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As of December 31, 2002, Duke Energy had $857 million in cash and cash equivalents compared to $290 million as of December 31, 2001. Duke Energy’s working capital was a $137 million deficit at December 31, 2002, compared to a $854 million deficit as of December 31, 2001. Duke Energy relies upon cash flows from operations, as well as, borrowings and the sale of assets to fund its liquidity and capital requirements. A material adverse change in operations or available financing may impact Duke Energy’s ability to fund its current liquidity and capital resource requirements. Operating Cash Flows Net cash provided by operating activities was $4,530 million in 2002 compared to $4,357 million in 2001, an increase of $173 million. The increase in cash provided by operating activities was due primarily to higher cash earnings plus changes in working capital from 2001. Although net income significantly decreased in 2002 (see Results of Operation for further discussion) many of the items affecting net income were non-cash. Non-cash items affecting earnings included an increase in depreciation expense, primarily due to the acquisition of Westcoast; non-cash impairment charges for goodwill (at International Energy), project sites (primarily at DENA) and property plant and equipment; and higher deferred tax expense. Net cash provided by operating activities was $4,357 million in 2001 compared to $2,011 million in 2000, an increase of $2,346 million. The increase was due primarily to price movements in the energy commodities markets which have a direct impact on Duke Energy’s use and generation of cash from operations. Earnings increase as natural gas and electricity prices move favorably with respect to contracts that Duke Energy holds. In addition, counterparties may be required to post collateral in cash or letters of credit if price moves benefit Duke Energy. This mechanism has given Duke Energy use of the cash on a short-term basis. Conversely, negative price impacts reduce earnings and may require Duke Energy to post collateral with its counterparties. Cash collateral posted by Duke Energy is included in Other Current Assets and cash collateral collected by Duke Energy is included in Other Current Liabilities in the Consolidated Balance Sheets. Duke Energy currently anticipates net cash provided by operating activities, plus the sale of assets, in 2003 to be approximately $4,400 million. Achievement of these projected cash flows is subject to a number of factors, including, but not limited to, industry restructuring, regulatory constraints, acquisition and divestiture opportunities, market volatility, and economic trends. Investing Cash Flows Cash used in investing activities was $6,809 million in 2002 compared to $6,043 million in 2001, an increase of $766 million. Additionally, cash used in investing activities was $6,043 million in 2001 compared to $4,716 million in 2000, an increase of $1,327 million. The primary use of cash for investing activities is capital and investment expenditures, which are detailed by business segment in the following table. Capital and Investment Expenditures by Business Segment (a)
Capital and investment expenditures increased $249 million in 2002 compared to 2001. The increase was due primarily to cash used in the acquisition of Westcoast of $1,707 million, net of cash acquired (see Note 2 to the Consolidated Financial Statements) partially offset by decreases in capital expenditures and investment expenditures. Capital expenditures decreased when compared to 2001 due to a decrease in DENA’s investments in generating facilities, as a result of management’s revised outlook for the merchant energy portion of its business, and a decrease in acquisitions of minor businesses and assets when compared to 2001. These decreases in capital expenditures were partially offset by an increase in plant construction costs at Franchised Electric primarily due to expenditures related to environmental equipment at coal-fired plants and the Mill Creek combustion turbine plant; and an increase in investments in property plant and equipment at Gas Transmission due to increased expansion projects in the Algonquin, ETNG, Texas Eastern and Westcoast systems, along with the M&N Pipeline expansion costs after its consolidation in 2002. Investment activities also decreased when compared to 2001, due primarily to reduced investments at Duke Ventures (primarily related to DCP) and Natural Gas Transmission’s 2001 investment in a 50% interest in Gulfstream. Capital and investment expenditures increased $1,489 million in 2001 compared to 2000. The increase reflects additional expansion and development expenditures (primarily related to DENA’s generating facilities), construction of the Mill Creek combustion turbine plant, refurbishment and upgrades to existing assets (primarily related to Franchised Electric), and minor acquisitions of businesses and assets. Also in 2001, Natural Gas Transmission invested in a 50% interest in Gulfstream. These increases were partially offset by Natural Gas Transmission’s acquisition of ETNG for approximately $390 million and of MHP for approximately $250 million in cash, and International Energy’s approximately $280 million tender offer for Companhia de Geracao de Energia Elétrica Paranapanema (Paranapanema) in 2000. Duke Energy’s projected 2003 capital and investment expenditures are approximately $3,000 million. Duke Energy is focusing on reducing risk and restructuring its business for future success, including opportunities to reduce further the projected capital expenditures. Duke Energy will invest in its strongest business sectors with an overall focus on positive net cash generation. Based on this goal, over 60% of projected 2003 capital expenditures are projected to be allocated to Natural Gas Transmission and Franchised Electric. Total projected capital and investment expenditures include approximately $1,800 million for maintenance and upgrades of existing plants, pipelines, and infrastructure to serve load growth. 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. (See Note 16 to the Consolidated Financial Statements.) As part of this legislation Duke Energy will spend an estimated total of $1.5 billion over the next ten years to install pollution controls in its coal-fired plants. Duke Energy expects to incur approximately $17 million of total capital costs associated with this legislation in 2003. All projected capital and investment expenditures are subject to periodic review and revision and may vary significantly depending on a number of factors, including, but not limited to, industry restructuring, regulatory constraints, acquisition opportunities, market volatility and economic trends. Financing Cash Flows and Liquidity Duke Energy’s consolidated capital structure as of December 31, 2002, including short-term debt, was 55% debt, 36% common equity, 5% minority interests, 3% trust preferred securities and 1% preferred stock. Fixed charges coverage ratio, calculated using SEC guidelines, was 2.1 times for 2002, 3.8 times for 2001 and 3.6 times for 2000. Duke Energy’s cash requirements for 2003 are expected to be funded by cash from operations, including the sale of assets, and to be adequate for funding capital expenditures, dividend payments and permanently retiring a portion of scheduled debt maturities. In addition, Duke Energy expects to access the capital markets as needed and also obtain some funding through common stock issuances in its InvestorDirect Choice Plan (a stock purchase and dividend reinvestment plan) and employee benefit plans. The ability to access the capital markets is dependent upon market opportunities presented, among other factors. Duke Energy does not have any material off-balance sheet financing entities or structures, except for normal operating lease arrangements and guarantee contracts (see Notes 16 and 17 to the Consolidated Financial Statements). Management believes Duke Energy has adequate financial flexibility and resources to meet its future needs. Credit Ratings. In August 2002, Standard & Poor’s (S&P) downgraded its long-term ratings for Duke Energy, Duke Capital Corporation (a wholly owned subsidiary of Duke Energy that provides financing and credit enhancement services for its subsidiaries) and its subsidiaries (with the exception of Maritimes & Northeast Pipeline, LLC and Maritimes and Northeast Pipeline, LP (collectively, M&N Pipeline) and DEFS) one ratings level, changing its outlook to Stable and leaving commercial paper ratings unchanged. S&P’s actions were based principally on a reassessment of Duke Energy’s consolidated creditworthiness and S&P’s perceived increase in risk of energy trading and merchant generation activities. In January 2003, S&P again lowered its long-term ratings for Duke Energy, Duke Capital Corporation and its subsidiaries, with the exception of M&N Pipeline and DEFS. In addition, S&P lowered the short-term ratings for Duke Energy and Duke Capital Corporation. This action was based primarily on S&P’s determination that reductions in capital and investment expenditures and planned asset divestitures will not be sufficient to provide funds needed to lower debt and reduce interest expense quickly enough to offset the impact of decreased earnings in 2002 and anticipated lower earnings in 2003. S&P concluded this action by placing Duke Energy and its subsidiaries, excluding M&N Pipeline and DEFS, on Negative Outlook citing the need to review Duke Energy’s progress on its divestiture program and its need to improve certain financial measures. In October 2002, Fitch Ratings (Fitch) downgraded its long-term ratings for Duke Energy and its long-term and short-term ratings of Duke Capital Corporation one ratings level, due primarily to Duke Energy’s reduced earnings outlook for the remainder of 2002 and 2003. Fitch placed Duke Energy and its subsidiaries, with the exception of DEFS, on Negative Outlook due to the ongoing uncertainty surrounding the merchant power industry and investigations by the FERC and the SEC. In January 2003, Fitch lowered the long-term and short-term ratings of Duke Energy and the long-term ratings of Duke Capital Corporation, and also lowered the ratings of Texas Eastern and PanEnergy Corp (PanEnergy) (both wholly owned subsidiaries of Duke Energy). Those actions were based on Duke Energy’s announcements that consolidated profits for 2002 and 2003 were expected to be well below previous estimates. Fitch concluded its actions leaving Duke Energy and its subsidiaries, excluding DEFS, on Negative Outlook due to the continued uncertainty of ongoing FERC and SEC investigations, and the perceived execution risk in management’s plans for non-core asset dispositions over the next year. In December 2002, Moody’s Investors Service (Moody’s) lowered its long-term and short-term ratings of Duke Energy, and its long-term ratings of Duke Capital Corporation, Texas Eastern and PanEnergy. Moody’s actions were in response to lower actual and anticipated earnings and cash flow as a result of continued weakness in wholesale energy markets both in the U.S. and abroad. Moody’s concluded its action placing Duke Energy and its subsidiaries, except M&N Pipeline and DEFS, on Negative Outlook, reflecting Moody’s perceived execution risk in Duke Capital Corporation’s program to strengthen its balance sheet. The following table summarizes the credit ratings of Duke Energy, its principal funding subsidiaries and its trading and marketing subsidiary DETM, as of February 28, 2003.
Duke Energy’s credit ratings are dependent on, among other factors, the ability to generate sufficient cash to fund Duke Energy’s capital and investment expenditures and dividends, while strengthening the balance sheet through debt reductions. If, as a result of market conditions or other factors affecting Duke Energy’s business, Duke Energy is unable to execute its business plan, including disposition of non-core assets, or if Duke Energy’s earnings outlook deteriorates, Duke Energy’s ratings could be further affected. The impacts of the credit rating downgrades to date have been minimal on Duke Energy and its subsidiaries. If further downgrades were to occur and to the extent that these downgrades placed certain of the entities (primarily DETM and DEFS) below investment grade, there could be a negative impact on that entity’s working capital and terms of trade. Significant Financing Activities. During 2002, Duke Energy issued $2,110 million of senior unsecured notes: $750 million of 6.25% senior unsecured notes due in 2012, $250 million of floating rate (based on the three-month LIBOR plus 0.35%) senior unsecured notes due in 2005, $250 million of 6.60% retail senior unsecured notes due in 2022 (swapped to floating rate based on the three-month LIBOR), $350 million of 6.45% senior unsecured notes due in 2032, $110 million of 4.61% senior unsecured notes due in 2007 and $400 million of 5.625% senior unsecured notes due in 2012. In addition, Duke Energy refinanced $250 million of senior unsecured debt with a short-term private debt securities offering. The proceeds from these issuances were used primarily for general corporate purposes, to repay the $250 million of private debt securities, to redeem $100 million of Duke Energy’s 7.5% Series B first and refunding mortgage bonds due in 2025, to repay commercial paper and to repay a $600 million intercompany loan from Duke Capital Corporation. In 2002, Duke Capital Corporation issued $500 million of 6.25% senior unsecured notes due in 2013 and $250 million of 6.75% senior unsecured notes due in 2032. In addition, Duke Capital Corporation, through private placement transactions, issued $500 million of floating rate (based on the one-month LIBOR plus 0.65%) senior unsecured notes due in 2003 and $100 million of floating rate (based on the one-month LIBOR plus 0.85%) senior unsecured notes due in 2004. The proceeds from these issuances were used for general corporate purposes and to repay commercial paper. Additionally, Duke Capital Corporation decreased its note payable to D/FD by $286 million, to $282 million as of December 31, 2002. The weighted-average interest rate on this note for 2002 was 2.5%. (See Notes 8 and 11 to the Consolidated Financial Statements.) In 2002, a wholly owned subsidiary of Duke Energy, Duke Australia Pipeline Finance Pty Ltd., closed a syndicated bank debt facility for 900 million Australian dollars (U.S. $450 million) with various banks to fund its pipeline and power businesses in Australia. The facility includes a Duke Capital Corporation-guaranteed tranche and a non-recourse project finance tranche that is secured by liens over existing Australian pipeline assets. Proceeds from the project finance tranche were used to repay intercompany loans. During 2002, Texas Eastern issued $300 million of 5.25% senior unsecured notes due in 2007 and $450 million of 7.0% senior unsecured notes due in 2032. The proceeds from these issuances were used for general corporate purposes, including the repayment of debt which matured in 2002, and for pipeline expansion and maintenance projects. In 2002, Algonquin Gas Transmission Company, a wholly owned subsidiary of Duke Energy, through a private placement transaction, issued $300 million of 5.69% senior unsecured notes due in 2012. The proceeds from this issuance were used for general corporate purposes, including repayment of maturing debt and for pipeline expansion and maintenance projects. In 2002, ETNG, a wholly owned subsidiary of Duke Energy, through a private placement transaction, issued $150 million of 5.71% senior unsecured notes due in 2012. The proceeds from this issuance were used for general corporate purposes and for pipeline expansion and maintenance projects. During 2002, Union Gas, issued 200 million Canadian dollars (U.S. $128 million) of 5.19% debentures due in 2007. The proceeds from this issuance were used for general corporate purposes, including repayment of maturing debt, repayment of commercial paper and funding of capital expenditures. In February 2003, Duke Energy issued $500 million of 3.75% five-year first and refunding mortgage bonds due in 2008 in a private placement transaction exempt from registration under Rule 144A of the Securities Act of 1933, as amended (Securities Act). The bonds are subject to a registration agreement, whereby Duke Energy has agreed to register an exchange with the holders of identical bonds under the Securities Act. The proceeds from this issuance were used to repay short-term debt, replace $100 million of Duke Energy’s first and refunding mortgage bonds that matured in February 2003, to repay approximately $200 million of an intercompany loan from Duke Capital Corporation and for general corporate purposes. Additionally, Duke Energy redeemed all of its Auction Series A preferred stock during 2002. The total redemption price was approximately $75 million. In 2000, Catawba, a fully consolidated financing entity managed by a subsidiary of Duke Energy, issued $1,025 million of preferred member interests to a third-party investor. The proceeds from the non-controlling investor were reflected on the Consolidated Balance Sheets as Minority Interest in Financing Subsidiary and were subsequently advanced to DE Power Generation, LLC (DEPG), a wholly owned subsidiary of Duke Energy. In September 2002, Catawba distributed the receivable from DEPG to the preferred member, THOR Investors, LLC (THOR), which simultaneously withdrew its interest. As a result, the $1,025 million that DEPG previously owed to Catawba became an obligation to THOR and was reclassified on the 2002 Consolidated Balance Sheet to Long-term Debt. In October 2002, Duke Energy purchased the equity interests in THOR and effectively reduced the debt to $994 million. Additionally, Duke Capital Corporation financially guaranteed the $994 million in return for certain modifications to the terms of the credit agreement. On March 14, 2002, Duke Energy acquired Westcoast for approximately $8 billion, including the assumption of $4.7 billion of debt. The assumed debt consists of debt of Westcoast, Union Gas and various project entities that are wholly owned or consolidated by Duke Energy. The interest rates on the assumed debt range from 1.8% to 15.0%, with maturity dates ranging from 2002 through 2031. In addition to the debt assumed, as of December 31, 2002, Westcoast and Union Gas had operating credit facilities of 450 million Canadian dollars (U.S. $285 million) and 600 million Canadian dollars (U.S. $380 million), respectively. Borrowings under the Union Gas credit facility are subject to and dependent on the senior unsecured rating of Union Gas, rated A by DBRS and A- by S&P as of February 28, 2003. For the Union Gas credit facility, no material adverse change can be declared if Union Gas maintains a rating of BBB or greater by either DBRS or S&P. Any outstanding debt would not become due and payable as a result of a change in its ratings. In the transaction, a Duke Energy subsidiary acquired all of the outstanding common shares of Westcoast in exchange for approximately $1.7 billion in cash (net of cash acquired) and approximately 49.9 million shares of Duke Energy common stock (including exchangeable shares of a Duke Energy Canadian subsidiary that are substantially equivalent to and exchangeable on a one-for-one basis for Duke Energy common stock). The value of the Duke Energy common stock issued was approximately $1.7 billion and was determined based on the average market price of Duke Energy’s common shares over the two-day period before and after the terms of the transaction became fixed, in accordance with EITF No. 99-12, “Determination of the Measurement Date for the Market Price of Acquirer Securities Issued in a Purchase Business Combination.” Under prorating provisions of the acquisition agreement that ensured that approximately 50% of the total consideration was paid in cash and 50% in stock, each common share of Westcoast entitled the holder to elect to receive 43.80 in Canadian dollars, or either 0.7711 of a share of Duke Energy common stock or of an exchangeable share of a Duke Energy Canadian subsidiary, or a combination thereof. The cash portion of the consideration was funded with the proceeds from the issuance of $750 million in mandatory convertible securities in November 2001 (see Note 18 to the Consolidated Financial Statements) along with incremental commercial paper. The commercial paper was repaid using the proceeds from a public offering of 54.5 million shares of common stock at $18.35 per share. The shares from the public offering were issued in October 2002 and the proceeds were approximately $1.0 billion, before underwriting commissions and other offering expenses. The Westcoast acquisition was accounted for using the purchase method of accounting, and goodwill totaling approximately $2.3 billion was recorded in the transaction. (See Note 2 to the Consolidated Financial Statements.) Credit Facilities and Related Borrowings. The following table summarizes Duke Energy’s credit facilities and related amounts outstanding as of December 31, 2002. The majority of the credit facilities support commercial paper programs. The issuance of commercial paper, letters of credit and other borrowings reduces the amount available under the credit facilities. Amounts related to outstanding commercial paper and other borrowings in the following table are included in the long-term debt table presented in Note 11 to the Consolidated Financial Statements. Credit Facilities Summary as of December 31, 2002
Existing bank credit facilities as of December 31, 2002 are not subject to minimum cash requirements. In addition, in October 2002, Duke Energy secured an option to borrow up to $500 million in February 2003 for a period ending no later than November 2003. In February 2003, this option was amended to allow Duke Energy to borrow up to $250 million between June 30, 2003 and August 29, 2003. Any amounts borrowed would be due no later than March 31, 2004. Also, Duke Energy is currently maintaining a minimum cash position of $500 million at Duke Capital Corporation to be used for short-term liquidity needs. This cash position is invested in highly rated, liquid, short-term money market securities. Duke Energy has approximately $3,700 million of credit facilities which mature in 2003. It is Duke Energy’s intent to reduce its need for these facilities as the year progresses and thus resyndicate less than the total $3,700 million. Duke Energy’s credit agreements contain various financial and other covenants. Failure to meet those covenants beyond applicable grace periods could result in acceleration of due dates of the borrowings and/or termination of the agreements. As of December 31, 2002, Duke Energy was in compliance with those covenants. In addition, certain of the agreements contain cross-acceleration provisions that may allow acceleration of payments or termination of the agreements upon nonpayment or acceleration of other significant indebtedness of the applicable borrower or certain of its subsidiaries. Other Financing Matters. As of December 31, 2002, Duke Energy and its subsidiaries had effective SEC shelf registrations for up to $1,140 million in gross proceeds from debt and other securities. Subsequent to December 31, 2002, these SEC shelf registrations have been increased to $2,500 million. In addition, as of December 31, 2002, Duke Energy had access to 950 million Canadian dollars (U.S. $602 million) available under Canadian shelf registrations for issuances in the Canadian market. In 2000, Duke Energy issued $250 million of 7.125% senior unsecured bonds due in 2012, with a put option that gave investors the choice to put the bond to Duke Energy at par value in September 2002 or extend the maturity until 2012. In September 2002, Duke Energy refinanced the senior unsecured bonds with private debt securities and paid approximately $43 million to buy back the option to extend the maturity of the bonds. The private debt securities were subsequently repaid in October 2002 by the issuance of $350 million of 6.45% senior unsecured notes due in 2032. The cost of the option will be amortized over the life of the $350 million senior unsecured notes. In 2000, Duke Capital Corporation issued $150 million senior unsecured bonds due in 2003 that may be required to be repaid if Duke Capital Corporation’s senior unsecured debt ratings fall below BBB at S&P or Baa2 at Moody’s. Additionally, $21 million of Duke Energy’s senior unsecured notes which mature serially through 2011 may be required to be repaid if Duke Energy’s senior unsecured debt ratings fall below BBB- at S&P or Baa3 at Moody’s, and $33 million of Duke Energy’s senior unsecured notes which mature serially through 2016 may be required to be repaid if Duke Energy’s senior unsecured debt ratings fall below BBB at S&P or Baa2 at Moody’s. As of February 28, 2003, Duke Energy’s senior unsecured credit rating was A- at S&P and A3 at Moody’s, and Duke Capital Corporation’s senior unsecured credit rating was BBB+ at S&P and Baa2 at Moody’s. Duke Energy’s Board of Directors adopted a dividend policy in 2000 that maintains dividends at the current quarterly rate of $0.275 per share, subject to the discretion after determination of the Board of Directors. Duke Energy has paid quarterly cash dividends for 76 consecutive years. Dividends on common and preferred stocks in 2003 are expected to be paid on March 17, June 16, September 16 and December 16, subject to the discretion of the Board of Directors. Duke Energy’s InvestorDirect Choice Plan, allows investors to reinvest dividends in new issuances of common stock and to purchase common stock directly from Duke Energy. Issuances under this plan were $105 million in 2002, $100 million in 2001 and $86 million in 2000. Duke Energy also sponsors employee savings plans that cover substantially all employees. Issuances of common stock under these plans were $188 million in 2002, $170 million in 2001 and $57 million in 2000. Duke Energy also issues authorized but unissued shares of its common stock to meet other employee benefit requirements. Issuances of common stock to meet other employee benefit requirements were approximately $50 million to $60 million each year for 2002, 2001 and 2000. This practice is expected to continue in 2003. (See Notes 19 and 20 to the Consolidated Financial Statements for additional information on stock-based compensation and employee benefit plans.) Additionally, no contributions to the Duke Energy defined benefit pension plan were made in 2002, 2001 or 2000. Duke Energy does not anticipate making a contribution in 2003 for the 2002 plan year. Duke Energy anticipates that it will make a contribution to its non-contributory defined benefit pension plan in 2004 of approximately $100 million for the 2003 plan year. Duke Energy anticipates that it will make a contribution of approximately $10 million to the Westcoast pension plans in 2003 for the 2003 plan year. Contributions for the 2004 plan year and beyond may vary based on the actual return on the defined benefit pension plan’s assets, as well as other factors. Contractual Obligations and Commercial Commitments As part of its normal business, Duke Energy is a party to various financial guarantees, performance guarantees and other contractual commitments to extend guarantees of credit and other assistance to various subsidiaries, investees and other third parties. These arrangements are largely entered into by Duke Capital Corporation. To varying degrees, these guarantees involve elements of performance and credit risk, which are not included on the Consolidated Balance Sheets. The possibility of Duke Energy or Duke Capital Corporation having to honor its contingencies is largely dependent upon future operations of various subsidiaries, investees and other third parties, or the occurrence of certain future events. Duke Energy would record a liability if events occurred that required that one be established. (See Note 17 to the Consolidated Financial Statements for more information on financial guarantees.) In addition, Duke Energy enters into various fixed-price, non-cancelable commitments to purchase or sell power (tolling arrangements or power purchase contracts), take-or-pay arrangements, transportation or throughput agreements and other contracts that may or may not be recognized on the Consolidated Balance Sheets. Some of these arrangements may be recognized at market value on the Consolidated Balance Sheets as trading contracts or qualifying hedge positions included in Unrealized Gains or Losses on Mark-to-Market and Hedging Transactions. The following table summarizes Duke Energy’s contractual cash obligations for each of the years presented. Contractual Cash Obligations
The following table summarizes the commercial commitments in effect as of December 31, 2002 by expiration date. Commercial Commitments
Duke Capital Corporation has guaranteed the issuance of surety bonds, which obligates itself to a surety to make payment upon the failure of another entity to honor its obligations to a third party. As of December 31, 2002, Duke Capital Corporation had guaranteed approximately $270 million of surety and bid bonds outstanding related to obligations of other entities, including wholly owned subsidiaries. |
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