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 September 30, 1997 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 of Incorporation) (IRS Employer Identification No.)
422 South Church Street
Charlotte, NC 28202-1904
(Address of Principal Executive Offices)
(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 October 31,
1997: 359,852,202 shares
DUKE ENERGY CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Page
----
Consolidated Statements of Income for the Three Months Ended and Year To Date
September 30, 1997 and 1996 2
Consolidated Statements of Cash Flows for the Year To Date September 30, 1997
and 1996 3
Consolidated Balance Sheets as of September 30, 1997 and December 31, 1996 4
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Results of Operations and Financial Condition 13
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
1
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
DUKE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In millions, except per share amounts)
Three Months Ended Year To Date
September 30 September 30
------------------------ ----------------------
1997 1996 1997 1996
--------- --------- ---------- ---------
Operating Revenues
Natural gas and petroleum products
Sales of natural gas and petroleum products $ 2,032.0 $ 1,424.4 $ 5,666.4 $ 3,742.2
Transportation and storage of natural gas 360.5 370.8 1,128.7 1,131.4
Electric
Generation, transmission, and distribution 1,261.1 1,232.1 3,268.3 3,385.5
Trading and marketing of electricity 984.9 24.6 1,179.9 33.4
Other 182.1 81.5 475.9 259.3
--------- --------- ---------- ---------
Total operating revenues 4,820.6 3,133.4 11,719.2 8,551.8
--------- --------- ---------- ---------
Operating Expenses
Natural gas and petroleum products purchased 1,968.7 1,357.5 5,354.2 3,490.1
Fuel used in electric generation 208.5 214.7 547.0 573.5
Net interchange and purchased power 1,055.0 69.5 1,413.0 278.5
Other operation and maintenance 673.3 554.1 1,932.4 1,654.7
Depreciation and amortization 213.5 196.6 622.9 587.2
Property and other taxes 95.3 87.9 281.4 259.8
--------- --------- ---------- ---------
Total operating expenses 4,214.3 2,480.3 10,150.9 6,843.8
--------- --------- ---------- ---------
Operating Income 606.3 653.1 1,568.3 1,708.0
--------- --------- ---------- ---------
Other Income and Expenses
Deferred returns and allowance for funds used
during construction 24.6 26.8 88.0 80.0
Other, net 1.3 17.6 27.2 31.6
--------- --------- ---------- ---------
Total other income and expenses 25.9 44.4 115.2 111.6
--------- --------- ---------- ---------
Earnings Before Interest and Taxes 632.2 697.5 1,683.5 1,819.6
Interest Expense 120.6 125.9 349.8 377.1
Minority Interests (1.6) 2.2 10.7 2.2
--------- --------- ---------- ---------
Earnings Before Income Taxes 513.2 569.4 1,323.0 1,440.3
Income Taxes 203.7 218.2 533.2 558.9
--------- --------- ---------- ---------
Net Income 309.5 351.2 789.8 881.4
Dividends on Preferred and Preference Stock 11.1 11.0 33.2 33.2
--------- --------- ---------- ---------
Earnings Available For Common Stockholders $ 298.4 $ 340.2 $ 756.6 $ 848.2
========= ========= ========== =========
Common Stock Data
Average shares outstanding 359.9 360.6 359.8 361.7
Earnings per share $ 0.83 $ 0.94 $ 2.10 $ 2.34
Dividends per share $ 0.55 $ 0.40 $ 1.35 $ 1.17
See Notes to Consolidated Financial Statements.
2
DUKE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
Year To Date
September 30
--------------------
1997 1996
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 789.8 $ 881.4
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 730.7 735.2
Deferred income taxes 43.0 32.9
Purchased capacity levelization 39.9 62.7
(Increase) Decrease in
Receivables (356.5) (152.3)
Inventory (35.7) 23.6
Other current assets (Note 2) (866.2) (2.2)
Increase (Decrease) in
Accounts payable 114.8 122.9
Taxes accrued 310.7 85.1
Interest accrued (18.9) (70.2)
Other current liabilities (Note 2) 790.2 (35.6)
Other, net 11.3 97.9
-------- --------
Net cash provided by operating activities 1,553.1 1,781.4
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (904.4) (974.8)
Investment expenditures (366.6) (121.9)
Decommissioning, proceeds from sales, and other investing 29.0 14.9
-------- --------
Net cash used in investing activities (1,242.0) (1,081.8)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issuance of
Long-term debt 623.7 165.9
Common stock -- 8.8
Payments for the redemption of
Long-term debt (357.9) (64.5)
Common stock -- (159.0)
Net change in notes payable and commercial paper (172.8) (216.9)
Dividends paid (517.5) (456.0)
Other (0.5) 2.4
-------- --------
Net cash used in financing activities (425.0) (719.3)
-------- --------
Net decrease in cash and cash equivalents (113.9) (19.7)
Cash and cash equivalents at beginning of period 166.0 172.5
-------- --------
Cash and cash equivalents at end of period $ 52.1 $ 152.8
======== ========
See Notes to Consolidated Financial Statements.
3
DUKE ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In millions)
September 30, December 31,
1997 1996
--------- ---------
ASSETS
Current Assets
Cash and cash equivalents $ 52.1 $ 166.0
Receivables 2,371.0 1,888.0
Inventory 469.2 433.5
Current portion of natural gas transition costs 66.9 67.9
Current portion of purchased capacity costs 69.9 51.3
Other (Note 2) 1,049.2 157.1
--------- ---------
Total current assets 4,078.3 2,763.8
--------- ---------
Investments and Other Assets
Investments in affiliates 480.1 502.9
Nuclear decommissioning trust funds 464.9 362.6
Pre-funded pension costs 378.4 360.6
Goodwill, net 485.9 222.1
Other 195.2 142.4
--------- ---------
Total investments and other assets 2,004.5 1,590.6
--------- ---------
Property, Plant and Equipment
Cost 25,185.5 24,468.2
Less accumulated depreciation and amortization 9,647.3 9,199.1
--------- ---------
Net property, plant and equipment 15,538.2 15,269.1
--------- ---------
Regulatory Assets
Purchased capacity costs 782.2 840.7
Debt expense 229.6 244.0
Regulatory asset related to income taxes 510.4 493.5
Natural gas transition costs 207.8 250.0
Environmental clean-up costs 107.7 153.2
Other 317.3 350.0
--------- ---------
Total regulatory assets 2,155.0 2,331.4
--------- ---------
Total Assets $23,776.0 $21,954.9
========= =========
See Notes to Consolidated Financial Statements.
4
DUKE ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In millions)
September 30, December 31,
1997 1996
------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 1,529.9 $ 1,286.5
Notes payable and commercial paper 286.9 459.7
Taxes accrued 385.5 74.8
Interest accrued 105.4 124.3
Current portion of natural gas transition liabilities 47.4 84.4
Current portion of environmental clean-up liabilities 26.9 32.4
Current maturities of long-term debt and preferred stock 88.2 350.6
Other (Note 2) 1,298.5 508.3
--------- ---------
Total current liabilities 3,768.7 2,921.0
--------- ---------
Long-term Debt 6,010.0 5,485.1
--------- ---------
Deferred Credits and Other Liabilities
Deferred income taxes 3,647.9 3,568.5
Investment tax credit 241.7 250.1
Nuclear decommissioning costs externally funded 464.9 362.6
Natural gas transition liabilities 85.0 121.9
Environmental clean-up liabilities 170.6 188.9
Other 988.8 948.2
--------- ---------
Total deferred credits and other liabilities 5,598.9 5,440.2
--------- ---------
Minority Interests 120.9 83.4
--------- ---------
Preferred and Preference Stock
Preferred & preference stock with sinking fund requirements 229.8 234.0
Preferred & preference stock without sinking fund requirements 450.0 450.0
--------- ---------
Total preferred and preference stock 679.8 684.0
--------- ---------
Common Stockholders' Equity
Common stock , no par, 500 million shares authorized; 359.9 million and
359.4 million shares outstanding at September 30, 1997 and
December 31, 1996, respectively 4,288.0 4,289.3
Retained earnings 3,309.7 3,051.9
--------- ---------
Total common stockholders' equity 7,597.7 7,341.2
--------- ---------
Total Liabilities and Stockholders' Equity $23,776.0 $21,954.9
========= =========
See Notes to Consolidated Financial Statements.
5
DUKE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Operations and Business Combinations
Duke Energy Corporation (the Company) is one of North America's leading energy
and energy services companies, involved in the production, transmission and
sales of energy and delivery of energy related services worldwide.
On June 18, 1997, Duke Power Company (Duke Power) changed its name to Duke
Energy Corporation in accordance with the terms of a merger agreement with
PanEnergy Corp (PanEnergy), pursuant to which the Company issued 158.3 million
shares of its common stock in exchange for all of the outstanding common stock
of PanEnergy. PanEnergy is involved in the transportation, storage, gathering
and processing of natural gas, the production of natural gas liquids and is a
marketer of natural gas, electricity, liquefied petroleum gases and related
energy services. Pursuant to the merger, each share of PanEnergy common stock
outstanding was converted into the right to receive 1.0444 shares of the
Company's common stock. In addition, each outstanding option to purchase
PanEnergy common stock became an option to purchase common stock of the Company,
adjusted accordingly. The merger was accounted for as a pooling of interests
and, accordingly, the consolidated financial statements for periods prior to the
combination were restated to include the results of operations of PanEnergy.
Operating revenues and net income previously reported by the separate companies
and the combined amounts presented in the accompanying consolidated financial
statements are as follows:
Duke
In Millions Power PanEnergy Adjustments Combined
- ---------------------------------- ---------- ----------- ------------ ---------
Three Months Ended September 30,
1996
Operating revenues $ 1,292.3 $ 1,827.7 $ 13.4 $ 3,133.4
Net income $ 265.1 $ 86.1 -- $ 351.2
Year To Date September 30, 1996
Operating revenues $ 3,574.2 $ 4,951.1 $ 26.5 $ 8,551.8
Net income $ 613.7 $ 267.7 -- $ 881.4
The adjustment to operating revenues reflects a reclassification of PanEnergy's
equity in earnings of unconsolidated affiliates from other income to revenues to
be consistent with the Company's presentation.
The Company participated in marketing electric power and natural gas through its
50% ownership interest in Duke/Louis Dreyfus LLC (Duke/Louis Dreyfus). On June
17, 1997, the Company acquired the remaining 50% ownership interest in
Duke/Louis Dreyfus from affiliates of Louis Dreyfus Corp. in exchange for two
notes totaling $247 million, which were paid on August 15, 1997. The acquisition
was accounted for by the purchase method. The assets and liabilities and results
of operations of Duke/Louis Dreyfus have been consolidated in the
6
Company's financial statements as of September 30, 1997. The purchase price
substantially represents goodwill and intangibles, which will be amortized over
10 years.
2. Accounting Policies
General - The consolidated financial statements include the accounts of the
Company and all majority-owned subsidiaries. These quarterly 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 are not necessarily indicative of amounts expected for the
respective years due to the effects of seasonal temperature variations on energy
consumption and the timing of maintenance of certain electric generating units.
Derivative Instruments - The Company, primarily through its subsidiaries, holds
and issues instruments that reduce the Company's exposure to market fluctuations
in the price and transportation costs of natural gas, petroleum products and
electric power marketed. The Company uses futures, swaps and options to manage
and hedge price and location risk related to market exposures. In order to
qualify as a hedge, the price movements in the commodity derivatives must be
highly correlated with the underlying hedged commodity. Gains and losses related
to commodity derivatives which qualify as hedges of commodity commitments are
recognized in income when the underlying hedged physical transaction closes (the
deferral method) and are included in natural gas and petroleum products
purchased or net interchange and purchased power in the Consolidated Statements
of Income. Gains and losses related to such instruments, to the extent settled
in cash, are reported as other current assets or liabilities, as appropriate, in
the Consolidated Balance Sheets until recognized in income. If the derivative
instrument is no longer sufficiently correlated to the underlying commodity, or
if the underlying commodity transaction closes earlier than anticipated, the
deferred gains or losses are recognized in income.
In addition to hedging activities, the Company also engages in the trading of
such instruments, and therefore experiences net open positions in terms of
price, volume and specified delivery point. Gains and losses on derivatives
utilized for trading are recognized in income on a current basis (the mark to
market method) and are also included in natural gas and petroleum products
purchased or net interchange and purchased power.
At September 30, 1997, the Company had unrealized gains of $893.9 million and
unrealized losses of $879.2 million recorded as other current assets and other
current liabilities, respectively, related to derivatives utilized for hedging
and trading purposes.
Supplemental Cash Flow Information - Total income taxes paid for the year to
date September 30, 1997 and 1996 were $250.9 million and $428.4 million,
respectively. Interest paid, net of amounts capitalized, for the year to date
September 30, 1997 and 1996 was $365.4 million and $389.8 million, respectively.
Reclassification - Certain amounts for the prior periods have been reclassified
in the consolidated financial statements to conform to the current presentation.
7
3. Business Segments
The Company 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 United States and abroad. The Company provides these
services primarily through four business segments: Electric Operations, Natural
Gas Transmission, Energy Services, and Parent and Other Operations.
The Electric Operations segment is engaged in the generation, transmission,
distribution and sale of electric energy in central and western North Carolina
and the western portion of South Carolina, comprising the area known as the
Piedmont Carolinas. 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.
The Natural Gas Transmission segment is involved in interstate transportation
and storage of natural gas for customers in the Mid-Atlantic, New England,
Midwest and Gulf Coast states. The interstate natural gas transmission and
storage operations of the Company's wholly owned subsidiaries Texas Eastern
Transmission Corporation (TETCO), Algonquin Gas Transmission Company
(Algonquin), Panhandle Eastern Pipe Line Company (PEPL), and Trunkline Gas
Company (Trunkline) are also subject to the rules and regulations of the FERC.
The Energy Services segment is comprised of several separate business units.
Field Services gathers and processes natural gas and produces natural gas
liquids. The Trading and Marketing operations focus on marketing of natural gas,
electricity and liquefied petroleum gases. Other business activities in this
segment include ownership and operation of energy-related facilities,
engineering consulting, construction and other related energy services.
Parent and Other Operations include real estate operations, communications
services, corporate costs and intersegment eliminations.
- ------------------------------------------------------------------------------------------------
Earnings
Before
Operating Interest Depreciation
In Millions Revenues Income & Taxes & Amortization
- ------------------------------------------------------------------------------------------------
Three Months Ended September 30, 1997
Electric Operations $1,278.9 $ 431.4 $ 453.6 $ 124.8
Natural Gas Transmission 365.5 132.0 134.6 57.3
Field Services 738.7 36.1 36.1 17.9
Trading & Marketing 2,437.5 (6.2) (5.4) 1.9
Other Energy Services 126.1 6.7 6.8 3.2
Parent & Other Operations (126.1) 6.3 6.5 8.4
--------- ------- ------- -------
Total Consolidated $4,820.6 $ 606.3 $ 632.2 $ 213.5
========= ======= ======= =======
Three Months Ended September 30, 1996
Electric Operations $1,243.3 $ 469.0 $ 499.6 $ 120.6
Natural Gas Transmission 368.4 134.8 148.8 56.1
Field Services 639.8 32.7 32.7 14.6
Trading & Marketing 913.6 9.4 10.0 1.0
Other Energy Services 58.9 8.3 8.3 2.4
Parent & Other Operations (90.6) (1.1) (1.9) 1.9
--------- ------- ------- -------
Total Consolidated $3,133.4 $ 653.1 $ 697.5 $ 196.6
========= ======= ======= =======
- ------------------------------------------------------------------------------------------------
8
- -----------------------------------------------------------------------------------------------
Earnings
Before
Operating Interest Depreciation
In Millions Revenues Income & Taxes & Amortization
- -----------------------------------------------------------------------------------------------
Year To Date September 30, 1997
Electric Operations $ 3,318.2 $ 991.9 $ 1,069.8 $372.1
Natural Gas Transmission 1,174.7 465.7 485.3 171.8
Field Services 2,208.8 118.7 118.9 52.8
Trading & Marketing 5,139.5 27.5 28.9 4.8
Other Energy Services 348.6 11.1 16.1 9.8
Parent & Other Operations (470.6) (46.6) (35.5) 11.6
--------- -------- --------- -------
Total Consolidated $11,719.2 $1,568.3 $ 1,683.5 $ 622.9
========= ======== ========= =======
Year To Date September 30, 1996
Electric Operations $3,428.4 $1,093.2 $1,179.4 $361.8
Natural Gas Transmission 1,154.1 430.3 449.3 171.1
Field Services 1,735.7 93.4 95.5 38.6
Trading & Marketing 2,362.6 44.9 46.0 2.8
Other Energy Services 159.2 16.3 17.7 7.6
Parent & Other Operations (288.2) 29.9 31.7 5.3
--------- -------- --------- -------
Total Consolidated $ 8,551.8 $1,708.0 $ 1,819.6 $ 587.2
========= ======== ========= =======
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
Capital and Investment
In Millions Expenditures Identifiable Assets
- ----------------------------------------------------------------------------------------------
Year To Year To
Date Date
September September September December
30, 1997 30, 1996 30, 1997 31, 1996
--------- -------- --------- --------
Electric Operations $ 495.8 $ 471.2 $12,872.1 $12,625.2
Natural Gas Transmission 148.2 106.8 5,043.2 5,216.4
Field Services 104.4 347.1 1,846.7 1,769.4
Trading & Marketing 8.1 5.1 2,350.1 992.2
Other Energy Services 85.6 50.8 768.1 652.4
Parent & Other Operations 428.9 115.7 895.8 699.3
--------- -------- --------- ---------
Total Consolidated $ 1,271.0 $1,096.7 $23,776.0 $21,954.9
========= ======== ========= =========
- ----------------------------------------------------------------------------------------------
9
4. Credit Facilities and Commercial Paper
The following credit facilities were available to the Company at September 30,
1997 and December 31, 1996:
- ----------------------------------------------------------------------------------------------
Credit Credit
Facilities at Outstanding Facilities at Outstanding
September 30, at September December 31, at December
In Millions 1997 30, 1997 1996 31, 1996
- ----------------------------------------------------------------------------------------------
Annually renewable facilities $ 54.0 $ 13.5 $ 64.9 $ 8.6
364-day facilities 300.0 -- 400.0 --
Two-year revolving facilities (a) 40.0 -- 40.0 --
Four-year revolving facilities (b) 125.0 72.0 235.0 42.0
Five-year facilities 2,200.0 -- 755.0 --
--------- ------ --------- ------
Total Consolidated $ 2,719.0 $ 85.5 $ 1,494.9 $ 50.6
========= ====== ========= ======
- ----------------------------------------------------------------------------------------------
(a) At September 30, 1997 and December 31, 1996, the Company had $40 million of
pollution control bonds, included in long-term debt, backed by the two-year
revolving facilities.
(b) The outstanding balances of $72 million and $42 million at September 30,
1997 and December 31, 1996, respectively, were included in long-term debt.
The Company had commercial paper facilities available of $2.5 billion at
September 30, 1997 and $780 million at December 31, 1996. The commercial paper
facilities are supported by the 364-day and five-year credit facilities. Amounts
outstanding under the commercial paper facilities at September 30, 1997 and
December 31, 1996 were as follows:
- -------------------------------------------------------------------
September December 31,
In Millions 30, 1997 1996
- -------------------------------------------------------------------
Total commercial paper outstanding $ 898.4 $ 324.2
Less portion classified as short-term 273.4 194.2
-------- -------
Portion classified as long-term debt $ 625.0 $ 130.0
======== =======
- -------------------------------------------------------------------
5. Commitments and Contingencies
Environmental Matters
In July 1997, the Environmental Protection Agency (EPA) revised both the ozone
and particulate matter national ambient air quality standards. The revised
levels required by both of these standards are significantly more stringent than
previous levels. The EPA is in the process of finalizing the implementation
plans and schedules for both standards. The Company is currently evaluating the
potential effects the changes in the standards may have on results of operations
and financial position. The Company supports the objective of the Clean Air Act
and has reduced emissions through the use of low-sulfur coal and installation of
low nitrogen-oxide burners at its fossil generating plants, through efficient
operations and by utilizing nuclear generation.
10
Litigation
On December 16, 1996, TETCO received notification that Marathon Oil Company
(Marathon) intended to commence substitution of other gas reserves,
deliverability and leases for those dedicated to a certain natural gas purchase
contract (the Marathon Contract) with TETCO. In TETCO's view, the tendered
substitute gas reserves, deliverability and leases are not subject to the
Marathon Contract and TETCO filed a declaratory judgment action on December 17,
1996 in the U.S. District Court for the Eastern District of Louisiana seeking a
ruling that Marathon's interpretation of the Marathon Contract is incorrect. On
January 7, 1997, Marathon filed an answer and a counterclaim to TETCO's
complaint seeking a declaratory judgment enforcing its interpretation of the
Marathon Contract.
On February 18, 1997, Amerada Hess Corporation (Amerada Hess) notified TETCO
that it intended to commence substitution of other gas reserves, deliverability
and leases for those dedicated to its natural gas purchase contract (the Amerada
Hess Contract) with TETCO. On the same date, Amerada Hess also filed a petition
in the District Court of Harris County, Texas, 157th Judicial District, seeking
a declaratory judgment that its interpretation of the Amerada Hess Contract,
which covers the same leases and reserves as the Marathon Contract, is correct.
TETCO filed a declaratory judgment action with respect to Amerada Hess'
contentions in the U.S. District Court for the Eastern District of Louisiana on
February 21, 1997. The two actions have been transferred to the judge presiding
over the Marathon Contract matter.
On September 26, 1997 the judge presiding over the Marathon and Amerada Hess
contract matters issued summary judgments in both actions in favor of TETCO.
Marathon and Amerada Hess subsequently filed notices of appeal of the summary
judgments. The potential liability of the Company associated with both the
Marathon Contract and the Amerada Hess Contract should TETCO be contractually
obligated to purchase natural gas based upon the substitute gas reserves,
deliverability and leases, and the effect of transition cost recoveries pursuant
to TETCO's Order 636 settlement involve numerous complex legal and factual
matters which will take a substantial period of time to resolve. As a result,
the Company cannot estimate the effects on results of operations or financial
position.
On April 25, 1997, a group of affiliated plaintiffs that own and/or operate
various pipeline and marketing partnerships in Kansas and Missouri filed suit
against PEPL in the U.S. District Court for the Western District of Missouri.
The plaintiffs allege that PEPL has engaged in unlawful and anti-competitive
conduct with regard to requests for interconnects with the PEPL system for
service to the Kansas City area. Asserting that PEPL has violated the antitrust
laws and tortiously interfered with the plaintiffs' contracts with third
parties, the plaintiffs seek compensatory and punitive damages in unspecified
amounts. Because these matters are in the early stages of litigation, the
Company cannot estimate the effects on results of operations or financial
position.
The Company is also involved in various other legal, tax and regulatory
proceedings before various courts, regulatory commissions and government
agencies 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 financial position of the
Company.
11
Other Commitments and Contingencies
The Company has a 10% ownership interest in TEPPCO Partners, L.P., a master
limited partnership (MLP) that owns and operates a petroleum products pipeline.
A subsidiary partnership of the MLP had $309.5 million in First Mortgage Notes
outstanding at September 30, 1997 with recourse to the general partner, a
subsidiary of the Company.
In the normal course of business, certain of the Company's affiliates enter into
various contracts, including agreements to buy and sell natural gas or electric
power; futures, swaps and options; and construction contracts, which contain
certain schedule and performance requirements. Such affiliates use risk
management techniques to mitigate their exposure associated with such contracts.
Certain subsidiaries of the Company have guaranteed performance by such
affiliates under some of these contracts.
Management is of the opinion that these commitments and contingencies will not
have a material adverse effect on the results of operations or the financial
position of the Company.
12
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
On June 18, 1997, Duke Power and PanEnergy consummated a stock-for-stock merger.
At the same time, the name of Duke Power Company was changed to Duke Energy
Corporation (the Company). This business combination was accounted for as a
pooling of interests, and accordingly, the consolidated financial statements for
periods prior to the combination were restated to include the results of
operations and financial position of PanEnergy. See Note 1 to the Consolidated
Financial Statements for further information. All information presented herein
relates to the combined entity.
OPERATIONS AND BUSINESS UNITS
Duke Energy Corporation 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 United States and abroad. The Company provides
these services primarily through four business segments: Electric Operations,
Natural Gas Transmission, Energy Services, and Parent and Other Operations. The
Electric Operations segment is engaged in the generation, transmission,
distribution and sale of electric energy in central and western North Carolina
and the western portion of South Carolina, comprising the area known as the
Piedmont Carolinas. The Natural Gas Transmission segment is involved in
interstate transportation and storage of natural gas for customers in the
Mid-Atlantic, New England, Midwest and Gulf Coast states. The Energy Services
segment is comprised of several separate business units whose pursuits include
gathering and processing of natural gas; the production of natural gas liquids;
marketing of natural gas, electricity and liquefied petroleum gases; ownership
and operation of energy-related facilities; and other energy services. Parent
and Other Operations include the real estate operations of Crescent Resources,
Inc., communications services, corporate costs and intersegment eliminations.
RESULTS OF OPERATIONS
Overview:
Earnings available for common stockholders was $298.4 million for the three
months ended September 30, 1997, or $.83 per share, compared with $340.2
million, or $.94 per share, for the same period in 1996. The decrease was
primarily due to a provision for non-recurring severance costs associated with a
workforce reduction of 600-700 employees in electric operations. Higher electric
operation and maintenance costs in the third quarter of 1997 also contributed to
the decline. These decreases were partially offset by higher electric sales
during the period.
Earnings available for common stockholders was $756.6 million for the year to
date September 30, 1997, or $2.10 per share, compared with $848.2 million, or
$2.34 per share, for the same period in 1996. The decrease was primarily due to
non-recurring merger related costs, the non-recurring provision associated with
the electric operations workforce reduction and to lower electric operations
revenues resulting from milder than normal weather in the winter and spring.
13
Operating income for the three months ended September 30, 1997 decreased to
$606.3 million compared to $653.1 million for the same period in 1996 due to the
non-recurring provision associated with the electric operations workforce
reduction and higher electric operation and maintenance costs in the third
quarter of 1997, partially offset by increased electric operations sales.
Operating income decreased to $1,568.3 million for the year to date September
30, 1997 compared to $1,708.0 million for the same period in 1996. These
decreases were primarily due to non-recurring merger related costs, the
non-recurring provision associated with the electric operations workforce
reduction and to lower electric operations revenues resulting from milder than
normal weather.
Operating income and earnings before interest and taxes are not materially
different, and are affected by the same fluctuations for the Company and each of
its business segments. Earnings before interest and taxes by business segment
are summarized below, and the explanation of these results by business segment
are discussed thereafter. Net income for the quarter and year to date reflect
minority interests associated primarily with Mobil Corporation's investment in
the trading and marketing operations of the Energy Services segment.
Earnings Before Interest and Taxes (EBIT) by Business Segment:
- --------------------------------------------------------------------------------------------------------------
Three Months Ended Year To Date
September September September September
In Millions 30, 1997 30, 1996 30, 1997 30, 1996
- --------------------------------------------------------------------------------------------------------------
Electric Operations $ 453.6 $ 499.6 $1,069.8 $1,179.4
Natural Gas Transmission 134.6 148.8 485.3 449.3
Energy Services
Field Services 36.1 32.7 118.9 95.5
Trading and Marketing (5.4) 10.0 28.9 46.0
Global Asset Development 2.1 2.2 6.7 8.0
Other Energy Services 4.7 6.1 9.4 9.7
-------- -------- -------- --------
Total Energy Services 37.5 51.0 163.9 159.2
Parent and Other Operations
Crescent Resources 34.1 16.1 72.0 51.3
Parent and Other Operations (27.6) (18.0) (107.5) (19.6)
-------- -------- -------- --------
Consolidated EBIT $ 632.2 $ 697.5 $1,683.5 $1,819.6
======== ======== ======== ========
- --------------------------------------------------------------------------------------------------------------
14
Electric Operations
- --------------------------------------------------------------------------------------------------------------
Three Months Ended Year To Date
September September September September
In Millions 30, 1997 30, 1996 30, 1997 30, 1996
- --------------------------------------------------------------------------------------------------------------
Operating Revenues $1,278.9 $1,243.3 $3,318.2 $3,428.4
Operating Expenses 847.5 774.3 2,326.3 2,335.2
-------- -------- -------- --------
Operating Income 431.4 469.0 991.9 1,093.2
Other Income, Net 22.2 30.6 77.9 86.2
-------- -------- -------- --------
EBIT $ 453.6 $ 499.6 $1,069.8 $1,179.4
======== ======== ======== ========
Volumes, GWh Electric Sales 21,621 20,806 57,911 58,870
- --------------------------------------------------------------------------------------------------------------
Earnings before interest and taxes for Electric Operations decreased to $453.6
million for the three months ended September 30, 1997 compared to $499.6 million
for the same period in 1996, primarily due a provision for non-recurring
severance costs associated with a workforce reduction of 600-700 employees.
Increased operating and maintenance costs also contributed to the decline for
the period. These decreases were partially offset by a 3.9% increase in
gigawatt-hour sales for the quarter compared to 1996. Sales to weather-sensitive
customers were up for the period, with sales to residential and general service
customers up 3.2% and 4.3%, respectively. Sales to industrial customers improved
1.8%, with textile sales up 2.8%.
Earnings before interest and taxes for Electric Operations decreased to $1,069.8
million for the year to date September 30, 1997 compared to $1,179.4 million for
the same period in 1996, driven by the non-recurring workforce reduction accrual
and milder than normal winter and spring weather. Lower kilowatt-hour sales were
driven by decreased sales to residential customers of 7% for the period, offset
partially by increased industrial sales of 1.7% for the year to date.
Natural Gas Transmission
- ----------------------------------------------------------------------------------------------------------
Three Months Ended Year To Date
September September September September
In Millions 30, 1997 30, 1996 30, 1997 30, 1996
- ----------------------------------------------------------------------------------------------------------
Operating Revenues $ 365.5 $ 368.4 $1,174.7 $1,154.1
Operating Expenses 233.5 233.6 709.0 723.8
-------- -------- -------- --------
Operating Income 132.0 134.8 465.7 430.3
Other Income, Net 2.6 14.0 19.6 19.0
-------- -------- -------- --------
EBIT $ 134.6 $ 148.8 $ 485.3 $ 449.3
======== ======== ======== ========
Volumes, TBtu Throughput 593 599 2,079 2,155
- ----------------------------------------------------------------------------------------------------------
15
Earnings before interest and taxes for Natural Gas Transmission decreased $14.2
million for the three months ended September 30, 1997 compared to the same
period in 1996 due primarily to favorable resolution of certain regulatory
matters in 1996, which were included in revenues and other income.
Earnings before interest and taxes for Natural Gas Transmission increased $36
million for the year to date September 30, 1997 compared to the same period in
1996 primarily due to the favorable resolution of certain regulatory matters in
1997 in excess of those in 1996. The increase was also due to market expansion
projects. The resolution of regulatory matters was reflected as additional
revenue and other income.
Energy Services
The Energy Services segment is comprised of several business units. Field
Services gathers and processes natural gas and produces natural gas liquids. The
Trading and Marketing operations focus on marketing of natural gas, electricity
and liquefied petroleum gases. Other Energy Services operations include
ownership and operation of energy-related facilities, engineering consulting,
construction and other energy services.
Earnings before interest and taxes for Energy Services decreased $13.5 million
for the three months ended September 30, 1997 compared to the same period in
1996 primarily due to decreased margins on trading of natural gas caused by
unusual market conditions with respect to natural gas prices. Earnings before
interest and taxes increased $4.7 million for the year to date September 30,
1997 compared to the same period in 1996, due primarily to increased amounts of
natural gas gathered and processed.
Field Services
- ----------------------------------------------------------------------------------------------------------
Three Months Ended Year To Date
September September September September
In Millions 30, 1997 30, 1996 30, 1997 30, 1996
- ----------------------------------------------------------------------------------------------------------
Operating Revenues $ 738.7 $ 639.8 $2,208.8 $1,735.7
Operating Expenses 702.6 607.1 2,090.1 1,642.3
-------- -------- -------- --------
Operating Income 36.1 32.7 118.7 93.4
Other Income, Net -- -- .2 2.1
-------- -------- -------- --------
EBIT $ 36.1 $ 32.7 $ 118.9 $ 95.5
======== ======== ========= =========
Volumes TBtu/day Natural Gas
Gathered/Processed 3.4 3.0 3.4 2.7
- ----------------------------------------------------------------------------------------------------------
Earnings before interest and taxes for Field Services increased $3.4 million for
the three months ended September 30, 1997 compared to the same period in 1996.
Year to date earnings before interest and taxes increased $23.4 million compared
to the same period in 1996. For both periods, operating revenues and operating
expenses increased as a result of increased gathering and processing volumes
related to acquisitions and expansion projects.
16
Trading and Marketing
- ----------------------------------------------------------------------------------------------------------
Three Months Ended Year To Date
September September September September
In Millions 30, 1997 30, 1996 30, 1997 30, 1996
- ----------------------------------------------------------------------------------------------------------
Operating Revenues $2,437.5 $ 913.6 $5,139.5 $2,362.6
Operating Expenses 2,443.7 904.2 5,112.0 2,317.7
-------- -------- -------- --------
Operating Income (6.2) 9.4 27.5 44.9
Other Income, Net .8 .6 1.4 1.1
-------- -------- -------- --------
EBIT $ (5.4) $ 10.0 $ 28.9 $ 46.0
======== ======== ========= =========
Volumes:
Natural Gas Marketed, TBtu/day 7.6 5.6 6.6 4.7
Electricity Marketed, GWh 36,422 1,361 45,775 2,058
- ----------------------------------------------------------------------------------------------------------
Earnings before interest and taxes for Trading and Marketing decreased $15.4
million for the three months ended September 30, 1997 compared with the same
period in 1996. The decline resulted primarily from lower natural gas trading
and marketing margins caused by unusual market conditions with respect to
natural gas prices. The margin decline was partially offset by increased
volumes. Natural gas and electricity volumes marketed increased primarily as a
result of acquiring 100% ownership of the Duke/Louis Dreyfus joint venture in
June 1997 and as a result of the formation of the joint venture with Mobil
Corporation in August 1996.
Earnings before interest and taxes for Trading and Marketing decreased $17.1
million for the year to date ended September 30, 1997 compared with the same
period in 1996. The decline resulted primarily from lower natural gas trading
and marketing margins offset by an increase in volumes. Natural gas and
electricity volumes marketed increased primarily as a result of acquiring 100%
ownership of the Duke/Louis Dreyfus joint venture in June 1997 and as a result
of the formation of the joint venture with Mobil Corporation in the third
quarter of 1996.
Other Operations
Increases in Crescent Resources earnings before interest and taxes for the
quarter and year to date are due primarily to bulk land sales. Parent and Other
Operations results for the three months ended and year to date September 30,
1997 reflect merger-related costs of $10 million and $81.2 million,
respectively. Merger-related costs consist primarily of advisory fees and
workforce reduction costs.
17
LIQUIDITY AND CAPITAL RESOURCES
Operating Cash Flow
Operating cash flows decreased $228.3 million comparing the year to date
September 30, 1997 with the year to date September 30, 1996. This decrease
primarily reflects the cash impact of lower electric revenues and costs incurred
associated with the merger, offset by reduced federal income tax payments.
Investing Cash Flow
Capital and investment expenditures totaled $1,271 million for year to date
September 30, 1997 compared with $1,096.7 million for the same period in 1996.
Increased capital and investment expenditures during the period were primarily
due to the acquisition of the remaining 50% ownership of the Duke/Louis Dreyfus
joint venture in August 1997. Additionally, increases in Crescent Resources'
real estate construction costs, and business expansion for the Natural Gas
Transmission and Other Energy Services segments caused expenditures to increase.
These increases were offset by a 1996 acquisition of certain assets of Mobil
Corporation for approximately $200 million by the Company's Field Services
business unit.
The Company participated in marketing electric power and natural gas through its
50% ownership interest in Duke/Louis Dreyfus. On June 17, 1997, the Company
acquired the remaining 50% ownership interest in Duke/Louis Dreyfus from
affiliates of Louis Dreyfus Corp. in exchange for two notes totaling $247
million, which were paid in August 1997. The purchase price substantially
represents goodwill and intangibles, which will be amortized over 10 years.
The Company is seeking to significantly grow its Energy Services businesses. In
conjunction with this, in June 1997 the Company signed a letter of intent to
build a $265 million, 520-megawatt natural gas fired merchant generation plant
in Bridgeport, Connecticut. The Company will be majority owner, with completion
expected mid-1999. Also, the Company recently signed a letter of intent to
acquire an ownership interest in American Ref-Fuel Company, the third largest
waste-to-energy firm in the United States, with operations primarily in New York
and New Jersey. The Company will have a 32.5% ownership interest in the joint
venture.
During 1997, the Company sold its ownership in trading and marketing operations
in the United Kingdom and its equity interests in certain affiliates. Proceeds
from these sales were $85 million.
18
Financing Cash Flow
The Company's consolidated capital structure at September 30, 1997, including
short-term debt, was 43.5% debt, 4.7% preferred stock and 51.8% common equity.
Fixed charges coverage for the year to date September 30, 1997, using the SEC
method, was 4.3 times compared to 4.5 times year to date September 30, 1996.
During August 1997, the Company instituted a new commercial paper program,
increasing its available commercial paper facilities to $2.5 billion. The
commercial paper facilities consist of $1.25 billion for Duke Energy Corporation
and $1.25 billion for Duke Capital Corp., a wholly owned subsidiary of the
Company. The Company's available commercial paper facilities were $780 million
at December 31, 1996. These facilities are supported by various bank credit
agreements. Total bank credit facilities at September 30, 1997 were $2.7 billion
and $1.5 billion at December 31, 1996. In conjunction with the revised
commercial paper program and the related credit facilities, the Company
dissolved the prior commercial paper program and related bank facilities held by
Duke Energy Corporation and PanEnergy. At September 30, 1997, $898.4 million of
commercial paper and $85.5 million under the bank credit facilities were
outstanding.
Since December 31, 1996, $172.6 million of the Company's first and refunding
mortgage bonds and $114.5 million of the Company's medium term notes have
matured. These retirements were funded primarily through the Company's
commercial paper facilities.
On October 3, 1997, the Company redeemed the outstanding $75 million of 8% first
and refunding mortgage bonds due 2004, the outstanding $150 million of 8 3/8%
first and refunding mortgage bonds due 2021, the outstanding $150 million of 8
3/4% first and refunding mortgage bonds due 2021 and the outstanding $100
million 8 5/8% first and refunding mortgage bonds due 2022. These redemptions
were funded through the Company's commercial paper facilities, backed by the
five-year credit facilities.
In October 1997, Standard & Poor's raised its rating on the first and refunding
mortgage bonds of the Company from A+ to AA-.
Dividends and debt repayments, along with operating and investing requirements,
are expected to be funded by cash from operations, debt and commercial paper
issuances and/or available credit facilities. The Company is seeking to
significantly grow its Energy Services businesses, which will likely require
additional financing to be issued by subsidiaries of the Company.
OTHER
Electric Operations Retail Competition
Competition for retail electric customers is not generally allowed in the
Company's service territory. However, there are discussions and events at the
national level and within certain states regarding retail competition which
could result in changes in the industry. Such changes, should they occur, could
impact all entities owning electric generating assets. During 1997, both North
and South Carolina have taken steps to address retail competition among electric
utilities.
19
In May 1997, North Carolina passed a bill which creates a study commission to
assess deregulation of electric utilities in the state. The commission's report
to the state General Assembly is expected to be completed by early 1999. Members
of the study commission include legislators, utility representatives, customers
and a member of an environmental group.
South Carolina has considered several proposals during 1997 to restructure the
electric industry, the most significant of which would have provided retail
customers with a choice of suppliers by January 1, 1998. None of these proposals
have been approved. However, in May 1997, The South Carolina Public Service
Commission (SCPSC ) requested interested parties to file restructuring proposals
for the electric industry. On June 30, 1997, the Company filed its proposal for
introducing electric competition in South Carolina with the SCPSC. The Company's
plan proposes that electric generation be deregulated while transmission and
distribution continue to be regulated by the FERC and the SCPSC. The Company's
plan also provides for recovery of stranded investment. The SCPSC held hearings
on August 19, 1997 on the various restructuring proposals it received and
intends to present its recommendation to the state legislature in January 1998.
Currently, the electric utility industry is predominantly regulated on a basis
designed to recover the cost of providing electric power to its customers. If
cost-based regulation were to be discontinued in the industry, for any reason,
including competitive pressure on the cost-based prices of electricity, profits
could be reduced and electric utilities might be required to reduce their asset
balances to reflect a market basis less than cost. Discontinuance of cost-based
regulation would also require affected utilities to write off their associated
regulatory assets. The regulatory assets of the Company are indicated on the
Consolidated Balance Sheets. Management cannot predict the potential impact, if
any, of these competitive forces on the Company's future financial position and
results of operations. However, the Company continues to position itself to
effectively meet these challenges by maintaining electric prices that are
locally, regionally and nationally competitive.
Computer Software Changes For The Year 2000
The Company expects to incur incremental development costs to modify existing
computer programs to accommodate the year 2000 and beyond. The Company is
currently evaluating its alternatives for the most cost-effective means for
these modifications. Management is of the opinion that the costs associated with
these modifications will not have a material adverse effect on the results of
operations or financial position of the Company.
Environmental Matters, Litigation and Contingencies
For information concerning environmental matters, litigation and other
commitments and contingencies, see Note 5 to the Consolidated Financial
Statements.
20
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 third quarter of 1997.
ITEM 5. OTHER INFORMATION
Forward-Looking Statements
From time to time, the Company may make statements regarding its expectations,
intent or beliefs about future events. These statements are intended as
"forward-looking statements" under the Private Securities Litigation Reform Act
of 1995. The Company cautions that assumptions, projections and expectations
about future events may and often do vary from actual results, the differences
between assumptions, projections and expectations and actual results can be
material, and there can be no assurance that the forward-looking statements will
be realized. The following are some of the factors that could cause actual
achievements and events to differ materially from those expressed or implied in
such forward-looking statements: state and federal legislative and regulatory
initiatives that increase competition, affect cost and investment recovery and
have an impact on rate structures; the speed and degree to which competition
enters the electric and natural gas industries; industrial, commercial and
residential growth in the service territory of the Company and its subsidiaries;
the weather and other natural phenomena; the timing and extent of changes in
commodity prices and interest rates; changes in environmental and other laws and
regulations to which the Company and its subsidiaries are subject or other
external factors over which the Company has no control; the results of financing
efforts; growth in opportunities for the Company's subsidiaries and diversified
operations; and the effect of the Company's accounting policies, in each case
during the periods covered by the forward-looking statements.
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 a report on Form 8-K on September 2, 1997 under Item
5, Other Events.
21
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
/s/ Richard J. Osborne
------------------------------
Richard J. Osborne
Executive Vice President and
Chief Financial Officer
/s/ Jeffrey L. Boyer
------------------------------
Jeffrey L. Boyer
Vice President and Controller
November 14, 1997
22