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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, 1998 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)
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
April 30, 1998......................................................360,413,387
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DUKE ENERGY CORPORATION
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1998
INDEX
Item Page
- ---- ----
PART I. FINANCIAL INFORMATION
1. Financial Statements ....................................................................... 1
Consolidated Statements of Income for the Three Months Ended March 31, 1998 and 1997 ... 1
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1998 and 1997.. 2
Consolidated Balance Sheets as of March 31, 1998 and December 31, 1997 ................... 3
Notes to Consolidated Financial Statements ............................................... 5
2. Management's Discussion and Analysis of Results of Operations and Financial Condition ...... 9
PART II. OTHER INFORMATION
1. Legal Proceedings........................................................................... 14
4 Submission of Matters to a Vote of Security Holders......................................... 14
5. Other Information........................................................................... 14
6. Exhibits and Reports on Form 8-K............................................................ 14
Signatures.................................................................................. 15
i
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
DUKE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In millions, except per share amounts)
Three Months Ended March 31
-----------------------------
1998 1997
------------- -------------
Operating Revenues
Sales, trading and marketing of natural gas and petroleum products $ 1,976.0 $ 2,127.3
Transportation and storage of natural gas 387.2 410.0
Generation, transmission and distribution of electricity 1,019.7 1,024.3
Trading and marketing of electricity 537.4 82.5
Other 194.5 141.7
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Total operating revenues 4,114.8 3,785.8
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Operating Expenses
Natural gas and petroleum products purchased 1,868.7 1,968.9
Fuel used in electric generation 152.8 171.0
Net interchange and purchased power 611.5 161.4
Other operation and maintenance 569.2 573.6
Depreciation and amortization 222.2 204.0
Property and other taxes 82.0 96.9
------------- -------------
Total operating expenses 3,506.4 3,175.8
------------- -------------
Operating Income 608.4 610.0
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Other Income and Expenses
Deferred returns and allowance for funds used during construction 23.2 26.2
Other, net 46.3 8.1
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Total other income and expenses 69.5 34.3
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Earnings Before Interest and Taxes 677.9 644.3
Interest Expense 123.6 117.6
Minority Interests 15.4 10.5
------------- -------------
Earnings Before Income Taxes 538.9 516.2
Income Taxes 210.8 204.5
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Income Before Extraordinary Item 328.1 311.7
Extraordinary Item (net of tax) (8.0) --
------------- -------------
Net Income 320.1 311.7
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Dividends and Premiums on Redemptions of
Preferred and Preference Stock 6.5 11.1
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Earnings Available For Common Stockholders $ 313.6 $ 300.6
============= =============
Common Stock Data
Average shares outstanding 360.1 359.6
Earnings per share (before extraordinary item)
Basic $ 0.89 $ 0.84
Diluted $ 0.89 $ 0.83
Earnings per share
Basic $ 0.87 $ 0.84
Diluted $ 0.87 $ 0.83
Dividends per share $ 0.55 $ 0.40
See Notes to Consolidated Financial Statements.
1
DUKE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
Three Months Ended March 31
-----------------------------
1998 1997
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 320.1 $ 311.7
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 262.7 232.6
Deferred income taxes (14.1) 34.8
Purchased capacity levelization 27.2 14.1
(Increase) Decrease in
Receivables 297.7 277.4
Inventory (10.8) 8.9
Other current assets 23.5 33.1
Increase (Decrease) in
Accounts payable (519.6) (385.2)
Taxes accrued 183.4 168.7
Interest accrued (6.2) (27.4)
Other current liabilities (76.5) (22.4)
Other, net 27.0 11.2
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Net cash provided by operating activities 514.4 657.5
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CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (288.9) (257.3)
Investment expenditures (97.6) (31.4)
Decommissioning, retirements and other (1.4) (13.3)
------------- -------------
Net cash used in investing activities (387.9) (302.0)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issuance of
Long-term debt 228.0 33.0
Payments for the redemption of
Long-term debt (79.9) (117.2)
Preferred and preference stock (180.2) --
Net change in notes payable and commercial paper 45.6 (129.8)
Dividends paid (203.1) (154.1)
Other (23.9) (34.0)
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Net cash used in financing activities (213.5) (402.1)
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Net decrease in cash and cash equivalents (87.0) (46.6)
Cash received from business acquisitions 34.5 --
Cash and cash equivalents at beginning of period 109.4 166.0
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Cash and cash equivalents at end of period $ 56.9 $ 119.4
============= =============
Supplemental Disclosures
Cash paid for interest (net of amount capitalized) $ 120.8 $ 104.8
Cash paid for income taxes $ 67.2 $ 4.3
See Notes to Consolidated Financial Statements.
2
DUKE ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions)
March 31, December 31,
1998 1997
(Unaudited)
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ASSETS
Current Assets
Cash and cash equivalents $ 56.9 $ 109.4
Receivables 1,995.9 2,280.8
Inventory 459.5 440.1
Current portion of natural gas transition costs 66.2 66.9
Current portion of purchased capacity costs 84.5 76.2
Unrealized gains on mark to market transactions 696.0 551.3
Other 138.0 160.5
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Total current assets 3,497.0 3,685.2
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Investments and Other Assets
Investments in affiliates 732.7 685.9
Nuclear decommissioning trust funds 495.2 471.1
Pre-funded pension costs 342.5 337.5
Goodwill, net 516.5 503.6
Notes receivable 240.4 239.6
Other 253.5 209.9
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Total investments and other assets 2,580.8 2,447.6
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Property, Plant and Equipment
Cost 25,774.4 25,448.1
Less accumulated depreciation and amortization 9,961.0 9,712.2
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Net property, plant and equipment 15,813.4 15,735.9
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Regulatory Assets and Deferred Debits
Purchased capacity costs 723.9 759.4
Debt expense 247.4 253.1
Regulatory asset related to income taxes 511.8 511.0
Natural gas transition costs 180.9 193.7
Environmental clean-up costs 99.3 103.6
Other 320.1 339.3
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Total regulatory assets and deferred debits 2,083.4 2,160.1
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Total Assets $ 23,974.6 $ 24,028.8
============= =============
See Notes to Consolidated Financial Statements.
3
DUKE ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions)
March 31, December 31,
1998 1997
(Unaudited)
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 1,155.3 $ 1,669.7
Notes payable and commercial paper 215.1 169.5
Taxes accrued 308.3 124.8
Interest accrued 105.0 111.2
Current portion of natural gas transition liabilities 35.0 35.0
Current portion of environmental clean-up liabilities 27.3 26.4
Current maturities of long-term debt 75.5 77.3
Unrealized losses on mark to market transactions 690.7 537.8
Other 452.0 523.5
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Total current liabilities 3,064.2 3,275.2
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Long-term Debt 6,749.7 6,530.0
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Deferred Credits and Other Liabilities
Deferred income taxes 3,692.3 3,706.5
Investment tax credit 236.2 238.9
Nuclear decommissioning costs externally funded 495.2 471.1
Natural gas transition liabilities 63.6 78.4
Environmental clean-up liabilities 153.6 157.6
Other 1,020.6 1,035.1
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Total deferred credits and other liabilities 5,661.5 5,687.6
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Minority Interests 163.0 168.3
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Guaranteed Preferred Beneficial Interests
in Corporation's Subordinated Notes 339.0 339.0
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Preferred and Preference Stock
Preferred and preference stock with sinking fund requirements 124.0 149.0
Preferred and preference stock without sinking fund requirements 208.9 340.0
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Total preferred and preference stock 332.9 489.0
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Common Stockholders' Equity
Common stock, no par, 500 million shares authorized; 360.3 million and 359.8 million
shares outstanding at March 31, 1998 and December 31, 1997, respectively 4,290.4 4,283.7
Retained earnings 3,373.9 3,256.0
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Total common stockholders' equity 7,664.3 7,539.7
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Total Liabilities and Stockholders' Equity $ 23,974.6 $ 24,028.8
============ ============
See Notes to Consolidated Financial Statements.
4
DUKE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General
Duke Energy Corporation (the 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
Corporation provides these services through its four business segments: Electric
Operations, Natural Gas Transmission, Energy Services 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. 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 engaged in interstate transportation and
storage of natural gas for customers primarily in the Mid-Atlantic, New England
and Midwest states. The interstate natural gas transmission and storage
operations 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, produces and markets natural
gas liquids and transports and trades crude oil; Trading and Marketing markets
natural gas, electricity and other energy-related products; Global Asset
Development develops, owns and operates energy-related facilities worldwide; and
Other Energy Services provides engineering consulting, construction and
integrated energy solutions.
Other Operations include the real estate operations of Crescent Resources, Inc.
and communications services. Corporate costs and intersegment eliminations are
also included in the financial results of this segment.
The consolidated financial statements include the accounts of the Corporation
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 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.
Certain amounts for the prior periods have been reclassified in the consolidated
financial statements to conform to the current presentation.
2. Earnings Per Common Share
Common stock options, which are common stock equivalents, had a dilutive effect
on earnings per share and increased the weighted average number of common shares
by 1 million and 1.9 million for the quarter ended March 31, 1998 and 1997,
respectively. The increase in weighted average number of common shares as a
result of the common stock options exercised is offset by the number of shares
purchased with the proceeds of the options. The weighted average number of
common shares, for dilutive purposes, was 361.1 million and 361.5 million for
the quarter ended March 31, 1998 and 1997, respectively.
5
3. Business Segments
Business segment financial information follows for the three months ended March
31, 1998 and 1997. Other Operations include intersegment eliminations.
- ----------------------------------------------------------------------------------------------------------
Earnings
Before Depreciation Capital and
Total Operating Interest & & Investment
In Millions Revenues Income Taxes Amortization Expenditures
- ----------------------------------------------------------------------------------------------------------
Quarter Ended March 31, 1998
- ----------------------------
Electric Operations $ 1,035.6 $ 354.7 $ 378.2 $ 129.8 $ 101.2
Natural Gas Transmission 409.7 199.9 208.8 57.9 72.6
Energy Services
Field Services 669.6 16.5 47.7 19.1 69.5
Trading and Marketing 2,011.9 12.3 12.7 2.1 0.8
Global Asset Development 37.4 5.3 9.1 2.4 84.5
Other Energy Services 115.2 7.4 7.4 1.5 3.7
Energy Services' Eliminations (145.6) - - - -
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Total Energy Services 2,688.5 41.5 76.9 25.1 158.5
Other Operations (19.0) 12.3 14.0 9.4 54.2
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Total Consolidated $ 4,114.8 $ 608.4 $ 677.9 $ 222.2 $ 386.5
===========================================================================================================
Quarter Ended March 31, 1997
- ----------------------------
Electric Operations $ 1,040.4 $ 316.3 $ 345.6 $ 123.1 $ 142.8
Natural Gas Transmission 437.9 195.9 206.0 57.2 15.9
Energy Services
Field Services 772.2 50.8 50.9 17.5 41.8
Trading and Marketing 1,629.5 29.6 30.1 1.3 2.0
Global Asset Development 21.2 (0.4) 0.1 2.3 13.3
Other Energy Services 84.4 3.8 (1.2) 1.1 1.0
Energy Services' Eliminations (187.6) -- -- -- --
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Total Energy Services 2,319.7 83.8 79.9 22.2 58.1
Other Operations (12.2) 14.0 12.8 1.5 71.9
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Total Consolidated $ 3,785.8 $ 610.0 $ 644.3 $ 204.0 $ 288.7
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Identifiable Assets
----------------------------------
March 31, December 31,
In Millions 1998 1997
----------------------------------
Electric Operations $12,897.4 $12,958.5
Natural Gas Transmission 5,057.4 5,088.9
Energy Services
Field Services 1,964.2 1,979.8
Trading and Marketing 1,747.7 1,857.3
Global Asset Development 1,121.5 987.6
Other Energy Services 222.3 223.2
Energy Services' Eliminations (118.3) (169.1)
----------------------------------
Total Energy Services 4,937.4 4,878.8
Other Operations 1,082.4 1,102.6
----------------------------------
Total Consolidated $23,974.6 $24,028.8
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6
4. Preferred Stock
During February 1998, the Corporation completed its tender offer to purchase a
maximum of 50% of the outstanding shares of six of its preferred issues,
purchasing 2.4 million shares of its preferred stock for $180.2 million.
5. Commitments and Contingencies
Litigation. On February 18, 1997, Amerada Hess Corporation (Amerada Hess)
notified Texas Eastern Transmission Corporation (TETCO), a subsidiary of the
Corporation, 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 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.
On September 26, 1997, the judge presiding over the Amerada Hess contract matter
issued a summary judgment in favor of TETCO. Amerada Hess subsequently filed a
notice of appeal of the summary judgment. The potential liability of the
Corporation associated with 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 involves numerous complex
legal and factual matters which will take a substantial period of time to
resolve. However, the Corporation does not believe that Amerada Hess will
prevail on its appeal of the lower court's summary judgment. Management is of
the opinion that the final disposition of this matter will not have a material
adverse effect on the consolidated results of operations or financial position
of the Corporation.
On April 25, 1997, a group of affiliated plaintiffs that own and/or operate
various pipeline and marketing companies and partnerships primarily in Kansas
filed suit against Panhandle Eastern Pipe Line Company (PEPL), a subsidiary of
the Corporation, 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. Based on information currently available to the
Corporation, the Corporation believes the resolution of this matter will not
have a material adverse effect on the consolidated results of operations or
financial position of the Corporation.
The Corporation and its subsidiaries are also involved in other 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 for these
matters, the Corporation 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
consolidated results of operations or financial position of the Corporation.
Other Commitments and Contingencies. In January 1998, the Corporation acquired a
9.8 percent ownership in Alliance Pipeline. This pipeline is designed to
transport natural gas from western Canada to the Chicago-area market center for
distribution throughout North America. The pipeline is scheduled to begin
commercial operation in the second half of 2000, provided the necessary U.S. and
Canadian regulatory approvals are secured. In addition to buying an ownership
interest in the pipeline project, the Corporation has contracted for 67.25
million cubic feet per day of capacity on the line over 15 years for an
estimated $315 million.
Periodically, the Corporation 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, the Corporation
may not receive the full value of anticipated benefits under the contracts.
7
In the normal course of business, certain of the Corporation's affiliates enter
into various contracts, including agreements for debt, natural gas transmission
service 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 Corporation 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 consolidated results of operations or the
financial position of the Corporation.
8
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
INTRODUCTION
Duke Energy Corporation (the 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
Corporation provides these services through its four business segments: Electric
Operations, Natural Gas Transmission, Energy Services 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. 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 primarily in the Mid-Atlantic, New
England and Midwest states. The interstate natural gas transmission and storage
operations 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, produces and markets natural
gas liquids (NGL) and transports and trades crude oil; Trading and Marketing
markets natural gas, electricity and other energy-related products; Global Asset
Development develops, owns and operates energy-related facilities worldwide; and
Other Energy Services provides engineering consulting, construction and
integrated energy solutions.
Other Operations include the real estate operations of Crescent Resources, Inc.
(Crescent Resources) and communications services. Corporate costs and
intersegment eliminations are also included in the financial results of this
segment.
Management's Discussion and Analysis should be read in conjunction with the
Consolidated Financial Statements of the Corporation.
RESULTS OF OPERATIONS
For the three months ended March 31, 1998, earnings available for common
stockholders was $313.6 million, or $.87 per share, net of an extraordinary item
of $8.0 million, or $.02 per share. For the comparable 1997 period, earnings
available to common stockholders was $300.6 million, or $.84 per share. The 4%
increase in earnings available for common stockholders is primarily due to
increased electric sales, decreased nuclear expenses due to fewer outage days
and decreased storm costs in the Electric Operations segment, partially offset
by an extraordinary item resulting from premiums paid associated with a debt
refinancing at TEPPCO Partners, L.P.
(TEPPCO) during the first quarter of 1998.
Operating income for the three months ended March 31, 1998 decreased to $608.4
million compared to $610 million for the same period in 1997. Earnings before
interest and taxes (EBIT) were $677.9 million and $644.3 million for the three
months ended March 31, 1998 and 1997, respectively. Operating income and
earnings before interest and taxes, excluding the effect of a $31.2 million gain
on an asset sale by Field Services in 1998, are not materially different, and
are affected by the same fluctuations for the Corporation 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.
9
Earnings Before Interest and Taxes by Business Segment:
- ----------------------------------------------------------------------------
Three Months Ended
March 31,
-----------------------------
In Millions 1998 1997
- ----------------------------------------------------------------------------
Electric Operations $ 378.2 $ 345.6
Natural Gas Transmission 208.8 206.0
Energy Services
Field Services 47.7 50.9
Trading and Marketing 12.7 30.1
Global Asset Development 9.1 0.1
Other Energy Services 7.4 (1.2)
-----------------------------
Total Energy Services 76.9 79.9
Crescent Resources 22.4 22.2
Other Operations (8.4) (9.4)
-----------------------------
Total Corporation $ 677.9 $ 644.3
============================================================================
Included in the amounts discussed below are intercompany transactions that do
not have a material impact on consolidated earnings before interest and taxes.
Electric Operations
- ----------------------------------------------------------------------------
Three Months Ended
March 31,
-----------------------------
Dollars In Millions 1998 1997
- ----------------------------------------------------------------------------
Operating Revenues $ 1,035.6 $ 1,040.4
Operating Expenses 680.9 724.1
-----------------------------
Operating Income 354.7 316.3
Other Income, Net 23.5 29.3
-----------------------------
EBIT $ 378.2 $ 345.6
=============================
Volumes, GWh Sales (a) 19,364 18,384
- ----------------------------------------------------------------------------
(a) Gigawatt-hour sales
Earnings before interest and taxes for Electric Operations increased 9% for the
three months ended March 31, 1998 compared to the same period in 1997, primarily
due to a 5.3% increase in gigawatt-hour sales, a decrease in nuclear expenses
due to fewer outage days and a decrease in storm-related expenses. Sales to
weather-sensitive customers increased for the period as compared to the prior
year quarter, with sales to residential and general service customers up 4.6%
and 5.3%, respectively. Sales in both periods were affected by milder than
normal weather. Sales to industrial customers increased 3.4%, with textile sales
up 5.1%.
Natural Gas Transmission
- ----------------------------------------------------------------------------
Three Months Ended March 31,
-----------------------------
Dollars In Millions 1998 1997
- ----------------------------------------------------------------------------
Operating Revenues $ 409.7 $ 437.9
Operating Expenses 209.8 242.0
-----------------------------
Operating Income 199.9 195.9
Other Income, Net 8.9 10.1
-----------------------------
EBIT $ 208.8 $ 206.0
=============================
Volumes, TBtu (a) 778 842
- ----------------------------------------------------------------------------
(a) Trillion British thermal units
10
Earnings before interest and taxes for the Natural Gas Transmission segment
increased slightly for the three months ended March 31, 1998 compared to the
same period in 1997. Earnings before interest and taxes for the Northeast
Pipelines increased $23.1 million for the three months ended March 31, 1998
compared to the prior year quarter, primarily as a result of a favorable state
property tax ruling in 1998 and a one-time charge for severance costs during the
first quarter of 1997. Increases in market expansion projects were largely
offset by a decrease in throughput as a result of the mild winter weather.
Earnings before interest and taxes for the Midwest Pipelines decreased $20.3
million for the three months ended March 31, 1998 compared to the prior year
quarter, primarily due to a provision reversal in the first quarter of 1997
related to favorable resolution of certain regulatory matters. Partially
offsetting this decrease were lower operating expenses in the first quarter of
1998.
Energy Services
Earnings before interest and taxes for Energy Services decreased 4% for the
three months ended March 31, 1998 compared to the same period in 1997. For the
three months ended March 31, 1998 and 1997, the decrease in earnings before
interest and taxes was primarily driven by the results of operations of Field
Services and Trading and Marketing.
Field Services
- ----------------------------------------------------------------------------
Three Months Ended March 31,
-----------------------------
Dollars In Millions 1998 1997
- ----------------------------------------------------------------------------
Operating Revenues $ 669.6 $ 772.2
Operating Expenses 653.1 721.4
-----------------------------
Operating Income 16.5 50.8
Other Income, Net 31.2 0.1
-----------------------------
EBIT $ 47.7 $ 50.9
=============================
Volumes
Natural Gas Gathered/Processed, TBtu/d (a) 3.7 3.4
NGL Production, MBbl/d (b) 106.4 106.2
- ----------------------------------------------------------------------------
(a) Trillion British thermal units per day
(b) Thousand barrels per day
Earnings before interest and taxes for Field Services decreased 6% for the three
months ended March 31, 1998 compared to the same period in 1997. For the three
months ended March 31, 1998, a decrease in average NGL prices of 27.5% from the
prior year quarter caused a significant decrease in revenues and operating
income. Offsetting this decrease was a $31.2 million gain on the sale of natural
gas fractionator facilities, which is included in other income and expenses for
the quarter ended March 31, 1998. Operating expenses decreased 9.5% for the
three months ended March 31, 1998 in comparison to the prior quarter, primarily
as a result of decreased natural gas prices.
11
Trading and Marketing
- ----------------------------------------------------------------------------
Three Months Ended March 31,
-----------------------------
Dollars In Millions 1998 1997
- ----------------------------------------------------------------------------
Operating Revenues $ 2,011.9 $ 1,629.5
Operating Expenses 1,999.6 1,599.9
-----------------------------
Operating Income 12.3 29.6
Other Income, Net 0.4 0.5
-----------------------------
EBIT $ 12.7 $ 30.1
=============================
Volumes
Natural Gas Marketed, TBtu/d 7.9 6.9
Electricity Marketed, GWh (a) 23,892 3,793
- ----------------------------------------------------------------------------
(a) Gigawatt-hours
Earnings before interest and taxes for Trading and Marketing decreased $17.4
million for the three months ended March 31, 1998 compared with the same period
in 1997. The decline results primarily from lower natural gas margin rates and
decreased trading margins caused by a significant decline in energy price
volatility in the first quarter of 1998 compared to the same period in 1997. The
margin decline was partially offset by increased volumes. Electricity volumes
marketed increased primarily as a result of acquiring 100% ownership of the
Duke/Louis Dreyfus, L.L.C. joint venture in June 1997.
Other Impacts on Earnings Available for Common Stockholders
For the three months ended March 31, 1998, interest expense increased 5% over
the comparable period in 1997 due to higher average debt balances outstanding.
Minority interest increased $4.9 million primarily as a result of dividends
incurred for the three months ended March 31, 1998, for the Corporation's trust
preferred securities, which were issued in December 1997.
In January 1998, TEPPCO, in which the Corporation has a 10% ownership interest,
redeemed certain First Mortgage Notes. The Corporation recorded a non-cash
extraordinary item of $8 million, net of income tax of $5.1 million, related to
its share of costs of the early retirement of debt.
LIQUIDITY AND CAPITAL RESOURCES
Operating Cash Flow. Operating cash flows decreased $143.1 million for the
three months ended March 31, 1998 compared to the same period in 1997 due
primarily to changes in working capital.
On April 28, 1998, Texas Eastern Transmission Corporation (TETCO), a subsidiary
of the Corporation, filed with the FERC a proposed settlement to accelerate
recovery of natural gas transition costs and to reduce depreciation expense to
more appropriately reflect the estimated useful lives of its facilities,
principally interstate natural gas pipelines. The Corporation reviewed the
condition of its natural gas pipeline facilities and current maintenance
practices, and concluded that extension of the useful lives was appropriate. The
proposed settlement reduces customer rates as a result of the reduced
depreciation expense offset by the accelerated recovery of natural gas
transition costs. TETCO anticipates implementation of the proposed settlement as
early as August 1998. The proposed settlement is not expected to have a material
effect on the net results of operations or financial position of the
Corporation. As a result of the proposed settlement, cash flows from operations
are not expected to change for the first two years after implementation due to
the offsetting effect on customer rates of the reduced depreciation expense and
increased recovery of natural gas transition costs. Once the natural gas
transition costs are fully recovered, cash flows from operations are expected to
decrease during 2001 through 2003 by an estimated total of $270 million.
12
Investing Cash Flow. Capital and investment expenditures totaled $386.5 million
for the three months ended March 31, 1998, compared with $288.7 million for the
same period in 1997. Increased capital and investment expenditures during
the period were primarily due to business expansion for the Natural Gas
Transmission and the Energy Services segments, specifically Field
Services and Global Asset Development. These increases were offset by
decreased expenditures for Electric Operations, primarily as a result of steam
generator replacements at certain of the Corporation's nuclear plants in 1997.
Financing Cash Flow. The Corporation's consolidated capital structure at March
31, 1998, including short-term debt, was 45.8% debt, 2.2% preferred stock, 49.8%
common equity and 2.2% trust preferred securities. Fixed charges coverage, using
the SEC method, was 5.0 times for both the three months ended March 31, 1998 and
1997.
The Corporation's commercial paper facilities consist of $1.25 billion for Duke
Energy Corporation and $1.25 billion for Duke Capital Corp. (Duke Capital), a
wholly owned subsidiary of the Corporation. These facilities are supported by
various bank credit agreements which totaled $2.7 billion at both March 31, 1998
and December 31, 1997. At March 31, 1998, $2.0 billion of commercial paper and
$114.7 million under the bank credit facilities were outstanding.
In February 1998, the Corporation completed its tender offer to purchase a
maximum of 50% of the outstanding shares of six of its preferred issues,
purchasing 2.4 million shares of its preferred stock for $180.2 million.
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 available credit facilities. The Corporation is seeking to
significantly grow its Energy Services businesses, which will likely require
additional financing to be issued by subsidiaries of the Corporation. The
Corporation plans to fund Energy Services growth opportunities through a
combination of internally generated cash and external debt. Debt financing will
be obtained through Duke Capital's commercial paper program and by accessing the
capital markets. In connection with its plans to access the capital markets,
Duke Capital filed a $1 billion shelf registration with the Securities and
Exchange Commission during 1998.
13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
For information concerning litigation and other contingencies, see Note 5 to the
Consolidated Financial Statements.
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
Corporation during the first quarter of 1998.
Item 5. Other Information.
Forward-Looking Statements
From time to time, the Corporation may make statements regarding its
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. The
Corporation 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. 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 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
the Corporation 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 Corporation and its subsidiaries are subject or other external factors
over which the Corporation has no control; the results of financing efforts;
growth in opportunities for the Corporation's subsidiaries and diversified
operations; and the effect of the Corporation'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 Corporation filed no reports on Form 8-K during the first quarter of
1998.
14
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
May 14, 1998 /s/ Richard J. Osborne
-----------------------------
Richard J. Osborne
Executive Vice President and
Chief Financial Officer
May 14, 1998 /s/ Jeffrey L. Boyer
-----------------------------
Jeffrey L. Boyer
Vice President and Corporate Controller