SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For Quarter Ended March 31, 1996 DUKE POWER COMPANY 422 South Church Street Charlotte, North Carolina 28242-0001 704-594-0887 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended March 31, 1996 Commission File Number 1-4928 DUKE POWER COMPANY (Exact name of registrant as specified in its charter) North Carolina 56-0205520 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 422 South Church Street, Charlotte, N.C. 28242-0001 (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code 704-594-0887 No Change (Former name, former address and former fiscal year, if changed since last report) 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 (or for such shorter period that the registrant was required to file such reports), 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 March 31, 1996 ..... 204,859,339 shares DUKE POWER COMPANY INDEX PAGE PART I. FINANCIAL INFORMATION Consolidated Statements of Income for the Three Months Ended March 31, 1996 and 1995................................................. 2 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1996 and 1995........................................... 3 Consolidated Balance Sheets - March 31, 1996 and December 31, 1995.. 4-5 Consolidated Statements of Capitalization - March 31, 1996 and December 31, 1995................................................. 6 Notes to Consolidated Financial Statements.......................... 7 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................. 8-9 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders......... 10 Item 6. Exhibits and Reports on Form 8-K............................ 10 SIGNATURES............................................................ 11 Part I. FINANCIAL INFORMATION Item 1. CONSOLIDATED FINANCIAL STATEMENTS DUKE POWER COMPANY CONSOLIDATED STATEMENTS OF INCOME (unaudited) (dollars in thousands) Three Months Ended March 31 1996 1995 Operating revenues..................................$ 1,162,077 $ 1,111,065 Operating expenses Fuel used in electric generation................... 176,545 169,368 Net interchange and purchased power................ 109,285 114,259 Other operation and maintenance.................... 330,073 282,130 Depreciation and amortization...................... 122,737 112,735 General taxes ..................................... 66,025 63,159 Total operating expenses ......................... 804,665 741,651 Operating income ................................... 357,412 369,414 Interest expense and other income Interest expense................................... (71,463) (72,523) Allowance for funds used during construction and other deferred returns............................. 28,910 31,597 Other, net ........................................ 2,938 2,048 Total interest expense and other income ........ (39,615) (38,878) Income before income taxes........................... 317,797 330,536 Income taxes ........................................ 126,493 129,260 Net income .......................................... 191,304 201,276 Dividends on preferred and preference stock.......... 11,127 12,735 Earnings for common stock ........................... $ 180,177 $ 188,541 Common stock data Average common shares outstanding (thousands) .... 204,859 204,859 Earnings per share ............................... $ 0.88 $ 0.92 Dividends per share .............................. $ 0.51 $ 0.49 See Notes to Consolidated Financial Statements. 2 DUKE POWER COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (dollars in thousands) Three Months Ended March 31 1996 1995 Cash flows from operating activities Net income .........................................$ 191,304 $ 201,276 Adjustments to reconcile net income to net cash provided by operating activities: Non-cash items Depreciation and amortization..................... 176,905 168,727 Deferred income taxes and investment tax credit amortization.................................... (10,759) 6,733 Allowance for equity funds used during construction ................................... (3,421) (5,928) Purchased capacity levelization .................. 31,037 (25,894) Other, net ....................................... 26,780 2,728 (Increase) Decrease in Accounts receivable ............................. 56,355 (16,518) Inventory........................................ 9,814 (23,167) Prepayments...................................... 1,091 (4,969) Increase (Decrease) in Accounts payable ................................ (67,745) (56,484) Taxes accrued ................................... 123,849 96,673 Interest accrued and other liabilities .......... (54,549) (29,579) Total adjustments................................. 289,357 112,322 Net cash provided by operating activities ...... 480,661 313,598 Cash flows from investing activities Construction expenditures and other property additions ........................................ (209,073) (215,142) External funding for decommissioning ............... (14,118) (14,118) Investment in nuclear fuel.......................... (6,412) (3,719) Investment in joint ventures........................ (16,552) (2,326) Net change in investment securities................. (9,956) (1,128) Net cash used in investing activities........... (256,111) (236,433) Cash flows from financing activities Proceeds from the issuance of Construction loans and other ...................... - 8,429 Payments for the redemption of First and refunding mortgage bonds ................ (3,000) (40,000) Short-term notes payable, net ..................... (118,000) 67,100 Preferred stock ................................... - (2,926) Construction loans and other....................... (2,170) (512) Dividends paid ..................................... (115,690) (113,305) Other............................................... 5,153 (371) Net cash used in financing activities .......... (233,707) (81,585) Net increase (decrease) in cash ..................... (9,157) (4,420) Cash at beginning of period ......................... 45,410 37,430 Cash at end of period ............................... $ 36,253 $ 33,010 See Notes to Consolidated Financial Statements. 3 DUKE POWER COMPANY CONSOLIDATED BALANCE SHEETS (unaudited) (dollars in thousands) March 31 December 31 1996 1995 ASSETS Current assets Cash............................................ $ 36,253 $ 45,410 Short-term investments ......................... 87,787 76,300 Receivables (less allowance for losses: 1996 - $6,679;1995 - $6,352).................. 633,349 689,703 Inventory - at average cost .................... 332,028 341,841 Prepayments and other........................... 21,809 22,900 Total current assets ........................ 1,111,226 1,176,154 Investments and other assets Investments in joint ventures .................. 179,826 163,274 Other investments, at cost or less ............. 83,664 85,194 Nuclear decommissioning trust funds............. 291,524 273,466 Pre-funded pension cost ........................ 80,000 80,000 Total investments and other assets........... 635,014 601,934 Property, plant and equipment Electric plant in service (at original cost) Production..................................... 7,258,416 7,154,332 Transmission................................... 1,537,403 1,532,302 Distribution .................................. 4,136,459 4,105,513 Other.......................................... 1,062,441 1,030,226 Electric plant in service..................... 13,994,719 13,822,373 Less accumulated depreciation and amortization................................. 5,219,942 5,122,192 Electric plant in service, net................ 8,774,777 8,700,181 Nuclear fuel................................... 712,201 731,691 Less accumulated amortization.................. 467,206 453,921 Nuclear fuel, net............................. 244,995 277,770 Construction work in progress (including nuclear fuel in process: 1996 - $25,491; 1995 - $25,500)............... 316,454 382,582 Total electric plant, net ................... 9,336,226 9,360,533 Other property - at cost (less accumulated depreciation: 1996 - $29,519; 1995 - $29,956)............... 379,745 354,713 Total property, plant and equipment, net .... 9,715,971 9,715,246 Deferred debits Purchased capacity costs ....................... 934,436 965,473 Debt expense, primarily refinancing costs, being amortized over the terms of related debt...... 178,385 180,930 Regulatory asset related to income taxes ....... 489,450 490,676 Regulatory asset related to DOE assessment fee.. 101,274 101,274 Other .......................................... 111,587 126,797 Total deferred debits ....................... 1,815,132 1,865,150 Total assets .....................................$ 13,277,343 $ 13,358,484 See Notes to Consolidated Financial Statements. 4 DUKE POWER COMPANY CONSOLIDATED BALANCE SHEETS (unaudited) (dollars in thousands) March 31 December 31 1996 1995 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable................................. $ 214,391 $ 343,692 Notes payable ................................... 37,300 155,300 Taxes accrued ................................... 156,231 34,884 Interest accrued................................. 71,002 73,675 Current maturities of long-term debt and preferred stock................................ 10,753 12,071 Other............................................ 97,594 149,555 Total current liabilities.................... 587,271 769,177 Long-term debt.................................... 3,713,875 3,711,405 Accumulated deferred income taxes............. 2,375,500 2,382,204 Deferred credits and other liabilities Investment tax credit ........................... 258,550 261,347 DOE assesssment fee.............................. 101,274 101,274 Nuclear decommissioning costs externally funded.............................. 291,524 273,466 Other............................................ 404,571 390,427 Total deferred credits and other liabilities............................... 1,055,919 1,026,514 Preferred and preference stock with sinking fund requirements.................................... 234,000 234,000 Preferred and preference stock without sinking fund requirements............................... 450,000 450,000 Common stockholders' equity Common stock, no par.............................. 1,926,909 1,926,909 Retained earnings................................. 2,933,869 2,858,275 Total common stockholders' equity........... 4,860,778 4,785,184 Total liabilities and stockholders' equity.........$ 13,277,343 $ 13,358,484 See Notes to Consolidated Financial Statements. 5 DUKE POWER COMPANY CONSOLIDATED STATEMENTS OF CAPITALIZATION (unaudited) (dollars in thousands) March 31 December 31 1996 1995 Common Stock Equity Common stock, no par, 300,000,000 shares authorized; 204,859,339 shares outstanding for 1996 and 1995....$ 1,926,909 $ 1,926,909 Retained earnings..................................... 2,933,869 2,858,275 Total common stock equity....................... 4,860,778 4,785,184 Preferred and preference stock (At March 31, 1996 and December 31, 1995 12,500,000 shares of preferred stock, 10,000,000 shares of preferred stock A, and 1,500,000 shares of preference stock were authorized with or without sinking fund requirements) Without sinking fund requirements.................... 450,000 450,000 With sinking fund requirements....................... 234,000 234,000 Total preferred and preference stock ............ 684,000 684,000 Long-term debt First and refunding mortgage bonds ................... 3,463,281 3,466,281 Capitalized leases ................................... 12,800 7,477 Other long-term debt.................................. 147,239 147,410 Unamortized debt discount and premium, net ........... (60,504) (61,674) Current maturities of long-term debt ................. (2,253) (4,295) Subtotal long-term debt............................. 3,560,563 3,555,199 Subsidiary long-term debt Crescent Resources, Inc.............................. 128,582 130,694 Nantahala Power and Light Company ................... 33,230 33,288 Current maturities of long-term debt ................ (8,500) (7,776) Subtotal subsidiary long-term debt ................. 153,312 156,206 Total consolidated long-term debt .............. 3,713,875 3,711,405 Total capitalization ..................................$ 9,258,653 $ 9,180,589 See Notes to Consolidated Financial Statements. 6 DUKE POWER COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Total income taxes paid for the quarter ended March 31 were $1,667,000 and $12,587,000 for 1996 and 1995, respectively. Interest paid, net of amounts capitalized, for the quarter ended March 31 was $68,019,000 and $67,591,000 for 1996 and 1995, respectively. 2. The Company is involved in legal, tax and regulatory proceedings before various courts, regulatory commissions and governmental agencies regarding matters arising in the ordinary course of business, some of which involve substantial amounts. Where appropriate, the Company has made accruals in accordance with Statement of Financial Accounting Standards No. 5 "Accounting for Contingencies," in order to provide for such matters. Management is of the opinion that the final disposition of these proceedings will not have a material adverse effect on the results of operations or the financial position of the Company. 3. These are quarterly financial statements and the amounts reported in the Consolidated Statements of Income are not necessarily indicative of amounts expected for the respective years. These amounts may be affected by seasonal temperature variations, timing of scheduled and unscheduled maintenance of certain electric generating units, and the Company's policy of accruing estimates for certain other expenses ratably over twelve months until final amounts are determined. 4. In the opinion of the Company, the accompanying financial statements contain adjustments of a normal recurring nature such that the financial statements present fairly the financial position of the Company as of the respective dates shown and the results of its operations for the respective periods then ended. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity And Capital Resources The South Carolina Public Service Commission, on May 7, 1996, ordered a rate reduction in the form of a decrement rider of 0.4319 cents per kilowatt-hour, or an average of approximately 8 percent, affecting South Carolina retail customers. The rate reduction will be reflected on bills rendered on or after June 1, 1996. This net decrement rider reflects a reduction for an interim true-up adjustment associated with Catawba Nuclear Station purchased capacity costs as well as an increase for demand side management costs recovery. The rate adjustment was made because, in the South Carolina retail jurisdiction, cumulative levelized revenues associated with the recovery of Catawba purchased capacity costs have exceeded purchased capacity payments and accrual of deferred returns. During the period January 1, 1996 through March 31, 1996, additions to property (including nuclear fuel) of $139.4 million and retirements of $28.1 million resulted in a net increase in gross plant of $111.3 million. The Company has substantially completed the construction of a combustion turbine facility in Lincoln County, North Carolina to provide capacity at periods of peak demand. During 1995, twelve units of the Lincoln Combustion Turbine Station began commercial operation. The last four units began commercial operation in the first quarter of 1996, two units on February 1, 1996 and two units on March 1, 1996. In 1995, the Company issued two requests for proposals (RFP) to solicit competitive bids for its future electric generating resources. The short-term RFP solicited bids to provide options for up to 675 megawatts of capacity with terms of 1 to 4 years. The long-term RFP solicited bids to provide up to 300 megawatts of purchased power to be available beginning in 1998 or 1999, for contract periods of between 5 and 20 years in duration. The Company has evaluated a total of 16 proposals received for both the short-term RFP and the long-term RFP. The Company has signed a Letter of Intent with PECO Energy Co. of Philadelphia for the option to purchase up to 250 megawatts of capacity during the summer months of 1998 through 2001. Final contract arrangements are currently underway, during which the two parties may agree to increase the option amount to 350 megawatts. The long-term RFP is closed and will not be awarded. This completes the solicitation process which began with the release of the two RFP's in 1995. The Company normally experiences seasonal peak loads in the summer and winter which are relatively in balance. On August 14, 1995, the Company experienced a new all-time peak load of 15,542 megawatts. This peak load figure excludes both the portion of the demand of the other joint owners of the Catawba Nuclear Station met by their retained ownership and the load of Nantahala Power and Light Company. Fixed charges coverage for the twelve months ended March 31, 1996, using the SEC method, was 4.91 times. Internal cash generation for the twelve months ended March 31, 1996 was 92 percent. The Company is involved in legal, tax and regulatory proceedings before various courts, regulatory commissions and governmental agencies regarding matters arising in the ordinary course of business, some of which involve substantial amounts. Where appropriate, the Company has made accruals in accordance with Statement of Financial Accounting Standards No. 5 "Accounting for Contingencies," in order to provide for such matters. Management is of the opinion that the final 8 disposition of these proceedings will not have a material adverse effect on the results of operations or the financial position of the Company. The Federal Energy Regulatory Commission (FERC) on December 14, 1995 issued an order accepting the Company's open access transmission tariffs and ordered a hearing on the rates to be charged for service under those tariffs. The terms and conditions of service are subject to the outcome of the FERC's final rule and the rates are subject to the outcome of ongoing proceedings before the FERC. On April 24, 1996, the FERC issued its final rule. The Company is evaluating any revisions to its transmission tariffs which may be required as a result of the final rule. Results Of Operations Earnings per share for the first quarter 1996 were $0.88, down 4.3% compared to the same period in 1995. This decrease was primarily due to increased operating and maintenance expenses. Revenues for first quarter 1996 increased $51 million when compared to the same period in 1995. Total kilowatt-hour sales increased 2.8% from the first quarter 1995 primarily due to higher sales to the Company's residential and general service customers. Residential sales were up 13.6% and general service sales were up 8.8% resulting from colder winter weather. Total industrial sales were down 0.8% with textile sales decreasing 8.0% and other industrial sales up 4.1%. Textile sales declined as a result of weak demand for textile goods. This increase in revenues was partially aided by increased revenues from the Associated Enterprises Group business units, primarily by the Company's real estate subsidiary, Crescent Resources, Inc. Fuel expense for first quarter 1996 increased by $7.2 million compared to the same period in 1995. This increase was primarily due to higher levels of fossil generation as a percentage of total generation. Net interchange and purchased power expense decreased $5.0 million for first quarter 1996 compared to first quarter 1995. This decrease was primarily due to decreases in power purchased from the other Catawba joint owners. Operating and maintenance expenses increased $47.9 million for the first quarter 1996 compared to first quarter 1995. This 17.0% increase was primarily due to the costs associated with a severe winter storm affecting large portions of the Company's service area in February 1996 and higher fossil maintenance costs from planned outages. Depreciation and amortization expense increased $10.0 million for the first quarter 1996 compared to the first quarter 1995. This increase was primarily due to the completion of the Lincoln Combustion Turbine Station and additions to distribution plant to meet customer growth. Allowance for funds used during construction and other deferred returns decreased $2.7 million for the first quarter 1996 compared to the same period during 1995. This decrease was largely due to the completion of the Lincoln Combustion Turbine Station. 9 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of the security holders of the Company during the first quarter of 1996. 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 The Company filed no Form 8-K reports during the first quarter of 1996. 10 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 POWER COMPANY Date: May 13, 1996 ______________________________________ Richard J. Osborne Senior Vice President and Chief Financial Officer Date: May 13, 1996 ______________________________________ Jeffrey L. Boyer Controller 11