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11. Impairment and Other Related Charges

Impairment and Other Related Charges

Duke Energy did not have any impairment and other related charges for 2001.

Duke Energy North America.     During the past two years, the merchant energy industry in the U.S. suffered from oversupply of merchant generation, low commodity pricing and volatility, and a steep decline in trading and marketing activity. These market conditions are expected to continue for several years. As a result of these market conditions, Duke Energy made decisions in 2003 and 2002 that caused Duke Energy to evaluate the carrying values of certain long-lived assets at DENA.

In the fourth quarter of 2003, Duke Energy decided to exit the merchant power generation business in the Southeastern U.S. and intends to sell DENA's eight plants in this region. The carrying value of these assets exceeded the fair value, resulting in an impairment charge in 2003. The fair value of the Southeastern U.S. power generation assets was estimated primarily based on third party comparable sales, analysis from outside advisors and information available from efforts to sell certain of these assets.

Also in the fourth quarter of 2003, Duke Energy decided not to fund completion of construction of three DENA merchant power plants located in Washington, Nevada and New Mexico (the deferred plants). Duke Energy intends to either sell the deferred plants "as is," complete construction of the plants in conjunction with a partner, or identify an alternative use for the facilities. The carrying value of these assets exceeded the fair value, resulting in an impairment charge in 2003. The fair value of the deferred plants was estimated based primarily on analysis from outside advisors and information available from efforts to sell certain of these assets.

During 2003, Duke Energy agreed to sell a power generation plant in Maine and classified the asset as held for sale. The carrying value exceeded the negotiated sales price for the plant so an impairment charge was recorded in 2003. Subsequently, the anticipated transaction did not occur, and management decided not to sell the plant, thus removing the asset from held for sale.

Duke Energy recorded additional impairment charges in 2003, primarily associated with a change in the expected dispatch of a plant in California and a plan to sell an investment in an unconsolidated affiliate. Fair value of these assets was estimated based primarily on discounted cash flow analysis.

Certain forward power contracts related to the power generation assets in the Southeastern U.S. and the deferred plants had been primarily designated as normal purchases and sales in accordance with SFAS No. 133. In addition, certain forward gas contracts related to the long-lived assets had been designated as cash flow hedges in accordance with SFAS No. 133. As a result of the change in management intent for the long-lived assets, the related forward power and gas contracts were de-designated as normal purchases and sales and hedges.

As a result of these decisions, Duke Energy recorded impairment charges in 2003 of $2,903 million, primarily related to electric generation plants which are classified as Property, Plant and Equipment on the Consolidated Balance Sheets and to mark the derivative contracts to market value and reclassify the hedge amounts previously included in AOCI in accordance with SFAS No. 133.

The 2002 impairment and other related charges included a partial impairment of uninstalled turbines and the termination of other turbines on order. Additionally, charges were recorded in 2002 to impair one of DENA's merchant power facilities, and write-off site development costs in California and an abandoned information technology system. These impairments were primarily related to electric generation plants which are classified as Property, Plant and Equipment on the Consolidated Balance Sheets. Fair value of these assets was estimated based on comparable sales or discounted cash flow analysis.

Field Services.     The 2002 charges were primarily to write-off inventory and other current assets to their net realizable value.

International Energy.     The 2002 charges were to write-off site development costs in Brazil and Bolivia, and to partially impair uninstalled turbines.

Other.     The 2003 charges were due primarily to the abandonment of a corporate risk management information system, primarily due to DENA exiting the proprietary trading business and the reduction of scope and scale of DETM's business.