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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, 2000 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 28, 2001................... None
Number of shares of Common Stock, without par value, outstanding at
February 28, 2001...................................................... 1,010
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DUKE CAPITAL CORPORATION
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2000
TABLE OF CONTENTS
Item Page
- ---- ----
PART I.
1.Business.............................................................. 1
General.............................................................. 1
Natural Gas Transmission............................................. 3
Field Services....................................................... 5
North American Wholesale Energy...................................... 6
International Energy................................................. 9
Other Energy Services................................................ 10
Duke Ventures........................................................ 11
Environmental Matters................................................ 11
Geographic Regions................................................... 12
Employees and Management............................................. 12
Recent Financing..................................................... 12
Operating Statistics................................................. 13
2.Properties............................................................ 13
3.Legal Proceedings..................................................... 15
PART II.
5.Market for Registrant's Common Equity and Related Stockholder
Matters................................................................. 16
6.Selected Financial Data............................................... 16
7.Management's Discussion and Analysis of Results of Operations and
Financial Condition..................................................... 17
7A. Quantitative and Qualitative Disclosures About Market Risk.......... 31
8.Financial Statements and Supplementary Data........................... 32
9.Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................... 61
PART IV.
14.Exhibits, Financial Statement Schedules, and Reports on Form 8-K...... 61
Signatures........................................................... 63
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 provides interstate transportation and storage of
natural gas for customers primarily in the Mid-Atlantic, New England and
southeastern states. Its operations are conducted primarily through Duke
Energy Gas Transmission Corporation. 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, markets and stores natural
gas and produces, transports, markets and stores natural gas liquids (NGLs).
Its operations are conducted primarily through Duke Energy Field Services, LLC
(DEFS), a limited liability company that is approximately 30% owned by
Phillips Petroleum. Field Services operates gathering systems in western
Canada and 11 contiguous states that serve major natural gas-producing regions
in the Rocky Mountain, Permian Basin, Mid-Continent, East Texas-Austin Chalk-
North Louisiana, as well as onshore and offshore Gulf Coast areas.
North American Wholesale Energy's (NAWE's) activities include asset
development, operation and management, primarily through Duke Energy North
America, LLC (DENA), and commodity sales and services related to natural gas
and power, primarily through Duke Energy Trading and Marketing, LLC (DETM).
DETM is a limited liability company that is approximately 40% owned by Exxon
Mobil Corporation. The operations of the previously segregated Trading and
Marketing segment were combined by management into NAWE during 2000.
International Energy conducts its operations through Duke Energy
International, LLC (DEI). International Energy's activities include asset
development, operation and management of natural gas and power facilities and
energy trading and marketing of natural gas and electric power. This activity
is targeted in the Latin American, Asia-Pacific and European regions.
Other Energy Services is a combination of businesses that provide
engineering, consulting, construction and integrated energy solutions
worldwide, primarily through Duke Engineering & Services, Inc. (DE&S),
Duke/Fluor Daniel (D/FD) and DukeSolutions, Inc. (DukeSolutions). D/FD is a
50/50 partnership between Duke Energy and Fluor Enterprises, Inc.
Duke Ventures is comprised of other diverse businesses, primarily operating
through Crescent Resources, Inc. (Crescent), DukeNet Communications, LLC
(DukeNet) and Duke Capital Partners (DCP). Crescent develops high-quality
commercial, residential and multi-family real estate projects and manages land
holdings primarily in the southeastern U.S. DukeNet provides fiber optic
networks for industrial, commercial and residential customers. DCP, a newly
formed, wholly owned merchant finance company, provides financing, investment
banking and asset management services to wholesale and commercial energy
markets.
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.
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.
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 (Electric). An interconnected group of electric
transmission lines and related equipment for moving or transferring electric
energy in bulk between points of supply and points at which it is transformed
for delivery over a distribution system to customers, or for delivery to other
electric transmission systems.
Transmission System (Natural Gas). An interconnected group of natural gas
pipelines and associated facilities for transporting natural gas in bulk
between points of supply and delivery points to industrial customers, local
distribution companies, or for delivery to other natural gas transmission
systems.
Watt. A measure of real power production or usage equal to one joule per
second.
A discussion of the current business and operations of each of 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 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.
2
NATURAL GAS TRANSMISSION
Natural Gas Transmission provides interstate transportation and storage of
natural gas through its operating subsidiaries, which include Texas Eastern
Transmission Corporation (TETCO) and Algonquin Gas Transmission Company
(Algonquin), East Tennessee Natural Gas Company (East Tennessee) and Market
Hub Partners (MHP). East Tennessee and MHP were acquired in March 2000 and
September 2000, respectively. Panhandle Eastern Pipe Line Company and
Trunkline Gas Company were also a part of Natural Gas Transmission until their
sale to CMS Energy Corporation (CMS) in March 1999. See further discussion of
the acquisitions and sale in Note 2 to the Consolidated Financial Statements,
"Business 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 near Nova Scotia in December 1999. The Company
operates the U.S. portion of the Maritimes & Northeast Pipeline.
For 2000, consolidated natural gas deliveries by Natural Gas Transmission's
interstate pipelines totaled 1,717 trillion British thermal units (TBtu),
compared to 1,565 TBtu in 1999, a 10% increase from last year. The pipelines
that were sold to CMS during 1999 also delivered 328 TBtu in 1999 prior to the
sale. A majority of Natural Gas Transmission's contracted volumes are under
long-term firm service agreements with local distribution company (LDC)
customers in the pipelines' market areas. Firm transportation services are
also provided 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 various customers on a short-term or
seasonal basis. See natural gas deliveries statistics under "Operating
Statistics." Demand for gas transmission on 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 major pipeline customers are located in Pennsylvania, New
Jersey, Connecticut, Virginia, Tennessee, Rhode Island and New York.
[MAP]
3
Natural Gas Transmission's interstate pipeline systems consist of
approximately 12,000 miles of pipe, which includes 830 miles related to the
partial ownership interest in Maritimes & Northeast Pipeline. The pipeline
systems receive natural gas from many major North American producing regions
for delivery to markets primarily in the Mid-Atlantic, southeastern and New
England states. Consistent with its growth strategy, the Company and The
Williams Companies, Inc. announced the closing on February 1, 2001 of their
joint purchase of Coastal Corporation's Gulfstream Natural Gas System LLC. The
planned 744-mile Gulfstream gas pipeline will originate near Mobile, Alabama,
and cross the Gulf of Mexico to Manatee County, Florida.
MHP owns natural gas salt cavern facilities in south Texas and Louisiana
with a total storage capacity of 23 billion cubic feet (Bcf). Utilizing these
facilities, MHP provides high deliverability firm storage services, real-time
title tracking and other interruptible storage hub services to producers, end-
users, LDCs, pipelines and natural gas marketers. TETCO and East Tennessee
also provide 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 with transportation. TETCO's storage services utilize two joint
venture storage facilities in Pennsylvania and one wholly owned and operated
storage field in Maryland. TETCO's certificated working capacity in these
three fields is 75 Bcf. TETCO also leases storage capacity. East Tennessee's
storage services utilize a liquefied natural gas (LNG) storage facility in
Tennessee which has a certificated working capacity of 1.2 Bcf. Algonquin owns
no storage fields.
Competition
The Company's interstate pipeline and storage subsidiaries compete with
other interstate and intrastate pipeline and storage facilities in the
transportation and storage of natural gas. The principal elements of
competition are rates, terms of service, and flexibility and reliability of
service.
Natural Gas Transmission competes directly with other interstate pipelines
serving the Mid-Atlantic, northeastern and southeastern states.
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 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 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,
Algonquin, East Tennessee and MHP 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.
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 NAWE 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 "Environmental Matters."
4
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, markets and stores natural
gas and produces, transports, markets and stores NGLs. Field Services owns and
operates approximately 57,000 miles of natural gas gathering systems,
including intrastate pipelines, and 68 natural gas processing plants in the
U.S. and Canada. Field Services also has ownership interests in 11 other
natural gas processing plants in the U.S.
Field Services gathers natural gas from production wellheads through
gathering systems in western Canada and 11 contiguous states that serve major
gas-producing regions in the Rocky Mountain, Permian Basin, Mid-Continent,
East Texas-Austin Chalk-North Louisiana, as well as onshore and offshore Gulf
Coast areas. Field Services' operations also include several intrastate
pipeline systems and one high-deliverability natural gas storage facility.
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.
[MAP]
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
5
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 56% in 2000 compared to 1999. 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.
In March 2000, the Company, through a wholly owned subsidiary, completed the
approximately $1.7 billion transaction that combined Field Services' gas
gathering and processing business with Phillips Petroleum's Gas Gathering,
Processing and Marketing unit (Phillips) to form a new midstream company,
named DEFS. In addition to this transaction, Duke Energy transferred its
interest in Texas Eastern Products Pipeline Company (TEPPCO), the general
partner of TEPPCO Partners, LP, to the newly formed company, DEFS. For further
discussion of the Phillips transaction see Note 2 to the Consolidated
Financial Statements, "Business Acquisitions and Dispositions."
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 Acquisitions and Dispositions."
See certain operating statistics of Field Services under "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 Field Services 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 Field Services 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
"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.
NAWE
NAWE's business activities include asset development, operation and
management of merchant generation facilities primarily through DENA and
commodity sales and services related to natural gas and power, primarily
through DETM, a limited liability company that is approximately 40% owned by
Exxon Mobil Corporation. NAWE conducts its business throughout the U.S. and
Canada.
6
DENA is an integrated energy business that develops, owns and manages a
portfolio of merchant generation facilities. To capture the greatest value,
DENA, through its portfolio management strategy, seeks opportunities to invest
in markets that have capacity needs and to divest assets, in whole or in part,
when significant value can be realized. DENA captures additional value by
combining its project development, commercial and risk management expertise
with the technical and operational skills of other of the Company's business
units to build and manage its projects with maximum efficiency. DENA also
supplies competitively priced energy, integrated logistics and asset
optimization services, as well as, risk management products, to wholesale
energy customers.
DENA currently owns, operates or has substantial interests in approximately
6,200 MW of gross operating generation and has approximately 7,300 MW of
projects under construction, which are slated for completion to meet summer
peak demand: 3,200 MW in 2001 and 4,100 MW in 2002. In additon to the
facilities in operation or under construction, DENA has approximately 13,500
MW in advanced development scheduled to begin operation between 2002 and 2004.
The following map includes DENA's power generation facilities.
[MAP]
DETM markets natural gas, electricity and other energy-related products to a
wide range of customers across North America. The Company owns a 60% interest
in DETM's natural gas and electric power trading operations, with Exxon Mobil
Corporation owning a 40% minority interest. The Company and Exxon Mobil
Corporation are in arbitration regarding the ownership of DETM. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition, Current Issues--Litigation and Contingencies, Exxon Mobil
Corporation" and Note 11 to the Consolidated Financial Statements,
"Commitments and Contingencies--Litigation."
DETM markets natural gas primarily to LDCs, electric power generators
(including DENA's generation facilities), municipalities, large industrial
end-users and energy marketing companies. DETM markets electricity to
investor-owned utilities, municipal power generators and other power
marketers. DETM also provides energy
7
management services, such as supply and market aggregation, peaking services,
dispatching, balancing, transportation, storage, tolling, contract negotiation
and administration, as well as energy commodity risk management products and
services. Operations are primarily in the U.S. and, to a lesser extent, in
Canada, and are serviced through three operating centers.
Natural gas marketing operations encompass both on-system and off-system
supplies. With respect to on-system supplies, DETM generally purchases natural
gas from producers who are connected to 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, DETM 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 by DETM
through 2006.
With respect to electricity marketing operations, DETM purchases electricity
from third-party suppliers and from DENA's domestic generation facilities for
resale to customers.
DETM 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. 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 DETM'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 NAWE under "Operating Statistics."
Activities of DETM can fluctuate in response to the seasonality affecting both
electricity and natural gas.
Competition
DETM 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-related
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.
DENA experiences substantial competition from existing utility companies as
well as other merchant electric generation companies in the U.S.
Regulation
The energy marketing activities of NAWE may, in certain circumstances, be
subject to the jurisdiction of the FERC. Current FERC policies permit NAWE's
trading and marketing entities to market natural gas, electricity and other
energy-related commodities at market-based rates, subject to FERC
jurisdiction.
Most of DENA's operations are not subject to rate regulation. However, to
the extent that DENA'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.
As described in Note 11 to the Consolidated Financial Statements,
"Commitments and Contingencies--California Issues," a number of investigations
have commenced to determine the causes of higher wholesale electric prices in
California in 2000. During March 2001, the FERC ordered several electricity
suppliers,
8
including DETM, to (i) refund or offset prices that were bid for power in
California during Stage 3 emergencies in January and February 2001, to the
extent such prices exceeded a FERC-approved market-clearing price or
(ii) submit information supporting the prices that were bid. During the months
of January and February 2001, DETM's bids included a commercially-based credit
premium to cover the substantial risk of nonpayment that existed at the time.
The credit premiums were responsible for the bids of DETM exceeding the FERC-
approved market-clearing prices for January and February 2001. Although DETM
believes that the credit premiums were appropriate, in a compliance filing
with the FERC on March 23, 2001, DETM elected to offset the credit premium
amounts against the bid prices, provided it was paid what it was owed based on
the FERC-approved market-clearing price. Pursuant to such filing, the amount
that DETM will offset totals approximately $20 million in the aggregate. It is
expected that the FERC will issue additional orders with respect to sales in
California covering the period from October 2 through December 31, 2000, and
periods following February 2001. Various parties have expressed differing
views on the FERC's actions in this area, and such actions may be subject to
reconsideration or appeal. Although this matter is in its earliest stage,
management believes this matter will not have a material effect on the
Company's consolidated results of operations, cash flows or financial
position.
NAWE is subject to federal, state and local environmental regulations. For a
discussion of environmental regulation, see "Environmental Matters."
INTERNATIONAL ENERGY
International Energy develops, owns and operates energy-related facilities
worldwide. These facilities provide natural gas and power development and
operations, as well as energy trading and marketing. International Energy
conducts its operations primarily in Latin America, Asia Pacific and Europe,
through DEI.
Liberalization of energy markets abroad is providing substantial
opportunities for International Energy to grow through acquisitions,
construction of greenfield projects and expansion of existing facilities.
International Energy is an active participant in international competitive
energy-related markets, which include natural gas pipelines, power generation,
energy trading and marketing and other services. International Energy owns,
operates or has substantial interests in approximately 5,000 MW of generation
and approximately 1,100 miles of pipeline systems.
International Energy continues to focus on its regional target areas in
Latin America, Asia Pacific and Europe for further expansion opportunities. In
January 2000, DEI completed a series of transactions to purchase, for
approximately $1.03 billion, an approximate 95% interest in Companhia de
Geracao de Energia Eletrica Paranapanema (Paranapanema), an electric
generating company in Brazil. From August 1999 through April 2000, DEI
acquired Dominion Resources, Inc.'s portfolio of hydroelectric, natural gas
and diesel power generation businesses in Argentina, Belize, Bolivia and Peru
for approximately $405 million. Also, during 2000, DEI acquired 100% of Mobil
Europe Gas Inc. (MEGAS) from Mobil Corporation. MEGAS is a gas marketing
company located in the Netherlands. For additional information on significant
business acquisitions see "Management's Discussion and Analysis of Results of
Operations and Financial Condition, Liquidity and Capital Resources--Investing
Cash Flows" and Note 2 to the Consolidated Financial Statements, "Business
Acquisitions and Dispositions".
9
The following map illustrates the locations of International Energy's
worldwide energy facilities, including projects under construction or under
contract.
[MAP]
Competition and Regulation
International Energy's operations are subject to country and region-specific
market and competition regulations enacted by various regulatory authorities.
Regulatory issues that are commonly addressed in various international regions
include: rules governing open and competitive access to the gas and power
transmission grids, dispatch rules for merchant power plant dispatch and
remuneration, and rules that support the emergence of competitive gas and
power trading and marketing.
International Energy's operations are subject to international environmental
regulations. For a discussion of environmental regulation, see "Environmental
Matters."
OTHER ENERGY SERVICES
Other Energy Services provides engineering, consulting, construction and
integrated energy solutions worldwide, primarily through DE&S, D/FD and
DukeSolutions.
DE&S 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.
D/FD, 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 Enterprises, Inc.
each own 50% of D/FD.
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. and 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 "Environmental Matters."
10
DUKE VENTURES
Duke Ventures is comprised of other diverse businesses, primarily operating
through Crescent, DukeNet and DCP.
Crescent develops high-quality commercial, residential and multi-family real
estate projects and manages land holdings primarily in the southeastern U.S.
At December 31, 2000, Crescent owned 3.8 million square feet of commercial and
industrial space, with an additional 2.3 million square feet under
construction. This portfolio included 2.9 million square feet of office space,
0.8 million square feet of warehouse space and 0.1 million square feet of
retail space. At December 31, 2000, Crescent also had approximately 175,000
acres of land under its management.
DukeNet provides fiber optic networks for industrial, commercial and
residential customers and plans to enable networks for energy services
applications. It owns and operates a 700-mile fiber optic communications
network centered in North Carolina and South Carolina that is interconnected
with a 15,500-mile, fiber optic communications network, through affiliate
agreements with third parties, that stretches from Maine to Texas. DCP, a
merchant finance company, provides financing, investment banking and asset
management services to wholesale and commercial energy markets. During
September 2000, DukeNet sold its 20% interest in BellSouth Carolina PCS to
BellSouth Corporation. See further discussion of this sale in Note 2 of the
Consolidated Financial Statements, "Business Acquisitions and Dispositions."
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 and the 1990 amendments to the Act, as well as state
laws and regulations impacting air emissions that impose
responsibilities on owners, operators or both of air emissions sources
including obtaining permits and annual compliance and reporting
obligations;
. 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, which can require any individual or entity which may have owned or
operated a disposal site, as well as transporters or generators of
hazardous wastes which were sent to such site, to share in remediation
costs for the site.
For further discussion of environmental matters involving the Company,
including possible liability and capital costs, see Item 3--"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, cash flows or financial position of the Company.
11
GEOGRAPHIC REGIONS
The Company's significant geographic regions are as follows:
Latin Other
U.S. Canada America Foreign Consolidated
------- ------ ------- ------- ------------
(In millions)
2000
Consolidated revenues.............. $33,895 $4,964 $ 512 $ 560 $39,931
Consolidated long-term assets...... 17,972 900 2,823 1,222 22,917
1999
Consolidated revenues.............. $14,466 $2,007 $ 171 $ 252 $16,896
Consolidated long-term assets...... 11,005 250 2,708 901 14,864
1998
Consolidated revenues.............. $12,038 $ 996 $ 31 $ 46 $13,111
Consolidated long-term assets...... 9,032 140 207 632 10,011
For a discussion of the Company's foreign operations and the risks
associated with them, see "Management's Discussion and Analysis of Results of
Operations and Financial Condition, Quantitative and Qualitative Disclosures
About Market Risk--Foreign Currency Risk" and Notes 3 and 6 to the
Consolidated Financial Statements, "Business Segments" and "Risk Management
and Financial Instruments," respectively.
EMPLOYEES AND MANAGEMENT
At December 31, 2000, the Company had approximately 12,000 employees.
Approximately 175 operating and maintenance employees are represented by
unions. Of these, approximately 60 are represented by the International
Brotherhood of Electrical Workers (IBEW). During 2000, a new agreement was
reached with the IBEW for these employees. Approximately 37 employees are
represented by the Paper, Allied, Chemical and Energy Workers Union (PACE) and
13 employees are represented by the PACE International Unit. A new labor
agreement was reached with the PACE International Unit in 2000. Approximately
64 employees are represented by the International Union of Operating
Engineers.
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.
RECENT FINANCING
In late March 2001, Duke energy completed an offering of 31 million units of
mandatorily convertible securities (Equity Units) at a price of $25 per unit
before underwriting discount and other offering expenses. The Equity Units
consist of senior notes of the Company and Duke Energy purchase contracts
obligating the investors to purchase shares of Duke Energy's common stock in
2004. Also in March 2001, the underwriters exercised options granted to them
to purchase an additional 4 million Equity Units at the original issue prices,
less underwriting discounts, to cover over-allotment made during the
offerings. Total net proceeds from the offering were approximately $850
million and were used to repay short-term debt and for other corporate
purposes.
12
OPERATING STATISTICS
Years Ended December 31,
-----------------------------------
2000 1999 1998 1997 1996
------- ------- ------ ------ -----
Natural Gas Transmission
Throughput Volumes(a), TBtu(b):........... 1,717 1,565 1,459 1,641 1,676
Field Services
Natural Gas Gathered and
Processed/Transported, TBtu/d(c)......... 7.6 5.1 3.6 3.4 2.9
NGL Production, MBbl/d(d)................. 358.5 192.4 110.2 108.2 78.5
Average Natural Gas Price per MMBtu(e).... $3.89 $2.27 $2.11 $2.59 $2.59
Average NGL Price per Gallon.............. $0.53 $0.34 $0.26 $0.35 $0.39
Natural Gas Marketed, TBtu/d.............. 0.7 0.5 0.4 0.4 0.5
NAWE
Natural Gas Marketed, TBtu/d.............. 11.9 10.5 8.0 6.9 5.5
Electricity Marketed, GWh(f).............. 275,258 109,634 98,991 64,650 4,229
- --------
(a) Excludes throughput of pipelines sold in March 1999 to CMS Energy: 328
TBtu (1999); 1,141 Tbtu (1998); 1,279 TBtu (1997); 1,319 TBtu (1996).
(b) Trillion British thermal units.
(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 approximately 9,000 miles of pipeline and has 70
compressor stations.
TETCO also owns and operates two offshore Louisiana pipeline systems, which
extend over 100 miles into the Gulf of Mexico and include 469 miles of TETCO's
pipeline system.
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.
East Tennessee's transmission system crosses TETCO's system at two points in
Tennessee and consists of two mainline systems totaling 1,100 miles of
pipeline in Tennessee and Virginia with 18 compressor stations.
For additional information and a map concerning natural gas transmission and
storage properties, see "Business, Natural Gas Transmission."
FIELD SERVICES
For information and a map regarding the properties of Field Services, see
"Business, Field Services."
13
NAWE
The DENA generation portfolio includes:
Ownership
Gross Interest
Name MW Fuel Location (percentage)
- ---- ----- --------------- -------------- ------------
Moss Landing.................. 1,478 Natural gas CA 100%
Morro Bay..................... 1,002 Natural gas CA 100
South Bay..................... 700 Natural gas CA 100
Madison....................... 640 Natural gas OH 50
Vermillion.................... 640 Natural gas IN 50
Maine Independence............ 520 Natural gas ME 100
Bridgeport.................... 480 Natural gas CT 67
American Ref-Fuel............. 286 Waste-to-energy CT, MA, NJ, NY 37
St. Francis................... 247 Natural gas MO 50
Oakland....................... 165 Oil CA 100
Fort Drum..................... 50 Coal NY 10
-----
Total....................... 6,208
=====
DENA has approximately 7,300 MW under construction in various high-growth
markets, which are slated for completion to meet summer peak demands: 3,200 MW
in 2001 and 4,100 MW in 2002. In addition to the facilities in operation or
under construction, DENA has approximately 13,500 MW in advanced development
scheduled to begin operation between 2002 and 2004.
For additional information and a map regarding the properties of NAWE, see
"Business, NAWE."
INTERNATIONAL ENERGY
The International Energy generation portfolio in operation includes:
Approximate
Ownership
Gross Interest
Name MW Fuel Location (percentage)
- ---- ----- ------------- ----------- ------------
Paranapanema...................... 2,307 Hydro Brazil 95
Hidroelectrica Cerros Colorados... 547 Thermal/Hydro Argentina 91
Egenor............................ 529 Hydro/Thermal Peru 90
Acajutla.......................... 400 Thermal El Salvador 88
Puncakjaya Power.................. 389 Thermal Indonesia 43
Western Australia................. 280 Thermal Australia 100
Electroquil....................... 169 Thermal Ecuador 52
Aquaytia.......................... 160 Hydro Peru 22
Empressa Electrica Corani......... 126 Hydro Bolivia 50
New Zealand....................... 112 Thermal New Zealand 100
Mollejon.......................... 25 Hydro Belize 95
-----
Total........................... 5,044
=====
DEI has approximately 562 and 43 gross MWs under construction in Latin
America and Australia, respectively. DEI owns approximately 1,320 miles of
pipeline systems in Australia, including 434 miles under development.
Additionally, DEI has an 11.84% ownership interest in 855 miles of pipeline
systems in Australia and a 21.9% ownership interest in 190 miles of pipeline
systems in Peru. Also as of December 31, 2000, DEI 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 a map regarding the properties of
International Energy, see "Business, International Energy."
14
DUKE VENTURES
For information regarding the properties of Duke Ventures, see "Business,
Duke Ventures."
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 Company's subsidiaries, DENA and DETM, have been named among 16
defendants in a class action lawsuit (the Gordon lawsuit) filed against
companies identified as "generators and traders" of electricity in California
markets. DETM also was named as one of numerous defendants in four additional
lawsuits, including two class actions (the Hendricks and Pier 23 Restaurant
lawsuits), filed against generators, marketers and traders and other unnamed
providers of electricity in California markets. These suits were brought
either by or on behalf of electricity consumers in the State of California.
The Gordon and Hendricks class action suits were filed in the Superior Court
of the State of California, San Diego County, in November 2000. The other
three suits were filed in January 2001, one in the Superior Court of the State
of California, San Diego County, and the other two in the Superior Court of
the State of California, County of San Francisco. These suits generally allege
that the defendants manipulated the wholesale electricity markets in violation
of state laws against unfair and unlawful business practices and state
antitrust laws. Plaintiffs in the Gordon suit seek aggregate damages of over
$4 billion, and the plaintiffs in the other suits, to the extent damages are
specified, allege damages in excess of $1 billion. The lawsuits each seek the
disgorgement of alleged unlawfully obtained revenues for sales of electricity
and, in three suits, an award of treble damages. For further information
related to this lawsuit, see Note 11 to the Consolidated Financial Statements,
"Commitments and Contingencies--California Issues," and "Management's
Discussion and Analysis of Results of Operations and Financial Condition,
Current Issues--California Issues."
In December 2000, three subsidiaries of the Company initiated binding
arbitration against three subsidiaries of the Exxon Mobil Corporation
(collectively, the "Exxon Mobil entities") concerning the parties' joint
ownership of DETM and certain related affiliates (collectively, the
"Ventures"). At issue is a buy-out right provision in the parties' agreement.
The agreements governing the ownership of the Ventures contain provisions
giving the Company the right to purchase the Exxon Mobil entities' 40%
interest in the Ventures in the event material business disputes arise between
the Ventures' owners. Such disputes have arisen, and consequently, the Company
exercised its right to buy the Exxon Mobil entities' interest. The Company
claims that refusal by the Exxon Mobil entities to honor the exercise is a
breach of the buy-out right provision, and seeks specific performance of the
provision. The Company also complains of the Exxon Mobil entities' lack of use
of, and contributions to, the Ventures.
In January 2001, the Exxon Mobil entities asserted counterclaims in the
arbitration and claims in a separate Texas state court action alleging that
the Company breached its obligations to the Ventures and to the Exxon Mobil
entities. The Exxon Mobil entities also claim that the Company violated a
Guaranty Agreement. While this matter is in its early stages, management
believes that the final disposition of this action will not have a material
adverse effect on the Company's consolidated results of operations, cash flows
or financial position.
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, cash flows or
financial position.
The Company's subsidiary, DEFS, is presently resolving non-compliance issues
with the Texas Natural Resources Conservation Commission associated with the
timing of air permit annual compliance certifications submitted to the agency
in 1998 and 1999. This matter, the bulk of which was voluntarily self-
disclosed to the agency, involves approximately 115 of DEFS' facilities that
did not meet specific administrative filing deadlines for required air permit
paperwork. Additionally, DEFS is actively resolving, with the New Mexico
Environment Department, alleged non-compliance of various air permit
requirements at four facilities in New Mexico. These matters, the majority of
which were also voluntarily self-disclosed to the agency, generally involve
document
15
preparation and submittal as required by permits, compliance testing
requirements at two facilities and compliance with permit emissions limits at
one facility. DEFS believes that these apparent non-compliance issues being
addressed with Texas and New Mexico agencies, under relevant air programs,
will result in total penalty assessments of less than $500,000. Management
believes that the resolution of this matter will not have a material adverse
effect on consolidated results of operations, cash flows or financial
position.
DEFS has also been in discussions with the Colorado Air Pollution Control
Division regarding various asserted non-compliance issues arising from agency
inspections of DEFS' Colorado facilities in 1999 and 2000, and arising from
compliance issues disclosed to the agency pursuant to permit requirements or
voluntarily disclosed to the agency in 2000. These items relate to various
specific and detailed terms of the Title V Operation Permits at seven gas
plants and two compressor stations in Colorado, including record keeping
requirements, parametric monitoring requirements, delayed filings, and
operation inconsistent with throughput limits on particular pieces of
equipment. As a result of these discussions, DEFS received from the agency in
March 2001, a comprehensive proposed settlement agreement to resolve all of
these various items related to air permit compliance at the nine facilities.
Although DEFS is still discussing the appropriate resolution of these non-
compliance instances with the Colorado Air Pollution Control Division,
management believes that the comprehensive resolution for all nine facilities
will result in a total penalty assessment of less than $575,000.
For additional information concerning litigation and other contingencies,
see Note 11 to the Consolidated Financial Statements, "Commitments and
Contingencies--Environmental," and "Management's Discussion and Analysis of
Results of Operations and Financial Condition, Current Issues--Environmental;
Current Issues--California Issues, and Current Issues--Litigation and
Contingencies."
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 2000 or 1999 and, in present, has no plans to pay such dividends in the
foreseeable future.
Item 6. Selected Financial Data.
Selected Financial Data
2000 1999 1998 1997(a) 1996(a)
------- ------- ------- ------- -------
(In millions, except per share amounts)
Income Statement
Operating revenues................... $39,931 $16,896 $13,111 $11,915 $7,816
Operating expenses................... 37,683 15,830 12,023 11,079 6,947
------- ------- ------- ------- ------
Operating income..................... 2,248 1,066 1,088 836 869
Other income and expenses............ 83 94 49 37 20
------- ------- ------- ------- ------
Earnings before interest and taxes... 2,331 1,160 1,137 873 889
Interest expense..................... 621 326 237 214 232
Minority interest expense............ 263 107 71 22 6
------- ------- ------- ------- ------
Earnings before income taxes......... 1,447 727 829 637 651
Income taxes......................... 521 237 310 257 252
------- ------- ------- ------- ------
Income before extraordinary item..... 926 490 519 380 399
Extraordinary gain (loss), net of
tax................................. -- 660 (8) -- (17)
------- ------- ------- ------- ------
Net income......................... $ 926 $ 1,150 $ 511 $ 380 $ 382
Balance Sheet
Total assets......................... $43,522 $20,600 $13,856 $11,097 $9,752
Long-term debt, less current
maturities.......................... $ 7,254 $ 5,319 $ 2,884 $ 2,919 $2,028
- --------
(a) Financial information reflects accounting for the 1997 merger with
PanEnergy Corp as a pooling of interests. As a result, the financial
information gives effect to the merger as if it had occurred January 1,
1996.
16
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 provides interstate transportation and storage of
natural gas for customers primarily in the Mid-Atlantic, New England and
southeastern states. Its operations are conducted primarily through Duke
Energy Gas Transmission Corporation. 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, markets and stores natural
gas and produces, transports, markets and stores natural gas liquids (NGLs).
Its operations are conducted primarily through Duke Energy Field Services, LLC
(DEFS), a limited liability company that is approximately 30% owned by
Phillips Petroleum. Field Services operates gathering systems in western
Canada and 11 contiguous states that serve major natural gas-producing regions
in the Rocky Mountain, Permian Basin, Mid-Continent, East Texas-Austin Chalk-
North Louisiana, as well as onshore and offshore Gulf Coast areas.
North American Wholesale Energy's (NAWE's) activities include asset
development, operation and management, primarily through Duke Energy North
America, LLC (DENA), and commodity sales and services related to natural gas
and power, primarily through Duke Energy Trading and Marketing, LLC (DETM).
DETM is a limited liability company that is approximately 40% owned by Exxon
Mobil Corporation. NAWE conducts its business throughout the U.S. and Canada.
The operations of the previously segregated Trading and Marketing segment were
combined by management into NAWE during 2000. Previous periods have been
restated to conform to current period presentation.
International Energy conducts its operations through Duke Energy
International, LLC. International Energy's activities include asset
development, operation and management of natural gas and power facilities and
energy trading and marketing of natural gas and electric power. This activity
is targeted in the Latin American, Asia Pacific and European regions.
Other Energy Services is a combination of businesses that provide
engineering, consulting, construction and integrated energy solutions
worldwide, primarily through Duke Engineering & Services, Inc. (DE&S),
Duke/Fluor Daniel (D/FD) and DukeSolutions, Inc. (DukeSolutions). D/FD is a
50/50 partnership between the Company and Fluor Enterprises, Inc.
Duke Ventures is comprised of other diverse businesses, primarily operating
through Crescent Resources, Inc. (Crescent), DukeNet Communications, LLC.
(DukeNet) and Duke Capital Partners (DCP). Crescent develops high-quality
commercial, residential and multi-family real estate projects and manages land
holdings primarily in the southeastern U.S. DukeNet provides fiber optic
networks for industrial, commercial and residential customers. DCP, a newly
formed, wholly owned merchant finance company, provides financing, investment
banking and asset management services to wholesale and commercial energy
markets.
Business Strategy. The company's business strategy is to develop integrated
energy businesses in targeted regions where the Company's extensive
capabilities in developing energy assets, operating electricity, natural gas
and NGL plants, optimizing commercial operations and managing risk can provide
comprehensive energy solutions for customers and create superior value for
shareholders. The growth in and restructuring of global energy markets are
providing opportunities for the Company's competitive business segments to
capitalize on their comprehensive capabilities. 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
17
its leading position in natural gas gathering, processing and NGL marketing,
and developing its trading and marketing structured origination expertise
across the energy spectrum. Internationally, the Company is currently focusing
on integrated electric and natural gas opportunities in Latin America, Asia
Pacific and Europe.
Natural Gas Transmission has increased its earnings growth rate by executing
a comprehensive strategy of selected acquisitions and expansions and by
developing expanded services and incremental projects that meet changing
customer needs.
Field Services has developed market-leading size, scope and reliability of
supply in natural gas gathering, processing and NGL marketing. Field Services
plans to make additional investments in gathering, processing and NGL
infrastructure. Field Services' interconnected natural gas processing
operations provide an opportunity to capture fee-based investment
opportunities in certain NGL assets, including pipelines, fractionators and
terminals.
NAWE plans to continue increasing earnings through acquisitions,
divestitures, construction of greenfield projects and expansion of existing
facilities as regional opportunities are identified, evaluated and realized
throughout the North American marketplace. To capture the greatest value in
the U.S., DENA, through its portfolio management strategy, seeks opportunities
to invest in energy assets in markets that have capacity needs and to divest
other assets, in whole or in part, when significant value can be realized.
Commodity sales and services related to natural gas and power continue to
expand as NAWE provides energy supply, structured origination, trading and
marketing, risk management and commercial optimization services to large
energy customers, energy aggregators and other wholesale companies.
International Energy plans to continue expanding through acquisitions,
divestitures, construction of greenfield projects and expansion of existing
facilities in selected international regions. International Energy's
combination of assets and capabilities and close working relationships with
other subsidiaries of the Company allow it to efficiently deliver natural gas
pipeline, power generation, energy marketing and other services.
Other Energy Services plans to grow by providing an expanding customer base
with a variety of engineering and energy efficiency services that allow
customers to more effectively deal with rapidly changing conditions in the
energy marketplace.
Duke Ventures plans to expand earnings capabilities in its real estate,
telecommunications and capital financing business units by developing regional
opportunities and by applying extensive experience to new project development.
The Company's business strategy and growth expectations can vary
significantly depending on many factors, including, but not limited to, the
pace and direction of industry restructuring, regulatory constraints,
acquisition opportunities, market volatility and economic trends.
Results of Operations
In 2000, net income was $926 million, including a pre-tax gain of $407
million on the sale of the Company's 20% interest in BellSouth Carolina PCS
(BellSouth PCS). In 1999, net income was $1,150 million, including an after-
tax extraordinary gain of $660 million resulting from the sale of the
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. The increase in income
before extraordinary items in 2000 was primarily due to a 101% increase in
segment earnings as described below, including the BellSouth PCS gain.
Partially offsetting this increase was the 1999 extraordinary gain and higher
interest and minority interest expense in the current year.
Net income increased $639 million in 1999 from 1998 net income of $511
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 earnings, was
partially offset by higher interest and minority interest expense.
18
Operating income for 2000 was $2,248 million compared to $1,066 million in
1999 and $1,088 million in 1998. Earnings before interest and taxes (EBIT)
were $2,331 million, $1,160 million and $1,137 million for 2000, 1999 and
1998, respectively. Management evaluates each business segment based on an
internal measure of EBIT, 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. EBIT is summarized in the following table and is discussed
by business segment thereafter.
EBIT by Business Segment
Years Ended December 31,
----------------------------
2000 1999 1998
-------- -------- --------
(In millions)
Natural Gas Transmission.......................... $ 534 $ 627 $ 702
Field Services.................................... 296 144 76
North American Wholesale Energy................... 330 214 133
International Energy.............................. 331 42 12
Other Energy Services............................. (61) (94) 10
Duke Ventures..................................... 563 162 122
Other Operations.................................. 107 (27) 25
EBIT attributable to minority interests........... 231 92 57
-------- -------- --------
Consolidated EBIT................................. $ 2,331 $ 1,160 $ 1,137
======== ======== ========
Other Operations primarily include 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,
--------------------------
2000 1999 1998
-------- -------- --------
(In millions, except
where noted)
Operating revenues.................................. $ 1,131 $ 1,230 $ 1,542
Operating expenses.................................. 609 615 864
-------- -------- --------
Operating income.................................... 522 615 678
Other income, net of expenses....................... 12 12 24
-------- -------- --------
EBIT................................................ $ 534 $ 627 $ 702
======== ======== ========
Throughput--TBtu(a)................................. 1,717 1,893 2,593
- --------
(a) Trillion British thermal units.
In 2000, EBIT for Natural Gas Transmission decreased $93 million compared to
1999, primarily due to $132 million of EBIT in 1999 that did not reoccur in
2000. These items consisted of $70 million of EBIT related to the Midwest
Pipelines, which were sold to CMS Energy Corporation (CMS) in March 1999; a
$24 million gain 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 environmental cleanup programs below estimates. These
items were partially offset by increased earnings from market-expansion
projects and joint ventures such as the Maritimes & Northeast Pipeline, which
was placed into service in December 1999, and earnings from East Tennessee
Natural Gas Company and Market Hub Partners (MHP), which were acquired in
March and September 2000, respectively. See Note 2 to the Consolidated
Financial Statements for additional information on the sale of the Midwest
Pipelines and the acquisitions of East Tennessee Natural Gas Company and MHP.
19
EBIT for Natural Gas Transmission decreased $75 million in 1999 compared to
1998. As a result of the sale of the Midwest Pipelines in March 1999, EBIT for
the Midwest Pipelines decreased $156 million compared to 1998's full year of
operation. For the remainder of Natural Gas Transmission, 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 $24 million gain 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 environmental cleanup programs
below estimates also increased EBIT in 1999. Partially offsetting these
contributions to EBIT were the favorable impacts in 1998 in connection with
the resolution of regulatory issues related to natural gas supply realignment
cost issues and a refund from a state property tax ruling.
Field Services
Years Ended December 31,
---------------------------
2000 1999 1998
-------- -------- --------
(In millions, except where
noted)
Operating revenues............................... $ 9,060 $ 3,590 $ 2,677
Operating expenses............................... 8,635 3,444 2,598
-------- -------- --------
Operating income................................. 425 146 79
Other income, net of expenses.................... 6 (2) (3)
Minority interest expense........................ 135 -- --
-------- -------- --------
EBIT............................................. $ 296 $ 144 $ 76
======== ======== ========
Natural gas gathered and processed/transported,
TBtu/d(a)....................................... 7.6 5.1 3.6
NGL production, MBbl/d(b)........................ 358.5 192.4 110.2
Natural gas marketed, TBtu/d..................... 0.7 0.5 0.4
Average natural gas price per MMBtu(c)........... $ 3.89 $ 2.27 $ 2.11
Average NGL price per gallon(d).................. $ 0.53 $ 0.34 $ 0.26
- --------
(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.
Field Services' EBIT increased $152 million in 2000 from 1999. The increase
in EBIT and volume activity was primarily due to the combination of Field
Services' natural gas gathering, processing and marketing business with
Phillips Petroleum's Gas Gathering, Processing and Marketing unit (Phillips)
in March 2000; the acquisition of the natural gas gathering, processing,
fractionation and NGL pipeline business from Union Pacific Resources (UPR)
(collectively, the "UPR acquisition") in April 1999; and other recent
acquisitions and plant expansions. For additional information on the Phillips
combination and the UPR acquisition, see Note 2 to the Consolidated Financial
Statements. Improved average NGL prices, which increased 56% over 1999 prices,
also contributed significantly to the increase in EBIT.
In 1999, Field Services' EBIT increased $68 million compared to 1998. A
significant portion of the increase resulted from earnings from the UPR
acquisition. Improved average NGL prices, which were up 31% from the prior
year also contributed to the increase in EBIT. Partially offsetting these
increases were $34 million of asset sale gains in 1998.
20
North American Wholesale Energy
Years Ended December 31,
--------------------------
2000 1999 1998
-------- -------- --------
(In millions, except
where noted)
Operating revenues................................... $ 29,303 $ 11,541 $ 8,783
Operating expenses................................... 28,900 11,326 8,619
-------- -------- -------
Operating income..................................... 403 215 164
Other income, net of expenses........................ -- 60 20
Minority interest expense............................ 73 61 51
-------- -------- -------
EBIT................................................. $ 330 $ 214 $ 133
======== ======== =======
Natural gas marketed, TBtu/d......................... 11.9 10.5 8.0
Electricity marketed, GWh(a)......................... 275,258 109,634 98,991
Proportional megawatt capacity owned(b).............. 8,984 5,799 5,098
- --------
(a)Gigawatt-hours.
(b)Includes under construction or under contract.
NAWE's EBIT increased $116 million in 2000 compared to 1999. The increase
was the result of increased earnings from asset positions, increased trading
margins due to price volatility in natural gas and power and a $47 million
increase in income from the sale of interests in generating facilities as a
result of NAWE executing its portfolio management strategy. Operating revenues
and expenses increased as the volumes of natural gas and power marketed
increased 13% and 151%, respectively. These increases were partially offset by
a $110 million charge related to receivables for energy sales in California,
and increased operating and development costs associated with business
expansion. See the Current Issues, California Issues section of Management's
Discussion and Analysis, and Note 11 to the Consolidated Financial Statements
for further information.
In 1999, EBIT for NAWE increased $81 million from 1998. The increase
included $99 million in income from the sale of partial interests in four
generating facilities as a result of NAWE executing its portfolio management
strategy, as well as, higher power trading margins. Partially offsetting these
increases were lower natural gas trading margins. Higher operating expenses
and increased development costs associated with business expansion also
partially offset the earnings increases.
International Energy
Years Ended
December 31,
-----------------
2000 1999 1998
------ ----- ----
(In millions,
except where
noted)
Operating revenues........................................... $1,067 $ 357 $159
Operating expenses........................................... 755 292 145
------ ----- ----
Operating income............................................. 312 65 14
Other income, net of expenses................................ 42 8 4
Minority interest expense.................................... 23 31 6
------ ----- ----
EBIT......................................................... $ 331 $ 42 $ 12
====== ===== ====
Proportional megawatt capacity owned(a)...................... 4,876 2,974 943
Proportional maximum pipeline capacity(a), MMcf/d(b)......... 416 321 124
- --------
(a) Includes under construction or under contract.
(b) Million cubic feet per day.
21
International Energy's EBIT increased $289 million in 2000 when compared to
1999. The increase was primarily attributable to increased earnings in Latin
America, mainly resulting from new investments (see Note 2 to the Consolidated
Financial Statements for a discussion of significant acquisitions). The
increase also included $54 million from the February 2000 sale of certain
assets relating to the transportation of liquefied natural gas.
In 1999, International Energy's EBIT increased $30 million compared to 1998.
Earnings from new investments in Latin America and Australia contributed $63
million to the increase. Partially offsetting these increases were higher
operating expenses and increased development costs associated with business
expansion.
Other Energy Services
Years Ended
December 31,
------------------
2000 1999 1998
---- ------ ----
(In millions)
Operating revenues........................................... $695 $ 989 $521
Operating expenses........................................... 756 1,083 511
---- ------ ----
EBIT......................................................... $(61) $ (94) $ 10
==== ====== ====
In 2000, EBIT for Other Energy Services improved $33 million compared to
1999. New business activity and decreased operating expenses at DukeSolutions,
and earnings related to new projects at D/FD were responsible for current year
improved EBIT. The results for 2000 also include the Company's portion of an
estimated project loss recorded by D/FD of approximately $62 million,
partially offset by 1999 charges of $38 million and $35 million at DE&S and
DukeSolutions, respectively. The 1999 charges primarily related to expenses
for severance and office closings associated with repositioning the companies
for growth.
EBIT for Other Energy Services decreased $104 million in 1999 compared to
1998. The decrease was primarily due to the above-mentioned charges of $38
million and $35 million at DE&S and DukeSolutions, respectively. Increased
development costs at DukeSolutions and decreased earnings from projects of
DE&S also contributed to lower EBIT.
Duke Ventures
Years Ended
December 31,
--------------
2000 1999 1998
---- ---- ----
(In millions)
Operating revenues............................................... $642 $232 $171
Operating expenses............................................... 79 70 49
---- ---- ----
EBIT............................................................. $563 $162 $122
==== ==== ====
EBIT for Duke Ventures increased $401 million in 2000 when compared to 1999.
This increase is primarily attributable to the sale by DukeNet of its 20%
interest in BellSouth PCS to BellSouth Corporation for a pre-tax gain of $407
million. Slightly offsetting this increase in EBIT was a decrease in
commercial project sales and land sales at Crescent.
In 1999, EBIT for Duke Ventures increased $40 million compared to 1998. The
increase was primarily due to Crescent's increased residential developed lot
sales, land sales and commercial project sales, partially offset by decreased
lake lot sales. Increased fiber optic revenues at DukeNet and decreased losses
related to its interest in BellSouth PCS also contributed to increased EBIT.
22
Other Impacts on Earnings Available for Common Stockholders
Interest expense increased $295 million in 2000 compared to 1999, and $89
million in 1999 compared to 1998 due to higher average debt balances
outstanding, resulting from acquisitions and expansion.
Minority interest expense increased $156 million in 2000 compared to 1999
and $36 million in 1999 compared to 1998. Included in minority interest
expense is expense related to regular distributions on issuances of the
Company's trust preferred securities (see Note 10 to the Consolidated
Financial Statements). This expense increased $13 million for 2000 and $34
million for 1999 due to additional issuances of the Company's trust preferred
securities during 1999 and 1998.
In addition, the increase for 2000 includes minority interest expense
related to Field Services' combination with Phillips Petroleum, and increased
minority interest expense at NAWE related to its joint venture with Exxon
Mobil Corporation, partially offset by decreased minority interest expense at
International Energy related to its 1999 and 2000 acquisitions. The 1999
increase in minority interest expense over 1998 related primarily to
International Energy's 1999 investments and NAWE's joint venture with Exxon
Mobil Corporation. For additional information regarding acquisitions and new
joint venture projects, see Notes 2 and 7 to the Consolidated Financial
Statements.
The Company's effective income tax rate was approximately 36%, 33% and 37%
for 2000, 1999 and 1998, respectively. The decrease in 1999 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.
The sale of the Midwest Pipelines to CMS closed in March 1999 and resulted
in a $660 million extraordinary gain, net of income tax of $404 million (see
Note 2 to the Consolidated Financial Statements).
In January 1998, TEPPCO Partners, LP, in which the Company has a 21.1%
ownership interest, redeemed certain First Mortgage Notes. This resulted in a
non-cash extraordinary loss of $8 million, net of income tax of $5 million,
related to the Company's share of costs of the early retirement of debt.
LIQUIDITY AND CAPITAL RESOURCES
Operating Cash Flows
Net cash provided by operations was $1,272 million in 2000, $1,128 million
in 1999 and $930 million in 1998. Cash flows from operations decreased in 2000
compared to 1999 primarily due to tax payments made in 2000 related to the
sale of the Midwest Pipelines. The increase in cash flows from operations in
1999 from 1998 was primarily due to net income resulting from business
expansion.
Investing Cash Flows
Capital and investment expenditures were approximately $4.8 billion in 2000
compared to $5.2 billion in 1999. The primary use of cash in investing
activities for capital and investment expenditures reflects development and
expansion expenditures, upgrades to existing assets and the acquisitions of
various businesses and assets. The change in Natural Gas Transmission's
capital expenditures is primarily due to business expansion related to the
approximately $390 million acquisition of East Tennessee Natural Gas Company
and the approximately $250 million of cash for the acquisition of MHP. In
2000, NAWE began construction of a number of power generation plants in the
U.S. and continued capital expenditures on projects initiated prior to 2000.
International Energy's business expansion included the completion of a tender
offer to the minority shareholders of Companhia de Geracao de Energia Eletrica
Paranapanema (Paranapanema) for approximately $280 million and the completion
of the approximately $405 million acquisition of Dominion Resources, Inc.'s
portfolio of hydroelectric, natural gas and diesel power generation businesses
in Latin America. Offsetting the capital and investing expenditures were cash
proceeds of $400 million from the 2000 sale of The Company's 20% interest in
BellSouth PCS to
23
BellSouth Corporation. For additional information concerning significant
acquisitions and dispositions, see Note 2 to the Consolidated Financial
Statements.
Capital and Investment Expenditures by Business Segment
Years Ended December 31,
--------------------------
2000 1999 1998
-------- -------- --------
(In millions)
Natural Gas Transmission............................ $ 973 $ 261 $ 290
Field Services...................................... 376 1,630 304
North American Wholesale Energy..................... 1,737 1,028 796
International Energy................................ 980 1,779 239
Other Energy Services............................... 28 94 41
Duke Ventures....................................... 643 382 232
Other Operations.................................... 35 3 12
-------- -------- --------
Total consolidated................................ $ 4,772 $ 5,177 $ 1,914
======== ======== ========
Capital and investment expenditures in 1999 increased approximately $3.3
billion from 1998 capital and investment expenditures of approximately $1.9
billion. The increase primarily resulted from business expansion for the Field
Services, NAWE and International Energy business segments. Business expansion
for Field Services included the $1.35 billion UPR acquisition. In 1999, NAWE
began construction of multiple power generation plants in the U.S. and
continued capital expenditures on projects initiated prior to 1999.
International Energy's business expansion included $1.7 billion for multiple
acquisitions in Latin America, western Australia and New Zealand. Expenditures
related to these activities were partially funded by $1.9 billion in cash
proceeds from the sale of the Midwest Pipelines. For additional information
concerning significant acquisitions and dispositions, see Note 2 to the
Consolidated Financial Statements.
Projected 2001 capital and investment expenditures for the Company are
approximately $6.4 billion, including approximately $5.8 billion for
acquisitions and other expansion opportunities and approximately $600 million
for existing plant upgrades. The Company's projected capital expenditures also
include $800 million in expenditures over the next three years for its
Gulfstream pipeline project.
All projected capital and investment expenditures 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, 2000, including
short-term debt, was 49% debt, 47% common equity and minority interests and 4%
trust preferred securities. Fixed charges coverage, calculated using the
Securities and Exchange Commission (SEC) method, was 3.1 times, 2.9 times and
4.2 times for 2000, 1999 and 1998, respectively.
The Company's business expansion opportunities, along with debt repayments
and operating requirements, are expected to be funded by cash from operations,
external financing, capital contributions from parent and the proceeds from
certain asset sales. Funding requirements met by external financing, capital
contributions from parent and proceeds from the sale of assets are dependent
upon the opportunities presented and favorable market conditions. Management
believes the Company has adequate financial resources to meet its future
needs.
In April 2000, DEFS issued approximately $2.75 billion of commercial paper
associated with the Phillips combination of which $1.22 billion was
distributed to Phillips Petroleum. In August 2000, DEFS issued $1.7 billion of
notes at rates from 7.50% to 8.125% and reduced the outstanding balance of its
commercial paper. In
24
December 2000, Texas Eastern Transmission Corporation (TETCO) issued $300
million of 7.30% notes due 2010. For additional information regarding debt,
see Note 9 to the Consolidated Financial Statements.
During 2000, the Company formed Catawba River Associates, LLC, and third-
party, non-controlling, preferred interest holders invested approximately
$1,025 million. The preferred interest receives a preferred return equal to an
adjusted floating reference rate (approximately 7.847% at December 31, 2000).
See Note 2 to the Consolidated Financial Statements for further discussion.
During 2000, the Company repaid $380 million of 8.0% notes, $200 million of
10.375% notes and made $320 million in scheduled debt repayments. In addition,
the Company made a tender offer for $115 million of the notes assumed with the
acquisition of MHP. As of December 31, 2000, approximately $88 million of
these notes had been retired.
Also during 2000, the Company received a $200 million capital contribution
from its parent, Duke Energy.
Under its commercial paper facilities and extendible commercial note
programs (ECNs), The Company had the ability to borrow up to $4.0 billion and
$2.1 billion at December 31, 2000 and 1999, respectively. A summary of the
available commercial paper and ECNs as of December 31, 2000, is as follows:
Duke Capital Duke Energy Duke Energy
Corporation Field Services International Total
------------ -------------- ------------- -----
(In billions)
Commercial paper................ $1.55 $1.00(a) $0.41(b) $2.96
ECNs............................ 1.00 -- -- 1.00
----- ----- ----- -----
Total......................... $2.55 $1.00 $0.41 $3.96
===== ===== ===== =====
- --------
(a) Original availability of $2.8 billion was reduced to $1.0 billion upon
DEFS' issuance of $1.7 billion in notes in August 2000.
(b) Includes ability to issue medium-term notes.
The amount of the Company's bank credit and construction facilities
available at December 31, 2000 and 1999, was approximately $3.0 billion and
$2.5 billion, respectively. Certain of the bank credit facilities support the
issuance of commercial paper; therefore, the issuance of commercial paper
reduces the amount available under these credit facilities. At December 31,
2000, approximately $1.9 billion was outstanding under the commercial paper
facilities and ECNs, and approximately $44 million was outstanding under bank
credit and construction facilities.
As of December 31, 2000, the Company and its subsidiaries had the ability to
issue up to $2.4 billion aggregate public offering price of debt and other
securities under shelf registrations filed with the SEC. Such securities may
be issued as Senior Notes, Subordinated Notes and Trust Preferred Securities.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Risk Policies
The Company is exposed to market risks associated with interest rates,
commodity prices, equity prices and foreign currency exchange rates.
Comprehensive risk management policies have been established by management to
monitor and manage these market risks. Duke Energy's Policy Committee is
responsible for the overall approval of market risk management policies and
the delegation of approval and authorization levels. The Policy Committee is
comprised of senior executives who receive periodic updates from the Chief
Risk Officer (CRO) on market risk positions, corporate exposures, credit
exposures and overall results of the Company's risk management activities. The
CRO has responsibility for the overall management of interest rate risk,
foreign currency risk, credit risk and energy risk, including monitoring of
exposure limits.
25
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 securities and trust
preferred securities and commercial paper, as well as interest rate swaps and
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 changes in interest rates. The Company may also enter into financial
derivative instruments, including, but not limited to, swaps, options and
treasury lock 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, 2000, it was estimated
that if market interest rates average 1% higher (lower) in 2001 than in 2000,
earnings before income taxes would decrease (increase) by approximately $35
million. Comparatively, based on a sensitivity analysis as of December 31,
1999, had interest rates averaged 1% higher (lower) in 2000 than in 1999, it
was estimated that earnings before income taxes would have decreased
(increased) by approximately $10 million. These amounts were determined by
considering the impact of the hypothetical interest rates on the variable-rate
securities outstanding as of December 31, 2000 and 1999. The increase in
interest rate sensitivity is primarily the result of the increase in
outstanding variable-rate commercial paper. 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
other energy-related 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. See Notes 1 and 6 to the Consolidated
Financial Statements for additional information.
The risk in the commodity trading portfolio is measured and monitored 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 limit and monitor the risk in the commodity trading portfolio
on monthly and annual bases.
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 other energy-related 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 Company's DER amounts are depicted in the table below.
The increase in DER amounts as compared to 1999 is a result of the Company's
expanding portfolio of energy-related products both domestically and
internationally.
Daily Earnings at Risk
Estimated One-Day Estimated One-Day Estimated Average Estimated Average
Impact on EBIT at Impact on EBIT at One-Day Impact on One-Day Impact on
Operational Locations December 31, 2000 December 31, 1999 EBIT for 2000 EBIT for 1999
- --------------------- ----------------- ----------------- ----------------- -----------------
(In millions)(a)
North American.......... $18 $ 7 $16 $ 8
Other international..... 11 -- 2 --
- --------
(a) Changes in markets inconsistent with historical trends could cause actual
results to exceed predicted limits.
26
Certain subsidiaries of the Company are also exposed to market fluctuations
in the prices of various commodities related to their ongoing power
generating, natural gas gathering, processing and marketing activities. The
Company closely monitors the risks associated with these commodities' price
changes on its future operations, and where appropriate, uses various
commodity instruments, such as electricity, natural gas, crude oil and NGLs to
hedge these price risks. Based on a sensitivity analysis as of December 31,
2000, it was estimated that if NGL prices average one cent per gallon less in
2001, EBIT would decrease by approximately $8 million, after considering the
effect of the Company's commodity hedge positions. Comparatively, the same
sensitivity analysis as of December 31, 1999, estimated that EBIT would have
decreased by approximately $6 million. Based on the sensitivity analyses
associated with other commodities' price changes, net of the Company's
commodity hedge positions, the effect on EBIT was not material as of December
31, 2000 or 1999.
Credit Risk
The Company's principal markets for power and natural gas marketing services
are industrial end-users and utilities located throughout the U.S., Canada,
Asia Pacific and Latin America. The Company has concentrations of receivables
from natural gas and electric utilities and their affiliates, as well as
industrial customers throughout these regions. These concentrations of
customers may affect the Company's overall credit risk in that certain
customers may be similarly affected by changes in economic, regulatory or
other factors. On all transactions where the Company is exposed to credit
risk, the Company analyzes the counterparties' financial condition prior to
entering into an agreement, establishes credit limits and monitors the
appropriateness of these limits on an ongoing basis. As of December 31, 2000,
the Company had approximately $400 million in receivables related to energy
sales in California. The Company quantified its exposures with regard to those
receivables and recorded a provision of $110 million. See the Current Issues,
California Issues section of Management's Discussion and Analysis, and Note 11
to the Consolidated Financial Statements for further information regarding
credit exposure.
The change in market value of New York Mercantile Exchange-traded futures
and options contracts requires daily cash settlement in margin accounts with
brokers. Physical forward contracts and financial derivatives are generally
settled at the expiration of the contract term or each delivery period;
however, these transactions are also generally subject to margin agreements
with the majority of the Company's counterparties.
Foreign Currency Risk
The Company is exposed to foreign currency risk that arises 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
investments 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, 2000, the Company's primary foreign currency exchange rate
exposures were the Brazilian real, the Peruvian nuevo sol, the Australian
dollar, the El Salvadoran colon, the Argentine peso, the European euro and the
Canadian dollar. Based on a sensitivity analysis as of December 31, 2000, a
10% devaluation in the currency exchange rates in Brazil would reduce the
Company's financial position by approximately $91 million and would not
significantly affect the Company's consolidated results of operations, cash
flows or financial position over the next 12 months. Based on a sensitivity
analysis as of December 31, 1999, a 10% devaluation in the Brazilian currency
exchange rates would have reduced the Company's financial position by
approximately $65 million. The increase in sensitivity to the Brazilian real
is primarily due to the increased investment in Paranapanema as a result of
the Company's tender offer in 2000. See Note 2 to the Consolidated Financial
Statements for further information. Based on these sensitivity analyses, a 10%
devaluation in other foreign currencies was insignificant to the Company's
consolidated results of operations, cash flows or financial position.
27
CURRENT ISSUES
Natural Gas Competition. Wholesale Competition. On February 9, 2000, the
FERC issued Order 637, which sets forth revisions to its regulations governing
short-term natural gas transportation services and policies governing the
regulation of interstate natural gas pipelines. "Short-term" has been defined
as all transactions of less than one year. Among the significant actions taken
are the lifting of the price cap for short-term capacity release by pipeline
customers for an experimental 2 1/2-year period ending September 1, 2002, and
requiring that interstate pipelines file pro forma tariff sheets to (i)
provide for nomination equality between capacity release and primary pipeline
capacity; (ii) implement imbalance management services (for which interstate
pipelines may charge fees) while at the same time reducing the use of
operational flow orders and penalties; and (iii) provide segmentation rights
if operationally feasible. Order 637 also narrows the right of first refusal
to remove economic biases perceived in the current rule. Order 637 imposes
significant new reporting requirements for interstate pipelines that were
implemented by the Company during the third quarter of 2000. Additionally,
Order 637 permits pipelines to propose peak/off-peak rates and term-
differentiated rates, and encourages pipelines to propose experimental
capacity auctions. By Order 637-A, issued in February 2000, the FERC generally
denied requests for rehearing and several parties, including the Company, have
filed appeals in the District of Columbia Court of Appeals seeking court
review of various aspects of the Order. During the third quarter of 2000, the
Company's interstate pipelines made the required pro forma tariff sheet
filings. These filings are currently subject to review and approval by the
FERC.
Management does not believe the effects of these matters will have a
material effect on the Company's future consolidated results of operations,
cash flows or financial position.
Retail Competition. Changes in regulation to allow retail competition could
affect the Company's natural gas transportation contracts with local natural
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, cash flows 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.
Superfund Sites. The Company is considered by regulators to be a potentially
responsible party and may be subject to future liability at four federal
Superfund sites and one state Superfund site. While the cost of remediation of
these 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, cash flows or financial position.
PCB (Polychlorinated Biphenyl) Assessment and Cleanup Programs. In June
1999, the Environmental Protection Agency (EPA) certified that TETCO, a wholly
owned subsidiary of the Company, had completed cleanup of PCB-contaminated
sites under conditions stipulated by a U.S. Consent Decree in 1989. TETCO was
required to continue groundwater monitoring on a number of sites for two
years. This required monitoring was completed as of the end of 2000, pending
EPA concurrence. TETCO will be evaluating and discussing with the EPA,
appropriate state authorities or both the need for additional remediation or
monitoring.
Under terms of the sales agreement with CMS discussed in Note 2 to the
Consolidated Financial Statements, the Company is obligated to complete
cleanup of previously identified contamination resulting from the past use of
PCB-containing lubricants and other discontinued practices at certain sites on
the PEPL and Trunkline systems. Based on the Company's experience to date and
costs incurred for cleanup 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, cash flows or
financial position.
Air Quality Control. In 1997, the United Nations held negotiations in Kyoto,
Japan to determine how to minimize global warming. The resulting Kyoto
Protocol prescribed, among other greenhouse gas emission
28
reduction tactics, carbon dioxide emission reductions from fossil-fueled
electric generating facilities in the U.S. and other developed nations, as
well as methane emission reductions from natural gas operations. Several
subsequent meetings have been held attempting to resolve operational details
to clear the way for multinational ratification and implementation without
resolution. If the Kyoto Protocol were to be adopted in its current form, it
could have far-reaching implications for the Company and the entire energy
industry. However, the outcome and timing of these implications are highly
uncertain, and the Company cannot estimate the effects on future consolidated
results of operations, cash flows or financial position. The Company remains
engaged with those developing public policy initiatives and continuously
assesses the commercial implications for its markets around the world.
California Issues. California Litigation. The Company's subsidiaries, DENA
and DETM, have been named among 16 defendants in a class action lawsuit (the
Gordon lawsuit) filed against companies identified as "generators and traders"
of electricity in California markets. DETM also was named as one of numerous
defendants in four additional lawsuits, including two class actions (the
Hendricks and Pier 23 Restaurant lawsuits), filed against generators,
marketers and traders and other unnamed providers of electricity in California
markets. These suits were brought either by or on behalf of electricity
consumers in the State of California. The Gordon and Hendricks class action
suits were filed in the Superior Court of the State of California, San Diego
County, in November 2000. The other three suits were filed in January 2001,
one in the Superior Court of the State of California, San Diego County, and
the other two in the Superior Court of the State of California, County of San
Francisco. These suits generally allege that the defendants manipulated the
wholesale electricity markets in violation of state laws against unfair and
unlawful business practices and state antitrust laws. Plaintiffs in the Gordon
suit seek aggregate damages of over $4 billion, and the plaintiffs in the
other suits, to the extent damages are specified, allege damages in excess of
$1 billion. The lawsuits each seek the disgorgement of alleged unlawfully
obtained revenues for sales of electricity and, in three suits, an award of
treble damages.
California Wholesale Electricity Markets. As a result of high prices in the
western U.S. wholesale electricity markets in 2000, several state and federal
regulatory investigations and complaints have commenced to determine the
causes of the prices and potentially to recommend remedial action. The FERC
concluded its investigation by issuing on December 15, 2000, an Order
Directing Remedies in California Wholesale Electricity Markets. In this
conclusion, the FERC found no basis in allegations made by government
officials in California that specific electric generators artificially drove
up power prices. This conclusion is consistent with similar findings by the
Compliance Unit of the California Power Exchange (CalPX) and the Northwest
Power Planning Council. That Order is the subject of numerous rehearing
requests.
At the state level, the California Public Utilities Commission, the
California Electricity Oversight Board, the California Bureau of State Audits
and the California Office of the Attorney General all have separate ongoing
investigations into the high prices and their causes. None of those
investigations have been completed and no findings have been made in
connection with any of them.
California Utilities Defaults and Other Proceedings. Two California electric
utilities recently defaulted on many of their obligations to suppliers and
creditors. NAWE supplies electric power to these utilities directly and
indirectly through contracts through the California Independent System
Operator (CAISO) and the CalPX. NAWE also supplies natural gas to these
utilities under direct contracts. With respect to electric power sales through
the CAISO and CalPX, the Company quantified its exposures at December 31, 2000
to these utilities and recorded a $110 million provision. As a result of these
defaults and certain related government actions, the Company has taken a
number of steps, including initiating court actions, to mitigate its exposure.
While these matters referenced above are in their earliest stages,
management does not believe, based on its analysis to date of the factual
background and the claims asserted in these matters, that their resolution
will have a material adverse effect on the Company's consolidated results of
operations, cash flows or financial position.
Litigation and Contingencies. Exxon Mobil Corporation Arbitration. In
December 2000, three subsidiaries of the Company initiated binding arbitration
against three subsidiaries of the Exxon Mobil
29
Corporation (collectively, the "Exxon Mobil entities") concerning the parties'
joint ownership of DETM and certain related affiliates (collectively, the
"Ventures"). At issue is a Buy-out Right provision in the parties' agreement.
The agreements governing the ownership of the Ventures contain provisions
giving the Company the right to purchase the Exxon Mobil entities' 40%
interest in the Ventures in the event material business disputes arise between
the Ventures' owners. Such disputes have arisen, and consequently, the Company
exercised its right to buy the Exxon Mobil entities' interest. The Company
claims that refusal by the Exxon Mobil entities to honor the exercise is a
breach of the Buy-out Right provision, and seeks specific performance of the
provision. The Company also complains of the Exxon Mobil entities' lack of use
of, and contributions to, the Ventures.
In January 2001, the Exxon Mobil entities asserted counterclaims in the
arbitration and claims in a separate Texas state court action alleging that
the Company breached its obligations to the Ventures and to the Exxon Mobil
entities. The Exxon Mobil entities also claim that the Company violated a
Guaranty Agreement. While this matter is in its early stages, management
believes that the final disposition of this action will not have a material
adverse effect on the Company's consolidated results of operations, cash flows
or financial position.
For information concerning litigation and other commitments and
contingencies, see Note 11 to the Consolidated Financial Statements.
New Accounting Standard. In June 1998, Statement of Financial Accounting
Standard (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued. The Company was 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 changes in the
fair value of derivatives are reported in current earnings, unless the
derivative is designated and effective as a hedge. If the intended use of the
derivative is to hedge the exposure to changes in the fair value of an asset,
a liability or a firm commitment, then changes in the fair value of the
derivative instrument will generally be offset in the income statement by
changes in the hedged item's fair value. However, if the intended use of the
derivative is to hedge the exposure to variability in expected future cash
flows, then changes in the fair value of the derivative instrument will
generally be reported in Other Comprehensive Income (OCI). The gains and
losses on the derivative instrument that are reported in OCI will be
reclassified to earnings in the periods in which earnings are impacted by the
hedged item.
The Company has determined the effect of implementing SFAS No. 133 and
recorded a net-of-tax cumulative-effect adjustment of $68 million as a
reduction in earnings. The net-of-tax cumulative-effect adjustment reducing
OCI and Common Stockholder's Equity is estimated to be $908 million on January
1, 2001.
Currently, there are ongoing discussions surrounding the implementation and
interpretation of SFAS No. 133 by the Financial Accounting Standards Board's
Derivatives Implementation Group. The Company implemented SFAS No. 133 based
on current rules and guidance in place as of January 1, 2001. However, if the
definition of derivative instruments is altered, this may impact the Company's
transition adjustment amounts and subsequent reported operating results.
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 at 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
30
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."
31
Item 8. Financial Statements and Supplementary Data.
DUKE CAPITAL CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(In millions)
Years Ended December 31,
--------------------------
2000 1999 1998
-------- -------- --------
Operating Revenues
Sales, trading and marketing of natural gas and
petroleum products.............................. $ 23,741 $ 10,661 $ 7,854
Trading and marketing of electricity............. 13,059 3,610 2,788
Transportation and storage of natural gas........ 1,045 1,139 1,450
Electric generation.............................. 565 328 80
Gain on sale of equity interest.................. 407 -- --
Other............................................ 1,114 1,158 939
-------- -------- --------
Total operating revenues....................... 39,931 16,896 13,111
-------- -------- --------
Operating Expenses
Natural gas and petroleum products purchased..... 23,317 10,376 7,497
Purchased power.................................. 11,583 3,169 2,602
Other operation and maintenance.................. 2,045 1,757 1,450
Depreciation and amortization.................... 587 418 385
Property and other taxes......................... 151 110 89
-------- -------- --------
Total operating expenses....................... 37,683 15,830 12,023
-------- -------- --------
Operating Income................................... 2,248 1,066 1,088
Other Income and Expenses.......................... 83 94 49
-------- -------- --------
Earnings Before Interest and Taxes................. 2,331 1,160 1,137
Interest Expense................................... 621 326 237
Minority Interest Expense.......................... 263 107 71
-------- -------- --------
Earnings Before Income Taxes....................... 1,447 727 829
Income Taxes....................................... 521 237 310
-------- -------- --------
Income Before Extraordinary Item................... 926 490 519
Extraordinary Gain, net of tax..................... -- 660 (8)
-------- -------- --------
Net Income......................................... $ 926 $ 1,150 $ 511
======== ======== ========
See Notes to Consolidated Financial Statements.
32
DUKE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Years Ended December 31,
----------------------------
2000 1999 1998
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income...................................... $ 926 $ 1,150 $ 511
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................... 603 442 397
Net mark-to-market gain......................... (292) 4 (75)
Extraordinary gain, net of tax.................. -- (660) 8
Gain on sale of equity investment............... (407) -- --
Provision on NAWE receivables................... 110 -- --
Deferred income taxes........................... 68 156 70
Transition cost recoveries (payments), net...... 82 95 (28)
(Increase) decrease in
Receivables.................................... (4,428) (790) (101)
Inventory...................................... (49) (86) (32)
Other current assets........................... (769) (139) (50)
Increase (decrease) in
Accounts payable............................... 4,538 619 56
Taxes accrued.................................. (346) (44) 40
Interest accrued............................... 58 28 6
Other current liabilities...................... 988 134 101
Other, net...................................... 190 219 27
-------- -------- --------
Net cash provided by operating activities..... 1,272 1,128 930
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital and investment expenditures............. (4,772) (5,177) (1,914)
Proceeds from sale of subsidiaries and equity
investment..................................... 400 1,900 --
Proceeds from sales and other, net.............. (127) 132 115
-------- -------- --------
Net cash used in investing activities......... (4,499) (3,145) (1,799)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issuance of:
Long-term debt.................................. 2,654 2,773 590
Guaranteed preferred beneficial interests in
subordinated notes of
Duke Capital Corporation....................... -- 242 581
Payments for the redemption of long-term debt... (987) (808) (78)
Net change in notes payable and commercial
paper.......................................... 1,412 54 (498)
Capital contributions from parent............... 200 200 200
Distributions to minority interests............. (1,216) -- --
Contributions from minority interests........... 1,116 -- --
Other, net...................................... (50) 28 6
-------- -------- --------
Net cash provided by financing activities..... 3,129 2,489 801
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents..................................... (98) 472 (68)
Cash received from business acquisitions......... 100 49 38
Cash and cash equivalents at beginning of
period.......................................... 585 64 94
-------- -------- --------
Cash and cash equivalents at end of period....... $ 587 $ 585 $ 64
======== ======== ========
Supplemental Disclosures
Cash paid for interest, net of amount
capitalized.................................... $ 559 $ 294 $ 224
Cash paid for income taxes...................... $ 92 $ 202 $ 192
See Notes to Consolidated Financial Statements.
33
DUKE CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions)
December 31,
---------------
2000 1999
------- -------
ASSETS
Current Assets
Cash and cash equivalents.................................... $ 587 $ 585
Receivables.................................................. 7,588 2,957
Inventory.................................................... 350 267
Current portion of regulatory assets......................... -- 81
Unrealized gains on mark-to-market transactions.............. 10,248 1,118
Other........................................................ 1,243 344
------- -------
Total current assets....................................... 20,016 5,352
------- -------
Investments and Other Assets
Investments in affiliates.................................... 1,336 1,299
Pre-funded pension costs..................................... -- 340
Goodwill, net................................................ 1,504 774
Notes receivable............................................. 462 154
Unrealized gains on mark-to-market transactions.............. 3,621 690
Other........................................................ 1,789 664
------- -------
Total investments and other assets......................... 8,712 3,921
------- -------
Property, Plant and Equipment
Cost......................................................... 17,160 13,642
Less accumulated depreciation and amortization............... 2,621 2,475
------- -------
Net property, plant and equipment.......................... 14,539 11,167
------- -------
Regulatory Assets and Deferred Debits.......................... 255 160
------- -------
Total Assets................................................... $43,522 $20,600
======= =======
See Notes to Consolidated Financial Statements.
34
DUKE CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions)
December 31,
----------------
2000 1999
------- -------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Accounts payable.......................................... $ 6,804 $ 2,106
Notes payable and commercial paper........................ 1,570 83
Taxes accrued............................................. 407 738
Interest accrued.......................................... 146 83
Current maturities of long-term debt...................... 284 277
Unrealized losses on mark-to-market transactions.......... 10,226 1,241
Other..................................................... 1,634 600
------- -------
Total current liabilities............................... 21,071 5,128
------- -------
Long-term Debt.............................................. 7,254 5,319
------- -------
Deferred Credits and Other Liabilities
Deferred income taxes..................................... 1,645 1,475
Environmental clean-up liabilities........................ 100 101
Unrealized losses on mark-to-market transactions.......... 3,222 438
Other..................................................... 511 657
------- -------
Total deferred credits and other liabilities............ 5,478 2,671
------- -------
Guaranteed Preferred Beneficial Interests in Subordinated
Notes of Duke Capital Corporation.......................... 823 823
------- -------
Minority Interests.......................................... 2,435 1,200
------- -------
Common Stockholder's Equity
Common stock, no par, 3,000 shares authorized, 1,010
shares outstanding....................................... -- --
Paid-in capital........................................... 3,400 3,200
Retained Earnings......................................... 3,185 2,261
Accumulated other comprehensive income.................... (124) (2)
------- -------
Total common stockholder's equity....................... 6,461 5,459
------- -------
Total Liabilities and Stockholder's Equity.................. $43,522 $20,600
======= =======
See Notes to Consolidated Financial Statements.
35
DUKE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY AND COMPREHENSIVE INCOME
(In millions)
Accumulated
Other Total
Common Paid-in Retained Comprehensive Comprehensive
Stock Capital Earnings Income Total Income
------ ------- -------- ------------- ------ -------------
Balance December 31,
1997................... $-- $2,766 $ 600 $ -- $3,366
Net income............ 511 511 $ 511
------
Total comprehensive
income............. $ 511
======
Capital contribution
from parent.......... 200 200
Other capital stock
transactions, net.... 3 (7) (4)
---- ------ ------ ----- ------
Balance December 31,
1998................... $-- $2,969 $1,104 $ -- $4,073
---- ------ ------ ----- ------
Net income............ 1,150 1,150 $1,150
Other comprehensive
income:
Foreign currency
translation
adjustments (Note
1)................. (2) (2) (2)
------
Total comprehensive
income............. $1,148
======
Capital contribution
from parent.......... 230 230
Other capital stock
transactions, net.... 1 7 8
---- ------ ------ ----- ------
Balance December 31,
1999................... $-- $3,200 $2,261 $ (2) $5,459
---- ------ ------ ----- ------
Net income............ 926 926 $ 926
Other comprehensive
income:
Foreign currency
translation
adjustments (Note
1)................. (122) (122) (122)
------
Total comprehensive
income............. $ 804
======
Capital contribution
from parent.......... 200 200
Other capital stock
transactions, net.... (2) (2)
---- ------ ------ ----- ------
Balance December 31,
2000................... $-- $3,400 $3,185 $(124) $6,461
---- ------ ------ ----- ------
See Notes to Consolidated Financial Statements.
36
DUKE CAPITAL CORPORATION
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2000, 1999 and 1998
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 of
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 best
available 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, natural
gas and natural gas liquid (NGL) products held in storage for transmission,
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. 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 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 that qualify as hedges are recognized in income when
the underlying hedged physical transaction closes and are included in the
Consolidated Statements of 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 uses interest rate swaps, accounted for under the
accrual method, to manage the interest rate characteristics associated with
outstanding debt. Interest rate differentials to be paid or received as
interest rates change are accrued and recognized as an adjustment to interest
expense. The amount accrued as either a payable to or a receivable from
counterparties is included in the Consolidated Balance Sheets as Regulatory
Assets and Deferred Debits.
The Company also periodically utilizes interest rate lock agreements to
hedge interest rate risk associated with new debt issuances. Under the
deferral method of accounting, gains or losses on such agreements, when
settled, are deferred in the Consolidated Balance Sheets as Long-Term Debt and
are amortized in the Consolidated Statements of Income 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 fluctuations,
when
37
DUKE CAPITAL CORPORATION
Notes to Consolidated Financial Statements--(Continued)
possible, contracts are denominated in or indexed to the U.S. dollar or
investments 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.
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, 2000 and 1999,
was $1,504 million and $774 million, net of accumulated amortization of $275
million and $212 million, respectively. 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 capitalized interest. 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 3.84%,
3.31% and 3.53% for 2000, 1999 and 1998, respectively.
When certain of the Company's property, plant and equipment, that are
regulated by the Federal Energy Regulatory Commission (FERC), 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
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 currently 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 cleanups are
probable and the costs can be reasonably estimated.
Cost-Based Regulation. Certain of the Company's FERC 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
38
DUKE CAPITAL CORPORATION
Notes to Consolidated Financial Statements--(Continued)
entities. The applicability of SFAS No. 71 is routinely evaluated, and factors
such as regulatory changes and the impact of competition are considered.
Discontinuing cost-based regulation or increasing competition might require
companies to reduce their asset balances to reflect a market basis less than
cost and to write off their associated regulatory assets. Management cannot
predict the potential impact, if any, of discontinuing cost-based regulation
or increasing competition on future consolidated results of operations, cash
flows or financial position.
Revenues. Revenues on sales of electricity and transportation and storage of
natural gas are recognized as service is provided. Revenues on sales of
natural gas and petroleum products, as well as electricity, gas and other
energy products marketed, are recognized in the period of delivery. The
allowance for doubtful accounts was approximately $183 million and $35 million
as of December 31, 2000 and 1999, respectively. 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.
During 2000, the Company adopted the provisions of Staff Accounting Bulletin
(SAB) 101 issued by the Securities and Exchange Commission. The impact of
adopting SAB 101 was not material to the Company.
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 Common Stockholder's Equity 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
resulting from foreign currency gains and losses is included in consolidated
net income.
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 after tax, 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, LP (TEPPCO), in which the Company has a
21.1% ownership 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 June 1998, SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" was issued. The Company was
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 changes in the fair value of derivatives are reported in
current earnings, unless the derivative is designated and effective as a
hedge. If the intended use of the derivative is to hedge the exposure to
changes in the fair value of an asset, a liability or a firm commitment, then
changes in the fair value of the derivative instrument will generally be
offset in the income statement by changes in the hedged item's fair value.
However, if the intended use of the derivative is to hedge the exposure to
variability in expected future cash flows, then changes in the fair value of
the derivative instrument will generally be reported in Other Comprehensive
Income (OCI). The
39
DUKE CAPITAL CORPORATION
Notes to Consolidated Financial Statements--(Continued)
gains and losses on the derivative instrument that are reported in OCI will be
reclassified to earnings in the periods in which earnings are impacted by the
hedged item.
The Company has determined the effect of implementing SFAS No. 133 and
recorded a net-of-tax cumulative-effect adjustment of $68 million as a
reduction in earnings. The net-of-tax cumulative-effect adjustment reducing
OCI and Common Stockholder's Equity is estimated to be $908 million on January
1, 2001.
Currently, there are ongoing discussions surrounding the implementation and
interpretation of SFAS No. 133 by the Financial Accounting Standards Board's
Derivatives Implementation Group. The Company implemented SFAS No. 133 based
on current rules and guidance in place as of January 1, 2001. However, if the
definition of derivative instruments is altered, this may impact the Company's
transition adjustment amounts and subsequent reported operating results.
Reclassifications. Certain prior period amounts have been reclassified in
the Consolidated Financial Statements to conform to the current presentation.
2. BUSINESS ACQUISITIONS AND DISPOSITIONS
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 is recorded as goodwill. Purchase
price allocations are subject to adjustment when additional information
concerning asset and liability valuations becomes available within one year
after the acquisition.
Market Hub Partners (MHP). In September 2000, the Company, through a wholly
owned subsidiary, completed the approximately $400 million acquisition of MHP
from subsidiaries of NiSource Inc. for approximately $250 million in cash and
the assumption of $150 million in debt. MHP provides natural gas storage
services in Louisiana and Texas with a current capacity of 23 billion cubic
feet with significant expansion capabilities. Approximately $159 million of
goodwill was recorded in the transaction and is being amortized on a straight-
line basis over 35 years. In association with the acquisition of MHP, a tender
offer was made for $115 million of the assumed debt as required by the debt
agreements. As of December 31, 2000, approximately $88 million of this debt
was retired.
Phillips Petroleum's Gas Gathering, Processing and Marketing Unit
(Phillips). In March 2000, the Company, through a wholly owned subsidiary,
completed the approximately $1.7 billion transaction that combined Field
Services' and Phillips' gas gathering, processing and marketing business to
form a new midstream company, named Duke Energy Field Services, LLC (DEFS). In
connection with the combination, DEFS issued approximately $2.75 billion of
commercial paper in April 2000. The proceeds were used to make one-time cash
distributions of approximately $1.53 billion to the Company and $1.22 billion
to Phillips Petroleum. The Company owns approximately 70% of DEFS and Phillips
Petroleum owns approximately 30%. Goodwill of approximately $429 million was
recorded in connection with the transaction and is being amortized on a
straight-line basis over 20 years.
East Tennessee Natural Gas Company. In March 2000, the Company, through a
wholly owned subsidiary, completed the approximately $390 million acquisition
of East Tennessee Natural Gas Company from El Paso Energy. East Tennessee
Natural Gas Company owns a 1,100-mile interstate natural gas pipeline system
that crosses the Company's Texas Eastern Transmission Corporation's (TETCO's)
pipeline and serves the southeastern region of the U.S.
40
DUKE CAPITAL CORPORATION
Notes to Consolidated Financial Statements--(Continued)
Dominion Resources' Hydroelectric, Natural Gas and Diesel Power Generation
Businesses. In August 1999, the Company, through its wholly owned subsidiary
Duke Energy International, LLC (DEI), reached a definitive agreement to
acquire Dominion Resources Inc.'s 1,200-megawatt portfolio of hydroelectric,
natural gas and diesel power generation businesses in Latin America
(collectively, the "Dominion acquisitions") for approximately $405 million.
The Dominion acquisitions were completed in April 2000, and total goodwill
related to these purchases was $109 million and is being amortized on a
straight-line basis over 40 years.
Companhia de Geracao de Energia Eletrica Paranapanema (Paranapanema). In
January 2000, the Company, through its wholly owned subsidiary DEI, completed
a series of transactions to purchase for approximately $1.03 billion an
approximate 95% interest in Paranapanema, an electric generating company in
Brazil. Goodwill of approximately $134 million was recorded in relation to
this acquisition and is being amortized on a straight-line basis over 40
years.
Union Pacific Resources' Gathering, Processing and Marketing Operations. In
March 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. Goodwill
of $135 million has been recorded and is being amortized on a straight-line
basis over 15 to 20 years.
Dispositions: BellSouth Carolina PCS (BellSouth PCS). In September 2000, the
Company, through its wholly owned subsidiary DukeNet Communications, LLC
(DukeNet), sold its 20% interest in BellSouth PCS for approximately $400
million to BellSouth Corporation. Operating Revenues includes the resulting
pre-tax gain of $407 million.
Catawba River Associates, LLC (Catawba River). During 2000, the Company
formed Catawba River, and third-party, non-controlling, preferred interest
holders invested $1,025 million. Catawba River is a limited liability company
with separate existence and identity from its members, and the assets of
Catawba River are separate and legally distinct from the Company. The
preferred interest receives a preferred return equal to an adjusted floating
reference rate (approximately 7.847% at December 31, 2000). The results of
operations, cash flows and financial position of Catawba River are
consolidated with the Company. The preferred interest and the expense
attributable to this interest are included in Minority Interests and Minority
Interest Expense, respectively, on the Consolidated Financial Statements.
PEPL Companies and Trunkline LNG. In March 1999, wholly owned subsidiaries
of the Company sold 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 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. In 1999 and 1998, earnings
before interest and taxes (EBIT) of $70 million and $156 million,
respectively, relating to the Midwest Pipelines was included in the Company's
operating results. Under the terms of the sales agreement with CMS, the
Company retained certain assets and liabilities, which will not have a
material adverse effect on consolidated results of operations, cash flows or
financial position.
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.
41
DUKE CAPITAL CORPORATION
Notes to Consolidated Financial Statements--(Continued)
Natural Gas Transmission provides interstate transportation and storage of
natural gas for customers primarily in the Mid-Atlantic, New England and
southeastern states. Its operations are conducted primarily through Duke
Energy Gas Transmission Corporation. The interstate natural gas transmission
and storage operations are subject to the rules and regulations of the FERC.
Field Services gathers, processes, transports, markets and stores natural
gas and produces, transports, markets and stores NGLs. Its operations are
conducted primarily through DEFS, a limited liability company that is
approximately 30% owned by Phillips Petroleum. Field Services operates
gathering systems in western Canada and 11 contiguous states that serve major
natural gas-producing regions in the Rocky Mountain, Permian Basin, Mid-
Continent, East Texas-Austin Chalk-North Louisiana, as well as onshore and
offshore Gulf Coast areas.
North American Wholesale Energy's (NAWE's) activities include asset
development, operation and management, primarily through Duke Energy North
America, LLC (DENA), and commodity sales and services related to natural gas
and power, primarily through Duke Energy Trading and Marketing, LLC (DETM).
DETM is a limited liability company that is approximately 40% owned by Exxon
Mobil Corporation. NAWE conducts its business throughout the U.S. and Canada.
The operations of the previously segregated Trading and Marketing segment were
combined by management into NAWE during 2000. Previous periods have been
restated to conform to current period presentation.
International Energy conducts its operations through DEI. International
Energy's activities include asset development, operation and management of
natural gas and power facilities and energy trading and marketing of natural
gas and electric power. This activity is targeted in the Latin American, Asia
Pacific and European regions.
Other Energy Services is a combination of businesses that provide
engineering, consulting, construction and integrated energy solutions
worldwide, primarily through Duke Engineering & Services, Inc., Duke/Fluor
Daniel (D/FD) and DukeSolutions, Inc. D/FD is a 50/50 partnership between the
Company and Fluor Enterprises, Inc.
Duke Ventures is comprised of other diverse businesses, primarily operating
through Crescent Resources, Inc. (Crescent), DukeNet and Duke Capital Partners
(DCP). Crescent develops high-quality commercial, residential and multi-family
real estate projects and manages land holdings primarily in the southeastern
U.S. DukeNet provides fiber optic networks for industrial, commercial and
residential customers. DCP, a newly formed, wholly owned merchant finance
company, provides financing, investment banking and asset management services
to wholesale and commercial energy markets.
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 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 certain unallocated corporate items.
42
DUKE CAPITAL CORPORATION
Notes to Consolidated Financial Statements--(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,
2000
Natural Gas
Transmission........... $ 998 $ 133 $ 1,131 $ 534 $131 $ 973 $ 4,995
Field Services.......... 7,601 1,459 9,060 296 240 376 6,266
North American Wholesale
Energy................. 29,019 284 29,303 330 61 1,737 25,989
International Energy.... 1,060 7 1,067 331 97 980 4,551
Other Energy Services... 635 60 695 (61) 13 28 543
Duke Ventures........... 642 -- 642 563 17 643 1,967
Other Operations........ (24) 68 44 107 28 35 2,407
Eliminations and
minority interests..... -- (2,011) (2,011) 231 -- -- (3,196)
------- ------- ------- ------ ---- ------ -------
Total consolidated..... $39,931 $ -- $39,931 $2,331 $587 $4,772 $43,522
------- ------- ------- ------ ---- ------ -------
Year Ended December 31,
1999
Natural Gas
Transmission........... $ 1,124 $ 106 $ 1,230 $ 627 $126 $ 261 $ 3,897
Field Services.......... 2,883 707 3,590 144 131 1,630 3,739
North American Wholesale
Energy................. 11,363 178 11,541 214 52 1,028 6,031
International Energy.... 323 34 357 42 58 1,779 4,459
Other Energy Services... 985 4 989 (94) 14 94 612
Duke Ventures........... 232 -- 232 162 12 382 1,031
Other Operations........ (14) 44 30 (27) 25 3 1,308
Eliminations and
Minority interests..... -- (1,073) (1,073) 92 -- -- (477)
------- ------- ------- ------ ---- ------ -------
Total consolidated..... $16,896 $ -- $16,896 $1,160 $418 $5,177 $20,600
------- ------- ------- ------ ---- ------ -------
Year Ended December 31,
1998
Natural Gas
Transmission........... $ 1,440 $ 102 $ 1,542 $ 702 $215 $ 290 $ 4,996
Field Services.......... 2,132 545 2,677 76 80 304 1,893
North American Wholesale
Energy................. 8,727 56 8,783 133 27 796 4,394
International Energy.... 125 34 159 12 15 239 900
Other Energy Services... 521 -- 521 10 12 41 376
Duke Ventures........... 171 -- 171 122 10 232 818
Other Operations........ (5) 26 21 25 26 12 665
Eliminations and
Minority interests..... -- (763) (763) 57 -- -- (186)
------- ------- ------- ------ ---- ------ -------
Total consolidated..... $13,111 $ -- $13,111 $1,137 $385 $1,914 $13,856
======= ======= ======= ====== ==== ====== =======
Geographic Data
Latin Other
U.S. Canada America Foreign Consolidated
------- ------ ------- ------- ------------
(In millions)
2000
Consolidated revenues.............. $33,895 $4,964 $ 512 $ 560 $39,931
Consolidated long-term assets...... 17,972 900 2,823 1,222 22,917
1999
Consolidated revenues.............. $14,466 $2,007 $ 171 $ 252 $16,896
Consolidated long-term assets...... 11,005 250 2,708 901 14,864
1998
Consolidated revenues.............. $12,038 $ 996 $ 31 $ 46 $13,111
Consolidated long-term assets...... 9,032 140 207 632 10,011
43
DUKE CAPITAL CORPORATION
Notes to Consolidated Financial Statements--(Continued)
4. REGULATORY MATTERS
Natural Gas Transmission. On February 9, 2000, the FERC issued Order 637
which sets forth revisions to its regulations governing short-term natural gas
transportation services and policies governing the regulation of interstate
natural gas pipelines. "Short-term" has been defined as all transactions of
less than one year. Among the significant actions taken are the lifting of the
price cap for short-term capacity release by pipeline customers for an
experimental 2 1/2-year period ending September 1, 2002, and requiring that
interstate pipelines file pro forma tariff sheets to (i) provide for
nomination equality between capacity release and primary pipeline capacity;
(ii) implement imbalance management services (for which interstate pipelines
may charge fees) while at the same time reducing the use of operational flow
orders and penalties and (iii) provide segmentation rights if operationally
feasible. Order 637 also narrows the right of first refusal to remove economic
biases perceived in the current rule. Order 637 imposes significant new
reporting requirements for interstate pipelines that were implemented by the
Company during the third quarter of 2000. Additionally, Order 637 permits
pipelines to propose peak/off-peak rates and term-differentiated rates, and
encourages pipelines to propose experimental capacity auctions. By Order 637-
A, issued in February 2000, the FERC generally denied requests for rehearing
and several parties, including the Company, have filed appeals in the District
of Columbia Court of Appeals seeking court review of various aspects of the
Order. During the third quarter of 2000, the Company's interstate pipelines
made the required pro forma tariff sheet filings. These filings are currently
subject to review and approval by the FERC.
Management does not believe the effects of these matters will have a
material effect on the Company's future consolidated results of operations,
cash flows or financial position.
5. INCOME TAXES
Income Tax Expense
For the Years
Ended December
31,
---------------
2000 1999 1998
---- ---- ----
(In millions)
Current income taxes
Federal...................................................... $390 $ 37 $200
State........................................................ 45 42 40
Foreign...................................................... 18 1 --
---- ---- ----
Total current income taxes................................. 453 80 240
---- ---- ----
Deferred income taxes, net
Federal...................................................... 39 169 59
State........................................................ -- (11) 11
Foreign...................................................... 29 (1) --
---- ---- ----
Total deferred income taxes, net........................... 68 157 70
---- ---- ----
Total income tax expense....................................... $521 $237 $310
==== ==== ====
44
DUKE CAPITAL CORPORATION
Notes to Consolidated Financial Statements--(Continued)
Income Tax Expense Reconciliation to Statutory Rate
For the Years
Ended December
31,
----------------
2000 1999 1998
---- ---- ----
(In millions)
Income tax, computed at the statutory rate of 35%............. $507 $255 $290
Adjustments resulting from:
State income tax, net of federal income tax effect.......... 31 20 33
Favorable resolution of federal tax issues.................. -- (30) --
Other items, net............................................ (17) (8) (13)
---- ---- ----
Total income tax expense.................................. $521 $237 $310
---- ---- ----
Effective tax rate............................................ 36.0% 32.6% 37.3%
==== ==== ====
Net Deferred Income Tax Liability Components
December 31,
----------------
2000 1999
------- -------
(In millions)
Deferred credits and other liabilities....................... $ 138 $ 39
International property, plant, & equipment................... 153 --
Other........................................................ 56 24
------- -------
Total deferred income tax assets........................... 347 63
Valuation allowance.......................................... (9) (6)
------- -------
Net deferred income tax assets............................. 338 57
------- -------
Investments and other assets................................. (223) (140)
Prefunded pension costs...................................... -- (108)
Property, plant and equipment................................ (1,254) (1,064)
Regulatory assets and deferred debits........................ (58) (52)
Natural gas transition costs................................. -- (28)
Other........................................................ (43) (45)
------- -------
Total deferred income tax liabilities...................... (1,578) (1,437)
------- -------
State deferred income tax, net of federal tax effect......... (73) (118)
------- -------
Net deferred income tax liability............................ $(1,313) $(1,498)
======= =======
6. RISK MANAGEMENT AND FINANCIAL INSTRUMENTS
Commodity Derivatives--Trading. The Company provides risk management
services to its customers through forward contracts, futures, over-the-counter
swap agreements and options (collectively, "commodity derivatives"). The
Company engages in the trading of commodity derivatives, and therefore
experiences net open positions, which are managed with strict policies that
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 trading portfolio was approximately 20 months at December 31, 2000.
45
DUKE CAPITAL CORPORATION
Notes to Consolidated Financial Statements--(Continued)
Net Gains Recognized from Trading Activities
2000 1999 1998
---- ---- ----
(In millions)
Natural gas...................................................... $ 98 $ 83 $114
Electricity...................................................... 368 41 14
Other(a)......................................................... 3 -- --
- --------
(a) Other includes crude oil and other miscellaneous commodities.
Absolute Notional Contract Quantity of Commodity Derivatives Held for Trading
Purposes
December 31,
---------------
2000 1999
------- -------
Natural gas, in billion cubic feet.............................. 26,788 17,248
Electricity, in gigawatt hours.................................. 289,109 185,536
Fair Values of Commodity Derivatives--Trading
2000 1999
--------------------- --------------------
Assets Liabilities Assets Liabilities
-------- ----------- ------- -----------
(In millions)
Fair values at December 31,
Natural gas....................... $ 40,607 $ 40,365 $ 2,953 $ 2,855
Electricity....................... 9,436 9,254 1,302 1,271
Other(a).......................... 131 134 -- --
Eliminations...................... (36,305) (36,305) (2,447) (2,447)
-------- -------- ------- -------
Total fair values............... $ 13,869 $ 13,448 $ 1,808 $ 1,679
======== ======== ======= =======
Average fair values for the year
Natural gas....................... 17,619 17,349 2,388 2,269
Electricity....................... 6,581 6,479 962 900
Other(a).......................... 329 331 -- --
- --------
(a) Other includes crude oil and other miscellaneous commodities.
Commodity Derivatives--Non-Trading. The Company also manages its exposure to
risk from existing assets, liabilities and commitments by hedging the impact
of market fluctuations. At December 31, 2000 and 1999, 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, 2000, these commodity derivatives
extended for periods up to 10 years and generally contain margin requirements.
The gains, losses and costs related to non-trading commodity derivatives are
not recognized until the underlying physical transaction closes. At December
31, 2000 and 1999, the Company had unrealized net losses of $1,572 million and
$121 million, respectively, related to non-trading commodity derivatives.
These unrealized losses partially offset the unrealized market value gains
related to future cash flows from underlying asset positions.
Absolute Notional Contract Quantity of Commodity Derivatives Held for Non-
Trading Purposes
December 31,
-------------
2000 1999
------ ------
Natural gas, in billion cubic feet................................ 399 592
Electricity, in gigawatt hours.................................... 75,138 45,672
Power capacity, in megawatt months................................ 35,325 25,950
Crude oil, in thousands of barrels................................ 43,991 32,764
46
DUKE CAPITAL CORPORATION
Notes to Consolidated Financial Statements--(Continued)
Interest Rate Derivatives. The Company periodically enters into financial
derivative instruments including, but not limited to, swaps, options and
interest rate locks to manage and mitigate interest rate risk related to
existing and anticipated borrowings. The notional amounts shown in the
following table serve solely as a basis for the calculation of payment streams
to be exchanged. These notional amounts are not a measure of the Company's
exposure through its use of derivatives. Fair values shown in the following
table represent estimated amounts that the Company would have received (paid)
if the swaps had been settled at current market rates on the respective dates.
Interest Rate Derivatives
December 31,
-------------------------------------------------
2000 1999
------------------------ ------------------------
Notional Fair Contracts Notional Fair Contracts
Amounts Value Expire Amounts Value Expire
-------- ----- --------- -------- ----- ---------
(Dollars in millions)
Fixed-to-floating rate
swaps...................... $275 $27 2009 -- -- --
Cancelable fixed-to-floating
rate swaps................. 328 4 2022 -- -- --
Interest rate locks......... 275 (9) 2011 -- -- --
Gains and losses that have been deferred in anticipation of planned
financing transactions on interest rate swap derivatives have been capitalized
and are being amortized over the life of the underlying debt. These deferred
gains and losses were not material in 2000 or 1999. As a result of the
interest rate swap contracts, interest expense for the relative notional
amount is recognized at the weighted-average rates as depicted in the
following table.
Weighted-Average Rates for Interest Rate Swaps
For the Years
Ended December 31,
---------------------
2000 1999 1998
------- ------ ------
Fixed-to-floating rate swaps.............................. 6.50% -- --
Cancelable fixed-to-floating rate swaps................... 4.25% -- --
Foreign Currency Derivatives. NAWE enters into foreign currency swap
agreements to manage foreign currency risks associated with energy contracts
denominated in foreign currencies, primarily in the Canadian dollar. As of
December 31, 2000, the agreements had a notional contract amount of
approximately $1,396 million, beginning in the year 2001 and extending through
the year 2005, and had a weighted-average fixed exchange rate of 1.4672
Canadian dollars to one U.S. dollar. 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 one U.S. dollar. The fair value of
foreign currency swap agreements was not material at December 31, 2000 or
1999.
Market and Credit Risk. The Company's principal markets for power and
natural gas marketing services are industrial end-users and utilities located
throughout the U.S., Asia Pacific, Canada, and Latin America. The Company has
concentrations of receivables from natural gas and electric utilities and
their affiliates, as well as industrial customers throughout these regions.
These concentrations of customers may affect the Company's overall credit risk
in that certain customers may be similarly affected by changes in economic,
regulatory or other factors. On all transactions where the Company is exposed
to credit risk, the Company analyzes the counterparties' financial condition
prior to entering into an agreement, establishes credit limits and monitors
the appropriateness of these limits on an ongoing basis. As of December 31,
2000, the Company had approximately
47
DUKE CAPITAL CORPORATION
Notes to Consolidated Financial Statements--(Continued)
$400 million in receivables related to energy sales in California. The Company
quantified its exposures with regard to those receivables and recorded a
provision of $110 million. See Note 11 to the Consolidated Financial
Statements for further information regarding credit exposure.
The change in market value of New York Mercantile Exchange-traded futures
and options contracts requires daily cash settlement in margin accounts with
brokers. Physical forward contracts and financial derivatives are generally
settled at the expiration of the contract term or each delivery period;
however, these transactions are also generally subject to margin agreements
with the majority of the Company's counterparties.
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, 2000 and 1999, are not necessarily indicative of the amounts
the Company could have realized in current markets. The majority of the
estimated fair value amounts were obtained from independent parties.
Financial Instruments
2000 1999
---------------------- ----------------------
Approximate Approximate
Book Value Fair Value Book Value Fair Value
---------- ----------- ---------- -----------
(In millions)
Long-term debt(a)................ $7,538 $8,150 $5,596 $5,557
Guaranteed preferred beneficial
interests in subordinated notes
of Duke Capital or
subsidiaries.................... 823 828 823 730
- --------
(a) Includes current maturities.
The fair value of cash and cash equivalents, notes receivable, notes payable
and commercial paper are not materially different from their carrying amounts
because of the short-term nature of these instruments or because the stated
rates approximate market rates.
Guarantees made on behalf of affiliates or recourse provisions from
affiliates have no book value associated with them, and there are no fair
values readily determinable since quoted market prices are not available.
7. INVESTMENT IN AFFILIATES
Investments in domestic and international affiliates that 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 $70 million and $6 million in 2000 and 1999,
respectively. The Company's share of net income from these affiliates is
reflected in the Consolidated Statements of Income as Other Operating
Revenues.
Natural Gas Transmission. Investments primarily include ownership interests
in natural gas pipeline joint ventures which transport natural gas to the U.S.
from Canada. Investments include a 37.5% ownership interest in Maritimes &
Northeast Pipeline, LLC.
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% ownership interest in TEPPCO.
North American Wholesale Energy. Significant investments include a 50%
indirect interest in VMC Generating Company, a merchant electric generating
company, a 32.5% indirect interest in American Ref-Fuel LLC and a 50% interest
in Southwest Power Partners.
48
DUKE CAPITAL CORPORATION
Notes to Consolidated Financial Statements--(Continued)
International Energy. International Energy has investments in various
natural gas and electric generation and transmission facilities in its
targeted geographic areas. Significant investments include 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.
Duke Ventures. Significant investments include various real estate
development projects and a 20% interest in the BellSouth PCS joint venture
until its sale in 2000.
Investment in Affiliates
December 31, 2000 December 31, 1999 December 31, 1998
----------------------------- ----------------------------- ----------------------------
Domestic International Total Domestic International Total Domestic International Total
-------- ------------- ------ -------- ------------- ------ -------- ------------- -----
(In millions)
Natural Gas
Transmission........... $ 82 $ 88 $ 170 $ 67 $ 83 $ 150 $104 $ 37 $141
Field Services.......... 373 -- 373 439 -- 439 303 -- 303
North American Wholesale
Energy................. 610 -- 610 425 -- 425 171 -- 171
International Energy.... -- 154 154 -- 224 224 -- 223 223
Other Energy Services... 11 7 18 51 6 57 19 23 42
Duke Ventures........... 23 -- 23 10 -- 10 24 -- 24
Other Operations........ (12) -- (12) (6) -- (6) (2) -- (2)
------ ---- ------ ---- ---- ------ ---- ---- ----
Total.................. $1,087 $249 $1,336 $986 $313 $1,299 $619 $283 $902
====== ==== ====== ==== ==== ====== ==== ==== ====
Equity in Earnings of Investment
For the Years Ended:
------------------------------------------------------------------------------------------
December 31, 2000 December 31, 1999 December 31, 1998
----------------------------- ----------------------------- ----------------------------
Domestic International Total Domestic International Total Domestic International Total
-------- ------------- ------ -------- ------------- ------ -------- ------------- -----
(In millions)
Natural Gas
Transmission........... $ 13 $ 4 $ 17 $ 16 $ 9 $ 25 $ 14 $ 3 $ 17
Field Services.......... 39 -- 39 44 -- 44 9 -- 9
North American Wholesale
Energy................. 45 -- 45 47 -- 47 50 -- 50
International Energy.... -- 43 43 -- 10 10 -- 18 18
Other Energy Services... (13) -- (13) 10 3 13 1 13 14
Duke Ventures........... (9) -- (9) (22) -- (22) (29) -- (29)
Other Operations........ (10) -- (10) (5) -- (5) -- -- --
------ ---- ------ ---- ---- ------ ---- ---- ----
Total.................. $ 65 $ 47 $ 112 $ 90 $ 22 $ 112 $ 45 $ 34 $ 79
====== ==== ====== ==== ==== ====== ==== ==== ====
49
DUKE CAPITAL CORPORATION
Notes to Consolidated Financial Statements--(Continued)
Summarized Combined Financial Information of Unconsolidated Affiliates
December 31,
--------------------
2000 1999 1998
------ ------ ------
(In millions)
Balance Sheet
Current assets........................................... $1,215 $1,544 $ 848
Noncurrent assets........................................ 6,469 7,826 7,340
Current liabilities...................................... 860 1,155 1,084
Noncurrent liabilities................................... 4,300 4,727 3,884
------ ------ ------
Net assets............................................... $2,524 $3,488 $3,220
====== ====== ======
Income Statement
Operating revenues....................................... $4,557 $3,510 $1,667
Operating expenses....................................... 3,952 3,104 1,166
Net income............................................... 472 193 263
The Company had outstanding notes receivable from certain affiliates of $70
million and $72 million at December 31, 2000 and 1999, respectively.
8. PROPERTY, PLANT AND EQUIPMENT
Net Property, Plant and Equipment
December 31,
----------------
2000 1999
------- -------
(In millions)
Land.......................................................... $ 36 $ 25
Plant:
Electric generation......................................... 3,653 3,840
Natural gas transmission.................................... 4,346 3,713
Gathering and processing facilities......................... 4,434 2,466
Other buildings and improvements............................ 150 145
Leasehold improvements...................................... 14 8
Equipment..................................................... 92 83
Vehicles...................................................... 36 37
Construction in process....................................... 1,858 877
Other......................................................... 2,541 2,448
------- -------
Total property, plant and equipment....................... 17,160 13,642
Total accumulated depreciation............................ (2,621) (2,475)
------- -------
Total net property, plant and equipment................... $14,539 $11,167
======= =======
Capitalized interest of $51 million, $36 million and $11 million is included
in the Consolidated Statements of Income for the years ended December 31,
2000, 1999 and 1998, respectively.
50
DUKE CAPITAL CORPORATION
Notes to Consolidated Financial Statements--(Continued)
9. DEBT AND CREDIT FACILITIES
Long-term Debt
December 31,
---------------
Year Due 2000 1999
--------- ------- ------
(In millions)
Duke Capital Corporation
Senior notes:
6.250%-7.50%....................................... 2004-2009 $ 1,400 $1,250
6.750%-8.50%....................................... 2018-2019 650 650
Commercial paper and extendable commercial notes,
6.660% and 5.910% weighted-average rate at December
31, 2000 and 1999, respectively(a)................. 1,378 535
Note payable to affiliate 6.140% and 5.030%
weighted-average rate at December 31, 2000 and
1999, respectively................................. 141 86
PanEnergy Corp
Bonds:
7.750%............................................. 2022 328 328
8.625% Debentures.................................. 2025 100 100
Notes:
7.0%-9.90%, maturing serially...................... 2003-2006 384 395
TETCO
Notes:
7.30%-10.375%...................................... 2001-2010 600 500
Medium-term, Series A, 7.640%-9.070%............... 2001-2012 51 51
Algonquin Gas Transmission Company
9.130% Notes....................................... 2003 100 100
DEFS
Notes, 7.50%-8.125%................................. 2005-2030 1,700 --
Commercial paper, 7.390% weighted-average rate at
December 31, 2000.................................. 346 --
DENA
Bonds, 7.50%-10.0%.................................. 2010-2030 302 --
Capital leases...................................... 2009-2028 272 207
Notes matured during 2000........................... -- 380
DEI
Medium-term note, 7.250%............................ 2004 139 162
Notes:
4.50%-18.0%........................................ 2001-2024 222 107
7.90%.............................................. 2004-2013 138 161
6.0%-10.0% (b)..................................... 2013-2017 477 485
Credit Facilities, 6.130% and 6.010% weighted-
average rate at
December 31, 2000 and 1999, respectively........... 44 80
Commercial Paper, 6.40% and 5.510% weighted-average
at
December 31, 2000 and 1999, respectively........... 223 49
Crescent (c)
Construction and mortgage loans, 6.30%-9.50%........ 2001-2010 67 46
Other debt of subsidiaries.......................... 103 34
Unamortized debt discount and premium, net.......... (57) (27)
------- ------
Total long-term debt................................ 9,108 5,679
Current maturities of long-term debt................ (284) (277)
Short-term notes payable and commercial paper....... (1,570) (83)
------- ------
Total long-term portion............................. $ 7,254 $5,319
======= ======
- --------
(a) Extendible commercial notes are included in the 2000 amounts.
(b) Paranapanema (Brazil) debt, principal is indexed annually to inflation.
(c) Substantial amounts of Crescent's real estate development projects, land
and buildings were pledged as collateral.
51
DUKE CAPITAL CORPORATION
Notes to Consolidated Financial Statements--(Continued)
The weighted-average interest rate on outstanding short-term notes payable
and commercial paper at December 31, 2000 and 1999 was 6.840% and 5.460%,
respectively.
Annual Maturities
(In millions)
2001.............................................................. $ 284
2002.............................................................. 256
2003.............................................................. 217
2004.............................................................. 848
2005.............................................................. 914
Thereafter........................................................ 5,019
------
Total long-term debt............................................ $7,538
======
Included in the annual maturities after 2005 is $428 million of long-term
debt that has call options whereby the Company has the option to repay the
debt early. Based on the years in which the Company may first exercise its
redemption options, $328 million could potentially be repaid in 2002 and $100
million in 2005.
Credit Facilities
December 31, 2000 December 31, 1999
---------------------- ----------------------
Credit Credit
Facilities Outstanding Facilities Outstanding
---------- ----------- ---------- -----------
(In millions)
364-day facilities(a)........... $1,796 $-- $ 823 $ 10
Three-year revolving
facilities..................... 84 44 565 450
Four-year revolving facilities.. 125 -- 125 --
Five-year revolving
facilities(a).................. 950 -- 950 --
------ ---- ------ ----
Total consolidated............ $2,955 $ 44 $2,463 $460
====== ==== ====== ====
- --------
(a) Supported commercial paper facilities.
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 junior subordinated notes issued by the respective
parent companies.
Trust Preferred Securities
December 31,
--------------
Issued Rate Due 2000 1999
------ ----- ---- ------ ------
(In millions)
1998 7.375% 2038 $ 350 $ 350
1998 7.375% 2038 250 250
1999 8.375% 2029 250 250
Unamortized debt
discount........ (27) (27)
------ ------
$ 823 $ 823
====== ======
52
DUKE CAPITAL CORPORATION
Notes to Consolidated Financial Statements--(Continued)
These trust preferred securities represent preferred undivided beneficial
interests in the assets of the respective trusts. Payment of distributions on
these preferred securities is guaranteed by the respective parent company, but
only to the extent the trusts have funds legally and immediately available to
make such distributions. Dividends of $65 million, $52 million and $18 million
related to the trust preferred securities have been included in the
Consolidated Statements of Income as Minority Interest Expense for the years
ended December 31, 2000, 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 four federal
Superfund sites and one state Superfund site. While the cost of remediation of
these 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, cash flows or financial position.
PCB (Polychlorinated Biphenyl) Assessment and Cleanup Programs. In June
1999, the Environmental Protection Agency (EPA) certified that TETCO, a wholly
owned subsidiary of the Company, had completed cleanup of PCB-contaminated
sites under conditions stipulated by a U.S. Consent Decree in 1989. TETCO was
required to continue groundwater monitoring on a number of sites for two
years. This required monitoring was completed as of the end of 2000, pending
EPA concurrence. TETCO will be evaluating and discussing with the EPA,
appropriate state authorities or both the need for additional remediation or
monitoring.
Under terms of the sales agreement with CMS discussed in Note 2 to the
Consolidated Financial Statements, the Company is obligated to complete
cleanup of previously identified contamination resulting from the past use of
PCB-containing lubricants and other discontinued practices at certain sites on
the PEPL and Trunkline systems. Based on the Company's experience to date and
costs incurred for cleanup 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, cash flows or
financial position.
California Issues. California Litigation. The Company's subsidiaries, DENA
and DETM, have been named among 16 defendants in a class action lawsuit (the
Gordon lawsuit) filed against companies identified as "generators and traders"
of electricity in California markets. DETM also was named as one of numerous
defendants in four additional lawsuits, including two class actions (the
Hendricks and Pier 23 Restaurant lawsuits), filed against generators,
marketers and traders and other unnamed providers of electricity in California
markets. These suits were brought either by or on behalf of electricity
consumers in the State of California. The Gordon and Hendricks class action
suits were filed in the Superior Court of the State of California, San Diego
County, in November 2000. The other three suits were filed in January 2001,
one in the Superior Court of the State of California, San Diego County, and
the other two in the Superior Court of the State of California, County of San
Francisco. These suits generally allege that the defendants manipulated the
wholesale electricity markets in violation of state laws against unfair and
unlawful business practices and state antitrust laws. Plaintiffs in the Gordon
suit seek aggregate damages of over $4 billion, and the plaintiffs in the
other suits, to the extent damages are specified, allege damages in excess of
$1 billion. The lawsuits each seek the disgorgement of alleged unlawfully
obtained revenues for sales of electricity and, in three suits, an award of
treble damages.
California Wholesale Electricity Markets. As a result of high prices in the
western U.S. wholesale electricity markets in 2000, several state and federal
regulatory investigations and complaints have commenced
53
DUKE CAPITAL CORPORATION
Notes to Consolidated Financial Statements--(Continued)
to determine the causes of the prices and potentially to recommend remedial
action. The FERC concluded its investigation by issuing on December 15, 2000,
an Order Directing Remedies in California Wholesale Electricity Markets. In
this conclusion, the FERC found no basis in allegations made by government
officials in California that specific electric generators artificially drove
up power prices. This conclusion is consistent with similar findings by the
Compliance Unit of the California Power Exchange (CalPX) and the Northwest
Power Planning Council. That Order is the subject of numerous rehearing
requests.
At the state level, the California Public Utilities Commission, the
California Electricity Oversight Board, the California Bureau of State Audits
and the California Office of the Attorney General all have separate ongoing
investigations into the high prices and their causes. None of those
investigations have been completed and no findings have been made in
connection with any of them.
California Utilities Defaults and Other Proceedings. Two California electric
utilities recently defaulted on many of their obligations to suppliers and
creditors. NAWE supplies electric power to these utilities directly and
indirectly through contracts through the California Independent System
Operator (CAISO) and the CalPX. NAWE also supplies natural gas to these
utilities under direct contracts. With respect to electric power sales through
the CAISO and CalPX, the Company quantified its exposures at December 31, 2000
to these utilities and recorded a $110 million provision. As a result of these
defaults and certain related government actions, the Company has taken a
number of steps, including initiating court actions, to mitigate its exposure.
While these matters referenced above are in their earliest stages,
management does not believe, based on its analysis to date of the factual
background and the claims asserted in these matters, that their resolution
will have a material adverse effect on the Company's consolidated results of
operations, cash flows or financial position.
Litigation. Exxon Mobil Corporation Arbitration. In December 2000, three
subsidiaries of the Company initiated binding arbitration against three
subsidiaries of the Exxon Mobil Corporation (collectively, the "Exxon Mobil
entities") concerning the parties' joint ownership of DETM and certain related
affiliates (collectively, the "Ventures"). At issue is a Buy-out Right
provision in the parties' agreement. The agreements governing the ownership of
the Ventures contain provisions giving the Company the right to purchase the
Exxon Mobil entities' 40% interest in the Ventures in the event material
business disputes arise between the Ventures' owners. Such disputes have
arisen, and consequently, the Company exercised its right to buy the Exxon
Mobil entities' interest. The Company claims that refusal by the Exxon Mobil
entities to honor the exercise is a breach of the Buy-out Right provision, and
seeks specific performance of the provision. The Company also complains of the
Exxon Mobil entities' lack of use of, and contributions to, the Ventures.
In January 2001, the Exxon Mobil entities asserted counterclaims in the
arbitration and claims in a separate Texas state court action alleging that
the Company breached its obligations to the Ventures and to the Exxon Mobil
entities. The Exxon Mobil entities also claim that the Company violated a
Guaranty Agreement. While this matter is in its early stages, management
believes that the final disposition of this action will not have a material
adverse effect on the Company's consolidated results of operations, cash flows
or financial position.
Other Commitments and Contingencies. Financial Guarantees. 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 $1.9 billion and $842 million as of December 31, 2000 and 1999,
respectively. The increase in the amount of these obligations is primarily due
to increasing support for margin deposits and power exchange participation.
Leases. The Company utilizes assets under operating leases in several areas
of operations. Consolidated rental expense amounted to $53 million, $44
million and $41 million in 2000, 1999 and 1998, respectively. Future minimum
rental payments under the Company's various operating leases for the years
2001 through 2005 are $43 million, $34 million, $29 million, $23 million and
$17 million, respectively.
54
DUKE CAPITAL CORPORATION
Notes to Consolidated Financial Statements--(Continued)
12. 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 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. No contributions to the Duke Energy Plan were
necessary in 2000 or 1999. The net unrecognized transition asset, resulting
from the implementation of accrual accounting, is being amortized over
approximately 20 years.
The fair market value of Duke Energy's plan assets was $3,038 million and
$3,121 million for December 31, 2000 and 1999, respectively. The projected
benefit obligation was $2,586 million and $2,446 million for December 31, 2000
and 1999, respectively. During 2000, the PanEnergy plan assets were merged
into Duke Energy's Plan. As a result, the balance of the pre-funded pension
assets was transferred to Duke Energy. The amount of pre-funded pension cost
allocated to the Company as of December 31, 1999 was $312 million.
Assumptions Used for Pension Benefits Accounting (a)
2000 1999 1998
---- ---- ----
(Percent)
Discount rate.................................................... 7.50 7.50 6.75
Salary increase.................................................. 4.53 4.50 4.67
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, 2000, 1999 and 1998 was $20
million, $25 million and $37 million, respectively. In 1998, a significant
amount of lump sum payouts was made from the plan resulting in a settlement
gain of $10 million.
55
DUKE CAPITAL CORPORATION
Notes to Consolidated Financial Statements--(Continued)
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 $27
million, $21 million and $21 million in 2000, 1999 and 1998, 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 $325 million and $327 million at December
31, 2000 and 1999, respectively. The accumulated postretirement benefit
obligation was $614 million and $562 million at December 31, 2000 and 1999,
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, 2000, 1999 and
1998, was $13 million, $12 million and $19 million, respectively.
For measurement purposes, a 6% average annual rate of increase in the per
capita cost of covered health care benefits was assumed for 2000 and is
expected to remain thereafter. Assumed health care cost trend rates have a
significant effect on the amounts reported for the health care plans.
Sensitivity to Changes in Assumed Health Care Cost Trend Rates
1-Percentage- 1-Percentage-
Point Point
Increase Decrease
------------- -------------
(In millions)
Effect on total service and interest costs.......... $ 1 $ (1)
Effect on postretirement benefit obligation......... 11 (10)
13. RELATED PARTY TRANSACTIONS
Certain balances due to or due from related parties included in the
Consolidated Balance Sheets at December 31, 2000 and 1999 are as follows:
2000 1999
---- ----
(In
millions)
Receivables........................................................... $317 $--
Notes receivable...................................................... -- 479
Accounts payable...................................................... 322 284
Taxes accrued......................................................... 290 570
Operating revenues and management fees of $241 million, $99 million and $85
million related to intercompany sales to Duke Energy are included in the
Consolidated Statements of Income for the years ended December 31, 2000, 1999
and 1998, respectively. Notes Receivable from related parties are classified
as Other Investments and Other Assets on the Consolidated Balance Sheets.
56
DUKE CAPITAL CORPORATION
Notes to Consolidated Financial Statements--(Continued)
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -------
(In millions)
2000
Operating revenues..................... $6,179 $7,919 $13,011 $12,822 $39,931
Operating income....................... 404 405 891 548 2,248
EBIT................................... 431 414 904 582 2,331
Net income............................. 185 123 421 197 926
1999
Operating revenues..................... $3,135 $3,618 $ 5,098 $ 5,045 $16,896
Operating income....................... 255 227 262 322 1,066
EBIT................................... 272 242 281 365 1,160
Income before Extraordinary item....... 99 134 107 150 490
Net income............................. 759 134 107 150 1,150
57
DUKE CAPITAL CORPORATION
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Additions
---------------------
Balance at Charged to Balance at
Beginning Charged to Other End of
of Period Expense Accounts Deductions Period
---------- ---------- ---------- ---------- ----------
(In millions)
Allowance for Doubtful
Accounts............... $ 37 $154 $ 8 $12 $187
Other(a)................ 215 24 65 38 266
---- ---- --- --- ----
December 31, 2000:...... $252 $178 $73(b) $50 $453
Allowance for Doubtful
Accounts............... $ 24 $ 15 $ 6 $ 8 $ 37
Other(a)................ 99 119 54 57 215
---- ---- --- --- ----
December 31, 1999:...... $123 $134 $60(b) $65 $252
December 31, 1998:...... $123
- --------
(a) Principally consists of property insurance reserves and litigation and
other contingency reserves which are included in "Other Current
Liabilities" or "Deferred Credits and Other Liabilities" in the
Consolidated Balance Sheets.
(b) Principally litigation and other contingency reserves assumed in business
acquisitions.
58
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, 2000 and 1999,
and the related consolidated statements of income, common stockholder's equity
and comprehensive income and cash flows for each of the three years in the
period ended December 31, 2000. Our audits also included the consolidated
financial statement schedule listed in the Index at Item 14. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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, 2000 and 1999, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 2000 in conformity
with accounting principles generally accepted in the United States of America.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Charlotte, North Carolina
January 18, 2001
59
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
60
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 for the Years Ended December 31,
2000, 1999 and 1998
Consolidated Balance Sheets as of December 31, 2000 and 1999
Consolidated Statements of Cash Flows for the Years Ended December
31, 2000, 1999 and 1998
Consolidated Statements of Common Stockholder's Equity and
Comprehensive Income for the Years Ended December 31, 2000, 1999 and
1998
Notes to Consolidated Financial Statements
Consolidated Financial Statement Schedule II--Valuation and
Qualifying Accounts and Reserves for the Years Ended December 31,
2000, 1999 and 1998
Quarterly Financial Data (unaudited) (included in Note 14 to the
Consolidated Financial Statements)
Independent Auditors' Report
All other schedules are omitted because of the absence of the conditions
under which they are required or because the required information is
included in the financial statements or notes thereto.
(b) Reports on Form 8-K
A Current Report on Form 8-K filed on December 20, 2000, contained
disclosures under Item 5, Other Events.
(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 1, 2000,
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 30, 2001, File No. 1-04928, as
Exhibit 10-O).
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).
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).
61
Exhibit
No. Description
------- -----------
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 LLC, dated as of
December 16, 1999 (filed as Exhibit 2.1 to Form 8-K of 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 LLC, dated as of
December 16, 1999 (filed as Exhibit 2.2 to Form 8-K of Duke Energy
Corporation, filed December 30, 1999).
10.6 First Amendment to Contribution and Governance Agreement dated as of
March 23, 2000 among Phillips Petroleum Company, Duke Energy
Corporation and Duke Energy Field Services, LLC (incorporated by
reference to Exhibit 10.7 (b) to Registration Statement on Form S-1/A
(Registration No. 333-32502) of Duke Energy Field Services
Corporation, file on March 27, 2000).
10.7 Parent Company Agreement dated as of March 31, 2000 among Phillips
Petroleum Company, Duke Energy Corporation, Duke Energy Field Services
Corporation (incorporated by reference to Exhibit 10.10 to
Registration Statement on Form S-1/A (Registration No. 333-32502) of
Duke Energy Field Services Corporation, filed on May 4, 2000).
10.8 Amended and restated Limited Liability company Agreement of Duke
Energy Field Services, LLC by and between Phillips Gas Company and
Duke Energy Field Services Corporation, dated as of March 31, 2000
(filed as Exhibit 3.1 to Form 10 of Duke Energy Field Services LLC,
File No. 000-31095, filed July 20, 2000).
10.9 First Amendment to the Parent Company Agreement dated as of May 25,
2000 among Phillips Petroleum Company, Duker Energy Corporation, Duke
Energy Field Services, LLC and Duke Energy Field Services Corporation
(filed as Exhibit 10.8 (b) to Form 10 of Duke Energy Field Services
LLC, File No. 000-31095, filed July 20, 2000).
12* Computation of Ratio of Earnings to Fixed Charges.
23* Independent Auditors' Consent.
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.
62
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 30, 2001 Duke Capital Corporation
(registrant)
By: /s/ 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/ Robert P. Brace
----------------------------------
Robert P. Brace
Vice President and Chief Financial Officer
(iii)Principal accounting officer:
/s/ Sandra P. Meyer
----------------------------------
Sandra P. Meyer
Controller
(iv)Directors:
/s/ Richard B. Priory
----------------------------------
Richard B. Priory
/s/ Harvey J. Padewer
----------------------------------
Harvey J. Padewer
/s/ Fred J. Fowler
----------------------------------
Fred J. Fowler
/s/ Robert P. Brace
----------------------------------
Robert P. Brace
/s/ Richard J. Osborne
----------------------------------
Richard J. Osborne
Date: March 30, 2001
63