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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 September 30, 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 October 31,
1998...............................................................361,973,623
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DUKE ENERGY CORPORATION
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1998
INDEX
Item Page
----
PART I. FINANCIAL INFORMATION
1. Financial Statements...................................................1
Consolidated Statements of Income for the Three and
Nine Months Ended September 30, 1998 and 1997..................1
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1998 and 1997.....................................2
Consolidated Balance Sheets as of September 30, 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............................................11
PART II. OTHER INFORMATION
1. Legal Proceedings.....................................................20
4. Submission of Matters to a Vote of Security Holders...................20
5. Other Information.....................................................20
6. Exhibits and Reports on Form 8-K......................................21
Signatures............................................................22
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 Nine Months Ended
September 30 September 30
----------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ---------
OPERATING REVENUES
Sales, trading and marketing of natural gas
and petroleum products $ 1,846.1 $ 2,032.0 $ 5,706.7 $ 5,666.4
Transportation and storage of natural gas 367.8 360.5 1,092.2 1,128.7
Generation, transmission and distribution of
electricity 1,429.5 1,261.1 3,562.8 3,268.3
Trading and marketing of electricity 1,421.3 984.9 2,376.0 1,179.9
Other 233.5 182.1 689.0 475.9
---------- ---------- ---------- ----------
Total operating revenues 5,298.2 4,820.6 13,426.7 11,719.2
---------- ---------- ---------- ----------
OPERATING EXPENSES
Natural gas and petroleum products purchased 1,766.3 1,968.7 5,430.8 5,354.2
Fuel used in electric generation 243.4 208.5 590.2 547.0
Net interchange and purchased power 1,469.1 1,055.0 2,564.9 1,413.0
Other operation and maintenance 659.4 673.3 1,904.4 1,932.4
Depreciation and amortization 238.4 213.5 684.1 622.9
Property and other taxes 95.8 95.3 269.3 281.4
---------- ---------- ---------- ----------
Total operating expenses 4,472.4 4,214.3 11,443.7 10,150.9
---------- ---------- ---------- ----------
OPERATING INCOME 825.8 606.3 1,983.0 1,568.3
---------- ---------- ---------- ----------
OTHER INCOME AND EXPENSES
Deferred returns and allowance for funds
used during construction 22.2 24.6 68.3 88.0
Other, net 22.9 1.3 79.9 27.2
---------- ---------- ---------- ----------
Total other income and expenses 45.1 25.9 148.2 115.2
---------- ---------- ---------- ----------
EARNINGS BEFORE INTEREST AND TAXES 870.9 632.2 2,131.2 1,683.5
INTEREST EXPENSE 138.7 120.6 385.1 349.8
MINORITY INTERESTS 30.0 (1.6) 62.1 10.7
---------- ---------- ---------- ----------
EARNINGS BEFORE INCOME TAXES 702.2 513.2 1,684.0 1,323.0
INCOME TAXES 273.5 203.7 647.7 533.2
---------- ---------- ---------- ----------
INCOME BEFORE EXTRAORDINARY ITEM 428.7 309.5 1,036.3 789.8
EXTRAORDINARY ITEM (NET OF TAX) - - (8.0) -
---------- ---------- ---------- ----------
NET INCOME 428.7 309.5 1,028.3 789.8
---------- ---------- ---------- ----------
DIVIDENDS AND PREMIUMS ON REDEMPTIONS OF
PREFERRED AND PREFERENCE STOCK 4.9 11.1 16.5 33.2
---------- ---------- ---------- ----------
EARNINGS AVAILABLE FOR COMMON STOCKHOLDERS $ 423.8 $ 298.4 $ 1,011.8 $ 756.6
========== ========== ========== ==========
COMMON STOCK DATA
Average shares outstanding 361.2 359.9 360.6 359.8
Earnings per share (before extraordinary item)
Basic $ 1.18 $ 0.83 $ 2.83 $ 2.10
Diluted $ 1.17 $ 0.83 $ 2.82 $ 2.09
Earnings per share
Basic $ 1.18 $ 0.83 $ 2.81 $ 2.10
Diluted $ 1.17 $ 0.83 $ 2.80 $ 2.09
Dividends per share (Note 10) $ - $ 0.55 $ 1.65 $ 1.35
See Notes to Consolidated Financial Statements.
1
DUKE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
Nine Months Ended
September 30
------------------------
1998 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,028.3 $ 789.8
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 808.5 730.7
Deferred income taxes (20.0) 43.0
Purchased capacity levelization 65.1 39.9
(Increase) Decrease in
Receivables (288.3) (356.5)
Inventory (72.5) (35.7)
Other current assets 10.2 19.0
Increase (Decrease) in
Accounts payable (2.1) 114.8
Taxes accrued 323.9 310.7
Interest accrued (7.2) (18.9)
Other current liabilities (27.1) (89.0)
Other, net (62.6) 5.3
----------- -----------
Net cash provided by operating activities 1,756.2 1,553.1
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (1,602.3) (904.4)
Investment expenditures (236.1) (366.6)
Decommissioning, retirements and other 43.3 29.0
----------- -----------
Net cash used in investing activities (1,795.1) (1,242.0)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issuance of
Long-term debt 775.4 623.7
Guaranteed preferred beneficial interests in
Corporation's subordinated notes 581.4 -
Common stock and stock options 91.2 11.6
Payments for the redemption of
Long-term debt (230.6) (357.9)
Common stock - (17.4)
Preferred and preference stock (180.4) -
Net change in notes payable and commercial paper (102.6) (172.8)
Dividends paid (609.9) (517.5)
Other 15.3 5.3
----------- -----------
Net cash provided by (used in) financing activities 339.8 (425.0)
----------- -----------
Net increase (decrease) in cash and cash equivalents 300.9 (113.9)
Cash received from business acquisitions 37.9 -
Cash and cash equivalents at beginning of period 109.4 166.0
----------- -----------
Cash and cash equivalents at end of period $ 448.2 $ 52.1
=========== ===========
SUPPLEMENTAL DISCLOSURES
Cash paid for interest (net of amount capitalized) $ 372.5 $ 365.4
Cash paid for income taxes $ 433.6 $ 250.9
See Notes to Consolidated Financial Statements.
2
DUKE ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions)
September 30, December 31,
1998 1997
(Unaudited)
---------- ----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 448.2 $ 109.4
Receivables 2,585.8 2,280.8
Inventory 521.2 440.1
Current portion of natural gas transition costs 100.0 66.9
Current portion of purchased capacity costs 94.3 76.2
Unrealized gains on mark to market transactions 769.7 551.3
Other 168.1 160.5
---------- ----------
Total current assets 4,687.3 3,685.2
---------- ----------
INVESTMENTS AND OTHER ASSETS
Investments in affiliates 783.4 685.9
Nuclear decommissioning trust funds 499.1 471.1
Pre-funded pension costs 354.5 337.5
Goodwill, net 504.3 503.6
Notes receivable 236.1 239.6
Unrealized gains on mark to market transactions 368.3 65.5
Other 213.6 144.4
---------- ----------
Total investments and other assets 2,959.3 2,447.6
---------- ----------
PROPERTY, PLANT AND EQUIPMENT
Cost 26,885.1 25,448.1
Less accumulated depreciation and amortization 10,249.2 9,712.2
---------- ----------
Net property, plant and equipment 16,635.9 15,735.9
---------- ----------
REGULATORY ASSETS AND DEFERRED DEBITS
Purchased capacity costs 676.2 759.4
Debt expense 235.9 253.1
Regulatory asset related to income taxes 506.6 511.0
Natural gas transition costs 106.6 193.7
Environmental clean-up costs 91.1 103.6
Other 285.0 339.3
---------- ----------
Total regulatory assets and deferred debits 1,901.4 2,160.1
---------- ----------
Total Assets $ 26,183.9 $ 24,028.8
========== ==========
See Notes to Consolidated Financial Statements.
3
DUKE ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions)
September 30, December 31,
1998 1997
(Unaudited)
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,679.5 $ 1,669.7
Notes payable and commercial paper 416.9 169.5
Taxes accrued 449.1 124.8
Interest accrued 104.0 111.2
Current portion of natural gas transition liabilities - 35.0
Current portion of environmental clean-up liabilities 14.3 26.4
Current maturities of long-term debt and preferred stock 275.3 77.3
Unrealized losses on mark to market transactions 775.8 537.8
Other 505.9 523.5
---------- ----------
Total current liabilities 4,220.8 3,275.2
---------- ----------
LONG-TERM DEBT 6,613.6 6,530.0
---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 3,701.4 3,706.5
Investment tax credit 245.7 256.7
Nuclear decommissioning costs externally funded 499.1 471.1
Natural gas transition liabilities 4.0 78.4
Environmental clean-up liabilities 150.0 157.6
Unrealized losses on mark to market transactions 341.5 50.3
Other 878.3 967.0
---------- ----------
Total deferred credits and other liabilities 5,820.0 5,687.6
---------- ----------
MINORITY INTERESTS 251.4 168.3
---------- ----------
GUARANTEED PREFERRED BENEFICIAL INTERESTS
IN CORPORATION'S SUBORDINATED NOTES 920.4 339.0
---------- ----------
PREFERRED AND PREFERENCE STOCK
Preferred and preference stock with sinking fund requirements 104.0 149.0
Preferred and preference stock without sinking fund requirements 208.9 340.0
---------- ----------
Total preferred and preference stock 312.9 489.0
---------- ----------
Common Stockholders' Equity
Common stock, no par, 500 million shares authorized; 361.7 million and
359.8 million shares outstanding at September 30, 1998 and December 31,
1997, respectively 4,365.2 4,283.7
Retained earnings 3,679.6 3,256.0
---------- ----------
Total common stockholders' equity 8,044.8 7,539.7
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 26,183.9 $ 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 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. 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.
Parent and 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
outstanding for dilutive purposes by 1.3 million and 1.5 million for the
quarters ended September 30, 1998 and 1997, respectively, and 1.2 million and
1.6 million for the nine months ended September 30, 1998 and 1997, respectively.
The weighted average number of common shares outstanding for dilutive purposes
was 362.5 million and 361.4 million for the quarters ended September 30, 1998
and 1997, respectively, and 361.8 million and 361.4 million for the nine months
ended September 30, 1998 and 1997, respectively. The increase in weighted
average number of common shares outstanding for dilutive purposes as a result of
the common stock options exerciseable is partially offset by the number of
shares assumed purchased with the proceeds of the options.
5
3. BUSINESS SEGMENTS
Business segment financial information follows for the three and nine months
ended September 30, 1998 and 1997. Parent and Other Operations include
intersegment eliminations.
- ----------------------------------------------------------------------------------------
Earnings Capital
Before Depreciation and
Total Operating Interest and Investment
In Millions Revenues Income and Taxes Amortization Expenditures
- -----------------------------------------------------------------------------------------
Three Months Ended
September 30, 1998
- ----------------------------
Electric Operations $1,437.7 $ 561.7 $ 590.5 $ 130.2 $ 145.9
Natural Gas Transmission 375.3 170.6 177.7 58.0 77.5
Energy Services
Field Services 725.5 9.3 7.9 20.4 74.3
Trading and Marketing 2,754.3 30.9 31.6 2.9 2.3
Global Asset Development 110.8 25.1 33.4 13.4 724.4
Other Energy Services 127.5 5.5 5.9 4.0 26.8
Energy Services'
Eliminations (209.9) - - - -
-----------------------------------------------------------
Total Energy Services 3,508.2 70.8 78.8 40.7 827.8
Parent and Other Operations (23.0) 22.7 23.9 9.5 77.4
-----------------------------------------------------------
Total Consolidated $5,298.2 $ 825.8 $ 870.9 $ 238.4 $1,128.6
======================================================================================
- ----------------------------
Three Months Ended
September 30, 1997
- ----------------------------
Electric Operations $1,278.9 $ 431.4 $ 453.6 $ 124.8 $ 176.0
Natural Gas Transmission 365.5 132.0 134.6 57.3 72.5
Energy Services
Field Services 738.7 36.1 36.1 17.9 30.1
Trading and Marketing 2,437.5 (6.2) (5.4) 1.9 3.8
Global Asset Development 29.5 2.0 2.1 1.9 31.7
Other Energy Services 96.6 4.7 4.7 1.3 7.7
Energy Services'
Eliminations (125.8) - - - -
-----------------------------------------------------------
Total Energy Services 3,176.5 36.6 37.5 23.0 73.3
Parent and Other Operations (0.3) 6.3 6.5 8.4 317.0
-----------------------------------------------------------
Total Consolidated $4,820.6 $ 606.3 $ 632.2 $ 213.5 $ 638.8
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6
- ---------------------------------------------------------------------------------------
Earnings Capital
Before Depreciation and
Total Operating Interest and Investment
In Millions Revenues Income and Taxes Amortization Expenditures
- ---------------------------------------------------------------------------------------
Nine Months Ended
September 30, 1998
- ----------------------------
Electric Operations $3,607.7 $1,254.8 $1,330.8 $ 390.1 $ 385.6
Natural Gas Transmission 1,152.4 512.4 534.1 172.4 201.5
Energy Services
Field Services 2,123.7 38.4 68.4 59.4 205.0
Trading and Marketing 6,492.8 57.6 59.1 7.3 3.9
Global Asset Development 208.3 41.1 57.4 19.2 828.9
Other Energy Services 378.3 14.8 15.3 7.3 39.4
Energy Services'
Eliminations (491.8) - - - -
-----------------------------------------------------------
Total Energy Services 8,711.3 151.9 200.2 93.2 1,077.2
Parent and Other Operations (44.7) 63.9 66.1 28.4 174.1
-----------------------------------------------------------
Total Consolidated $13,426.7 $1,983.0 $ 2,131.2 $ 684.1 $ 1,838.4
=======================================================================================
- ----------------------------
Nine Months Ended
September 30, 1997
- ----------------------------
Electric Operations $3,318.2 $ 991.9 $1,069.8 $ 372.1 $ 495.8
Natural Gas Transmission 1,174.7 465.7 485.3 171.8 148.2
Energy Services
Field Services 2,208.8 118.7 118.9 52.8 104.4
Trading and Marketing 5,139.5 27.5 28.9 4.8 8.1
Global Asset Development 80.2 (3.4) 6.7 6.4 53.3
Other Energy Services 268.4 14.5 9.4 3.4 32.3
Energy Services'
Eliminations (441.1) - - - -
-----------------------------------------------------------
Total Energy Services 7,255.8 157.3 163.9 67.4 198.1
Parent and Other Operations (29.5) (46.6) (35.5) 11.6 428.9
-----------------------------------------------------------
Total Consolidated $11,719.2 $1,568.3 $1,683.5 $ 622.9 $1,271.0
=======================================================================================
- -----------------------------------------------------------
Identifiable Assets
-------------------------------
September 30, December 31,
In Millions 1998 1997
- -----------------------------------------------------------
Electric Operations $ 13,153.5 $ 12,958.5
Natural Gas Transmission 4,966.6 5,088.9
Energy Services
Field Services 1,963.0 1,979.8
Trading and Marketing 2,580.0 1,857.3
Global Asset Development 1,883.8 987.6
Other Energy Services 319.1 223.2
Energy Services'Eliminations (61.8) (169.1)
-------------------------------
Total Energy Services 6,684.1 4,878.8
Parent and Other Operations 1,379.7 1,102.6
-------------------------------
Total Consolidated $ 26,183.9 $ 24,028.8
===========================================================
4. Regulatory Matters
Two California electric generating plants, Moss Landing and Oakland, sell
electricity under the terms of Reliability Must Run (RMR) Agreements with the
California Independent System Operator (ISO), which purchases electricity at
FERC regulated rates. The Corporation has not received final approval from the
FERC with respect to the electric
7
rates charged by the two plants, and, therefore, the rates are subject to
partial refund. Management is of the opinion that the final resolution of this
matter will not have a material adverse effect on the consolidated results of
operations or financial position of the Corporation.
On August 29, 1998, the FERC approved a settlement filed by Texas Eastern
Transmission Corporation (TETCO), a subsidiary of the Corporation, which will
accelerate recovery of natural gas transition costs and 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. These facilities have a book value of approximately $1.8 billion,
net of accumulated depreciation of $2.6 billion. The weighted average rate of
depreciation will be approximately 1.25%. Implementation of the settlement began
October 1, 1998, and a rate moratorium will be in effect until 2004. The
settlement reduces customer rates as a result of the reduced depreciation
expense offset by the accelerated recovery of natural gas transition costs. The
settlement is not expected to have a material effect on the net results of
operations or financial position of the Corporation.
5. PROPERTY, PLANT AND EQUIPMENT
On July, 1, 1998, a subsidiary of the Corporation purchased three electric
generating stations in California for $501 million from Pacific Gas & Electric
Company. These power plants have a combined capacity of 2,645 megawatts. Two of
the three plants, Moss Landing and Oakland, are subject to the terms of RMR
Agreements with the California ISO.
6. Long-term Debt
On July 20, 1998, Duke Capital Corporation (Duke Capital), a wholly owned
subsidiary of the Corporation, issued $250 million Series A 6 1/4% Senior Notes
due 2005 and $150 million Series B 6 3/4% Senior Notes due 2018.
7. GUARANTEED PREFERRED BENEFICIAL INTERESTS IN CORPORATION'S SUBORDINATED NOTES
On June 1, 1998, Duke Capital Financing Trust I (Trust I) issued $250 million of
its 7 3/8% trust preferred securities, at a $7.9 million discount, representing
preferred undivided beneficial interests in the assets of Trust I. On September
15, 1998, Duke Capital Financing Trust II (Trust II) issued $350 million of its
7 3/8% trust preferred securities, at an $11.0 million discount, representing
preferred undivided beneficial interests in the assets of Trust II. Payment of
distributions on these preferred securities is guaranteed by Duke Capital, but
only to the extent the trusts have funds legally and immediately available to
make such distributions. The trusts are statutory business trusts, of which Duke
Capital owns all the common securities. Trust I was established for the purpose
of issuing and selling preferred securities and investing the gross proceeds in
the 7 3/8% Series A Junior Subordinated Notes of Duke Capital due March 31,
2038. Trust II was established for the purpose of issuing and selling preferred
securities and investing the gross proceeds in the 7 3/8% Series B Junior
Subordinated Notes of Duke Capital due June 30, 2038.
8. PREFERRED AND PREFERENCE 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 stock issues,
purchasing 2.4 million shares of its preferred stock for $180.4 million.
9. COMMITMENTS AND CONTINGENCIES
LITIGATION. 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 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.
8
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. On July 7, 1998, the Fifth Circuit
Court of Appeals affirmed the lower court's judgment in favor of TETCO. In
August 1998, Amerada Hess and TETCO entered into an agreement terminating the
Amerada Hess Contract effective June 30, 1998. Management is of the opinion that
this matter was resolved on terms favorable to 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. 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.
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. The Corporation and
certain of its subsidiaries have financial and/or performance guarantees 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.
10. COMMON STOCK DIVIDENDS DECLARED
On June 17, 1998, the Corporation's board of directors declared third quarter
dividends of $0.55 per share for the quarter. During the third quarter of 1998,
no dividends were declared. During the quarter ended September 30, 1997, third
quarter dividends of $0.55 per share were declared.
11. SUBSEQUENT EVENT
The Corporation, through its wholly owned subsidiaries, PanEnergy Corp
(PanEnergy) and Texas Eastern Corporation (TEC), entered into a Stock Purchase
Agreement between PanEnergy, TEC and CMS Energy
9
Corporation (CMS Energy) dated October 31, 1998. Pursuant to the agreement,
PEPL, Trunkline Gas Company and the storage related to those systems
(collectively, the PEPL Companies), along with Trunkline LNG Company (Trunkline
LNG), will be sold to CMS Energy. The sales price of $2.2 billion involves a
cash payment of $1.9 billion and existing PEPL debt of approximately $300
million. While certain assets and liabilities will be retained, such as the
Houston office building, certain environmental, legal and tax liabilities, and
substantially all intercompany balances, management is of the opinion that these
assets and liabilities will not have a material adverse effect on the
consolidated results of operations or financial position of the Corporation. The
sale will result in an after tax gain of approximately $700 million and is
contingent upon completion of due diligence and receipt of clearances under the
Hart-Scott-Rodino Act. Closing is anticipated in January 1999.
Total assets of the PEPL Companies and Trunkline LNG were $1.3 billion at
September 30, 1998. Combined operating results of the PEPL Companies and
Trunkline LNG, excluding intercompany transactions, are as follows:
- ----------------------------------------------------
Nine Months Ended
September 30,
--------------------
IN MILLIONS 1998 1997
- ----------------------------------------------------
Operating Revenues $ 323.1 $ 354.7
Operating Expenses 204.1 221.5
--------------------
Operating Income 119.0 133.2
Other Income, Net 10.2 11.4
---------------------
Earnings Before
Interest and Taxes $ 129.2 $ 144.6
====================================================
10
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 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. 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.
Parent and 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 quarter ended September 30, 1998, earnings available for common
stockholders was $423.8 million, or $1.18 per share. For the comparable 1997
period, earnings available to common stockholders was $298.4 million, or $0.83
per share. The 42.0% increase in earnings available for common stockholders was
primarily due to increased electric sales and energy marketing activities, the
favorable resolution of gas supply realignment cost issues, expansions and
acquisitions and the absence of 1997 severance costs. These increases were
partially offset by decreased NGL prices and increased interest expense and
minority interest expense.
For the nine months ended September 30, 1998, earnings available for common
stockholders was $1,011.8 million, or $2.81 per share, net of an extraordinary
item of $8.0 million, or $0.02 per share. For the nine months ended September
30, 1997, earnings available to common stockholders was $756.6 million, or $2.10
per share. The 33.7% increase in earnings available for common stockholders was
primarily due to increased electric sales and energy marketing activities,
expansions and acquisitions, gains on sales of assets and the absence of 1997
merger and severance costs. These increases were partially offset by decreased
NGL prices and increased interest expense and minority interest expense.
Operating income for the quarter ended September 30, 1998 increased to $825.8
million compared to $606.3 million for the same period in 1997. Earnings before
interest and taxes (EBIT) were $870.9 million and $632.2 million for the
quarters ended September 30, 1998 and 1997, respectively. For the nine months
ended September 30, 1998, operating income increased $414.7 million, to $1,983.0
million from the same period in 1997, and earnings before interest and taxes
increased $447.7 million, to $2,131.2 million from the same period in 1997.
Operating income and earnings before interest and taxes, excluding the effect of
a $31.2 million gain on an asset
11
sale by Field Services in the first quarter of 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.
EARNINGS BEFORE INTEREST AND TAXES BY BUSINESS SEGMENT:
- -------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
-----------------------------------------
IN MILLIONS 1998 1997 1998 1997
- -------------------------------------------------------------------------
Electric Operations $ 590.5 $ 453.6 $ 1,330.8 $1,069.8
Natural Gas Transmission 177.7 134.6 534.1 485.3
Energy Services
Field Services 7.9 36.1 68.4 118.9
Trading and Marketing 31.6 (5.4) 59.1 28.9
Global Asset Development 33.4 2.1 57.4 6.7
Other Energy Services 5.9 4.7 15.3 9.4
-----------------------------------------
Total Energy Services 78.8 37.5 200.2 163.9
Crescent Resources 32.8 34.1 97.5 72.0
Parent and Other Operations (8.9) (27.6) (31.4) (107.5)
-----------------------------------------
Total Corporation $ 870.9 $ 632.2 $ 2,131.2 $1,683.5
=========================================================================
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 Nine Months Ended
September 30, September 30,
-----------------------------------------
DOLLARS IN MILLIONS 1998 1997 1998 1997
- -------------------------------------------------------------------------
Operating Revenues $1,437.7 $1,278.9 $3,607.7 $3,318.2
Operating Expenses 876.0 847.5 2,352.9 2,326.3
-----------------------------------------
Operating Income 561.7 431.4 1,254.8 991.9
Other Income, Net 28.8 22.2 76.0 77.9
-----------------------------------------
EBIT $ 590.5 $ 453.6 $1,330.8 $1,069.8
=========================================
Volumes, GWh Sales(a) 23,365 21,704 63,458 58,265
------------------------------------------------------------------------
(a) Gigawatt-hour sales
For the quarter ended September 30, 1998, earnings before interest and taxes for
Electric Operations increased 30.2% compared to the same period in 1997,
primarily due to a 7.7% increase in gigawatt-hour sales and non-recurring 1997
severance costs. Sales to weather-sensitive customers increased significantly
for the period as compared to the prior year quarter, with sales to residential
and general service customers up 13.3% and 8.0%, respectively, primarily due to
warm weather conditions. Electric Operations reached an all-time peak load of
17,465 megawatts on July 22, 1998, the third peak load of the summer, during
exceptionally warm summer weather. Also contributing to the increase in earnings
before interest and taxes were increased bulk power marketing activities. The
increase in earnings before interest and taxes was partially offset by a
decrease in total industrial sales of 1.8%, with textile sales down 5.2%.
For the nine months ended September 30, 1998, earnings before interest and taxes
for Electric Operations increased to $1,330.8 million from $1,069.8 million for
the same period in 1997, primarily due to an 8.9% increase in gigawatt-hour
sales and non-recurring 1997 severance costs. Sales to residential and general
service customers increased 11.5% and 8.1%, respectively, over the same period
in 1997, primarily due to warm weather conditions. For the nine months ended
September 30, 1998, sales to industrial customers increased slightly over the
comparable
12
period in 1997, with textile sales up 1.2%. Also contributing to the increase in
earnings before interest and taxes were increased bulk power marketing
activities. Partially offsetting the increase in earnings before interest and
taxes were increased nuclear expenses due primarily to maintenance work
performed during refueling outages.
NATURAL GAS TRANSMISSION
- -------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
-----------------------------------------
DOLLARS IN MILLIONS 1998 1997 1998 1997
- -------------------------------------------------------------------------
Operating Revenues $ 375.3 $ 365.5 $ 1,152.4 $ 1,174.7
Operating Expenses 204.7 233.5 640.0 709.0
-----------------------------------------
Operating Income 170.6 132.0 512.4 465.7
Other Income, Net 7.1 2.6 21.7 19.6
-----------------------------------------
EBIT $ 177.7 $ 134.6 $ 534.1 $ 485.3
=========================================
Volumes, TBtu (a) 527 593 1,896 2,079
- -------------------------------------------------------------------------
(a) Trillion British thermal units
For the quarter ended September 30, 1998, earnings before interest and taxes for
the Natural Gas Transmission segment increased 32.0% compared to the same period
in 1997. Earnings before interest and taxes for the Northeast Pipelines
increased $30.0 million for the quarter ended September 30, 1998 compared to the
prior year quarter, primarily as a result of the favorable resolution of gas
supply realignment cost issues. Earnings before interest and taxes for the
Midwest Pipelines increased $13.1 million for the quarter ended September 30,
1998 compared to the prior year quarter, primarily due to lower operating
expenses in 1998.
For the nine months ended September 30, 1998, earnings before interest and taxes
for the Natural Gas Transmission segment increased $48.8 million over the
comparable period in 1997. Earnings before interest and taxes for the Northeast
Pipelines increased $57.1 million for the nine months ended September 30, 1998
compared to the same period in 1997, primarily as a result of the favorable
resolution of gas supply realignment cost issues and state property tax rulings,
increased market expansion projects and non-recurring 1997 severance costs.
These increases were partially offset by a decrease in throughput primarily as a
result of mild winter weather.
For the nine months ended September 30, 1998, earnings before interest and taxes
for the Midwest Pipelines decreased slightly compared to the same period in
1997, primarily due to the favorable resolution of certain regulatory matters in
1997, which was reflected as additional revenue and other income, partially
offset by lower operating expenses in 1998.
ENERGY SERVICES
Earnings before interest and taxes for Energy Services increased $41.3 million
to $78.8 million in the quarter ended September 30, 1998 compared to the prior
year quarter. For the nine months ended September 30, 1998, earnings before
interest and taxes for Energy Services increased $36.3 million to $200.2 million
compared to the same period in 1997. For the quarter and nine months ended
September 30, 1998, the increase in earnings before interest and taxes is
primarily due to increased earnings of Trading and Marketing and Global Asset
Development, partially offset by decreased earnings of Field Services.
13
Field Services
- -------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
-----------------------------------------
DOLLARS IN MILLIONS 1998 1997 1998 1997
- -------------------------------------------------------------------------
Operating Revenues $ 725.5 $ 738.7 $ 2,123.7 $2,208.8
Operating Expenses 716.2 702.6 2,085.3 2,090.1
-----------------------------------------
Operating Income 9.3 36.1 38.4 118.7
Other Income, Net (1.4) - 30.0 0.2
-----------------------------------------
EBIT $ 7.9 $ 36.1 $ 68.4 $ 118.9
=========================================
Volumes
Natural Gas Gathered/Processed,
TBtu/d(a) 3.7 3.4 3.7 3.4
Natural Gas Delivered, TBtu/d 0.5 0.4 0.5 0.4
NGL Production, MBbl/d(b) 115.4 109.7 111.5 108.1
- -------------------------------------------------------------------------
(a) Trillion British thermal units per day
(b) Thousand barrels per day
Earnings before interest and taxes for Field Services decreased $28.2 million
for the quarter ended September 30, 1998 compared to the same period in 1997,
primarily due to a decrease in average NGL prices of approximately $0.10 per
gallon, or 29%, from the prior year quarter.
For the nine months ended September 30, 1998, earnings before interest and taxes
for Field Services decreased $50.5 million compared to the same period in 1997,
primarily due to a decrease in average NGL prices of approximately $0.09 per
gallon, or 25%, and increased operating expenses due to growth. The decrease in
earnings before interest and taxes was partially offset by a $31.2 million gain
on the sale of two NGL fractionation facilities in the first quarter of 1998,
which was included in other income and expenses.
TRADING AND MARKETING
- -------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
-----------------------------------------
DOLLARS IN MILLIONS 1998 1997 1998 1997
- -------------------------------------------------------------------------
Operating Revenues $2,754.3 $2,437.5 $ 6,492.8 $5,139.5
Operating Expenses 2,723.4 2,443.7 6,435.2 5,112.0
-----------------------------------------
Operating Income 30.9 (6.2) 57.6 27.5
Other Income, Net 0.7 0.8 1.5 1.4
-----------------------------------------
EBIT $ 31.6 $ (5.4) $ 59.1 $ 28.9
=========================================
Volumes
Natural Gas Marketed, TBtu/d 7.5 7.6 7.5 6.6
Electricity Marketed, GWh (a) 37,000 36,422 80,426 45,775
- -------------------------------------------------------------------------
(a) Gigawatt-hours
Earnings before interest and taxes for Trading and Marketing increased $37.0
million for the quarter ended September 30, 1998 compared with the same period
in 1997. The increase results primarily from increased electricity and natural
gas margin rates and increased risk trading margins.
For the nine months ended September 30, 1998, earnings before interest and taxes
for Trading and Marketing increased $30.2 million compared with the same period
in 1997. The increase results primarily from increased electricity and natural
gas volumes marketed, increased electricity margin rates and increased risk
trading margins, partially offset by decreased natural gas margin rates.
Electricity volumes marketed increased primarily as a result of acquiring 100%
ownership of the Duke/Louis Dreyfus, L.L.C. (D/LD) joint venture in June 1997.
14
GLOBAL ASSET DEVELOPMENT
- -------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
-----------------------------------------
IN MILLIONS 1998 1997 1998 1997
- -------------------------------------------------------------------------
Operating Revenues $ 110.8 $ 29.5 $ 208.3 $ 80.2
Operating Expenses 85.7 27.5 167.2 83.6
-----------------------------------------
Operating Income 25.1 2.0 41.1 (3.4)
Other Income, Net 8.3 0.1 16.3 10.1
-----------------------------------------
EBIT $ 33.4 $ 2.1 $ 57.4 $ 6.7
=========================================================================
Earnings before interest and taxes for Global Asset Development increased $31.3
million for the quarter ended September 30, 1998 compared with the same period
in 1997. The increase results primarily from business expansion and acquisitions
which include the July 1, 1998 purchase of three electric generating stations in
California from Pacific Gas & Electric Company (PG&E), the December 1997
acquisition of an indirect 32.5% ownership interest in American Ref-Fuel
Company, and the completion of Phase I of Bridgeport Energy, a 520-megawatt
combined cycle natural gas fired merchant generation plant, of which the
Corporation is the majority owner.
For the nine months ended September 30, 1998, earnings before interest and taxes
for Global Asset Development increased $50.7 million compared with the same
period in 1997. The increase results primarily from business expansion and
acquisitions, including the July 1, 1998 acquisition of three electric
generating stations in California from PG&E and the December 1997 acquisition of
an indirect 32.5% ownership interest in American Ref-Fuel Company.
PARENT AND OTHER OPERATIONS
For the quarter ended September 30, 1998, earnings before interest and taxes for
Crescent Resources decreased slightly compared to the same period in 1997. For
the nine months ended September 30, 1998, earnings before interest and taxes for
Crescent Resources increased $25.5 million, primarily as a result of a gain on
land sales in the Jocassee Gorges region of South Carolina and increased project
and lake lot sales.
For the quarter ended September 30, 1998, earnings before interest and taxes for
Parent and Other Operations, excluding Crescent Resources, increased $18.7
million over the same period in 1997, primarily as a result of 1997 costs
incurred for consolidation of the trading and marketing function and
restructuring of contracts. For the nine months ended September 30, 1998,
earnings before interest and taxes for Parent and Other Operations, excluding
Crescent Resources, increased $76.1 million over the same period in 1997,
primarily as a result of the absence of 1997 merger-related costs, partially
offset by a 1997 gain on the sale of the Corporation's interest in the Midland
Cogeneration Venture.
OTHER IMPACTS ON EARNINGS AVAILABLE FOR COMMON STOCKHOLDERS
For the quarter and nine months ended September 30, 1998, interest expense
increased 15.0% and 10.1%, respectively, over the comparable 1997 periods due to
higher average debt balances outstanding.
For the quarter and nine months ended September 30, 1998, minority interests
increased $31.6 million and $51.4 million, respectively, over the comparable
1997 periods, which includes dividends incurred during 1998 for the
Corporation's trust preferred securities, of which $350 million were issued in
December 1997 and $250 million and $350 million were issued in June 1998 and
September 1998, respectively. See further discussion of the 1998 issuances of
trust preferred securities in the Liquidity and Capital Resources section of
Management's Discussion and Analysis.
15
During the second quarter of 1998, the Corporation recognized a tax benefit of
$11.9 million related to the excess of fair market value over the sales price of
the land in the Jocassee Gorges region of South Carolina sold by Crescent
Resources to the State of South Carolina.
In January 1998, TEPPCO Partners, L.P. (TEPPCO), in which the Corporation has a
10% ownership interest, redeemed certain First Mortgage Notes. The Corporation
recorded a non-cash extraordinary item of $8.0 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
On August 29, 1998, the FERC approved a settlement from Texas Eastern
Transmission Corporation (TETCO), a subsidiary of the Corporation, which will
accelerate recovery of natural gas transition costs and reduce depreciation
expense to more appropriately reflect the estimated useful lives of its
facilities, principally interstate natural gas pipelines. The order was
effective October 1, 1998 and includes a rate moratorium until 2004. 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. For more information concerning the settlement, see Note
4 to the Consolidated Financial Statements.
INVESTING CASH FLOW
For the nine months ended September 30, 1998, capital and investment
expenditures were $1,838.4 million, an increase of $567.4 million over the same
period in 1997. This increase was primarily due to business expansion by Global
Asset Development, which included the $501 million purchase in July 1998 of
three electric generating stations in California from PG&E. Business expansion
by Natural Gas Transmission and Field Services also contributed to the increase
in capital and investment expenditures. These increases were partially 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,
and by Trading and Marketing's acquisition of the remaining 50% ownership of the
D/LD joint venture in June 1997.
During the quarter ended September 30, 1998, the first phase of Bridgeport
Energy, a $265 million, 520-megawatt combined cycle natural gas fired merchant
generation plant of which the Corporation is the majority owner, was completed.
Phase I represents a 340-megawatt single cycle facility. Phase II of the
project, which will provide an additional 180 megawatts, is scheduled for
completion in mid-1999.
On October 1, 1998, Global Asset Development broke ground on Maine Independence
Station, a $221 million, 520-megawatt combined cycle natural gas fired merchant
generation plant in Maine. The project is scheduled to begin producing power in
the summer of 2000.
Proceeds from the sales of two NGL fractionation facilities to TEPPCO were $40
million in 1998. Proceeds from the sales of the Corporation's ownership in
operations in the United Kingdom and its equity interests in certain affiliates
were $85 million in 1997.
FINANCING CASH FLOW
The Corporation's consolidated capital structure at September 30, 1998,
including short-term debt, was 43.9% debt, 5.6% trust preferred securities, 2.0%
preferred stock and 48.5% common equity. Fixed charges coverage, using the SEC
method, was 5.0 times and 4.3 times for the nine months ended September 30, 1998
and 1997, respectively.
The Corporation's commercial paper facilities consist of $1.25 billion for Duke
Energy Corporation and $1.55 billion for Duke Capital Corporation (Duke
Capital), a wholly owned subsidiary of the Corporation. On August 24,
16
1998, Duke Capital renewed its 364-day bank credit facility and increased the
amount available from $300.0 million to $600.0 million. At September 30, 1998
and December 31, 1997, the Corporation's bank credit facilities totaled $2.9
billion and $2.7 billion, respectively, of which $2.8 billion and $2.5 billion
supported the commercial paper facilities at September 30, 1998 and December 31,
1997, respectively. At September 30, 1998, $1.8 billion of commercial paper and
$100.0 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 stock issues,
purchasing 2.4 million shares of its preferred stock for $180.4 million.
In order to maintain financial flexibility and reduce the Corporation's
growth-related financing requirements, the Corporation's board of directors
adopted a dividend policy in June 1998 that will target 50% of earnings paid out
in dividends on the Corporation's common stock. Prior to the adoption of the
policy, approximately 65% of earnings were paid out in dividends. The board of
directors intends to maintain dividends at the current quarterly rate of $0.55
per share until the target payout ratio is reached.
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 the Corporation's plans to access the capital markets, Duke
Capital filed a $1 billion shelf registration statement, which was declared
effective by the Securities and Exchange Commission on May 13, 1998.
Subsequently, financing was obtained under this shelf registration statement on
June 1, 1998, when Duke Capital Financing Trust I (Trust I) issued $250 million
of its 7 3/8% trust preferred securities, at a $7.9 million discount,
representing preferred undivided beneficial interests in the assets of Trust I.
Additional financing was obtained under the shelf registration statement on
September 15, 1998, when Duke Capital Financing Trust II (Trust II) issued $350
million of its 7 3/8% trust preferred securities, at an $11.0 million discount,
representing preferred undivided beneficial interests in the assets of Trust II.
Trust I and Trust II are business trusts which are treated as subsidiaries of
the Corporation for financial reporting purposes. Payment of distributions on
the trust preferred securities is guaranteed by Duke Capital, but only to the
extent the trusts have funds legally and immediately available to make such
distributions. Trust I's assets consist of an investment of approximately $258
million in Duke Capital's 7 3/8% Series A Junior Subordinated Notes due 2038.
Trust II's assets consist of an investment of approximately $361 million in Duke
Capital's 7 3/8% Series B Junior Subordinated Notes due 2038.
Additional financing was obtained under the $1 billion shelf registration
statement on July 20, 1998, when Duke Capital issued $250 million Series A 6
1/4% Senior Notes due 2005 and $150 million Series B 6 3/4% Senior Notes due
2018. In connection with the issuance of these Senior Notes, Duke Capital
entered into Treasury Rate Lock Agreements during the second quarter to
partially hedge its position. The hedge transactions had a notional amount of
$250 million and were settled on July 15, 1998 resulting in a net payment of
$4.1 million.
CURRENT ISSUES
DISPOSITIONS
The Corporation, through its wholly owned subsidiaries, PanEnergy Corp
(PanEnergy) and Texas Eastern Corporation (TEC), entered into a Stock Purchase
Agreement between PanEnergy, TEC and CMS Energy Corporation (CMS Energy) dated
October 31, 1998. Pursuant to the agreement, the Corporation will sell Panhandle
Eastern Pipe Line Company (PEPL), Trunkline Gas Company and the storage related
to those systems, along with the Trunkline LNG Company, to CMS Energy. The
purchase price of $2.2 billion involves a cash payment of $1.9 billion and
existing PEPL debt of approximately $300 million. While certain assets and
liabilities will be retained, such as the Houston office building, certain
environmental, legal and tax liabilities, and substantially all intercompany
balances, management is of the opinion that these assets and liabilities will
not have a material adverse effect on the consolidated results of operations or
financial position of the Corporation. The sale will result in an after tax
gain of approximately $700 million and is contingent upon completion of due
diligence and receipt of clearances under the
17
Hart-Scott-Rodino Act. Closing is anticipated in January 1999. For additional
information, see Note 11 to the Consolidated Financial Statements.
REGULATORY MATTERS
On July 6, 1998, the Corporation filed an application for a 20-year renewal of
its Oconee Nuclear Station's operating license, a 40-year license granted by the
Nuclear Regulatory Commission in 1973. The license renewal process could take as
many as three to five years to complete.
On July 29, 1998, the FERC issued a Notice of Proposed Rulemaking (NOPR) on
short-term natural gas transportation services, which proposed an integrated
package of revisions to its regulations governing interstate natural gas
pipelines. "Short term" has been defined in the NOPR as all transactions of less
than one year. Under the proposed approach, cost-based regulation would be
eliminated for short-term transportation and replaced by regulatory policies
intended to maximize competition in the short-term transportation market,
mitigate the ability of companies to exercise residual monopoly power, and
provide opportunities for greater flexibility providing pipeline services. The
proposed changes include initiatives to revise pipeline scheduling procedures,
receipt and delivery point policies, and penalty policies; require pipelines to
auction short-term capacity; improve the FERC's reporting requirements; permit
pipelines to negotiate rates and terms of services; and revise certain rate and
certificate policies that affect competition.
In conjunction with the NOPR, the FERC also issued a Notice of Inquiry (NOI) on
its pricing policies in the existing long-term market and pricing policies for
new capacity. The FERC wants to ensure that its policies are not biased toward
either short-term or long-term service, provide accurate price signals and the
right incentives for pipelines to provide optimal transportation services and
construct facilities that meet future demand, but do not result in over building
and excess capacity. Comments on the NOPR and NOI are due January 22, 1999.
Because these notices are only at a very early stage and any ultimate resolution
is unknown, management cannot estimate the effects of these matters on future
consolidated results of operations or financial position.
YEAR 2000 READINESS PROGRAM
STATE OF READINESS
In 1996, the Corporation initiated its Year 2000 Readiness Program and began a
formal review of computer-based systems and devices that are used in its
business operations both domestically and internationally. These systems and
devices include customer information, financial, materials management, and
personnel systems, as well as components of natural gas production, gathering,
processing and transmission, and electric generation, distribution and
transmission.
The Corporation is using a three-phase approach to address Year 2000 issues: 1)
inventory and preliminary assessment of computer systems, equipment and devices;
2) detailed assessment and remediation planning; and 3) conversion, testing and
contingency planning. The Corporation is employing a combination of systems
repair and planned systems replacement activities to achieve Year 2000 readiness
for its business and process control systems, equipment and devices. The
Corporation has substantially completed the first two phases throughout its
business operations, and is in various stages of the third and final phase. The
Corporation's goal is to have its critical systems, equipment and devices Year
2000 ready by mid-1999. Business acquisitions routinely involve an analysis of
Year 2000 readiness and are incorporated into the Corporation's overall program
as necessary.
The Corporation is actively evaluating and tracking Year 2000 readiness of
external third parties with which it has a material relationship. Such third
parties include vendors, customers, governmental agencies, including foreign
governments and agencies, and other business associates. While the Corporation
cannot control the Year 2000 readiness of third parties, the Corporation is
attempting to assess the readiness of third parties and any potential
implications to the Corporation. Alternate suppliers of critical products, goods
and services are being identified, where necessary.
18
COSTS
Management believes it is devoting the resources necessary to achieve Year 2000
readiness in a timely manner. Current estimates for total costs of the program,
including internal labor as well as incremental costs such as consulting and
contract costs, are approximately $65 million, of which approximately $35
million has been incurred as of September 30, 1998. These costs exclude
replacement systems that, in addition to being Year 2000 ready, provide
significantly enhanced capabilities which will benefit operations in future
periods.
RISKS
Management believes it has an effective program in place to manage the risks
associated with the Year 2000 issue in a timely manner. Nevertheless, since it
is not possible to anticipate all future outcomes, especially when third parties
are involved, there could be circumstances in which the Corporation would
temporarily be unable to deliver energy or energy services to its customers. The
Corporation believes that the most reasonably likely worst case scenario would
be small, localized interruptions of service, which likely would be rapidly
restored. In addition, there could be a temporary reduction in energy needs of
customers due to their own Year 2000 problems. In the event that such a
scenario occurs, it is not expected to have a material adverse impact on the
Corporation's consolidated results of operations or financial position.
CONTINGENCY PLANS
Year 2000 contingency planning is currently underway to assure continuity of
business operations for all periods during which Year 2000 impacts may occur.
The Corporation is participating in multiple industry efforts to assure
effective Year 2000 contingency plans, and intends to complete its own Year 2000
contingency plans by mid-1999. These plans address various Year 2000 risk
scenarios that cross departmental, business unit and industry lines as well as
specific risks from various internal and external sources, including supplier
readiness.
Based on assessments completed to date and compliance plans in process,
management is of the opinion that Year 2000 issues, including the cost of making
critical systems, equipment and devices ready, will not have a material adverse
effect on the Corporation's business operation or consolidated results of
operations or financial position. Nevertheless, achieving Year 2000 readiness is
subject to risks and uncertainties, including those described above. While
management believes the possibility is remote, if the Corporation's internal
systems, or the internal systems of external parties, fail to achieve Year 2000
readiness in a timely manner, the Corporation's business, consolidated results
of operations or financial condition could be adversely affected.
19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
A subsidiary of the Corporation continues to negotiate a consolidated Compliance
Order with the Colorado Department of Public Health and Environment concerning
alleged record-keeping and reporting air quality permit violations at multiple
Colorado facilities. The consolidated Compliance Order currently assesses a
combined civil penalty in the amount of $250,000 which includes a $137,000
penalty previously assessed against the Greeley facility, notices of violation
issued for seven facilities, and alleged violations at four additional
facilities. The Corporation intends to voluntarily implement certain additional
air emission controls which will reduce the combined civil penalty to
approximately $50,000. The Corporation will be responsible for an additional
noncompliance penalty at the Greeley facility in an amount yet to be determined
but not expected to exceed $100,000.
In September 1998, a subsidiary of the Corporation and the Missouri Department
of Natural Resources reached a settlement agreement related to air quality
permit violations at a natural gas compressor station, which resulted in a
payment of $250,000. An additional environmental administrative proceeding is
underway before the Illinois Environmental Protection Agency relating to a
natural gas compressor station that could result in a fine in excess of
$100,000.
Management is of the opinion that the resolution of these matters will not have
a material adverse effect on the consolidated results of operations or financial
position of the Corporation. For information concerning material litigation and
other contingencies, see Note 9 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 third 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; achievement of Year 2000 readiness; and the effect
of the Corporation's accounting policies, in each case during the periods
covered by the forward-looking statements.
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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 third quarter
of 1998.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DUKE ENERGY CORPORATION
November 11, 1998 /s/ Richard J. Osborne
---------------------------
Richard J. Osborne
Executive Vice President and
Chief Financial Officer
November 11, 1998 /s/ Jeffrey L. Boyer
----------------------------
Jeffrey L. Boyer
Vice President and Corporate
Controller
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