Back to GetFilings.com
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
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 0-23977
DUKE CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 51-0282142
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
526 South Church Street, Charlotte, 28202-1904
North 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
------------------- ---------------------
7 3/8% Quarterly Income Preferred Securities
issued by Duke Capital Financing Trust I and
guaranteed by Duke Capital Corporation New York Stock Exchange, Inc.
7 3/8% Trust Originated Preferred Securities
issued by Duke Capital Financing Trust II and
guaranteed by Duke Capital Corporation New York Stock Exchange, Inc.
8 3/8% Trust Preferred Securities issued by Duke
Capital Financing Trust III and guaranteed by
Duke Capital Corporation New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
Title of class
Common Stock, without par value
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. [X]
The registrant meets the conditions set forth in General Instruction
(I)(1)(a) and (b) of Form 10-K and is therefore filing this Form 10-K with the
reduced disclosure format. Items 4, 10, 11, 12 and 13 have been omitted in
accordance with Instruction I(2)(c).
All of the registrant's common shares are directly owned by Duke Energy
Corporation (File No. 1-4928), which files reports and proxy material pursuant
to the Securities Exchange Act of 1934, as amended.
Estimated aggregate market value of the voting stock held by
nonaffiliates of the registrant at February 29, 2000................... None
Number of shares of Common Stock, without par value, outstanding at
February 29, 2000...................................................... 1,010
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DUKE CAPITAL CORPORATION
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
Item Page
- ---- ----
PART I.
1. Business.............................................................. 1
General............................................................... 1
Natural Gas Transmission.............................................. 3
Field Services........................................................ 5
Trading and Marketing................................................. 7
Global Asset Development.............................................. 8
Other Energy Services................................................. 10
Real Estate Operations................................................ 11
Environmental Matters................................................. 11
Foreign Operations and Export Sales................................... 12
Employees and Management.............................................. 12
Operating Statistics.................................................. 13
2. Properties............................................................ 13
3. Legal Proceedings..................................................... 14
PART II.
5. Market for Registrant's Common Equity and Related Stockholder
Matters............................................................... 15
6. Selected Financial Data............................................... 15
7. Management's Discussion and Analysis of Results of Operations and
Financial Condition................................................... 15
7A.Quantitative and Qualitative Disclosures About Market Risk............ 28
8. Financial Statements and Supplementary Data........................... 29
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................. 60
PART IV.
14.Exhibits, Financial Statement Schedules, and Reports on Form 8-K...... 60
Signatures............................................................ 62
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
From time to time, the Company may make statements regarding its assumptions,
projections, expectations, intentions or beliefs about future events. These
statements are intended as "forward-looking statements" under the Private
Securities Litigation Reform Act of 1995. The Company 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 Capital Corporation (collectively with its subsidiaries, the "Company")
is a wholly owned subsidiary of Duke Energy Corporation (Duke Energy) and
serves as the parent of certain of Duke Energy's non-utility and other
operations. The Company provides financing and credit enhancement services for
its subsidiaries and conducts its operations through six business segments:
. Natural Gas Transmission
. Field Services
. Trading and Marketing
. Global Asset Development
. Other Energy Services
. Real Estate Operations
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 Federal
Energy Regulatory Commission (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. The Company 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 the Company.
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.
On June 18, 1997, Duke Energy completed a stock-for-stock merger with
PanEnergy Corp (PanEnergy). On June 30, 1997, Duke Energy contributed the
common stock of PanEnergy to the Company. The combination of the Company and
PanEnergy was accounted for similar to a pooling of interests; therefore, the
Consolidated Financial Statements and other financial information included in
this annual report for periods prior to the combination include the combined
historical financial results of the Company and PanEnergy. (See Note 2 to the
Consolidated Financial Statements, "Business Combinations, Acquisitions and
Dispositions.")
1
Certain terms used to describe the Company'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.
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.
Merchant Power Plant. A power plant that sells directly to wholesale
customers without its output necessarily being committed to long-term power
sales agreements.
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.
Throughput. The amount of natural gas or natural gas liquids transported
through a pipeline system.
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 the Company's
segments follows. For further discussion of the operating outlook of the
Company and its segments, see "Management's Discussion and Analysis of Results
of Operations and Financial Condition, Introduction--Business Strategy." For
financial
2
information concerning the Company's business segments, see Note 3 to the
Consolidated Financial Statements, "Business Segments."
The Company is a Delaware corporation with its principal executive offices
located at 526 South Church Street, Charlotte, NC 28202-1904. The telephone
number is 704-594-6200.
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 15 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. A majority of the delivered
volumes of Natural Gas Transmission's interstate pipelines represents gas
transported under long-term firm service agreements with 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.
3
(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.
Competition
The Company'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 the Company'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
4
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 the Company.
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."
With respect to the FERC Notice of Proposed Rulemaking (NOPR) discussed in
"Management's Discussion and Analysis of Results of Operations and Financial
Condition, Current Issues -- Natural Gas Transmission," on February 9, 2000,
the FERC issued Order 637 setting forth revisions to its regulations governing
the regulation of interstate natural gas pipelines. Order 637 is subject to
requests for rehearing and possible court appeal. Because the ultimate
resolution of this proceeding is unknown, management cannot estimate the effect
of this matter on future consolidated results of operations or financial
position.
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 Environmental
Protection Agency (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.
5
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.
6
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 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, The Company 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 15 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. The Company 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 the Company.
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
7
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 the
Company'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 6 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.
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
8
and other services. Global Asset Development owns, operates or has substantial
interests in approximately 12,500 megawatts (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 15 to the Consolidated
Financial Statements, "Business Combinations, Acquisitions and Dispositions"
and "Subsequent Events," respectively.
9
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 depciting 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.
10
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
domestically and internationally. Subsidiaries of the Company 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
The Company 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 the
Company include:
. The Clean Air Act Amendments of 1990;
. State Implementation Plans, which were issued by the EPA to 22 states 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
(CERCLA), 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.
11
For further discussion of environmental matters involving the Company,
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 11 to the Consolidated
Financial Statements, "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 the Company.
FOREIGN OPERATIONS AND EXPORT SALES
Foreign operations consisted of 13% of consolidated revenues in 1999, of
which 12% was from Canadian operations, and 26% of consolidated long-lived
assets as of December 31, 1999, of which 20% related to Latin American
operations. For 1998 and 1997, foreign operations and export sales were not
material to the Company's business as a whole. For a discussion of risks
associated with the Company's foreign operations, see "Management's Discussion
and Analysis of Results of Operations and Financial Condition, Quantitative and
Qualitative Disclosures About Market Risk--Foreign Operations Risk" and Note 6
to the Consolidated Financial Statements, "Risk Management and Financial
Instruments."
EMPLOYEES AND MANAGEMENT
At December 31, 1999, the Company had approximately 8,700 employees.
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.
The officers and directors of the Company consist of certain executive
officers of Duke Energy. Duke Energy has entered into employment agreements
with certain key executives. Additionally, the Company's business units
maintain their own management structure.
12
OPERATING STATISTICS
Years Ended December 31,
------------------------------------
1999 1998 1997 1996 1995
------- ------ ------ ----- -----
Natural Gas Transmission
Throughput Volumes, TBtu(a):
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(b)..................
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(c)....... 5.1 3.6 3.4 2.9 1.9
NGL Production, MBbl/d(d)............... 192.4 110.2 108.2 78.5 54.8
Average Natural Gas Price per MMBtu(e).. $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(f)............ 109,634 98,991 64,650 4,229 513
- --------
(a) Trillion British thermal units.
(b) Sold in March 1999.
(c) Trillion British thermal units per day.
(d) Thousand barrels per day.
(e) Million British thermal units.
(f) Gigawatt-hour.
Item 2. Properties.
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."
13
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."
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 the Company's other business
activities are considered material to the Company'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 the Company relating to
alleged air quality permit violations at a natural gas compressor station. The
Company 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. Management
believes that the resolution of this matter will not have a material adverse
effect on consolidated results of operations or financial position.
For additional information concerning litigation and other contingencies, see
Note 11 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 in
"Management's Discussion and Analysis of Results of Operations and Financial
Condition, Current Issues--Environmental--Air Quality Control," in March 2000,
14
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.
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
All of the outstanding common stock of the Company is, as of the date hereof,
owned by Duke Energy. There is no market for the Company's common stock.
Dividends on the Company's common stock will be paid when declared by the Board
of Directors. The Company did not pay dividends on its common stock in 1999 and
1998 and, at present, has no plans to pay such dividends in the forseeable
future.
Item 6. Selected Financial Data.
1999 1998 1997(a) 1996(a) 1995(a)
------- ------- ------- ------- -------
In millions
Income Statement
Operating revenues................... $16,872 $13,059 $11,915 $7,816 $5,188
Operating expenses................... 15,830 12,023 11,079 6,947 4,394
------- ------- ------- ------ ------
Operating income..................... 1,042 1,036 836 869 794
Other income and expenses............ 118 101 37 20 18
------- ------- ------- ------ ------
Earnings before interest and taxes... 1,160 1,137 873 889 812
Interest expense..................... 326 237 214 232 240
Minority interests................... 107 71 22 6 --
------- ------- ------- ------ ------
Earnings before income taxes......... 727 829 637 651 572
Income taxes......................... 237 310 257 252 224
------- ------- ------- ------ ------
Income before extraordinary item..... 490 519 380 399 348
Extraordinary gain (loss)............ 660 (8) -- (17) --
------- ------- ------- ------ ------
Net income........................... $ 1,150 $ 511 $ 380 $ 382 $ 348
======= ======= ======= ====== ======
Balance Sheet
Total assets......................... $20,600 $13,856 $11,097 $9,752 $8,226
Long-term debt....................... $ 5,319 $ 2,884 $ 2,919 $2,028 $2,215
- --------
(a) Financial information reflects accounting for the 1997 combination of the
Company with PanEnergy Corp similar to a pooling of interests. As a result,
the financial information gives effect to the combination as if it had
occurred on 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.
Business Segments. Duke Capital Corporation (collectively with its
subsidiaries, "the Company") is a wholly owned subsidiary of Duke Energy
Corporation (Duke Energy) and serves as the parent for certain of Duke Energy's
non-utility and other operations. The Company provides financing and credit
enhancement services for its subsidiaries and conducts its operations through
six business segments:
. Natural Gas Transmission
. Field Services
. Trading and Marketing
. Global Asset Development
. Other Energy Services
. Real Estate Operations
15
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 Federal Energy Regulatory Commission (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. The Company 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 the Company.
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.
On June 18, 1997, Duke Energy completed a stock-for-stock merger with
PanEnergy Corp (PanEnergy). On June 30, 1997, Duke Energy contributed the
common stock of PanEnergy to the Company. The combination of the Company and
PanEnergy was accounted for similar to a pooling of interests; therefore, the
Consolidated Financial Statements and other financial information included in
this Annual Report for periods prior to the combination include the combined
historical financial results of the Company and PanEnergy. See Note 2 to the
Consolidated Financial Statements for additional information on the
combination.
Business Strategy. The Company's business strategy is to develop integrated
energy infrastructures in targeted regions where the Company'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, the Company 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, the Company is currently
focusing on integrated electric and gas opportunities in Australia and Latin
America and intends to implement its strategies in Europe.
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 15 to the Consolidated Financial Statements.
16
The Company 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
its 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 15 to the Consolidated Financial Statements for further discussion.
Trading and marketing activities at the Company continue to expand as Trading
and Marketing provides energy supply, output marketing, risk management and
commercial optimization services to all of the Company'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. The Company'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
substantial growth opportunities for both the commercial and residential
development of Real Estate Operations. In addition to initiating development of
significant 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
Operations also announced plans to enter the multi-family market and to
significantly increase its retail development.
Results of Operations
In 1999, net income was $1,150 million including an after-tax extraordinary
gain of $660 million. In 1998, net income was $511 million net of an after-tax
extraordinary loss of $8 million. The increase in net income 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 higher interest expense and
minority interest expense.
Net income increased $131 million in 1998 from 1997 net income of $380
million. The increase in net income 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 $1,042 million compared to $1,036 million in
1998 and $836 million in 1997. Earnings before interest and taxes (EBIT) were
$1,160 million, $1,137 million and $873 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
the Company 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.
17
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
Natural Gas Transmission................................ $ 627 $ 702 $624
Field Services.......................................... 144 76 157
Trading and Marketing................................... 75 81 23
Global Asset Development................................ 181 64 4
Other Energy Services................................... (94) 10 18
Real Estate Operations.................................. 176 142 98
Other Operations........................................ (41) 5 (73)
Minority Interests...................................... 92 57 22
------ ------ ----
Consolidated EBIT....................................... $1,160 $1,137 $873
====== ====== ====
Other Operations primarily include communication services and certain
unallocated corporate costs. Included in the amounts discussed hereafter are
intercompany transactions that are eliminated in the Consolidated Financial
Statements.
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 the Company'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 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.
18
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 15 to the Consolidated Financial Statements for
further discussion.
19
Trading and Marketing
Years Ended December
31,
---------------------
1999 1998 1997
------- ------ ------
In millions, except
where noted
Operating Revenues.................................... $11,533 $8,785 $7,489
Operating Expenses.................................... 11,459 8,665 7,446
------- ------ ------
Operating Income...................................... 74 120 43
Other Income, Net of Expenses......................... 43 2 1
Minority Interest Expense............................. 42 41 21
------- ------ ------
EBIT.................................................. $ 75 $ 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 $6 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
20
earnings resulting from lower prices at National Methanol Company, a methanol
and MTBE (methyl tertiary butyl ether) business in Saudi Arabia.
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 $46 million in 1999 compared to 1998,
primarily as a result of the resolution of certain contingent items during
1998. EBIT for Other Operations increased $78 million in 1998 compared to 1997,
primarily as a result of the absence 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 the Company's ownership interest in the
Midland Cogeneration Venture.
Other Impacts on Net Income
Interest expense increased $89 million in 1999 compared to 1998, and $23
million in 1998 compared to 1997 due to higher average debt balances
outstanding, resulting from acquisitions and expansion.
Minority interests increased $36 million in 1999 compared to 1998, and $49
million in 1998 compared to 1997. The increases were due primarily to regular
distributions paid on new issuances of the Company's trust preferred
securities. For more information on issuances of trust preferred securities,
see Note 10 to the
21
Consolidated Financial Statements. Excluding these distributions, 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 7 to the
Consolidated Financial Statements.
Duke Capital's effective tax rate was approximately 33%, 37% 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 Capital 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 the Company has a 21.1%
ownership interest, redeemed certain First Mortgage Notes which resulted in the
Company recording a non-cash extraordinary loss of $8 million, net of income
tax of $5 million, related to its share of costs of the early retirement of
debt.
LIQUIDITY AND CAPITAL RESOURCES
Operating Cash Flows
Net cash provided by operations was $1,128 million in 1999, $930 million in
1998 and $698 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 the Company, 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.
Investing Cash Flows
Capital and investment expenditures were approximately $5.2 billion in 1999
compared to approximately $1.9 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.
Capital and investment expenditures in 1998 increased $627 million from $1.3
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 the acquisition of the remaining 50% ownership of the D/LD joint
venture in June 1997.
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
22
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 15 to the Consolidated Financial
Statements.
The Company 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 its 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 15 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 15 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. The Company's
intent is to produce natural gas to partially offset the short gas position of
the Company'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.
Financing Cash Flows
The Company's consolidated capital structure at December 31, 1999, including
short-term debt, was 43% debt, 9% minority interests, 6% trust preferred
securities and 42% common equity. Fixed charges coverage, calculated using the
Securities and Exchange Commission method, was 2.9 times, 4.2 times and 3.7
times for 1999, 1998 and 1997, respectively.
The Company's business expansion opportunities, debt repayments and operating
and investing requirements, are expected to be funded by cash from operations,
external financing and the proceeds from certain asset sales.
During 1999, the Company issued a total of $1.5 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
23
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 9 to the Consolidated Financial Statements.
Also during the year, a business trust of the Company, which is treated as a
wholly owned subsidiary for financial reporting purposes, issued a total of
$250 million of trust preferred securities. See Note 10 to the Consolidated
Financial Statements for additional information on trust preferred securities.
Under its commercial paper facilities, the Company had the ability to borrow
up to $1.55 billion at both December 31, 1999 and 1998. Global Asset
Development also had available an approximately $500 million combined
commercial paper and medium-term note program. The Company's various bank
credit facilities totaled approximately $2.5 billion (including approximately
$320 million related to foreign facilities) at December 31, 1999 and $1.7
billion at December 31, 1998. At December 31, 1999, approximately $580 million
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 9 to the Consolidated Financial Statements).
As of December 31, 1999, Duke Energy and its subsidiaries had the ability to
issue up to $600 million 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 Senior Notes, Subordinated Notes
or Preferred Securities.
On December 16, 1999, Duke Energy announced that it had signed definitive
agreements to combine Field Services' 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 the Company 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 15 to the Consolidated
Financial Statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Risk Policies
The Company is exposed to market risks associated with interest rates,
commodity prices and foreign exchange rates. Comprehensive risk management
policies have been established by Duke Energy's Corporate Risk Management
Committee (CRMC) to monitor and control these market risks. The CRMC is chaired
by the Chief Financial Officer of Duke Energy and is comprised of senior
executives of Duke Energy. 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
The Company 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 and commercial paper, as well as interest rate lock
agreements. The Company 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
24
changes in interest rates. The Company 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, 6,
9 and 10 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 $10
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 $7 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 the Company's financial structure.
Commodity Price Risk
The Company, 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. The Company employs 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 6 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. The Company'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 $7 million and $10 million,
respectively. 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 $8 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 the Company are also exposed to market fluctuations in the
prices of NGLs related to their ongoing gathering and processing operating
activities. The Company 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 the Company'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.
25
Foreign Operations Risk
The Company 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. The Company also uses foreign currency
derivatives, where possible, to manage its risk related to foreign currency
fluctuations. To monitor its currency exchange rate risks, the Company uses
sensitivity analysis, which measures the impact of a devaluation of the foreign
currencies to which it has exposure.
At December 31, 1999, the Company'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 the Company's financial position by
approximately $65 million and would not significantly affect the Company'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 the Company'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
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
overbuilding 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 the Company'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.
Environmental. The Company is subject to international, federal, state and
local regulations regarding air and water quality, hazardous and solid waste
disposal and other environmental matters.
26
Superfund Sites. The Company is considered by regulators to be a potentially
responsible party and may be subject to future liability at five federal
Superfund sites and one state Superfund site. While the cost of remediation of
the remaining sites may be substantial, the Company 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 the Company, 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, the Company 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. The Company 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 the Company's ability to deliver natural gas to customers. Based on
the Company'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. 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 the Company 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 11 to the Consolidated Financial
Statements.
Year 2000 Readiness Program. The Company did not experience any disruption to
its operations resulting from the transition to the year 2000. The Company
completed its year 2000 readiness program at all of its business units in
November 1999. Systems will continue to be monitored throughout the year. The
total cost of the program, including internal labor as well as incremental
costs such as consulting and contract costs, was approximately $7 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. The Company is required to
27
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. The Company 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 Field Services' 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 the Company and Phillips Petroleum. At closing, the
Company 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, the Company 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 the Company'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, the Company 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
the Company's economic ownership from approximately 44% to approximately 95%.
Forward-Looking Statements. From time to time, the Company'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. The Company 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 the Company 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 the Company and its
subsidiaries are subject or other external factors over which the Company has
no control; the results of financing efforts, including the Company's ability
to obtain financing on favorable terms, which can be affected by the Company's
credit rating and general economic conditions; growth in opportunities for the
Company'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."
28
Item 8. Financial Statements and Supplementary Data.
DUKE CAPITAL CORPORATION
Consolidated Statements Of Income And Comprehensive Income
Years Ended
December 31,
-------------------------
1999 1998 1997
------- ------- -------
In millions
Operating Revenues
Sales, trading and
marketing of natural gas
and petroleum products .. $10,661 $ 7,854 $ 8,151
Trading and marketing of
electricity.............. 3,610 2,788 1,665
Transportation and storage
of natural gas........... 1,139 1,450 1,504
Other....................... 1,462 967 595
------- ------- -------
Total operating
revenues............... 16,872 13,059 11,915
------- ------- -------
Operating Expenses
Natural gas and petroleum
products purchased....... 10,376 7,497 7,705
Purchased power........... 3,169 2,602 1,658
Other operation and
maintenance.............. 1,757 1,450 1,279
Depreciation and
amortization............. 418 385 342
Property and other taxes.. 110 89 95
------- ------- -------
Total operating
expenses............... 15,830 12,023 11,079
------- ------- -------
Operating Income............ 1,042 1,036 836
Other Income and Expenses... 118 101 37
------- ------- -------
Earnings Before Interest and
Taxes...................... 1,160 1,137 873
Interest Expense ........... 326 237 214
Minority Interests ......... 107 71 22
------- ------- -------
Earnings Before Income
Taxes...................... 727 829 637
Income Taxes ............... 237 310 257
------- ------- -------
Income Before Extraordinary
Item....................... 490 519 380
Extraordinary Gain (Loss),
net of tax................. 660 (8) --
------- ------- -------
Net Income.................. $ 1,150 $ 511 $ 380
======= ======= =======
Other Comprehensive
Income, net of tax
Foreign currency
translation adjustments
......................... (2) -- --
------- ------- -------
Total Comprehensive
Income................. $ 1,148 $ 511 $ 380
======= ======= =======
See Notes to Consolidated Financial Statements.
29
DUKE CAPITAL CORPORATION
Consolidated Statements Of Cash Flows
Years Ended December 31,
----------------------------
1999 1998 1997
-------- -------- --------
In millions
Cash Flows From Operating Activities
Net income..................................... $ 1,150 $ 511 $ 380
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................ 442 397 349
Extraordinary (gain) loss, net of tax........ (660) 8 --
Deferred income taxes........................ 156 70 133
Transition cost recoveries (payments), net... 95 (28) (36)
(Increase) decrease in
Receivables................................ (790) (101) (241)
Inventory.................................. (86) (32) (11)
Other current assets....................... (139) (50) (6)
Increase (decrease) in
Accounts payable........................... 619 56 198
Taxes accrued.............................. (44) 40 33
Interest accrued........................... 28 6 (9)
Other current liabilities.................. 134 101 (46)
Other, net................................... 223 (48) (46)
-------- -------- --------
Net cash provided by operating
activities.............................. 1,128 930 698
-------- -------- --------
Cash Flows From Investing Activities
Capital and investment expenditures............ (5,177) (1,914) (1,287)
Proceeds from sale of subsidiaries............. 1,900 -- --
Proceeds from sales and other, net............. 132 115 109
-------- -------- --------
Net cash used in investing activities.... (3,145) (1,799) (1,178)
-------- -------- --------
Cash Flows From Financing Activities
Proceeds from the issuance of
Long-term debt............................... 2,773 590 947
Guaranteed preferred beneficial interests in
subordinated notes of
Duke Capital Corporation.................... 242 581 --
Common stock................................. -- -- 6
Payments for the redemption of long-term debt.. (808) (78) (200)
Net change in notes payable and commercial
paper......................................... 54 (498) (221)
Capital contributions from parent.............. 200 200 --
Dividends paid................................. -- -- (83)
Other, net..................................... 28 6 (26)
-------- -------- --------
Net cash provided by financing
activities.............................. 2,489 801 423
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents..................................... 472 (68) (57)
Cash received from business acquisitions......... 49 38 --
Cash and cash equivalents at beginning of year... 64 94 151
-------- -------- --------
Cash and cash equivalents at end of year......... $ 585 $ 64 $ 94
======== ======== ========
Supplemental Disclosures
Cash paid for interest, net of amount
capitalized................................... $ 294 $ 224 $ 222
Cash paid for income taxes..................... $ 202 $ 192 $ 112
See Notes to Consolidated Financial Statements.
30
[THIS PAGE INTENTIONALLY LEFT BLANK]
31
DUKE CAPITAL CORPORATION
Consolidated Balance Sheets
December 31,
---------------
1999 1998
------- -------
In millions
ASSETS
Current Assets
Cash and cash equivalents..................................... $ 585 $ 64
Receivables................................................... 2,957 1,767
Inventory..................................................... 267 214
Current portion of natural gas transition costs............... 81 100
Unrealized gains on mark-to-market transactions............... 1,118 1,457
Other......................................................... 344 236
------- -------
Total current assets........................................ 5,352 3,838
------- -------
Investments and Other Assets
Investments in affiliates..................................... 1,299 902
Pre-funded pension costs...................................... 340 340
Goodwill, net................................................. 774 495
Notes receivable.............................................. 154 244
Unrealized gains on mark-to-market transactions............... 690 396
Other......................................................... 664 169
------- -------
Total investments and other assets.......................... 3,921 2,546
------- -------
Property, Plant and Equipment
Cost.......................................................... 13,642 11,020
Less accumulated depreciation and amortization................ 2,475 3,866
------- -------
Net property, plant and equipment........................... 11,167 7,154
------- -------
Regulatory Assets and Deferred Debits
Debt expense.................................................. 42 58
Regulatory asset related to income taxes...................... 13 15
Natural gas transition costs.................................. 4 80
Environmental clean-up costs.................................. 27 69
Other......................................................... 74 96
------- -------
Total regulatory assets and deferred debts.................. 160 318
------- -------
Total Assets................................................... $20,600 $13,856
======= =======
See Notes to Consolidated Financial Statements.
32
DUKE CAPITAL CORPORATION
Consolidated Balance Sheets, Continued
December 31,
----------------
1999 1998
------- -------
In millions
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Accounts payable............................................ $ 2,106 $ 1,406
Notes payable and commercial paper.......................... 83 29
Taxes accrued............................................... 738 159
Interest accrued............................................ 83 57
Current maturities of long-term debt........................ 277 258
Unrealized losses on mark-to-market transactions............ 1,241 1,387
Other....................................................... 600 492
------- -------
Total current liabilities................................. 5,128 3,788
------- -------
Long-term Debt............................................... 5,319 2,884
------- -------
Deferred Credits and Other Liabilities
Deferred income taxes....................................... 1,475 1,434
Environmental clean-up liabilities.......................... 101 148
Unrealized losses on mark-to-market transactions............ 438 362
Other....................................................... 657 334
------- -------
Total deferred credits and other liabilities.............. 2,671 2,278
------- -------
Minority Interests........................................... 1,200 253
------- -------
Guaranteed Preferred Beneficial Interests in Subordinated
Notes of Duke Capital Corporation........................... 823 580
------- -------
Common Stockholder's Equity
Common stock, no par, 3,000 shares authorized; 1,010 shares
outstanding................................................ -- --
Paid-in capital............................................. 3,200 2,969
Retained earnings........................................... 2,261 1,104
Accumulated other comprehensive income...................... (2) --
------- -------
Total common stockholder's equity......................... 5,459 4,073
------- -------
Total Liabilities and Stockholder's Equity................... $20,600 $13,856
======= =======
See Notes to Consolidated Financial Statements.
33
DUKE CAPITAL CORPORATION
Consolidated Statements Of Common Stockholder's Equity
Years Ended December
31,
----------------------
1999 1998 1997
------ ------ ------
In millions
Common Stock
Balance at beginning of year.......................... $ -- $ -- $ --
------ ------ ------
Balance at end of year.............................. -- -- --
------ ------ ------
Paid-in Capital
Balance at beginning of year.......................... 2,969 2,766 2,745
Dividend reinvestment and employee benefits........... -- -- 7
Capital contribution from parent...................... 230 200 10
Other capital stock transactions, net................. 1 3 4
------ ------ ------
Balance at end of year.............................. 3,200 2,969 2,766
------ ------ ------
Retained Earnings
Balance at beginning of year.......................... 1,104 600 316
Net income............................................ 1,150 511 380
Dividends declared.................................... -- -- (83)
Other capital stock transactions, net................. 7 (7) (13)
------ ------ ------
Balance at end of year.............................. 2,261 1,104 600
------ ------ ------
Accumulated Other Comprehensive Income
Balance at beginning of year.......................... -- -- --
Foreign currency translation adjustments ............. (2) -- --
------ ------ ------
Balance at end of year.............................. (2) -- --
------ ------ ------
Total Common Stockholder's Equity....................... $5,459 $4,073 $3,366
====== ====== ======
See Notes to Consolidated Financial Statements
34
DUKE CAPITAL CORPORATION
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1999, 1998 and 1997
1. Summary of Significant Accounting Policies
Consolidation. Duke Capital Corporation (collectively with its subsidiaries,
"the Company") is a wholly owned subsidiary of Duke Energy Corporation (Duke
Energy). The consolidated financial statements include the accounts of all the
Company's majority-owned subsidiaries after the elimination of significant
intercompany transactions and balances. Investments in other entities that are
not controlled by the Company, 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.
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, and processing and sales commitments. Inventory is recorded
at the lower of cost or market, primarily using the average cost method.
Accounting for Risk Management and Commodity Trading Activities. The Company,
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
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 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.
The Company 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.
The Company 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
35
DUKE CAPITAL CORPORATION
Notes to Consolidated Financial Statements -- Continued
1. Summary of Significant Accounting Policies -- Continued
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.
The Company 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.
The Company 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 the
Company'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 $774 million and $495 million, net of accumulated
amortization of $212 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. The Company 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 were 3.31%, 3.53% and 3.50%
for 1999, 1998 and 1997, respectively.
When property, plant and equipment maintained by the Company'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 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
36
DUKE CAPITAL CORPORATION
Notes to Consolidated Financial Statements -- Continued
1. Summary of Significant Accounting Policies -- Continued
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. The Company'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 the impact of competition and the necessity to discount cost
based rates charged to customers are considered. 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, the Company continues to position
itself to effectively meet these challenges by maintaining competitive prices.
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, gas and other energy products marketed, are
recognized in the period of delivery. 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.
The Company recognizes revenues from engineering and consulting services
provided through costs plus fee contracts based on the costs incurred during
the period plus a pro rata portion of the total fee earned. Revenues from
services provided through fixed price contracts are recognized using the
percentage-of-completion method, primarily based on contract costs to date
compared with the total estimated contract costs.
The Company recognizes profits from sales of residential real estate
development projects at closing. Profit is recognized under the accrual method
using estimates of average gross profit per developed lot within the project,
based on total estimated project costs. Gains on commercial real estate
development projects are recognized under the accrual method. Gains on land
trades are recognized based on the fair market value of the land received,
adjusted for any cash consideration, as compared to the cost of the land
traded.
Allowance for Funds Used During Construction (AFUDC). 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, the Company is permitted to recover these costs, including a fair
return, through their inclusion in rate base and in the provision for
depreciation. Rates used for capitalization of AFUDC by the Company's regulated
operations are calculated in compliance with FERC rules.
Foreign Currency Translation. Assets and liabilities of the Company'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.
37
DUKE CAPITAL CORPORATION
Notes to Consolidated Financial Statements -- Continued
1. Summary of Significant Accounting Policies -- Continued
Income Taxes. The Company and its subsidiaries file a consolidated federal
income tax return. Federal income taxes have been provided by the Company on
the basis of its separate company income and deductions in accordance with
established practices of the consolidated group. 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.
Extraordinary Items. In 1999, the Company realized an extraordinary gain of
$660 million 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 the
Company 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.
New Accounting Standard. In September 1998, SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," was issued. The Company 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 derivative. The Company 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 changed its name to Duke Energy Corporation and completed a
stock-for-stock merger with PanEnergy. On June 30, 1997, the common stock of
PanEnergy was contributed by Duke Energy to the Company. The combination of the
Company and PanEnergy was accounted for similar to a pooling of interests;
therefore, the Consolidated Financial Statements and other financial
information included in this Annual Report for periods prior to the combination
include the combined historical financial results of the Company and the
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 the Company 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, the Company, 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
38
DUKE CAPITAL CORPORATION
Notes to Consolidated Financial Statements -- Continued
2. Business Combinations, Acquisitions and Dispositions -- Continued
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 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, the Company 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
the Company's economic ownership from approximately 44% to approximately 95%.
See Note 15 to the Consolidated Financial Statements.
Union Pacific Resources' Gathering, Processing and Marketing Operations. On
March 31, 1999, the Company, 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 the Company 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, the Company 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.
39
DUKE CAPITAL CORPORATION
Notes to Consolidated Financial Statements -- Continued
2. Business Combinations, Acquisitions and Dispositions -- Continued
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 the
Company.
The pro forma results of operations for acquisitions and dispositions do not
materially differ from reported results.
3. Business Segments
The Company is an integrated energy and energy services provider with the
ability to offer physical delivery and management of both electricity and
natural gas throughout the U.S. and abroad. The Company provides these and
other services through six business segments:
. Natural Gas Transmission
. Field Services
. Trading and Marketing
. Global Asset Development
. Other Energy Services
. Real Estate Operations
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 limited hydrocarbon
exploration and production activities that are wholly owned by the Company.
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.
40
DUKE CAPITAL CORPORATION
Notes to Consolidated Financial Statements -- Continued
3. Business Segments -- Continued
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.
The Company'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 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 and certain
unallocated corporate items.
41
DUKE CAPITAL CORPORATION
Notes to Consolidated Financial Statements -- Continued
3. Business Segments -- Continued
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
Natural Gas
Transmission........... $ 1,100 $ 106 $ 1,206 $ 627 $126 $ 261 $ 3,897
Field Services.......... 2,883 707 3,590 144 131 1,630 3,739
Trading and Marketing... 11,074 459 11,533 75 7 104 3,823
Global Asset
Development............ 612 165 777 181 104 2,703 6,673
Other Energy Services... 985 4 989 (94) 14 94 612
Real Estate Operations.. 233 -- 233 176 9 368 983
Other Operations........ (15) 44 29 (41) 27 17 1,356
Eliminations and
Minority Interests..... -- (1,485) (1,485) 92 -- -- (483)
------- ------- ------- ------ ---- ------ -------
Total Consolidated.... $16,872 $ -- $16,872 $1,160 $418 $5,177 $20,600
======= ======= ======= ====== ==== ====== =======
Year Ended December 31,
1998
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... 521 -- 521 10 12 41 376
Real Estate Operations.. 181 -- 181 142 6 217 724
Other Operations........ (14) 26 12 5 30 27 759
Eliminations and
Minority Interests..... -- (926) (926) 57 -- -- (186)
------- ------- ------- ------ ---- ------ -------
Total Consolidated.... $13,059 $ -- $13,059 $1,137 $385 $1,914 $13,856
======= ======= ======= ====== ==== ====== =======
Year Ended December 31,
1997
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... 361 15 376 18 6 47 223
Real Estate Operations.. 124 -- 124 98 4 223 594
Other Operations........ (39) -- (39) (73) 16 247 855
Eliminations and
Minority Interests..... -- (785) (785) 22 -- -- (334)
------- ------- ------- ------ ---- ------ -------
Total Consolidated.... $11,915 $ -- $11,915 $ 873 $342 $1,287 $11,097
======= ======= ======= ====== ==== ====== =======
In 1999, foreign operations consisted of 13% of consolidated revenues, of
which 12% was from Canadian operations, and 26% of consolidated long-lived
assets, of which 20% related to Latin American operations. Foreign operations
were not material for 1998 and 1997.
42
DUKE CAPITAL CORPORATION
Notes to Consolidated Financial Statements -- Continued
4. Regulatory Matters
Natural Gas Transmission. The Company's interstate natural gas pipelines
primarily provide transportation and storage services pursuant to FERC Order
636. Order 636 allows pipelines to recover eligible 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.
In 1992, Panhandle Eastern Pipe Line Company (PEPL), a former subsidiary of
the Company, placed into effect, subject to refund, general rate increases. On
February 26, 1997, the FERC approved PEPL's settlement agreement, which
provided final resolution of refund matters and established prospective rates.
The agreement terminated other actions relating to these proceedings as well as
PEPL's restructuring of rates and transition cost recoveries related to FERC
Order 636. As a result of the resolution of these and certain other
proceedings, PEPL refunded $38 million to customers in 1997 and recorded
earnings before interest and taxes of $33 million.
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. Income Taxes
Income Tax Expense
For the Years
Ended December
31,
---------------
1999 1998 1997
---- ---- ----
In millions
Current income taxes
Federal................................................... $ 38 $200 $ 96
State..................................................... 42 40 28
---- ---- ----
Total current income taxes.............................. 80 240 124
---- ---- ----
Deferred income taxes, net
Federal................................................... 168 59 122
State..................................................... (11) 11 11
---- ---- ----
Total deferred income taxes, net........................ 157 70 133
---- ---- ----
Total income tax expense.................................... $237 $310 $257
==== ==== ====
43
DUKE CAPITAL CORPORATION
Notes to Consolidated Financial Statements -- Continued
5. 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%.......... $255 $290 $223
Adjustments resulting from:
State income tax, net of federal income tax effect....... 20 33 25
Favorable resolution of tax issues....................... (30) -- --
Other items, net......................................... (8) (13) 9
---- ---- ----
Total income tax expense............................... $237 $310 $257
---- ---- ----
Effective tax rate......................................... 32.6% 37.3% 40.3%
==== ==== ====
Net Deferred Income Tax Liability Components
December 31,
----------------
1999 1998
------- -------
In millions
Deferred credits and other liabilities.................... $ 95 $ 108
Alternative minimum tax credit carryforward............... -- 30
Other..................................................... 24 7
------- -------
Total deferred income tax assets........................ 119 145
Valuation allowance....................................... (62) (52)
------- -------
Net deferred income tax assets.......................... 57 93
------- -------
Investments and other assets.............................. (140) (109)
Prefunded pension costs................................... (108) (103)
Property, plant and equipment............................. (1,064) (1,025)
Regulatory assets and deferred debits..................... (52) (91)
Natural gas transition costs.............................. (28) (62)
Other..................................................... (45) (66)
------- -------
Total deferred income tax liabilities................... (1,437) (1,456)
------- -------
State deferred income tax, net of federal tax effect...... (118) (97)
------- -------
Net deferred income tax liability......................... $(1,498) $(1,460)
======= =======
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.
6. Risk Management and Financial Instruments
Commodity Derivatives. The Company, 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
44
DUKE CAPITAL CORPORATION
Notes to Consolidated Financial Statements -- Continued
6. Risk Management and Financial Instruments -- Continued
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 the Company to receive or make payments based on 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. The Company engages in the trading of
commodity derivatives, and therefore experiences net open positions. The
Company 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 the Company'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......................... $2,953 $2,855 $1,275 $1,179
Electricity......................... 1,302 1,271 578 570
Average fair values for the year
Natural gas......................... 2,388 2,269 805 757
Electricity......................... 962 900 420 416
Commodity Derivatives -- Non-Trading. At December 31, 1999 and 1998, the
Company 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, the Company had unrealized net gains (losses) of $(121) million and $10
million, respectively, related to non-trading commodity derivatives. The
determination of unrealized net gains (losses) requires judgment in
interpreting market data and developing estimates of fair value. Accordingly,
the
45
DUKE CAPITAL CORPORATION
Notes to Consolidated Financial Statements -- Continued
6. Risk Management and Financial Instruments -- Continued
unrealized net gains (losses) as of December 31, 1999 and 1998 are not
necessarily indicative of the amounts the Company could have realized in the
current market.
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.................................. 45,672 9,764
Power capacity, in megawatt months.............................. 25,950 --
Oil, in thousands of barrels.................................... 32,764 4,875
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.
In anticipation of the tender offer for Paranapanema (see Note 15 to the
Consolidated Financial Statements), the Company 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, the Company is
exposed to credit risk in the event of nonperformance by the counterparties.
For each counterparty, the Company 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 the
Company could have realized in current market exchanges. The majority of the
estimated fair value amounts were obtained from independent parties.
Financial Instruments
1999 1998
------------------ ------------------
Book Approximate Book Approximate
Value Fair Value Value Fair Value
------ ----------- ------ -----------
In millions
Long-term debt (a)................... $5,596 $5,557 $3,142 $3,341
Guaranteed preferred beneficial
interests in subordinated notes of
Duke Capital or subsidiaries........ 823 730 580 590
--------
(a) Includes current maturities.
46
DUKE CAPITAL CORPORATION
Notes to Consolidated Financial Statements -- Continued
6. Risk Management and Financial Instruments -- Continued
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.
7. Investment in Affiliates
Investments in domestic and international affiliates which are not controlled
by the Company but where the Company 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. The
Company's share of net income from these affiliates is reflected in the
Consolidated Statements of Income and Comprehensive Income as Other Operating
Revenues.
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.
47
DUKE CAPITAL CORPORATION
Notes to Consolidated Financial Statements -- Continued
7. Investment In Affiliates -- Continued
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
==== ==== ====== ==== ==== ==== ==== ==== ====
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
The Company had outstanding notes receivable from certain affiliates of $72
million and $80 million at December 31, 1999 and 1998, respectively.
48
DUKE CAPITAL CORPORATION
Notes to Consolidated Financial Statements -- Continued
8. Property, Plant and Equipment
Property, Plant and Equipment
December 31,
---------------
1999 1998
------- -------
In millions
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................................ 1,403 2,111
------- -------
Total Property, Plant and Equipment....................... $13,642 $11,020
======= =======
Accumulated Depreciation
December 31,
-------------
1999 1998
------ ------
In millions
Natural gas transmission...................................... $1,217 $2,585
Gathering and processing...................................... 528 482
Non-regulated generation...................................... 493 26
Other......................................................... 237 773
------ ------
Total Accumulated Depreciation.............................. $2,475 $3,866
====== ======
49
DUKE CAPITAL CORPORATION
Notes to Consolidated Financial Statements -- Continued
9. Debt and Credit Facilities
Long-term Debt
December 31,
--------------
Year Due 1999 1998
------------ ------ ------
In millions
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%........................................... 2003 100 100
Crescent Resources, Inc. (a)
Construction and mortgage loans, 5.86% -- 7.26%... 2000 -- 2011 46 69
Revolving credit facilities, 5.98% weighted-aver-
age 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% (b)................................... 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........ (23) (12)
------ ------
Total long-term debt.............................. 5,596 3,142
Current maturities of long-term debt.............. (277) (258)
------ ------
Total long-term portion........................... $5,319 $2,884
====== ======
- --------
(a) Substantial amounts of Crescent Resources' real estate development
projects, land and buildings were pledged as collateral.
(b) Paranapanema (Brazil) debt, principal is indexed annually to inflation.
50
DUKE CAPITAL CORPORATION
Notes to Consolidated Financial Statements -- Continued
9. Debt and Credit Facilities -- Continued
Annual Maturities
In millions
2000............................................................. $277
2001............................................................. 152
2002............................................................. 219
2003............................................................. 345
2004............................................................. 852
Annual maturities exclude $428 million of long-term debt that matures after
2004 which have call options whereby the Company has the option to repay the
debt early. Based on the years in which the Company may first exercise their
redemption options, $328 million could potentially be repaid in 2002 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).............. 950 -- 950 --
------ ---- ------ ----
Total Consolidated......... $2,463 $460 $1,675 $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.................................... 580 525
----- ----
1,126 629
Less portion classified as long-term
Credit facilities............................................. (460) (100)
Note payable.................................................. (83) --
Commercial paper.............................................. (500) (500)
----- ----
Portion classified as short-term................................ $ 83 $ 29
===== ====
The weighted average interest rate on outstanding short-term notes payable
and commercial paper at December 31, 1999 and 1998 was 5.46% and 5.73%,
respectively.
51
DUKE CAPITAL CORPORATION
Notes to Consolidated Financial Statements -- Continued
10. Guaranteed Preferred Beneficial Interests in Subordinated Notes of Duke
Capital Corporation
The Company has formed business trusts for which it owns 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 Company.
Trust Preferred Securities
December
31,
----------
Junior Subordinated
Issued Rate 1999 1998 Notes
------ ------ ---- ---- ------------------------
In
millions
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........ (27) (20)
---- ----
$823 $580
==== ====
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 Company, but only to the extent
the trusts have funds legally and immediately available to make such
distributions. Dividends of $52 million and $18 million related to the trust
preferred securities have been included in the Consolidated Statements of
Income as Minority Interests for the year ended December 31, 1999 and 1998,
respectively.
11. Commitments and Contingencies
Environmental. The Company is subject to international, federal, state and
local regulations regarding air and water quality, hazardous and solid waste
disposal and other environmental matters.
Superfund Sites. The Company is considered by regulators to be a potentially
responsible party and may be subject to future liability at five federal
Superfund sites and one state Superfund site. While the cost of remediation of
the remaining sites may be substantial, the Company 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 the Company, 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, the Company 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. The Company has communicated with the EPA and
appropriate state regulatory agencies on these matters.
52
DUKE CAPITAL CORPORATION
Notes to Consolidated Financial Statements -- Continued
11. Commitments and Contingencies -- Continued
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 the Company's ability to deliver natural gas to customers. Based on
the Company'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.
Litigation. Under the terms of the agreement with CMS discussed in Note 2 to
the Consolidated Financial Statements, the Company is retaining certain legal
and tax liabilities, including the matter specifically discussed below.
On May 13, 1997, Anadarko Petroleum Corporation (Anadarko) filed suits
against PEPL and other affiliates, as defendants, both in the United States
District Court for the Southern District of Texas and state district court of
Harris County, Texas. Pursuing only the federal court claim, Anadarko claims
that it was effectively indemnified by the defendants against any
responsibility for refunds of Kansas ad valorem taxes which are due purchasers
of gas from Anadarko, retroactive to 1983. On October 20, 1998 and January 15,
1999, the FERC issued orders on ad valorem tax issues, finding that first
sellers of gas were primarily liable for refunds. The FERC also noted that
claims for indemnity or reimbursement among the parties would be better
addressed by the United States District Court for the Southern District of
Texas. The Company believes the resolution of this matter will not have a
material adverse effect on consolidated results of operations or financial
position.
The Company and its subsidiaries are also 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, the Company 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.
Other Commitments and Contingencies. Periodically, the Company may become
involved in contractual disputes with natural gas transmission customers
involving potential or threatened abrogation of contracts by the customers. If
the customers are successful, the Company may not receive the full value of
anticipated benefits under the contracts.
53
DUKE CAPITAL CORPORATION
Notes to Consolidated Financial Statements -- Continued
11. Commitments and Contingencies -- Continued
In the normal course of business, certain of the Company's subsidiaries and
affiliates enter into various contracts for energy services that contain
certain schedule and performance requirements. The Company and certain
subsidiaries of the Company 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
the Company have guaranteed debt agreements of affiliates and have provided
surety bonds and letters of credit, all of which totaled approximately $842
million and $481 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 the Company 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. The Company utilizes assets under operating leases in several areas
of operations. Consolidated rental expense amounted to $44 million, $41 million
and $42 million in 1999, 1998 and 1997, respectively. Future minimum rental
payments under the Company's various operating leases for the years 2000
through 2004 are $36 million, $30 million, $23 million, $20 million and $17
million, respectively.
12. Stock-Based Compensation
The Company participates in Duke Energy's 1998 Stock Incentive Plan, under
which stock options for up to fifteen million shares of common stock may be
granted to key employees. The exercise price of each option granted under the
plan 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 the merger with Duke Energy, 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.
13. Employee Benefit Plans
Retirement Plans. Certain employees of the Company and its subsidiaries
participate in either the following Duke Energy or PanEnergy 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
54
DUKE CAPITAL CORPORATION
Notes to Consolidated Financial Statements -- Continued
13. Employee Benefit Plans -- Continued
highest average eligible earnings, and (ii) for eligible employees of certain
other subsidiaries under a cash balance formula. 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.
The Company's policy and 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 Energy plan. As a
result of this transfer, no contributions to the Duke Energy plan were
necessary in 1999 or 1998.
The fair market value of Duke Energy's plan assets was $3,121 million and
$2,922 million for December 31, 1999 and 1998, respectively. The projected
benefit obligation was $2,446 million and $2,540 million for December 31, 1999
and 1998, respectively. The amount of pre-funded pension cost allocated to the
Company as of December 31, 1999 and 1998 was $312 million and $337 million,
respectively.
Assumptions Used for Pension and Other Postretirement 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.
The Company's net periodic pension benefit, including amounts allocated by
Duke Energy, for the years ending December 31, 1999, 1998 and 1997 was $25
million, $37 million and $19 million, respectively. In 1998, a significant
amount of lump sum payouts was made from the plan resulting in a settlement
gain of $10 million.
Duke Energy also sponsors, and the Company participates in, an employee
savings plan, which covers substantially all employees. The Company expensed
plan contributions, including amounts allocated by Duke Energy, of $21 million,
$21 million and $19 million in 1999, 1998 and 1997, respectively.
Other Postretirement Benefits. The Company and most of its subsidiaries, in
conjunction with Duke Energy, provides 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.
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. With respect to the entire plan, the
fair value of the plan assets was $327 million and $305 million at December 31,
1999 and 1998, respectively. The accumulated
55
DUKE CAPITAL CORPORATION
Notes to Consolidated Financial Statements -- Continued
13. Employee Benefit Plans -- Continued
postretirement benefit obligation was $562 million and $625 million at December
31, 1999 and 1998, respectively.
It is the Company's and Duke Energy's general policy to fund accrued
postretirement health care costs. Duke Energy funds postretirement benefits
through various mechanisms, including retired lives reserves, voluntary
employee's beneficiary association trusts and 401(h) funding.
The Company's net periodic postretirement benefit cost, including amounts
allocated by Duke Energy, for the years ended December 31, 1999, 1998 and 1997,
was $12 million, $19 million and $17 million, respectively.
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.
Duke Energy's 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)
14. Related Party Transactions
Certain balances due to or due from related parties included in the
Consolidated Balance Sheets at December 31, 1999 and 1998 are as follows:
1999 1998
---- ----
In
millions
Receivables........................................................ $ -- $ 6
Notes receivable................................................... 479 --
Accounts payable................................................... 284 129
Taxes accrued...................................................... 570 73
Operating revenues of $99 million, $85 million and $18 million related to
intercompany sales to Duke Energy are included in the Consolidated Statements
of Income for the years ended December 31, 1999, 1998 and 1997, respectively.
Notes Receivable from related parties are classified as Other in Investments
and Other Assets on the Consolidated Balance Sheets.
15. Subsequent Events
On December 16, 1999, Duke Energy announced that it had signed definitive
agreements to combine Field Services' 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.
56
DUKE CAPITAL CORPORATION
Notes to Consolidated Financial Statements -- Continued
15. Subsequent Events -- Continued
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 increases
Duke Energy's economic ownership from approximately 44% to approximately 95%.
16. Quarterly Financial Data (Unaudited)
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -------
In millions
1999
Operating revenues.................. $3,117 $3,618 $5,116 $5,021 $16,872
Operating income.................... 237 227 280 298 1,042
EBIT................................ 272 242 281 365 1,160
Income before extraordinary item.... 99 134 107 150 490
Net income.......................... 759 134 107 150 1,150
1998
Operating revenues.................. $3,093 $2,895 $3,881 $3,190 $13,059
Operating income.................... 257 209 264 306 1,036
EBIT................................ 303 219 280 335 1,137
Income before extraordinary item.... 147 108 117 147 519
Net income.......................... 139 108 117 147 511
57
DUKE CAPITAL CORPORATION
Notes to Consolidated Financial Statements -- Continued
INDEPENDENT AUDITORS' REPORT
Duke Capital Corporation:
We have audited the accompanying consolidated balance sheets of Duke Capital
Corporation and subsidiaries (the Company) as of December 31, 1999 and 1998,
and the related consolidated statements of income and comprehensive income,
common stockholder's equity and cash flows for each of the three years in the
period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements 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 the Company 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.
/s/ Deloitte & Touche LLP
Charlotte, North Carolina
February 11, 2000
58
RESPONSIBILITY FOR FINANCIAL STATEMENTS
The financial statements of Duke Capital Corporation and subsidiaries (the
Company) 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.
The Company'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. The Company's accounting controls are
continually reviewed for effectiveness. In addition, written policies,
standards and procedures, and a strong internal audit program augment the
Company's accounting controls.
/s/ Sandra P. Meyer
Sandra P. Meyer
Controller
59
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Consolidated Financial Statements and Supplemental Financial Data
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 Stockholder's Equity for the Years
Ended December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
Independent Auditors Reports
Quarterly Financial Data (unaudited) (included in Note 16 to the
Consolidated Financial Statements)
All 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, Exhibits.
(c) Exhibits
Exhibits filed herewith are designated by an asterisk (*). All exhibits not
so designated are incorporated by reference to a prior filing, as indicated.
Exhibit
No. Description
------- -----------
3.1 Restated Certificate of Incorporation of registrant (filed with
registrant's Form 10, as amended, File No. 0-23977).
3.2 By-Laws of registrant (filed with registrant's Form 10, as amended,
File No. 0-23977).
4.1 $950,000,000 Five-Year Credit Agreement dated as of August 25, 1997,
among the registrant, the banks listed therein and The Chase Manhattan
Bank, as Administrative Agent (filed with Form 10-K of Duke Energy
Corporation for the year ended December 31, 1997, File No. 1-4928, as
Exhibit 10-S).
4.2 $600,000,000 364-Day Credit Agreement dated as of August 23, 1999,
among the registrant, the banks listed therein and The Chase Manhattan
Bank, as Administrative Agent (filed with Form 10-K of Duke Energy
Corporation dated March 21, 2000, File No. 1-04928, as Exhibit 10-N).
10.1 Formation Agreement between PanEnergy Trading and Market Services,
Inc. and Mobil Natural Gas, Inc. dated May 29, 1996 (filed with Form
10-K of PanEnergy Corp for the year ended December 31, 1996, File No.
1-8157, as Exhibit 2.02).
60
Exhibit
No. Description
------- -----------
10-2 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 Duke Energy Corporation, File No.
1-4928, filed November 5, 1998).
10-3 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 Duke Energy Corporation, File No. 1-4928, filed
December 1, 1998).
10-4 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 Duke Energy
Corporation, filed December 30, 1999).
10-5 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 Duke Energy
Corporation, filed December 30, 1999).
12* Computation of Ratios of Earnings to Fixed Charges.
23* Independent Auditors' Consent.
27* Financial Data Schedule.
Undertaking
The registrant hereby undertakes, pursuant to Regulation S-K, Item 601(b),
paragraph (4)(iii), to furnish to the Securities and Exchange Commission upon
request all constituent instruments defining the rights of holders of long-term
debt of the registrant and its consolidated subsidiaries not filed herewith for
the reason that the total amount of securities authorized under any of such
instruments does not exceed 10% of the total consolidated assets of the
registrant and its consolidated subsidiaries.
61
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 27, 2000 Duke Capital Corporation
(registrant)
By: Richard B. Priory
----------------------------------
Richard B. Priory
Chairman of the Board
and President
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:
/s/ Richard B. Priory
-------------------------------
Richard B. Priory
Chairman of the Board and
President
(ii) Principal financial officer:
/s/ Richard J. Osborne
-------------------------------
Richard J. Osborne
Vice President and Chief Financial Officer
(iii) Principal accounting officer:
/s/ Sandra P. Meyer
-------------------------------
Sandra P. Meyer
Controller
(iv) A majority of the Directors:
/s/ Richard B. Priory
-------------------------------
Richard B. Priory
/s/ Harvey J. Padewer
-------------------------------
Harvey J. Padewer
/s/ Fred J. Fowler
-------------------------------
Fred J. Fowler
/s/ Richard J. Osborne
-------------------------------
Richard J. Osborne
Date: March 27, 2000
62