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10. Investment in Unconsolidated Affiliates and Related Party Transactions

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. Duke Energy received distributions of $263 million in 2003, $369 million in 2002 and $158 million in 2001 from those investments. Duke Energy's share of net income from these unconsolidated affiliates is reflected in the Consolidated Statements of Operations as Equity in Earnings of Unconsolidated Affiliates. (See Note 2 for 2003 dispositions.)

As of December 31, 2003 investment in affiliates were carried at approximately $66 million less than the amount of underlying equity in net assets (5% of total investment in affiliates as of December 31, 2003). This amount is related to the difference in the carrying amount and the underlying net assets of investments owned by Field Services. Such difference has been fully allocated to the respective investee's long-lived assets and the amounts are being amortized into income over the life of the underlying related long-lived assets.

As of December 31, 2002 investment in affiliates were carried at approximately $330 million less than the amount of underlying equity in net assets (16% of total investment in affiliates as of December 31, 2002). Approximately $146 million related to recording investments acquired as part of the Westcoast acquisition at fair value. These assets were sold in 2003. Approximately $161 million related to the difference in the carrying amount and the underlying net assets of investments owned by Field Services. Such difference has been fully allocated to the respective investee's long-lived assets, and the amounts are being amortized into income over the life of the underlying related long-lived assets.

Natural Gas Transmission.     As of December 31, 2003 investments primarily included a 50% interest in Gulfstream Natural Gas System, LLC (Gulfstream). 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.

Field Services.     As of December 31, 2003 investments primarily included a 33% interest in Discovery Producer, LLC, a natural gas gathering and processing system that includes a pipeline in the Gulf of Mexico and natural gas processing and fractionation facilities in Louisiana.

Duke Energy North America.     As of December 31, 2003 investments primarily included a 50% interest in Southwest Power Partners, LLC. 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 this investment, it is not consolidated as it does not hold a majority of voting control.

International Energy.     As of December 31, 2003 significant investments included 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 Operations.     As of December 31, 2003 investments included participation in various construction and support activities for fossil-fueled generating plants through D/FD and various real estate development projects through Crescent.

Investment in Unconsolidated Affiliates

Equity in Earnings of Unconsolidated Affiliates

(a)   Includes equity investments at the corporate level and the elimination of 50% of the profit earned by D/FD on construction projects with DENA and Duke Power. D/FD is included in Other Operations investments in affiliates and is 50% owned by Duke Energy. See additional information in the Related Party Transactions section that follows.

Summarized Combined Financial Information of Unconsolidated Affiliates

Related Party Transactions.     Outstanding notes receivable from unconsolidated affiliates were $146 million as of December 31, 2003 and $113 million as of December 31, 2002. Of the notes outstanding as of December 31, 2003, $128 million related to notes from partners in two projects in which International Energy had 30% and 50% ownership and the majority of the remaining $18 million related to notes that Crescent had with partners in three of its joint ventures. These outstanding notes receivables had interest rates at or above current market rates.

In 2002, Natural Gas Transmission recognized $28 million in earnings for a construction fee received from an unconsolidated affiliate related to the successful completion of Gulfstream.

In 2003, Natural Gas Transmission sold its ownership interest in Alliance Pipeline and Vector Pipeline. However, Natural Gas Transmission has certain commitments to pay for firm capacity on these pipelines. Payments for the year ended December 31, 2003 were $33 million and $30 million for the year ended December 31, 2002.

Subsidiaries of Duke Energy and Fluor Corporation 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-fueled plants in the U.S. and internationally. D/FD was the primary builder of DENA's merchant generation plants. D/FD has built and provides support for some plants for Duke Power. Fifty percent of the profit earned by D/FD for the construction of affiliates' generation plants, which is associated with Duke Energy's ownership, is either deferred in consolidation until the plant is sold or, once the plant becomes operational, the deferred profit is amortized over the plant's useful life or on an accelerated basis if the plants are impaired. Fifty percent of the profit earned by D/FD for operating and maintenance services for Duke Energy owned plants is eliminated in consolidation. For the year ended December 31, 2003, Duke Energy deferred profit of $59 million for D/FD construction contracts and eliminated profit of less than one million for operating and maintenance services. For the year ended December 31, 2002, Duke Energy deferred profit of $159 million for 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. 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 14). During 2003, Duke Energy and Fluor Corporation announced that the D/FD partnership between subsidiaries of the two companies will be dissolved. The D/FD partners have adopted a plan for an orderly wind-down of the business targeted for completion in July 2005.

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 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.

Also see Note 14, Debt and Credit Facilities, Note 17, Commitments and Contingencies, and Note 18, Guarantees and Indemnifications, for additional related party information.