of $28 million at Crescent in 2002. EBIT. EBIT for the year ended December 31, 2002 increased $21 million to $204 million from $183 million for the year ended December 31, 2001. This increase was due primarily to higher profit margins on properties sold by Crescent in 2002 as compared to 2001 and the gain on sale of water operations during 2002. These increases were offset by reduced earnings from commercial project sales and reduced rental revenue at Crescent. Year Ended December 31, 2001 as Compared to December 31, 2000 Operating Revenues. Operating revenues for the year ended December 31, 2001 decreased $151 million to $646 million from $797 million for the year ended December 31, 2000. The decrease was primarily a result of a gain of $407 million recorded in 2000 on DukeNet’s sale of its 20% interest in BellSouth Carolina PCS to BellSouth Corporation. The decrease in operating revenues was offset by a $215 million increase in commercial project sales at Crescent during 2001 and losses of $10 million incurred in 2000 related to DukeNet’s BellSouth Carolina PCS investment. Operating Expenses. Operating expenses for the year ended December 31, 2001 increased $232 million to $461 million from $229 million for the year ended December 31, 2000. This increase was due primarily to increased commercial project sales at Crescent in 2001, which contributed additional operating expenses of $190 million. EBIT. EBIT for the year ended December 31, 2001 decreased $385 million to $183 million from $568 million for the year ended December 31, 2000. This decrease was due mainly to DukeNet’s gain on sale of its 20% interest in BellSouth Carolina PCS to BellSouth Corporation in 2000, offset by increased earnings at Crescent related primarily to increased commercial project sales, and the absence of losses related to DukeNet’s BellSouth Carolina PCS investment in 2001. In March 2003, Duke Energy announced that it will exit the merchant finance business at DCP in an orderly manner. Other Operations EBIT for Other Operations decreased $49 million in 2002 and $163 million in 2001. The decrease for 2002 was due primarily to increased intercompany profits between Duke Energy’s segments which are eliminated within the Other Operations segment. These intercompany profits are primarily a result of earnings at D/FD for energy plants it has under construction or completed for DENA, and profits on gas contracts between DENA and Natural Gas Transmission. Partially offsetting the decrease were the expenses associated with increased contributions in 2001 to the Duke Energy Foundation (an independent, Internal Revenue Code section 501(c)(3) entity that funds Duke Energy’s charitable contributions) and mark-to-market losses in 2001 on corporately managed energy risk positions used to hedge exposure to commodity prices. The decrease for 2001 was due primarily to increased contributions to the Duke Energy Foundation, mark-to-market losses on corporately managed energy risk positions used to hedge exposure to commodity prices, increased unallocated corporate costs and an interest refund in 2000 from an Internal Revenue Agency Ruling. Other Impacts on Earnings Available for Common Stockholders Interest expense increased $325 million in 2002 as compared to 2001, due primarily to higher debt balances resulting from debt assumed in, and issued with respect to, the acquisition of Westcoast and increased financing throughout the corporation, partially offset by lower interest rates in 2002. In 2001 as compared to 2000, interest expense decreased $126 million due primarily to lower interest rates. Minority interest expense decreased $220 million in 2002 as compared to 2001 and increased $20 million in 2001 as compared to 2000. Minority interest expense includes expense related to regular distributions on preferred securities of Duke Energy and its subsidiaries. This expense decreased $31 million in 2002 as compared to 2001 and increased $39 million in 2001 as compared to 2000. The decrease in 2002 was due primarily to lower distributions related to Catawba River Associates, LLC (Catawba). Beginning in October 2002, subsequent costs associated with this financing have been classified as interest expense. (See Financing Cash Flows and Note 14 to the Consolidated Financial Statements for additional information related to Catawba.) Minority interest expense as shown and discussed in the preceding business segment EBIT sections includes only minority interest expense related to EBIT of Duke Energy’s joint ventures. It does not include minority interest expense related to interest and taxes of the joint ventures. Total minority interest expense related to the joint ventures (including the portion related to interest and taxes) decreased $189 million in 2002 as compared to 2001 and $19 million in 2001 as compared to 2000. The 2002 change was driven by decreased earnings at DETM and decreased earnings from DEFS. The 2001 decrease was due to changes in the ownership percentage of DENA’s waste-to-energy plants and decreased earnings by DETM, offset slightly by increased minority interest expense for DEFS as a result of the change in ownership due to the Phillips combination. The effective tax rate increased to 37.4% in 2002 as compared to 36.6% in 2001 primarily as a result of a non-deductible goodwill write-off of $194 million for International Energy’s European trading and marketing business and income tax reserves related to losses in Europe and South America, which may be unrealized in the future, offset by favorable foreign taxes due to the acquisition of regulated Westcoast entities; a benefit from a change in the federal tax law relating to the deduction of employee stock ownership plan dividends; and a state tax settlement finalized during 2002. The effective tax rate increased slightly to 36.6% in 2001 as compared to 36.5% in 2000. During 2001, Duke Energy recorded a one-time net-of-tax charge of $96 million related to the cumulative effect of a change in accounting principle for the January 1, 2001 adoption of SFAS No. 133. This charge related to contracts that either did not meet the definition of a derivative under previous accounting guidance or do not qualify as hedge positions under new accounting requirements. (See Notes 1 and 7 to the Consolidated Financial Statements.) |
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