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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 2000 Commission File Number 1-4928
DUKE ENERGY CORPORATION
(Exact name of Registrant as Specified in its Charter)
North Carolina 56-0205520
(State or Other Jurisdiction (IRS Employer Identification No.)
of Incorporation)
526 South Church Street
Charlotte, NC 28202-1904
(Address of Principal Executive Offices)
(Zip code)
704-594-6200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes x No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Number of shares of Common Stock, without
par value, outstanding at July 31, 2000........................368,065,715
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DUKE ENERGY CORPORATION
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2000
INDEX
Item Page
- ---- ----
PART I. FINANCIAL INFORMATION
1. Financial Statements........... ..........................................1
Consolidated Statements of Income and Comprehensive Income for the
Three and Six Months Ended June 30, 2000 and 1999...................1
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2000 and 1999..............................................2
Consolidated Balance Sheets as of June 30, 2000 and
December 31, 1999...................................................3
Notes to Consolidated Financial Statements............................5
2. Management's Discussion and Analysis of Results of Operations
and Financial Condition................................................11
PART II. OTHER INFORMATION
1. Legal Proceedings........................................................22
4. Submission of Matters to a Vote of Security Holders......................22
6. Exhibits and Reports on Form 8-K.........................................22
Signatures...............................................................23
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
From time to time, Duke Energy's reports, filings and other public announcements
may include assumptions, projections, expectations, intentions or beliefs about
future events. These statements are intended as "forward-looking statements"
under the Private Securities Litigation Reform Act of 1995. Duke Energy cautions
that assumptions, projections, expectations, intentions or beliefs about future
events may and often do vary from actual results and the differences between
assumptions, projections, expectations, intentions or beliefs and actual results
can be material. Accordingly, there can be no assurance that actual results will
not differ materially from those expressed or implied by the forward-looking
statements. Some of the factors that could cause actual achievements and events
to differ materially from those expressed or implied in such forward-looking
statements include state, federal and foreign legislative and regulatory
initiatives that affect cost and investment recovery, have an impact on rate
structures and affect the speed and degree to which competition enters the
electric and natural gas industries; industrial, commercial and residential
growth in the service territories of Duke Energy and its subsidiaries; the
weather and other natural phenomena; the timing and extent of changes in
commodity prices, interest rates and foreign currency exchange rates; changes in
environmental and other laws and regulations to which Duke Energy and its
subsidiaries are subject or other external factors over which Duke Energy has no
control; the results of financing efforts, including Duke Energy's ability to
obtain financing on favorable terms, which can be affected by Duke Energy's
credit rating and general economic conditions; growth in opportunities for Duke
Energy's business units; and the effect of accounting policies issued
periodically by accounting standard-setting bodies.
i
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
DUKE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
(In millions, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2000 1999 2000 1999
Operating Revenues
Sales, trading and marketing of natural gas
and petroleum products $ 6,549 $ 2,388 $ 10,836 $ 4,402
Generation, transmission and distribution of electricity 1,277 1,113 2,515 2,210
Trading and marketing of electricity 2,542 667 3,753 1,106
Transportation and storage of natural gas 267 253 526 632
Other 291 270 586 519
-------- -------- --------- ---------
Total operating revenues 10,926 4,691 18,216 8,869
-------- -------- --------- ---------
Operating Expenses
Natural gas and petroleum products purchased 6,246 2,307 10,309 4,247
Net interchange and purchased power 2,380 665 3,586 1,149
Fuel used in electric generation 188 195 368 360
Other operation and maintenance 912 673 1,579 1,293
Depreciation and amortization 304 233 564 458
Property and other taxes 102 87 204 186
-------- -------- --------- ---------
Total operating expenses 10,132 4,160 16,610 7,693
-------- -------- --------- ---------
Operating Income 794 531 1,606 1,176
-------- -------- --------- ---------
Other Income and Expenses
Deferred returns and allowance for funds used during construction 20 19 39 40
Other, net 23 18 51 35
-------- -------- --------- ---------
Total other income and expenses 43 37 90 75
-------- -------- --------- ---------
Earnings Before Interest and Taxes 837 568 1,696 1,251
Interest Expense 228 120 413 252
Minority Interests 89 33 120 68
-------- -------- --------- ---------
Earnings Before Income Taxes 520 415 1,163 931
Income Taxes 191 127 441 336
-------- -------- --------- ---------
Income Before Extraordinary Item 329 288 722 595
Extraordinary Gain, net of tax - - - 660
-------- -------- --------- ---------
Net Income 329 288 722 1,255
Dividends and Premiums on Redemptions of
Preferred and Preference Stock 5 5 10 10
-------- -------- --------- ---------
Earnings Available For Common Stockholders 324 283 712 1,245
Other Comprehensive Income, net of tax
Foreign currency translation adjustments (47) - (48) -
-------- -------- --------- ---------
Total Comprehensive Income $ 277 $ 283 $ 664 $ 1,245
======== ======== ========= =========
Common Stock Data
Weighted average shares outstanding 368 364 367 364
Earnings per share (before extraordinary item)
Basic $ 0.88 $ 0.77 $ 1.94 $ 1.60
Diluted $ 0.88 $ 0.77 $ 1.93 $ 1.60
Earnings per share
Basic $ 0.88 $ 0.77 $ 1.94 $ 3.42
Diluted $ 0.88 $ 0.77 $ 1.93 $ 3.41
Dividends per share $ 1.10 $ 1.10 $ 1.65 $ 1.65
See Notes to Consolidated Financial Statements.
1
DUKE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
Six Months Ended
June 30,
----------------------------
2000 1999
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 722 $ 1,255
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 654 542
Extraordinary gain, net of tax - (660)
Deferred income taxes 133 19
Purchased capacity levelization 67 56
Transition cost recoveries, net 45 44
(Increase) decrease in
Receivables (2,037) (35)
Inventory (21) (45)
Other current assets (298) (27)
Increase (decrease) in
Accounts payable 2,106 (42)
Taxes accrued (429) 159
Interest accrued 8 8
Other current liabilities (48) (80)
Other, net (206) (72)
------------- -------------
Net cash provided by operating activities 696 1,122
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital and investment expenditures (2,909) (2,790)
Proceeds from sale of subsidiaries - 1,900
Decommissioning, retirements and other (35) 50
------------- -------------
Net cash used in investing activities (2,944) (840)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issuance of
Long-term debt 552 792
Guaranteed preferred beneficial interests in subordinated notes of
Duke Energy Corporation or Subsidiaries - 242
Common stock and stock options 87 77
Payments for the redemption of long-term debt (294) (518)
Net change in notes payable and commercial paper 3,256 (191)
Distributions to minority interests (1,217) -
Dividends paid (413) (410)
Other (11) (54)
------------- -------------
Net cash provided by (used in) financing activities 1,960 (62)
------------- -------------
Net (decrease) increase in cash and cash equivalents (288) 220
Cash received from business acquisitions 90 -
Cash and cash equivalents at beginning of period 613 80
------------- -------------
Cash and cash equivalents at end of period $ 415 $ 300
============= =============
Supplemental Disclosures
Cash paid for interest, net of amount capitalized $ 392 $ 230
Cash paid for income taxes $ 749 $ 264
See Notes to Consolidated Financial Statements.
2
DUKE ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions)
June 30, December 31,
2000 1999
(Unaudited)
------------- -------------
ASSETS
Current Assets
Cash and cash equivalents $ 415 $ 613
Receivables 5,595 3,248
Inventory 750 599
Current portion of natural gas transition costs 36 81
Current portion of purchased capacity costs 142 146
Unrealized gains on mark-to-market transactions 5,084 1,131
Other 752 353
------------- -------------
Total current assets 12,774 6,171
------------- -------------
Investments and Other Assets
Investments in affiliates 1,375 1,299
Nuclear decommissioning trust funds 703 703
Pre-funded pension costs 300 315
Goodwill, net 1,213 844
Notes receivable 353 154
Unrealized gains on mark-to-market transactions 2,032 690
Other 860 705
------------- -------------
Total investments and other assets 6,836 4,710
------------- -------------
Property, Plant and Equipment
Cost 32,978 30,436
Less accumulated depreciation and amortization 9,592 9,441
------------- -------------
Net property, plant and equipment 23,386 20,995
------------- -------------
Regulatory Assets and Deferred Debits
Purchased capacity costs 434 497
Debt expense 212 223
Regulatory asset related to income taxes 501 500
Other 292 313
------------- -------------
Total regulatory assets and deferred debits 1,439 1,533
------------- -------------
Total Assets $ 44,435 $ 33,409
============= =============
See Notes to Consolidated Financial Statements.
3
DUKE ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions)
June 30, December 31,
2000 1999
(Unaudited)
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 4,878 $ 2,312
Notes payable and commercial paper 3,574 267
Taxes accrued 275 685
Interest accrued 149 139
Current maturities of long-term debt and preferred stock 598 515
Unrealized losses on mark-to-market transactions 5,079 1,241
Other 667 717
------------- -------------
Total current liabilities 15,220 5,876
------------- -------------
Long-term Debt 8,903 8,683
------------- -------------
Deferred Credits and Other Liabilities
Deferred income taxes 3,665 3,402
Investment tax credit 218 225
Nuclear decommissioning costs externally funded 703 703
Environmental clean-up liabilities 101 101
Unrealized losses on mark-to-market transactions 1,776 438
Other 1,703 2,099
------------- -------------
Total deferred credits and other liabilities 8,166 6,968
------------- -------------
Minority Interests 1,116 1,200
------------- -------------
Guaranteed Preferred Beneficial Interests in Subordinated
Notes of Duke Energy Corporation or Subsidiaries 1,405 1,404
------------- -------------
Preferred and Preference Stock
Preferred and preference stock with sinking fund requirements 71 71
Preferred and preference stock without sinking fund requirements 209 209
------------- -------------
Total preferred and preference stock 280 280
------------- -------------
Common Stockholders' Equity
Common stock, no par, 1 billion shares authorized; 368 million
and 366 million shares outstanding at June 30, 2000 and
December 31, 1999, respectively 4,681 4,603
Retained earnings 4,714 4,397
Accumulated other comprehensive income (50) (2)
------------- -------------
Total common stockholders' equity 9,345 8,998
------------- -------------
Total Liabilities and Stockholders' Equity $ 44,435 $ 33,409
============= =============
See Notes to Consolidated Financial Statements.
4
DUKE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General
Duke Energy Corporation (collectively with its subsidiaries, "Duke Energy") is
an integrated energy and energy services provider with the ability to offer
physical delivery and management of both electricity and natural gas throughout
the U.S. and abroad. Duke Energy provides these and other services through seven
business segments:
o Franchised Electric
o Natural Gas Transmission
o Field Services
o North American Wholesale Energy
o International Energy
o Other Energy Services
o Duke Ventures
Franchised Electric generates, transmits, distributes and sells electric energy
in central and western North Carolina and the western portion of South Carolina
(doing business as Duke Power or Nantahala Power and Light). These electric
operations are subject to the rules and regulations of the Federal Energy
Regulatory Commission (FERC), the North Carolina Utilities Commission and the
Public Service Commission of South Carolina.
Natural Gas Transmission provides interstate transportation and storage of
natural gas for customers primarily in the Mid-Atlantic and New England states.
With the purchase of East Tennessee Natural Gas Company in March 2000, Natural
Gas Transmission also began serving the southeastern region of the U.S. (see
Note 3 to the Consolidated Financial Statements). The interstate natural gas
transmission and storage operations are subject to the rules and regulations of
the FERC.
Field Services gathers, processes, transports and markets natural gas and
produces, transports and markets natural gas liquids. Field Services operates
gathering systems in western Canada and eleven contiguous states that serve
major gas-producing regions in the Rocky Mountain, Permian Basin, Mid-Continent,
East Texas-Austin Chalk - North Louisiana and onshore and offshore Gulf Coast
areas.
North American Wholesale Energy's (NAWE) activities include asset operation,
development and management, primarily through Duke Energy North America, LLC, as
well as commodity sales and services related to natural gas and power, primarily
through Duke Energy Trading and Marketing (DETM), a joint venture with
ExxonMobil, a 40% partner in DETM. NAWE also includes Duke Energy Merchants,
which develops new business lines in the evolving energy commodity markets. The
operations of the Trading and Marketing segment were combined by management into
NAWE during the second quarter.
International Energy develops, owns and operates energy-related facilities
worldwide providing energy trading, marketing and natural gas and power
development and operations. It conducts its operations through Duke Energy
International, LLC (DEI).
Other Energy Services provides engineering, consulting, construction and
integrated energy solutions worldwide, primarily through Duke Engineering &
Services, Inc., Duke/Fluor Daniel and DukeSolutions, Inc.
Duke Ventures is comprised of Crescent Resources, Inc. (Crescent), DukeNet
Communications (DukeNet) and Duke Capital Partners. Crescent develops high
quality commercial and residential real estate projects and manages land
holdings primarily in the southeastern U.S. DukeNet provides fiber optic and
wireless
5
digital networks for industrial, commercial and residential customers. Duke
Capital Partners is a newly formed, wholly owned finance company that plans to
provide lending, investment banking and asset management services to the
wholesale and commercial energy markets.
2. Summary of Significant Accounting Policies
Consolidation. The Consolidated Financial Statements include the accounts of
Duke Energy and all majority-owned subsidiaries. These Consolidated Financial
Statements reflect all normal recurring adjustments that are, in the opinion of
management, necessary to present fairly the financial position and results of
operations for the respective periods. Amounts reported in the Consolidated
Statements of Income and Comprehensive Income are not necessarily indicative of
amounts expected for the respective annual periods due to the effects of
seasonal temperature variations on energy consumption and the timing of
maintenance of certain electric generating units.
Earnings Per Common Share. Basic earnings per share is based on a simple
weighted average of common shares outstanding. Diluted earnings per share
reflects the potential dilution that could occur if securities or other
agreements to issue common stock, such as stock options, were exercised or
converted into common stock. The numerator for the calculation of basic and
diluted earnings per share is earnings available for common stockholders.
Denominator for Earnings per Share (In millions)
- --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2000 1999 2000 1999
--------- -------- -------- -------
Denominator for basic earnings per share
(weighted average shares outstanding) 367.6 364.3 367.1 363.9
Assumed exercise of diluted stock options 1.1 0.6 0.9 0.7
--------- -------- -------- -------
Denominator for diluted earnings per share 368.7 364.9 368.0 364.6
- --------------------------------------------------------------------------------
Extraordinary Item. On March 29, 1999, wholly owned subsidiaries of Duke Energy
sold Panhandle Eastern Pipe Line Company (PEPL), Trunkline Gas Company and
additional storage related to those systems, which substantially comprised the
Midwest Pipelines, along with Trunkline LNG Company to CMS Energy Corporation
(CMS). The sales price of $2.2 billion involved cash proceeds of $1.9 billion
and CMS' assumption of existing PEPL debt of approximately $300 million. The
sale resulted in an extraordinary gain of $660 million, net of income tax of
$404 million, and an increase in basic earnings per share of $1.82.
New Accounting Standard. In December 1999, the Securities and Exchange
Commission (SEC) released Staff Accounting Bulletin No. 101 (SAB 101) which
provides the SEC staff's views on revenue recognition policies. Duke Energy has
adopted the provisions of SAB 101 as of April 1, 2000. The impact of adopting
SAB 101 was not material to Duke Energy's consolidated results of operations or
financial position.
Reclassifications. Certain amounts have been reclassified in the Consolidated
Financial Statements to conform to the current presentation.
3. Business Acquisitions
For acquisitions accounted for using the purchase method, assets and liabilities
have been consolidated as of the purchase date and earnings from the
acquisitions have been included in consolidated earnings of Duke Energy
subsequent to the purchase date. Assets acquired and liabilities assumed are
recorded at their estimated fair values, and the excess of the purchase price
over the estimated fair value of the net identifiable assets and liabilities
acquired is recorded as goodwill. Purchase price allocations are subject to
6
adjustment when additional information concerning asset and liability valuations
are finalized and the evaluation of certain pre-acquisition contingent
liabilities are completed.
Phillips Petroleum's Gas Gathering, Processing and Marketing Unit (Phillips). In
March 2000, Duke Energy, through a wholly owned subsidiary, completed the
approximately $1.7 billion transaction that combined Field Services' gas
gathering and processing business with Phillips to form a new midstream company,
named Duke Energy Field Services, LLC (DEFS). In connection with the
combination, DEFS issued approximately $2.75 billion of commercial paper in
April 2000. The proceeds were used to make one-time cash distributions of
approximately $1.53 billion to Duke Energy and $1.22 billion to Phillips
Petroleum. Duke Energy owns approximately 70% of DEFS and Phillips Petroleum
owns approximately 30%. During the third quarter, DEFS filed a shelf
registration statement with the SEC to offer up to $2.0 billion of long-term
debt securities. DEFS plans to issue approximately $1.7 billion of long-term
debt securities under this shelf registration.
Assets and liabilities acquired have been recorded at preliminary estimated fair
values. During the second quarter, adjustments to the allocated purchase price,
primarily pass through tax basis adjustments that affected deferred tax
liabilities, resulted in an approximately $70 million reduction in goodwill.
Goodwill of approximately $167 million was recorded in connection with the
transaction and is being amortized on a straight-line basis over 20 years.
The parent company of DEFS, Duke Energy Field Services Corporation (DEFS
Corporation), plans to offer a portion of its common stock to the public in
2000, or 2001, in an initial public offering. The proceeds of this offering will
be used to reduce the debt described above. Such an offering is subject to
favorable market conditions. After the offering, the ownership of Duke Energy
and Phillips Petroleum in DEFS Corporation will be reduced accordingly.
East Tennessee Natural Gas Company. In March 2000, Duke Energy completed the
approximately $390 million acquisition of East Tennessee Natural Gas Company
from El Paso Energy. East Tennessee Natural Gas Company owns a 1,100-mile
interstate natural gas pipeline system that crosses Duke Energy's Texas Eastern
Transmission Corporation's pipeline and serves the southeastern region of the
U.S. Assets and liabilities have been recorded at preliminary estimated fair
values. No goodwill was recorded in the transaction.
Dominion Resources' Hydroelectric, Natural Gas and Diesel Power Generation
Businesses. In August 1999, DEI reached a definitive agreement to acquire
Dominion Resources Inc.'s 1,200-megawatt portfolio of hydroelectric, natural gas
and diesel power generation businesses in Argentina, Belize, Bolivia and Peru
(collectively, the "Dominion acquisitions") for approximately $405 million. The
purchases of the businesses in Belize and Peru were completed in 1999. In March
and April 2000, DEI completed the purchases of the businesses in Argentina and
Bolivia, respectively. Assets and liabilities of the Dominion acquisitions have
been recorded at preliminary estimated fair values. Total goodwill related to
these purchases was $111 million and is being amortized on a straight-line basis
over 40 years.
Companhia de Geracao de Energia Eletrica Paranapanema (Paranapanema). In August
1999, DEI entered a series of transactions to complete a $761 million purchase
of a controlling voting interest and an approximate 44% economic interest in
Paranapanema, an electric generating company in Brazil. In January 2000, Duke
Energy completed a tender offer to the minority shareholders of Paranapanema and
successfully acquired an additional 51% economic interest in the company for
approximately $280 million. This increased Duke Energy's economic ownership from
approximately 44% to approximately 95%. The purchase accounting for the
acquisition of this additional interest included a reduction of the carrying
value of the related assets by approximately $626 million to reflect the
difference in the purchase price from the book value of minority interest
acquired.
7
4. Business Segments
Duke Energy's reportable segments are strategic business units that offer
different products and services and are each managed separately. Management
evaluates segment performance based on earnings before interest and taxes (EBIT)
after deducting minority interests. EBIT presented in the accompanying table
includes intersegment sales accounted for at prices representative of
unaffiliated party transactions. Segment assets are provided as additional
information in the accompanying table and are net of intercompany advances,
intercompany notes receivable and investments in subsidiaries.
Business Segment Data (In millions)
- --------------------------------------------------------------------------------
Depreciation Capital and
Unaffiliated Intersegment Total and Investment
Revenues Revenues Revenues EBIT Amortization Expenditures
------------ ------------ ------------ ------------- ------------- --------------
Three Months Ended
June 30, 2000
Franchised Electric $ 1,158 $ - $ 1,158 $365 $141 $ 114
Natural Gas Transmission 249 32 281 121 32 39
Field Services 1,870 285 2,155 68 71 87
North American
Wholesale Energy 7,280 50 7,330 106 19 491
International Energy 249 - 249 84 27 383
Other Energy Services 98 40 138 9 3 5
Duke Ventures 33 - 33 13 4 100
Other Operations(a) (11) 4 (7) (6) 7 42
Eliminations and
Minority Interests - (411) (411) 77 - -
------------ ------------ ------------ ------------- ------------- --------------
Total Consolidated $ 10,926 $ - $ 10,926 $837 $304 $1,261
- --------------------------------------------------------------------------------------------------------------------
Three Months Ended
June 30, 1999
Franchised Electric $ 1,095 $ - $ 1,095 $319 $137 $ 178
Natural Gas Transmission 237 23 260 146 28 65
Field Services 614 168 782 36 36 92
North American
Wholesale Energy 2,527 78 2,605 27 14 262
International Energy 43 12 55 5 6 20
Other Energy Services 135 24 159 (6) 4 2
Duke Ventures 37 - 37 24 3 98
Other Operations(a) 3 5 8 1 5 (13)
Eliminations and
Minority Interests - (310) (310) 16 - -
------------ ------------ ------------ ------------- ------------- --------------
Total Consolidated $ 4,691 $ - $ 4,691 $568 $233 $ 704
- --------------------------------------------------------------------------------------------------------------------
8
Business Segment Data (In millions)
- --------------------------------------------------------------------------------
Depreciation Capital and
Unaffiliated Intersegment Total and Investment
Revenues Revenues Revenues EBIT Amortization Expenditures
------------ ------------ ------------ ------------- ------------- --------------
Six Months Ended
June 30, 2000
Franchised Electric $ 2,273 $ - $ 2,273 $ 806 $282 $ 291
Natural Gas Transmission 501 66 567 273 61 467
Field Services 3,144 477 3,621 137 109 215
North American
Wholesale Energy 11,443 192 11,635 184 35 826
International Energy 455 2 457 186 49 830
Other Energy Services 345 68 413 16 6 16
Duke Ventures 67 - 67 30 8 164
Other Operations(a) (12) 26 14 (19) 14 100
Eliminations and
Minority Interests - (831) (831) 83 - -
------------ ------------ ------------ ------------- ------------- --------------
Total Consolidated $ 18,216 $ - $ 18,216 $1,696 $564 $2,909
- --------------------------------------------------------------------------------------------------------------------
Six Months Ended
June 30, 1999
Franchised Electric $ 2,156 $ - $ 2,156 $ 726 $273 $ 303
Natural Gas Transmission 615 47 662 354 69 107
Field Services 848 278 1,126 48 56 1,537
North American
Wholesale Energy 4,839 133 4,972 72 25 353
International Energy 79 21 100 4 12 316
Other Energy Services 269 44 313 (11) 7 10
Duke Ventures 63 - 63 37 6 162
Other Operations(a) - 18 18 (16) 10 2
Eliminations and
Minority Interests - (541) (541) 37 - -
------------ ------------ ------------ ------------- ------------- --------------
Total Consolidated $ 8,869 $ - $ 8,869 $ 1,251 $458 $2,790
- --------------------------------------------------------------------------------------------------------------------
Segment Assets (In millions)
- --------------------------------------------------------------------------------
June 30, December 31,
2000 1999
----------------- -----------------
Franchised Electric $12,970 $13,133
Natural Gas Transmission 4,174 3,897
Field Services 6,199 3,565
North American Wholesale Energy 14,496 6,268
International Energy 4,292 4,459
Other Energy Services 786 612
Duke Ventures 1,169 1,031
Other Operations(a) 1,773 1,250
Eliminations (1,424) (806)
----------------- -----------------
Total Consolidated $44,435 $33,409
- --------------------------------------------------------------------------------
(a) Includes certain unallocated corporate items.
9
5. Risk Management and Financial Instruments
Interest Rate Derivatives. To take advantage of current interest rates, Duke
Energy entered into several fixed-to-floating interest rate swap agreements
during June 2000. The swaps have a total notional amount of $328 million and
will expire in October 2022. Duke Energy also entered into several interest rate
hedges which have a total notional amount of $225 million and will expire in
September 2000. The purpose of the hedges is to lock in treasury rates, ranging
from 5.90% to 6.35%, to reduce exposure to interest rate fluctuations on planned
debt issuances by DEFS.
6. Debt and Credit Facilities
In March 2000, Duke Energy issued $300 million of Series D 7 3/8% Senior Notes
due 2010. In April 2000, DEFS issued approximately $2.75 billion of commercial
paper associated with the Phillips acquisition (see Note 3 to the Consolidated
Financial Statements).
7. Commitments and Contingencies
Litigation. Duke Energy and its subsidiaries are involved in legal, tax and
regulatory proceedings before various courts, regulatory commissions and
governmental agencies regarding performance, contracts and other matters arising
in the ordinary course of business, some of which involve substantial amounts.
Where appropriate, Duke Energy has made accruals in accordance with Statement of
Financial Accounting Standards No. 5, "Accounting for Contingencies," to provide
for such matters. Management believes that the final disposition of these
proceedings will not have a material adverse effect on consolidated results of
operations or financial position.
Other Commitments and Contingencies. Periodically, Duke Energy may become
involved in contractual disputes with natural gas transmission customers
involving potential or threatened abrogation of contracts by the customers. If
the customers are successful, Duke Energy may not receive the full value of
anticipated benefits under the contracts.
Management believes that these commitments and contingencies will not have a
material adverse effect on consolidated results of operations or financial
position.
10
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
Introduction
Duke Energy Corporation (collectively with its subsidiaries, "Duke Energy") is
an integrated energy and energy services provider with the ability to offer
physical delivery and management of both electricity and natural gas throughout
the U.S. and abroad. Duke Energy provides these and other services through seven
business segments:
o Franchised Electric
o Natural Gas Transmission
o Field Services
o North American Wholesale Energy
o International Energy
o Other Energy Services
o Duke Ventures
See Note 1 to the Consolidated Financial Statements for further descriptions.
Management's Discussion and Analysis should be read in conjunction with the
Consolidated Financial Statements.
RESULTS OF OPERATIONS
For the quarter ended June 30, 2000, earnings available for common stockholders
were $324 million, or $0.88 per basic share. For the comparable 1999 period,
earnings available for common stockholders were $283 million, or $0.77 per basic
share. The increase is primarily due to higher segment profit and loss due to
business expansion, as described by segment below, partially offset by increased
interest and minority interest expense.
For the six months ended June 30, 2000, earnings available for common
stockholders were $712 million, or $1.94 per basic share. For the comparable
1999 period, earnings available for common stockholders were $1,245 million, or
$3.42 per basic share, including an after-tax extraordinary gain of $660
million, or $1.82 per basic share. The decrease in earnings available for common
stockholders was primarily due to the 1999 extraordinary gain resulting from the
sale of the Midwest Pipelines. The absence of this gain and higher interest and
minority interest expense in the current year were partially offset by increased
segment profit and loss primarily due to business expansion, as described by
segment below.
Operating income and earnings before interest and taxes (EBIT) for the quarter
ended June 30, 2000 were $794 million and $837 million, respectively, compared
to $531 million and $568 million, respectively, for the same period in 1999. For
the six months ended June 30, 2000, operating income increased $430 million to
$1,606 million from the same period in 1999. EBIT for the six months ended June
30, 2000 was $1,696 million compared to $1,251 million for the same period in
1999. Management evaluates each business segment based on an internal measure of
EBIT, after deducting minority interests. Operating income and EBIT are affected
by the same fluctuations for Duke Energy and each of its business segments. The
only notable difference between operating income and EBIT is the inclusion in
EBIT of certain non-operating activities. See Note 4 to the Consolidated
Financial Statements for additional information on business segments.
11
EBIT is summarized in the following table and is discussed by business segment
thereafter.
EBIT by Business Segment (In millions)
- ---------------------------------- ---------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- --------------------------------
2000 1999 2000 1999
---------------- --------------- ---------------- ---------------
Franchised Electric $365 $319 $ 806 $ 726
Natural Gas Transmission 121 146 273 354
Field Services 68 36 137 48
North American
Wholesale Energy 106 27 184 72
International Energy 84 5 186 4
Other Energy Services 9 (6) 16 (11)
Duke Ventures 13 24 30 37
Other Operations (6) 1 (19) (16)
EBIT attributable to
Minority Interests 77 16 83 37
---------------- --------------- ---------------- ---------------
Consolidated EBIT $837 $568 $1,696 $1,251
- --------------------------------------------------------------------------------
Other Operations primarily include certain unallocated corporate costs. Included
in the amounts discussed hereafter are intercompany transactions that are
eliminated in the Consolidated Financial Statements.
Franchised Electric
- --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- --------------- --------------
(In millions, except where noted) 2000 1999 2000 1999
- --------------------------------- -------------- ------------- --------------- --------------
Operating Revenues $1,158 $1,095 $2,273 $2,156
Operating Expenses 813 796 1,506 1,471
-------------- ------------- --------------- --------------
Operating Income 345 299 767 685
Other Income, Net of Expenses 20 20 39 41
-------------- ------------- --------------- --------------
EBIT $ 365 $ 319 $ 806 $ 726
============== ============= =============== ==============
Sales - GWh (a) 20,661 19,787 41,215 39,323
- --------------------------------------------------------------------------------
(a) Gigawatt-hours.
Franchised Electric's EBIT increased $46 million for the quarter and $80 million
for the six months ended June 30, 2000 compared to the same periods in 1999,
primarily due to growth in customers and favorable weather partially offset by
increased storm repair costs. The average number of customers in Franchised
Electric's service territory increased 2.5% for this year's second quarter and
2.6% for the six months. Increased sales to retail customers boosted total
gigawatt-hour sales for the quarter by 4.4% and for the six months by 4.8%. For
the quarter, sales to general service and residential customers increased 8.0%
and 7.4%, respectively. Total industrial sales increased 1.6% during the
quarter. For the six months, sales to general service and residential customers
increased 6.9% and 5.8%, respectively, while total industrial sales increased
0.7%.
12
Natural Gas Transmission
- --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- -----------------------------
(In millions, except where noted) 2000 1999 2000 1999
- ---------------------------------- ------------- ------------- -------------- --------------
Operating Revenues $281 $260 $567 $662
Operating Expenses 162 116 308 318
------------- ------------- -------------- --------------
Operating Income 119 144 259 344
Other Income, Net of Expenses 2 2 14 10
------------- ------------- -------------- --------------
EBIT $121 $146 $273 $354
============= ============= ============== ==============
Throughput - TBtu (a) 372 340 877 1,151
- --------------------------------------------------------------------------------
(a) Trillion British thermal units.
For the quarter and six months ended June 30, 2000, EBIT for Natural Gas
Transmission decreased $25 million and $81 million, respectively, compared to
the same periods in 1999. A $28 million benefit in 1999 related to the
completion of certain PCB (polychlorinated biphenyl) and soil clean-up programs
below estimates contributed to the decrease in EBIT for both the quarter and
six-month periods. The decrease for the six-month period also resulted from the
absence of $70 million in 1999 EBIT related to the Midwest Pipelines, which were
sold to CMS Energy Corporation in March 1999. The decreases in EBIT for both
periods were partially offset by increased earnings from market-expansion
projects and joint ventures and the Maritimes & Northeast Pipeline, which was
placed into service in December 1999, and earnings from East Tennessee Natural
Gas Company, which was acquired in March 2000. See Note 3 to the Consolidated
Financial Statements for additional information on the acquisition.
Field Services
- --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ------------------------
(In millions, except where noted) 2000 1999 2000 1999
- ---------------------------------- ------------- ------------- ----------- ------------
Operating Revenues $ 2,155 $ 782 $ 3,621 $ 1,126
Operating Expenses 2,044 747 3,437 1,079
------------- ------------- ----------- ------------
Operating Income 111 35 184 47
Other Income, Net of Expenses - 1 (4) 1
Minority Interest Expense 43 - 43 -
------------- ------------- ----------- ------------
EBIT $ 68 $ 36 $ 137 $ 48
============= ============= =========== ============
Natural Gas Gathered and
Processed/Transported, TBtu/d(a) 8.0 5.3 7.0 4.4
Natural Gas Liquids (NGL)
Production, MBbl/d(b) 401.5 214.0 316.3 161.1
Natural Gas Marketed, TBtu/d 0.5 0.5 0.5 0.4
Average Natural Gas Price per MMBtu(c) $ 3.47 $ 2.14 $ 2.99 $ 1.95
Average NGL Price per Gallon(d) $ 0.47 $ 0.30 $ 0.49 $ 0.27
- --------------------------------------------------------------------------------
(a) Trillion British thermal units per day.
(b) Thousand barrels per day.
(c) Million British thermal units.
(d) Does not reflect results of commodity hedges.
EBIT for Field Services increased $32 million and $89 million for the quarter
and six months ended June 30, 2000, respectively, compared to the same periods
in 1999. The increase for both periods was primarily due to growth and
acquisitions including: earnings from the combination of Field Services' gas
gathering
13
and processing business with Phillips Petroleum's Gas Gathering, Processing and
Marketing unit (Phillips) in March 2000 (see Note 3 to the Consolidated
Financial Statements for further discussion); incremental earnings from the
acquisition of the natural gas gathering, processing, fractionation and NGL
pipeline business from Union Pacific Resources (UPR) in April 1999; and,
earnings from other recent acquisitions and plant expansions. Improved average
NGL prices, which increased 57% for the quarter and 81% for the six months, when
compared to the prior year, also contributed to the increase in EBIT.
North American Wholesale Energy
- --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
(In millions, except where noted) 2000 1999 2000 1999
- ---------------------------------- ------------- ------------- ------------- -------------
Operating Revenues $ 7,330 $ 2,605 $ 11,635 $ 4,972
Operating Expenses 7,188 2,575 11,418 4,885
------------- ------------- ------------- -------------
Operating Income 142 30 217 87
Other Income, Net of Expenses (8) 11 (4) 18
Minority Interest Expense 28 14 29 33
------------- ------------- ------------- -------------
EBIT $ 106 $ 27 $ 184 $ 72
============= ============= ============= =============
Natural Gas Marketed, TBtu/d 11.2 10.0 11.6 10.5
Electricity Marketed, GWh 58,198 22,179 108,551 44,016
Proportional Megawatt Capacity Owned(a) - - 8,473 6,225
- --------------------------------------------------------------------------------
(a) Includes under construction or under contract.
In the second quarter of 2000, Duke Energy's Trading and Marketing segment was
combined with North American Wholesale Energy (NAWE). See Note 1 to the
Consolidated Financial Statements for additional information. For the quarter
ended June 30, 2000, EBIT for NAWE increased $79 million compared with the same
period in 1999. The increase was attributable to increased earnings from asset
positions and favorable trading margins due to price volatility in natural gas
and power. In addition, NAWE increased its volumes of natural gas and power
marketed by 12% and 162%, respectively. Partially offsetting the increase in
EBIT were increased operating and development costs.
NAWE's EBIT increased $112 million for the six months ended June 30, 2000
compared to the same period in 1999. The increase was the result of increased
trading margins due to price volatility in gas and power and a $59 million
increase in income from the sale of interests in generating facilities as a
result of NAWE executing its domestic portfolio management strategy. In
addition, the volumes of natural gas and power marketed increased 10% and 147%,
respectively. This income was partially offset by reduced earnings from
generation facilities in California and increased operating and development
costs associated with business expansion.
14
International Energy
- --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
(In millions, except where noted) 2000 1999 2000 1999
- ---------------------------------- ------------- ------------- ------------- -------------
Operating Revenues $ 249 $ 55 $ 457 $ 100
Operating Expenses 173 51 288 99
------------- ------------- ------------- -------------
Operating Income 76 4 169 1
Other Income, Net of Expenses 14 3 28 7
Minority Interest Expense 6 2 11 4
------------- ------------- ------------- -------------
EBIT $ 84 $ 5 $ 186 $ 4
============= ============= ============= =============
Proportional Megawatt Capacity Owned(a) - - 4,370 906
Proportional Maximum Pipeline
Capacity(a), MMcf/d(b) - - 321 321
- --------------------------------------------------------------------------------
(a) Includes under construction or under contract.
(b) Million cubic feet per day.
International Energy's EBIT increased $79 million for the quarter and $182
million for the six months ended June 30, 2000 compared to the same periods in
1999. The increase for both periods is primarily attributable to increased
earnings in Latin America of $70 million and $118 million for the quarter and
six-month period, respectively, mainly resulting from new projects (see Note 3
to the Consolidated Financial Statements for a discussion of recent
acquisitions). The increase for the six-month period also included $54 million
from the February 2000 sale of certain assets relating to the transportation of
natural gas liquids.
Other Energy Services
- --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
(In millions) 2000 1999 2000 1999
- ---------------------------------- ------------- ------------- ------------- -------------
Operating Revenues $ 138 $ 159 $ 413 $ 313
Operating Expenses 129 165 397 324
------------- ------------- ------------- -------------
EBIT $ 9 $ (6) $ 16 $ (11)
- --------------------------------------------------------------------------------
For the quarter and six months ended June 30, 2000, EBIT for Other Energy
Services increased $15 million and $27 million, respectively, compared to the
same periods in 1999. The increase was primarily due to decreased operating
expenses at Duke Engineering & Services, Inc., and increased earnings from new
business and decreased operating expenses at DukeSolutions, Inc. Earnings growth
from new projects at Duke/Fluor Daniel also contributed to the increase in EBIT
for the six-month period.
Duke Ventures
- --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
(In millions) 2000 1999 2000 1999
- ---------------------------------- ------------- ------------- ------------- -------------
Operating Revenues $ 33 $ 37 $ 67 $ 63
Operating Expenses 20 13 37 26
------------- ------------- ------------- -------------
EBIT $ 13 $ 24 $ 30 $ 37
- --------------------------------------------------------------------------------
EBIT for Duke Ventures decreased $11 million and $7 million for the quarter and
six months ended June 30, 2000, respectively, compared with the same periods in
1999. For the quarter, the decrease is primarily attributable to a decline in
residential developed lot sales and surplus land sales by Crescent Resources,
Inc.
15
(Crescent). For the six-month period, the decrease is primarily attributable to
a decline in residential developed lot sales and commercial project sales,
partially offset by increased surplus land sales by Crescent. The decline in
Crescent's EBIT for both periods was partially offset by decreased operating
costs at DukeNet Communications.
Other Impacts on Earnings Available for Common Stockholders
Interest expense increased $108 million for the quarter and $161 million for the
six months ended June 30, 2000 compared to the same periods in 1999, due to
higher average debt balances outstanding, resulting from acquisitions and
expansion.
Minority interests increased $56 million and $52 million for the quarter and six
months ended June 30, 2000, respectively, compared to the same periods in 1999.
Included in minority interests is expense related to regular distributions on
issuances of Duke Energy's trust preferred securities. This expense increased $9
million for the quarter and $18 million for the six-month period due to
additional issuances of Duke Energy's trust preferred securities during 1999.
Minority interest expense related to joint ventures increased $47 million and
$34 million for the quarter and six-month period, respectively, primarily due to
the Field Services' joint venture with Phillips Petroleum (see Note 3 to the
Consolidated Financial Statements for further discussion). Offsetting the
minority interest expense in the six-month period was a minority interest
benefit in the first quarter from NAWE's joint venture with ExxonMobil.
As a result of favorable resolution of several income tax issues and the
utilization of certain capital loss carryforwards due to the sale of the Midwest
Pipelines, income tax provisions aggregating $30 million were reduced during the
second quarter of 1999.
The sale of the Midwest Pipelines closed in March 1999 and resulted in a $660
million extraordinary gain, net of income tax of $404 million. For further
discussion on the sale, see Note 2 to the Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Operating Cash Flows
Net cash provided by operations was $696 million for the six months ended June
30, 2000 compared to $1,122 million for the same period in 1999. The decrease in
cash was primarily due to increased tax payments as a result of the sale of the
Midwest Pipelines.
In 1999, Duke Energy established an accrual for estimated injury and damages
claims. During the first quarter of 2000, Duke Energy paid approximately $253
million related to the insurance premium. Management believes that the long-term
cash requirements of the projected liability will not have a material effect on
Duke Energy's liquidity or cash flows.
Investing Cash Flows
Capital and investment expenditures were $2,909 million for the six months ended
June 30, 2000 compared to $2,790 million for the same period in 1999. The
increase in capital and investment expenditures during the period primarily
resulted from current year business expansion for the Natural Gas Transmission,
NAWE and International Energy segments discussed below. This increase in
expenditures was partially offset by the 1999 $1.35 billion acquisition of the
natural gas gathering, processing, fractionation and NGL pipeline business from
UPR, as well as UPR's NGL marketing activities.
16
Natural Gas Transmission
In March 2000, Duke Energy completed the approximately $390 million acquisition
of East Tennessee Natural Gas Company from El Paso Energy. East Tennessee
Natural Gas Company owns a 1,100-mile interstate natural gas pipeline system
that crosses Duke Energy's Texas Eastern Transmission Corporation's pipeline and
serves the southeastern region of the U.S. See Note 3 to the Consolidated
Financial Statements for further discussion.
North American Wholesale Energy
In the first six months of 2000, Duke Energy North America, LLC (DENA) began
construction of three new 520-megawatt, natural gas-fired, combined cycle
generating plants (the McClain Energy Facility in Oklahoma, the Hinds Energy
Facility and Attala Energy Facility in Mississippi), and two new 640-megawatt,
natural gas-fired facilities (the Lee County Facility in Illinois and the
Audrain County Facility in Missouri). Duke Energy's capital commitment to these
projects totals approximately $1.2 billion through June 2001. DENA also
continued capital expenditures on projects initiated prior to 2000.
International Energy
In January 2000, Duke Energy International, LLC (DEI) completed a tender offer
to the minority shareholders of Companhia de Geracao de Energia Eletrica
Paranapanema (Paranapanema) and successfully acquired an additional 51% economic
interest in the company for approximately $280 million. This increased Duke
Energy's economic ownership from approximately 44% to approximately 95%. For
additional information on the Paranapanema acquisition, see Note 3 to the
Consolidated Financial Statements.
In August 1999, DEI announced that it would be acquiring Dominion Resources,
Inc.'s portfolio of hydroelectric, natural gas and diesel power generation
businesses in Argentina, Belize, Bolivia and Peru for approximately $405
million. The purchases of the businesses in Belize and Peru were completed in
1999. In March and April 2000, DEI completed the purchases of the businesses in
Argentina and Bolivia, respectively. See Note 3 to the Consolidated Financial
Statements for further discussion.
All projected capital and investment expenditures for the above segments 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
Duke Energy's consolidated capital structure at June 30, 2000, including
short-term debt, was 51% debt, 5% minority interest, 6% trust preferred
securities, 1% preferred stock and 37% common equity. Fixed charges coverage,
calculated using the Securities and Exchange Commission (SEC) method, was 3.5
times and 4.3 times for the six months ended June 30, 2000 and 1999,
respectively.
Duke Energy plans to continue to significantly grow several of its business
segments: Field Services, NAWE, International Energy and Other Energy Services.
These growth opportunities, along with dividends, debt repayments and operating
requirements, are expected to be funded by cash from operations, external
financing, common stock issuances and the proceeds from certain asset sales.
Funding requirements met by external financing, common stock issuances and
proceeds from the sale of assets are dependent upon the opportunities presented
and favorable market conditions. Management believes Duke Energy has adequate
financial resources to meet its future needs.
In March 2000, Duke Energy issued $300 million of Series D 7 3/8% Senior Notes
due 2010.
17
Under its commercial paper facilities and extendable commercial note program,
Duke Energy had the ability to borrow up to $6.6 billion and $2.8 billion at
June 30, 2000 and December 31, 1999, respectively. The commercial paper
facilities and extendable commercial note program at June 30, 2000 consisted of
$1.25 billion for Duke Energy, $2.55 billion for Duke Capital Corporation and
$2.8 billion for Duke Energy Field Services, LLC (DEFS). At June 30, 2000, DEI
also had available a combined commercial paper and medium-term note program for
approximately $450 million. At June 30, 2000 and December 31, 1999, Duke
Energy's various bank credit and construction facilities totaled approximately
$7.0 billion and $3.7 billion, respectively (including approximately $301
million and $320 million related to foreign facilities for the respective
periods). At June 30, 2000, approximately $5.0 billion was outstanding under the
commercial paper facilities and extendable commercial note program, and
approximately $543 million of borrowings were outstanding under the bank credit
and construction facilities. Certain of the credit facilities support the
issuance of commercial paper; therefore, the issuance of commercial paper
reduces the amount available under these credit facilities.
DEFS issued approximately $2.75 billion of commercial paper in April 2000 in
connection with the combination of Field Services' gas gathering and processing
businesses with Phillips. The proceeds were used to make one-time cash
distributions of approximately $1.53 billion to Duke Energy and $1.22 billion to
Phillips Petroleum. Duke Energy used its share of the proceeds to reduce
existing indebtedness and fund business expansion. During the third quarter,
DEFS filed a shelf registration statement with the SEC to offer up to $2.0
billion of long-term debt securities. DEFS plans to issue approximately $1.7
billion of long-term debt securities under this shelf registration.
The parent company of DEFS, Duke Energy Field Services Corporation (DEFS
Corporation), plans to offer a portion of its common stock to the public in
2000, or 2001, in an initial public offering. The proceeds of this offering will
be used to reduce the debt described above. Such an offering is subject to
favorable market conditions. After the offering, the ownership of Duke Energy
and Phillips Petroleum in DEFS Corporation will be reduced accordingly. See Note
3 to the Consolidated Financial Statements for further discussion.
As of June 30, 2000, Duke Energy and its subsidiaries had the ability to issue
up to $3.35 billion aggregate principal amount of debt and other securities
under shelf registrations filed with the SEC. Such securities may be issued as
First and Refunding Mortgage Bonds, Senior Notes, Subordinated Notes or
Preferred Securities.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Risk Policies
Duke Energy is exposed to market risks associated with interest rates, commodity
prices, equity prices and foreign exchange rates. Comprehensive risk management
policies have been established by the Corporate Risk Management Committee (CRMC)
to monitor and manage these market risks. The CRMC is chaired by the Chief
Financial Officer and is comprised of senior executives. The CRMC has
responsibility for oversight of interest rate risk, foreign currency risk,
credit risk and energy risk management, including approval of energy financial
exposure limits. A description of the changes in Duke Energy's market risk since
December 31, 1999 follows.
Interest Rate Risk
From time to time Duke Energy may enter into financial derivative instruments
including, but not limited to, swaps, options and treasury rate agreements to
manage and mitigate interest rate risk exposure. See Note 5 to the Consolidated
Financial Statements for additional information.
During June 2000, Duke Energy entered into several fixed-to-floating interest
rate swap agreements for a total notional amount of $328 million, to exchange
fixed rate interest payment obligations to variable rate
18
obligations to take advantage of current interest rates. Duke Energy also
entered into interest rate hedges for a total notional amount of $225 million.
These hedges lock in a treasury rate to reduce exposure to interest rate
fluctuations on planned debt issuances by DEFS. For additional information, see
Note 3 to the Consolidated Financial Statements.
Commodity Price Risk
In March 2000, Duke Energy's exposure to market fluctuations in the prices of
NGLs increased as a result of Duke Energy combining its gas gathering and
processing business with Phillips to form a new midstream company. See Note 3 to
the Consolidated Financial Statements for additional information on the
combination. Duke Energy closely monitors the risks associated with NGL price
changes on its future operations, and where appropriate, uses crude oil and
natural gas commodity instruments to hedge NGL prices. Based on a sensitivity
analysis as of June 30, 2000, it was estimated that if NGL prices average one
cent per gallon less in the next twelve months, earnings before income taxes
would decrease by approximately $7 million, after considering the effect of Duke
Energy's commodity hedge positions.
The risk in Duke Energy's commodity trading portfolio is measured on a daily
basis utilizing a Value-at-Risk model to determine the maximum potential one-day
favorable or unfavorable Daily Earnings at Risk (DER). The DER is monitored
daily in comparison to established thresholds. Other measures are also utilized
to monitor the risk in the commodity trading portfolio on a monthly and annual
basis. For additional information on the DER computations, see the Quantitative
and Qualitative Disclosures About Market Risk section in the 1999 Duke Energy
Form 10-K filing.
The estimated potential one-day favorable or unfavorable impact on earnings
before income taxes related to commodity derivatives held for trading purposes
was approximately $17 million and $10 million at June 30, 2000 and December 31,
1999, respectively. The average estimated potential one-day favorable or
unfavorable impact on earnings before income taxes related to commodity
derivatives held for trading purposes was approximately $12 million and $9
million for the six months ended June 30, 2000 and 1999, respectively.
Foreign Operations Risk
Duke Energy is exposed to foreign currency risk, sovereign risk and other
foreign operations risk that arise from investments in international affiliates
and businesses owned and operated in foreign countries. To mitigate risks
associated with foreign currency fluctuations, when possible, contracts are
denominated in or indexed to the U.S. dollar or may be hedged through debt
denominated in the foreign currency. Duke Energy also uses foreign currency
derivatives, where possible, to manage its risk related to foreign currency
fluctuations. To monitor its currency exchange rate risks, Duke Energy uses
sensitivity analysis, which measures the impact of a devaluation of the foreign
currencies to which it has exposure.
At June 30, 2000, Duke Energy's primary foreign currency exchange rate exposures
were the Brazilian Real, the Peruvian Nuevo Sol, the Australian dollar, the El
Salvadorian Colon, and the Canadian dollar. Based on a sensitivity analysis at
June 30, 2000, a 10% devaluation in the currency exchange rates in Brazil would
reduce Duke Energy's financial position by approximately $96 million and would
not significantly affect Duke Energy's consolidated results of operations or
cash flows over the next twelve months. Based on a sensitivity analysis at June
30, 2000, a 10% devaluation in other foreign currencies were insignificant to
Duke Energy's consolidated results of operations, financial position or cash
flows.
CURRENT ISSUES
Electric Competition. Wholesale Competition. On December 20, 1999, the Federal
Energy Regulatory Commission (FERC) issued its Order No. 2000 regarding Regional
Transmission Organizations (RTOs). In its order, the FERC stressed the voluntary
nature of RTO participation by utilities and sets minimum
19
characteristics and functions that must be met by utilities that participate in
an RTO. The order provides for an open, flexible structure for RTOs to meet the
needs of the market and provides for the possibility of incentive ratemaking and
other benefits for utilities that participate in an RTO.
On February 25, 2000, the FERC issued an Order on Rehearing -- Order No. 2000-A.
In Order No. 2000-A, the Commission reaffirmed the core elements and basic
framework of Order No. 2000 and issued clarifying guidance in several areas.
Among the issues clarified was the requirement that the RTO must have exclusive
and independent authority to propose rates, terms and conditions of transmission
service provided over the facilities it operates.
Several entities, including the Edison Electric Institute, of which Duke Energy
is a member, have filed Petitions for Review of Order No. 2000 and Order No.
2000-A at the U.S. Court of Appeals for the District of Columbia Circuit. Duke
Energy has joined with two other investor-owned utilities, Carolina Power &
Light and South Carolina Electric & Gas, to propose a for-profit, independent
transmission company to satisfy the requirements of FERC orders 2000 and 2000-A.
Because Order No. 2000 ultimately may be revised in certain respects by the
court, management cannot estimate its effect on future consolidated results of
operations or financial position.
Retail Competition. In May 1997, North Carolina passed a bill that established a
study commission to examine whether competition should be implemented in the
state. Members of this commission include legislators, customers, utilities and
a member of an environmental group. The study commission unanimously approved a
set of recommendations on electric restructuring in April 2000. The commission's
report to the legislature containing these recommendations was submitted in a
report to the general assembly in May. The report basically recommended retail
deregulation beginning partially in 2005 and in full in 2006. No legislative
action based upon the recommendations is expected until 2001.
Natural Gas Competition. Wholesale Competition. On February 9, 2000, the FERC
issued Order 637 which sets forth revisions to its regulations governing
short-term natural gas transportation services and policies governing the
regulation of interstate natural gas pipelines. "Short term" has been defined as
all transactions of less than one year. Among the significant actions taken are
the lifting of the price cap for short-term capacity release by pipeline
customers for an experimental 2 1/2-year period ending September 1, 2002 and
requiring that interstate pipelines file pro forma tariff sheets to (i) provide
for nomination equality between capacity release and primary pipeline capacity;
(ii) implement imbalance management services (for which interstate pipelines may
charge) while at the same time reducing the use of operational flow orders and
penalties and (iii) provide segmentation rights if operationally feasible. Order
637 also narrows the right of first refusal to remove economic biases perceived
in the current rule. Order 637 imposes significant new reporting requirements
for interstate pipelines which must be implemented by September 1, 2000. The
stated FERC goal of these reporting requirements is to increase transparency of
transactions on a real-time basis and to provide additional information on
pipeline organizational structure. Additionally, Order 637 permits pipelines to
propose peak/off-peak rates and term-differentiated rates, and encourages
pipelines to propose experimental capacity auctions. By Order 637-A issued in
February 2000, the FERC generally denied request for rehearing and several
parties, including Duke Energy, have filed appeals in the District of Columbia
Court of Appeals seeking court review of various aspects of the Order.
Because the ultimate resolution of the foregoing proceeding is unknown,
management cannot estimate the effects of these matters on future consolidated
results of operations or financial position.
Environmental Matters. Air Quality Control. In October 1998, the Environmental
Protection Agency (EPA) issued a final ruling on regional ozone control that
requires revised State Implementation Plans (SIPs) for 22 eastern states and the
District of Columbia. This EPA ruling was challenged in court by various states,
industry and other interests, including the states of North Carolina and South
Carolina and Duke Energy. In March 2000, the court upheld most aspects of the
EPA's rule. Petitioners asked the court to rehear the case and overturn the
March decision, but in June the court declined to rehear the case and
20
lifted its earlier stay of the states' obligation to revise their SIPs. Industry
and state petitioners have not decided at this time if they will continue to
seek review of the rule. Late in 1999, the EPA finalized another ozone-related
rule having virtually identical goals to its October 1998 action. The 1999 rule
has likewise been challenged in court by the same or similar parties. The North
Carolina Environmental Management Commission (EMC) is considering several
competing proposals to reduce utility emissions of nitrogen oxides. The EMC
voted in March 2000 to send three alternative nitrogen oxide proposals to public
hearing with the intention of adopting a final rule in September 2000. Duke
Energy announced that it will undertake additional nitrogen oxide control
projects between 2000 and 2005, at a cost of approximately $100 million as an
interim step to address possible contributions to ozone formation in North
Carolina. Depending on the resolution of these matters, costs to Duke Energy may
range from the $100 million that Duke Energy has already committed to spend, to
$600 million in capital costs for additional emission controls.
In October 1999, the EPA sent Duke Energy a request seeking information on Duke
Power's repair and maintenance of its coal-fired plants since 1978. This is part
of the EPA's New Source Reviews (NSR) enforcement initiative, in which the EPA
claims that utilities and others have committed widespread violations of the
Clean Air Act permitting requirements for the past quarter century. The EPA has
filed suit against several utilities and issued administrative orders alleging
numerous NSR permitting violations. In May 2000, Duke Energy received a notice
of violation from the EPA alleging various violations of the NSR
pre-construction permitting requirements of the Clean Air Act. The EPA's
allegations run counter to previous EPA guidance regarding the applicability of
the NSR permitting requirements. Duke Energy, along with several other
utilities, has routinely undertaken the type of repair, replacement, and
maintenance projects that the EPA now claims are illegal. Duke Energy believes
that all of its electric generation units are properly permitted and have been
properly maintained and has met with the EPA to explain that it has not violated
the Act. Duke Energy intends to defend itself vigorously against these alleged
violations; however, because these matters are in a preliminary stage,
management cannot estimate the effects of these matters on future consolidated
results of operations or financial position.
Nuclear Re-licensing. In May 2000, the Nuclear Regulatory Commission renewed the
operating license for Duke Energy's three Oconee nuclear stations through 2033
to 2034.
21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Illinois Environmental Protection Agency has initiated an environmental
enforcement proceeding against a former subsidiary of Duke Energy relating to
alleged air quality permit violations at a natural gas compressor station. Duke
Energy has agreed to indemnify the purchaser of this former subsidiary against
liability for any penalty or fines resulting from these alleged violations. This
proceeding could result in a penalty in excess of $100,000.
For additional information concerning litigation and other contingencies, see
Note 7 to the Consolidated Financial Statements, "Commitments and
Contingencies."
Management believes that the resolution of the matters discussed and referred to
above will not have a material adverse effect on consolidated results of
operations or financial position.
Item 4. Submission of Matters to a Vote of Security Holders.
At the Duke Energy Corporation Annual Meeting of Shareholders held April 20,
2000, the shareholders elected Robert J. Brown, William T. Esrey, George Dean
Johnson, Jr., James G. Martin and Richard B. Priory to serve as Class III
directors with terms expiring in 2003. The shareholders also voted to ratify the
selection of Deloitte & Touche LLP to act as independent auditors to make an
examination of Duke Energy's accounts for the year 2000. The shareholders
approved the Duke Energy 2000 Policy Committee Short-Term Incentive Plan, which
rewards members of the Policy Committee when corporate performance reaches
certain predetermined levels, with 292,316,362 shares voted for the plan,
24,549,740 shares voted against the plan and 3,360,035 shares abstained. The
shareholders did not approve the two shareholder proposals presented in the
proxy statement for the meeting. With respect to the proposal related to the use
of mixed-oxide fuel in Duke Energy's nuclear reactors, 12,003,647 shares voted
for the proposal, 252,425,601 shares voted against the proposal and 17,377,701
shares abstained. With respect to the proposal to limit board members' outside
director positions, 23,050,310 shares voted for the proposal, 251,480,126 shares
voted against the proposal and 7,276,508 shares abstained.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
(27) Financial Data Schedule (included in electronic filing only)
(b) Reports on Form 8-K
A Current Report on Form 8-K filed on April 28, 2000 contained
disclosures under Item 5, Other Events and Item 7, Financial Statements, Pro
Forma Financial Information and Exhibits.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DUKE ENERGY CORPORATION
August 11, 2000 /s/ Richard J.Osborne
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Richard J. Osborne
Executive Vice President and
Chief Financial Officer
August 11, 2000 /s/ Sandra P. Meyer
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Sandra P. Meyer
Vice President and Corporate Controller
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