2. Business Acquisitions and Dispositions
Business Acquisitions. Duke Energy consolidates assets and liabilities from acquisitions as of the purchase date, and includes earnings from acquisitions in consolidated earnings after the purchase date. Assets acquired and liabilities assumed are recorded at estimated fair values on the date of acquisition. The purchase price minus the estimated fair value of the acquired assets and liabilities is recorded as goodwill. The allocation of the purchase price may be adjusted if additional information on contingencies existing at the date of acquisition becomes available within one year after the acquisition, and longer for certain income tax items.
On March 14, 2002, Duke Energy acquired Westcoast Energy Inc. (Westcoast) for approximately $8 billion, including the assumption of $4.7 billion of debt. 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 (Equity Units) in November 2001, along with incremental commercial paper. The commercial paper was repaid using the proceeds from the October 2002 public offering of Duke Energy Common Stock.
The acquisition of Westcoast was consistent with Duke Energy's natural gas pipeline strategy to expand its footprint between key supply and market areas in North America. During its evaluation, Duke Energy identified revenue enhancement opportunities through expansion projects and business integration, cost reduction initiatives, and the divestiture of several non-strategic business lines and assets. These initiatives, when combined with the ongoing earnings contributions from Westcoast's pipelines and distribution businesses, supported a purchase price in excess of the fair value of Westcoast's assets, which resulted in the recognition of goodwill. The Westcoast acquisition was accounted for using the purchase method, and goodwill to the Natural Gas Transmission segment of approximately $2.3 billion was recorded in the transaction, of which approximately $57 million was expected to be deductible for income tax purposes. Of the $57 million, $52 million was allocated for tax purposes to Empire State Pipeline which was sold in February 2003.
During 2003, Duke Energy recorded additional purchase price adjustments as information regarding the assets acquired became available, including adjustments related to the sale of Empire State Pipeline and adjustments recorded to reflect the revised tax basis of certain acquired assets, with an offsetting increase to goodwill attributable to the acquisition.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date, including the adjustments described above.
Purchase Price Allocation for Westcoast Acquisition
|
|
(in millions) | |
|---|---|---|---|
Current assets |
|
$ |
2,050 |
Investments and other assets |
|
|
1,207 |
Goodwill |
|
|
2,269 |
Property, plant and equipment |
|
|
4,991 |
Regulatory assets and deferred debits |
|
| 809 |
Total assets acquired |
|
| 11,326 |
Current liabilities |
|
|
1,655 |
Long-term debt |
|
|
4,132 |
Deferred credits and other liabilities |
|
|
1,678 |
Minority interests |
|
| 560 |
Total liabilities assumed |
|
| 8,025 |
Net assets acquired |
|
$ | 3,301 |
The following unaudited pro forma consolidated financial results are presented as if the acquisition had taken place at the beginning of the periods presented.
Consolidated Pro Forma Results for Duke Energy, including Westcoast (unaudited)
|
|
For the years ended |
|
||||
|---|---|---|---|---|---|---|---|
|
|
2002 |
|
2001 |
|
||
|
|
(in millions, except |
|
||||
Income Statement Data |
|
|
|
|
|
|
|
Operating revenues |
|
$ |
16,507 |
|
$ |
20,682 |
|
Income before cumulative effect of change in accounting principle |
|
|
1,071 |
|
|
2,189 |
|
Cumulative effect of change in accounting principle, net of tax |
|
|
— |
|
|
(96) |
|
Preferred and preference stock dividends |
|
|
13 |
|
|
14 |
|
Earnings available to common stockholders |
|
$ |
1,058 |
|
$ |
2,079 |
|
|
|
|
|||||
Common Stock Data |
|
|
|
|
|
|
|
Weighted-average shares outstanding |
|
|
846 |
|
|
817 |
|
Earnings per share (before cumulative effect of change
in accounting |
|
|
|
|
|
|
|
Basic |
|
$ |
1.25 |
|
$ |
2.66 |
|
Diluted |
|
$ |
1.25 |
|
$ |
2.63 |
|
Earnings per share |
|
|
|
|
|
|
|
Basic |
|
$ |
1.25 |
|
$ |
2.54 |
|
Diluted |
|
$ |
1.25 |
|
$ |
2.52 |
|
Dispositions. The following table details proceeds from the sale of Duke Energy’s assets and businesses for 2003 and 2002.
Proceeds from Sales of Assets and Businesses
|
|
For the years ended |
|||||
|---|---|---|---|---|---|---|---|
|
|
2003 |
|
|
2002 |
||
|
|
(in millions) |
|||||
Sales of discontinued operations (see Note 12)(a) |
|
$ |
693 |
|
|
$ |
45 |
Sales which were recorded as purchase price adjustments |
|
|
243 |
|
|
|
53 |
Sales of other assets and businesses(c) |
|
|
1,190 |
|
|
|
214 |
Cash disposed of in sales |
|
|
(16) |
|
|
|
— |
|
|
|
|
|
|
|
|
Net proceeds, including debt assumed by buyers |
|
|
2,110 |
|
|
|
312 |
Debt assumed by buyers |
|
|
(387) |
|
|
|
— |
|
|
|
|
|
|
|
|
Net proceeds included in the Consolidated Statements
of |
|
$ | 1,723 |
|
|
$ | 312 |
(a)2003 includes $259 million of debt
assumed by buyer |
|||||||
| (b)2003 includes $58 million of debt assumed by buyer | |||||||
| (c)2003 includes $70 million of debt assumed by buyer | |||||||
| (d)Excludes investing activities related to sales and collections of notes receivable of $243 million for 2003 and $204 million for 2002, and proceeds from sales of Crescent Resources, LLC’s (Crescent’s) assets which are considered operating activities | |||||||
The sale of other assets and businesses for approximately $1,120 million in proceeds plus the assumption of $70 million of debt by the buyers for 2003 resulted in net losses of $111 million recorded in (Losses) Gains on Sales of Other Assets, net on the Consolidated Statements of Operations, and gains of $279 million recorded in Gains on Sales of Equity Investments in the Consolidated Statements of Operations. Significant sales of other assets and businesses in 2003 (other than discontinued operations as presented in Note 12, and sales which were recorded as purchase price adjustments to the Westcoast acquisition as presented above) are detailed by business segment as follows:
- Natural Gas Transmission's sales of assets and businesses totaled
$610 million in proceeds, and the assumption of $70 million of debt by the
buyers. Those sales resulted in gains of $90 million which were recorded
in Gains on Sales of Equity Investments in the Consolidated Statements of
Operations, and gains of $7 million which were recorded in (Losses) Gains
on Sales of Other Assets, net in the Consolidated Statements of Operations.
Significant sales included the sale of its remaining limited partnership
interests in Northern Border Partners L.P.; the sale of its investments in
the Alliance Pipeline and the associated Aux Sable natural gas liquids plant,
Foothills Pipe Lines Ltd., and Vector Pipeline; the sale of Pacific Northern
Gas Ltd.; and the sale of two office buildings.
- Field Services sales of assets totaled $141 million in proceeds. Those
sales resulted in gains of $11 million which were recorded in Gains on Sales
of Equity Investments in the Consolidated Statements of Operations. Significant
sales included Field Services' Class B units of TEPPCO Partners, L.P.
- Duke Energy North America's (DENA's) asset sales totaled $372 million in proceeds. The sale of DENA's 50% ownership interest in Duke/UAE Ref-Fuel resulted in a gain of $178 million, which was recorded in Gains on Sales of Equity Investments in the Consolidated Statements of Operations. Impairment charges and net losses on sales, primarily related to the sale of Duke Energy Trading and Marketing, LLC (DETM) contracts, resulted in a net loss of $124 million, which was recorded in (Losses) Gains on Sales of Other Assets, net in the Consolidated Statements of Operations. Impairment charges and losses on the DETM contracts resulted from DENA's decision to wind-down DETM's operations. As a result, DENA and its partner are executing a reduction of DETM business in scope and scale and soliciting interest from selected parties for a significant portion of DETM's contract portfolio. The ultimate financial impact to DENA of the reduction in the scope and sale of DETM and related liquidation of its contract portfolio cannot be reasonably estimated. However, it is possible that DENA will incur additional losses as a result of liquidating the DETM contracts.
The sale of other assets and businesses for approximately $214 million in gross proceeds for 2002 resulted in gains of $32 million recorded in (Losses) Gains on Sales of Other Assets, net on the Consolidated Statements of Operations, and gains of $32 million recorded in Gains on Sales of Equity Investments in the Consolidated Statements of Operations. Significant sales of other assets and businesses in 2002 are detailed by business segment as follows:
- Natural Gas Transmission's sales of assets totaled $81 million in
proceeds. Those sales resulted in gains of $32 million, which were included
in Gains on Sales of Equity Investments in the Consolidated Statements of Operations.
Significant sales included a portion of Natural Gas Transmission's limited
partnership interests in Northern Border Partners L.P.
- Other Operations' sales of assets and businesses totaled $133 million in proceeds. Those sales resulted in gains of $32 million, which were included in (Losses) Gains on Sales of Other Assets, net in the Consolidated Statements of Operations. Significant sales included portions of the Duke Engineering & Services, Inc. (DE&S) and DukeSolutions, Inc. (DukeSolutions) businesses, and the sale of Duke Energy's remaining water operations.