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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999 or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
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 (I.R.S. Employer Identification No.)
incorporation or organization)
526 South Church Street, Charlotte, North 28202-1904
Carolina (Zip Code)
(Address of principal executive offices)
704-594-6200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, without par value New York Stock Exchange, Inc.
6.375% Preferred Stock A, 1993 Series, par value
$25 New York Stock Exchange, Inc.
First and Refunding Mortgage Bonds, 5 7/8% Due
2001 New York Stock Exchange, Inc.
First and Refunding Mortgage Bonds, 5 7/8%
Series C Due 2003 New York Stock Exchange, Inc.
First and Refunding Mortgage Bonds, 6 1/4%
Series B Due 2004 New York Stock Exchange, Inc.
First and Refunding Mortgage Bonds, 6 3/8% Due
2008 New York Stock Exchange, Inc.
First and Refunding Mortgage Bonds, 6 5/8%
Series B Due 2003 New York Stock Exchange, Inc.
First and Refunding Mortgage Bonds, 6 3/4% Due
2025 New York Stock Exchange, Inc.
First and Refunding Mortgage Bonds, 6 7/8%
Series B Due 2023 New York Stock Exchange, Inc.
First and Refunding Mortgage Bonds, 7% Due 2000 New York Stock Exchange, Inc.
First and Refunding Mortgage Bonds, 7% Series B
Due 2000 New York Stock Exchange, Inc.
First and Refunding Mortgage Bonds, 7% Due 2033 New York Stock Exchange, Inc.
First and Refunding Mortgage Bonds, 7 1/2%
Series B Due 2025 New York Stock Exchange, Inc.
First and Refunding Mortgage Bonds, 7 7/8% Due
2024 New York Stock Exchange, Inc.
7.20% Quarterly Income Preferred Securities
issued by Duke Energy
Capital Trust I and guaranteed by Duke Energy
Corporation New York Stock Exchange, Inc.
7.20% Trust Preferred Securities issued by Duke
Energy Capital
Trust II and guaranteed by Duke Energy
Corporation New York Stock Exchange, Inc.
Preference Stock Purchase Rights New York Stock Exchange, Inc.
Series C 6.60% Senior Notes Due 2038 New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
Title of class
Preferred Stock, par value $100
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
Estimated aggregate market value of the voting stock held by
nonaffiliates of the registrant at
February 29, 2000............................................ $ 17,313,000,000
Number of shares of Common Stock, without par value,
outstanding at February 29, 2000............................. 366,689,508
Documents incorporated by reference:
The registrant is incorporating herein by reference certain sections of the
proxy statement relating to the 2000 annual meeting of shareholders to provide
information required by Part III, Items 10, 11, 12 and 13 of this annual
report.
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DUKE ENERGY CORPORATION
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
Item Page
- ---- ----
PART I.
1.Business............................................................... 1
General............................................................... 1
Electric Operations................................................... 3
Natural Gas Transmission.............................................. 7
Field Services........................................................ 9
Trading and Marketing................................................. 11
Global Asset Development.............................................. 12
Other Energy Services................................................. 14
Real Estate Operations................................................ 15
Environmental Matters................................................. 15
Foreign Operations and Export Sales................................... 16
Employees............................................................. 16
Operating Statistics.................................................. 17
Executive Officers of Duke Energy..................................... 18
2.Properties............................................................. 18
3.Legal Proceedings...................................................... 20
4.Submission of Matters to a Vote of Security Holders.................... 20
PART II.
5.Market for Registrant's Common Equity and Related Stockholder Matters.. 20
6.Selected Financial Data................................................ 21
7.Management's Discussion and Analysis of Results of Operations and
Financial Condition..................................................... 21
7A.Quantitative and Qualitative Disclosures About Market Risk............ 39
8.Financial Statements and Supplementary Data............................ 40
9.Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................... 80
PART III.
10.Directors and Executive Officers of the Registrant.................... 80
11.Executive Compensation................................................ 80
12.Security Ownership of Certain Beneficial Owners and Management........ 80
13.Certain Relationships and Related Transactions........................ 80
PART IV.
14.Exhibits, Financial Statement Schedule, and Reports on Form 8-K....... 81
Signatures............................................................. 82
Exhibit Index.......................................................... 83
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
From time to time, Duke Energy 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. 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 the actual
results will not differ materially from those expressed or implied by the
forward-looking statements. For a discussion of some factors that could cause
actual achievements and events to differ materially from those expressed or
implied in such forward-looking statements, see "Management's Discussion and
Analysis of Results of Operations and Financial Condition, Current Issues--
Forward-Looking Statements."
PART I.
Item 1. Business.
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 U.S. and abroad. Duke Energy provides these and other services through
seven business segments:
.Electric Operations
.Natural Gas Transmission
.Field Services
.Trading and Marketing
.Global Asset Development
.Other Energy Services
.Real Estate Operations
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
(NCUC) and the Public Service Commission of South Carolina (PSCSC).
Natural Gas Transmission 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 2 to the Consolidated Financial Statements, "Business Combinations,
Acquisitions and Dispositions." The interstate natural gas transmission and
storage operations are subject to the rules and regulations of the FERC.
Field Services gathers, processes, transports and markets natural gas and
produces, transports 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 energy trading operations, with Mobil Corporation
owning a 40% minority interest. This segment also includes certain other
trading activities and limited hydrocarbon exploration and production
activities that are wholly owned by Duke Energy.
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)
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 land holdings in the southeastern U.S.
The 1997 merger of Duke Power Company (Duke Power) and PanEnergy Corp
(PanEnergy) was accounted for as a pooling of interests; therefore, all
financial information included in this annual report for
1
periods prior to the merger include the combined historical financial results
of Duke Power and PanEnergy. See Note 2 to the Consolidated Financial
Statements, "Business Combinations, Acquisitions and Dispositions," for
additional information on the merger.
Certain terms used to describe Duke Energy's business are explained below.
British Thermal Unit (Btu). A standard unit for measuring thermal energy or
heat commonly used as a gauge for the energy content of natural gas and other
fuels.
Cubic Foot (cf). The most common unit of measurement of gas volume; the
amount of natural gas required to fill a volume of one cubic foot under stated
conditions of temperature, pressure and water vapor.
Distribution. The system of lines, transformers and switches that connect the
electric transmission system to customers.
Federal Energy Regulatory Commission (FERC). The agency that regulates the
transportation of electricity and natural gas in interstate commerce and
authorizes the buying and selling of energy commodities at market-based rates.
Gathering System. Pipeline, processing and related facilities that access
production and other sources of natural gas supplies for delivery to mainline
transmission systems.
Generation. The process of transforming other forms of energy, such as
nuclear or fossil fuels, into electricity. Also, the amount of electric energy
produced, expressed in megawatt-hours.
Greenfield Development. The development of a new power generating facility on
an undeveloped site.
Independent System Operator (ISO). Ensures non-discriminatory access to a
regional transmission system, providing all customers access to the power
exchange and clearing all bilateral contract requests for use of the electric
transmission system. Also responsible for maintaining bulk electric system
reliability.
Jurisdictional. Facilities and activities subject to the primary regulatory
oversight of FERC or state regulatory agencies.
Liquefied Natural Gas (LNG). Natural gas that has been converted to a liquid
by cooling it to -260 degrees Fahrenheit.
Local Distribution Company (LDC). A company that obtains the major portion of
its revenues from the operations of a retail distribution system for the
delivery of electricity or gas for ultimate consumption.
2
Natural Gas. A naturally occurring mixture of hydrocarbon and non-hydrocarbon
gases found in porous geological formations beneath the earth's surface, often
in association with petroleum. The principal constituent is methane.
Natural Gas Liquids (NGLs). Liquid hydrocarbons extracted during the
processing of natural gas. Principal commercial NGLs include butanes, propane,
natural gasoline and ethane.
Peak Load. The amount of electricity required during periods of highest
demand. Peak periods fluctuate by season, generally occurring in the morning
hours in winter and in late afternoon during the summer.
Throughput. The amount of natural gas or natural gas liquids transported
through a pipeline system.
Transmission System (Electric). An interconnected group of electric
transmission lines and related equipment for moving or transferring electric
energy in bulk between points of supply and points at which it is transformed
for delivery over a distribution system to customers, or for delivery to other
electric transmission systems.
Transmission System (Natural Gas). An interconnected group of natural gas
pipelines and associated facilities for transporting natural gas in bulk
between points of supply and delivery points to industrial customers, local
distribution companies, or for delivery to other natural gas transmission
systems.
Watt. A measure of real power production or usage equal to one joule per
second.
A discussion of the current business and operations of each of Duke Energy's
segments follows. For further discussion of the operating outlook of Duke
Energy and its segments, see "Management's Discussion and Analysis of Results
of Operations and Financial Condition, Introduction--Business Strategy." For
financial information concerning Duke Energy's business segments, see Note 3 to
the Consolidated Financial Statements, "Business Segments."
Duke Energy is a North Carolina corporation with its principal executive
offices located at 526 South Church Street, Charlotte, NC 28202-1904. The
telephone number is 704-594-6200.
ELECTRIC OPERATIONS
Service Area and Customers
Electric Operations' service area, approximately two-thirds of which lies in
North Carolina, covers about 22,000 square miles with an estimated population
of 5.3 million and includes a number of cities, of which the largest are
Charlotte, Greensboro, Winston-Salem and Durham in North Carolina, and
Greenville and Spartanburg in South Carolina. Electric Operations supplies
electric service directly to approximately two million residential, commercial
and industrial customers in more than 200 cities, towns and unincorporated
communities. Electricity is sold at wholesale to incorporated municipalities
and to several public and private utilities. In addition, sales are made
through contractual agreements to municipal or cooperative customers who
purchased portions of the Catawba Nuclear Station. For statistics related to
gigawatt-hour sales by customer type, see "Business, Operating Statistics." For
further discussion of the Catawba Nuclear Station joint ownership, see Note 5
to the Consolidated Financial Statements, "Joint Ownership of Generating
Facilities."
Electric Operations' service area is undergoing increasingly diversified
industrial and commercial development. The textile industry, machinery and
equipment manufacturing, and chemical and chemical-related industries are of
major significance to the economy of the area. Other industrial activities
include rubber and plastic products, paper and allied products, and various
other light and heavy manufacturing and service businesses. The largest
industry served is the textile industry, which accounted for approximately $428
million of Electric Operations' revenues for 1999, representing 10% of total
electric revenues and 36% of industrial revenues. Electric Operations normally
experiences seasonal peak loads in summer and winter.
3
(A map appears here depicting Electric Operation's 100 kV Electric Lines, 230kV
Electric Lines, 500 kV Electric Lines, Nuclear Facilities, Fossil Facilities,
Hydro Facilities, and Combustion Turbine Facilities.)
Capability and Resources of Energy
Electric energy required to supply the needs of Electric Operations'
customers is primarily generated by three nuclear generating stations with a
combined net capability of 5,020 megawatts (MW) (Oconee Nuclear Station--2,538
MW, McGuire Nuclear Station--2,200 MW and Catawba Nuclear Station--282 MW,
which represents Electric Operations' 12.5% ownership share in the Catawba
Nuclear Station), eight coal-fired stations with a combined capability of 7,699
MW, thirty-one hydroelectric stations with a combined capability of 2,803 MW
and six combustion turbine stations with a combined capability of 1,784 MW.
Energy and capacity are also supplied through contracts with other generators
of electricity and purchased on the open market. Electric Operations has
interconnections and arrangements with its neighboring utilities, which are
considered adequate for planning, emergency assistance, exchange of capacity
and energy and reliability of power supply. Future increased energy
requirements of Electric Operations' customers are expected to be supplied
through purchased power contracts and open market purchases. For statistics
regarding sources of electric energy, see "Business, Operating Statistics."
4
Fuel Supply
Electric Operations presently relies principally on coal and nuclear fuel for
the generation of electric energy. Electric Operations' reliance on oil and gas
is minimal. Information regarding the utilization of sources of power and cost
of fuels for each of the three years in the period ended December 31, 1999 is
set forth in the following table:
Cost of Fuel
per Net
Generation by Kilowatt-hour
Source Generated
(Percent)(d) (Cents)(d)
----------------- --------------
1999 1998 1997 1999 1998 1997
----- ----- ----- ---- ---- ----
Coal...................................... 50.4 50.7 59.0 1.33 1.32 1.30
Nuclear(a)................................ 48.0 46.2 38.5 0.43 0.44 0.48
Oil and gas(b)............................ 0.8 1.0 0.4 4.51 4.01 5.58
----- ----- ----- ---- ---- ----
All fuels (cost based on weighted
average)(a).............................. 99.2 97.9 97.9 0.92 0.93 0.99
Hydroelectric(c).......................... 0.8 2.1 2.1
----- ----- -----
100.0 100.0 100.0
===== ===== =====
--------
(a) Statistics related to nuclear generation and all fuels reflect
Electric Operations' 12.5% ownership interest in the Catawba
Nuclear Station.
(b) Cost statistics include amounts for light-off fuel at Electric
Operations' coal-fired stations.
(c) Generating figures are net of output required to replenish pumped
storage units during off-peak periods.
(d) Years prior to 1998 have been restated to include Nantahala Power
and Light.
Coal. Electric Operations meets its coal demand through purchase supply
contracts and spot agreements. Large amounts of its coal supply are obtained
under supply contracts with mining operators utilizing both underground and
surface mining. Electric Operations has an adequate supply of coal to fuel its
current operations. Its supply contracts, all of which have price adjustment
provisions, have expiration dates ranging from 2000 to 2003. Duke Energy
believes that it will be able to renew such contracts as they expire or to
enter into similar contractual arrangements with other coal suppliers for the
quantities and qualities of coal required. The coal purchased under these
supply contracts is produced from mines located in eastern Kentucky, southern
West Virginia and southwestern Virginia. Coal requirements not met by supply
contracts have been and are expected to be fulfilled with spot market
purchases.
The average sulfur content of coal being purchased by Electric Operations is
approximately 1%. Such coal satisfies the current emission limitation for
sulfur dioxide for existing facilities. See also "Management's Discussion and
Analysis of Results of Operations and Financial Condition, Current Issues--
Environmental, Air Quality Control" for additional information regarding
particulate matter.
Nuclear. Generally, the process for developing nuclear generating fuel supply
involves the mining and milling of uranium ore to produce uranium concentrates,
the conversion of uranium concentrates to uranium hexafluoride, enrichment of
that gas and fabrication of the enriched uranium hexafluoride into usable fuel
assemblies. Electric Operations has contracted for uranium materials and
services required to fuel the Oconee, McGuire and Catawba Nuclear Stations.
Based upon current projections, these contracts will meet Electric Operations'
requirements through the following years:
Uranium Conversion Enrichment Fabrication
Nuclear Station Material Service Service Service
--------------- -------- ---------- ---------- -----------
Oconee............................ 2000 2000 2002 2006
McGuire........................... 2000 2000 2002 2009
Catawba........................... 2000 2000 2002 2009
5
Uranium material requirements will be met through various supplier contracts,
with uranium material produced primarily in the U.S. and Canada. Duke Energy
believes that it will be able to renew contracts as they expire or to enter
into similar contractual arrangements with other suppliers of nuclear fuel
materials and services. Requirements not met by long-term supply contracts have
been and are expected to be fulfilled with unfabricated uranium spot market
purchases.
Duke Energy entered into a contract with the Department of Energy (DOE) to
use mixed oxide fuel at its McGuire and Catawba nuclear stations. The mixed
oxide fuel is fabricated from plutonium from the government's surplus and is
similar to conventional uranium fuel. Before using the fuel, Duke Energy must
apply for and receive amendments to the respective facility operating licenses
from the Nuclear Regulatory Commission (NRC). Mixed oxide fuel is scheduled to
be used at McGuire and Catawba nuclear stations in 2007.
After spent fuel is removed from a nuclear reactor, it is placed in temporary
storage for cooling in a spent fuel pool at the nuclear station site. Under
provisions of the Nuclear Waste Policy Act of 1982, Duke Energy has entered
into contracts with the DOE for the disposal of spent nuclear fuel. The DOE
failed to begin accepting the spent nuclear fuel on January 31, 1998, the date
provided by the Nuclear Waste Policy Act and by Duke Energy's contract with the
DOE. On June 8, 1998, Duke Energy filed with the U.S. Court of Federal Claims a
claim against the DOE for damages in excess of $1 billion arising out of the
DOE's failure to begin accepting commercial spent nuclear fuel by January 31,
1998. Damages claimed in the suit are intended to recover costs that Duke
Energy is incurring and will continue to incur as a result of the DOE's partial
material breach of its contract with Duke Energy, including costs associated
with securing additional spent fuel storage capacity. Duke Energy will continue
to safely manage its spent nuclear fuel until the DOE accepts it.
Competition
Electric industry restructuring is being addressed in all 50 states and in
the District of Columbia, which is resulting in changes in the industry. For
further discussion, see "Management's Discussion and Analysis of Results of
Operations and Financial Condition, Current Issues--Electric Competition."
Electric Operations is currently subject to competition in some areas from
government owned power systems, municipally owned electric systems, rural
electric cooperatives and, in certain instances, other private utilities.
Currently, statutes in North Carolina and South Carolina provide for the
assignment by the NCUC and the PSCSC, respectively, of all areas outside
municipalities in such States to regulated electric utilities and rural
electric cooperatives. Substantially all of the territory comprising the
Electric Operations' service area has been so assigned. The remaining areas
have been designated as unassigned and in such areas Electric Operations
remains subject to competition. A decision of the North Carolina Supreme Court
limits, in some instances, the right of North Carolina municipalities to serve
customers outside their corporate limits. In South Carolina there continues to
be competition between municipalities and other electric suppliers outside the
corporate limits of the municipalities, subject, however, to the regulation of
the PSCSC. In addition, Electric Operations is engaged in continuing
competition with various natural gas providers.
Regulation
The NCUC and the PSCSC approve rates for retail electric sales within their
respective states. The FERC approves Electric Operations' rates for certain
electric sales to wholesale customers. For further discussion of rate matters,
see Note 4 to the Consolidated Financial Statements, "Regulatory Matters--
Electric Operations." The FERC, the NCUC and the PSCSC also have authority over
the construction and operation of Electric Operations' facilities. Electric
Operations holds certificates of public convenience and necessity issued by the
FERC, the NCUC and the PSCSC, authorizing it to construct and operate the
electric facilities now in operation for which certificates are required, and
to sell electricity to retail and wholesale customers. Prior approval from the
NCUC and the PSCSC is required to issue securities.
The NCUC, PSCSC and FERC have implemented regulations governing access to
regulated electric customer data by non-regulated entities and services
provided between regulated and non-regulated affiliated
6
entities. These regulations affect the activities of Trading and Marketing,
Global Asset Development, and Other Energy Services with Electric Operations.
The Energy Policy Act of 1992 (EPACT) and the FERC's subsequent rulemaking
activities permit the FERC to order transmission access for third parties to
transmission facilities owned by another entity. EPACT does not, however,
permit the FERC to issue orders requiring transmission access to retail
customers. The FERC has issued orders for third-party transmission service and
a number of rules of general applicability, including Orders 888 and 889.
Pursuant to the FERC's final rules, Electric Operations obtained from the FERC
open-access rule the rights to sell capacity and energy at market-based rates
from its own assets. For further discussion, see "Management's Discussion and
Analysis of Results of Operations and Financial Condition, Current Issues--
Electric Competition."
The Electric Operations segment is subject to the jurisdiction of the NRC as
to the design, construction and operation of its nuclear stations. For
discussions of nuclear decommissioning costs and nuclear insurance regulatory
requirements and coverages, see Note 11 to the Consolidated Financial
Statements, "Nuclear Decommissioning Costs" and Note 14 to the Consolidated
Financial Statements, "Commitments and Contingencies--Nuclear Insurance,"
respectively.
The hydroelectric generating facilities of Electric Operations are licensed
by the FERC under Part I of the Federal Power Act, with license terms expiring
from 2001 to 2036. The nuclear generating facilities of Electric Operations are
licensed by the NRC with license terms expiring from 2013 to 2026. The FERC has
authority to grant extensions of hydroelectric generating licenses, and the NRC
has authority to grant extensions of nuclear generating licenses. Duke Energy
has filed an application for a 20-year renewal of its operating license for the
Oconee Nuclear Station. The application is expected to receive approval from
the NRC in 2000. Duke Energy is also initiating the license renewal process for
the McGuire and Catawba Nuclear Stations in 2000. Duke Energy has filed a
license application for one of its hydroelectric facilities for which it
expects to receive a new license by 2001. Duke Energy is also in various stages
of relicensing other facilities whose licenses expire between 2005 and 2008.
The Electric Operations segment is subject to the jurisdiction of the
Environmental Protection Agency (EPA) and state environmental agencies. For a
discussion of environmental regulation, see "Business, Environmental Matters."
NATURAL GAS TRANSMISSION
Natural Gas Transmission provides interstate transportation and storage of
natural gas through its Northeast Pipelines, which includes Texas Eastern
Transmission Corporation (TETCO) and Algonquin Gas Transmission Company
(Algonquin). The Midwest Pipelines, which included Panhandle Eastern Pipe Line
Company (PEPL) and Trunkline Gas Company (Trunkline), were also a part of
Natural Gas Transmission until their sale to CMS Energy Corporation (CMS) in
March 1999. See further discussion of the sale in Note 2 to the Consolidated
Financial Statements, "Business Combinations, Acquisitions and Dispositions."
Investments include a 37.5% ownership interest in Maritimes & Northeast
Pipeline, which has a design capacity of 530 million cubic feet per day
(MMcf/d) in Canada and 400 MMcf/d in the U.S. Maritimes & Northeast Pipeline
was placed in service and received the first delivery of natural gas from the
Sable Offshore Energy Project in December 1999.
In January 2000, Natural Gas Transmission announced that it had entered into
a definitive agreement to purchase the East Tennessee Natural Gas Company, a
1,100-mile pipeline that crosses the TETCO pipeline in Tennessee and serves the
rapidly growing southeastern region of the U.S. The transaction is expected to
close in late March 2000, subject to regulatory approval. For more information
on this purchase, see Note 19 to the Consolidated Financial Statements,
"Subsequent Events."
For 1999, consolidated natural gas deliveries by Natural Gas Transmission's
interstate pipelines totaled 1,893 trillion British thermal units (TBtu),
compared to 2,593 TBtu in 1998. For the Northeast Pipelines, 1999 natural gas
deliveries were 1,565 TBtu, a 7% increase from last year. The Midwest
Pipelines, as a consequence of the sale to CMS, reported natural gas deliveries
of 328 TBtu in 1999 compared to 1,141 TBtu in 1998.
7
A majority of the delivered volumes of Natural Gas Transmission's interstate
pipelines represents gas transported under long-term firm service agreements
with local distribution company (LDC) customers in the pipelines' market areas.
Firm transportation services are also provided under contract to gas marketers,
producers, other pipelines, electric power generators and a variety of end-
users. In addition, the pipelines provide both firm and interruptible
transportation to customers on a short-term or seasonal basis. See natural gas
deliveries statistics under "Business, Operating Statistics." Demand for gas
transmission of Natural Gas Transmission's interstate pipeline systems is
seasonal, with the highest throughput occurring during the colder periods in
the first and fourth quarters.
Natural Gas Transmission's interstate pipeline systems consist of
approximately 11,000 miles of pipe, which include 650 miles related to the
partial ownership interest in Maritimes & Northeast Pipeline. The pipeline
systems receive natural gas from most major North American producing regions
for delivery to markets primarily in the Mid-Atlantic and New England states.
(A map appears here depicting Natural Gas Transmission's interstate pipeline
systems and storage.)
TETCO's major customers are located in Pennsylvania, New Jersey and New York,
and include LDCs serving the Pittsburgh, Philadelphia, Newark and New York City
metropolitan areas. Algonquin's major customers include LDCs and electric power
generators located in the Boston, Hartford, New Haven, Providence and Cape Cod
areas.
TETCO also provides firm and interruptible open-access storage services.
Storage is offered as a stand-alone unbundled service or as part of a no-notice
bundled service. TETCO's storage services utilize two joint venture storage
facilities in Pennsylvania and one wholly owned and operated storage field in
Maryland. TETCO also leases storage capacity. TETCO's certificated working
capacity in these three fields is 75 billion cubic feet (Bcf), and the combined
working gas in storage was 59 Bcf on December 31, 1999. Algonquin owns no
storage fields.
8
Competition
Duke Energy's interstate pipeline subsidiaries compete with other interstate
and intrastate pipeline companies in the transportation and storage of natural
gas. The principal elements of competition among pipelines are rates, terms of
service, and flexibility and reliability of service.
In the Mid-Atlantic and New England markets, TETCO competes directly with
Transcontinental Gas Pipe Line Corporation, Tennessee Gas Pipeline Company
(TGPC), Iroquois Gas Transmission System (Iroquois), CNG Transmission
Corporation and Columbia Gas Transmission Corporation. Algonquin competes
directly in certain market areas with TGPC and Iroquois.
Natural gas competes with other forms of energy available to Duke Energy's
customers and end-users, including electricity, coal and fuel oils. The primary
competitive factor is price. Changes in the availability or price of natural
gas and other forms of energy, the level of business activity, conservation,
legislation and governmental regulations, the capability to convert to
alternative fuels, and other factors, including weather, affect the demand for
natural gas in the areas served by Duke Energy.
Regulation
The FERC has authority to regulate rates and charges for natural gas
transported in or stored for interstate commerce or sold by a natural gas
company in interstate commerce for resale. For further discussion of rate
matters, see "Management's Discussion and Analysis of Results of Operations and
Financial Condition, Liquidity and Capital Resources--Operating Cash Flows" and
Note 4 to the Consolidated Financial Statements, "Regulatory Matters--Natural
Gas Transmission." The FERC also has authority over the construction and
operation of pipeline and related facilities utilized in the transportation,
storage and sale of natural gas in interstate commerce, including the
extension, enlargement or abandonment of such facilities. TETCO and Algonquin
hold certificates of public convenience and necessity issued by the FERC,
authorizing them to construct and operate the pipelines, facilities and
properties now in operation for which such certificates are required, and to
transport and store natural gas in interstate commerce.
As required by FERC Order 636, Natural Gas Transmission's pipelines operate
as open-access transporters of natural gas, providing unbundled firm and
interruptible transportation and storage services on an equal basis for all gas
supplies, whether purchased from the pipeline or from another gas supplier.
FERC allows pipelines to recover eligible costs, known as "transition costs,"
resulting from the implementation of Order 636. For further discussion of Order
636, see Note 4 to the Consolidated Financial Statements, "Regulatory Matters--
Natural Gas Transmission."
The FERC has implemented regulations governing access to regulated natural
gas transmission customer data by non-regulated entities and services provided
between regulated and non-regulated affiliated entities. These regulations
affect the activities of Trading and Marketing, Global Asset Development and
Other Energy Services with Natural Gas Transmission.
Natural Gas Transmission is subject to the jurisdiction of the EPA and state
environmental agencies. For a discussion of environmental regulation, see
"Business, Environmental Matters." Natural Gas Transmission is also subject to
the Natural Gas Pipeline Safety Act of 1968, which regulates gas pipeline and
LNG plant safety requirements, and to the Hazardous Liquid Pipeline Safety Act
of 1979, which regulates oil and petroleum pipelines.
FIELD SERVICES
Field Services gathers, processes, transports and markets natural gas and
produces, transports and markets NGLs. Field Services owns and operates
approximately 28,000 miles of natural gas gathering systems, including
intrastate pipelines, and 52 natural gas processing plants in the U.S. and
Canada. Field Services also has ownership interests in 12 other natural gas
processing plants in the U.S.
Field Services gathers natural gas from production wellheads through
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. Field Services' operations also include
several intrastate pipeline systems and one high-deliverability natural gas
storage facility.
9
The map below includes Field Services' natural gas gathering systems,
intrastate pipelines, region offices and supply areas. The map also shows the
interstate systems of the Natural Gas Transmission segment.
(A map appears here depicting the items indicated in the above paragraph.)
Field Services' NGL processing operations involve the extraction of NGLs from
natural gas and, at certain facilities, the fractionation of the NGLs into
their individual components (ethane, propane, butane and natural gasoline). The
natural gas used in Field Services' processing operations is generally gathered
on its own gathering system. NGLs are sold by Field Services to a variety of
customers ranging from large, multi-national petrochemical and refining
companies to small, family-owned retail propane distributors. Most NGL sales
are based upon current market-related prices. Field Services also produces
helium at the National Helium Corporation facility in Liberal, Kansas and the
Ladder Creek facility in Colorado.
Field Services' operating results are significantly impacted by changes in
NGL prices, which increased approximately 30.8% in 1999 compared to 1998. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition, Quantitative and Qualitative Disclosures About Market Risk" for a
discussion of Field Services' exposure to changes in commodity prices.
On March 31, 1999, Field Services 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
10
natural gas and NGL marketing activities (collectively, "the UPR acquisition").
For further discussion of the UPR acquisition see Note 2 to the Consolidated
Financial Statements, "Business Combinations, Acquisitions and Dispositions."
In 1998, Field Services sold assets related to its crude oil gathering and
marketing business, including 1,800 miles of intrastate crude oil pipelines in
the Mid-Continent and South Texas areas and 450 miles of intrastate NGL
pipelines in the Texas Gulf Coast area, to TEPPCO Partners, L.P. (TEPPCO) in
exchange for an additional ownership interest in TEPPCO. As a result of the
sale, Duke Energy now has a 2% general partner interest and a 19.1% limited
partner interest in TEPPCO, a publicly owned master limited partnership that
transports refined products and liquefied petroleum products through a 4,300
mile pipeline system.
On December 16, 1999, Field Services announced that it had signed definitive
agreements to combine Field Services' gas gathering and processing businesses
with Phillips Petroleum Company's Gas Processing and Marketing unit to form a
new midstream company. The transaction is expected to close by late March 2000.
For additional information, see Note 19 to the Consolidated Financial
Statements, "Subsequent Events."
See certain operating statistics of Field Services under "Business, Operating
Statistics." Activities of Field Services can fluctuate in response to the
seasonality affecting natural gas.
Competition
Field Services competes with major integrated oil companies, major interstate
pipelines, national and local natural gas gatherers, brokers, marketers and
distributors for natural gas supplies, in gathering and processing natural gas
and in marketing and transporting natural gas and NGLs. Competition for natural
gas supplies is primarily based on the efficiency and reliability of
operations, the availability of transportation to high demand markets and the
ability to obtain a satisfactory price for the producer's natural gas.
Competition for sales customers is based primarily upon reliability and price
of delivered natural gas and NGLs.
Regulation
The intrastate pipelines owned by the Field Services group are subject to
state regulation and, to the extent they provide services under Section 311 of
the Natural Gas Policy Act of 1978, are also subject to FERC regulation.
However, the majority of the natural gas gathering activities of the Field
Services group are not subject to regulation by the FERC.
Field Services is subject to the jurisdiction of the EPA and state
environmental agencies. For a discussion of environmental regulation, see
"Business, Environmental Matters." Certain operations of Field Services are
subject to the jurisdiction of the Department of Transportation and certain
similar state agencies whose regulations have incorporated certain provisions
of the Natural Gas Pipeline Safety Act of 1968, the Hazardous Liquid Pipeline
Safety Act of 1979, and subsequent amendments.
TRADING AND MARKETING
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 natural gas and electric power trading operations, with
Mobil Corporation (Mobil) owning a 40% minority interest. Trading and Marketing
also includes certain other trading activities and limited hydrocarbon
exploration and production activities that are wholly owned by Duke Energy.
11
Trading and Marketing markets natural gas primarily to LDCs, electric power
generators (including Global Asset Development's generation facilities),
municipalities, large industrial end-users and energy marketing companies.
Trading and Marketing markets electricity to investor owned utilities,
municipal power generators and other power marketers. Trading and Marketing
also provides energy management services, such as supply and market
aggregation, peaking services, dispatching, balancing, transportation, storage,
tolling, contract negotiation and administration, as well as energy commodity
risk management products and services. Operations are primarily in the U.S.
and, to a lesser extent, in Canada, and are serviced through three operating
centers. Additionally, during 1999, Duke Energy Hydrocarbons was formed to
invest capital in limited hydrocarbon exploration and production prospects
through non-operating working interests.
Natural gas marketing operations encompass both on-system and off-system
supplies. With respect to on-system supplies, Trading and Marketing generally
purchases natural gas from Field Services' facilities and delivers the gas to
an intrastate or interstate pipeline for redelivery to another customer.
Natural Gas Transmission's pipelines are utilized for deliveries when prudent.
With respect to off-system supplies, Trading and Marketing purchases natural
gas from producers, pipelines and other suppliers not connected with Duke
Energy's facilities for resale to customers. Substantially all of Mobil's U.S.
and Canadian natural gas production is committed to be marketed through Trading
and Marketing through 2006.
With respect to electricity marketing operations, Trading and Marketing
purchases electricity from third-party suppliers and from Global Asset
Development's domestic generation facilities for resale to customers.
Trading and Marketing has a portfolio of short-term and long-term sales
agreements with customers, the vast majority of which incorporate market-
sensitive pricing terms. Long-term gas purchase agreements with producers,
principally entered into in connection with on-system supplies, also generally
include market-sensitive pricing provisions. Purchases and sales of off-system
gas and electricity supplies are normally made under short-term contracts.
Purchase and sales commitments involving significant price and location risk
are generally hedged with offsetting commitments and commodity futures, swaps
and options. For information concerning Trading and Marketing's risk-management
activities, see "Management's Discussion and Analysis of Results of Operations
and Financial Condition, Quantitative and Qualitative Disclosures About Market
Risk--Commodity Price Risk" and Note 7 to the Consolidated Financial
Statements, "Risk Management and Financial Instruments--Commodity Derivatives--
Trading."
See certain operating statistics of Trading and Marketing under "Business,
Operating Statistics." Activities of Trading and Marketing can fluctuate in
response to the seasonality affecting both electricity and natural gas.
Competition
Trading and Marketing competes with major integrated oil companies, major
interstate pipelines and their marketing affiliates, brokers, marketers and
distributors, and electric utilities and other electric power marketers for
natural gas supplies and in marketing natural gas, electricity and other energy
commodities. Competition in the energy marketing business is driven by the
price of commodities and services delivered, along with the quality and
reliability of services provided.
Regulation
The energy marketing activities of Trading and Marketing may, in certain
circumstances, be subject to the jurisdiction of the FERC. Current FERC
policies permit Trading and Marketing entities subject to FERC jurisdiction to
market natural gas and electricity at market-based rates.
GLOBAL ASSET DEVELOPMENT
Global Asset Development develops, owns and operates energy-related
facilities worldwide. Global Asset Development conducts its operations
primarily in the U.S. through Duke Energy North America and internationally,
currently in Australia and Latin America, through Duke Energy International.
12
Deregulation of energy markets in the U.S. and abroad is providing
substantial opportunities for Global Asset Development to grow through
acquisitions, construction of greenfield projects and expansion of existing
facilities. Global Asset Development is an active participant in both domestic
and international competitive energy-related markets, which include natural gas
pipelines, power generation, energy trading and marketing and other services.
Global Asset Development owns, operates or has substantial interests in
approximately 12,500 MW of generation and approximately 1,900 miles of pipeline
systems, including projects under construction.
Domestically, Duke Energy North America is investing in new merchant power
plants throughout the U.S. To capture the greatest value, Duke Energy North
America, through its portfolio management strategy, seeks opportunities to
invest in markets which have capacity needs and to divest, in whole or in part,
when significant value can be realized. During 1999, Duke Energy North America
began construction of multiple new power generation plants in the southwest and
midwest.
The following map includes Duke Energy North America's power generation
facilities.
(A map appears here depicting Duke Energy North America's power generation
facilities, including those under construction.)
Duke Energy International continues to focus on its regional target areas in
Australia and Latin America for further expansion opportunities and intends to
implement its strategies in Europe. In January 1999, Duke Energy International
completed the $315 million purchase of power generation and transmission assets
in western Australia and New Zealand, including an ownership interest in a
pipeline in western Australia. From August 1999 through January 2000, Duke
Energy International entered into a series of transactions to complete an
approximate $1.0 billion purchase of an approximate 95% economic interest in
Companhia de Geracao de Energia Eletrica Paranapanema, an electric generating
company in Brazil. Also during 1999, Duke Energy International 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. For additional
information on business acquisitions see "Management's Discussion and Analysis
of Results of Operations and Financial Condition, Liquidity and Capital
Resources--Investing Cash Flows" and Notes 2 and 19 to the Consolidated
Financial Statements, "Business Combinations, Acquisitions and Dispositions"
and "Subsequent Events," respectively.
13
The following map illustrates the locations of Duke Energy International's
worldwide energy facilities, including projects under construction or under
contract.
(A map appears here depicting the items indicated in the above paragraph.)
Competition and Regulation
Global Asset Development experiences substantial competition from existing
utility companies as well as other merchant electric generation companies in
the U.S. Internationally, Global Asset Development focuses on regions where
free markets prevail or are developing. Competition in these markets is from
other multinational energy companies and local private and public utilities.
Most of Global Asset Development's operations are not subject to regulation.
However, to the extent that Global Asset Development's generating stations in
California sell electricity under "reliability must run" agreements to the
California Independent System Operator, such sales are made at FERC regulated
rates.
Global Asset Development is subject to international, federal, state and
local environmental regulations. For a discussion of environmental regulation,
see "Business, Environmental Matters."
OTHER ENERGY SERVICES
Other Energy Services provides engineering, consulting, construction and
integrated energy solutions worldwide, primarily through Duke Engineering &
Services, Duke/Fluor Daniel and DukeSolutions.
Duke Engineering & Services specializes in energy and environmental projects
and provides comprehensive engineering, quality assurance, project and
construction management and operating and maintenance services for all phases
of hydroelectric, nuclear and renewable power generation, transmission and
distribution projects worldwide.
Duke/Fluor Daniel, operating through several entities, provides full service
siting, permitting, licensing, engineering, procurement, construction, start-
up, operating and maintenance services for fossil-fired plants, both
14
domestically and internationally. Subsidiaries of Duke Energy and Fluor
Corporation each own 50% of Duke/Fluor Daniel.
DukeSolutions provides energy consulting services to large end users of
energy by first identifying and then affecting points in a customer's
operations where energy related costs are incurred, including procurement,
production and disposal. The scope of services involves providing strategic
solutions to reduce costs when customers buy energy, convert it into a usable
form, use it to manufacture products and dispose of any waste.
Other Energy Services experiences substantial competition from utilities and
other independent companies in the U. S. or abroad.
Other Energy Services is subject to the jurisdiction of the EPA and
international, state and local environmental agencies. For a discussion of
environmental regulation, see "Business, Environmental Matters."
REAL ESTATE OPERATIONS
Real Estate Operations conducts its business through Crescent Resources Inc.,
which develops high quality commercial and residential real estate projects and
manages land holdings in the southeastern U.S. At December 31, 1999, Real
Estate Operations owned 4.2 million square feet of commercial and industrial
space, with an additional 1.4 million square feet under construction. At
December 31, 1999, the commercial portfolio included 2.6 million square feet of
office space, 1.5 million square feet of warehouse space and 0.1 million square
feet of retail space. In 1999, commercial buildings totaling 2.0 million of
square feet were sold for $155 million.
Real Estate Operations' residential developments are high-end, country club
and golf course communities with individual lots sold to custom builders. In
1999, Real Estate Operations added the development of moderately priced
residential communities in Jacksonville, Florida, with sales in tracts to
national builders. In 1999, Real Estate Operations sold 917 residential
developed lots for $138 million, and tract sales were $9 million.
In 1999, Real Estate Operations also announced plans to enter the multi-
family market and to significantly increase its retail development. At December
31, 1999, Real Estate Operations had approximately 200,000 acres of land under
its management.
ENVIRONMENTAL MATTERS
Duke Energy is subject to international, federal, state and local regulations
with regard to air and water quality, hazardous and solid waste disposal and
other environmental matters. Certain environmental regulations affecting Duke
Energy include:
. The Clean Air Act Amendments of 1990, which require a two-phase reduction
by electric utilities in aggregate annual emissions of sulfur dioxide and
nitrogen oxide by 2000;
. State Implementation Plans, which were issued by the EPA to 22 states
including North and South Carolina, and the District of Columbia related
to existing and new national ambient air quality standards for ozone;
. The Federal Water Pollution Control Act Amendments of 1987, which require
permits for facilities that discharge treated wastewater into the
environment; and
. The Comprehensive Environmental Response, Compensation and Liability Act,
which can require any individual or entity which may have owned or
operated a disposal site, as well as transporters or generators of
hazardous wastes which were sent to such site, to share in remediation
costs for the site.
For further discussion of environmental matters involving Duke Energy,
including possible liability and capital costs, see "Legal Proceedings,"
"Management's Discussion and Analysis of Results of Operations and Financial
Condition, Current Issues--Environmental" and Note 14 to the Consolidated
Financial Statements,
15
"Commitments and Contingencies--Environmental." Compliance with international,
federal, state and local provisions' regulating the discharge of materials into
the environment, or otherwise protecting the environment, is not expected to
have a material adverse effect on the competitive position, consolidated
results of operations or financial position of Duke Energy.
FOREIGN OPERATIONS AND EXPORT SALES
Foreign operations consisted of 10% of consolidated revenues in 1999 and 15%
of consolidated long-lived assets as of December 31, 1999. For 1998 and 1997,
foreign operations and export sales were not material to Duke Energy as a
whole. For a discussion of Duke Energy's foreign operations and the risks
associated with them, see "Management's Discussion and Analysis of Results of
Operations and Financial Condition, Quantitative and Qualitative Disclosures
About Market Risk--Foreign Operations Risk" and Notes 3 and 7 to the
Consolidated Financial Statements, "Business Segments" and "Risk Management and
Financial Instruments," respectively.
EMPLOYEES
At December 31, 1999, Duke Energy had approximately 21,000 employees.
Approximately 1,600 operating and maintenance employees are represented by
unions. Of these approximately 1,400 are represented by the International
Brotherhood of Electrical Workers (IBEW). During 1999, new agreements were
reached with IBEW units for a portion of the employees. Additionally,
negotiations began with the IBEW for a new contract for other employees. The
new contract when completed, will be effective in 2000. An additional 74
employees are represented by the United Steelworkers and Rubberworkers of
America. Approximately 160 employees are represented by the Paper, Allied,
Chemical and Energy Workers Union (PACE, formerly the Oil, Chemical and Atomic
Workers International Union). Two new agreements were reached with PACE during
1999.
16
OPERATING STATISTICS
Years Ended December 31,
-----------------------------------------
1999 1998 1997 1996 1995
-------- ------- ------- ------ ------
Electric Operations(a)
Sources of Electric Energy, GWh(b)
Generated--net output:
Coal............................. 41,306 42,164 45,234 40,649 32,389
Nuclear.......................... 39,263 38,366 29,569 33,177 39,836
Hydro............................ 638 1,714 1,633 1,802 2,117
Oil and gas...................... 662 846 301 199 255
-------- ------- ------- ------ ------
Total generation............... 81,869 83,090 76,737 75,827 74,597
Purchased power and net
interchange..................... 3,617 2,659 3,781 3,885 1,239
-------- ------- ------- ------ ------
Total output................... 85,486 85,749 80,518 79,712 75,836
Plus: Purchases from other
Catawba joint owners............ 1,233 1,656 2,316 2,662 6,070
-------- ------- ------- ------ ------
Total sources of energy........ 86,719 87,405 82,834 82,374 81,906
Less: Line loss and company
usage........................... 5,171 5,394 4,899 4,827 4,780
-------- ------- ------- ------ ------
Total GWh sales................ 81,548 82,011 77,935 77,547 77,126
======== ======= ======= ====== ======
Electric Energy Sales, GWh
Residential...................... 21,897 22,002 20,483 21,484 20,124
General service.................. 21,807 21,093 19,687 19,593 18,461
Industrial
Textile......................... 11,201 11,981 11,955 11,603 12,155
Other........................... 18,704 18,668 18,376 18,131 17,738
Other energy and wholesale....... 7,715 8,933 7,029 6,781 7,852
-------- ------- ------- ------ ------
Total GWh sales billed......... 81,324 82,677 77,530 77,592 76,330
Unbilled GWh sales............... 224 (666) 405 (45) 796
-------- ------- ------- ------ ------
Total GWh sales................ 81,548 82,011 77,935 77,547 77,126
======== ======= ======= ====== ======
Natural Gas Transmission
Throughput Volumes, TBtu(c):
Northeast Pipelines
TETCO........................... 1,254 1,148 1,300 1,349 1,234
Algonquin....................... 311 311 341 327 331
-------- ------- ------- ------ ------
Total Northeast Pipelines...... 1,565 1,459 1,641 1,676 1,565
-------- ------- ------- ------ ------
Midwest Pipelines(d)
PEPL............................ 176 560 659 687 663
Trunkline....................... 152 581 620 632 519
-------- ------- ------- ------ ------
Total Midwest Pipelines........ 328 1,141 1,279 1,319 1,182
-------- ------- ------- ------ ------
Intercompany eliminations........ -- (7) (58) (56) (44)
-------- ------- ------- ------ ------
Total Natural Gas
Transmission.................. 1,893 2,593 2,862 2,939 2,703
======== ======= ======= ====== ======
Field Services
Natural Gas Gathered and
Processed/Transported, TBtu/d(e).. 5.1 3.6 3.4 2.9 1.9
NGL Production, MBbl/d(f).......... 192.4 110.2 108.2 78.5 54.8
Average Natural Gas Price per
MMBtu(g).......................... $2.27 $2.11 $2.59 $2.59 $1.64
Average NGL Price per Gallon....... $0.34 $0.26 $0.35 $0.39 $0.33
Natural Gas Marketed, TBtu/d....... 0.5 0.4 0.4 0.5 0.1
Trading and Marketing
Natural Gas Marketed, TBtu/d....... 10.5 8.0 6.9 5.5 3.6
Electricity Marketed, GWh.......... 109,634 98,991 64,650 4,229 513
- --------
(a) Years prior to 1998 have been restated to include Nantahala Power and
Light.
(b) Gigawatt-hour.
(c) Trillion British thermal units.
(d) Sold in March 1999.
(e) Trillion British thermal units per day.
(f) Thousand barrels per day.
(g) Million British thermal units.
17
EXECUTIVE OFFICERS OF DUKE ENERGY
Richard B. Priory, 53, Chairman of the Board, President and Chief Executive
Officer. Mr. Priory served as President and Chief Operating Officer from 1994
until he assumed his present position in 1997 following the merger with
PanEnergy.
William A. Coley, 56, Group President, Duke Power. Mr. Coley served as
President of Duke Energy's Associated Enterprises Group from 1994 to 1997 when
he assumed his present position following the merger.
Fred J. Fowler, 54, Group President, Energy Transmission. Mr. Fowler served
as Group Vice President of PanEnergy from 1996 until the merger, when he
assumed his present position. He was President of TETCO from 1994 to 1996.
Harvey J. Padewer, 52, Group President, Energy Services. Mr. Padewer assumed
his present position on January 1, 1999. From 1995 through 1998, he served as
Senior Vice President and General Manager of Utilicorp Energy Group, where he
was President, Aquila Energy; President, Utilico Group; and Vice Chairman of
the Board, Aquila Pipeline Corporation. From 1989 to 1995, he served in
executive positions at ABB Power Generation, Inc., first as Vice President,
Sales and Marketing and later as President, Turbine Power Division.
Richard W. Blackburn, 57, Executive Vice President, General Counsel and
Secretary. Mr. Blackburn was named to his present position in October 1997.
Prior to joining Duke Energy, he served as President and Group Executive of
NYNEX Corporation's Worldwide Communications and Media Group from 1995 to 1997.
Richard J. Osborne, 49, Executive Vice President and Chief Financial Officer.
Mr. Osborne served as Senior Vice President and Chief Financial Officer from
1994 until he assumed his present position in 1997 following the merger.
Ruth G. Shaw, 52, Executive Vice President and Chief Administrative Officer.
Ms. Shaw served as Senior Vice President, Corporate Resources, from 1994 until
she assumed her present position following the merger.
Sandra P. Meyer, 45, Vice President and Corporate Controller. Ms. Meyer
assumed her present position in September 1999. Prior to her present position,
Ms. Meyer served as Vice President, Duke Power Planning and Finance following
the merger in 1997. She became Vice President and Controller of PanEnergy in
1994 and was named to the additional position of Treasurer in October 1996.
Executive officers are elected annually by the Board of Directors and serve
until the first meeting of the Board of Directors following the annual meeting
of shareholders and until their successors are duly elected.
There are no family relationships between any of the executive officers nor
any arrangement or understanding between any executive officer and any other
person pursuant to which the officer was selected.
Item 2. Properties.
ELECTRIC OPERATIONS
At December 31, 1999, Electric Operations operated three nuclear generating
stations with a combined net capability of 5,020 MW (which includes 12.5%
ownership in the Catawba Nuclear Station), eight coal-fired stations with a
combined capability of 7,699 MW, thirty-one hydroelectric stations with a
combined capability of 2,803 MW and six combustion turbine stations with a
combined capability of 1,784 MW, all of which are located in North Carolina or
South Carolina.
18
In addition, Electric Operations owned, as of December 31, 1999,
approximately 13,000 conductor miles of electric transmission lines, including
600 conductor miles of 525 kilovolts, 2,600 conductor miles of 230 kilovolts,
6,500 conductor miles of 100 kilovolts, and 3,300 conductor miles of 13 to 66
kilovolts. Electric Operations also owned approximately 91,100 conductor miles
of electric distribution lines, including 61,800 conductor miles of rural
overhead lines, 15,500 conductor miles of urban overhead lines, 7,500 conductor
miles of rural underground lines and 6,300 conductor miles of urban underground
lines. At December 31, 1999, the electric transmission and distribution systems
comprised approximately 1,600 substations.
Substantially all electric plant is mortgaged under the Indenture relating to
First and Refunding Mortgage Bonds.
NATURAL GAS TRANSMISSION
TETCO's gas transmission system extends approximately 1,700 miles from
producing fields in the Gulf Coast region of Texas and Louisiana to Ohio,
Pennsylvania, New Jersey and New York. It consists of two parallel systems, one
consisting of three large-diameter parallel pipelines and the other consisting
of from one to three large-diameter pipelines over its length. TETCO's system
consists of 9,220 miles of pipeline and has 73 compressor stations.
TETCO also owns and operates two offshore Louisiana pipeline systems, which
extend over 100 miles into the Gulf of Mexico and consist of 490 miles of
pipeline.
Algonquin's transmission system connects with TETCO's facilities in New
Jersey, and extends approximately 250 miles through New Jersey, New York,
Connecticut, Rhode Island and Massachusetts. The system consists of 1,066 miles
of pipeline with six compressor stations.
For information concerning natural gas storage properties, see "Business,
Natural Gas Transmission."
FIELD SERVICES
For information regarding the properties of Field Services, see "Business,
Field Services."
GLOBAL ASSET DEVELOPMENT
Duke Energy North America owns several gas-fueled electric generating
stations throughout the U.S., including four wholly owned stations in
California with combined capacity of 3,351 MW. As of December 31, 1999, Duke
Energy North America had ownership interests ranging from 24.42% to 50% in
numerous other generating facilities with combined capacity of 1,217 MW.
Additionally, Duke Energy North America wholly owns or has ownership interests
ranging from 50% to 78.53% in several generating stations that are under
construction. The combined capacity of these facilities is 2,960 MW.
As of December 31, 1999, Duke Energy International's properties included a
combination of hydroelectric and thermal power generation assets. Duke Energy
International had ownership interests ranging from 50% to 98% in hydroelectric
facilities located in Brazil, Argentina, Bolivia, Peru and Belize, with
combined capacity of 3,443 MW. Wholly owned thermal facilities in Australia and
New Zealand had capacity of 392 MW. Thermal facilities in which Duke Energy
International had ownership interests ranging from 21.9% to 97% in Peru,
Ecuador, El Salvador, Indonesia and Argentina had capacity of 1,085 MW. These
statistics include projects under construction or under contract.
Additionally, Duke Energy International owned 889 miles of pipeline systems
in Australia, and had an ownership interest of 11.84% in 800 miles of pipeline
systems in Australia and a 21.9% ownership interest in 190 miles of pipeline
systems in Peru. These statistics include projects under construction. Also as
of December 31, 1999, Duke Energy International had a 25% indirect interest in
National Methanol Company, which owns and operates a methanol and MTBE (methyl
tertiary butyl ether) business in Jubail, Saudi Arabia.
For additional information and maps regarding the properties of Global Asset
Development, see "Business, Global Asset Development."
19
REAL ESTATE OPERATIONS
For information regarding the properties of Real Estate Operations, see
"Business, Real Estate Operations."
OTHER
None of the properties used in connection with Duke Energy's other business
activities are considered material to Duke Energy's operations as a whole.
Item 3. 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 has agreed to indemnify the purchaser of this former subsidiary against
liability for any penalty or fines resulting from these alleged violations.
This proceeding could result in a penalty in excess of $100,000.
See Note 14 to the Consolidated Financial Statements, "Commitments and
Contingencies--Injury and Damages Claims," for discussion of Duke Energy's
injury and damages claims.
Management believes that the resolution of the matters discussed and referred
to above 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 14 to the Consolidated Financial Statements, "Commitments and
Contingencies," and "Management's Discussion and Analysis of Results of
Operations and Financial Condition, Current Issues--Environmental." With respect
to the State Implementation Plan EPA proceeding discussed under "Management's
Discussion and Analysis of Results of Operations and Financial Condition,
Current Issues--Environmental--Air Quality Control," in March 2000, the court
ruled in favor of the EPA with respect to several issues. Management's estimate
of the potential capital improvement costs in this matter remain appropriate.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of Duke Energy's security holders during
the last quarter of 1999.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The common stock of Duke Energy is listed for trading on the New York Stock
Exchange. At February 29, 2000, there were approximately 152,392 holders of
record of such common stock.
Common Stock Data by Quarter
1999 1998
----------------------------- ----------------------------
Stock Price Range Stock Price Range
Dividends ------------------- Dividends ------------------
Per Share High Low Per Share High Low
--------- --------- --------- --------- --------- --------
First Quarter.... $0.55 $64 11/16 $54 13/16 $0.55 $60 5/8 $53 7/16
Second Quarter... 1.10 61 3/16 52 1/8 1.10 62 9/16 55 1/8
Third Quarter.... -- 58 1/2 52 7/16 -- 66 3/16 57 1/16
Fourth Quarter... 0.55 56 7/8 47 1/16 0.55 70 11/16 60 1/16
On December 17, 1998, Duke Energy's Board of Directors adopted a shareholder
rights plan, which was subsequently approved by the North Carolina Utilities
Commission and the Public Service Commission of South Carolina. Under the terms
of the plan, holders of record of outstanding common stock on February 12, 1999
received one right for each share of common stock owned. The plan is intended
to assure fair and equal treatment for all shareholders in the event of a
hostile takeover attempt and to encourage a potential acquirer to negotiate
with the Board of Directors a fair price for all shareholders before attempting
a takeover. The adoption of the plan was not in response to any takeover offer
or threat.
20
Item 6. Selected Financial Data.
1999 1998 1997(b) 1996(b) 1995(b)
------- ------- ------- ------- -------
In millions, except per share amounts
Income Statement
Operating revenues.................. $21,742 $17,610 $16,309 $12,302 $ 9,694
Operating expenses(a)............... 19,947 15,177 14,339 10,143 7,626
------- ------- ------- ------- -------
Operating income.................... 1,795 2,433 1,970 2,159 2,068
Other income and expenses........... 248 214 138 135 122
------- ------- ------- ------- -------
Earnings before interest and taxes.. 2,043 2,647 2,108 2,294 2,190
Interest expense.................... 601 514 472 499 508
Minority interests.................. 142 96 23 6 --
------- ------- ------- ------- -------
Earnings before income taxes........ 1,300 2,037 1,613 1,789 1,682
Income taxes........................ 453 777 639 698 664
------- ------- ------- ------- -------
Income before extraordinary item.... 847 1,260 974 1,091 1,018
Extraordinary gain/(loss), net of
tax................................ 660 (8) -- (17) --
------- ------- ------- ------- -------
Net income.......................... 1,507 1,252 974 1,074 1,018
Dividends and premiums on
redemptions of preferred and
preference stock................... 20 21 72 44 49
------- ------- ------- ------- -------
Earnings available for common
stockholders....................... $ 1,487 $ 1,231 $ 902 $ 1,030 $ 969
======= ======= ======= ======= =======
Common Stock Data
Shares of common stock outstanding
Year-end........................... 366 363 360 359 362
Weighted average................... 365 361 360 361 361
Earnings per share (before
extraordinary item)(a)
Basic.............................. $ 2.26 $ 3.43 $ 2.51 $ 2.90 $ 2.68
Dilutive........................... $ 2.25 $ 3.42 $ 2.50 $ 2.88 $ 2.67
Earnings per share(a)
Basic.............................. $ 4.08 $ 3.41 $ 2.51 $ 2.85 $ 2.68
Dilutive........................... $ 4.07 $ 3.40 $ 2.50 $ 2.83 $ 2.67
Dividends per share................. $ 2.20 $ 2.20 $ 1.90 $ 1.57 $ 1.50
Balance Sheet
Total assets........................ $33,409 $26,806 $24,029 $22,366 $20,868
Long-term debt...................... $ 8,683 $ 6,272 $ 6,530 $ 5,485 $ 5,803
Preferred stock with sinking fund
requirements....................... $ 104 $ 124 $ 149 $ 234 $ 234
- --------
(a) Financial information reflects a pre-tax $800 million charge for estimated
injury and damages claims. The earnings per share effect of this charge was
$1.34 per share. See Note 14 to the Consolidated Financial Statements,
"Commitments and Contingencies--Injury and Damages Claims," for additional
information.
(b) Financial information reflects accounting for the 1997 merger with
PanEnergy Corp as a pooling of interests. As a result, the financial
information gives effect to the merger as if it had occurred January 1,
1995.
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
INTRODUCTION
Management's Discussion and Analysis should be read in conjunction with the
Consolidated Financial Statements.
21
Business Segments. 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 U.S. and abroad. Duke Energy
provides these and other services through seven business segments:
.Electric Operations
.Natural Gas Transmission
.Field Services
.Trading and Marketing
.Global Asset Development
.Other Energy Services
.Real Estate Operations
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
(NCUC) and the Public Service Commission of South Carolina (PSCSC).
Natural Gas Transmission 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 2 to the Consolidated Financial Statements. The interstate natural gas
transmission and storage operations are subject to the rules and regulations of
the FERC.
Field Services gathers, processes, transports and markets natural gas and
produces, transports 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 energy trading operations, with Mobil Corporation
owning a 40% minority interest. This segment also includes certain other
trading activities and limited hydrocarbon exploration and production
activities that are wholly owned by Duke Energy.
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)
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 land holdings in the southeastern U.S.
In 1997, Duke Power Company (Duke Power) merged with PanEnergy Corp
(PanEnergy). The merger was accounted for as a pooling of interests; therefore,
the Consolidated Financial Statements and other financial information included
in this Annual Report for periods prior to the merger include the combined
historical financial results of Duke Power and PanEnergy. See Note 2 to the
Consolidated Financial Statements for additional information on the
combination.
22
Business Strategy. Duke Energy's business strategy is to develop integrated
energy infrastructures in targeted regions where Duke Energy's extensive
capabilities in developing energy assets, operating electricity, gas and NGL
plants, optimizing commercial operations and managing risk can provide
comprehensive energy solutions for customers and create superior value for
shareholders. Domestically, Duke Energy is aggressively investing in new
merchant power plants throughout the U.S., expanding its natural gas pipeline
infrastructure in the eastern U.S., rapidly increasing its leading position in
gas processing and NGL marketing and broadening its trading and marketing
expertise across the energy spectrum. Internationally, Duke Energy is
currently focusing on integrated electric and gas opportunities in Australia
and Latin America and intends to implement its strategies in Europe.
Electric Operations continues to strive to maintain low costs and
competitive rates for its customers and to provide high quality customer
service. Electric Operations is expected to grow moderately, consistent with
historical trends. Expansion will primarily result from continued economic
growth in its service territory.
Natural Gas Transmission provides solid earnings growth and strengthens its
competitive position by adhering to a comprehensive strategy of selected
acquisitions and developing incremental projects that expand services to meet
specific customer needs. In January 2000, Natural Gas Transmission announced
that it had entered into a definitive agreement to purchase the East Tennessee
Natural Gas Company, a pipeline well positioned to serve the rapidly growing
southeastern region of the U.S. The transaction is expected to close in the
first quarter of 2000, subject to regulatory approval. For more information on
this purchase, see Note 19 to the Consolidated Financial Statements.
Duke Energy plans to significantly grow several of its business segments:
Field Services, Trading and Marketing, Global Asset Development and Other
Energy Services. Restructuring of energy markets in the U.S. and abroad is
providing substantial opportunities for these segments to capitalize on their
broad capabilities.
Expansion opportunities for Field Services include the planned combination
of Duke Energy's gas gathering and processing businesses with Phillips
Petroleum's Gas Processing and Marketing unit to form a new midstream company.
The transaction is expected to close by first quarter 2000, subject to
regulatory approval. See Note 19 to the Consolidated Financial Statements for
further discussion.
Trading and marketing activities at Duke Energy continue to expand as
Trading and Marketing provides energy supply, output marketing, risk
management and commercial optimization services to all of Duke Energy's
merchant structure developments. Trading and Marketing continues to increase
its customer base for wholesale energy management services to aggregators,
distribution companies, large industrials and other marketers.
Global Asset Development expects to continue strong earnings growth through
acquisitions, divestitures, construction of greenfield projects and expansion
of existing facilities as opportunities are extracted, evaluated and realized
through the marketplace. Duke Energy's combination of assets and capabilities
that span the energy value chain have contributed to Global Asset
Development's successful delivery of natural gas pipeline, power generation,
energy marketing and other services as demonstrated both domestically and
internationally. To capture the greatest value in North America, Duke Energy
North America, through its portfolio management strategy, seeks opportunities
to invest in markets which have capacity needs and to divest, in whole or in
part, when significant value can be realized.
Other Energy Services seeks to grow with various types of services including
comprehensive energy efficiencies in food, textile and government facilities.
The strong real estate market in the Southeast continues to present substan-
tial growth opportunities for both the commercial and residential development
of Real Estate Operations. In addition to initiating development of signifi-
cant office and industrial facilities in each of its established markets, Real
Estate Operations entered a new market niche in 1999 to develop moderately
priced residential communities in Jacksonville, Florida. Real Estate Opera-
tions also announced plans to enter the multi-family market and to signifi-
cantly increase its retail development.
23
RESULTS OF OPERATIONS
In 1999, earnings available for common stockholders were $1,487 million, or
$4.08 per basic share, net of an after-tax extraordinary gain of $660 million,
or $1.82 per basic share. In 1998, earnings available for common stockholders
were $1,231 million, or $3.41 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 was primarily due to the 1999
extraordinary gain resulting from the sale of the Midwest Pipelines. This gain,
along with the factors described below that affect segment profit and loss, was
partially offset by a pre-tax $800 million charge for estimated injury and
damages claims (see Note 14 to the Consolidated Financial Statements), higher
interest expense and minority interest expense
Earnings available for common stockholders increased $329 million in 1998
from 1997 earnings of $902 million, or $2.51 per basic share. The increase in
earnings available for common stockholders was due to the factors described
below that affect segment profit and loss. These factors were partially offset
by increased interest expense and minority interests.
Operating income for 1999 was $1,795 million compared to $2,433 million in
1998 and $1,970 million in 1997. Earnings before interest and taxes (EBIT) were
$2,043 million, $2,647 million and $2,108 million for 1999, 1998 and 1997,
respectively. Management evaluates each business segment based on an internal
measure of earnings before interest and taxes, after deducting minority
interests. Operating Income and EBIT are affected by the same fluctuations for
Duke Energy and each of its business segments. The only notable difference
between Operating Income and EBIT is the inclusion in EBIT of certain non-
operating activities. See Note 3 to the Consolidated Financial Statements for
additional information on business segments.
EBIT is summarized in the following table and is discussed by business
segment thereafter.
EBIT by Business Segment
Years Ended December 31,
---------------------------
1999 1998 1997
-------- -------- --------
In millions
Electric Operations............................. $ 856 $ 1,513 $ 1,282
Natural Gas Transmission........................ 627 702 624
Field Services.................................. 144 76 157
Trading and Marketing........................... 70 81 23
Global Asset Development........................ 181 64 4
Other Energy Services........................... (94) 10 18
Real Estate Operations.......................... 176 142 98
Other Operations................................ (9) 2 (120)
Minority Interests.............................. 92 57 22
-------- -------- --------
Consolidated EBIT............................... $ 2,043 $ 2,647 $ 2,108
======== ======== ========
Other Operations primarily include communication services, water services and
certain unallocated corporate costs. Included in the amounts discussed
hereafter are intercompany transactions that are eliminated in the Consolidated
Financial Statements.
24
Electric Operations
Years Ended December 31,
--------------------------------
1999 1998 1997
---------- ---------- ----------
In millions, except where noted
Operating Revenues......................... $ 4,700 $ 4,626 $ 4,401
Operating Expenses......................... 3,966 3,228 3,221
---------- ---------- ----------
Operating Income........................... 734 1,398 1,180
Other Income, Net of Expenses.............. 122 115 102
---------- ---------- ----------
EBIT....................................... $ 856 $ 1,513 $ 1,282
========== ========== ==========
Sales -- GWh (a)........................... 81,548 82,011 77,935
--------
(a) Gigawatt-hours.
In 1999, EBIT for Electric Operations decreased $657 million compared to
1998, primarily due to an $800 million charge for estimated injury and damages
claims. See Note 14 to the Consolidated Financial Statements for additional
information related to this charge. Partially offsetting this decrease was a
2.8% increase in the number of customers in the Electric Operations' service
territory during 1999, and the absence of 1998 severance and other costs
related to closing Electric Operations' merchandising business.
In 1998, EBIT for Electric Operations increased $231 million as compared to
1997, primarily due to a 5.2% increase in gigawatt-hour sales. Gigawatt-hour
sales increased as a result of warmer spring and summer weather conditions
during 1998 and a 2.5% growth in the number of customers in the Electric
Operations' service territory. EBIT also increased due to the absence of 1997
severance costs, however this was substantially offset by 1998 costs related to
the closing of Electric Operations' merchandising business.
Natural Gas Transmission
Years Ended December 31,
--------------------------------
1999 1998 1997
---------- ---------- ----------
In millions, except where noted
Operating Revenues......................... $ 1,206 $ 1,528 $ 1,572
Operating Expenses......................... 615 864 964
---------- ---------- ----------
Operating Income........................... 591 664 608
Other Income, Net of Expenses.............. 36 38 16
---------- ---------- ----------
EBIT....................................... $ 627 $ 702 $ 624
========== ========== ==========
Throughput -- TBtu (a)..................... 1,893 2,593 2,862
--------
(a) Trillion British thermal units.
EBIT for Natural Gas Transmission decreased $75 million in 1999 compared to
1998. As a result of the sale of the Midwest Pipelines to CMS Energy
Corporation (CMS) on March 29, 1999, EBIT for the Midwest Pipelines decreased
$156 million compared to 1998's full year of operation. For the Northeast
Pipelines, EBIT increased $81 million compared to 1998, primarily as a result
of increased earnings from market-expansion projects and joint ventures, higher
throughput and lower operating expenses. A gain of $24 million resulting from
the sale of Duke Energy's interest in the Alliance Pipeline project and
benefits totaling $38 million related to the completion of certain PCB
(polychlorinated biphenyl) and soil clean-up programs below estimates also
increased EBIT in 1999. Partially offsetting these contributions to EBIT were
the non-recurrence of the 1998 favorable resolution of regulatory issues
related to gas supply realignment cost issues ("GSR issues") and a 1998 refund
from a state property tax ruling.
In 1998, EBIT for Natural Gas Transmission increased $78 million compared to
1997. EBIT for the Northeast Pipelines increased $56 million in 1998 over 1997,
primarily as a result of the favorable resolution of
25
GSR issues, favorable state property tax rulings and increased market expansion
projects. These increases were partially offset by a decrease in throughput
primarily as a result of mild winter weather.
For the Midwest Pipelines, 1998 EBIT increased $22 million compared to 1997,
primarily due to a gain on the sale of the general partner interests in
Northern Border Partners, L.P. and non-recurring 1997 litigation expenses.
These increases were partially offset by the favorable resolution of certain
regulatory matters in 1997, which was reflected as additional revenue and other
income.
Field Services
Years Ended December 31,
---------------------------------
1999 1998 1997
---------- ---------- ----------
In millions, except where noted
Operating Revenues....................... $ 3,590 $ 2,639 $ 3,055
Operating Expenses....................... 3,444 2,598 2,898
---------- ---------- ----------
Operating Income......................... 146 41 157
Other Income, Net of Expenses............ (2) 35 --
---------- ---------- ----------
EBIT..................................... $ 144 $ 76 $ 157
========== ========== ==========
Natural Gas Gathered and
Processed/Transported, TBtu/d (a)....... 5.1 3.6 3.4
NGL Production, MBbl/d (b)............... 192.4 110.2 108.2
Natural Gas Marketed, TBtu/d............. 0.5 0.4 0.4
Average Natural Gas Price per MMBtu (c).. $ 2.27 $ 2.11 $ 2.59
Average NGL Price per Gallon (d)......... $ 0.34 $ 0.26 $ 0.35
--------
(a) Trillion British thermal units per day.
(b) Thousand barrels per day.
(c) Million British thermal units.
(d) Does not reflect results of commodity hedges.
In 1999, EBIT for Field Services increased $68 million compared to 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"). For more information on the UPR acquisition, see Note 2 to the
Consolidated Financial Statements. Improved average NGL prices, which were up
$0.08 per gallon, or 30.8% from the prior year, also contributed to the
increase in EBIT. Partially offsetting these increases were $34 million in 1998
of gains on sales of assets, which were included in other income.
EBIT for Field Services decreased $81 million in 1998 from 1997, primarily
due to a decrease in average NGL prices of approximately $0.09 per gallon, or
25.7%. The decrease in EBIT was partially offset by $34 million of gains on
sales of assets, which were included in other income.
On December 16, 1999, Duke Energy announced that it had signed definitive
agreements with Phillips Petroleum to form a new midstream gas gathering and
processing company. See Note 19 to the Consolidated Financial Statements for
further discussion.
26
Trading and Marketing
Years Ended December 31,
---------------------------------
1999 1998 1997
----------- ---------- ----------
In millions, except where noted
Operating Revenues........................ $ 11,793 $ 8,785 $ 7,489
Operating Expenses........................ 11,724 8,665 7,446
----------- ---------- ----------
Operating Income.......................... 69 120 43
Other Income, Net of Expenses............. 43 2 1
Minority Interest Expense................. 42 41 21
----------- ---------- ----------
EBIT...................................... $ 70 $ 81 $ 23
=========== ========== ==========
Natural Gas Marketed, TBtu/d.............. 10.5 8.0 6.9
Electricity Marketed, GWh................. 109,634 98,991 64,650
In 1999, EBIT for Trading and Marketing decreased $11 million from 1998. The
decrease resulted primarily from lower natural gas trading margins, partially
offset by higher electricity trading margins as well as margins associated with
other trading activities and sales of natural gas interests associated with
drilling activities.
EBIT for Trading and Marketing increased $58 million in 1998 compared to
1997. The increase resulted primarily from increased trading margins and
electricity margins, partially offset by increased expenses due to business
growth. Electricity volumes marketed increased primarily as a result of
acquiring the remaining 50% ownership interest in the Duke/Louis Dreyfus,
L.L.C. (D/LD) joint venture in June 1997.
Global Asset Development
Years Ended December 31,
--------------------------------
1999 1998 1997
---------- ---------- ----------
In millions, except where noted
Operating Revenues....................... $ 777 $ 319 $ 123
Operating Expenses....................... 571 261 129
---------- ---------- ----------
Operating Income......................... 206 58 (6)
Other Income, Net of Expenses............ 25 22 11
Minority Interest Expense................ 50 16 1
---------- ---------- ----------
EBIT..................................... $ 181 $ 64 $ 4
========== ========== ==========
Proportional Megawatt Capacity Owned
(a)..................................... 8,773 6,041 3,912
Proportional Maximum Pipeline Capacity
(a), MMcf/d (b)......................... 309 124 --
--------
(a) Includes under construction or under contract.
(b) Million cubic feet per day.
In 1999, EBIT for Global Asset Development increased $117 million compared to
1998. The increase includes $99 million in income from the sale of partial
interests in four generating stations in the U.S. as a result of executing its
domestic portfolio management strategy. Earnings from new projects in Latin
America and Australia also contributed $63 million to the increase. Partially
offsetting these increases were higher operating expenses and increased
development costs associated with business expansion.
EBIT for Global Asset Development increased $60 million in 1998 over 1997.
The increase resulted primarily from business expansion and acquisitions,
including the July 1998 acquisition of three electric generating stations in
California and the December 1997 acquisition of an indirect 32.5% ownership
interest in American Ref-Fuel Company. An expansion to the PT Puncakjaya power
generation facility in Indonesia also contributed to the increase in EBIT
during 1998. The increase in EBIT was partially offset by decreased earnings
resulting from lower prices at National Methanol Company, a methanol and MTBE
(methyl tertiary butyl ether) business in Saudi Arabia.
27
Other Energy Services
Years Ended December 31,
---------------------------
1999 1998 1997
--------- ------- --------
In millions
Operating Revenues............................... $ 989 $ 521 $ 376
Operating Expenses............................... 1,083 511 353
--------- ------- -------
Operating Income................................. (94) 10 23
Other Income, Net of Expenses.................... -- -- (5)
--------- ------- -------
EBIT............................................. $ (94) $ 10 $ 18
========= ======= =======
In 1999, EBIT for Other Energy Services decreased $104 million compared to
1998. The decrease was primarily due to charges of $38 million and $35 million
at Duke Engineering & Services and DukeSolutions, respectively. These charges,
which include costs associated with repositioning the companies to focus on
growth markets, included expenses related to severance, office closings and
write-offs of uncollectable accounts. Increased development activity at
DukeSolutions and decreased earnings from projects of Duke Engineering &
Services also contributed to lower EBIT. EBIT for Other Energy Services
decreased $8 million in 1998 compared to 1997, primarily due to reduced
earnings of Duke Engineering & Services.
Real Estate Operations
Years Ended December 31,
--------------------------
1999 1998 1997
-------- -------- --------
In millions
Operating Revenues................................ $ 233 $ 181 $ 124
Operating Expenses................................ 57 39 26
-------- -------- --------
EBIT.............................................. $ 176 $ 142 $ 98
======== ======== ========
In 1999, EBIT for Real Estate Operations increased $34 million compared to
1998. The increase was primarily due to increased residential developed lot
sales, land sales and commercial project sales, partially offset by decreased
lake lot sales. EBIT for Real Estate Operations increased $44 million in 1998
over 1997, primarily as a result of increased commercial project sales, lake
lot sales and land sales, including a gain on the sale of land in the Jocassee
Gorges region of South Carolina.
Other Operations
EBIT for Other Operations decreased $11 million in 1999 compared to 1998,
primarily as a result of the resolution of certain contingent items during
1998. EBIT for Other Operations increased $122 million in 1998 compared to
1997, primarily as a result of the absence of $71 million of non-recurring 1997
merger-related costs and the favorable resolution of certain contingent items
in 1998, partially offset by a 1997 gain on the sale of Duke Energy's ownership
interest in the Midland Cogeneration Venture.
Other Impacts on Earnings Available for Common Stockholders
Interest expense increased $87 million in 1999 compared to 1998, and $42
million in 1998 compared to 1997 due to higher average debt balances
outstanding, resulting from acquisitions and expansion.
Minority interests increased $46 million in 1999 compared to 1998, and $73
million in 1998 compared to 1997. The increases were due primarily to regular
distributions paid on new issuances of Duke Energy's trust preferred
securities. For more information on issuances of trust preferred securities,
see Note 12 to the Consolidated Financial Statements. Excluding these
dividends, minority interests related primarily to Global Asset Development's
1999 investments and Trading and Marketing's joint venture with Mobil
Corporation. For more information regarding acquisitions and new projects, see
Notes 2 and 8 to the Consolidated Financial Statements.
28
Duke Energy's effective income tax rate was approximately 35%, 38% and 40%
for 1999, 1998 and 1997, respectively. The decrease in 1999 from 1998 was
primarily due to the favorable resolution of several income tax issues and the
utilization of certain capital loss carryforwards due to the sale of the
Midwest Pipelines. Favorable resolution of income tax issues also resulted in a
decline in the effective tax rate in 1998 from 1997. Duke Energy expects its
ongoing effective tax rate to approximate 38%.
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. For further discussion on the sale, see Note 2 to the Consolidated
Financial Statements.
In January 1998, TEPPCO Partners, L.P., in which Duke Energy has a 21.1%
ownership interest, redeemed 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.
In December 1997, Duke Energy redeemed four issues of preferred stock and
commenced a tender offer to purchase a portion of six additional issues of
preferred stock. Premiums related to these redemptions were included in the
Consolidated Statements of Income and Comprehensive Income in 1997 as Dividends
and Premiums on Redemptions of Preferred and Preference Stock.
LIQUIDITY AND CAPITAL RESOURCES
Operating Cash Flows
Net cash provided by operations was $2,684 million in 1999, $2,331 million in
1998 and $2,140 million in 1997. In each of these years, the increase in cash
was primarily due to net income resulting from business expansion.
On August 29, 1998, the FERC approved a settlement from Texas Eastern
Transmission Corporation (TETCO), a subsidiary of Duke Energy, which
accelerates recovery of natural gas transition costs. The order was effective
October 1, 1998 and includes a rate moratorium until 2004. Net cash flows from
operations are not expected to change for the first two years after
implementation; however, after the natural gas transition costs are fully
recovered, cash flows from operations are expected to decrease on an annual
basis. For more information concerning the settlement, see Note 4 to the
Consolidated Financial Statements.
In late 1999, Duke Energy established an accrual for estimated injury and
damages claims. Duke Energy expects to fund approximately $350 million, which
is comprised of an insurance policy premium and estimated claim activity over
the next year, primarily through new debt issuances. Management believes that
the long-term cash requirements of the projected liability will not have a
material effect on Duke Energy's liquidity or cash flows. See Note 14 to the
Consolidated Financial Statements for further discussion.
Investing Cash Flows
Capital and investment expenditures were approximately $5.9 billion in 1999
compared to approximately $2.5 billion in 1998. The increase primarily resulted
from business expansion for the Field Services and Global Asset Development
segments. Business expansion for Field Services included 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. International business expansion for Global Asset Development
included $1.7 billion for multiple acquisitions in Latin America, western
Australia and New Zealand. In 1999, Global Asset Development also began
construction of multiple power generation plants in North America and continued
capital expenditures on projects initiated prior to 1999. Expenditures related
to these activities were partially funded by $1.9 billion in cash proceeds from
the sale of Panhandle Eastern Pipe Line Company (PEPL), Trunkline Gas Company
(Trunkline) and additional storage related to those systems, which
substantially comprised the Midwest Pipelines, along with Trunkline LNG
Company. For additional information concerning acquisitions and dispositions,
see Note 2 to the Consolidated Financial Statements.
29
Capital and investment expenditures in 1998 increased $472 million from $2.0
billion in 1997 primarily due to business expansion by Global Asset
Development. This included the $501 million purchase of three electric
generating stations in California and the completion of the first phase of
Bridgeport Energy, a power generation plant in Connecticut. Business expansion
for Natural Gas Transmission and Field Services also contributed to the
increase in capital and investment expenditures. The increase was partially
offset by decreased expenditures for Electric Operations, primarily as a result
of steam generator replacements at certain of its nuclear plants in 1997, and
by the acquisition of the remaining 50% ownership of the D/LD joint venture in
June 1997.
Projected 2000 capital and investment expenditures for Electric Operations,
including allowance for funds used during construction, are approximately $900
million. These projections include expenditures for existing plants, including
refurbishment and upgrades related to the Oconee Nuclear Station's application
for a 20-year renewal of its operating license, which is expected to receive
approval from the Nuclear Regulatory Commission in 2000.
Projected 2000 capital and investment expenditures for Natural Gas
Transmission, including allowance for funds used during construction, are
approximately $600 million. These projections include expansion of the
Maritimes & Northeast Pipeline, which delivers natural gas to markets in the
Canadian Maritimes provinces and the northeastern U.S. from a supply basin
offshore of Nova Scotia, and the planned $386 million purchase of the East
Tennessee Natural Gas Company, which is expected to close in the first quarter
of 2000 and is contingent upon regulatory approval. For further discussion on
this purchase, see Note 19 to the Consolidated Financial Statements.
Duke Energy plans to continue to significantly grow several of its business
segments: Field Services, Global Asset Development, Trading and Marketing and
Other Energy Services. Expansion plans for Field Services include the
combination of Duke Energy's gas gathering and processing businesses with
Phillips Petroleum's Gas Processing and Marketing unit to form a new midstream
company. The transaction is expected to close by first quarter 2000 and is
subject to regulatory approval. See Note 19 to the Consolidated Financial
Statements for additional information.
Projected 2000 capital and investment expenditures for Global Asset
Development are approximately $3.6 billion. Expansion opportunities for Global
Asset Development's domestic division, Duke Energy North America, include the
continuation of various greenfield projects across the U.S. Expansion plans for
Global Asset Development's international division, Duke Energy International,
include completing the purchase of Dominion Resources, Inc.'s portfolio of
hydroelectric, natural gas and diesel power generation businesses in Argentina
and Bolivia (see Note 2 to the Consolidated Financial Statements) and the
January 2000 completion of the tender offer for additional ownership interests
in Companhia de Geracao de Energia Eletrica Paranapanema (Paranapanema) (see
Note 19 to the Consolidated Financial Statements). Duke Energy International
will also continue to focus on its regional target areas in Australia and Latin
America for further expansion opportunities and intends to implement its
strategies in Europe.
Projected 2000 capital and investment expenditures for Trading and Marketing
are approximately $200 million. This includes expenditures related to Trading
and Marketing's new subsidiary, Duke Energy Hydrocarbons, which was formed in
the second quarter of 1999 to invest capital in limited hydrocarbon exploration
and production prospects through non-operating working interests. Duke Energy's
intent is to produce natural gas to partially offset the short gas position of
Duke Energy's power generation assets and to increase production volumes that
will be beneficial to Field Services, Trading and Marketing, and Natural Gas
Transmission.
Projected 2000 capital and investment expenditures for Other Energy Services,
Real Estate Operations and Other Operations are approximately $200 million,
$400 million and $250 million, respectively.
All projected capital and investment expenditures for the above segments are
subject to periodic review and revision and may vary significantly depending on
a number of factors including, but not limited to, industry restructuring,
regulatory constraints, acquisition opportunities, market volatility and
economic trends.
30
Financing Cash Flows
Duke Energy's consolidated capital structure at December 31, 1999, including
short-term debt, was 44% debt, 6% minority interests, 7% trust preferred
securities, 1% preferred stock and 42% common equity. Fixed charges coverage,
calculated using the Securities and Exchange Commission method, was 2.9 times,
4.7 times and 4.1 times for 1999, 1998 and 1997, respectively.
Duke Energy's business expansion opportunities, along with dividends, debt
repayments and operating and investing requirements, are expected to be funded
by cash from operations, external financing, common stock issuances and the
proceeds from certain asset sales.
During 1999, Duke Energy and its subsidiary, Duke Capital Corporation (Duke
Capital), issued a total of $1.9 billion of Senior Notes. The proceeds were
used for general corporate purposes, including reducing commercial paper
indebtedness incurred in connection with acquisitions of electric power
generating assets in Latin America. Global Asset Development, through its
Australian subsidiary, borrowed approximately $450 million under new financing
arrangements, including a combined commercial paper and medium-term note
program, bank facilities and non-recourse financing for certain western
Australian assets. These new Global Asset Development financings are
denominated in either Australian or New Zealand dollars. Issuances from the
combined commercial paper and medium-term note program and the bank facilities
were used to refund bridge financing of assets obtained during 1998 and 1999
and to fund on-going construction expenditures for the Eastern Gas Pipeline and
future projects in Australia. Global Asset Development also assumed
approximately $430 million of non-recourse debt, denominated in Brazilian
reais, in relation to the acquisition of Paranapanema (see Note 2 to the
Consolidated Financial Statements) and borrowed $380 million under a new bank
facility to refinance the California generating assets. For additional
information regarding debt, see Note 10 to the Consolidated Financial
Statements.
Also during the year, Duke Energy's and Duke Capital's business trusts, which
are treated as wholly owned subsidiaries for financial reporting purposes,
issued a total of $500 million of trust preferred securities. See Note 12 to
the Consolidated Financial Statements for additional information on trust
preferred securities.
Under its commercial paper facilities, Duke Energy had the ability to borrow
up to $2.8 billion at both December 31, 1999 and 1998. The commercial paper
facilities consisted of $1.25 billion for Duke Energy and $1.55 billion for
Duke Capital. At December 31, 1999, Global Asset Development also had available
an approximately $500 million combined commercial paper and medium-term note
program. Duke Energy's various bank credit facilities totaled approximately
$3.7 billion (including approximately $320 million related to foreign
facilities) at December 31, 1999 and $2.9 billion at December 31, 1998. At
December 31, 1999, approximately $1.8 billion was outstanding under the
commercial paper facilities and approximately $460 million of borrowings were
outstanding under the bank credit facilities. Certain of the credit facilities
support the issuance of commercial paper, therefore, the issuance of commercial
paper reduces the amount available under these credit facilities (see Note 10
to the Consolidated Financial Statements).
As of December 31, 1999, Duke Energy and its subsidiaries had the ability to
issue up to $2.15 billion aggregate principal amount of debt and other
securities under shelf registrations filed with the Securities and Exchange
Commission. Effective January 7, 2000, the amount available was increased by
$1.5 billion. Such securities may be issued as First and Refunding Mortgage
Bonds, Senior Notes, Subordinated Notes or Preferred Securities.
On December 16, 1999, Duke Energy announced that it had signed definitive
agreements to combine Duke Energy's gas gathering and processing businesses
with Phillips Petroleum's Gas Processing and Marketing unit to form a new
midstream company. The new company will seek to arrange approximately $2.6
billion of debt financing and, upon closing of the transaction, will make a
one-time cash distribution of $1.2 billion to both Duke Energy and Phillips
Petroleum. The new company would then offer approximately 20% of its equity to
the public in 2000 to reduce the debt resulting from the transaction. Such an
offering is conditional upon completion of the transaction and favorable market
conditions. For additional information, see Note 19 to the Consolidated
Financial Statements.
31
To maintain financial flexibility and reduce the amount of financing needed
for growth opportunities, Duke Energy's Board of Directors adopted a dividend
policy in June 1998 that targets 50% of earnings paid out in dividends on
common stock. 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 at which time it intends to re-evaluate its dividend policy.
In April 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 effecting financings, stock splits or
stock dividends, stock plans and other transactions and arrangements involving
the use of common stock.
Duke Energy InvestorChoice Plan, a stock dividend reinvestment plan, allows
investors to reinvest dividends in new issuances of common stock and to
purchase common stock directly from Duke Energy. Issuances under this plan were
not material in 1999, 1998 or 1997.
Duke Energy used authorized but unissued shares of its common stock to meet
1999 and 1998 employee benefit plan contribution requirements. This practice is
expected to continue in 2000.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Risk Policies
Duke Energy is exposed to market risks associated with interest rates,
commodity prices, 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 is comprised of senior executives. The CRMC
has responsibility for oversight of interest rate risk, foreign currency risk,
credit risk and energy risk management, including approval of energy financial
exposure limits.
Interest Rate Risk
Duke Energy is exposed to risk resulting from changes in interest rates as a
result of its issuance of variable-rate debt, fixed-rate debt and trust
preferred securities, commercial paper and auction market preferred stock, as
well as interest rate swaps and interest rate lock agreements. Duke Energy
manages its interest rate exposure by limiting its variable-rate and fixed-rate
exposures to certain percentages of total capitalization, as set by policy, and
by monitoring the effects of market changes in interest rates. Duke Energy may
also enter into financial derivative instruments including, but not limited to,
swaps, options and treasury rate agreements to manage and mitigate interest
rate risk exposure. See Notes 1, 7, 10, 12 and 13 to the Consolidated Financial
Statements for additional information.
Based on a sensitivity analysis as of December 31, 1999, it was estimated
that if market interest rates average 1% higher (lower) in 2000 than in 1999,
earnings before income taxes would decrease (increase) by approximately $24
million. Comparatively, based on a sensitivity analysis as of December 31,
1998, had interest rates averaged 1% higher (lower) in 1999 than in 1998, it
was estimated that earnings before income taxes would have decreased
(increased) by approximately $23 million. These amounts were determined by
considering the impact of the hypothetical interest rates on the variable-rate
securities outstanding as of December 31, 1999 and 1998. In the event of a
significant change in interest rates, management would likely take actions to
manage its exposure to the change. However, due to the uncertainty of the
specific actions that would be taken and their possible effects, the
sensitivity analysis assumes no changes in Duke Energy's financial structure.
Commodity Price Risk
Duke Energy, substantially through its subsidiaries, is exposed to the impact
of market fluctuations in the price of natural gas, electricity and natural gas
liquid products marketed and purchased. Duke Energy employs
32
established policies and procedures to manage its risks associated with these
market fluctuations using various commodity derivatives, including forward
contracts, futures, swaps and options. Market risks associated with commodity
derivatives held for purposes other than trading were not material at December
31, 1999 and 1998. See Notes 1 and 7 to the Consolidated Financial Statements
for additional information.
The risk in the commodity trading portfolio is measured on a daily basis
utilizing a Value-at-Risk model to determine the maximum potential one-day
favorable or unfavorable Daily Earnings at Risk (DER). The DER is monitored
daily in comparison to established thresholds. Other measures are also utilized
to monitor the risk in the commodity trading portfolio on a monthly and annual
basis.
The DER computations are based on a historical simulation, which utilizes
price movements over a specified period to simulate forward price curves in the
energy markets to estimate the favorable or unfavorable impact of one-day's
price movement on the existing portfolio. The historical simulation emphasizes
the most recent market activity, which is considered the most relevant
predictor of immediate future market movements for natural gas, electricity and
petroleum products. The DER computations utilize several key assumptions,
including a 95% confidence level for the resultant price movement and the
holding period specified for the calculation. Duke Energy's DER calculation
includes commodity derivative instruments held for trading purposes. The
estimated potential one-day favorable or unfavorable impact on earnings before
income taxes related to commodity derivatives held for trading purposes at
December 31, 1999 and 1998 was approximately $10 million. The average estimated
potential one-day favorable or unfavorable impact on earnings before income
taxes related to commodity derivatives held for trading purposes was
approximately $11 million and $5 million during 1999 and 1998, respectively.
The increase in average 1999 amounts compared to 1998 is a result of an
increase in the authorized energy financial exposure limit in 1998, which was
approved by the CRMC. Changes in markets inconsistent with historical trends
could cause actual results to exceed predicted limits.
Subsidiaries of Duke Energy are also exposed to market fluctuations in the
prices of NGLs related to their ongoing gathering and processing operating
activities. Duke Energy closely monitors the risks associated with NGL price
changes on its future operations, and where appropriate, uses crude oil and
natural gas commodity instruments to hedge NGL prices. Based on a sensitivity
analysis as of December 31, 1999, it was estimated that if NGL prices average
one cent per gallon less in 2000, earnings before income taxes would decrease
by approximately $6 million, after considering the effect of Duke Energy's
commodity hedge positions. Comparatively, based on sensitivity analysis as of
December 31, 1998, if NGL prices would have averaged one cent per gallon less
in 1999, it was estimated that earnings before income taxes would have
decreased by approximately $8 million.
Equity Price Risk
Duke Energy maintains trust funds, as required by the Nuclear Regulatory
Commission, to fund certain costs of nuclear decommissioning. (See Note 11 to
the Consolidated Financial Statements.) As of December 31, 1999 and 1998, these
funds were invested primarily in domestic and international equity securities,
fixed-rate, fixed-income securities and cash and cash equivalents. Management
believes that its exposure to fluctuations in equity prices or interest rates
will not materially affect consolidated results of operations. See further
discussion in the Current Issues, Nuclear Decommissioning Costs section of
Management's Discussion and Analysis.
Foreign Operations Risk
Duke Energy is exposed to foreign currency risk, sovereign risk and other
foreign operations risk that arise from investments in international affiliates
and businesses owned and operated in foreign countries. To mitigate risks
associated with foreign currency fluctuations, when possible, contracts are
denominated in or indexed to the U.S. dollar or may be hedged through debt
denominated in the foreign currency. Duke Energy also uses foreign currency
derivatives, where possible, to manage its risk related to foreign currency
fluctuations. To monitor its currency exchange rate risks, Duke Energy uses
sensitivity analysis, which measures the impact of a devaluation of the foreign
currencies to which it has exposure.
33
At December 31, 1999, Duke Energy's primary foreign currency exchange rate
exposures were the Brazilian real, the Australian dollar and the Canadian
dollar. Exposures to other foreign currencies were not material. Based on the
sensitivity analysis at December 31, 1999, a 10% devaluation in the currency
exchange rates in Brazil would reduce Duke Energy's financial position by
approximately $65 million and would not significantly affect Duke Energy's
consolidated results of operations or cash flows over the next twelve months.
Based on the sensitivity analysis at December 31, 1999, a 10% devaluation in
other foreign currencies were insignificant to Duke Energy's consolidated
results of operations, financial position or cash flows. Exposures to foreign
currency risks were not material to consolidated results of operations,
financial position or cash flows during 1998.
CURRENT ISSUES
Electric Competition. Wholesale Competition. The Energy Policy Act of 1992
(EPACT) and the FERC's subsequent rulemaking activities have established the
regulatory framework to open the wholesale energy market to competition. EPACT
amended provisions of the Public Utility Holding Company Act of 1935 and the
Federal Power Act to remove certain barriers to a competitive wholesale market.
EPACT permits utilities to participate in the development of independent
electric generating plants for sales to wholesale customers, and also permits
the FERC to order transmission access for third parties to transmission
facilities owned by another entity. It does not, however, permit the FERC to
issue an order requiring transmission access to retail customers. The FERC,
responsible in large measure for implementation of EPACT, has moved vigorously
to implement its mandate, interpreting the statute broadly and issuing orders
for third-party transmission service and a number of rules of general
applicability, including Orders 888 and 889.
Open-access transmission for wholesale customers as defined by the FERC's
final rules provides energy suppliers, including Duke Energy, with
opportunities to sell and deliver capacity and energy at market-based prices.
Duke Energy and several of its non-regulated subsidiaries have been granted
authority by the FERC to act as power marketers. Electric Operations obtained
from the FERC open-access rule the rights to sell capacity and energy at
market-based rates from its own assets. Open access provides another supply
option through which Electric Operations can purchase at attractive rates a
portion of capacity and energy requirements resulting in lower overall costs to
customers. Open access also provides Electric Operations' existing wholesale
customers with competitive opportunities to seek other suppliers for their
capacity and energy requirements.
On December 20, 1999, the FERC issued its Order No. 2000 regarding Regional
Transmission Organizations (RTOs). In its order, the FERC stressed the
voluntary nature of RTO participation by utilities and sets minimum
characteristics and functions that must be met by utilities that participate in
an RTO. The order provides for an open, flexible structure for RTOs to meet the
needs of the market, and provides for the possibility of incentive ratemaking
and other benefits for utilities that participate in 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 order requires each utility subject to the
jurisdiction of the FERC and not already in a FERC-approved RTO to make a
filing by October 15, 2000, that either proposes participation in an RTO that
will be in operation no later than December 15, 2001, or provides a status
report on the utility's progress towards participation in an RTO.
Because Order No. 2000 has just been issued, and may be revised in certain
respects, management cannot estimate its effect on future consolidated results
of operations or financial position.
Retail Competition. Currently, Electric Operations operates as a vertically
integrated, investor-owned utility with exclusive rights to supply electricity
in a franchised service territory--a 20,000-square-mile service territory in
the Carolinas. In its retail business, the NCUC and the PSCSC regulate Electric
Operations' service and rates.
34
Electric industry restructuring is being addressed in all 50 states and in
the District of Columbia. These restructurings will likely impact all entities
owning electric generating assets. The NCUC and the PSCSC are studying the
merits of restructuring the electric utility industry in the Carolinas. During
1999, three electric utility restructuring bills were filed in South Carolina's
House of Representatives. All three bills would 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 May 1997, North Carolina passed a bill that established a study commission
to examine whether competition should be implemented in the state. Members of
this commission include legislators, customers, utilities and a member of an
environmental group. The study commission expects to issue its report to the
General Assembly in 2000.
One of the significant issues the study commission must address is the
approximately $6 billion of debt issued by the two North Carolina municipal
agencies (North Carolina Municipal Power Agency Number 1 and the North Carolina
Eastern Municipal Agency). This debt is related to their joint ownership of
generation assets with Duke Energy and Carolina Power & Light (CP&L). The
municipal power agencies' member municipalities currently have electric rates
higher than either Duke Energy or CP&L and are facing significant rate
increases in the future to service the debt. As a result, the power agencies'
debt and electric rates are economic development issues for the 51 power agency
municipalities and, by extension, for the state as a whole.
On October 26 and 27, 1999, at the request of the study commission, four
proposals were submitted to resolve the municipal debt issue, one of which was
a joint Duke Energy-CP&L proposal. The study commission expects to include a
recommendation to resolve the municipal debt issue in its report to the General
Assembly in 2000.
More than a dozen bills on electric restructuring have been introduced in the
last session of Congress. On October 27, 1999 the U.S. House Commerce
Subcommittee on Energy and Power voted to move H.R. 2944, "The Electricity
Competition and Reliability Act," to the full Commerce Committee. The primary
restructuring issues addressed include repeal of major provisions of the Public
Utility Holding Company Act and the Public Utility Regulatory Policies Act,
reliability, transmission, nuclear decommissioning and state authority.
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 $1.4 billion, including primarily
purchased capacity costs, debt expense and deferred taxes related to regulatory
assets. Duke Energy is recovering substantially all of these regulatory assets
through its current 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 continue to work with customers, legislators
and
35
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.
Natural Gas Competition. Wholesale Competition. 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 in providing pipeline services. The proposed changes
include initiatives to revise pipeline scheduling procedures, receipt and
delivery point policies and penalty policies, and require pipelines to auction
short-term capacity. Other proposed changes would 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 seeks comments on whether its policies are 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 and do not result in
over building and excess capacity. Comments on the NOPR and NOI were due in
April 1999. On September 15, 1999, the FERC issued a new policy statement on
certifying new interstate capacity in response to comments filed on the
certificate issues raised in the NOPR.
Because the ultimate resolution of these issues is unknown, management cannot
estimate the effects of these matters on future consolidated results of
operations or financial position.
Retail Competition. Changes in regulation to allow retail competition could
affect Duke Energy's natural gas transportation contracts with local gas
distribution companies. Natural gas retail deregulation is in the very early
stages of development and management cannot estimate the effects of this matter
on future consolidated results of operations or financial position.
Nuclear Decommissioning Costs. Duke Energy's estimated site-specific nuclear
decommissioning costs total approximately $1.9 billion stated in 1999 dollars
based on decommissioning studies completed in 1999. This estimate includes the
cost of decommissioning plant components not subject to radioactive
contamination. Duke Energy contributes to an external decommissioning trust
fund and maintains an internal reserve to fund these costs.
The balance of the external funds as of December 31, 1999 and 1998 was $703
million and $580 million, respectively. The balance of the internal reserve as
of December 31, 1999 and 1998 was $223 million and $217 million, respectively,
and is reflected in the Consolidated Balance Sheets as Accumulated Depreciation
and Amortization.
Both the NCUC and the PSCSC have granted Duke Energy recovery of estimated
decommissioning costs through retail rates over the expected remaining service
periods of its nuclear plants. Management believes that funding of the
decommissioning costs will not have a material adverse effect on consolidated
results of operations or financial position. See Note 11 to the Consolidated
Financial Statements for additional information.
As of December 31, 1999 and 1998, the external decommissioning trust fund was
invested primarily in domestic and international equity securities, fixed-rate,
fixed-income securities and cash and cash equivalents. Maintaining a portfolio
that includes long-term equity investments maximizes the returns to be utilized
to fund nuclear decommissioning, which in the long-term will better correlate
to inflationary increases in decommissioning costs. However, the equity
securities included in Duke Energy's portfolio are exposed to price
36
fluctuations in equity markets, and the fixed-rate, fixed-income securities are
exposed to changes in interest rates.
Duke Energy actively monitors its portfolio by benchmarking the performance
of its investments against certain indexes and by maintaining, and periodically
reviewing, established target allocation percentages of the assets in its
trusts. Because the accounting for nuclear decommissioning recognizes that
costs are recovered through the Electric Operations segment's rates,
fluctuations in equity prices or interest rates do not affect consolidated
results of operations.
Environmental. Duke Energy is subject to international, federal, state and
local regulations regarding air and water quality, hazardous and solid waste
disposal and other environmental matters.
Manufactured Gas Plants and Superfund Sites. Duke Energy was an operator of
manufactured gas plants until the early 1950s and has entered into a
cooperative effort with the State of North Carolina and other owners of certain
former manufactured gas plant sites to investigate and, where necessary,
remediate these contaminated sites. The State of South Carolina has expressed
interest in entering into a similar arrangement. Duke Energy is considered by
regulators to be a potentially responsible party and may be subject to future
liability at seven federal Superfund sites and two state Superfund sites. While
the cost of remediation of the remaining sites may be substantial, Duke Energy
will share in any liability associated with remediation of contamination at
such sites with other potentially responsible parties. Management believes that
resolution of these matters will not have a material adverse effect on
consolidated results of operations or financial position.
PCB (Polychlorinated Biphenyl) Assessment and Clean-up Programs. In June
1999, the Environmental Protection Agency (EPA) certified that TETCO, a wholly
owned subsidiary of Duke Energy, had completed clean up of PCB contaminated
sites under conditions stipulated by a U.S. Consent Decree in 1989. 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.
Under terms of the agreement with CMS discussed in Note 2 to the Consolidated
Financial Statements, Duke Energy is obligated to complete clean-up of
previously identified contamination at certain agreed-upon sites on the PEPL
and Trunkline systems. These clean-up programs are expected to continue until
2001. The contamination resulted from the past use of lubricants containing
PCBs and the prior use of wastewater collection facilities and other on-site
disposal areas. Soil and sediment testing, to date, has detected no significant
off-site contamination. Duke Energy has communicated with the EPA and
appropriate state regulatory agencies on these matters.
At December 31, 1999 and 1998, remaining estimated clean-up costs on the
TETCO, PEPL and Trunkline systems were accrued and included in the Consolidated
Balance Sheets as Other Current Liabilities and Environmental Clean-up
Liabilities. These cost estimates represent gross clean-up costs expected to be
incurred, have not been discounted or reduced by customer recoveries and
generally do not include fines, penalties or third-party claims. Costs expected
to be recovered from customers have been deferred and are included in the
Consolidated Balance Sheets as Environmental Clean-up Costs.
The federal and state clean-up programs are not expected to interrupt or
diminish Duke Energy's ability to deliver natural gas to customers. Based on
Duke Energy's experience to date and costs incurred for clean-up operations,
management believes the resolution of matters relating to the environmental
issues discussed above will not have a material adverse effect on consolidated
results of operations or financial position.
Air Quality Control. The Clean Air Act Amendments of 1990 require a two-phase
reduction by electric utilities in aggregate annual emissions of sulfur dioxide
and nitrogen oxide by 2000. Duke Energy currently meets all requirements of
Phase I. Duke Energy supports the national objective of protecting air quality
in the most cost-effective manner, and has already reduced emissions by
operating plants efficiently, using nuclear and hydroelectric generation and
implementing various compliance strategies. To meet Phase II requirements by
37
2000, Duke Energy's current strategy includes using low-sulfur coal,
purchasing sulfur dioxide emission allowances and installing low-nitrogen
oxide burners and emission monitoring equipment. Construction activities
needed to comply with Phase II requirements will be completed in the spring of
2000, allowing compliance with year 2000 Phase II requirements. Additional
annual operating expenses of approximately $25 million for low-sulfur coal
premiums, emission allowance purchases and other compliance activities will
occur after 2000. This strategy is contingent upon developments in future
markets for emission allowances, low-sulfur coal, future regulatory and
legislative actions and advances in clean air technologies.
In October 1998, the EPA issued a final ruling on regional ozone control
which requires revised State Implementation Plans for 22 eastern states and
the District of Columbia. This EPA ruling is being challenged in court by var-
ious states, industry and other interests, including the states of North Caro-
lina and South Carolina and Duke Energy. In May 1999, the court ordered that
no state need submit a plan "pending further order of the court." The EPA has
undertaken other ozone-related actions having virtually identical goals. These
actions have likewise been challenged by the same or similar parties. The res-
olution of the October 1998 action is expected to resolve these other ozone-
related actions as well. The North Carolina Environmental Management Commis-
sion is considering several competing proposals to reduce utility emissions of
nitrogen oxide. A proposed rule is anticipated in March 2000 with a final rule
in September 2000. Depending on the resolution of these matters, costs to Duke
Energy may range from approximately $100 million to $600 million for addi-
tional capital improvements.
In October 1999, the EPA sent Duke Energy a request seeking information on
Duke Power's repair and maintenance of its coal-fired plants since 1978. This
is part of the EPA's New Source Reviews (NSR) enforcement initiative, in which
the EPA claims that utilities and others have committed widespread violations
of the Clean Air Act permitting requirements for the past quarter century. In
November 1999, the EPA filed suit against seven utilities and issued an
administrative order to Tennessee Valley Authority alleging numerous NSR
permitting violations. The EPA's allegations run counter to previous EPA
guidance regarding the applicability of the NSR permitting requirements. Duke
Power, along with several other utilities, has routinely undertaken the type
of repair, replacement, and maintenance projects that the EPA now claims are
illegal. A suit has not been instituted against Duke Energy, and while it is
too early to predict any consequences, Duke Energy believes that all of its
electric generation units are properly permitted and have been properly
maintained. Because this matter is in its most preliminary stage with respect
to Duke Energy, management cannot estimate the effects of these matters on
future consolidated results of operations or financial position.
In December 1997, the United Nations held negotiations in Kyoto, Japan to
determine how to minimize global warming caused by, among other things, carbon
dioxide emissions from fossil-fired generating facilities and methane from
natural gas operations. Further negotiations in November 1998 resulted in a
work plan to complete the operational details of the Kyoto agreement by late
2000. If this initiative is adopted in its current form, it could have far
reaching implications to Duke Energy and the entire energy industry. Because
this matter is in the early stages of discussion, management cannot estimate
the effects on future consolidated results of operations or financial
position.
Litigation and Contingencies. For information concerning litigation and
other commitments and contingencies, see Note 14 to the Consolidated Financial
Statements.
Year 2000 Readiness Program. Duke Energy did not experience any disruption
to its operations resulting from the transition to the year 2000. Duke Energy
completed its year 2000 readiness program at all of its business units in
November 1999. Systems will continue to be monitored throughout the year, with
special attention given to the leap year transition. The total cost of the
program, including internal labor as well as incremental costs such as
consulting and contract costs, was approximately $58 million. These costs
exclude replacement systems that, in addition to being Year 2000 ready,
provided significantly enhanced capabilities which benefit operations in
future periods.
New Accounting Standard. In September 1998, Statement of Financial
Accounting Standard (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued. Duke Energy is required to
38
adopt this standard by January 1, 2001. SFAS No. 133 requires that all
derivatives be recognized as either assets or liabilities and measured at fair
value, and it defines the accounting for changes in the fair value of the
derivatives depending on the intended use of the derivative. Duke Energy is
currently reviewing the expected impact of SFAS No. 133 on consolidated results
of operations and financial position.
Subsequent Events. On December 16, 1999, Duke Energy announced that it had
signed definitive agreements to combine Duke Energy's gas gathering and
processing businesses with Phillips Petroleum's Gas Processing and Marketing
unit to form a new midstream company. Under the terms of the agreements, the
new company will seek to arrange approximately $2.6 billion of debt financing
and, upon closing of the transaction, will make a one-time cash distribution of
$1.2 billion to both Duke Energy and Phillips Petroleum. At closing, Duke
Energy will own about 70% of the new company and Phillips Petroleum will own
about 30%. The new company would then offer approximately 20% of its equity to
the public in 2000 to reduce the debt resulting from the transaction. Such an
offering is conditional upon completion of the transaction and favorable market
conditions.
On January 4, 2000, Duke Energy announced that it had entered into a
definitive agreement to purchase, for $386 million, 100% of the stock of El
Paso Energy Corporation's wholly owned subsidiary, East Tennessee Natural Gas
Company, a 1,100-mile pipeline that crosses Duke Energy's TETCO pipeline and
serves the southeastern region of the U.S.
Both transactions are subject to regulatory approval and are expected to
close in the first quarter of 2000.
In January 2000, Duke Energy completed a tender offer to the minority
shareholders of Paranapanema and successfully acquired an additional 51%
economic interest in the company for approximately $280 million. This increased
Duke Energy's economic ownership from approximately 44% to approximately 95%.
Forward-Looking Statements. From time to time, Duke Energy's reports, filings
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; and the effect of accounting policies issued
periodically by accounting standard-setting bodies.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
See "Management's Discussion and Analysis of Results of Operations" and
"Financial Condition, Quantitative and Qualitative Disclosures About Market
Risk."
39
Item 8. Financial Statements and Supplementary Data.
DUKE ENERGY CORPORATION
Consolidated Statements Of Income And Comprehensive Income
Years Ended December 31,
----------------------------
1999 1998 1997
-------- -------- --------
In millions, except
per share amounts
Operating Revenues
Sales, trading and
marketing of natural gas
and petroleum products
(Notes 1 and 7)........... $ 10,922 $ 7,854 $ 8,151
Generation, transmission
and distribution of
electricity (Notes 1 and
4)........................ 4,934 4,586 4,334
Trading and marketing of
electricity (Notes 1 and
7)........................ 3,610 2,788 1,665
Transportation and storage
of natural gas (Notes 1
and 4).................... 1,139 1,450 1,504
Other (Note 8)................ 1,137 932 655
-------- -------- --------
Total operating revenues... 21,742 17,610 16,309
-------- -------- --------
Operating Expenses
Natural gas and petroleum
products purchased (Note
1)........................ 10,636 7,497 7,705
Net interchange and
purchased power (Notes 1,
4 and 5).................. 3,507 2,916 1,960
Fuel used in electric
generation (Notes 1 and
11)....................... 764 767 743
Other operation and
maintenance (Notes 4, 11
and 14)................... 3,701 2,738 2,721
Depreciation and
amortization (Notes 1 and
5)........................ 968 909 841
Property and other taxes... 371 350 369
-------- -------- --------
Total operating expenses... 19,947 15,177 14,339
-------- -------- --------
Operating Income............ 1,795 2,433 1,970
-------- -------- --------
Other Income and Expenses
Deferred returns and
allowance for funds used
during construction (Note
1)........................ 82 88 109
Other, net................. 166 126 29
-------- -------- --------
Total other income and
expenses.................. 248 214 138
-------- -------- --------
Earnings Before Interest and
Taxes...................... 2,043 2,647 2,108
Interest Expense (Notes 7
and 10).................... 601 514 472
Minority Interests (Note
12)........................ 142 96 23
-------- -------- --------
Earnings Before Income
Taxes...................... 1,300 2,037 1,613
Income Taxes (Notes 1 and
6)......................... 453 777 639
-------- -------- --------
Income Before Extraordinary
Item....................... 847 1,260 974
Extraordinary Gain (Loss),
net of tax................. 660 (8) --
-------- -------- --------
Net Income.................. 1,507 1,252 974
-------- -------- --------
Dividends and Premiums on
Redemptions of Preferred
and Preference Stock (Note
13)........................ 20 21 72
-------- -------- --------
Earnings Available For
Common Stockholders........ 1,487 1,231 902
-------- -------- --------
Other Comprehensive Income,
net of tax
Foreign currency
translation adjustments
(Note 1).................. (2) -- --
-------- -------- --------
Total Comprehensive
Income.................... $ 1,485 $ 1,231 $ 902
======== ======== ========
Common Stock Data (Note 1)
Weighted average shares
outstanding............... 365 361 360
Earnings per share (before
extraordinary item)
Basic.................... $ 2.26 $ 3.43 $ 2.51
Dilutive................. $ 2.25 $ 3.42 $ 2.50
Earnings per share
Basic.................... $ 4.08 $ 3.41 $ 2.51
Dilutive................. $ 4.07 $ 3.40 $ 2.50
Dividends per share........ $ 2.20 $ 2.20 $ 1.90
See Notes to Consolidated Financial Statements.
40
DUKE ENERGY CORPORATION
Consolidated Statements Of Cash Flows
Years Ended December 31,
----------------------------
1999 1998 1997
-------- -------- --------
In millions
Cash Flows From Operating Activities
Net income...................................... $ 1,507 $ 1,252 $ 974
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................. 1,151 1,055 983
Extraordinary (gain) loss, net of tax......... (660) 8 --
Injuries and damages accrual.................. 800 -- --
Deferred income taxes......................... (210) (35) 99
Purchased capacity levelization............... 104 88 56
Transition cost recoveries (payments), net.... 95 (28) (36)
(Increase) decrease in
Receivables.................................. (659) (18) (266)
Inventory.................................... (89) (104) (7)
Other current assets......................... (138) (39) (18)
Increase (decrease) in
Accounts payable............................. 477 72 239
Taxes accrued................................ (57) (6) 50
Interest accrued............................. 32 (2) (13)
Other current liabilities.................... 73 84 15
Other, net.................................... 258 4 64
-------- -------- --------
Net cash provided by operating activities..... 2,684 2,331 2,140
-------- -------- --------
Cash Flows From Investing Activities
Capital and investment expenditures............. (5,936) (2,500) (2,028)
Proceeds from sale of subsidiaries.............. 1,900 -- --
Decommissioning, retirements and other.......... 236 24 34
-------- -------- --------
Net cash used in investing activities......... (3,800) (2,476) (1,994)
-------- -------- --------
Cash Flows From Financing Activities
Proceeds from the issuance of
Long-term debt................................ 3,221 1,357 1,618
Guaranteed preferred beneficial interests in
subordinated notes of Duke Energy Corporation
or Subsidiaries.............................. 484 581 339
Common stock and stock options................ 162 176 15
Payments for the redemption of
Long-term debt................................ (1,505) (698) (869)
Common stock.................................. -- -- (25)
Preferred and preference stock................ (20) (180) (224)
Net change in notes payable and commercial
paper.......................................... 58 (350) (290)
Dividends paid.................................. (822) (814) (726)
Other........................................... 22 6 (41)
-------- -------- --------
Net cash provided by (used in) financing
activities................................... 1,600 78 (203)
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents.................................... 484 (67) (57)
Cash received from business acquisitions........ 49 38 --
Cash and cash equivalents at beginning of year.. 80 109 166
-------- -------- --------
Cash and cash equivalents at end of year........ $ 613 $ 80 $ 109
======== ======== ========
Supplemental Disclosures
Cash paid for interest, net of amount
capitalized.................................... $ 541 $ 490 $ 476
Cash paid for income taxes...................... $ 732 $ 733 $ 470
See Notes to Consolidated Financial Statements.
41
DUKE ENERGY CORPORATION
Consolidated Balance Sheets
December 31,
---------------
1999 1998
------- -------
In millions
ASSETS
Current Assets (Note 1)
Cash and cash equivalents (Note 7)............................ $ 613 $ 80
Receivables (Note 7).......................................... 3,248 2,318
Inventory..................................................... 599 543
Current portion of natural gas transition costs (Note 4)...... 81 100
Current portion of purchased capacity costs (Note 5).......... 146 99
Unrealized gains on mark-to-market transactions (Note 7)...... 1,131 1,457
Other (Note 7)................................................ 353 246
------- -------
Total current assets........................................ 6,171 4,843
------- -------
Investments and Other Assets
Investments in affiliates (Notes 8 and 14).................... 1,299 902
Nuclear decommissioning trust funds (Note 11)................. 703 580
Pre-funded pension costs (Note 17)............................ 315 332
Goodwill, net (Notes 1 and 2)................................. 844 495
Notes receivable.............................................. 154 244
Unrealized gains on mark-to-market transactions (Notes 1 and
7)........................................................... 690 396
Other......................................................... 705 283
------- -------
Total investments and other assets.......................... 4,710 3,232
------- -------
Property, Plant and Equipment (Notes 1, 5, 9, 10 and 11)
Cost.......................................................... 30,436 27,128
Less accumulated depreciation and amortization................ 9,441 10,253
------- -------
Net property, plant and equipment........................... 20,995 16,875
------- -------
Regulatory Assets and Deferred Debits (Note 1)
Purchased capacity costs (Note 5)............................. 497 648
Debt expense.................................................. 223 253
Regulatory asset related to income taxes...................... 500 506
Natural gas transition costs (Note 4)......................... 4 80
Environmental clean-up costs (Note 14)........................ 27 69
Other......................................................... 282 300
------- -------
Total regulatory assets and deferred debits................. 1,533 1,856
------- -------
Total Assets................................................... $33,409 $26,806
======= =======
See Notes to Consolidated Financial Statements.
42
DUKE ENERGY CORPORATION
Consolidated Balance Sheets, Continued
December 31,
----------------
1999 1998
------- -------
In millions
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable............................................. $ 2,312 $ 1,754
Notes payable and commercial paper (Notes 7 and 10).......... 267 209
Taxes accrued (Note 1)....................................... 685 119
Interest accrued............................................. 139 109
Current maturities of long-term debt and preferred stock
(Notes 10 and 13)........................................... 515 707
Unrealized losses on mark-to-market transactions (Notes 1 and
7).......................................................... 1,241 1,387
Other (Notes 1 and 14)....................................... 717 670
------- -------
Total current liabilities.................................. 5,876 4,955
------- -------
Long-term Debt (Notes 7 and 10)............................... 8,683 6,272
------- -------
Deferred Credits and Other Liabilities (Note 1)
Deferred income taxes (Note 6)............................... 3,402 3,705
Investment tax credit (Note 6)............................... 225 242
Nuclear decommissioning costs externally funded (Note 11).... 703 580
Environmental clean-up liabilities (Note 14)................. 101 148
Unrealized losses on mark-to-market transactions (Note 7).... 438 362
Other (Note 14).............................................. 2,099 907
------- -------
Total deferred credits and other liabilities............... 6,968 5,944
------- -------
Minority Interests (Note 2)................................... 1,200 253
------- -------
Guaranteed Preferred Beneficial Interests in Subordinated
Notes of Duke Energy Corporation or Subsidiaries (Notes 7 and
12)......................................................... 1,404 919
------- -------
Preferred and Preference Stock (Notes 7 and 13)
Preferred and preference stock with sinking fund
requirements................................................ 71 104
Preferred and preference stock without sinking fund
requirements................................................ 209 209
------- -------
Total preferred and preference stock....................... 280 313
------- -------
Commitments and Contingencies (Notes 5, 11 and 14)
Common Stockholders' Equity (Notes 15 and 16)
Common stock, no par, 1 billion shares authorized; 366
million and 363 million shares outstanding at December 31,
1999 and 1998, respectively................................. 4,603 4,449
Retained earnings............................................ 4,397 3,701
Accumulated other comprehensive income....................... (2) --
------- -------
Total common stockholders' equity.......................... 8,998 8,150
------- -------
Total Liabilities and Stockholders' Equity.................... $33,409 $26,806
======= =======
See Notes to Consolidated Financial Statements.
43
DUKE ENERGY CORPORATION
Consolidated Statements Of Common Stockholders' Equity
Years Ended December 31,
----------------------------
1999 1998 1997
-------- -------- --------
In millions
Common Stock
Balance at beginning of year................... $ 4,449 $ 4,284 $ 4,289
Dividend reinvestment and employee benefits.... 154 165 (9)
Other capital stock transactions, net.......... -- -- 4
-------- -------- --------
Balance at end of year....................... 4,603 4,449 4,284
-------- -------- --------
Retained Earnings
Balance at beginning of year................... 3,701 3,256 3,052
Net income..................................... 1,507 1,252 974
Common stock dividends......................... (802) (794) (682)
Preferred and preference stock dividends and
premiums on redemptions (Note 13)............. (20) (21) (72)
Other capital stock transactions, net.......... 11 8 (16)
-------- -------- --------
Balance at end of year....................... 4,397 3,701 3,256
-------- -------- --------
Accumulated Other Comprehensive Income
Balance at beginning of year................... -- -- --
Foreign currency translation adjustments (Note
1)............................................ (2) -- --
-------- -------- --------
Balance at end of year....................... (2) -- --
-------- -------- --------
Total Common Stockholders' Equity................ $ 8,998 $ 8,150 $ 7,540
======== ======== ========
See Notes to Consolidated Financial Statements
44
DUKE ENERGY CORPORATION
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1999, 1998 and 1997
1. Summary of Significant Accounting Policies
Consolidation. The consolidated financial statements include the accounts of
all of Duke Energy Corporation's majority-owned subsidiaries after the
elimination of significant intercompany transactions and balances. Investments
in other entities that are not controlled by Duke Energy Corporation, but where
it has significant influence over operations, are accounted for using the
equity method.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Although these estimates are based on management's knowledge of current
and expected future events, actual results could differ from those estimates.
"Duke Energy" is used in these Notes as a collective reference to Duke Energy
Corporation and its subsidiaries.
Cash and Cash Equivalents. All liquid investments with maturities at date of
purchase of three months or less are considered cash equivalents.
Inventory. Inventory consists primarily of materials and supplies, gas held
for transmission, processing and sales commitments, and coal held for electric
generation. Inventory is recorded at the lower of cost or market, primarily
using the average cost method.
Accounting for Risk Management and Commodity Trading Activities. Duke Energy,
primarily through its subsidiaries, manages its exposure to risk from existing
contractual commitments and provides risk management services to its customers
and suppliers through commodity derivatives, including forward contracts,
futures, over-the-counter swap agreements and options.
Commodity derivatives utilized for trading purposes are accounted for using
the mark-to-market method. Under this methodology, these instruments are
adjusted to market value, and the unrealized gains and losses are recognized in
current period income and are included in the Consolidated Statements of Income
and Comprehensive Income as Natural Gas and Petroleum Products Purchased or Net
Interchange and Purchased Power, and in the Consolidated Balance Sheets as
Unrealized Gains or Losses on Mark-to-Market Transactions.
Commodity derivatives such as futures, forwards, over-the-counter swap
agreements and options are also utilized for non-trading purposes to hedge the
impact of market fluctuations in the price of natural gas, electricity and
other energy-related products. To qualify as a hedge, the price movements in
the commodity derivatives must be highly correlated with the underlying hedged
commodity. Under the deferral method of accounting, gains and losses related to
commodity derivatives which qualify as hedges are recognized in income when the
underlying hedged physical transaction closes and are included in the
Consolidated Statements of Income and Comprehensive Income as Natural Gas and
Petroleum Products Purchased, or Net Interchange and Purchased Power. If the
commodity derivative is no longer sufficiently correlated to the underlying
commodity, or if the underlying commodity transaction closes earlier than
anticipated, the deferred gains or losses are recognized in income.
Duke Energy periodically uses interest rate swaps, accounted for under the
accrual method, to manage the interest rate characteristics associated with
outstanding debt. Interest rate differentials to be paid or received as
interest rates change are accrued and recognized as an adjustment to interest
expense. The amount accrued as either a payable to or receivable from
counterparties is included in the Consolidated Balance Sheets as Regulatory
Assets and Deferred Debits.
45
DUKE ENERGY CORPORATION
Notes to Consolidated Financial Statements -- Continued
1. Summary of Significant Accounting Policies -- Continued
Duke Energy also periodically utilizes interest rate lock agreements to hedge
interest rate risk associated with new debt issuances. Under the deferral
method of accounting, gains or losses on such agreements, when settled, are
deferred in the Consolidated Balance Sheets as Long-term Debt and are amortized
in the Consolidated Statements of Income and Comprehensive Income as an
adjustment to interest expense.
Duke Energy is exposed to foreign currency risk from investments in
international affiliates and businesses owned and operated in foreign
countries. To mitigate risks associated with foreign currency fluctuations,
when possible, contracts are denominated in or indexed to the U.S. dollar or
may be hedged through debt denominated in the foreign currency. Duke Energy
also uses foreign currency derivatives, where possible, to hedge its risk
related to foreign currency fluctuations. To qualify as a hedge, there must be
a high degree of correlation between price movements in the derivative and the
item designated as being hedged. These derivatives are accounted for under the
deferral method previously described under commodity derivatives used for non-
trading purposes.
Duke Energy also enters into foreign currency swap agreements to manage
foreign currency risks associated with energy contracts denominated in foreign
currencies. These agreements are accounted for under the mark-to-market method
previously described.
Goodwill. Goodwill represents the excess of acquisition costs over the fair
value of the net assets of an acquired business. The goodwill created by Duke
Energy's acquisitions is amortized on a straight-line basis over the useful
lives of the assets, ranging from 10 to 40 years. The amount of goodwill
reported on the Consolidated Balance Sheets as of December 31, 1999 and 1998,
respectively, was $844 million and $495 million, net of accumulated
amortization of $218 million and $166 million. See Note 2 to the Consolidated
Financial Statements for information on significant goodwill additions.
Property, Plant and Equipment. Property, plant and equipment are stated at
original cost. Duke Energy capitalizes all construction-related direct labor
and material costs, as well as indirect construction costs. Indirect costs
include general engineering, taxes and the cost of money. The cost of renewals
and betterments that extend the useful life of property, plant and equipment is
also capitalized. The cost of repairs and replacements is charged to expense as
incurred. Depreciation is generally computed using the straight-line method.
The composite weighted-average depreciation rates, excluding nuclear fuel, were
3.73%, 3.82% and 3.67% for 1999, 1998 and 1997, respectively.
When property, plant and equipment maintained by Duke Energy's regulated
operations are retired, the original cost plus the cost of retirement, less
salvage, is charged to accumulated depreciation and amortization. When entire
regulated operating units are sold or non-regulated properties are retired or
sold, the property and related accumulated depreciation and amortization
accounts are reduced, and any gain or loss is recorded in income, unless
otherwise required by the Federal Energy Regulatory Commission (FERC).
Impairment of Long-Lived Assets. The recoverability of long-lived assets and
intangible assets are reviewed whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable. Such
evaluation is based on various analyses, including undiscounted cash flow
projections.
Unamortized Debt Premium, Discount and Expense. Premiums, discounts and
expenses incurred in connection with the issuance of presently outstanding
long-term debt are amortized over the terms of the respective issues. Any call
premiums or unamortized expenses associated with refinancing higher-cost debt
obligations used to finance regulated assets and operations are amortized
consistent with regulatory treatment of those items.
Environmental Expenditures. Environmental expenditures that relate to an
existing condition caused by past operations and do not contribute to current
or future revenue generation are expensed. Environmental
46
DUKE ENERGY CORPORATION
Notes to Consolidated Financial Statements -- Continued
1. Summary of Significant Accounting Policies -- Continued
expenditures relating to current or future revenues are expensed or capitalized
as appropriate. Liabilities are recorded when environmental assessments and/or
clean-ups are probable and the costs can be reasonably estimated. Certain of
these environmental assessments and clean-up costs are expected to be recovered
from Natural Gas Transmission customers and have, therefore, been deferred and
are included in the Consolidated Balance Sheets as Environmental Clean-up
Costs.
Cost-Based Regulation. Duke Energy's regulated operations are subject to the
provisions of Statement of Financial Accounting Standards (SFAS) No. 71,
"Accounting for the Effects of Certain Types of Regulation." Accordingly,
certain assets and liabilities that result from the regulated ratemaking
process are recorded that would not be recorded under generally accepted
accounting principles for non-regulated entities. These regulatory assets and
liabilities are classified in the Consolidated Balance Sheets as Regulatory
Assets and Deferred Debits, and Deferred Credits and Other Liabilities,
respectively. The applicability of SFAS No. 71 is routinely evaluated, and
factors such as regulatory changes and the impact of competition are
considered. Discontinuing cost-based regulation or increasing competition might
require companies to reduce their asset balances to reflect a market basis less
than cost and to write off their associated regulatory assets. Management
cannot predict the potential impact, if any, of discontinuing cost-based
regulation or increasing competition on future financial position or
consolidated results of operations. However, Duke Energy continues to position
itself to effectively meet these challenges by maintaining competitive prices.
Common Stock Options. Duke Energy accounts for stock-based compensation using
the intrinsic method of accounting. Under this method, compensation cost, if
any, is measured as the excess of the quoted market price of Duke Energy's
stock at the date of the grant over the amount an employee must pay to acquire
the stock. Restricted stock is recorded as compensation cost over the requisite
vesting period based on the market value on the date of the grant. Pro forma
disclosures utilizing the fair value accounting method are included in Note 16
to the Consolidated Financial Statements.
Revenues. Revenues on sales of electricity and transportation and storage of
natural gas are recognized as service is provided. Revenues on sales of natural
gas and petroleum products, as well as electricity, gas and other energy
products marketed, are recognized in the period of delivery. Receivables on the
Consolidated Balance Sheets included $207 million and $193 million as of
December 31, 1999 and 1998, respectively, for electric service that has been
provided but not yet billed to customers. When rate cases are pending final
approval, a portion of the revenues is subject to possible refund. Reserves are
established where required for such cases.
Nuclear Fuel. Amortization of nuclear fuel is included in the Consolidated
Statements of Income and Comprehensive Income as Fuel Used in Electric
Generation. The amortization is recorded using the units-of-production method.
Deferred Returns and Allowance for Funds Used During Construction (AFUDC).
Deferred returns represent the estimated financing costs associated with
funding certain regulatory assets. These regulatory assets primarily arose from
the funding of purchased capacity costs above levels collected in rates.
Deferred returns are non-cash items and are primarily recognized as an addition
to Purchased Capacity Costs with an offsetting credit to Other Income and
Expenses.
AFUDC represents the estimated debt and equity costs of capital funds
necessary to finance the construction of new regulated facilities. AFUDC is a
non-cash item and is recognized as a cost of Property, Plant and Equipment,
with offsetting credits to Other Income and Expenses and to Interest Expense.
After construction is completed, Duke Energy is permitted to recover these
costs, including a fair return, through their inclusion in rate base and in the
provision for depreciation.
47
DUKE ENERGY CORPORATION
Notes to Consolidated Financial Statements -- Continued
1. Summary of Significant Accounting Policies -- Continued
Rates used for capitalization of deferred returns and AFUDC by Duke Energy's
regulated operations are calculated in compliance with FERC rules.
Foreign Currency Translation. Assets and liabilities of Duke Energy's
international operations, where the local currency is the functional currency,
have been translated at year-end exchange rates, and revenues and expenses have
been translated using average exchange rates prevailing during the year.
Adjustments resulting from translation are included in the Consolidated
Statements of Income and Comprehensive Income as Foreign Currency Translation
Adjustments. The financial statements of international operations, where the
U.S. dollar is the functional currency, reflect certain transactions
denominated in the local currency that have been remeasured in U.S. dollars.
The remeasurement of local currencies into U.S. dollars creates gains and
losses from foreign currency transactions that are included in consolidated net
income.
Income Taxes. Duke Energy and its subsidiaries file a consolidated federal
income tax return. Deferred income taxes have been provided for temporary
differences. Temporary differences occur when events and transactions
recognized for financial reporting result in taxable or tax-deductible amounts
in different periods. Investment tax credits have been deferred and are being
amortized over the estimated useful lives of the related properties.
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.
1999 1998 1997
---- ---- ----
In millions
Denominator for Earnings per Share
Denominator for basic earnings per share (weighted average
shares outstanding)....................................... 365 361 360
Assumed exercise of dilutive stock options................. (a) 1 2
--- --- ---
Denominator for dilutive earnings per share................ 365 362 362
=== === ===
--------
(a) While Duke Energy had dilutive stock options as of December 31,
1999, the amount did not round to one million.
Extraordinary Items. In 1999, Duke Energy realized an extraordinary gain of
$660 million, or $1.82 per share, relating to the sale of certain pipeline
companies. See Note 2 to the Consolidated Financial Statements for additional
information on the extraordinary item.
In January 1998, TEPPCO Partners, L.P. (TEPPCO), 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.
New Accounting Standard. In September 1998, SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," was issued. Duke Energy is
required to adopt this standard by January 1, 2001. SFAS No. 133 requires that
all derivatives be recognized as either assets or liabilities and measured at
fair value, and it defines the accounting for changes in the fair value of the
derivatives depending on the intended use of the
48
DUKE ENERGY CORPORATION
Notes to Consolidated Financial Statements -- Continued
1. Summary of Significant Accounting Policies -- Continued
derivative. Duke Energy is currently reviewing the expected impact of SFAS No.
133 on consolidated results of operations and financial position.
Reclassifications. Certain amounts have been reclassified in the Consolidated
Financial Statements to conform to the current presentation.
2. Business Combinations, Acquisitions and Dispositions
Business Combinations: PanEnergy Corp (PanEnergy). On June 18, 1997, Duke
Power Company (Duke Power) changed its name to Duke Energy Corporation and
completed a stock-for-stock merger with PanEnergy (the merger). PanEnergy was
involved in the gathering, processing, transportation and storage of natural
gas; the production of natural gas liquids (NGLs); and the marketing of natural
gas, electricity and other energy-related products. Pursuant to the merger
agreement, Duke Energy issued 158.3 million shares of its common stock in
exchange for all of the outstanding common stock of PanEnergy. Accordingly,
each share of PanEnergy common stock outstanding was converted into the right
to receive 1.0444 shares of Duke Energy's common stock. In addition, each
outstanding option to purchase PanEnergy common stock became an option to
purchase common stock of Duke Energy, adjusted accordingly. The merger was
accounted for as a pooling of interests; therefore, the Consolidated Financial
Statements and other financial information included in this Annual Report for
periods prior to the merger include the combined historical financial results
of Duke Power and PanEnergy.
Business Acquisitions: For acquisitions accounted for using the purchase
method, assets and liabilities have been consolidated as of the purchase date
and earnings from the acquisitions have been included in consolidated earnings
of Duke Energy subsequent to the purchase date. Assets acquired and liabilities
assumed are recorded at their estimated fair values, and the excess of the
purchase price over the estimated fair value of the net identifiable assets and
liabilities acquired are recorded as goodwill.
Dominion Resources' Hydroelectric, Natural Gas and Diesel Power Generation
Businesses. In August 1999, Duke Energy, through its wholly owned subsidiary,
Duke Energy International, LLC (Duke Energy International) reached a definitive
agreement with Dominion Resources, Inc. (Dominion Resources) to acquire its
portfolio of hydroelectric, natural gas and diesel power generation businesses
in Argentina, Belize, Bolivia and Peru for approximately $405 million. In
October 1999, Duke Energy International completed the purchase of the
businesses in Belize and Peru from Dominion Resources, as well as acquired
additional ownership interests in the Peru business (Egenor) from two other
parties for $152 million in cash and certain other ownership interests in South
America. The purchase increased Duke Energy International's ownership in Egenor
from approximately 30% to 90%. The completion of the purchases in Argentina and
Bolivia are subject to receiving appropriate governmental consents and
approvals and are expected to close by mid-2000.
Assets and liabilities of the Belize and Peru businesses have been recorded
at preliminary fair values along with goodwill of $74 million which is being
amortized on a straight-line basis over 35 to 40 years. The final purchase
price allocation and estimated life of goodwill are subject to adjustment when
additional information concerning asset and liability valuations is finalized
and the evaluation of certain pre-acquisition contingent liabilities has been
completed.
Companhia de Geracao de Energia Eletrica Paranapanema (Paranapanema). In
August 1999, Duke Energy International entered a series of transactions to
complete a $761 million purchase of a controlling voting interest and an
approximate 44% economic interest in Paranapanema, an electric generating
company in
49
DUKE ENERGY CORPORATION
Notes to Consolidated Financial Statements -- Continued
2. Business Combinations, Acquisitions and Dispositions -- Continued
Brazil. Assets and liabilities have been recorded at preliminary fair values
along with goodwill of $134 million which is being amortized on a straight-line
basis over 40 years. The final purchase price allocation and estimated life of
goodwill are subject to adjustment when additional information concerning asset
and liability valuations is finalized and the evaluation of certain pre-
acquisition contingent liabilities has been completed.
In January 2000, Duke Energy completed a tender offer to the minority
shareholders of Paranapanema and successfully acquired an additional 51%
economic interest in the company for approximately $280 million. This increased
Duke Energy's economic ownership from approximately 44% to approximately 95%.
See Note 19 to the Consolidated Financial Statements.
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 NGL marketing activities
(collectively, "the UPR acquisition"). Goodwill of $135 million has been
recorded and is being amortized on a straight-line basis over 15 to 20 years.
The final purchase price allocation and estimated life of goodwill are subject
to adjustment pending additional information concerning asset and liability
valuations and the evaluation of certain pre-acquisition contingent
liabilities.
Dispositions: PEPL Companies and Trunkline LNG. On March 29, 1999, wholly
owned subsidiaries of Duke Energy 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 retained 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 retained
by Duke Energy.
The pro forma results of operations for acquisitions and dispositions do not
materially differ from reported results.
50
DUKE ENERGY CORPORATION
Notes to Consolidated Financial Statements -- Continued
3. Business Segments
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 U.S. and abroad. Duke Energy provides these and
other services through seven business segments:
. Electric Operations
. Natural Gas Transmission
. Field Services
. Trading and Marketing
. Global Asset Development
. Other Energy Services
. Real Estate Operations
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 FERC, the
North Carolina Utilities Commission (NCUC) and the Public Service Commission of
South Carolina (PSCSC).
Natural Gas Transmission 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 2 to the Consolidated Financial Statements. The interstate natural gas
transmission and storage operations are subject to the rules and regulations of
the FERC.
Field Services gathers, processes, transports and markets natural gas and
produces, transports and markets 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 energy trading operations, with Mobil Corporation
owning a 40% minority interest. This segment also includes certain other
trading activities and limited hydrocarbon exploration and production
activities that are wholly owned by Duke Energy.
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)
and Duke Energy International.
Other Energy Services provides engineering, consulting, construction and
integrated energy solutions worldwide, primarily through Duke Engineering &
Services, Inc., Duke/Fluor Daniel and DukeSolutions, Inc.
Real Estate Operations conducts its business through Crescent Resources,
Inc., which develops high quality commercial and residential real estate
projects and manages land holdings in the southeastern U.S.
Duke Energy's reportable segments are strategic business units that offer
different products and services and are each managed separately. The accounting
policies for the segments are the same as those described in Note 1 to the
Consolidated Financial Statements. Management evaluates segment performance
based on earnings before interest and taxes (EBIT) after deducting minority
interests. EBIT presented in the accompanying table includes intersegment sales
accounted for at prices representative of unaffiliated party
51
DUKE ENERGY CORPORATION
Notes to Consolidated Financial Statements -- Continued
3. Business Segments -- Continued
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.
Other Operations primarily includes communication services, water services
and certain unallocated corporate items.
Business Segment Data
Depreciation Capital and
Unaffiliated Intersegment Total and Investment Segment
Revenues Revenues Revenues EBIT Amortization Expenditures Assets
------------ ------------ -------- ------- ------------ ------------ -------
In millions
Year Ended December 31,
1999
Electric Operations..... $ 4,700 $ -- $ 4,700 $ 856 $542 $ 759 $13,133
Natural Gas
Transmission........... 1,100 106 1,206 627 126 261 3,897
Field Services.......... 2,883 707 3,590 144 131 1,630 3,565
Trading and Marketing... 11,334 459 11,793 70 12 104 4,060
Global Asset
Development............ 612 165 777 181 104 2,703 6,673
Other Energy Services... 886 103 989 (94) 14 94 612
Real Estate Operations.. 233 -- 233 176 9 368 983
Other Operations........ (6) 44 38 (9) 30 17 1,298
Eliminations and
Minority Interests..... -- (1,584) (1,584) 92 -- -- (812)
------- ------- ------- ------- ---- ------ -------
Total Consolidated.... $21,742 $ -- $21,742 $ 2,043 $968 $5,936 $33,409
======= ======= ======= ======= ==== ====== =======
Year Ended December 31,
1998
Electric Operations..... $ 4,626 $ -- $ 4,626 $ 1,513 $522 $ 586 $12,953
Natural Gas
Transmission........... 1,426 102 1,528 702 215 290 4,996
Field Services.......... 2,094 545 2,639 76 80 304 1,893
Trading and Marketing... 8,614 171 8,785 81 11 8 3,233
Global Asset
Development............ 237 82 319 64 31 1,027 2,061
Other Energy Services... 436 85 521 10 12 41 376
Real Estate Operations.. 181 -- 181 142 6 217 724
Other Operations........ (4) 26 22 2 32 27 968
Eliminations and
Minority Interests..... -- (1,011) (1,011) 57 -- -- (398)
------- ------- ------- ------- ---- ------ -------
Total Consolidated.... $17,610 $ -- $17,610 $ 2,647 $909 $2,500 $26,806
======= ======= ======= ======= ==== ====== =======
Year Ended December 31,
1997
Electric Operations..... $ 4,401 $ -- $ 4,401 $ 1,282 $498 $ 743 $12,958
Natural Gas
Transmission........... 1,468 104 1,572 624 229 247 5,059
Field Services.......... 2,481 574 3,055 157 71 157 1,855
Trading and Marketing... 7,411 78 7,489 23 7 18 1,857
Global Asset
Development............ 109 14 123 4 9 348 988
Other Energy Services... 343 33 376 18 6 47 223
Real Estate Operations.. 124 -- 124 98 4 223 594
Other Operations........ (28) -- (28) (120) 17 245 941
Eliminations and
Minority Interests..... -- (803) (803) 22 -- -- (446)
------- ------- ------- ------- ---- ------ -------
Total Consolidated.... $16,309 $ -- $16,309 $ 2,108 $841 $2,028 $24,029
======= ======= ======= ======= ==== ====== =======
52
DUKE ENERGY CORPORATION
Notes to Consolidated Financial Statements -- Continued
3. Business Segments -- Continued
In 1999, foreign operations consisted of 10% of consolidated revenues and 15%
of consolidated long-lived assets, primarily in Canada and Latin America.
Foreign operations were not material for 1998 and 1997.
4. Regulatory Matters
Electric Operations. The NCUC and the PSCSC approve rates for retail electric
sales within their respective states. The FERC approves Electric Operations'
rates for electric sales to wholesale customers. Electric sales to the other
joint owners of the Catawba Nuclear Station, which represent a majority of
Electric Operations' electric wholesale revenues, are set through contractual
agreements.
In 1997, in conjunction with its merger with PanEnergy, Duke Energy agreed to
cap the base electric rates for retail customers at existing levels through
2000, with very limited exceptions. Duke Energy also agreed to freeze rates,
except for the market-based rates, for transmission and wholesale electric
sales. In addition, Duke Energy agreed to a cap on the rates charged to the
other joint owners of Catawba Nuclear Station under the interconnection
agreements and on the reimbursement of certain costs related to administration
and general expenses and general plant costs under operation and fuel
agreements. Management believes that these agreements will not have a material
adverse effect on consolidated results of operations or financial position.
Fuel costs are reviewed semiannually in the wholesale jurisdiction and
annually in the South Carolina retail jurisdiction, with provisions for
reviewing such costs in base rates. In the North Carolina retail jurisdiction,
a review of fuel costs in rates is required annually and during general rate
case proceedings. All jurisdictions allow Duke Energy to adjust electric rates
for past over- or under-recovery of fuel costs. Therefore, the difference
between actual fuel costs incurred for electric operations and fuel costs
recovered through rates is reflected in revenues. The stipulation agreements
related to the merger do not apply to the fuel cost adjustments.
Certain of Electric Operations' electric wholesale customers, excluding the
other Catawba Nuclear Station joint owners, initiated proceedings in 1995
before the FERC concerning rate-related matters. Duke Energy and nine of its
eleven wholesale customers entered into a settlement in July 1996 which reduced
the customers' electric rates by approximately 9%. These contracts will be in
effect through 2001, subject to annual renewals thereafter. Both of the
customers that did not enter into the settlement signed agreements and began
purchasing electricity from other suppliers in 1997. Management believes that
these agreements will not have a material adverse impact on consolidated
results of operations or financial position.
In December 1997, Duke Energy filed applications with the FERC, NCUC and
PSCSC for authority to combine Nantahala Power and Light (a wholly owned
subsidiary) and Duke Power. Duke Energy received the necessary approvals in
June, April and February 1998, respectively. Nantahala Power and Light began
operations as a division of Duke Power effective August 3, 1998.
On December 20, 1999, the FERC issued Order 2000, which encourages
transmission owners to voluntarily join Regional Transmission Organizations
(RTOs) to increase access to the nation's power grid. All public utilities that
own, operate, or control interstate electric transmission are required to file
with the FERC by October 15, 2000. This filing must describe the company's
proposal to join an RTO, including a description of efforts to participate,
reasons for not participating, plans for further work towards participation
and/or any obstacles in participation. All RTOs are to be operational by
December 15, 2001.
Natural Gas Transmission. Duke Energy's interstate natural gas pipelines
primarily provide transportation and storage services pursuant to FERC Order
636. Order 636 allows pipelines to recover eligible
53
DUKE ENERGY CORPORATION
Notes to Consolidated Financial Statements -- Continued
4. Regulatory Matters -- Continued
costs resulting from implementation of the order (transition costs). In 1994,
the FERC approved Texas Eastern Transmission Corporation's (TETCO) settlement
resolving regulatory issues related primarily to Order 636 transition costs and
a number of other issues related to services prior to Order 636. Under the 1994
settlement, TETCO's liability for transition costs was estimated based on the
amount of producers' natural gas reserves and other factors. In 1998, TETCO
favorably resolved all remaining gas purchase contracts, recognizing $39
million of income ($24 million after tax). In addition, the FERC approved a
settlement filed by TETCO, which accelerates recovery of natural gas transition
costs. The 1998 settlement is not expected to have a material adverse effect on
the consolidated results of operations or financial position.
Global Asset Development. Three California electric generating plants, Moss
Landing, South Bay and Oakland, sell electricity under the terms of Reliability
Must Run Agreements with the California Independent System Operator, which
purchases electricity at FERC regulated rates. Moss Landing and Oakland have
entered into settlement agreements with respect to the rates to be paid to them
by the Independent System Operator. Those settlements were approved by the FERC
in January 2000. South Bay has not reached a final agreement with respect to
its electric rates and, therefore, its rates are subject to partial refund or
surcharge. Management believes that the final resolution of this matter will
not have a material adverse effect on consolidated results of operations or
financial position.
5. Joint Ownership of Generating Facilities
Joint Ownership of Catawba Nuclear Station
Ownership
Owner Interest
----- ---------
North Carolina Municipal Power Agency Number 1 (NCMPA)............. 37.5%
North Carolina Electric Membership Corporation (NCEMC)............. 28.125%
Duke Energy Corporation............................................ 12.5%
Piedmont Municipal Power Agency (PMPA)............................. 12.5%
Saluda River Electric Cooperative, Inc. (Saluda River)............. 9.375%
--------
100%
========
As of December 31, 1999, $523 million of Property, Plant and Equipment and
$243 million of accumulated depreciation and amortization represented Duke
Energy's investment in Catawba Nuclear Station Units 1 and 2. Duke Energy's
share of operating costs is included in the Consolidated Statements of Income
and Comprehensive Income.
Duke Energy entered into contractual interconnection agreements with the
other joint owners of Catawba Nuclear Station to purchase declining percentages
of the generating capacity and energy from the station. These purchased power
agreements became effective in 1985 and 1986. The purchased power agreements
were established for fifteen years for NCMPA and PMPA and ten years for NCEMC
and Saluda River.
The portion of purchased capacity subject to levelization not recovered in
rates was deferred. Duke Energy is recovering the accumulated balance,
including returns on the deferred balance, over a period expected to end in
2004. Jurisdictional levelizations are intended to recover total costs,
including deferred returns, and are subject to adjustments, including final
true-ups. The current levelized approved revenues are approximately $186
million.
54
DUKE ENERGY CORPORATION
Notes to Consolidated Financial Statements -- Continued
5. Joint Ownership of Generating Facilities -- Continued
For the years ended December 31, 1999, 1998 and 1997, purchased capacity and
energy costs from the other joint owners was approximately $62 million, $88
million and $120 million, respectively. These amounts, after adjustments for
the costs of capacity purchased not reflected in current rates, are included in
the Consolidated Statements of Income and Comprehensive Income as Net
Interchange and Purchased Power. As of December 31, 1999 and 1998, $643 million
and $747 million, respectively, associated with the cost of capacity purchased
but not reflected in current rates have been accumulated in the Consolidated
Balance Sheets as Purchased Capacity Costs and Current Portion of Purchased
Capacity Costs.
The interconnection agreements also provide for supplemental power sales by
Duke Energy to the other joint owners of Catawba Nuclear Station to satisfy
their capacity and energy needs beyond the capacity and energy which they
retain from the station or potentially acquire in the form of other resources.
The agreements
further provide the other joint owners the ability to secure such supplemental
requirements outside of these contractual agreements following an appropriate
notice period. NCEMC, Saluda River and NCMPA have given such appropriate notice
effective January 1, 2001. PMPA will continue to receive supplemental power
sales from Duke Energy through December 31, 2005. As the other joint owners
retain more capacity and energy from the station, or obtain additional capacity
and energy from a third party, supplemental power sales are expected to
decline. Management believes this will not have a material adverse effect on
consolidated results of operations or financial position.
6. Income Taxes
Income Tax Expense
For the Years Ended
December 31,
----------------------
1999 1998 1997
------ ------ ------
In millions
Current income taxes
Federal............................................ $ 526 $ 673 $ 433
State.............................................. 138 138 100
------ ------ ------
Total current income taxes....................... 664 811 533
------ ------ ------
Deferred income taxes, net
Federal............................................ (127) (15) 112
State.............................................. (65) (4) 9
------ ------ ------
Total deferred income taxes, net................. (192) (19) 121
------ ------ ------
Investment tax credit amortization................... (19) (15) (15)
------ ------ ------
Total income tax expense............................. $ 453 $ 777 $ 639
====== ====== ======
55
DUKE ENERGY CORPORATION
Notes to Consolidated Financial Statements -- Continued
6. Income Taxes -- Continued
Income Tax Expense Reconciliation to Statutory Rate
For the Years Ended
December 31,
----------------------
1999 1998 1997
------ ------ ------
In millions
Income tax, computed at the statutory rate of 35%.. $ 455 $ 713 $ 565
Adjustments resulting from:
State income tax, net of federal income tax
effect.......................................... 47 90 71
Favorable resolution of tax issues............... (30) -- --
Other items, net................................. (19) (26) 3
------ ------ ------
Total income tax expense....................... $ 453 $ 777 $ 639
------ ------ ------
Effective tax rate................................. 34.9% 38.1% 39.6%
====== ====== ======
Net Deferred Income Tax Liability Components
December 31,
----------------
1999 1998
------- -------
In millions
Deferred credits and other liabilities.................... $ 556 $ 268
Alternative minimum tax credit carryforward............... -- 30
Other..................................................... 8 36
------- -------
Total deferred income tax assets........................ 564 334
Valuation allowance....................................... (62) (52)
------- -------
Net deferred income tax assets.......................... 502 282
------- -------
Investments and other assets.............................. (245) (207)
Property, plant and equipment............................. (2,483) (2,405)
Regulatory assets and deferred debits..................... (427) (542)
Regulatory asset related to restating to pre-tax basis.... (432) (435)
Other..................................................... -- (69)
------- -------
Total deferred income tax liabilities................... (3,587) (3,658)
------- -------
State deferred income tax, net of federal tax effect...... (340) (357)
------- -------
Net deferred income tax liability......................... $(3,425) $(3,733)
======= =======
The change in the net deferred income tax liability from 1998 to 1999 differs
from the 1999 deferred income tax expense as a result of the removal of net
deferred income tax liabilities due to the sale of the PEPL Companies and
Trunkline LNG.
7. Risk Management and Financial Instruments
Commodity Derivatives. Duke Energy, primarily through Trading and Marketing,
manages its exposure to risk from existing contractual commitments and provides
risk management services to its customers through forward contracts, futures,
over-the-counter swap agreements and options (collectively, "commodity
derivatives"). Energy commodity forward contracts involve physical delivery of
an energy commodity. Energy commodity futures involve the buying or selling of
natural gas, electricity or other energy-related commodities at a fixed price.
Over-the-counter swap agreements require Duke Energy to receive or make
payments based on
56
DUKE ENERGY CORPORATION
Notes to Consolidated Financial Statements -- Continued
7. Risk Management and Financial Instruments -- Continued
the difference between a specified price and the actual price of the underlying
commodity. Energy commodity options held to mitigate price risk provide the
right, but not the requirement, to buy or sell energy-related commodities at a
fixed price.
Commodity Derivatives -- Trading. Duke Energy engages in the trading of
commodity derivatives, and therefore experiences net open positions. Duke
Energy manages open positions with strict policies which limit its exposure to
market risk and require daily reporting to management of potential financial
exposure. These policies include statistical risk tolerance limits using
historical price movements to calculate a daily earnings at risk measurement.
The weighted-average life of Duke Energy's commodity risk portfolio was
approximately 20 months at December 31, 1999.
Net Gains Recognized from Trading Commodity Derivatives
1999 1998 1997
---- ---- ----
In millions
Natural gas.................................................. $83 $114 $34
Electricity.................................................. 41 14 (a)
--------
(a) Not material.
Absolute Notional Contract Quantity of Commodity Derivatives Held for
Trading Purposes
December 31,
---------------
1999 1998
------- -------
Natural gas, in billion cubic feet........................... 36,285 11,149
Electricity, in gigawatt hours............................... 469,371 112,867
Fair Values of Commodity Derivatives -- Trading
1999 1998
------------------ ------------------
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
In millions
Fair value at December 31
Natural gas......................... $2,966 $2,855 $1,275 $1,179
Electricity......................... 1,302 1,271 578 570
Average fair values for the year
Natural gas......................... 2,401 2,269 805 757
Electricity......................... 962 900 420 416
Commodity Derivatives -- Non-Trading. At December 31, 1999 and 1998, Duke
Energy held or issued several commodity derivatives, primarily in the form of
swaps, that reduce exposure to market price fluctuations for certain power and
NGL production facilities. At December 31, 1999, these commodity derivatives
extended for periods up to ten years. The gains, losses and costs related to
non-trading commodity derivatives that qualify as a hedge are not recognized
until the underlying physical transaction closes. At December 31, 1999 and
1998, Duke Energy had unrealized net gains (losses) of $(120) million and $10
million, respectively, related to non-trading commodity derivatives. The
determination of unrealized net gains (losses) requires judgement in
interpreting market data and developing estimates of fair value. Accordingly,
the unrealized net gains (losses) as of December 31, 1999 and 1998 are not
necessarily indicative of the amounts Duke Energy could have realized in the
current market.
57
DUKE ENERGY CORPORATION
Notes to Consolidated Financial Statements -- Continued
7. Risk Management and Financial Instruments -- Continued
Absolute Notional Contract Quantity of Commodity Derivatives Held for Non-
Trading Purposes
1999 1998
------ ------
Natural gas, in billion cubic feet............................. 592 218
Electricity, in gigawatt hours................................. 45,877 10,618
Power capacity, in megawatt months............................. 25,950 --
Oil, in thousands of barrels................................... 32,764 4,875
Interest Rate Derivatives. Duke Energy periodically enters into financial
derivative instruments including, but not limited to, swaps, options and
treasury rate agreements to manage and mitigate interest rate risk exposure
related to borrowings. The notional amounts shown in the following table serve
solely as a basis for the calculation of payment streams to be exchanged. These
notional amounts are not a measure of the company's exposure through its use of
derivatives. Fair values shown in the following table represent estimated
amounts that Duke Energy would have received if the swaps had been settled at
current market rates on the respective dates.
Interest Rate Derivatives
December 31,
-------------------------------------------------
1999 1998
------------------------ ------------------------
Notional Fair Contracts Notional Fair Contracts
Amounts Value Expire Amounts Value Expire
-------- ----- --------- -------- ----- ---------
Dollars in millions
Interest rate swaps........ $600 $ 2 2000 $300 $ 8 1999-2000
Deferred gains on settled interest rate derivatives were not material in 1999
or 1998. Unrealized gains and losses and exposure to changes in market
condition were not material at December 31, 1999 and 1998. As a result of the
interest rate swap contracts which swap fixed rate obligations to effective
floating rates, interest expense for the relative notional amount on the
Consolidated Statements of Income and Comprehensive Income is recognized at the
weighted average London interbank offered rate (LIBOR) for the year plus the
applicable margins.
Weighted Average Rates for Interest Rate Swaps
For the Years
Ended December
31,
----------------
1999 1998 1997
---- ---- ----
8% Series B Swap........................................... 5.36% 5.69% 5.78%
7.5% Series B Swap......................................... 6.42% 6.74% 6.83%
Commercial paper fixed rate swaps.......................... 4.95% -- --
Foreign Currency Derivatives. Trading and Marketing enters into foreign
currency swap agreements to manage foreign currency risks associated with
energy contracts denominated in foreign currencies. As of December 31, 1999,
the agreements had a notional contract amount of approximately $762 million,
beginning in the year 2000 and extending to the year 2005, and had a weighted
average fixed exchange rate of 1.470 Canadian dollars to U.S. dollars. As of
December 31, 1998, the agreements had a notional contract amount of
approximately $120 million, beginning in the year 2000 and extending to the
year 2005, and had a weighted average fixed exchange rate of 1.472 Canadian
dollars to U.S. dollars. The fair value of foreign currency swap agreements was
not material at December 31, 1999 or 1998.
58
DUKE ENERGY CORPORATION
Notes to Consolidated Financial Statements -- Continued
7. Risk Management and Financial Instruments -- Continued
In anticipation of the tender offer for Paranapanema (see Note 19 to the
Consolidated Financial Statements), Duke Energy entered into foreign currency
forward contracts to obtain Brazilian reais. As of December 31, 1999, the
forward contracts had a notional amount of $280 million at an average exchange
rate of 1.8496 Brazilian reais to U.S. dollars which approximated fair value.
Market and Credit Risk. New York Mercantile Exchange (Exchange) traded
futures and option contracts are guaranteed by the Exchange and have nominal
credit risk. On all other transactions previously described, Duke Energy is
exposed to credit risk in the event of nonperformance by the counterparties.
For each counterparty, Duke Energy analyzes its financial condition prior to
entering into an agreement, establishes credit limits and monitors the
appropriateness of these limits on an ongoing basis. The change in market value
of exchange-traded futures and options contracts requires daily cash settlement
in margin accounts with brokers. Swap contracts and most other over-the-counter
instruments are generally settled at the expiration of the contract term and
may be subject to margin requirements with the counterparty.
Financial Instruments. The fair value of financial instruments is summarized
in the following table. Judgment is required in interpreting market data to
develop the estimates of fair value. Accordingly, the estimates determined as
of December 31, 1999 and 1998 are not necessarily indicative of the amounts
Duke Energy could have realized in current market exchanges. The majority of
the estimated fair value amounts were obtained from independent parties.
Financial Instruments
1999 1998
---------------------- ----------------------
Approximate Approximate
Book Value Fair Value Book Value Fair Value
---------- ----------- ---------- -----------
In millions
Long-term debt (a)............ $9,165 $8,891 $6,959 $7,240
Guaranteed preferred
beneficial interests in
subordinated notes of Duke
Energy or subsidiaries....... 1,404 1,207 919 937
Preferred stock (a)........... 313 303 333 346
--------
(a) Includes current maturities.
The fair value of cash and cash equivalents, notes receivable, notes payable
and commercial paper are not materially different from their carrying amounts
because of the short-term nature of these instruments or because the stated
rates approximate market rates.
Guarantees made on behalf of affiliates or recourse provisions from
affiliates have no book value associated with them, and there are no fair
values readily determinable since quoted market prices are not available.
8. Investment in Affiliates
Investments in domestic and international affiliates which are not controlled
by Duke Energy but where Duke Energy has significant influence over operations
are accounted for by the equity method. These investments include undistributed
earnings of $6 million and $5 million in 1999 and 1998, respectively. Duke
Energy's share of net income from these affiliates is reflected in the
Consolidated Statements of Income and Comprehensive Income as Other Operating
Revenues.
59
DUKE ENERGY CORPORATION
Notes to Consolidated Financial Statements -- Continued
8. Investment in Affiliates -- Continued
Natural Gas Transmission. Investments primarily include ownership interests
in natural gas pipeline joint ventures which transport gas from Canada to the
U.S. Investments include a 37.5% ownership interest in Maritimes & Northeast
Pipeline, L.L.C.
Field Services. Investments primarily include a 37% interest in a partnership
which owns natural gas gathering systems in the Gulf of Mexico (Dauphin Island
Gathering Partners) and a 21.1% interest in TEPPCO.
Global Asset Development. Global Asset Development has investments in various
natural gas and electric generation and transmission facilities in its targeted
geographic areas. Significant investments include a 50% indirect interest in
VMC Generating Company, a merchant electric generating company, a 36.8%
indirect interest in American Ref-Fuel Company and a 25% indirect interest in
National Methanol Company, which owns and operates a methanol and MTBE (methyl
tertiary butyl ether) business in Jubail, Saudi Arabia.
Other Energy Services. Investments include the participation in various
construction and support activities for fossil-fueled generating plants.
Real Estate Operations. Investments include various real estate development
projects.
Other Operations. Investments include a 20% interest in the BellSouth PCS
L.P. joint venture, which provides wireless personal communication services.
Investment in Affiliates
December 31, 1999 December 31, 1998 December 31, 1997
----------------------------- ---------------------------- ----------------------------
Domestic International Total Domestic International Total Domestic International Total
-------- ------------- ------ -------- ------------- ----- -------- ------------- -----
In millions
Natural Gas
Transmission........... $ 67 $ 83 $ 150 $104 $ 37 $141 $ 67 $ -- $ 67
Field Services.......... 439 -- 439 303 -- 303 160 -- 160
Global Asset
Development............ 425 224 649 171 223 394 174 208 382
Other Energy Services... 51 6 57 19 23 42 16 10 26
Real Estate Operations.. 11 -- 11 5 -- 5 2 -- 2
Other Operations........ (7) -- (7) 17 -- 17 36 13 49
----- ---- ------ ---- ---- ---- ---- ---- ----
Total.................. $ 986 $313 $1,299 $619 $283 $902 $455 $231 $686
===== ==== ====== ==== ==== ==== ==== ==== ====
Equity in Earnings of Investment
For the years ended:
-----------------------------------------------------------------------------------------
December 31, 1999 December 31, 1998 December 31, 1997
----------------------------- ---------------------------- ----------------------------
Domestic International Total Domestic International Total Domestic International Total
-------- ------------- ------ -------- ------------- ----- -------- ------------- -----
In millions
Natural Gas
Transmission........... $ 16 $ 9 $ 25 $ 14 $ 3 $ 17 $ 8 $ -- $ 8
Field Services.......... 44 -- 44 9 -- 9 19 -- 19
Global Asset
Development............ 47 10 57 50 18 68 8 21 29
Other Energy Services... 10 3 13 1 13 14 4 8 12
Real Estate Operations.. 3 -- 3 -- -- -- -- -- --
Other Operations........ (30) -- (30) (29) -- (29) (30) -- (30)
----- ---- ------ ---- ---- ---- ---- ---- ----
Total.................. $ 90 $ 22 $ 112 $ 45 $ 34 $ 79 $ 9 $ 29 $ 38
===== ==== ====== ==== ==== ==== ==== ==== ====
60
DUKE ENERGY CORPORATION
Notes to Consolidated Financial Statements -- Continued
8. Investment in Affiliates -- Continued
Summarized Combined Financial Information of Unconsolidated Subsidiaries
December 31,
--------------------
1999 1998 1997
------ ------ ------
In millions
Balance Sheet
Current Assets........................................ $1,544 $ 848 $ 642
Noncurrent Assets..................................... 7,826 7,340 5,868
Current Liabilities................................... 1,155 1,084 758
Noncurrent Liabilities................................ 4,727 3,884 3,257
------ ------ ------
Net Assets.......................................... $3,488 $3,220 $2,495
====== ====== ======
Income Statement
Operating Revenues.................................... $3,510 $1,667 $ 905
Operating Expenses.................................... 3,104 1,166 703
Net Income.......................................... 193 263 72
Duke Energy had outstanding notes receivable from certain affiliates of $72
million and $80 million at December 31, 1999 and 1998, respectively.
9. Property, Plant and Equipment
December 31,
---------------
1999 1998
------- -------
In millions
Electric utility
Generation................................................. $ 7,876 $ 7,670
Transmission and distribution.............................. 6,577 6,324
General plant.............................................. 1,166 1,127
Nuclear fuel............................................... 741 554
Construction work in progress.............................. 343 328
------- -------
Total electric utility................................... 16,703 16,003
------- -------
Natural gas transmission.................................... 4,473 6,194
Non-regulated generation.................................... 4,457 837
Gathering and processing.................................... 2,428 1,409
Construction work in progress............................... 881 469
Other property and equipment................................ 1,494 2,216
------- -------
Total Property, Plant and Equipment...................... $30,436 $27,128
======= =======
Accumulated Depreciation
December 31,
---------------
1999 1998
------- -------
In millions
Electric utility(a)......................................... $ 6,950 $ 6,371
Natural gas transmission.................................... 1,217 2,585
Non-regulated generation.................................... 493 26
Other....................................................... 781 1,271
------- -------
Total Accumulated Depreciation........................... $ 9,441 $10,253
======= =======
--------
(a) Includes amortization of nuclear fuel: 1999--$444 million; 1998--$325
million.
61
DUKE ENERGY CORPORATION
Notes to Consolidated Financial Statements -- Continued
10. Debt and Credit Facilities
Long-term Debt
December 31,
--------------
Year Due 1999 1998
---------- ------ ------
In millions
Duke Energy
First and refunding mortgage bonds:(a)
7%................................................. 2000 $ 200 $ 200
5 7/8%--6 5/8%..................................... 2001--2008 625 625
6 3/4%--8.30%...................................... 2023--2025 661 678
7%--8.95%.......................................... 2027--2033 165 165
Mortgage bonds matured during 1999................. -- 425
Pollution control debt, 3.85%--7.75%................ 2012--2017 172 172
Notes:
5.38%--9.21%....................................... 2009--2016 264 65
6%--6.6%........................................... 2028--2038 500 300
Commercial paper, 5.84% and 5.28% weighted-average
rate at December 31, 1999 and 1998, respectively... 1,000 1,200
Other debt.......................................... 21 23
Duke Capital Corporation
Senior Notes:
6 1/4%--7 1/2%..................................... 2004--2009 1,250 250
6 3/4%--8%......................................... 2018--2019 650 150
Commercial paper, 5.91% and 5.73% weighted-average
rate at December 31, 1999 and 1998, respectively... 500 500
Note payable to affiliate 5.03% and 4.68% weighted-
average rate at December 31, 1999 and 1998,
respectively....................................... 83 24
PanEnergy
Bonds:
7 3/4%............................................. 2022 328 328
8 5/8% Debentures.................................. 2025 100 100
Notes:
7%--9.9%, maturing serially........................ 2003--2006 395 395
Notes matured during 1999.......................... -- 114
TETCO
Notes:
8%--10 3/8%........................................ 2000--2004 500 500
Medium-term, Series A, 7.64% -- 9.07%.............. 2001--2012 51 100
Algonquin Gas Transmission Company
9.13% Notes........................................ 2003 100 100
Crescent Resources, Inc(b)
Construction and mortgage loans, 5.86%--7.26%....... 2000--2011 46 69
Revolving credit facilities, 5.98% weighted-average
rate at December 31, 1998.......................... 2001 -- 100
Global Asset Development
Medium-term note, 7.25%............................. 2004 162 --
Credit facilities, 6.01% weighted-average rate at
December 31, 1999.................................. 2002 460 --
Notes:
7.69%--18%......................................... 2000--2005 107 33
7.8%............................................... 2004--2013 161 --
6%--10%(c)......................................... 2013--2017 485 --
Capital leases...................................... 2009--2028 207 --
Notes matured during 1999........................... -- 78
Other debt of subsidiaries.......................... 34 313
Unamortized debt discount and premium, net.......... (62) (48)
------ ------
Total long-term debt................................ 9,165 6,959
Current maturities of long-term debt................ (482) (687)
------ ------
Total long-term portion............................. $8,683 $6,272
====== ======
- --------
(a) Substantially all of Electric Operations' electric plant was mortgaged.
(b) Substantial amounts of Crescent Resources' real estate development
projects, land and buildings were pledged as collateral.
(c) Paranapanema (Brazil) debt, principal is indexed annually to inflation.
62
DUKE ENERGY CORPORATION
Notes to Consolidated Financial Statements -- Continued
10. Debt and Credit Facilities -- Continued
Annual Maturities
In millions
2000............................................................. $482
2001............................................................. 306
2002............................................................. 225
2003............................................................. 601
2004............................................................. 958
Annual maturities exclude $1,736 million of long-term debt that matures after
2004 which have call options whereby Duke Energy has the option to repay the
debt early. Based on the years in which Duke Energy may first exercise their
redemption options, $881 million could potentially be repaid in 2000, $328
million in 2002, $227 million in 2003, $200 million in 2004 and $100 million
thereafter.
Credit Facilities
December 31, 1999 December 31, 1998
---------------------- ----------------------
Credit Credit
Facilities Outstanding Facilities Outstanding
---------- ----------- ---------- -----------
In millions
364-day facilities (a)....... $ 823 $ 10 $ 600 $ --
Three-year revolving
facilities.................. 565 450 -- --
Four-year revolving
facilities.................. 125 -- 125 100
Five-year revolving
facilities (a).............. 2,200 -- 2,200 --
------ ---- ------ ----
Total Consolidated......... $3,713 $460 $2,925 $100
====== ==== ====== ====
--------
(a) Supported commercial paper facilities.
Notes Payable and Commercial Paper
December 31,
----------------
1999 1998
------- -------
In millions
Credit facilities outstanding.............................. $ 460 $ 100
Note payable............................................... 86 4
Commercial paper outstanding............................... 1,764 1,905
------- -------
2,310 2,009
Less portion classified as long-term
Credit facilities........................................ (460) (100)
Note payable............................................. (83) --
Commercial paper......................................... (1,500) (1,700)
------- -------
Portion classified as short-term........................... $ 267 $ 209
======= =======
The weighted average interest rate on outstanding short-term notes payable
and commercial paper at December 31, 1999 and 1998 was 5.72% and 5.23%,
respectively.
63
DUKE ENERGY CORPORATION
Notes to Consolidated Financial Statements -- Continued
11. Nuclear Decommissioning Costs
Nuclear Decommissioning Costs. Estimated site-specific nuclear
decommissioning costs, including the cost of decommissioning plant components
not subject to radioactive contamination, total approximately $1.9 billion
stated in 1999 dollars based on decommissioning studies completed in 1999. This
amount includes Duke Energy's 12.5% ownership in the Catawba Nuclear Station.
The other joint owners of Catawba Nuclear Station are responsible for
decommissioning costs related to their ownership interests in the station. Both
the NCUC and the PSCSC have granted Duke Energy recovery of estimated
decommissioning costs through retail rates over the expected remaining service
periods of Duke Energy's nuclear stations. Such estimates presume each unit
will be decommissioned as soon as possible following the end of its license
life. Although subject to extension, the current operating licenses for Duke
Energy's nuclear units expire as follows: Oconee 1 and 2 --2013, Oconee 3 --
2014; McGuire 1 -- 2021, McGuire 2 -- 2023; and Catawba 1 -- 2024, Catawba
2 -- 2026.
During 1999 and 1998, Duke Energy expensed approximately $57 million which
was contributed to the external funds for decommissioning costs and accrued an
additional $6 million to the internal reserve. Nuclear units are depreciated at
an annual rate of 4.7%, of which 1.61% is for decommissioning. The balance of
the external funds as of December 31, 1999 and 1998 was $703 million and $580
million, respectively. The balance of the internal reserve as of December 31,
1999 and 1998 was $223 million and $217 million, respectively, and is reflected
in the Consolidated Balance Sheets as Accumulated Depreciation and
Amortization. Management believes that the decommissioning costs being
recovered through rates, when coupled with assumed after-tax fund earnings of
5.5% to 5.9%, are currently sufficient to provide for the cost of
decommissioning.
A provision in the Energy Policy Act of 1992 established a fund for the
decontamination and decommissioning of the Department of Energy's (DOE) uranium
enrichment plants. Licensees are subject to an annual assessment for 15 years
based on their pro rata share of past enrichment services. The annual
assessment is recorded in the Consolidated Statements of Income and
Comprehensive Income as Fuel Used in Electric Generation. Duke Energy paid $10
million during 1999 and has paid $75 million cumulatively related to its
ownership interests in nuclear plants. The remaining liability and regulatory
assets of $70 million and $79 million at December 31, 1999 and 1998,
respectively, are reflected in the Consolidated Balance Sheets as Deferred
Credits and Other Liabilities, and Regulatory Assets and Deferred Debits,
respectively.
Spent Nuclear Fuel. Under provisions of the Nuclear Waste Policy Act of 1982,
Duke Energy has entered into contracts with the DOE for the disposal of spent
nuclear fuel. The DOE failed to begin accepting the spent nuclear fuel on
January 31, 1998, the date provided by the Nuclear Waste Policy Act and by Duke
Energy's contract with the DOE. On June 8, 1998, Duke Energy filed with the
United States Court of Federal Claims a claim against the DOE for damages in
excess of $1 billion arising out of the DOE's failure to begin accepting
commercial spent nuclear fuel by January 31, 1998. Damages claimed in the suit
are intended to recover costs that Duke Energy is incurring and will continue
to incur as a result of the DOE's partial material breach of its contract with
Duke Energy, including costs associated with securing additional spent fuel
storage capacity. Duke Energy will continue to safely manage its spent nuclear
fuel until the DOE accepts it. Payments made to the DOE for disposal costs are
based on nuclear output and are included in the Consolidated Statements of
Income and Comprehensive Income as Fuel Used in Electric Generation.
12. Guaranteed Preferred Beneficial Interests in Subordinated Notes of Duke
Energy or Subsidiaries
Duke Energy and Duke Capital Corporation (Duke Capital) have each formed
business trusts for which they own all the respective common securities. The
trusts issue and sell preferred securities and invest the gross proceeds in
assets of the trusts. Substantially all the assets of each trust are junior
subordinated notes issued by the respective company.
64
DUKE ENERGY CORPORATION
Notes to Consolidated Financial Statements -- Continued
12. Guaranteed Preferred Beneficial Interests in Subordinated Notes of Duke
Energy or Subsidiaries -- Continued
Trust Preferred Securities
December 31,
---------------
Issued Rate 1999 1998 Junior Subordinated Notes
------ ----- ------- ------ -------------------------
In millions
Duke Energy
1997.................... 7.2% $ 350 $ 350 7.2% Series A due 2037
1999.................... 7.2% 250 -- 7.2% Series B due 2039
Duke Capital
1998.................... 7 3/8% 250 250 7 3/8% Series A due 2038
1998.................... 7 3/8% 350 350 7 3/8% Series B due 2038
1999.................... 8 3/8% 250 -- 8 3/8% Series C due 2029
Unamortized debt
discount................. (46) (31)
------- -----
$ 1,404 $ 919
======= =====
These trust preferred securities represent preferred undivided beneficial
interests in the assets of the respective trusts. Payment of distributions on
these preferred securities is guaranteed by the respective company, but only to
the extent the trusts have funds legally and immediately available to make such
distributions. Dividends of $87 million, $44 million and $15 million related to
the trust preferred securities have been included in the Consolidated
Statements of Income and Comprehensive Income as Minority Interests for the
years ended December 31, 1999, 1998 and 1997, respectively.
13. Preferred and Preference Stock
Authorized Shares of Stock as of December 31, 1999 and 1998
Par Value Shares
--------- -----------
In millions
Preferred Stock........................................ $100 12.5
Preferred Stock A...................................... $ 25 10.0
Preference Stock....................................... $100 1.5
As of December 31, 1999 and 1998, there were no shares of preference stock
outstanding.
Preferred Stock with Sinking Fund Requirements
December 31,
Shares Outstanding -------------------
Rate/Series Year Issued at December 31, 1999 1999 1998
----------- ----------- -------------------- --------- ---------
Dollars in millions
6.10% C (Preferred Stock A)....... 1992 800,000 $ 20 $ 20
6.20% D (Preferred Stock A)....... 1992 800,000 20 20
6.20% T........................... 1992 130,000 13 13
6.30% U........................... 1992 130,000 13 13
6.40% V........................... 1992 130,000 13 13
6.75% X........................... 1993 250,000 25 25
5.95% B (Preferred Stock A) (a)... 1992 -- -- 20
--------- ---------
Total....................... $ 104 $ 124
========= =========
--------
(a) Preferred stock series redeemed in September 1999.
65
DUKE ENERGY CORPORATION
Notes to Consolidated Financial Statements -- Continued
13. Preferred and Preference Stock -- Continued
The annual sinking fund requirements for 2000 through 2004 are $33 million,
$33 million, $13 million, $2 million and $2 million, respectively. Some
additional redemptions are permitted at Duke Energy's option.
Preferred Stock without Sinking Fund Requirements
December 31,
-------------------
Year Shares Outstanding
Rate/Series Issued at December 31, 1999 1999 1998
----------- ------ -------------------- --------- ---------
Dollars in millions
4.50% C..................... 1964 175,000 $ 18 $ 18
7.85% S..................... 1992 300,000 30 30
7.00% W..................... 1993 249,989 25 25
7.04% Y..................... 1993 299,995 30 30
6.375% (Preferred Stock A).. 1993 1,257,185 31 31
Auction Series A............ 1990 750,000 75 75
--------- ---------
Total..................... $ 209 $ 209
========= =========
The call provisions for the outstanding preferred stock specify various
redemption prices not exceeding 104% of par value, plus accumulated dividends
to the redemption date.
During February 1998, Duke Energy purchased approximately two million shares
of its preferred stock for $180 million. During December 1997, Duke Energy
redeemed approximately three million shares of preferred stock for $203
million. The premiums related to these redemptions were included in the
Consolidated Statements of Income and Comprehensive Income as Dividends and
Premiums on Redemptions of Preferred and Preference Stock for 1997.
14. Commitments and Contingencies
Nuclear Insurance. Duke Energy owns and operates the McGuire and Oconee
Nuclear Stations with two and three nuclear reactors, respectively, and
operates and has a partial ownership interest in the Catawba Nuclear Station
with two nuclear reactors. Nuclear insurance coverage is maintained in three
program areas: liability coverage; property, decontamination and
decommissioning coverage; and business interruption and/or extra expense
coverage. Certain expenses associated with nuclear insurance premiums paid by
Duke Energy are reimbursed by the other joint owners of the Catawba Nuclear
Station.
Pursuant to the Price-Anderson Act, Duke Energy is required to insure against
public liability claims resulting from nuclear incidents to the full limit of
liability of approximately $9.8 billion.
Primary Liability Insurance. The maximum required private primary liability
insurance of $200 million has been purchased along with a like amount to cover
certain worker tort claims.
Excess Liability Insurance. This policy currently provides approximately $9.6
billion of coverage through the Price-Anderson Act's mandatory industry-wide
excess secondary insurance program of risk pooling. The $9.6 billion of
coverage is the sum of the current potential cumulative retrospective premium
assessments of $88 million per licensed commercial nuclear reactor. This $9.6
billion will be increased by $88 million as each additional commercial nuclear
reactor is licensed, or reduced by $88 million for certain nuclear reactors
that are no longer operational and may be exempted from the risk pooling
insurance program. Under this program, licensees could be assessed
retrospective premiums to compensate for damages in the event of a nuclear
incident at any licensed facility in the nation. If such an incident occurs and
public liability damages exceed primary insurances, licensees may be assessed
up to $88 million for each of their licensed reactors, payable at a rate not
66
DUKE ENERGY CORPORATION
Notes to Consolidated Financial Statements -- Continued
14. Commitments and Contingencies -- Continued
to exceed $10 million a year per licensed reactor for each incident. The $88
million amount is subject to indexing for inflation and may be subject to state
premium taxes.
Duke Energy is a member of Nuclear Electric Insurance Limited (NEIL), which
provides property and business interruption insurance coverage for Duke
Energy's nuclear facilities under the following three policy programs:
Primary Property Insurance. This policy provides $500 million in primary
property damage coverage for each of Duke Energy's nuclear facilities.
Excess Property Insurance. This policy provides excess property,
decontamination and decommissioning liability insurance in the following
amounts: $2.25 billion for the Catawba Nuclear Station and $1.5 billion each
for the Oconee and McGuire Nuclear Stations.
Business Interruption Insurance. This policy provides business interruption
and/or extra expense coverage resulting from an accidental outage of a nuclear
unit. Each unit of the McGuire and Catawba Nuclear Stations is insured for up
to approximately $4 million per week and the Oconee Nuclear Station units are
insured for up to approximately $3 million per week. Coverage amounts per unit
decline if more than one unit is involved in an accidental outage. Initial
coverage begins after a 12-week deductible period and continues at 100% for 52
weeks and 80% for the next 110 weeks.
If NEIL's losses ever exceed its reserves for any of the above three
programs, Duke Energy will be liable for assessments of up to five times its
annual premiums. The current potential maximum assessments are as follows:
Primary Property Insurance -- $22 million; Excess Property Insurance -- $22
million; Business Interruption Insurance -- $20 million.
The other joint owners of the Catawba Nuclear Station are obligated to assume
their pro rata share of any liabilities for retrospective premiums and other
premium assessments resulting from the Price-Anderson Act's excess secondary
insurance program of risk pooling or the NEIL policies.
Environmental. Duke Energy is subject to international, federal, state and
local regulations regarding air and water quality, hazardous and solid waste
disposal and other environmental matters.
Manufactured Gas Plants and Superfund Sites. Duke Energy was an operator of
manufactured gas plants until the early 1950s and has entered into a
cooperative effort with the State of North Carolina and other owners of certain
former manufactured gas plant sites to investigate and, where necessary,
remediate these contaminated sites. The State of South Carolina has expressed
interest in entering into a similar arrangement. Duke Energy is considered by
regulators to be a potentially responsible party and may be subject to future
liability at seven federal Superfund sites and two state Superfund sites. While
the cost of remediation of the remaining sites may be substantial, Duke Energy
will share in any liability associated with remediation of contamination at
such sites with other potentially responsible parties. Management believes that
resolution of these matters will not have a material adverse effect on
consolidated results of operations or financial position.
PCB (Polychlorinated Biphenyl) Assessment and Clean-up Programs. In June
1999, the Environmental Protection Agency (EPA) certified that TETCO, a wholly
owned subsidiary of Duke Energy, had completed clean up of PCB contaminated
sites under conditions stipulated by a U.S. Consent Decree in 1989. 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.
67
DUKE ENERGY CORPORATION
Notes to Consolidated Financial Statements -- Continued
14. Commitments and Contingencies -- Continued
Under terms of the agreement with CMS discussed in Note 2 to the Consolidated
Financial Statements, Duke Energy is obligated to complete clean-up of
previously identified contamination at certain agreed-upon sites on the PEPL
and Trunkline systems. These clean-up programs are expected to continue until
2001. The contamination resulted from the past use of lubricants containing
PCBs and the prior use of wastewater collection facilities and other on-site
disposal areas. Soil and sediment testing, to date, has detected no significant
off-site contamination. Duke Energy has communicated with the EPA and
appropriate state regulatory agencies on these matters.
At December 31, 1999 and 1998, remaining estimated clean-up costs on the
TETCO, PEPL and Trunkline systems have been accrued and are included in the
Consolidated Balance Sheets as Other Current Liabilities and Environmental
Clean-up Liabilities. These cost estimates represent gross clean-up costs
expected to be incurred, have not been discounted or reduced by customer
recoveries and generally do not include fines, penalties or third-party claims.
Costs expected to be recovered from customers have been deferred and are
included in the Consolidated Balance Sheets as of December 31, 1999 and 1998,
as Environmental Clean-up Costs.
The federal and state clean-up programs are not expected to interrupt or
diminish Duke Energy's ability to deliver natural gas to customers. Based on
Duke Energy's experience to date and costs incurred for clean-up operations,
management believes the resolution of matters relating to the environmental
issues discussed above will not have a material adverse effect on consolidated
results of operations or financial position.
Injury and Damages Claims. Duke Energy has experienced numerous claims
relating to damages for personal injury alleged to have arisen from the
exposure to or use of asbestos in connection with construction and maintenance
activities performed by Duke Energy on its electric generation plants during
the 1960s and 1970s. During 1999, Duke Energy experienced a significant
increase in the number of these claims. This increase, coupled with its
cumulative experience in claims received, prompted Duke Energy to conduct a
comprehensive review which was completed in late 1999 and to record an $800
million accrual, which is included in Other Deferred Credits and Other
Liabilities in the Consolidated Financial Statements, to reflect the purchase
of a third party insurance policy as well as estimated amounts for future
claims not recoverable under such policy. The insurance policy, combined with
amounts covered by self-insurance reserves, provides for claims paid up to an
aggregate of $1.6 billion. Duke Energy currently believes the estimated claims
relating to this exposure will not exceed such amount. While Duke Energy is
uncertain as to the timing of when claims will be received, portions of the
estimated claims may not be received and paid for 30 or more years. Amounts
reserved for injury and damages claims were not material in 1998 and 1997.
While Duke Energy has recorded an accrual related to this estimated
liability, such estimates cannot be made with certainty. Factors, such as the
frequency and magnitude of claims, could result in changes in the estimates of
the injury and damages liability and insurance recoveries. Such changes could
result in, over time, a difference from the amount currently reflected in the
financial statements. However, due to Duke Energy's insurance program related
to this liability, management believes that any changes in the estimates would
not have a material adverse affect on consolidated results of operations or
financial position.
Litigation. Duke Energy and its subsidiaries are involved in legal, tax and
regulatory proceedings before various courts, regulatory commissions and
governmental agencies regarding performance, contracts and other 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.
68
DUKE ENERGY CORPORATION
Notes to Consolidated Financial Statements -- Continued
14. Commitments and Contingencies -- Continued
Other Commitments and Contingencies. 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. Certain subsidiaries of Duke
Energy had guaranteed performance under some of these contracts in the amount
of approximately $2.5 billion and $1.2 billion as of December 31, 1999 and
1998, respectively. In addition, certain subsidiaries of Duke Energy have
guaranteed debt agreements of affiliates and have provided surety bonds and
letters of credit, all of which totaled approximately $853 million and $492
million as of December 31, 1999 and 1998, respectively. The increase in the
amount of these obligations is due to the increased construction activities at
Duke Energy North America and Duke/Fluor Daniel. Management monitors and
approves these obligations and believes it is unlikely that Duke Energy would
be required to perform or otherwise incur any material losses associated with
the above obligations.
Management believes that these commitments and contingencies will not have a
material adverse effect on consolidated results of operations or financial
position.
Leases. Duke Energy utilizes assets under operating leases in several areas
of operations. Consolidated rental expense amounted to $87 million, $80 million
and $92 million in 1999, 1998 and 1997, respectively. Future minimum rental
payments under Duke Energy's various operating leases for the years 2000
through 2004 are $79 million, $68 million, $58 million, $50 million and $45
million, respectively.
15. 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.
In 1996, the Board of Directors authorized Duke Energy to repurchase up to $1
billion of its common stock during the period beginning February 1996 and
ending February 2001. No repurchases of common stock were made in 1999, 1998 or
1997, and none are anticipated in the future.
16. Stock-Based Compensation
Under Duke Energy's 1998 Stock Incentive Plan, stock options for up to
fifteen million shares of common stock may be granted to key employees. Under
the plan, the exercise price of each option granted equals the market price of
Duke Energy's common stock on the date of grant. Vesting periods range from one
to five years with a maximum exercise term of ten years.
Effective with Duke Energy's merger with PanEnergy Corp, each share of
PanEnergy common stock, outstanding immediately prior to the merger, was
converted into the right to receive 1.0444 shares of Duke Energy common stock.
Each option to purchase PanEnergy common stock, outstanding prior to the
merger, was assumed by Duke Energy and became exercisable upon the same terms
as under the applicable PanEnergy stock option plan and option agreement,
except that these options became options to purchase shares of Duke Energy
common stock, appropriately adjusted.
69
DUKE ENERGY CORPORATION
Notes to Consolidated Financial Statements -- Continued
16. Stock-Based Compensation -- Continued
Stock Option Activity
Weighted
Options Average
(In thousands) Exercise Price
-------------- --------------
Outstanding at December 31, 1996............... 3,274 $20
Granted...................................... 388 44
Exercised.................................... (873) 19
Forfeited.................................... (60) 27
-----
Outstanding at December 31, 1997............... 2,729 24
Granted...................................... 3,548 57
Exercised.................................... (948) 21
Forfeited.................................... (868) 57
-----
Outstanding at December 31, 1998............... 4,461 45
Granted...................................... 5,154 54
Exercised.................................... (428) 23
Forfeited.................................... (375) 57
-----
Outstanding at December 31, 1999............... 8,812 51
=====
Stock Options at December 31, 1999
Outstanding Exercisable
------------------------------------ -----------------------
Weighted Weighted Weighted
Range of Average Average Average
Exercise Number Remaining Exercise Number Exercise
Prices (In thousands) Life (Years) Price (In thousands) Price
-------- -------------- ------------ -------- -------------- --------
$10 to $14 36 1.4 $12 36 $12
$15 to $20 728 4.0 19 728 19
$21 to $25 153 4.2 23 153 23
$26 to $31 157 6.1 27 157 27
$42 to $50 2,992 9.8 49 124 44
$51 to $59 4,443 8.6 58 582 57
$60 to $67 303 9.0 65 13 67
----- -----
Total 8,812 1,793 34
===== =====
Duke Energy had 1.5 million and 2.4 million options exercisable at December
31, 1998 and 1997, with weighted average exercise prices of $22 and $21 per
option, respectively.
The weighted-average fair value of options granted was $10, $9 and $10 per
option during 1999, 1998 and 1997, respectively. The fair value of each option
grant was estimated on the date of grant using the Black-Scholes option-pricing
model.
Weighted-Average Assumptions for Option-Pricing
1999 1998 1997
------- ------- -------
Stock dividend yield................................. 4.1% 4.2% 3.5%
Expected stock price volatility...................... 18.8% 15.1% 20.7%
Risk-free interest rates............................. 5.9% 5.6% 6.5%
Expected option lives................................ 7 years 7 years 7 years
70
DUKE ENERGY CORPORATION
Notes to Consolidated Financial Statements -- Continued
16. Stock-Based Compensation -- Continued
Had compensation expense for stock-based compensation been determined based
on the fair value at the grant dates, 1999 net income would have been $1,498
million, or $4.06 per basic share; 1998 net income would have been $1,250
million, or $3.40 per basic share; and 1997 net income would have been $971
million, or $2.50 per basic share.
Duke Energy has the 1996 Stock Incentive Plan (the 1996 Plan) under which two
million shares of common stock were reserved for awards to employees.
Restricted stock grants made under the 1996 Plan vest over a period ranging
between one and five years. Duke Energy awarded 65,850 restricted shares (fair
value at grant dates of approximately $4 million) in 1999 and 3,000 restricted
shares in 1998. Compensation expense for the grants is charged to earnings over
the restriction period and was not material in 1999, 1998 or 1997.
In addition, Duke Energy granted Performance Awards under the 1998 Long-Term
Incentive Plan (the 1998 Plan), under which fifteen million shares of common
stock have been reserved for employee awards. Grants under the 1998 Plan vest
over periods ranging between one and seven years. Duke Energy awarded 493,200
shares (fair value at grant dates of $26 million) in 1999. Compensation expense
for the stock grants is charged to earnings over the vesting period, and
amounted to $3 million in 1999.
17. Employee Benefit Plans
Retirement Plans. Duke Energy and its subsidiaries maintain a non-
contributory defined benefit retirement plan covering most employees with
minimum service requirements using a cash balance formula. Under a cash balance
formula, a plan participant accumulates a retirement benefit based upon a
percentage, which may vary with age and years of service, of current eligible
earnings and current interest credits.
On December 31, 1998, all defined benefit retirement plans maintained by Duke
Energy and its subsidiaries, except for the PanEnergy retirement plan, were
merged to form the Duke Energy Retirement Cash Balance Plan (Duke Energy Plan).
The plan merger changed the benefit for certain participants, from a formula
based primarily on benefit accrual service and highest average earnings, to a
cash balance formula.
Through December 31, 1998, the PanEnergy retirement plan provided retirement
benefits (i) for eligible employees of certain subsidiaries that are generally
based on an employee's years of benefit accrual service and highest average
eligible earnings, and (ii) for eligible employees of certain other
subsidiaries under a cash balance formula. In 1998, a significant amount of
lump sum payouts was made from the PanEnergy plan resulting in a settlement
gain of $10 million. Effective January 1, 1999, the benefit formula under the
PanEnergy plan, for all eligible employees, was changed to a cash balance
formula.
In connection with the 1999 sale of the Midwest Pipelines to CMS, benefit
accruals under the PanEnergy plan were frozen on December 31, 1998 for all
participants who, as a result of the sale, became employees of CMS and its
subsidiaries. Once the transfer of the benefit obligation and related assets of
the affected participants to CMS was completed, the PanEnergy plan was merged
into the Duke Energy Plan.
Duke Energy's policy is to fund amounts, as necessary, on an actuarial basis
to provide assets sufficient to meet benefits to be paid to plan participants.
On December 30, 1997, assets and related liabilities of $236 million and $204
million, respectively, for certain PanEnergy plan participants were transferred
to the Duke Power plan. As a result of this transfer, no contributions to the
Duke Energy plan were necessary in 1999 or 1998.
71
DUKE ENERGY CORPORATION
Notes to Consolidated Financial Statements -- Continued
17. Employee Benefit Plans -- Continued
Components of Net Periodic Pension Costs
For the Years Ended
December 31,
----------------------
1999 1998 1997
------ ------ ------
In millions
Service cost benefit earned during the year.......... $ 72 $ 63 $ 62
Interest cost on projected benefit obligation........ 165 169 164
Expected return on plan assets....................... (224) (218) (209)
Amortization of prior service cost................... (3) (4) (5)
Amortization of net transition asset................. (4) (4) (4)
Recognized net actuarial loss........................ 12 10 17
Settlement gain...................................... -- (10) --
------ ------ ------
Net periodic pension costs........................... $ 18 $ 6 $ 25
====== ====== ======
Reconciliation of Funded Status to Pre-funded Pension Costs
December 31,
--------------
1999 1998
------ ------
In millions
Change in Benefit Obligation
Benefit obligation at beginning of year...................... $2,540 $2,372
Service cost................................................. 72 63
Interest cost................................................ 165 169
Plan amendment............................................... -- 5
Actuarial (gain) loss........................................ (41) 141
Transfer to CMS.............................................. (85) --
Benefits paid................................................ (205) (210)
------ ------
Benefit obligation at end of year............................ $2,446 $2,540
====== ======
Change in Plan Assets
Fair value of plan assets at beginning of year (a)........... $2,922 $2,725
Actual return on plan assets................................. 491 406
Employer contributions....................................... (2) 1
Transfer to CMS.............................................. (85) --
Benefits paid................................................ (205) (210)
------ ------
Fair value of plan assets at end of year (a)................. $3,121 $2,922
====== ======
Funded status................................................ $ 675 $ 382
Unrecognized net experience (gain) loss...................... (315) 2
Unrecognized prior service cost reduction.................... (24) (27)
Unrecognized net transition asset............................ (21) (25)
------ ------
Pre-funded pension costs..................................... $ 315 $ 332
====== ======
--------
(a) Principally equity and fixed income securities.
72
DUKE ENERGY CORPORATION
Notes to Consolidated Financial Statements -- Continued
17. Employee Benefit Plans -- Continued
Assumptions Used for Pension Benefits Accounting (a)
1999 1998 1997
---- ---- ----
Percent
Discount rate................................................. 7.50 6.75 7.25
Salary increase............................................... 4.50 4.67 4.15
Expected long-term rate of return on plan assets.............. 9.25 9.25 9.25
--------
(a) Reflects weighted averages across all plans.
Duke Energy also sponsors employee savings plans which cover substantially
all employees. Employer matching contributions of $68 million, $53 million and
$53 million were expensed in 1999, 1998 and 1997, respectively.
Other Postretirement Benefits. Duke Energy and most of its subsidiaries
provide certain health care and life insurance benefits for retired employees
on a contributory and non-contributory basis. Employees become eligible for
these benefits if they have met certain age and service requirements at
retirement, as defined in the plans. Under plan amendments effective late 1998
and early 1999, health care benefits for future retirees were changed to limit
employer contributions and medical coverage.
Such benefit costs are accrued over the active service period of employees to
the date of full eligibility for the benefits. The net unrecognized transition
obligation, resulting from the implementation of accrual accounting, is being
amortized over approximately 20 years.
Components of Net Periodic Postretirement Benefit Costs
For the Years Ended
December 31,
----------------------
1999 1998 1997
------ ------ ------
In millions
Service cost benefit earned during the year........ $ 7 $ 10 $ 10
Interest cost on accumulated postretirement benefit
obligation........................................ 40 43 46
Expected return on plan assets..................... (21) (18) (19)
Amortization of prior service cost................. 1 7 6
Amortization of net transition obligation.......... 18 16 16
Recognized net actuarial (gain) loss............... (1) 1 (1)
------ ------ ------
Net periodic postretirement benefit costs.......... $ 44 $ 59 $ 58
====== ====== ======
73
DUKE ENERGY CORPORATION
Notes to Consolidated Financial Statements -- Continued
17. Employee Benefit Plans -- Continued
Reconciliation of Funded Status to Accrued Postretirement Benefit Costs
December 31,
--------------
1999 1998
------ ------
In millions
Change in Benefit Obligation
Accumulated postretirement benefit obligation at beginning
of year................................................... $ 625 $ 667
Service cost............................................... 7 10
Interest cost.............................................. 40 43
Plan participants' contributions........................... 7 6
Amendments................................................. -- (49)
Actuarial gain............................................. (68) (6)
Benefits paid.............................................. (49) (46)
------ ------
Accumulated postretirement benefit obligation at end of
year...................................................... $ 562 $ 625
------ ------
Change in Plan Assets
Fair value of plan assets at beginning of year (a)......... $ 305 $ 266
Actual return on plan assets............................... 41 34
Employer contributions..................................... 23 45
Plan participants' contributions........................... 7 6
Benefits paid.............................................. (49) (46)
------ ------
Fair market value of plan assets at end of year (a)........ $ 327 $ 305
------ ------
Funded status.............................................. $ (235) $ (320)
Unrecognized prior service cost............................ 8 9
Unrecognized net experience gain........................... (110) (23)
Unrecognized transition obligation......................... 229 239
------ ------
Accrued postretirement benefit costs....................... $ (108) $ (95)
====== ======
--------
(a) Principally equity and fixed income securities.
Assumptions Used for Postretirement Benefits Accounting (a)
1999 1998 1997
----- ----- -----
Percent
Discount rate.............................................. 7.50 6.75 7.25
Salary increase............................................ 4.50 4.67 4.33
Expected long-term rate of return on 401(h) assets......... 9.25 9.25 9.25
Expected long-term rate of return on RLR assets............ 6.75 6.75 6.75
Expected long-term rate of return on VEBA assets........... 9.25 9.25 9.25
Assumed tax rate (b)....................................... 39.60 39.60 39.60
--------
(a) Reflects weighted averages across all plans.
(b) Health care portion of postretirement benefits in VEBA trusts.
For measurement purposes, a 5.0% weighted average rate of increase in the per
capita cost of covered health care benefits was assumed for 1999. The rate was
assumed to decrease gradually to 4.75% for 2005 and remain at that level
thereafter. Assumed health care cost trend rates have a significant effect on
the amounts reported for the health care plans.
74
DUKE ENERGY CORPORATION
Notes to Consolidated Financial Statements -- Continued
17. Employee Benefit Plans -- Continued
Sensitivity to Changes in Assumed Health Care Cost Trend Rates
1-Percentage- 1-Percentage-
Point Increase Point Decrease
-------------- --------------
In millions
Effect on total of service and interest cost
components................................. $ 3 $ (2)
Effect on postretirement benefit
obligation................................. 34 (24)
18. Quarterly Financial Data (Unaudited)
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -------
In millions, except per share data
1999
Operating revenues................ $4,160 $4,691 $6,694 $6,197 $21,742
Operating income.................. 627 531 884 (247) 1,795
EBIT.............................. 683 568 908 (116) 2,043
Income before extraordinary item.. 307 288 441 (189) 847
Net income........................ 967 288 441 (189) 1,507
Earnings per share (before
extraordinary item)
Basic........................... $ 0.83 $ 0.77 $ 1.20 $(0.53) $ 2.26
Dilutive........................ $ 0.83 $ 0.77 $ 1.19 $(0.53) $ 2.25
Earnings per share
Basic........................... $ 2.65 $ 0.77 $ 1.20 $(0.53) $ 4.08
Dilutive........................ $ 2.64 $ 0.77 $ 1.19 $(0.53) $ 4.07
1998
Operating revenues................ $4,115 $4,014 $5,298 $4,183 $17,610
Operating income.................. 608 549 826 450 2,433
EBIT.............................. 678 582 871 516 2,647
Income before Extraordinary item.. 328 279 429 224 1,260
Net income........................ 320 279 429 224 1,252
Earnings per share before
Extraordinary item)
Basic........................... $ 0.89 $ 0.76 $ 1.18 $ 0.60 $ 3.43
Dilutive........................ $ 0.89 $ 0.76 $ 1.17 $ 0.60 $ 3.42
Earnings per share
Basic........................... $ 0.87 $ 0.76 $ 1.18 $ 0.60 $ 3.41
Dilutive........................ $ 0.87 $ 0.76 $ 1.17 $ 0.60 $ 3.40
19. Subsequent Events
On December 16, 1999, Duke Energy announced that it had signed definitive
agreements to combine Duke Energy's gas gathering and processing businesses
with Phillips Petroleum's Gas Processing and Marketing unit to form a new
midstream company. Under the terms of the agreements, the new company will seek
to arrange approximately $2.6 billion of debt financing and, upon closing of
the transaction, will make a one-time cash distribution of $1.2 billion to both
Duke Energy and Phillips Petroleum. At closing, Duke Energy will own about 70%
of the new company and Phillips Petroleum will own about 30%. The new company
would then offer approximately 20% of its equity to the public in 2000 to
reduce the debt resulting from the transaction. Such an offering is conditional
upon completion of the transaction and favorable market conditions.
On January 4, 2000, Duke Energy announced that it had entered into a
definitive agreement to purchase, for $386 million, 100% of the stock of El
Paso Energy Corporation's wholly owned subsidiary, East Tennessee
75
DUKE ENERGY CORPORATION
Notes to Consolidated Financial Statements -- Continued
19. Subsequent Events -- Continued
Natural Gas Company, a 1,100-mile pipeline that crosses Duke Energy's TETCO
pipeline and serves the southeastern region of the U.S.
Both transactions are subject to regulatory approval and are expected to
close in the first quarter of 2000.
In January 2000, Duke Energy completed a tender offer to the minority
shareholders of Paranapanema and successfully acquired an additional 51%
economic interest in the company for approximately $280 million. This increases
Duke Energy's economic ownership from approximately 44% to approximately 95%.
76
DUKE ENERGY CORPORATION
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Additions
-------------------------
Balance at Charged to Charged to Balance at
Beginning of Period Expense Other Accounts Deductions End of Period
------------------- ---------- -------------- ---------- -------------
In millions
December 31, 1999:
Injuries and Damages... $113 $ 900 $-- $111 $ 902
Other (a).............. 254 150 60(c) 104 360
---- ------ --- ---- ------
$367 $1,050 $60 $215 $1,262
December 31, 1998 (b)... 367
December 31, 1997 (b)... 329
- --------
(a) Principally consists of property insurance reserves and litigation and
other contingency reserves which are included in "Other Current
Liabilities" or "Deferred Credits and Other Liabilities" in the
Consolidated Balance Sheets.
(b) Principally consists of injury and damages reserves, property insurance
reserves and litigation and other contingency reserves which are included
in "Other Current Liabilities" or "Deferred Credits and Other Liabilities"
in the Consolidated Balance Sheets.
(c) Principally litigation and other contingency reserves assumed in business
combinations.
77
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Duke Energy Corporation
We have audited the accompanying consolidated balance sheets of Duke Energy
Corporation and subsidiaries (Duke Energy) as of December 31, 1999 and 1998,
and the related consolidated statements of income and comprehensive income,
common stockholders' equity and cash flows for each of the three years in the
period ended December 31, 1999. Our audits also included the consolidated
financial statement schedule listed in the accompanying index at Item 14. These
financial statements and financial statement schedule are the responsibility of
Duke Energy's management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Duke Energy as of December 31,
1999 and 1998, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1999 in conformity
with generally accepted accounting principles. Also, in our opinion such
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Charlotte, North Carolina
February 11, 2000
78
RESPONSIBILITY FOR FINANCIAL STATEMENTS
The financial statements of Duke Energy Corporation (Duke Energy) are
prepared by management, who are responsible for their integrity and
objectivity. The statements are prepared in conformity with generally accepted
accounting principles in all material respects and necessarily include
judgments and estimates of the expected effects of events and transactions that
are currently being reported.
Duke Energy's system of internal accounting control is designed to provide
reasonable assurance that assets are safeguarded and transactions are executed
according to management's authorization. Internal accounting controls also
provide reasonable assurance that transactions are recorded properly, so that
financial statements can be prepared according to generally accepted accounting
principles. In addition, accounting controls provide reasonable assurance that
errors or irregularities which could be material to the financial statements
are prevented or are detected by employees within a timely period as they
perform their assigned functions. Duke Energy's accounting controls are
continually reviewed for effectiveness. In addition, written policies,
standards and procedures, and a strong internal audit program augment Duke
Energy's accounting controls.
The Board of Directors pursues its oversight role for the financial
statements through the audit committee, which is composed entirely of directors
who are not employees of Duke Energy. The audit committee meets with management
and internal auditors periodically to review accounting control issues and to
monitor each group's discharge of its responsibilities. The audit committee
also meets periodically with Duke Energy's independent auditors, Deloitte &
Touche LLP. The independent auditors have free access to the audit committee
and the Board of Directors to discuss internal accounting control, auditing and
financial reporting matters without the presence of management.
/s/ Sandra P. Meyer
Sandra P. Meyer
Vice President and Corporate Controller
79
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III.
Item 10. Directors and Executive Officers of the Registrant.
Reference is made to "Executive Officers of Duke Energy" included in "Item 1.
Business" of this report. See "The Board of Directors," "Information on the
Board of Directors" and "Other Information" in the proxy statement relating to
Duke Energy's 2000 annual meeting of shareholders (the Proxy Statement),
incorporated herein by reference.
Item 11. Executive Compensation.
See "Compensation" and "Information on the Board of Directors - Compensation
of Directors" in the Proxy Statement, incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
See "Beneficial Ownership" in the Proxy Statement, incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions.
See "Information on the Board of Directors -- Certain Relationships" in the
Proxy Statement, incorporated herein by reference.
80
PART IV.
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K.
(a) Consolidated Financial Statements, Supplemental Financial Data and
Supplemental Schedule included in Part II of this annual report are as follows:
Consolidated Financial Statements
Consolidated Statements of Income and Comprehensive Income for the
Years Ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended December
31, 1999, 1998 and 1997
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Common Stockholders' Equity for the Years
Ended December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
Quarterly Financial Data (unaudited) (included in Note 18 to the
Consolidated Financial Statements)
Consolidated Financial Statement Schedule II--Valuation and Qualifying
Accounts and Reserves for the Years Ended December 31, 1999, 1998 and 1997
All other schedules are omitted because of the absence of the conditions
under which they are required or because the required information is included in
the financial statements or notes thereto.
(b) Reports on Form 8-K
A Current Report on Form 8-K filed on December 30, 1999 contained disclosures
under Item 5, Other Events, and Item 7, Financial Statements and Exhibits.
(c) Exhibits--See Exhibit Index immediately following the signature page.
81
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 20, 2000 Duke Energy Corporation
(Registrant)
By: Richard B. Priory
Richard B. Priory
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
(i) Principal executive officer:
Richard B. Priory
Chairman of the Board, President and Chief Executive Officer
(ii) Principal financial officer:
Richard J. Osborne
Executive Vice President and Chief Financial Officer
(iii) Principal accounting officer:
Sandra P. Meyer
Vice President and Corporate Controller
(iv) All of the Directors:
Richard B. Priory
G. Alex Bernhardt, Sr.
Robert J. Brown
William A. Coley
William T. Esre
Ann Maynard Gray
Dennis R. Hendrix
Harold S. Hook
George Dean Johnson, Jr.
Max Lennon
Leo E. Linbeck, Jr.
James G. Martin
Russell M. Robinson, II
Date: March 20, 2000
Richard J. Osborne, by signing his name hereto, does hereby sign this
document on behalf of the registrant and on behalf of each of the above-named
persons pursuant to a power of attorney duly executed by the registrant and
such persons, filed with the Securities and Exchange Commission as an exhibit
hereto.
/s/ Richard J. Osborne
By: __________________________________
Attorney-In-Fact
82
EXHIBIT INDEX
Exhibits filed herewith are designated by an asterisk (*). All exhibits not
so designated are incorporated by reference to a prior filing, as indicated.
Items constituting management contracts or compensatory plans or arrangements
are designated by a double asterisk (**).
Exhibit
Number
-------
2 Agreement and Plan of Merger, dated as of November 24, 1996,
as amended and restated as of March 10, 1997, among
registrant, Duke Transaction Corporation and PanEnergy Corp
(filed with Form 8-K dated March 20, 1997, File No. 1-4928, as
Exhibit 2(a)).
3-A Restated Articles of Incorporation of registrant, dated June
18, 1997 (filed with Form S-8, No. 333-29563, effective June
19, 1997, as Exhibit 4(G)).
*3-B Articles of Amendment to Restated Articles of Incorporation of
registrant.
*3-C By-Laws of registrant, as amended.
4 Rights Agreement, dated as of December 17, 1998, between the
registrant and The Bank of New York, as Rights Agent (filed
with Form 8-K dated February 11, 1999).
10-A Agreement, dated March 6, 1978, between the registrant and the
North Carolina Municipal Power Agency No. 1 (filed with Form
8-K for the month of March 1978, File No. 1-4928).
10-B Agreement, dated August 1, 1980, between the registrant and
Piedmont Municipal Power Agency (filed with Form 8-K for the
month of August 1980, File No. 1-4928).
10-C Agreement, dated October 14, 1980, between the registrant and
North Carolina Electric Membership Corporation (filed with
Form 10-Q for the quarter ended September 30, 1980, File No.
1-4928).
10-D Agreement, dated October 14, 1980, between the registrant and
Saluda River Electric Cooperative, Inc. (filed with Form 10-Q
for the quarter ended September 30, 1980, File No. 1-4928).
10-E** Directors' Charitable Giving Program (filed with Form 10-K for
the year ended December 31, 1992, File No. 1-4928, as Exhibit
10-P).
10-F** Estate Conservation Plan (filed with Form 10-K for the year
ended December 31, 1992, File No. 1-4928, as Exhibit 10-R).
10-G** Directors' Savings Plan (filed with Form 10-K for the year
ended December 31, 1996, File No. 1-4928, as Exhibit 10-BB).
10-H** Duke Power Company Stock Incentive Plan (filed as Appendix A
to Schedule 14A of registrant, March 18, 1996, File No. 1-
4928).
83
Exhibit
Number
-------
10-I** 1989 Non-employee Directors Stock Option Plan of Panhandle
Eastern Corporation, adopted February 1, 1989 (filed with Form
S-8 Registration Statement of Panhandle Eastern Corporation,
File No. 33-28912, as Exhibit 28(a)).
10-J** 1982 Key Employee Stock Option Plan of Panhandle Eastern
Corporation, as amended through December 3, 1986 (and related
Agreement) (filed with Form 10-K of Panhandle Eastern
Corporation for the year ended December 31, 1986, File No. 1-
8157, as Exhibit 10(g)).
10-K** Panhandle Eastern Corporation 1994 Long Term Incentive Plan
(filed with Form 10-K of Panhandle Eastern Corporation for the
year ended December 31, 1993, File No. 1-8157, as Exhibit
10.18).
10-L $1,250,000,000 Five-Year Credit Agreement dated as of August
25, 1997, among registrant, the banks listed therein and
Morgan Guaranty Trust Company of New York, as Administrative
Agent (filed with Form 10-K for the year ended December 31,
1997, as Exhibit 10-R).
10-M $950,000,000 Five-Year Credit Agreement dated as of August 25,
1997, among Duke Capital Corporation, the banks listed therein
and The Chase Manhattan Bank, as Administrative Agent (filed
with Form 10-K for the year ended December 31, 1997, as
Exhibit 10-S).
*10-N $600,000,000 364-Day Credit Agreement dated as of August 23,
1999, among Duke Capital Corporation, the banks listed therein
and The Chase Manhattan Bank, as Administrative Agent.
10-O** Employment Agreement by and between the registrant and Richard
B. Priory dated November 24, 1996 (incorporated by reference
to Exhibit C-1 of Exhibit 2 to this Form 10-K), and the First
Amendment thereto dated October 22, 1997 (filed with Form 10-K
for the year ended December 31, 1997, as part of Exhibit 10-
U).
10-P** Employment Agreement by and among PanEnergy Corp, the
registrant and Fred J. Fowler dated November 24, 1996
(incorporated by reference to Exhibit B-3 of Exhibit 2 to this
Form 10-K), and the First Amendment thereto dated October 24,
1997, filed herewith.
10-Q** Employment Agreement by and between the registrant and William
A. Coley dated November 24, 1996 (incorporated by reference to
Exhibit C-2 of Exhibit 2 to this Form 10-K), and the First
Amendment thereto dated October 24, 1997 (filed with Form 10-K
for the year ended December 31, 1997, as part of Exhibit 10-
X).
10-R** Employment Agreement by and between the registrant and Richard
J. Osborne dated November 24, 1996 (incorporated by reference
to Exhibit C-3 of Exhibit 2 to this Form 10-K), and the First
Amendment thereto dated October 27, 1997 (filed with Form 10-K
for the year ended December 31, 1997, as part of Exhibit 10-
Y).
84
Exhibit
Number
-------
10-S** 1990 Long-Term Incentive Plan of Panhandle Eastern Corporation
(filed with Form 10-K of Panhandle Eastern Corporation for the
year ended December 31, 1990, File No. 1-8157, as Exhibit
10.14).
10-T Formation Agreement between PanEnergy Trading and Market
Services, Inc. and Mobil Natural Gas, Inc. dated May 29, 1996
(filed with Form 10-Q of PanEnergy Corp for the quarter ended
June 30, 1996, File No. 1-8157, as Exhibit 2).
10-U Duke Energy Corporation Long-Term Incentive Plan (filed as
Appendix A to Schedule 14A of the registrant, March 16, 1998).
10-V** Duke Energy Corporation Policy Committee Short-Term Incentive
Plan (filed as Appendix B to Schedule 14A of the registrant,
March 16, 1998).
10-W Stock Purchase Agreement between PanEnergy Corp, Texas Eastern
Corporation and CMS Energy Corporation, dated as of October
31, 1998 (filed as Exhibit 10 to Form 8-K of the registrant,
File No. 1-4928, filed November 5, 1998).
10-X Merger and Purchase Agreement among Union Pacific Resources
Company, Union Pacific Fuels, Inc., Duke Energy Field
Services, Inc. and DEFS Merger Sub Corp., dated as of November
20, 1998 (filed as Exhibit 10 to Form 8-K of the registrant,
File No. 1-4928, filed December 1, 1998).
10-Y** Duke Energy Corporation Executive Savings Plan (filed with
Form 10-K Report of TEPPCO Partners, LP, File No. 1-10403, for
the year ended December 31, 1999, as Exhibit 10.7).
10-Z** Duke Energy Corporation Executive Cash Balance Plan (filed
with Form 10-K Report of TEPPCO Partners, LP, File No. 1-
10403, for the year ended December 31, 1999, as Exhibit 10.8).
10-AA** Duke Energy Corporation Retirement Benefit Equalization Plan
(filed with Form 10-K Report of TEPPCO Partners, LP, File No.
1-10403, for the year ended December 31, 1999, as Exhibit
10.9).
*10-BB** Form of Key Employee Severance Agreement and Release between
the registrant and certain key executives.
*10-CC** Form of Change in Control Agreement between the registrant and
certain key executives.
10-DD Contribution Agreement by and among Phillips Petroleum
Company, Duke Energy Corporation and Duke Energy Field
Services L.L.C., dated as of December 16, 1999 (filed as
Exhibit 2.1 to Form 8-K of the registrant, filed December 30,
1999).
10-EE Governance Agreement by and among Phillips Petroleum Company,
Duke Energy Corporation and Duke Energy Field Services L.L.C.,
dated as of December 16, 1999 (filed as Exhibit 2.2 to Form 8-
K of the registrant, filed December 30, 1999).
*12 Computation of Ratio of Earnings to Fixed Charges.
*21 List of Subsidiaries.
*23(a) Independent Auditors' Consent.
*24(a) Power of attorney authorizing Richard J. Osborne and others to
sign the annual report on behalf of the registrant and certain
of its directors and officers.
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*24(b) Certified copy of resolution of the Management Committee of the Board
of Directors of the registrant authorizing power of attorney.
*27 Financial Data Schedule for the Year Ended December 31, 1999.
The total amount of securities of the registrant or its subsidiaries
authorized under any instrument with respect to long-term debt not filed as an
exhibit does not exceed 10% of the total assets of the registrant and its
subsidiaries on a consolidated basis. The registrant agrees, upon request of
the Securities and Exchange Commission, to furnish copies of any or all of such
instruments.
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