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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 1999 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.)
526 SOUTH CHURCH STREET
CHARLOTTE, NC 28202-1904
(Address of Principal Executive Offices)
(Zip code)
704-594-6200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes x No __
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Number of shares of Common Stock, without par value, outstanding at July 31,
1999.........364,889,191
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DUKE ENERGY CORPORATION
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1999
INDEX
Item Page
- ---- ----
PART I. FINANCIAL INFORMATION
1. Financial Statements.................................................................................1
Consolidated Statements of Income for the Three and Six Months Ended June 30, 1999 and 1998..........1
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1999 and 1998............2
Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998.............................3
Notes to Consolidated Financial Statements........................................................5
2. Management's Discussion and Analysis of Results of Operations and Financial Condition...............13
PART II. OTHER INFORMATION
1. Legal Proceedings...................................................................................25
4. Submission of Matters to a Vote of Security Holders.................................................25
6. Exhibits and Reports on Form 8-K....................................................................25
Signatures..........................................................................................26
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
From time to time, Duke Energy's reports and other public announcements may
include assumptions, projections, expectations, intentions or beliefs about
future events. These statements are intended as "forward-looking statements"
under the Private Securities Litigation Reform Act of 1995. Duke Energy cautions
that assumptions, projections, expectations, intentions or beliefs about future
events may and often do vary from actual results and the differences between
assumptions, projections, expectations, intentions or beliefs and actual results
can be material. Accordingly, there can be no assurance that actual results will
not differ materially from those expressed or implied by the forward-looking
statements. Some of the factors that could cause actual achievements and events
to differ materially from those expressed or implied in such forward-looking
statements include state, federal and foreign legislative and regulatory
initiatives that affect cost and investment recovery, have an impact on rate
structures and affect the speed and degree to which competition enters the
electric and natural gas industries; industrial, commercial and residential
growth in the service territories of Duke Energy and its subsidiaries; the
weather and other natural phenomena; the timing and extent of changes in
commodity prices, interest rates and foreign currency exchange rates; changes in
environmental and other laws and regulations to which Duke Energy and its
subsidiaries are subject or other external factors over which Duke Energy has no
control; the results of financing efforts, including Duke Energy's ability to
obtain financing on favorable terms, which can be affected by Duke Energy's
credit rating and general economic conditions; growth in opportunities for Duke
Energy's business units; achievement of year 2000 readiness; and the effect of
accounting policies issued periodically by accounting standard-setting bodies.
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 Six Months Ended
June 30, June 30,
------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
OPERATING REVENUES
Sales, trading and marketing of natural gas
and petroleum products $ 2,388 $ 1,885 $ 4,402 $ 3,861
Transportation and storage of natural gas 253 337 632 724
Generation, transmission and distribution of
electricity 1,113 1,113 2,210 2,133
Trading and marketing of electricity 667 418 1,106 955
Other 270 260 501 455
----------- ----------- ----------- -----------
Total operating revenues 4,691 4,013 8,851 8,128
----------- ----------- ----------- -----------
OPERATING EXPENSES
Natural gas and petroleum products purchased 2,307 1,795 4,247 3,664
Fuel used in electric generation 195 194 360 347
Net interchange and purchased power 665 484 1,149 1,096
Other operation and maintenance 673 676 1,293 1,245
Depreciation and amortization 233 224 458 446
Property and other taxes 87 91 186 173
----------- ----------- ----------- -----------
Total operating expenses 4,160 3,464 7,693 6,971
----------- ----------- ----------- -----------
OPERATING INCOME 531 549 1,158 1,157
----------- ----------- ----------- -----------
OTHER INCOME AND EXPENSES
Deferred returns and allowance for funds
used during construction 19 23 40 46
Other, net 18 10 53 57
----------- ----------- ----------- -----------
Total other income and expenses 37 33 93 103
----------- ----------- ----------- -----------
EARNINGS BEFORE INTEREST AND TAXES 568 582 1,251 1,260
INTEREST EXPENSE 120 122 252 246
MINORITY INTERESTS 33 17 68 32
----------- ----------- ----------- -----------
EARNINGS BEFORE INCOME TAXES 415 443 931 982
INCOME TAXES 127 163 336 374
----------- ----------- ----------- -----------
INCOME BEFORE EXTRAORDINARY ITEM 288 280 595 608
EXTRAORDINARY GAIN (LOSS), NET OF TAX - - 660 (8)
----------- ----------- ----------- -----------
NET INCOME 288 280 1,255 600
----------- ----------- ----------- -----------
DIVIDENDS AND PREMIUMS ON REDEMPTIONS OF
PREFERRED AND PREFERENCE STOCK 5 6 10 12
----------- ----------- ----------- -----------
EARNINGS AVAILABLE FOR COMMON STOCKHOLDERS $ 283 $ 274 $1,245 $ 588
=========== =========== =========== ===========
COMMON STOCK DATA
Weighted average shares outstanding 364 361 364 360
Earnings per share (before extraordinary item)
Basic $ 0.77 $ 0.76 $ 1.60 $ 1.65
Dilutive $ 0.77 $ 0.76 $ 1.60 $ 1.65
Earnings per share
Basic $ 0.77 $ 0.76 $ 3.42 $ 1.63
Dilutive $ 0.77 $ 0.76 $ 3.41 $ 1.63
Dividends per share $ 1.10 $ 1.10 $ 1.65 $ 1.65
See Notes to Consolidated Financial Statements.
1
DUKE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN MILLIONS)
Six Months Ended
June 30,
----------------------
1999 1998
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,255 $ 600
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 542 528
Extraordinary (gain) loss, net of tax (660) 8
Deferred income taxes 19 (30)
Purchased capacity levelization 56 48
Transition cost recoveries, net 44 1
(Increase) decrease in
Receivables (35) 300
Inventory (45) (73)
Other current assets (27) 59
Increase (decrease) in
Accounts payable (42) (522)
Taxes accrued 159 145
Interest accrued 8 1
Other current liabilities (80) (45)
Other, net (72) (52)
--------- ---------
Net cash provided by operating activities 1,122 968
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital and investment expenditures (2,790) (710)
Proceeds from sale of subsidiaries 1,900 -
Decommissioning, retirements and other 50 8
--------- ---------
Net cash used in investing activities (840) (702)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issuance of
Long-term debt 792 232
Guaranteed preferred beneficial interests in subordinated notes of
Duke Energy Corporation or Subsidiaries 242 242
Common stock and stock options 77 49
Payments for the redemption of
Long-term debt (518) (107)
Preferred and preference stock - (180)
Net change in notes payable and commercial paper (191) (178)
Dividends paid (410) (406)
Other (54) 2
--------- ---------
Net cash used in financing activities (62) (346)
--------- ---------
Net increase (decrease) in cash and cash equivalents 220 (80)
Cash received from business acquisitions - 35
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 80 109
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 300 $ 64
========= =========
SUPPLEMENTAL DISCLOSURES
Cash paid for interest, net of amount capitalized $ 230 $ 232
Cash paid for income taxes $ 264 $ 315
See Notes to Consolidated Financial Statements.
2
DUKE ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
June 30, December 31,
1999 1998
(Unaudited)
----------- ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 300 $ 80
Receivables 2,427 2,318
Inventory 548 543
Current portion of natural gas transition costs 100 100
Current portion of purchased capacity costs 122 99
Unrealized gains on mark-to-market transactions 1,710 1,457
Other 189 228
----------- ----------
Total current assets 5,396 4,825
----------- ----------
INVESTMENTS AND OTHER ASSETS
Investments in affiliates 1,228 902
Nuclear decommissioning trust funds 663 580
Prefunded pension costs 322 332
Goodwill, net 628 495
Notes receivable 224 244
Unrealized gains on mark-to-market transactions 1,249 396
Other 447 283
----------- ----------
Total investments and other assets 4,761 3,232
----------- ----------
PROPERTY, PLANT AND EQUIPMENT
Cost 26,362 27,128
Less accumulated depreciation and amortization 8,626 10,253
----------- ----------
Net property, plant and equipment 17,736 16,875
----------- ----------
REGULATORY ASSETS AND DEFERRED DEBITS
Purchased capacity costs 569 648
Debt expense 233 253
Regulatory asset related to income taxes 505 506
Natural gas transition costs 36 80
Environmental cleanup costs 36 87
Other 284 300
----------- ----------
Total regulatory assets and deferred debits 1,663 1,874
----------- ----------
TOTAL ASSETS $ 29,556 $ 26,806
=========== ==========
See Notes to Consolidated Financial Statements.
3
DUKE ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
June 30, December 31,
1999 1998
(Unaudited)
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,785 $ 1,754
Notes payable and commercial paper 18 209
Taxes accrued 876 119
Interest accrued 115 109
Current maturities of long-term debt and preferred stock 1,003 707
Unrealized losses on mark-to-market transactions 1,696 1,387
Other 724 642
----------- ---------
Total current liabilities 6,217 4,927
----------- ---------
LONG-TERM DEBT 6,082 6,272
----------- ---------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 3,536 3,733
Investment tax credit 232 242
Nuclear decommissioning costs externally funded 663 580
Environmental cleanup liabilities 215 148
Unrealized losses on mark-to-market transactions 1,119 362
Other 866 907
----------- ---------
Total deferred credits and other liabilities 6,631 5,972
----------- ---------
MINORITY INTERESTS 280 253
----------- ---------
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN SUBORDINATED
NOTES OF DUKE ENERGY CORPORATION OR SUBSIDIARIES 1,162 919
----------- ---------
PREFERRED AND PREFERENCE STOCK
Preferred and preference stock with sinking fund requirements 104 104
Preferred and preference stock without sinking fund requirements 209 209
----------- ---------
Total preferred and preference stock 313 313
----------- ---------
COMMON STOCKHOLDERS' EQUITY
Common stock, no par, 1 billion shares authorized; 365 million and 363 million
shares outstanding at June 30, 1999 and December 31, 1998, respectively 4,522 4,449
Retained earnings 4,349 3,701
----------- ---------
Total common stockholders' equity 8,871 8,150
----------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 29,556 $ 26,806
=========== =========
See Notes to Consolidated Financial Statements.
4
DUKE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. GENERAL
Duke Energy Corporation (collectively with its subsidiaries, "Duke Energy")
is an integrated energy and energy services provider with the ability to
offer physical delivery and management of both electricity and natural gas
throughout the United States and abroad. Duke Energy provides these and other
services through seven business segments:
o Electric Operations
o Natural Gas Transmission
o Field Services
o Trading and Marketing
o Global Asset Development
o Other Energy Services
o Real Estate Operations
These segments were defined as a result of Duke Energy adopting Statement of
Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an
Enterprise and Related Information," in December 1998.
Electric Operations generates, transmits, distributes and sells electric energy
in central and western North Carolina and the western portion of South Carolina
(doing business as Duke Power or Nantahala Power and Light). These electric
operations are subject to the rules and regulations of the Federal Energy
Regulatory Commission (FERC), the North Carolina Utilities Commission
and the Public Service Commission of South Carolina.
Natural Gas Transmission, through its Northeast Pipelines, provides interstate
transportation and storage of natural gas for customers primarily in the
Mid-Atlantic and New England states. Until the sale of the Midwest Pipelines on
March 29, 1999, Natural Gas Transmission also provided interstate transportation
and storage services in the midwest states. See further discussion of the sale
of the Midwest Pipelines in Note 3 to the Consolidated Financial Statements. The
interstate natural gas transmission and storage operations are also subject to
the rules and regulations of the FERC.
Field Services gathers, processes, transports and markets natural gas and
produces and markets natural gas liquids (NGLs). Field Services operates
gathering systems in western Canada and ten contiguous states that serve major
gas-producing regions in the Rocky Mountain, Permian Basin, Mid-Continent and
onshore and offshore Gulf Coast areas.
Trading and Marketing markets natural gas, electricity and other energy-related
products across North America. Duke Energy owns a 60% interest in Trading and
Marketing's operations, with Mobil Corporation owning a 40% minority interest.
Global Asset Development develops, owns and operates energy-related facilities
worldwide. Global Asset Development conducts its operations primarily through
Duke Energy North America, LLC (formerly Duke Energy Power Services, LLC) and
Duke Energy International, LLC.
Other Energy Services provides engineering, consulting, construction and
integrated energy solutions worldwide, primarily through Duke Engineering &
Services, Inc., Duke/Fluor Daniel and DukeSolutions, Inc.
5
Real Estate Operations conducts its business through Crescent Resources, Inc.,
which develops high quality commercial and residential real estate projects and
manages forest holdings in the southeastern United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION. The Consolidated Financial Statements include the accounts of
Duke Energy and all majority-owned subsidiaries. These Consolidated Financial
Statements reflect all normal recurring adjustments that are, in the opinion of
management, necessary to present fairly the financial position and results of
operations for the respective periods. Amounts reported in the Consolidated
Statements of Income 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.
COMMODITY INSTRUMENTS. Effective January 1, 1999, Duke Energy adopted Emerging
Issues Task Force Consensus No. 98-10, "Accounting for Contracts Involved in
Energy Trading and Risk Management Activities" for certain energy forward
contracts. This accounting standard requires entities involved in energy trading
activities to record energy trading contracts using the mark-to-market method of
accounting. Under this methodology, the contracts are adjusted to market value,
and the gains and losses are recognized in current period income and are
included in the Consolidated Statements of Income as Natural Gas and Petroleum
Products Purchased. In prior years, these contracts were accounted for under the
accrual method of accounting. Under this methodology, gains and losses were
recognized as the contract settled. While implementation of this accounting
standard affected certain components of financial position, the cumulative
effect of the change in accounting method on the Consolidated Statements of
Income for the period ended June 30, 1999 was not material.
Earnings Per Common Share. Basic earnings per share is based on a simple
weighted average of common shares outstanding. Dilutive earnings per share
reflects the potential dilution that could occur if securities or other
agreements to issue common stock, such as stock options, were exercised or
converted into common stock. The numerator for the calculation of basic and
dilutive earnings per share is earnings available for common stockholders.
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DENOMINATOR FOR EARNINGS PER SHARE (IN MILLIONS)
---------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------
1999 1998 1999 1998
--------------------------------------
Denominator for basic earnings
per share (weighted average
shares outstanding) 364 361 364 360
Assumed exercise of dilutive
stock options 1 1 1 1
--------------------------------------
Denominator for dilutive
earnings per share 365 362 365 361
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EXTRAORDINARY ITEM. For a description of the 1999 extraordinary item, see
Note 3 to the Consolidated Financial Statements.
In January 1998, TEPPCO Partners, L.P., in which a subsidiary of Duke Energy has
a 2% general partner interest and a 19.1% limited partner interest, redeemed
certain First Mortgage Notes. A non-cash extraordinary loss of $8 million, net
of income tax of $5 million, was recorded related to costs of the early
retirement of debt. Earnings per common share for 1998 were reduced by $0.02 as
a result of this charge.
RECLASSIFICATIONS. Certain amounts have been reclassified in the Consolidated
Financial Statements to conform to the current presentation.
6
3. BUSINESS ACQUISITIONS/DISPOSITIONS
UNION PACIFIC RESOURCES' GATHERING, PROCESSING AND MARKETING OPERATIONS. On
March 31, 1999, Duke Energy, through its wholly owned subsidiary, Duke Energy
Field Services, Inc., completed the $1.35 billion acquisition of the natural gas
gathering, processing, fractionation and NGL pipeline business from Union
Pacific Resources (UPR), as well as UPR's natural gas and NGL marketing
activities (collectively, "the UPR acquisition"). The UPR acquisition was
accounted for by the purchase method. The assets and liabilities of the UPR
acquisition were consolidated in Duke Energy's financial statements as of March
31, 1999 and earnings have been consolidated subsequent to that date. The excess
of the purchase price over the fair value of the net identifiable assets and
liabilities acquired of $158 million has been recorded as goodwill and is being
amortized on a straight-line basis over 15 to 20 years.
Duke Energy assumed responsibility for certain environmental liabilities
associated with the UPR acquisition. During due diligence procedures prior to
the acquisition, Duke Energy identified environmental contamination at certain
UPR facilities. Soil and groundwater contamination at the identified UPR sites
will be addressed in conjunction with Duke Energy's remediation plans. Also,
other environmental matters, such as the status of air emission permits at some
facilities, may require corrective action. The estimated cost to remediate these
conditions at June 30, 1999 is $157 million, which is included in Environmental
Clean-up Liabilities on the Consolidated Balance Sheets. The total estimated
amount of environmental liabilities is currently being refined. Under the terms
of the purchase agreement, certain environmental liabilities in excess of $40
million will be considered a reduction in the purchase price. To the extent that
changes in the established environmental liabilities do not result in a purchase
price adjustment, the change will be reflected as an adjustment to goodwill.
Other adjustments to estimated amounts recorded in conjunction with the UPR
acquisition also will be recorded as an adjustment to goodwill. However,
management believes that any change in the estimated costs will not have a
material adverse effect on the consolidated results of operations or financial
position.
PEPL Companies and Trunkline LNG. On March 29, 1999, Duke Energy, through its
wholly owned subsidiaries, PanEnergy Corp and Texas Eastern Corporation, sold
Panhandle Eastern Pipe Line Company (PEPL), Trunkline Gas Company and additional
storage related to those systems (collectively, the PEPL Companies), which
substantially comprised the Midwest Pipelines, along with Trunkline LNG Company
(Trunkline LNG), to CMS Energy Corporation (CMS). The sales price of $2.2
billion involved cash proceeds of $1.9 billion and CMS' assumption of existing
PEPL debt of approximately $300 million. The sale resulted in an extraordinary
gain of $660 million, net of income tax of $404 million, and an increase in
earnings per basic share of $1.82. Under the terms of the agreement with CMS,
Duke Energy is retaining certain assets and liabilities, such as the Houston
office building, certain environmental, legal and tax liabilities, and
substantially all intercompany balances. Management believes that the retention
of these items will not have a material adverse effect on consolidated results
of operations or financial position.
- ---------------------------------------------------------------------------
Combined Operating Results of the PEPL Companies and Trunkline LNG
For the Period From January 1, 1999 through March 28, 1999(a) (In millions)
- ---------------------------------------------------------------------------
Operating Revenues $126
Operating Expenses 57
Other Income, Net 4
---------------
Earnings Before Interest and Taxes $ 73
- ---------------------------------------------------------------------------
(a) Excludes intercompany building rental revenue, allocated corporate expenses,
building depreciation and certain other costs to be retained by Duke Energy.
7
4. BUSINESS SEGMENTS
Duke Energy's reportable segments are strategic business units that offer
different products and services and are each managed separately. Management
evaluates segment performance based on earnings before interest and taxes
(EBIT). Segment EBIT, presented in the accompanying table, includes intersegment
sales accounted for at prices representative of unaffiliated party transactions.
Segment assets are provided as additional information in the accompanying table
and are net of intercompany advances, intercompany notes receivable and
investments in subsidiaries.
- --------------------------------------------------------------------------------
BUSINESS SEGMENT DATA (IN MILLIONS)
- --------------------------------------------------------------------------------
Capital
and
Unaffiliated Intersegment Total Investment
Revenues Revenues Revenues EBIT Expenditures
--------------------------------------------------------
THREE MONTHS ENDED
JUNE 30, 1999
Electric Operations $1,095 $ - $1,095 $319 $178
Natural Gas Transmission 237 23 260 146 65
Field Services 614 168 782 36 92
Trading and Marketing 2,476 70 2,546 24 26
Global Asset Development 94 20 114 25 256
Other Energy Services 135 24 159 (6) 2
Real Estate Operations 38 - 38 28 93
Other Operations (a) 2 5 7 (4) (8)
Eliminations - (310) (310) - -
--------------------------------------------------------
Total Consolidated $4,691 $ - $4,691 $568 $704
- --------------------------------------------------------------------------------
THREE MONTHS ENDED
JUNE 30, 1998
Electric Operations $1,134 $ - $1,134 $362 $139
Natural Gas Transmission 342 25 367 147 51
Field Services 602 126 728 13 61
Trading and Marketing 1,709 18 1,727 15 1
Global Asset Development 59 1 60 15 20
Other Energy Services 117 19 136 2 9
Real Estate Operations 49 - 49 42 48
Other Operations (a) 1 1 2 (14) (6)
Eliminations - (190) (190) - -
--------------------------------------------------------
Total Consolidated $4,013 $ - $4,013 $582 $323
- --------------------------------------------------------------------------------
8
- --------------------------------------------------------------------------------
BUSINESS SEGMENT DATA, CONTINUED (IN MILLIONS)
- --------------------------------------------------------------------------------
Capital
and
Unaffiliated Intersegment Total Investment
Revenues Revenues Revenues EBIT Expenditures
--------------------------------------------------------
SIX MONTHS ENDED
JUNE 30, 1999
Electric Operations $2,156 $ - $2,156 $ 726 $ 303
Natural Gas Transmission 615 47 662 354 107
Field Services 848 278 1,126 48 1,537
Trading and Marketing 4,718 114 4,832 56 31
Global Asset Development 182 40 222 57 638
Other Energy Services 269 44 313 (11) 10
Real Estate Operations 66 - 66 46 153
Other Operations(a) (3) 18 15 (25) 11
Eliminations - (541) (541) - -
--------------------------------------------------------
Total Consolidated $8,851 $ - $8,851 $1,251 $2,790
- --------------------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30, 1998
Electric Operations $2,170 $ - $2,170 $ 740 $240
Natural Gas Transmission 721 56 777 356 124
Field Services 1,132 266 1,398 61 131
Trading and Marketing 3,712 27 3,739 28 2
Global Asset Development 95 2 97 24 105
Other Energy Services 216 35 251 9 13
Real Estate Operations 79 - 79 64 90
Other Operations (a) 3 2 5 (22) 5
Eliminations - (388) (388) - -
--------------------------------------------------------
Total Consolidated $8,128 $ - $8,128 $1,260 $710
- --------------------------------------------------------------------------------
- ----------------------------------------------
SEGMENT ASSETS (IN MILLIONS)
- ----------------------------------------------
June 30, December 31,
1999 1998
----------------------
Electric Operations $12,976 $12,953
Natural Gas Transmission 3,862 4,996
Field Services 3,581 1,893
Trading and Marketing 4,653 3,233
Global Asset Development 2,615 2,061
Other Energy Services 393 376
Real Estate Operations 858 724
Other Operations (a) 1,212 968
Eliminations (594) (398)
----------------------
Total Consolidated $29,556 $26,806
- ----------------------------------------------
(a) Includes communication services, water services and certain unallocated
corporate items.
5. RISK MANAGEMENT AND FINANCIAL INSTRUMENTS
FOREIGN CURRENCY DERIVATIVES. On February 18, 1999, Duke Energy announced its
intent to make a concurrent cash tender offer in Chilean pesos in Chile and the
United States for 51% of the outstanding shares of Empresa Nacional de
Electricidad S.A. (Endesa-Chile) for an estimated total cash outlay of
9
approximately $2.1 billion based on current exchange rates. In anticipation of
the purchase of Endesa-Chile, Duke Energy entered into foreign currency forward
and swap contracts to obtain Chilean pesos for the purchase. On April 21, 1999,
following a competitive counter offer, Duke Energy reached the conclusion that
Endesa-Chile could not be acquired on terms favorable to Duke Energy's
shareholders and withdrew the tender offer. During the second quarter 1999, all
the forward and swap contracts were settled resulting in a net loss of $4
million which is included in the Consolidated Statement of Income as Other
Income and Expenses.
INTEREST RATE DERIVATIVES. To manage the interest rate risk associated with Duke
Energy's variable rate commercial paper, Duke Energy entered into interest rate
swap agreements in July of 1999. Under these swap agreements, Duke Energy will
pay a fixed interest rate of 4.95% and in turn will receive a variable interest
amount based on an index for the daily average of one-month commercial paper.
The swaps have a notional amount of $500 million and will expire on March 30,
2000. On March 30, 2000, the dealer has the one time right to extend the swaps
for an additional five years at the weighted average rate of 5.96%.
6. DEBT AND CREDIT FACILITIES
Duke Energy issued $200 million Series B 5 3/8% Senior Notes due 2009 and $200
million Series C 6.60% Senior Notes due 2038 in January 1999 and March 1999,
respectively.
Associated with the purchase of certain assets in Australia and New Zealand,
Duke Energy borrowed approximately $300 million in both Australian and New
Zealand dollars during the first quarter of 1999. The six-month bridge financing
expired in July 1999, but has been extended through December 31, 1999. These
notes have variable interest rates that approximated 5.4% as of June 30, 1999.
During the second quarter 1999, Duke Energy obtained a three-year medium term
foreign facility that allows borrowings up to approximately $350 million. This
facility has a variable interest rate that approximated 5.4% as of June 30,
1999.
7. GUARANTEED PREFERRED BENEFICIAL INTERESTS IN SUBORDINATED NOTES OF DUKE
ENERGY OR SUBSIDIARIES
On June 14, 1999, Duke Energy Capital Trust II (the Trust) issued $250 million
of its 7.20% trust preferred securities, at an approximate $8 million discount,
representing preferred undivided beneficial interests in the assets of the
Trust. Payment of distributions on such preferred securities is guaranteed by
Duke Energy, but only to the extent the Trust has funds legally and immediately
available to make such distributions. The Trust is a business trust which is
treated as a subsidiary of Duke Energy for financial reporting purposes. The
proceeds from the issuance of the trust preferred securities were invested in
Duke Energy's 7.20% Series B Junior Subordinated Notes due March 31, 2039.
8. COMMON STOCK
At Duke Energy's annual meeting of shareholders held on April 15, 1999,
shareholders approved an amendment to the Articles of Incorporation to increase
the authorized common stock from 500 million to 1 billion shares.
During the quarters ended June 30, 1999 and 1998, the Corporation's board of
directors declared second and third quarter dividends of $0.55 per share per
quarter, for a total of $1.10 per share of dividends declared.
9. COMMITMENTS AND CONTINGENCIES
LITIGATION. Under the terms of the agreement with CMS discussed in Note 3 to the
Consolidated Financial Statements, Duke Energy is retaining certain legal and
tax liabilities including the following matter. On April 25, 1997, a group of
affiliated plaintiffs that own and/or operate various pipeline and marketing
10
companies and partnerships primarily in Kansas filed suit against PEPL, a former
subsidiary of Duke Energy, in the U.S. District Court for the Western District
of Missouri. The plaintiffs alleged that PEPL had 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 had violated the
antitrust laws and tortiously interfered with the plaintiffs' business
expectancies, the plaintiffs pursued compensatory and punitive damages. In
February 1999, this case was settled. The court entered an order dismissing the
case on March 3, 1999. The settlement did not have a material adverse effect on
consolidated results of operations or financial position.
Duke Energy 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, Duke
Energy has made accruals in accordance with SFAS No. 5, "Accounting for
Contingencies," to provide for such matters. Management believes that the final
disposition of these proceedings will not have a material adverse effect on
consolidated results of operations or financial position.
ENVIRONMENTAL. In June 1999, the Environmental Protection Agency certified that
Texas Eastern Transmission Corporation (TETCO), a wholly owned subsidiary of
Duke Energy, had completed clean up of PCB (polychlorinated biphenyl)
contaminated sites under conditions stipulated by a U.S. Consent Decree in 1989.
Due to the completion of the project ahead of schedule and under budget, the
estimated liability and amounts to be recovered from customers were reduced
resulting in a $28 million reduction in expense in June 1999. TETCO is required
to continue groundwater monitoring on a number of sites for at least the next
two years. The estimated cost of such monitoring is not material.
OTHER COMMITMENTS AND CONTINGENCIES. In January 1998, Duke Energy acquired a
9.8% 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 late 2000. In addition to buying an ownership interest
in the pipeline project, Duke Energy has a contractual commitment for 67.25
million cubic feet per day of capacity on the line over 15 years for an
estimated total of $315 million.
Periodically, Duke Energy may become involved in contractual disputes with
natural gas transmission customers involving potential or threatened abrogation
of contracts by the customers. If the customers are successful, Duke Energy may
not receive the full value of anticipated benefits under the contracts.
In the normal course of business, certain of Duke Energy's subsidiaries and
affiliates enter into various contracts for energy services that contain certain
schedule and performance requirements. Risk management techniques are used to
mitigate the exposure associated with such contracts. Certain subsidiaries of
Duke Energy have guaranteed performance under some of these contracts. In
addition, certain subsidiaries of Duke Energy have guaranteed debt agreements of
affiliates and have provided surety bonds and letters of credit.
Management believes that these commitments and contingencies will not have a
material adverse effect on consolidated results of operations or financial
position.
10. SUBSEQUENT EVENTS
In July 1999, Duke Energy International successfully bid for a controlling
voting interest and an approximate 40% economic interest in Companhia de Geracao
de Energia Eletrica Paranapanema (Paranapanema) for approximately $690 million.
Paranapanema is Brazil's eleventh largest electric generating company, operating
2,307 megawatts of hydroelectric generation facilities. Duke Energy
International advanced the funds for the purchase, financed by commercial paper,
and will assume operational control of Paranapanema in August 1999.
11
In July 1999, Duke Energy International also reached agreement to obtain
controlling interest in two El Salvadorian generating companies, Generadora
Acajutla S.A. de C.V. and Generadora Salvadorena, S.A. de C.V. for approximately
$125 million. The El Salvadorian generating companies currently control 275
megawatts of thermal power generation. Duke Energy International will assume
operation of the companies in September and modernization construction of
approximately $75 million will begin prior to the end of the year with
completion scheduled for late 2001.
In August 1999, Duke Energy International announced that it has reached a
definitive agreement with Dominion Resources, Inc. to acquire its portfolio of
hydroelectric, natural gas and diesel power generation businesses in Argentina,
Belize, Bolivia and Peru for approximately $405 million. The businesses being
purchased total approximately 1,200 megawatts of gross generation capacity. The
transaction is expected to be completed before the end of 1999 and is subject to
receiving appropriate governmental consents and approvals.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
INTRODUCTION
Duke Energy Corporation (collectively with its subsidiaries, "Duke Energy")
is an integrated energy and energy services provider with the ability to
offer physical delivery and management of both electricity and natural gas
throughout the United States and abroad. Duke Energy provides these and other
services through seven business segments:
o Electric Operations
o Natural Gas Transmission
o Field Services
o Trading and Marketing
o Global Asset Development
o Other Energy Services
o Real Estate Operations
These segments were defined as a result of Duke Energy adopting Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information," in December 1998.
Electric Operations generates, transmits, distributes and sells electric energy
in central and western North Carolina and the western portion of South Carolina
(doing business as Duke Power or Nantahala Power and Light). These electric
operations are subject to the rules and regulations of the Federal Energy
Regulatory Commission (FERC), the North Carolina Utilities Commission
and the Public Service Commission of South Carolina.
Natural Gas Transmission, through its Northeast Pipelines, provides interstate
transportation and storage of natural gas for customers primarily in the
Mid-Atlantic and New England states. Until the sale of the Midwest Pipelines on
March 29, 1999, Natural Gas Transmission also provided interstate transportation
and storage services in the midwest states. For further discussion of the sale
of the Midwest Pipelines, see Note 3 to the Consolidated Financial Statements.
The interstate natural gas transmission and storage operations are also subject
to the rules and regulations of the FERC.
Field Services gathers, processes, transports and markets natural gas and
produces and markets natural gas liquids (NGLs). Field Services operates
gathering systems in western Canada and ten contiguous states that serve major
gas-producing regions in the Rocky Mountain, Permian Basin, Mid-Continent and
onshore and offshore Gulf Coast areas.
Trading and Marketing markets natural gas, electricity and other energy-related
products across North America. Duke Energy owns a 60% interest in Trading and
Marketing's operations, with Mobil Corporation owning a 40% minority interest.
Global Asset Development develops, owns and operates energy-related facilities
worldwide. Global Asset Development conducts its operations primarily through
Duke Energy North America, LLC (Duke Energy North America, formerly Duke Energy
Power Services, LLC) and Duke Energy International, LLC (Duke Energy
International).
Other Energy Services provides engineering, consulting, construction and
integrated energy solutions worldwide, primarily through Duke Engineering &
Services, Inc. (Duke Engineering & Services), Duke/Fluor Daniel and
DukeSolutions, Inc. (DukeSolutions).
Real Estate Operations conducts its business through Crescent Resources, Inc.,
which develops high quality commercial and residential real estate projects and
manages forest holdings in the southeastern United States.
13
Management's Discussion and Analysis should be read in conjunction with the
Consolidated Financial Statements.
RESULTS OF OPERATIONS
For the quarter ended June 30, 1999, earnings available for common stockholders
were $283 million, or $0.77 per basic share. For the comparable 1998 period,
earnings available for common stockholders were $274 million, or $0.76 per basic
share.
For the six months ended June 30, 1999, earnings available for common
stockholders were $1,245 million, or $3.42 per basic share, including an
after-tax extraordinary gain of $660 million, or $1.82 per basic share. For the
comparable 1998 period, earnings available for common stockholders were $588
million, or $1.63 per basic share, net of an after-tax extraordinary loss of $8
million, or $0.02 per basic share. The increase in earnings available for common
stockholders is primarily due to the 1999 extraordinary gain resulting from the
sale of the Midwest Pipelines.
Operating income and earnings before interest and taxes (EBIT) for the quarter
ended June 30, 1999 were $531 million and $568 million, respectively compared to
$549 million and $582 million, respectively for the same period in 1998. For the
six months ended June 30, 1999, operating income increased $1 million, to $1,158
million from the same period in 1998. EBIT for the six months ended June 30,
1999 was $1,251 million compared to $1,260 million for the same period in 1998.
Operating income and EBIT are affected by the same fluctuations for Duke Energy
and each of its business segments. The only notable variable between the two
amounts is the inclusion in EBIT of gains on sales of assets in Other, net on
the Consolidated Statements of Income. Gains on sales of assets include a $14
million gain on an investment sale by Global Asset Development for the six
months ended June 30, 1999 and a $31 million gain on an asset sale by Field
Services for the six months ended June 30, 1998. EBIT by business segment are
summarized below, and are discussed by business segment thereafter.
- ---------------------------------------------------------------------
EBIT BY BUSINESS SEGMENT (IN MILLIONS)
- ---------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------------------
1999 1998 1999 1998
---------------------------------------------
Electric Operations $319 $362 $ 726 $ 740
Natural Gas
Transmission 146 147 354 356
Field Services 36 13 48 61
Trading and Marketing 24 15 56 28
Global Asset
Development 25 15 57 24
Other Energy Services (6) 2 (11) 9
Real Estate Operations 28 42 46 64
Other Operations (a) (4) (14) (25) (22)
---------------------------------------------
Consolidated EBIT $568 $582 $1,251 $1,260
- ---------------------------------------------------------------------
(a) Includes communication services, water services and certain unallocated
corporate items.
Included in the amounts discussed hereafter are intercompany transactions that
are eliminated in the Consolidated Financial Statements.
14
ELECTRIC OPERATIONS
- ---------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------------
(In millions, except where
noted) 1999 1998 1999 1998
- ---------------------------------------------------------------------------
Operating Revenues $1,095 $1,134 $2,156 $2,170
Operating Expenses 796 796 1,471 1,477
------------------------------------------
Operating Income 299 338 685 693
Other Income, Net of Expenses 20 24 41 47
------------------------------------------
EBIT $ 319 $ 362 $ 726 $ 740
==========================================
Sales - GWh (a) 19,787 20,837 39,323 40,094
- ---------------------------------------------------------------------------
(a) Gigawatt-hours
For the quarter ended June 30, 1999, EBIT for Electric Operations decreased $43
million, or 11.9%, compared to the same period in 1998. Although the average
number of total customers increased 2.9%, the decrease is primarily due to a
5.0% decrease in gigawatt-hour sales. Sales to weather-sensitive customers
decreased as a result of milder weather in the quarter compared to the prior
year, which was affected by warmer than normal weather. Sales to residential and
general service customers were down 2.7% and up 3.2%, respectively. Sales to
industrial customers decreased 3.7%, with sales to textile customers down 11.0%.
For the six months ended June 30, 1999, EBIT for Electric Operations decreased
$14 million, or 1.9%, compared to the same period in 1998. The decrease is
primarily due to a 1.9% decrease in gigawatt-hour sales, partially offset by a
2.8% increase in the average number of total customers. Sales to
weather-sensitive customers decreased slightly for the period when compared to
the prior year which was affected by warmer than normal weather. Sales to
residential and general service customers were down 1.0% and up 3.4%,
respectively. Sales to industrial customers decreased 3.6%, with sales to
textile customers down 9.6%.
NATURAL GAS TRANSMISSION
- ---------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------------
(In millions, except where
noted) 1999 1998 1999 1998
- ---------------------------------------------------------------------------
Operating Revenues $260 $367 $662 $777
Operating Expenses 116 225 318 435
------------------------------------------
Operating Income 144 142 344 342
Other Income, Net of Expenses 2 5 10 14
------------------------------------------
EBIT $146 $147 $354 $356
==========================================
Throughput - TBtu (a) 340 591 1,151 1,369
- ---------------------------------------------------------------------------
(a) Trillion British thermal units
For the quarter and six months ended June 30, 1999, EBIT for the Natural Gas
Transmission segment decreased $1 million and $2 million, respectively, compared
to the same periods in 1998.
EBIT for the Northeast Pipelines increased $46 million for the quarter and $52
million for the six months ended June 30, 1999 compared to the prior year. These
increases are the result of increased income from market-expansion projects and
joint ventures and lower operating expenses. Also contributing to the increase
in EBIT was a $28 million benefit from EPA certification of completion of Texas
Eastern Transmission Corporation's PCB (polychlorinated biphenyl) assessment and
soil clean-up program in
15
accordance with the Consent Decree issued in 1989. The soil clean-up program was
finished ahead of schedule and below original cost estimates. Partially
offsetting the benefits in the six month period was the non-recurrence of a 1998
refund from a state property tax ruling.
Due to the sale of the Midwest Pipelines to CMS Energy Corporation (CMS) on
March 29, 1999, EBIT for the Midwest Pipelines decreased $47 million and $54
million for the quarter and six months ended June 30, 1999, respectively,
compared to the prior year.
FIELD SERVICES
- ---------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------------
(In millions, except where
noted) 1999 1998 1999 1998
- ---------------------------------------------------------------------------
Operating Revenues $782 $728 $1,126 $1,398
Operating Expenses 747 716 1,079 1,369
------------------------------------------
Operating Income 35 12 47 29
Other Income, Net of Expenses 1 1 1 32
------------------------------------------
EBIT $ 36 $ 13 $ 48 $ 61
==========================================
Natural Gas Gathered and
Processed/Transported,
TBtu/d (a) 5.3 3.7 4.4 3.7
NGL Production, MBbl/d (b) 214.0 112.8 161.1 109.6
Natural Gas Marketed, TBtu/d 0.5 0.3 0.4 0.3
Average Natural Gas Price per
MMBtu (c) $2.14 $2.19 $1.95 $2.20
Average NGL Price per Gallon $0.30 $0.27 $0.27 $0.28
- ---------------------------------------------------------------------------
(a) Trillion British thermal units per day
(b) Thousand barrels per day
(c) Million British thermal units
For the quarter ended June 30, 1999, EBIT for Field Services increased $23
million compared to the same period in 1998. A significant portion of the
increase resulted from the March 31, 1999 acquisition of the natural gas
gathering, processing, fractionation and NGL pipeline business from Union
Pacific Resources (UPR), (collectively, the "UPR acquisition"). Improved average
NGL prices, which were up $0.03 per gallon, or 11.1%, from the prior year
quarter, and higher processing margins due to lower average natural gas prices,
also contributed significantly to increased EBIT.
For the six months ended June 30, 1999, EBIT for Field Services decreased $13
million compared to the same period in 1998. The decrease resulted primarily
from a $31 million gain on the sale of two NGL fractionation facilities in 1998,
which is included in other income. Additionally, gross revenues and expenses
decreased as a result of the November 1998 sale of Duke Energy Transport and
Trading Co., which gathered, stored, transported and marketed crude oil and
operated two NGL pipelines, to TEPPCO Partners, L.P., a company in which Duke
Energy has a 21.1% ownership interest. Offsetting these decreases were results
of the UPR acquisition and improved NGL prices and processing margins.
16
TRADING AND MARKETING
- ---------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------------
(In millions, except where
noted) 1999 1998 1999 1998
- ---------------------------------------------------------------------------
Operating Revenues $2,546 $1,727 $4,832 $3,739
Operating Expenses 2,524 1,712 4,781 3,712
------------------------------------------
Operating Income 22 15 51 27
Other Income, Net of Expenses 2 - 5 1
------------------------------------------
EBIT $ 24 $ 15 $ 56 $ 28
==========================================
Natural Gas Marketed, TBtu/d 10.0 7.2 10.5 7.5
Electricity Marketed, GWh 22,179 19,534 44,016 43,426
- ---------------------------------------------------------------------------
EBIT for Trading and Marketing increased $9 million or 60.0%, for the three
months ended June 30, 1999 compared with the same period in 1998. The increase
results primarily from higher electricity trading margins and from growing
contributions from more complex structured transactions. This increase was
slightly offset by lower natural gas trading margins and higher operating
expenses resulting from business growth.
For the six months ended June 30, 1998, EBIT for Trading and Marketing increased
$28 million compared to the same period in 1998. The increase is primarily due
to higher electricity and natural gas trading margins, partially offset by
higher operating expenses resulting from business growth.
GLOBAL ASSET DEVELOPMENT
- ---------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------------
(In millions, except where
noted) 1999 1998 1999 1998
- ---------------------------------------------------------------------------
Operating Revenues $114 $60 $222 $97
Operating Expenses 102 49 203 81
------------------------------------------
Operating Income 12 11 19 16
Other Income, Net of Expenses 13 4 38 8
------------------------------------------
EBIT $ 25 $15 $ 57 $24
==========================================
Proportional MW (a) Capacity
Owned (b) - - 7,131 3,893
Proportional Maximum Pipeline (b)
Capacity, Tbtu - - 112 4
- ---------------------------------------------------------------------------
(a) Megawatts
(b) Includes under construction or under contract
For the quarter ended June 30, 1999, EBIT for Global Asset Development increased
$10 million, or 66.7%, compared with the same period in 1998. The increase is
primarily due to contributions from projects in California, Connecticut,
Australia and Chile that were acquired since June 1998. Partially offsetting
these increases were higher operating expenses due to increased development
costs and business expansion. Additionally, other income includes option fee
income from the sale of a portion of the ownership interest in the Bridgeport
Energy facility.
For the six months ended June 30, 1999, EBIT for Global Asset Development
increased $33 million compared with the same period in 1998. The increase is
primarily due to contributions from new projects in California, Connecticut,
Australia and Chile, partially offset by higher operating expenses due to
business growth. Increases in EBIT also resulted from a $14 million gain on the
sale of the Mecklenburg
17
Cogeneration facility in March 1999 and option fee income related to the
Bridgeport Energy facility, both of which are included in other income.
OTHER ENERGY SERVICES
- ---------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------------
(In millions) 1999 1998 1999 1998
- ---------------------------------------------------------------------------
Operating Revenues $159 $136 $313 $251
Operating Expenses 165 134 324 242
------------------------------------------
EBIT $ (6) $ 2 $ (11) $ 9
- ---------------------------------------------------------------------------
For the quarter ended June 30, 1999, EBIT for Other Energy Services decreased $8
million compared with the same period in 1998, primarily due to increased
business development activity at DukeSolutions.
For the six months ended June 30, 1999, EBIT for Other Energy Services decreased
$20 million compared with the same period in 1998, primarily due to decreased
earnings from projects of Duke Engineering & Services and increased development
activity at DukeSolutions.
REAL ESTATE OPERATIONS
- ---------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------------
(In millions) 1999 1998 1999 1998
- ---------------------------------------------------------------------------
Operating Revenues $38 $49 $66 $79
Operating Expenses 11 7 21 15
------------------------------------------
Operating Income 27 42 45 64
Other Income, Net of Expenses 1 - 1 -
------------------------------------------
EBIT $ 28 $42 $46 $64
- ---------------------------------------------------------------------------
For the quarter and six months ended June 30, 1999, EBIT for Real Estate
Operations decreased $14 million and $18 million, respectively, when compared
with the same periods in 1998. This resulted primarily from a reduction in land
sales, including the 1998 gain on the sale of land in the Jocassee Gorges region
of South Carolina, and decreased project sales. These decreases were partially
offset by increased developed lot sales.
OTHER IMPACTS ON EARNINGS AVAILABLE FOR COMMON STOCKHOLDERS
Minority interest increased $16 million and $36 million for the quarter and six
months ended June 30, 1999, respectively, over the comparable periods in 1998.
The increases were due primarily to dividends incurred for Duke Energy's trust
preferred securities, $250 million, $350 million, and $250 million of which were
issued in June 1998, September 1998 and June 1999, respectively. Excluding these
dividends, minority interests relate primarily to the trading and marketing
joint venture with Mobil Corporation.
As a result of favorable resolution of several income tax issues and the
utilization of certain capital loss carryforwards due to the sale of the Midwest
Pipelines, income tax provisions aggregating $30 million were reduced during the
second quarter of 1999.
The sale of the Midwest Pipelines to CMS closed on March 29, 1999 and resulted
in a $660 million extraordinary gain, net of income tax of $404 million. (See
further discussion in Liquidity and Capital Resources, Investing Cash Flows
section below and in Note 3 to the Consolidated Financial Statements.) In
January 1998, TEPPCO Partners L.P., in which Duke Energy has a 21.1% ownership
interest, redeemed
18
certain First Mortgage Notes which resulted in Duke Energy recording a non-cash
extraordinary loss of $8 million, net of income tax of $5 million, related to
its share of costs of the early retirement of debt.
LIQUIDITY AND CAPITAL RESOURCES
INVESTING CASH FLOWS
Capital and investment expenditures were approximately $2,790 million for the
six months ended June 30, 1999 compared to approximately $710 million for the
same period in 1998. Increased capital and investment expenditures during the
period were primarily due to business expansion for the Field Services and
Global Asset Development segments discussed below.
FIELD SERVICES
On March 31, 1999, Field Services completed the $1.35 billion acquisition of the
natural gas gathering, processing, fractionation and NGL pipeline business from
UPR along with its natural gas and NGL marketing activities (collectively "the
UPR acquisition"). Additionally, Duke Energy assumed responsibility for certain
environmental liabilities associated with the UPR acquisition. During due
diligence procedures prior to the acquisition, Duke Energy identified
environmental contamination at certain UPR facilities. Soil and groundwater
contamination at the identified UPR sites will be addressed in conjunction with
Duke Energy's remediation plans. Also, other environmental matters, such as the
status of air emission permits at some facilities, may require corrective
action. The estimated cost to remediate these conditions at June 30, 1999 is
$157 million, which is included in Environmental Clean-up Liabilities on the
Consolidated Balance Sheets.
GLOBAL ASSET DEVELOPMENT
On January 22, 1999, Global Asset Development's international business unit,
Duke Energy International, completed the $315 million purchase of power
generation and transmission assets in western Australia and New Zealand from
Broken Hill Proprietary Company Limited (BHP), including an ownership interest
in a pipeline in western Australia. This acquisition also includes a development
proposal for a cogeneration plant and a portfolio of international and
Australian-based projects.
Global Asset Development's domestic business unit, Duke Energy North America,
began construction of the Hidalgo Energy project located in south Texas, which
is targeted to begin commercial operation in mid-2000. For the 510-megawatt,
gas-fired merchant plant, Duke/Fluor Daniel will serve as the construction
contractor, a Duke Energy Natural Gas Transmission pipeline will deliver the
natural gas supply, and Trading and Marketing will provide energy management
services and market the plant's output.
Duke Energy North America will be constructing two new energy plants: the
Madison Generating Station, a 640-megawatt, gas-fired merchant peaking plant in
Butler County, Ohio; and, the Vermillion Generating Station, a 640-megawatt,
gas-fired merchant peaking plant in Vermillion County, Indiana. Duke/Fluor
Daniel will serve as the construction contractor for the plants, a Duke Energy
Natural Gas Transmission pipeline will deliver the natural gas supply and
Trading and Marketing will provide energy management services and market the
plants' output. The Madison Generating Station will cost approximately $250
million and is planned to begin commercial operation by late 2000. The
Vermillion Generation Station will cost approximately $260 million and is
planned to begin commercial operation by late 2000.
In July 1999, Duke Energy International successfully bid for a controlling
voting interest and an approximate 40% economic interest in Companhia de Geracao
de Energia Eletrica Paranapanema (Paranapanema) for approximately $690 million.
Paranapanema is Brazil's eleventh largest electric generating company, operating
2,307 megawatts of hydroelectric generation facilities. Duke Energy
International advanced the funds for the purchase, financed by commercial paper,
and will assume operational control of Paranapanema in August 1999.
19
In July 1999, Duke Energy International also reached agreement to obtain
controlling interest in two El Salvadorian generating companies, Generadora
Acajutla S.A. de C.V. and Generadora Salvadorena, S.A. de C.V. for approximately
$125 million. The El Salvadorian generating companies currently control 275
megawatts of thermal power generation. Duke Energy International will assume
operation of the companies in September and modernization construction of
approximately $75 million will begin prior to the end of the year, with
completion scheduled for late 2001.
In August 1999, Duke Energy International announced that it has reached a
definitive agreement with Dominion Resources, Inc. to acquire its portfolio of
hydroelectric, natural gas and diesel power generation businesses in Argentina,
Belize, Bolivia and Peru for approximately $405 million. The businesses being
purchased total approximately 1,200 megawatts of gross generation capacity. The
transaction is expected to be completed before the end of 1999 and is subject to
receiving appropriate governmental consents and approvals.
TRADING AND MARKETING
During the second quarter of 1999, Trading and Marketing formed a new
subsidiary, Duke Energy Hydrocarbons, to invest capital in limited hydrocarbon
exploration and production prospects through non-operating working interests.
Duke Energy's intent is to generate a natural gas hedge position to offset the
short gas position of Duke Energy's power generation assets and to increase
production volumes that will be beneficial to Field Services and Trading and
Marketing. To date, Duke Energy Hydrocarbons has contracted to participate in
two drilling programs, for a total of 20 wells, in the Gulf of Mexico. Limited
drilling began in the second quarter with additional drilling expected to begin
later this year.
ELECTRIC OPERATIONS
On April 19, 1999, Duke Power entered into a contract to purchase six steam
generators from Babcock & Wilcox to replace those currently at Duke Power's
Oconee Nuclear Station. The total estimated cost of the steam generator
replacement project is $420 million. It is projected that the steam generators
on Unit 1 will be installed in 2003, with Units 2 and 3 following in 2004.
NATURAL GAS TRANSMISSION
On March 29, 1999, Duke Energy, through its wholly owned subsidiaries, PanEnergy
Corp and Texas Eastern Corporation, sold Panhandle Eastern Pipe Line Company
(PEPL), Trunkline Gas Company and additional storage related to those systems,
which substantially comprised the Midwest Pipelines, along with Trunkline LNG
Company, to CMS. The sales price of $2.2 billion included cash proceeds of $1.9
billion and CMS' assumption of existing PEPL debt of approximately $300 million.
FINANCING CASH FLOWS
Duke Energy's consolidated capital structure at June 30, 1999, including
short-term debt, was 40% debt, 7% trust preferred securities, 2% preferred stock
and 51% common equity. Fixed charges coverage, calculated using the Securities
and Exchange Commission method, was 4.3 times and 4.7 times for the six months
ended June 30, 1999 and 1998, respectively.
Duke Energy plans to continue to significantly grow several of its business
segments: Field Services, Trading and Marketing, Global Asset Development and
Other Energy Services. These growth opportunities, along with dividends, debt
repayments and operating and investing requirements, are expected to be funded
by cash from operations, external financing and the proceeds from the sale of
the Midwest Pipelines.
In January 1999, Duke Energy issued $200 million of 5 3/8% Series B Senior Notes
due 2009. In March 1999, Duke Energy issued $200 million of 6.60% Series C
Senior Notes due 2038. Also included in
20
financings for the first six months of 1999 are bank borrowings of Global Asset
Development related to the purchase and development of assets in Australia and
New Zealand. Approximately $300 million of these borrowings occurred in the
first quarter and related to the purchase of BHP's portfolio of energy assets.
The six-month bridge financing expired in July 1999, but has been extended
through December 31, 1999. These notes have variable interest rates that
approximated 5.4% as of June 30, 1999
On June 14, 1999, Duke Energy Capital Trust II (the Trust) issued $250 million
of its 7.20% trust preferred securities, at an approximate $8 million discount,
representing preferred undivided beneficial interests in the assets of the
Trust. Payment of distributions on such preferred securities is guaranteed by
Duke Energy, but only to the extent the Trust has funds legally and immediately
available to make such distributions. The Trust is a business trust which is
treated as a subsidiary of Duke Energy for financial reporting purposes. The
proceeds from the issuance of the trust preferred securities were invested in
Duke Energy's 7.20% Series B Junior Subordinated Notes due March 31, 2039.
Under its commercial paper facilities, Duke Energy had the ability to borrow up
to $2.8 billion at both June 30, 1999 and December 31, 1998. The commercial
paper facilities consisted of $1.25 billion for Duke Energy and $1.55 billion
for Duke Capital Corporation, a wholly owned subsidiary of Duke Energy that
serves as the parent for Duke Energy's business segments except for Electric
Operations and certain other operations. Duke Energy's various bank credit
facilities totaled approximately $3.3 billion (including approximately $330
million related to foreign facilities) at June 30, 1999 and $2.9 billion at
December 31, 1998. At June 30, 1999, approximately $1.5 billion was outstanding
under the commercial paper facilities and approximately $80 million of
borrowings were outstanding under the bank credit facilities.
On April 15, 1999, Duke Energy's shareholders approved an amendment to the
Articles of Incorporation to increase the authorized common stock from 500
million to 1 billion shares. This increase in authorized stock will provide Duke
Energy with added flexibility in affecting financings, stock splits or stock
dividends, stock plans and other transactions and arrangements involving the use
of stock.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
RISK POLICIES
Duke Energy is exposed to market risks associated with commodity prices,
interest rates, equity prices and foreign exchange rates. Comprehensive risk
management policies have been established by the Corporate Risk Management
Committee (CRMC) to monitor and control these market risks. The CRMC is chaired
by the Chief Financial Officer and primarily comprises senior executives. The
CRMC has responsibility for oversight of all corporate energy risk management
and approving energy financial exposure limits, as well as responsibility for
oversight of interest rate risk, foreign currency risk and credit risk. Changes
in Duke Energy's market risk since December 31, 1998 follows.
COMMODITY PRICE RISK
As a result of Field Services' acquisition from UPR on March 31, 1999, Duke
Energy's exposure to market fluctuations in the prices of NGLs increased. Duke
Energy has a program in place that analyzes and actively hedges its commodity
price risk exposure, primarily NGLs. As of June 30, 1999, if NGL prices average
one cent per gallon less in 1999, earnings before income taxes will decrease by
approximately $10 million, after considering the effect of Duke Energy's
commodity hedge positions.
FOREIGN OPERATIONS RISK AND INTEREST RATE RISK
On February 18, 1999, Duke Energy announced its intent to make a concurrent cash
tender offer in Chilean pesos in Chile and the United States for 51% of the
outstanding shares of Empresa Nacional de Electricidad S.A. (Endesa-Chile) for
an estimated total cash outlay of approximately $2.1 billion based on current
exchange rates. In anticipation of the purchase of Endesa-Chile, Duke Energy
entered into foreign
21
currency forward and swap contracts to obtain Chilean pesos for the purchase.
Exposures to foreign currency risks associated with these instruments were
managed through established policies and procedures. (See Note 5 to the
Consolidated Financial Statements.) On April 21, 1999, following a competitive
counter offer, Duke Energy reached the conclusion that Endesa-Chile could not be
acquired on terms favorable to Duke Energy's shareholders and withdrew the
tender offer. The forward and swap contracts were settled with a net loss of $4
million recorded during the second quarter of 1999.
To manage the interest rate risk associated with Duke Energy's variable rate
commercial paper, Duke Energy entered into several fixed rate swap transactions
for a total notional amount of $500 million in July 1999. The swaps effectively
convert the variable rate nature of commercial paper to a fixed rate, mitigating
the risk of future interest rate increases.
CURRENT ISSUES
ELECTRIC COMPETITION
During 1999, three electric utility restructuring bills have been filed in South
Carolina's House of Representatives. All three bills introduce competition while
allowing utilities to recover stranded costs, and have transition and phase-in
periods ranging from five to six years. A task force formed by the South
Carolina Senate is also examining issues related to deregulation of the state's
electric utility business. This task force will prepare a report for review,
discussion and possible legislative action by the state's Senate Judiciary
Committee and General Assembly as a whole.
In April 1999, an electric utility restructuring bill, proposed by the
Department of Energy (DOE), was introduced in Congress: the 1999 Comprehensive
Electricity Competition Act. The primary restructuring issues addressed include
repeal of major provisions of the Public Utility Holding Company Act (PUHCA) and
the Public Utility Regulatory Policies Act (PURPA), stranded costs, reliability,
reciprocity and transmission. January 1, 2003 was chosen as the deadline for
retail choice to be implemented, with a grandfather clause for states that are
already deregulating.
Currently, the electric utility industry is predominantly regulated on a basis
designed to recover the cost of providing electric power to customers. If
cost-based regulation were to be discontinued in the industry for any reason,
including competitive pressure on the cost-based prices of electricity, profits
could be reduced and electric utilities might be required to reduce their asset
balances to reflect a market basis less than cost. Discontinuance of cost-based
regulation would also require affected utilities to write off their associated
regulatory assets. Duke Energy's regulatory assets are included in the
Consolidated Balance Sheets. The portion of these regulatory assets related to
Electric Operations is approximately $1.5 billion, including primarily purchased
capacity costs, debt expense and deferred taxes related to regulatory assets.
Currently, Duke Energy is recovering substantially all of these regulatory
assets through wholesale and retail electric rates and would attempt to continue
to recover these assets during a transition to competition. In addition, Duke
Energy would seek to recover the costs of its electric generating facilities in
excess of the market price of power at the time of transition.
Duke Energy supports a properly managed and orderly transition to competitive
generation and retail services in the electric industry. However, transforming
the current regulated industry into efficient, competitive generation and retail
electric markets is a complex undertaking, which will require a carefully
considered transition to a restructured electric industry. The key to effective
retail competition is fairness among customers, service providers and investors.
Duke Energy intends to work with customers, legislators and regulators to
address all the important issues. Management currently cannot predict the
impact, if any, of these competitive forces on future consolidated results of
operations or financial position.
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FERC NOTICE OF PROPOSED RULEMAKING
On May 13, 1999, the FERC issued a Notice of Proposed Rulemaking (NOPR)
requesting comment on proposed rules concerning Regional Transmission
Organizations (RTOs). The stated purpose of the NOPR is to (1) specify certain
minimum required characteristics and functions of RTOs; (2) provide for an open,
flexible architecture of RTOs to meet market needs; (3) provide for flexible
ratemaking; and (4) require certain filings by October 15, 2000 of
transmission-owning utilities with regard to their efforts to join an RTO.
The characteristics for acceptable RTOs include independence from market
participants, operational control over a region of sufficient scope to support
efficient and nondiscriminatory markets, and exclusive authority to maintain
short-term reliability. The NOPR does not mandate RTO membership; however, FERC
expects public utilities to join RTOs, and the NOPR announced a willingness to
include rate incentives and non-pricing benefits to encourage participation.
Comments on the NOPR are due August 23, 1999. Because this NOPR is in the very
early stages, and ultimate resolution is unknown, management cannot estimate the
effects on future consolidated results of operations or financial position.
MIXED-OXIDE FUELS
Duke Power has entered into a contract to use mixed oxide fuel at its McGuire
and Catawba nuclear stations. Mixed-oxide fuel is very similar to conventional
uranium fuel, but it utilizes plutonium from the government's surplus. Before
using the fuel, Duke Power must apply for and receive amendments to the
respective facility operating licenses from the Nuclear Regulatory Commission
(NRC). Duke Power is currently in the process of researching and preparing for
the application process with actual license application to the NRC planned for
mid-2004. Mixed-oxide fuel is expected to be available for Duke Power use in
2007. Under a contract with the DOE, Duke Power will be reimbursed for all
operating, maintenance and capital expenditures necessary to refurbish its
plants for mixed-oxide fuel use. By using mixed-oxide fuel, Duke Power expects
to realize a long-term supply of nuclear fuel at moderate savings over
conventional uranium fuel.
Duke Engineering & Services will also participate in the design and construction
of the facility to fabricate mixed-oxide fuel.
YEAR 2000 READINESS PROGRAM
STATE OF READINESS
Duke Energy initiated its Year 2000 Readiness Program in 1996 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.
Duke Energy's goal is to provide energy services reliably and safely to its
customers - now, on January 1, 2000 and beyond. By "Year 2000 ready," Duke
Energy means that it has executed the Year 2000 approach described below and
management believes the business will not suffer a material adverse impact to
consolidated financial results caused by Year 2000 events. However, the Year
2000 issue is complex and the Year 2000 readiness of customers, suppliers and
others beyond our control can affect our business operations.
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Duke Energy 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. Duke Energy is employing a combination of systems repair,
planned systems replacement activities, systems retirement and workarounds to
achieve Year 2000 readiness for its business and process control systems,
equipment and devices. Field Services, Other Energy Services, and Global Asset
Development plan to have their existing critical systems, equipment and devices
Year 2000 ready by September 30, 1999. All other business units, including
Electric Operations and Natural Gas Transmission, achieved Year 2000 readiness
of their critical systems, equipment and devices as of June 30, 1999. Global
Asset Development has recently announced acquisitions which may extend the Year
2000 readiness date beyond September 30, 1999 for those acquired assets.
Duke Energy is monitoring the Year 2000 readiness of key third parties. Third
parties include vendors, customers, U.S. governmental agencies, foreign
governments and agencies, and other business associates. While the Year 2000
readiness of third parties cannot be controlled, Duke Energy is attempting to
assess the readiness of key third parties and potential implications to its
operations. Alternate suppliers of critical products, goods and services are
being identified, where necessary.
Duke Energy conducts an analysis of Year 2000 issues for potential acquisitions.
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 $50
million had been incurred as of June 30, 1999. 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 Duke Energy would
temporarily be unable to deliver energy or energy services to its customers.
Management 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 consolidated
results of operations or financial position.
CONTINGENCY PLANS
Year 2000 contingency planning addresses continuity of business operations for
all periods during which Year 2000 impacts may occur. Duke Energy is
participating in multiple industry efforts to facilitate effective Year 2000
contingency plans, and has completed its own Year 2000 contingency plans as of
June 30, 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 Year 2000 readiness efforts and contingency plans in place, management
believes that Year 2000 issues, including the cost of making critical systems,
equipment and devices ready, will not have a material adverse effect on Duke
Energy'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 Duke Energy's internal systems,
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or the internal systems of external parties, fail to achieve Year 2000 readiness
in a timely manner, Duke Energy's business, consolidated results of operations
or financial condition could be adversely affected.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Illinois Environmental Protection Agency has initiated an environmental
enforcement proceeding against a former subsidiary of Duke Energy relating to
alleged air quality permit violations at a natural gas compressor station. Duke
Energy retained the liabilities for these alleged violations. This proceeding
could result in a penalty in excess of $100,000. Management believes that the
resolution of this matter will not have a material adverse effect on
consolidated results of operations or financial position.
For additional information concerning litigation and other contingencies, see
Note 9 to the Consolidated Financial Statements, "Commitments and
Contingencies."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the Duke Energy Corporation Annual Meeting of Shareholders held April 15,
1999, the shareholders elected G. Alex Bernhardt, Sr., William A. Coley, Max
Lennon and Leo E. Linbeck, Jr. to serve as Class II directors with terms
expiring in 2002. The shareholders also voted to ratify the selection of
Deloitte & Touche LLP to act as independent auditors to make an examination of
Duke Energy's accounts for the year 1999. The shareholders approved the proposal
to amend the Articles of Incorporation to increase the amount of authorized
Common Stock of Duke Energy from 500,000,000 to 1,000,000,000 shares, with
255,717,157 shares voted for the amendment, 43,442,086 shares voted against the
amendment and 1,945,194 shares abstaining. The shareholders did not approve the
shareholder proposal presented in the proxy statement for the meeting, with
19,245,024 shares voted for the proposal, 230,476,042 shares voted against the
proposal and 16,323,918 shares abstaining.
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
Duke Energy filed no reports on Form 8-K during the second quarter of 1999.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DUKE ENERGY CORPORATION
August 10, 1999 /s/ Richard J. Osborne
---------------------------
Richard J. Osborne
Executive Vice President and
Chief Financial Officer
August 10, 1999 /s/ Jeffrey L. Boyer
----------------------------
Jeffrey L. Boyer
Vice President and Corporate
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