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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or (g) of The Securities Exchange Act of 1934
DUKE CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 51-0282142
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
422 South Church Street
Charlotte, NC 28202-1904
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 704-594-6200
Securities to be registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class to be so registered which each class is to be registered
None Not applicable
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, without par value
(Title of class)
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DUKE CAPITAL CORPORATION
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
TABLE OF CONTENTS
<TABLE>
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Item Page
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<S> <C>
1. Business......................................................................................................1
General..............................................................................................1
Natural Gas Transmission.............................................................................1
Energy Services......................................................................................3
Other Operations.....................................................................................6
Environmental Matters................................................................................6
Other Matters........................................................................................6
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995.....................6
Operating Statistics.................................................................................7
2. Financial Information.........................................................................................8
3. Properties...................................................................................................17
4. Security Ownership of Certain Beneficial Owners and Management...............................................18
5. Directors and Executive Officers.............................................................................18
6. Executive Compensation.......................................................................................18
7. Certain Relationships and Related Transactions...............................................................18
8. Legal Proceedings............................................................................................18
9. Market Price of and Dividends on the Registrant's Common Equity and Related Stockholder Matters..............18
10. Recent Sales of Unregistered Securities......................................................................18
11. Description of Registrant's Securities to be Registered......................................................18
12. Indemnification of Directors and Officers....................................................................18
13. Financial Statements and Supplementary Data..................................................................20
Part I. Audited Financial Statements for the Years Ended December 31, 1997, 1996 and 1995.................20
Independent Auditors' Report....................................................................20
Consolidated Statements of Income...............................................................21
Consolidated Statements of Cash Flows...........................................................22
Consolidated Balance Sheets.....................................................................23
Consolidated Statements of Common Stockholder's Equity..........................................25
Notes to Consolidated Financial Statements......................................................26
Part II. Quarterly Financial Data.........................................................................42
14. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.........................43
15. Financial Statements and Exhibits............................................................................43
(a) Financial Statements
(b) Exhibits
Signatures...................................................................................................44
</TABLE>
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Item 1. Business.
GENERAL
Duke Capital Corporation (the Company) (formerly Church Street Capital
Corp.) is a wholly owned subsidiary of Duke Energy Corporation (Duke Energy). On
June 18, 1997, Duke Power Company (Duke Power) changed its name to Duke Energy
Corporation in accordance with the terms of a merger agreement with PanEnergy
Corp (PanEnergy), pursuant to which PanEnergy became a wholly owned subsidiary
of Duke Energy (the merger). Subsequently, the common stock of PanEnergy was
contributed by Duke Energy to the Company, which served as the parent company
of Duke Energy's non-utility operations under the name Church Street
Capital Corp. The combination of the Company and PanEnergy was accounted
for as a pooling of interests and, accordingly, the consolidated financial
statements for periods prior to the combination were restated to include the
operations of PanEnergy.
The Company provides financing and credit enhancement services for its
subsidiaries. The Company conducts its operating activities through its
three business segments: Natural Gas Transmission, Energy Services and
Other Operations.
The Natural Gas Transmission segment is involved in interstate
transportation and storage of natural gas for customers in the Mid-Atlantic, New
England and Midwest states. The interstate natural gas transmission and storage
operations are subject to the rules and regulations of the Federal Energy
Regulatory Commission (FERC).
The Energy Services segment is comprised of several separate business
units: Field Services gathers and processes natural gas, produces and markets
natural gas liquids (NGLs) and transports and trades crude oil; Trading and
Marketing markets natural gas, electricity and other energy-related products;
Global Asset Development develops, owns and operates energy-related facilities
worldwide; and Other Energy Services provides engineering consulting,
construction and integrated energy solutions.
The Other Operations segment includes the real estate operations of
Crescent Resources, Inc. (Crescent Resources) and the communications services of
DukeNet Communications, Inc. (DukeNet), wholly owned subsidiaries of the
Company. Corporate costs and intersegment eliminations are also reflected in the
financial results of this segment.
A discussion of the current business and operations of each of the
Company's segments follows. The Company expects relatively slow growth in the
Natural Gas Transmission segment, due to increased competition. The
Company is seeking to significantly grow its Energy Services segment through
acquisition, construction and expansion opportunities. 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,
Current Issues - Operations Outlook." For financial information concerning the
Company's business segments, see Note 4 to the Consolidated Financial
Statements, "Business Segments."
The Company is a Delaware corporation with its principal executive offices
located at 422 South Church Street, Charlotte, NC 28202-1904. The telephone
number is 704-594-6200.
NATURAL GAS TRANSMISSION
During 1997, the Natural Gas Transmission segment completed the
organization of its operations into the Northeast Pipelines, which includes
Texas Eastern Transmission Corporation (TETCO) and Algonquin Gas Transmission
Company (Algonquin), and the Midwest Pipelines, which includes Panhandle Eastern
Pipe Line Company (PEPL) and Trunkline Gas Company (Trunkline).
In 1997, consolidated natural gas deliveries by the Natural Gas
Transmission segment's interstate pipelines totaled 2,862 TBtu (Trillion British
thermal units), compared to 2,939 TBtu in 1996, which represented approximately
12% of the natural gas consumed in the United States. A substantial majority of
the delivered volumes of the Natural Gas Transmission segment's interstate
pipelines represents gas transported under long-term firm service agreements
with local distribution company (LDC) customers in the pipelines' market areas.
Firm transportation services are also provided under contract to gas marketers,
producers, other pipelines, electric power generators and a variety of
end-users. In addition, the pipelines offer interruptible transportation to
customers on a short-term or seasonal basis. See natural gas deliveries
statistics under "Business, Operating Statistics." Demand for gas transmission
of the Natural Gas Transmission segment's interstate
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pipeline systems is seasonal, with the highest throughput occurring during the
colder periods in the first and fourth quarters.
The Natural Gas Transmission segment's 37,500 mile interstate pipeline
system is fully interconnected and can receive natural gas from most major North
American producing regions for delivery to markets throughout the Northeast and
Midwest states, as shown in the map below.
[Map of United States depicting the Natural Gas Transmission segment's
interstate pipelines and storage fields appears here]
Northeast Pipelines
TETCO's major customers are located in Pennsylvania, New Jersey and New
York, and include LDCs serving the Pittsburgh, Philadelphia, Newark and New York
City metropolitan areas. Algonquin's major customers include LDCs and electric
power generators located in the Boston, Hartford, New Haven, Providence and Cape
Cod areas.
TETCO also provides firm and interruptible open-access storage services.
Since the implementation of the FERC Order 636 restructuring, storage is offered
as a stand-alone unbundled service or as part of a no-notice bundled service.
TETCO's storage services utilize two joint venture storage facilities in
Pennsylvania and one wholly owned and operated storage field in Maryland. TETCO
also leases storage capacity. TETCO's certificated working capacity in these
three fields is 70 Billion cubic feet (Bcf), and the combined working gas in
storage was 55 Bcf on December 31, 1997. Algonquin owns no storage fields. For
further discussion of Order 636, see "Business, Natural Gas Transmission
- - Regulation."
The Company is participating in and responsible for the development of the
$1 billion Maritimes & Northeast project, which will construct approximately 800
miles of pipeline facilities from the Sable Island Natural gas project through
Maine.
Midwest Pipelines
PEPL's market volumes are concentrated among approximately 20 utilities
located in the Midwest market area that encompasses large portions of Michigan,
Ohio, Indiana, Illinois and Missouri. Trunkline's major customers include eight
utilities located in portions of Tennessee, Missouri, Illinois, Indiana and
Michigan.
PEPL also owns and operates three underground storage fields located in
Illinois, Michigan and Oklahoma. Trunkline owns and operates one storage field
in Louisiana. The combined maximum working gas capacity of the four fields is 44
Bcf. Additionally, PEPL, through a subsidiary, Pan Gas Storage Company (Pan
Gas), is the owner of a storage field in Kansas with an estimated maximum
capacity of 26 Bcf. PEPL is the operator of the field. Since the implementation
of Order 636, each of PEPL, Trunkline and Pan Gas offer firm and interruptible
storage on an open-access basis. In addition to owning and operating storage
fields, PEPL also leases storage capacity. PEPL and Trunkline have retained the
right to use up to 15 Bcf and 10 Bcf, respectively, of their storage capacity
for system needs. See further discussion of Order 636 in "Business, Natural Gas
Transmission - Regulation."
PEPL also has an effective 5.4% ownership interest in Northern Border
Pipeline Company (Northern Border). Northern Border own and operates a
transmission system consisting of approximately 1,000 miles of pipeline
extending from the Canadian border through Montana to Iowa.
Competition
The Company's interstate pipeline subsidiaries compete with other
interstate and intrastate pipeline companies in the transportation and storage
of natural gas. The principal elements of competition among pipelines are rates,
terms of service and flexibility and reliability of service. Competitive
forces may cause the Company's interstate pipeline subsidiaries to modify rates
to remain competitive. The Company's pipelines continue to offer selective
discounting to maximize revenues from existing capacity and to advance
projects that provide expanded services to meet the specific needs of customers.
In the Mid-Atlantic and New England markets, TETCO competes directly with
Transcontinental Gas Pipe Line Corporation, Tennessee Gas Pipeline Company
(TGPC), Iroquois Gas Transmission System (Iroquois), CNG Transmission
Corporation and Columbia Gas Transmission Corporation. Algonquin competes
directly in certain market areas with TGPC and Iroquois. PEPL and Trunkline
compete directly with ANR Pipeline Company, Natural Gas Pipeline Company of
America and Texas Gas Transmission Corporation in the Midwest market area.
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 5 to the
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Consolidated Financial Statements, "Regulatory Matters." The FERC also
has authority over the construction and operation of pipeline and related
facilities utilized in the transportation and sale of natural gas in
interstate commerce, including the extension, enlargement or abandonment of
such facilities. TETCO, Algonquin, PEPL, Trunkline and Pan Gas 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.
The Natural Gas Transmission segment's pipelines operate as open-access
transporters of natural gas. In 1992, the FERC issued Order 636, which requires
open-access pipelines to provide firm and interruptible transportation services
on an equal basis for all gas supplies, whether purchased from the pipeline or
from another gas supplier. To implement this requirement, Order 636 provided,
among other things, for mandatory unbundling of services that have historically
been provided by pipelines into separate open-access transportation, sales and
storage services. Order 636 allows pipelines to recover eligible costs, known as
"transition costs," resulting from the implementation of Order 636. For further
discussion of Order 636, see Note 5 to the Consolidated Financial Statements,
"Regulatory Matters."
The Natural Gas Transmission segment is subject to the jurisdiction of the
Environmental Protection Agency (EPA) and state environmental agencies. For a
discussion of environmental regulation, see "Business, Environmental Matters."
The Natural Gas Transmission segment is also subject to the Natural Gas Pipeline
Safety Act of 1968, which regulates gas pipeline safety requirements, and to the
Hazardous Liquid Pipeline Safety Act of 1979, which regulates oil and petroleum
pipelines.
ENERGY SERVICES
The Energy Services segment is comprised of several separate business
units: Field Services, Trading and Marketing, Global Asset Development and Other
Energy Services. See certain operating statistics of the Energy Services segment
under "Operating Statistics." Activities of the Energy Services segment can
fluctuate in response to the seasonality affecting both electricity and natural
gas.
Field Services
Field Services owns and operates approximately 17,000 miles of natural gas
gathering systems, including intrastate pipelines, and 27 natural gas processing
plants in the United States. Field Services also has ownership interests in 11
other natural gas processing plants in the United States.
Field Services' gathering systems are located in 10 states, which serve
major gas-producing regions in the Rocky Mountains, Permian Basin, Mid-Continent
and Gulf Coast (offshore and onshore) areas. Field Services' gathering
operations also include several intrastate pipeline systems and two natural gas
storage facilities.
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 or from the natural gas stream on the Company's
transmission system. Field Services also operates approximately 450 miles of NGL
pipelines in the Texas Gulf Coast area which transport NGLs received from 12
processing plants in South Texas. 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. NGL sales are based
upon current market-related prices. Field Services also provides, on a more
limited basis, processing services to producers and others for a stipulated fee
and produces helium at the National Helium facility.
Field Services also operates approximately 1,500 miles of intrastate crude
oil pipelines in the Mid-Continent and South Texas areas. The crude oil pipeline
system provides gathering and mainline transportation service, for a volumetric
fee, based on published tariffs. Crude oil is also purchased from producers and
sold to end-users.
Subsidiaries of the Company own a 2% general partner interest and an
approximate 8% limited partner interest in TEPPCO Partners, L.P. (TEPPCO
Partners). TEPPCO Partners owns and operates an approximate 4,300 mile refined
petroleum products and liquefied petroleum gases pipeline system extending from
southeast Texas through the midwestern and central U.S. to the northeastern
U.S.
Trading and Marketing
The Company's energy marketing operations are conducted through Duke Energy
Trading and Marketing L.L.C. in the United States and Duke Energy Marketing
Limited Partnership in Canada (collectively, DETM) and through Duke/Louis
Dreyfus L.L.C. (D/LD).
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DETM was formed in August 1996 as a natural gas and power marketing joint
venture with Mobil Corporation (Mobil). All of Mobil's United States and
Canadian natural gas production is committed to be marketed through DETM for at
least a 10-year period. The Company, through its affiliates, operates the joint
venture and owns a 60% interest, with Mobil owning a 40% minority interest.
In June 1997, a wholly owned subsidiary of the Company acquired the
remaining 50% ownership interest in D/LD not already owned from affiliates of
Louis Dreyfus Corp. A substantial portion of the Company's trading and marketing
of electricity is conducted through D/LD.
Trading and Marketing markets natural gas primarily to LDCs, electric power
generators, municipalities, industrial end-users and energy marketing companies
and markets electricity to investor owned utilities, municipal power generators
and other power marketers. Operations are primarily in the United States and, to
a lesser extent, in Canada, and are serviced through 13 offices or operating
centers.
Natural gas marketing operations encompass both on-system and off-system
sales. With respect to on-system sales, Trading and Marketing generally
purchases natural gas from the Company's Field Services' facilities and delivers
the gas to an intrastate or interstate pipeline for redelivery to another
customer. The Company's Natural Gas Transmission pipelines are utilized for
deliveries when prudent. With respect to off-system sales, Trading and Marketing
purchases natural gas from producers, pipelines and other suppliers not
connected with the Company's facilities for resale to customers.
Trading and Marketing has a portfolio of short-term and long-term sales
agreements with customers, the vast majority of which incorporate
market-sensitive pricing terms. Long-term gas purchase agreements with
producers, principally entered into in connection with on-system sales,
generally also include market-sensitive pricing provisions. Purchases and sales
of off-system gas and electricity supply are normally made under short-term
contracts. Purchase and sales commitments involving significant price and
location risk are generally hedged with commodity futures, swaps and options.
For information concerning the Company's risk-management activities, see
"Management's Discussion and Analysis of Results of Operations and Financial
Condition, Quantitative and Qualitative Disclosures About Market Risk -
Commodity Price Risk" and Note 7 to the Consolidated Financial Statements,
"Financial Instruments and Risk Management - Commodity Derivative Instruments."
Trading and Marketing also provides energy management services, such as
supply and market aggregation, peaking services, dispatching, balancing,
transportation, storage, tolling, contract negotiation and administration, as
well as energy commodity risk management products and services.
Global Asset Development
Global Asset Development is an active participant in competitive power
markets worldwide and has ownership interests in more than 6,500 megawatts of
generation worldwide, including projects under construction and under contract.
Global Asset Development is comprised of three units: Duke Energy Power Services
(DEPS), Duke Energy Industrial Asset Development, and Duke Energy International.
DEPS develops, owns and operates electric generation projects for customers
in the United States and Canada. DEPS focuses on acquisitions of existing energy
production facilities, greenfield opportunities and operating energy assets.
Domestic investments include a 32.5% indirect ownership interest in American
Ref-Fuel Company, which owns five waste to - energy facilities in New York, New
Jersey, Massachusetts and Connecticut. Such facilities process about 4
million tons of municipal solid waste per year and have an aggregate generating
capacity of 286 megawatts. DEPS's projects under construction include an
ownership interest in the Bridgeport Energy Project, a 520 megawatt combined
cycle natural gas-fired merchant generation plant, which will be Connecticut's
largest non-nuclear power plant.
On November 18, 1997, DEPS entered into an agreement with Pacific Gas &
Electric Company (PG&E) for the purchase of three electric generating plants in
California for approximately $500 million. The plants have a combined net
operating capacity of 2,645 megawatts. The sale is expected to close during
1998. Pursuant to California's electric restructuring law, DEPS must contract
with PG&E to operate and maintain the facilities for two years following the
sale. Energy and capacity from the plants will be sold into the California power
exchange and under separate contracts.
Duke Energy Industrial Asset Development was formed in July 1997 to
develop, own, manage and operate on-site, inside-the-fence electric generation
and energy conversion facilities for industrial customers. Its primary market
focus is
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the United States and Canada. This unit is currently working with prospective
customers from the textile, pulp and paper, petrochemical, agricultural, food
and automotive industries and the federal privatization sector.
Duke Energy International develops, owns and operates energy projects
worldwide. This unit focuses on projects involving natural gas exploration,
production, processing, transportation and supply. Additionally, projects
include generation, delivery and marketing of electric power and thermal energy.
Its ownership interests include investments in National Methanol Company, a
methanol plant and methyl tertiary butyl ether plant in Saudi Arabia; one
storage facility and two liquid natural gas (LNG) vessels utilized in
international LNG trade; Piedra del Aguilla, a 1,400 megawatt hydroelectric
generating facility in Argentina; and Puncakjaya Power, a 194 megawatt diesel
fired plant in Indonesia. Certain projects under construction include
investments in:
o Nueva Renca, a 370 megawatt gas fired plant in Chile
o Aguaytia, Peru's first integrated energy development project encompassing
natural gas development and production, gathering, processing and
transmission facilities; gas-fired electric generation; and electric
transmission.
Other Energy Services
Other Energy Services provides engineering consulting, construction and
integrated energy solutions, primarily through Duke Engineering & Services, Inc.
(DE&S), Duke/Flour Daniel and DukeSolutions, Inc. (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 projects worldwide.
Duke/Flour Daniel, operating through several entities, provides full
service siting, permitting, licensing, engineering, procurement, construction,
start-up, operating and maintenance services for fossil-fired plants, both
domestically and internationally.
DukeSolutions provides integrated energy solutions to industrial,
commercial, institutional, governmental and wholesale customers and focuses on
increasing customers' efficiency, productivity and profitability through energy
cost savings.
Competition
Field Services and Trading and Marketing compete with major integrated oil
companies, major interstate pipelines and their marketing affiliates, national
and local natural gas gatherers, brokers, marketers and distributors and
electric utilities and other electric power marketers for natural gas supplies,
in gathering and processing natural gas and in marketing and transporting
natural gas, electricity, NGLs and crude oil. Competition for natural gas
supplies is primarily based on efficiency, reliability, availability of
transportation and the ability to obtain a satisfactory price for the producer's
natural gas. Competition for customers is based primarily upon reliability and
price of delivered natural gas, NGLs and crude oil. 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.
The Global Asset Development and Other Energy Services business units
experience substantial competition in their fields from utility companies in the
United States or abroad and from independent companies.
Regulation
The intrastate pipelines owned by the Field Services group are subject to
state regulation and, to the extent they provide services under Section 311 of
the Natural Gas Policy Act of 1978 (NGPA), are also subject to FERC regulation.
The natural gas gathering activities of the Field Services group are generally
not subject to regulation by the FERC, but are subject to state regulation.
The energy marketing activities of the Trading and Marketing group may, in
certain circumstances, be subject to the jurisdiction of the FERC. Current FERC
policies permit the Trading and Marketing entities subject to FERC jurisdiction
to market natural gas and electricity at market-based rates.
The North Carolina Utilities Commission, The Public Service Commission of
South Carolina and the FERC have implemented regulations governing access to
regulated electric customer data by non-regulated entities and services provided
between regulated and non-regulated affiliated entities. These regulations
affect Energy Services' activities with Duke Energy's Electric Operations
segment.
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The Energy Services segment is subject to the jurisdiction of the EPA and
state environmental agencies. For a discussion of environmental regulation, see
"Business, Environmental Matters." The Energy Services segment 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.
OTHER OPERATIONS
The Other Operations segment includes the Company's non-energy related
subsidiaries, including Crescent Resources and DukeNet.
Crescent Resources develops high quality commercial and residential real
estate projects and manages substantial forest holdings. At December 31, 1997,
Crescent Resources owned 3.5 million square feet of commercial space, of which
75% of the operating space was leased. Crescent Resources' portfolio included
2.1 million square feet of warehouse space, 1.1 million square feet of office
space and .3 million square feet of retail space at December 31, 1997. In 1997,
Crescent Resources sold 884 residential developed lots compared to 869 lots sold
in 1996. At December 31, 1997, Crescent Resources also had approximately .2
million acres of land under its management.
DukeNet develops and manages communications systems, including fiber optic
and wireless digital network services. DukeNet provides a network for
communications and other services to commercial, industrial and residential
markets.
ENVIRONMENTAL MATTERS
The Company is subject to federal, state and local regulations with regard
to air and water quality, hazardous and solid waste disposal and other
environmental matters. Certain environmental statutes affecting the Company
include, but are not limited to:
o The Clean Air Act Amendments of 1990;
o State Implementation Plans (SIP), which were issued by the EPA to 22 states
related to existing and new national ambient air quality standards for
ozone;
o The Federal Water Pollution Control Act Amendments of 1987, which require
permits for facilities that discharge treated wastewater into the
environment; and
o The Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA), which can require any individual or entity which may have owned
or operated a disposal site, as well as transporters or generators of
hazardous wastes which were sent to such site, to share in remediation
costs for the site.
For further discussion of environmental matters involving the Company,
including possible liability and capital costs, see "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." Except as set forth therein,
compliance with federal, state and local provisions which have been enacted or
adopted regulating the discharge of materials into the environment, or otherwise
protecting the environment, is not expected to have a material adverse effect on
the consolidated results of operations or financial position of the Company.
OTHER MATTERS
Foreign operations and export sales are not material to the Company's
business as a whole. For a discussion of risks associated with the Company's
foreign operations, see "Management's Discussion and Analysis of Results of
Operations and Financial Condition, Quantitative and Qualitative Disclosures
About Market Risk - Foreign Operations Risk."
At December 31, 1997, the Company had approximately 8,400 employees.
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
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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. For a discussion of some factors that
could cause actual results 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."
OPERATING STATISTICS
<TABLE>
<CAPTION>
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Natural Gas Transmission Years Ended December 31,
----------------------------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Throughput Volumes, TBtu(a):
Northeast Pipelines
TETCO 1,300 1,349 1,234 1,194 1,115
Algonquin 341 327 331 288 245
------ ------ ------ ------ ------
Total Northeast Pipelines 1,641 1,676 1,565 1,482 1,360
Midwest Pipelines
PEPL 659 687 663 626 607
Trunkline 620 632 519 560 633
------ ------ ------ ------ ------
Total Midwest Pipelines 1,279 1,319 1,182 1,186 1,240
Intercompany eliminations (58) (56) (44) (91) (125)
------ ------ ------ ------ ------
Total Natural Gas Transmission 2,862 2,939 2,703 2,577 2,475
===================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Energy Services Years Ended December 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
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<S> <C> <C> <C> <C> <C>
Field Services Natural Gas Gathered/Processed, TBtu/d(b) 3.4 2.9 1.9 1.6 1.4
Field Services NGL Production, MBbl/d(c) 103.9 76.5 54.8 49.4 42.0
Trading and Marketing Natural Gas Marketed, TBtu/d 6.9 5.5 3.6 2.7 2.1
Trading and Marketing Electricity Marketed, GWh (d) 64,650 4,229 513 -- --
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</TABLE>
(a) Trillion British thermal units
(b) Trillion British thermal units per day
(c) Thousand barrels per day
(d) Gigawatt-hours
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Item 2. Financial Information.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
In Millions 1997(a) 1996(a) 1995(a) 1994(a) 1993(a)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income Operating Revenues $11,914.8 $7,816.1 $5,187.7 $4,753.1 $4,420.2
Statement Operating Expenses 11,079.0 6,946.8 4,393.9 4,071.4 3,879.3
--------------------------------------------------------------
Operating Income 835.8 869.3 793.8 681.7 540.9
Other Income and Expenses 36.7 20.1 18.0 (1.7) 46.1
--------------------------------------------------------------
Earnings Before Interest and Taxes 872.5 889.4 811.8 680.0 587.0
Interest Expense 214.2 232.1 239.5 231.5 265.4
Minority Interests 21.4 6.2 - - -
--------------------------------------------------------------
Earnings Before Income Taxes 636.9 651.1 572.3 448.5 321.6
Income Taxes 256.6 252.1 224.2 181.2 130.5
--------------------------------------------------------------
Income Before Extraordinary Item 380.3 399.0 348.1 267.3 191.1
Extraordinary Item -- 16.7 -- -- --
--------------------------------------------------------------
Net Income $ 380.3 $ 382.3 $ 348.1 $ 267.3 $ 191.1
- ------------------------------------------------------------------------------------------------------------------------
Balance Total Assets $11,096.8 $9,751.7 $8,225.8 $7,983.9 $7,965.7
Sheet Long-term Debt $ 2,918.8 $2,028.2 $2,214.6 $2,445.9 $2,138.4
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Financial information reflects accounting for the combination of the
Company with PanEnergy as a pooling of interests. As a result, the
financial information gives effect to the combination as if it had occurred
on January 1, 1993.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
INTRODUCTION
Duke Capital Corporation (the Company) (formerly Church Street Capital
Corp.) is a wholly owned subsidiary of Duke Energy Corporation (Duke Energy). On
June 18, 1997, Duke Power Company (Duke Power) changed its name to Duke Energy
Corporation in accordance with the terms of a merger agreement with PanEnergy
Corp (PanEnergy), pursuant to which PanEnergy became a wholly owned subsidiary
of Duke Energy (the merger). Subsequently, the common stock of PanEnergy was
contributed by Duke Energy to the Company, which served as the parent company of
Duke Energy's non-utility operations under the name Church Street Capital Corp.
The Company provides financing and credit enhancement services for its
subsidiaries. The Company conducts its operating activities through its
three business segments:
The Natural Gas Transmission segment is involved in interstate
transportation and storage of natural gas for customers primarily in the
Mid-Atlantic, New England and Midwest states. The interstate natural gas
transmission and storage operations are subject to the rules and regulations of
the Federal Energy Regulatory Commission (FERC).
The Energy Services segment is comprised of several separate business
units: Field Services gathers and processes natural gas, produces and markets
natural gas liquids and transports and trades crude oil; Trading and Marketing
markets natural gas, electricity and other energy-related products; Global Asset
Development develops, owns and operates energy-related facilities worldwide; and
Other Energy Services provides engineering consulting, construction and
integrated energy solutions.
The Other Operations segment includes the real estate operations of
Crescent Resources, Inc. (Crescent Resources) and the communications services of
DukeNet Communications, Inc., wholly owned subsidiaries of the Company.
Corporate costs and intersegment eliminations are also reflected in the
financial results of this segment.
The combination of the Company and PanEnergy was accounted for as a pooling
of interests and, accordingly, the Consolidated Financial Statements included
herein are presented as if the combination was consummated as of the beginning
of the earliest period presented. Portions of the following discussion provide
information related to material
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changes in the Company's consolidated results of operations and financial
condition between the periods presented, based on the combined historical
information of the Company and PanEnergy.
Management's Discussion and Analysis should be read in conjunction with the
Consolidated Financial Statements of the Company.
RESULTS OF OPERATIONS
Net income in 1997 decreased slightly as compared to 1996, from $382.3
million in 1996 to $380.3 million in 1997. The decrease was due primarily to
increases in non-recurring merger related costs, Trading and Marketing
operations' due primarily to growth and amortization of goodwill associated
with the purchase of the remaining 50% ownership interest of the Duke/Louis
Dreyfus joint venture (see Note 3 to the Consolidated Financial Statements).
These increases were offset by Natural Gas Transmission's market-expansion
projects placed in service and an extraordinary item related to the early
retirement of debt in 1996.
In 1996, net income increased 10% over 1995, from $348.1 million in 1995 to
$382.3 million in 1996. Contributing to the increase were business expansion
projects placed in service in both the Natural Gas Transmission and the Energy
Services segments and increased volumes in Energy Services due primarily to the
joint venture formed with Mobil . Partially offsetting the increase was an
extraordinary item related to the early retirement of debt in 1996.
Operating income of the Company for 1997 was $835.8 million as compared to
$869.3 million in 1996 and $793.8 million in 1995. Earnings before interest and
taxes (EBIT) were $872.5 million, $889.4 million and $811.8 million for 1997,
1996 and 1995, respectively. Operating income and earnings before interest and
taxes are not materially different, and are affected by the same fluctuations
for the Company and each of its business segments. Earnings before interest and
taxes by business segment are summarized below, and an explanation of these
results by business segment is provided thereafter.
Earnings Before Interest and Taxes by Business Segment is as follows:
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In Millions 1997 1996 1995
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Natural Gas Transmission
Northeast Pipelines $420.5 $399.4 $370.5
Midwest Pipelines 203.9 196.1 197.1
-----------------------------------
Total Natural Gas Transmission 624.4 595.5 567.6
-----------------------------------
Energy Services
Field Services 157.0 151.6 106.1
Trading and Marketing 44.4 57.9 17.1
Global Asset Development 4.5 - 26.8
Other Energy Services 18.2 20.0 23.7
-----------------------------------
Total Energy Services 224.1 229.5 173.7
-----------------------------------
Crescent Resources 97.6 87.7 64.0
Other Operations (73.6) (23.3) 6.5
-----------------------------------
Consolidated EBIT $872.5 $889.4 $811.8
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Net income for 1997 is net of a full year of the minority interest
associated with the joint venture with Mobil Corporation (Mobile) in the
Trading and Marketing operation of the Energy Services segment (see Note
3 to the Consolidated Financial Statements, "Business Combinations and
Acquisitions - Duke Energy Trading and Marketing, L.L.C.").
Included in the amounts discussed below are intercompany transactions that
do not impact consolidated earnings before interest and taxes.
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Natural Gas Transmission
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Dollars In Millions 1997 1996 1995
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Revenue $1,572.1 $1,556.3 $1,533.4
Operating Expenses 964.4 972.5 971.1
------------------------------------
Operating Income 607.7 583.8 562.3
Other Income, Net of Expenses 16.7 11.7 5.3
------------------------------------
EBIT $ 624.4 $ 595.5 $ 567.6
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Volumes, TBtu(a) 2,862 2,939 2,703
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(a) Trillion British thermal units
During 1997, the Natural Gas Transmission segment completed the
organization of its operations into the Northeast Pipelines, which includes
Texas Eastern Transmission Corporation (TETCO) and Algonquin Gas Transmission
Company (Algonquin), and the Midwest Pipelines, which includes Panhandle Eastern
Pipe Line Company (PEPL) and Trunkline Gas Company (Trunkline). Earnings before
interest and taxes for the Natural Gas Transmission segment increased 5% in 1997
over the prior year, with increases in earnings at Northeast Pipelines and
Midwest Pipelines of 5% and 4%, respectively. Earnings before interest and taxes
increased primarily due to market-expansion projects placed in service and the
favorable resolution of regulatory matters in 1997 in amounts in excess of those
resolved in 1996. The resolution of regulatory matters was reflected as
additional revenue and other income. The increases were partially offset by
certain litigation expenses recorded in 1997.
In 1996, earnings before interest and taxes for the Natural Gas
Transmission segment increased 5% over 1995. This was primarily due to a 9%
increase in throughput resulting from new pipeline expansion projects placed in
service in late 1995 and due to colder weather, which increased revenues.
Operating expenses in 1995 included a charge for higher Order 636 transition
cost estimates, partially offset by the benefit of lower-than-projected PCB
(polychlorinated biphenyl) clean-up costs (see Note 5 to the Consolidated
Financial Statements, "Regulatory Matters").
Energy Services
As noted previously in the table of Earnings Before Interest and Taxes by
Business Segment, earnings before interest and taxes for the Energy Services
segment in 1997 decreased slightly as compared to 1996, which was 32% higher
than 1995 earnings before interest and taxes. During 1997, 1996 and 1995, these
fluctuations were driven primarily by the results of operations of Field
Services and Trading and Marketing.
Field Services
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Dollars In Millions 1997 1996 1995
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Revenue $3,054.6 $2,636.5 $1,791.4
Operating Expenses 2,897.9 2,487.1 1,694.6
------------------------------------
Operating Income 156.7 149.4 96.8
Other Income, Net of Expenses 0.3 2.2 9.3
------------------------------------
EBIT $ 157.0 $ 151.6 $ 106.1
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Volumes
Natural Gas Gathered/
Processed, TBtu/d(a) 3.4 2.9 1.9
NGL Production, MBbl/d(b) 103.9 76.5 54.8
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(a) Trillion British thermal units per day
(b) Thousand barrels per day
Field Services' earnings before interest and taxes increased 4% for 1997
over 1996 primarily due to higher volumes as a result of acquisitions in 1996.
Natural gas gathered and processed volumes increased 17% and natural gas liquids
(NGL) production increased 36%. Partially offsetting these increases were higher
natural gas prices, which increased operating expenses, and a decrease in NGL
prices of 8%, which decreased revenues.
Earnings before interest and taxes for Field Services increased 43% in 1996
as compared with 1995. Strong processing margins and increased gathering and
processing volumes related to expansion projects and asset acquisitions,
primarily the
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acquisition of assets from Mobil, contributed to the increase in revenues.
Average NGL prices increased 30%, while NGL production increased 40%. These
improvements were partially offset by increased operating expenses and
depreciation as a result of the Mobil asset acquisition and other projects
placed in service. A gain on the sale of an investment in Seagull Shoreline
System in 1995 caused a comparative reduction in other income.
Trading and Marketing
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Dollars In Millions 1997 1996 1995
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Revenue $ 7,488.7 $ 3,814.0 $ 1,866.7
Operating Expenses 7,446.0 3,757.7 1,846.7
--------------------------------------
Operating Income 42.7 56.3 20.0
Other Income, Net of Expenses 1.7 1.6 (2.9)
--------------------------------------
EBIT $ 44.4 $ 57.9 $ 17.1
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Volumes
Natural Gas Marketed, TBtu/d 6.9 5.5 3.6
Electricity Marketed, GWh(a) 64,650 4,229 513
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(a) Gigawatt-hours
A wholly owned subsidiary of the Company acquired the remaining 50%
ownership interest in the Duke/Louis Dreyfus, L.L.C. (D/LD) joint venture in
June 1997. This acquisition, coupled with a full year of operations of the joint
venture with Mobil formed in August 1996, accounted for the significant
increases in Trading and Marketing revenues, related operating expenses and
volumes in 1997 over 1996. Natural gas marketed volumes increased 25%, in
addition to increases in natural gas margins from trading activities, which
were largely offset by the emerging electric power trading and marketing
activities. Higher operating expenses, driven mainly by increased personnel
levels and system development costs to provide the necessary infrastructure
for growth in the trading and marketing business, resulted in a decrease in
earnings before interest and taxes in 1997 as compared to 1996.
In 1996, Trading and Marketing's earnings before interest and taxes
increased $40.8 million as compared to 1995 primarily as a result of expanded
operations due to the joint venture with Mobil. The increase resulted primarily
from higher gas volumes, improved margins resulting from colder weather and gas
price volatility, and higher trading margins. Total gas volumes marketed
increased 53%. The increase in margins was partially offset by higher operating
expenses related to the joint venture with Mobil.
Other Operations
As noted previously in the table of Earnings Before Interest and Taxes by
Business Segment, earnings before interest and taxes for Crescent Resources
increased 11% in 1997 over 1996. The increase was primarily due to gains
associated with bulk land sales in 1997. In 1996, earnings before interest and
taxes for Crescent Resources increased 37% over 1995 resulting from increased
developed lot sales as well as bulk land sales.
Also noted previously in the table of Earnings Before Interest and Taxes by
Business Segment, earnings before interest and taxes for Other Operations,
excluding Crescent Resources, declined $50.3 million in 1997 as compared to
1996. The decrease was due primarily to increased non-recurring merger related
costs and the 1997 amortization of goodwill associated with the purchase of the
remaining 50% ownership interest in the D/LD joint venture. These decreases were
partially offset by a gain on the sale of the Company's ownership
interest in the Midland Cogeneration Venture in 1997.
In 1996, earnings before interest and taxes for Other Operations, excluding
Crescent Resources, decreased $29.8 million as compared to 1995 primarily as a
result of losses related to the start-up activities of a wireless communications
joint venture.
Other Impacts on Net Income
In 1997, interest expense decreased $17.9 million, or 8%, as compared to
1996 as a result of lower interest rates. Interest expense in 1996 decreased 3%
as compared with 1995 as a result of lower average interest rates and lower
average debt balances outstanding.
Minority interests in 1997 and 1996 relate primarily to the joint venture
with Mobil.
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On October 1, 1996, a subsidiary of the Company redeemed its $150 million,
10% debentures and its $100 million, 101/8% debentures, both due 2011. The
Company recorded a non-cash extraordinary item of $16.7 million (net of income
tax of $10.3 million) related to the unamortized discount on this early
retirement of debt.
LIQUIDITY AND CAPITAL RESOURCES
Operating Cash Flow. Operating cash flows decreased $233.7 million from
1996 to 1997. This decrease reflects the cash impacts of natural gas transition
cost recoveries and receivables sold in 1996 and repaid in 1997 which were
classified as current liabilities. Additionally, payments associated with rate
case settlements during 1997 caused cash flows from operations to
decrease.
Operating cash flows increased $359.1 million from 1995 to 1996, primarily
reflecting higher 1996 earnings, net cash inflows related to Order 636
transition costs and lower tax payments. In 1996, TETCO received $98.6 million
from the sale of the right to collect certain Order 636 transition costs, with
limited recourse. Increases in accounts receivable, related to higher levels of
trading and marketing activities of the Trading and Marketing Operations, were
mostly offset by corresponding increases in accounts payable. The Company also
received $100 million for accounts receivable sold that remained outstanding at
December 31, 1996.
Assets and liabilities recorded in the Consolidated Balance Sheets related
to the natural gas transition cost recoveries and the related cash flow impacts
are effected by state and federal regulatory initiatives and specific
agreements. For more information on the natural gas transition cost recoveries,
see Note 5 to the Consolidated Financial Statements, "Regulatory Matters."
Investing Cash Flow. Capital and investment expenditures were approximately
$1.3 billion in 1997 as compared with approximately $961.1 million in 1996.
Increased capital and investment expenditures were partially due to the
acquisition of the remaining 50% ownership interest in the D/LD joint venture
and the acquisition of an ownership interest in American Ref-Fuel Company.
Additionally, increased business expansion for the Natural Gas Transmission
segment caused expenditures to increase. These increases were partially offset
by the 1996 acquisition of certain assets from Mobil.
The Company participated in the marketing of electric power and natural gas
through its 50% ownership interest in D/LD. On June 17, 1997, the Company,
through one of its subsidiaries, acquired the remaining 50% ownership interest
in D/LD from affiliates of Louis Dreyfus Corp. for $247 million. The purchase
price substantially represents goodwill, which will be amortized over 10 years.
Also in June 1997, the Company signed a letter of intent to build a $265
million, 520-megawatt combined cycle natural gas fired merchant generation plant
in Bridgeport, Connecticut. The Company will be majority owner, with the first
phase of the project scheduled to provide power in mid-1998. The project is
currently under construction.
During December 1997, a wholly owned subsidiary of the Company formed a
joint venture with UAE Ref-Fuel L.L.C. (UAE), a wholly owned subsidiary of
United American Energy Corp. The Company owns a 65% interest in the joint
venture, with UAE owning a 35% minority interest. The joint venture acquired a
50% ownership interest in American Ref-Fuel Company, a waste-to-energy firm,
with operations primarily in New York and New Jersey. Thus, the Company has an
indirect 32.5% ownership interest in American Ref-Fuel Company and provided $237
million of investment and financing to the venture.
During 1997, the Company sold its equity interest in certain affiliates and
its ownership in trading and marketing operations in the United Kingdom.
Proceeds from these sales were $87 million.
Capital and investment expenditures in 1996 included the acquisition of
certain assets of Mobil for approximately $300 million by Field Services. The
increase in capital and investment expenditures in 1996 over 1995 was a result
of this acquisition and other Energy Services expansion projects.
The Company plans to maintain its regulated facilities and pursue business
expansion of its regulated operations as opportunities arise. Projected 1998
capital and investment expenditures for the Natural Gas Transmission segment,
including allowance for funds used during construction, are approximately $300
million. This projection is subject to
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periodic review and revisions. Actual expenditures incurred may vary from such
estimates due to various factors, including business expansion opportunities,
environmental matters and cost and availability of capital.
The Energy Services segment plans to spend approximately $100 million in
1998 for required capital expenditures at its existing facilities. In addition,
the Company is seeking to significantly grow its Energy Services businesses,
primarily through the Global Asset Development business unit. One expansion
opportunity includes the 520-megawatt combined cycle natural gas fired merchant
generation plant in Bridgeport, Connecticut already under construction. Another
growth opportunity includes the recently announced agreement to purchase from
Pacific Gas & Electric Company three power plants in California. The power
plants have a combined capacity of 2,645 megawatts. The purchase price is
estimated at approximately $500 million and the transaction is expected to close
during 1998. Global Asset Devleopment is actively pursuing other similar
initiatives which will likely require significant capital and investment
expenditures in 1998. Potential investments will be subject to periodic review
and revision and may vary significantly depending on the value-added
opportunities presented.
Projected capital and investment expenditures for 1998 of the Other
Operations segment are approximately $200 million, consisting primarily of
Crescent Resources' real estate operations. These projected capital and
investment expenditures are subject to periodic review and revision and may vary
significantly depending on the value-added opportunities presented.
Financing Cash Flow. The Company's consolidated capital structure at
December 31, 1997, including short-term debt, was 48% debt and 52% common
equity. Fixed charges coverage, using the SEC method, was 3.7 times for 1997
compared to 3.6 and 3.2 times for 1996 and 1995, respectively.
Subsequent to the merger, several rating agencies reviewed and
in some cases revised their debt ratings for PanEnergy, PEPL, and TETCO.
As of December 31, 1997, the Company has been assigned a corporate
credit rating of A by Standard & Poor's Group and an indicative senior
debt rating of A3 by Moody's Investors Service. The Company's intent
is to maintain these credit ratings.
During August 1997, the Company instituted a new commercial paper program,
increasing its available commercial paper facilities to $1.25 billion. The
Company's total commercial paper facilities were $400 million at December 31,
1996. These facilities are supported by various bank credit agreements which
totaled $1.4 billion and $1.0 billion at December 31, 1997 and 1996,
respectively. As a result of the revised commercial paper program and the
related credit facilities, the Company terminated the prior commercial paper
program and related bank facilities held by the Company and PanEnergy. At
December 31, 1997, $933.7 million of commercial paper and $77 million of bank
borrowings were outstanding.
Since December 31, 1996, $114.5 million of the Company's medium term notes
matured. These retirements were funded primarily through the Company's
commercial paper facilities.
The Company's subsidiaries have authority to issue up to $250 million
aggregate principal amount of unsecured debt securities under shelf registration
statements filed with the Securities and Exchange Commission.
Dividends and debt repayments, along with operating and investing
requirements, are expected to be funded by cash from operations, debt and
commercial paper issuances and available credit facilities. As noted previously,
the Company is seeking to significantly grow its Energy Services businesses,
which will likely require significant additional financing.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk. The Company is exposed to changes in interest rates as
a result of significant financing through its issuance of variable-rate debt,
fixed-rate debt and commercial paper. The Company manages its interest rate
exposure by limiting its variable-rate exposure to a certain percentage of total
capitalization, as set by policy, and by monitoring the effects of market
changes in interest rates. (See Note 7, "Financial Instruments and Risk
Management" and Note 10, "Debt and Credit Facilities" to the Consolidated
Financial Statements.)
If market interest rates average 1% more in 1998 than in 1997, the
Company's interest expense, would increase, and income before taxes would
decrease by approximately $11.3 million. This amount has been determined by
considering the impact of the hypothetical interest rates on the Company's
variable-rate debt balances and commercial paper balances as of December 31,
1997. These analyses do not consider the effects of the reduced level of overall
economic activity that could exist in such an environment. In the event of a
significant change in interest rates, management would likely take actions to
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further mitigate 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 and transportation
costs of natural gas, electricity and petroleum products marketed and employs
established policies and procedures to manage its risks associated with these
market fluctuations using various commodity derivatives, including futures,
swaps and options. (See Note 7 to the Consolidated Financial Statements,
"Financial Instruments and Risk Management.") The Company measures the risk in
its commodity derivative portfolio on a daily basis utilizing a Value-at-Risk
(VAR) model to determine the maximum potential one-day favorable or unfavorable
impact on its earnings and monitors its risk in comparison to established
thresholds. The Company also utilizes other measures to monitor the risk in its
commodity derivative portfolio on a monthly, quarterly and annual basis. The VAR
computations are based on an 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 VAR computations utilize several key
assumptions, including the confidence level for the resultant price movement and
the holding period chosen for the calculation. The Company's calculation
includes commodity derivative instruments held for trading purposes and excludes
the effects of written and embedded physical options in the trading portfolio.
At December 31, 1997, the Company's estimated potential one-day favorable or
unfavorable impact on income before taxes, as measured by VAR, related to its
commodity derivatives held for trading purposes, was approximately $2 million.
Changes in markets inconsistent with historical trends could cause actual
results to exceed predicted limits. Market risks associated with commodity
derivatives held for purposes other than trading were not material at December
31, 1997.
Subsidiaries of the Company are also exposed to market fluctuations in the
price of NGLs related to their ongoing gathering and processing operating
activities. Because the Company generally does not maintain an inventory
of NGLs or actively trade commodity derivatives related to NGLs, the Company
was not exposed to this risk at December 31, 1997. However, the Company closely
monitors the risks associated with NGL price changes on its future
operations.
Foreign Operations Risk. The Company has investments in several
international operations, many of which are joint ventures. At December 31,
1997, the Company had investments in international affiliates of $230.1 million.
These investments represent primarily investments in affiliates which own
energy-related production, generation and transmission facilities.
The Company is exposed to foreign currency risk, sovereign risk and other
foreign operations risks, primarily through investments in affiliates of $43.6
million in Asia and $100.7 million in South America. In order to mitigate risks
associated with foreign currency fluctuations, the majority of contracts entered
into by the Company or its affiliates are denominated in or indexed to the U.S.
dollar. Other exposures to foreign currency risk, sovereign risk or other
foreign operations risk are periodically reviewed by management and were not
material to the Company's consolidated results of operations or financial
position during the period.
CURRENT ISSUES
Operations Outlook. Due to increased competition, especially for the
Midwest Pipelines, relatively slow growth is expected for future operations of
the Company's Natural Gas Transmission segment. The Natural Gas Transmission
segment continues to offer selective discounting to maximize revenues from
existing capacity and to advance projects that provide expanded services to meet
the specific needs of customers. Several projects have been announced that
position the Natural Gas Transmission segment to meet increasing demand for gas
in northeast markets by providing continuous paths from new supplies in both
eastern and western Canada in addition to traditional domestic supply basins.
The Company is seeking to significantly grow its Energy Services segment.
Deregulation of energy markets in the U.S. and abroad is providing substantial
opportunities for the Energy Services business units to capitalize on their
broad capabilities. Growth is expected to be achieved through acquisitions,
construction of greenfield projects and expansion of existing facilities as
value-added opportunities present themselves.
The strong real estate market in the southeast continues to present
substantial growth opportunities for Crescent Resources. In 1997, Crescent
Resources initiated development of significant office and industrial facilities
in each of its established markets to capitalize on market conditions.
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Environmental. The Company is subject to federal, state and local
regulations regarding air and water quality, hazardous and solid waste disposal
and other environmental matters.
Superfund Sites. Subsidiaries of the Company are considered by regulators
to be a potentially responsible party and may be subject to future liability at
six federal Superfund sites. While the cost of remediation of the remaining
sites may be substantial, the Company's subsidiaries will share in any liability
associated with remediation of contamination at such sites with other
potentially responsible parties. Management is of the opinion that resolution of
these matters will not have a material adverse effect on the consolidated
results of operation or financial position of the Company.
PCB (Polychlorinated Biphenyl) Assessment and Clean-up Programs. TETCO, a
wholly owned subsidiary of the Company, is currently conducting PCB assessment
and clean-up programs at certain of its compressor station sites under
conditions stipulated by a U.S. Consent Decree. The programs include on- and
off-site assessment, installation of on-site source control equipment and
groundwater monitoring wells, and on- and off-site clean-up work. TETCO expects
to complete these clean-up programs during 1998. Groundwater monitoring
activities will continue at several sites beyond 1998.
The Company has also identified environmental contamination at certain
sites on the PEPL and Trunkline systems and is undertaking clean-up programs at
these sites. The contamination resulted from the past use of lubricants
containing PCBs and the prior use of wastewater collection facilities and other
on-site disposal areas. Soil and sediment testing, to date, has detected no
significant off-site contamination. The Company has communicated with the
Environmental Protection Agency (EPA) and appropriate state regulatory agencies
on these matters. Environmental clean-up programs are expected to continue until
2002.
At December 31, 1997 and 1996, the Company had accrued liabilities for
remaining estimated clean-up costs on the TETCO, PEPL and Trunkline systems,
which were included in Environmental Clean-up Liabilities in the Consolidated
Balance Sheets. These cost estimates represent gross clean-up costs expected to
be incurred, have not been discounted or reduced by customer recoveries and do
not include fines, penalties or third-party claims. Costs expected to be
recovered from customers are included in the Consolidated Balance Sheets as of
December 31, 1997 and 1996, as Regulatory Assets and Deferred Debits.
In 1987, the Commonwealth of Kentucky instituted a suit in state court
against TETCO, alleging improper disposal of PCBs at TETCO's three compressor
station sites in Kentucky. This suit is still pending. In 1996, TETCO completed
clean-up of these sites under the U.S. Consent Decree.
The federal and state clean-up programs are not expected to interrupt or
diminish the Company's ability to deliver natural gas to customers. Based on the
Company's experience to date and costs incurred for clean-up operations,
management believes the resolution of matters relating to the environmental
issues discussed above will not have a material adverse effect on the
consolidated results of operations or financial position of the Company.
Air Quality Control. In 1994, the State of Missouri issued a Notice of
Violation to PEPL alleging violations of Missouri air pollution regulations at
the Company's Houstonia compressor station. The Company is in negotiations with
the State to resolve this matter. The State is seeking a penalty and correction
of the alleged violations.
In December 1997, the United Nations held negotiations in Kyoto, Japan to
determine how to achieve worldwide stabilization of greenhouse gas emissions,
including carbon dioxide emissions from fossil-fired generating facilities.
Because this matter is in the early stages of discussion, the Company cannot
estimate the effects on future consolidated results of operations or financial
position of the Company.
Litigation and Contingencies. For information concerning litigation and
other commitments and contingencies, see Note 11 to the Consolidated Financial
Statements, "Commitments and Contingencies."
Computer Systems Changes for the Year 2000. The Company is incurring
incremental costs to modify existing computer systems to accommodate the year
2000 and beyond. The Company is currently making modifications to its programs
and is of the opinion that remaining modifications will be completed before
significant problems related to the year 2000 arise. Management is of the
opinion that the costs associated with these modifications will not have a
material adverse effect on the consolidated results of operations or financial
position of the Company.
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Forward-Looking Statements. 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 actual results will not differ materially from those expressed or
implied by the forward-looking statements. The following are some of the factors
that could cause actual achievements and events to differ materially from those
expressed or implied in such forward-looking statements: state and federal
legislative and regulatory initiatives that affect cost and investment recovery,
have an impact on rate structures, and affect the speed and degree to which
competition enters the electric and natural gas industries; industrial,
commercial and residential growth in the service territories of the Company and
its subsidiaries; the weather and other natural phenomena; the timing and extent
of changes in commodity prices and interest rates; changes in environmental and
other laws and regulations to which the Company and its subsidiaries are subject
or other external factors over which the Company has no control; the results of
financing efforts; growth in opportunities for the Company's subsidiaries; and
the effect of the Company's accounting policies, in each case during the periods
covered by the forward-looking statements.
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Item 3. 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,
including its gathering systems, has 73 compressor stations. The TETCO system
connects with the PEPL and Trunkline systems in Lebanon, Ohio.
TETCO also owns and operates two offshore Louisiana gas supply systems,
which extend over 100 miles into the Gulf of Mexico and consist of 490 miles of
pipeline.
Algonquin's transmission system connects with TETCO's facilities in New
Jersey, and extends through New Jersey, New York, Connecticut, Rhode Island and
Massachusetts. The system consists of approximately 250 miles of pipeline with 6
compressor stations.
PEPL's transmission system, which consists of four large-diameter parallel
pipelines and 13 mainline compressor stations, extends a distance of
approximately 1,300 miles from producing areas in the Anadarko Basin of Texas,
Oklahoma and Kansas through the states of Missouri, Illinois, Indiana and Ohio
into Michigan.
Trunkline's transmission system extends approximately 1,400 miles from the
Gulf Coast areas of Texas and Louisiana through the states of Arkansas,
Mississippi, Tennessee, Kentucky, Illinois and Indiana to a point on the
Indiana-Michigan border. The system consists principally of three large-diameter
parallel pipelines and 18 mainline compressor stations.
Trunkline also owns and operates two offshore Louisiana gas supply systems
consisting of 337 miles of pipeline extending approximately 81 miles into the
Gulf of Mexico.
For information concerning natural gas storage properties, see "Business,
Natural Gas Transmission."
ENERGY SERVICES
For information regarding the properties of Field Services, see "Business,
Energy Services - Field Services."
Global Asset Development owns two LNG ships, each with a transportation
capacity of 125,000 cubic meters of LNG. Both vessels have been chartered to
Nigeria LNG Limited (Nigeria LNG) for 22 years starting in 1999. Under the terms
of the charter, Nigeria LNG will have the right to purchase the vessels.
Global Asset Development also owns a marine terminal, storage and
regasification facility for LNG located in Louisiana. The LNG facility has a
design output capacity of approximately 700 million cubic feet per day (MMcf/d)
and a storage capacity of approximately 1.8 million barrels, which approximates
6 Bcf.
Other generation, transmission and distribution properties of Global Asset
Development are owned primarily through joint ventures in which the Company's
ownership interest is 50% or less.
Properties of Trading and Marketing and Other Energy Services are not
considered material to the Company's operations as a whole.
OTHER OPERATIONS
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.
17
<PAGE>
Item 4. Security Ownership of Certain Beneficial Owners and Management.
Omitted.
Item 5. Directors and Executive Officers.
Omitted.
Item 6. Executive Compensation.
Omitted.
Item 7. Certain Relationships and Related Transactions.
Omitted.
Item 8. Legal Proceedings.
See Note 11 to the Consolidated Financial Statements, "Commitments and
Contingencies" and "Management's Discussion and Analysis of Results of
Operations and Financial Condition, Current Issues - Environmental" for a
discussion of material legal proceedings.
Item 9. Market Price of and Dividends on the 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 Common Stock. Dividends
on the Common Stock will be paid when declared by the Board of Directors. At
present, the Company has no plans to pay a dividend on the Common Stock.
Item 10. Recent Sales of Unregistered Securities.
None.
Item 11. Description of Registrant's Securities to be Registered.
The Company's Restated Certificate of Incorporation authorizes the issuance
of 3,000 shares of Common Stock without par value. As of December 31, 1997,
1,010 shares were issued and outstanding, all of which were duly and validly
issued and fully paid and nonassessable. Holders of Common Stock are entitled to
one vote for each share on all matters voted on by stockholders and, except as
otherwise required by law, the holders of such shares possess all voting power.
The Restated Certificate of Incorporation does not provide for cumulative voting
in the election of directors. Holders of Common Stock have no preemptive,
redemption or conversion rights and are not liable for further calls or
assessments. Holders of Common Stock are entitled to such dividends as may be
declared from time to time by the Board of Directors of the Company from funds
available therefor, and upon liquidation are entitled to receive pro rata all
assets of the Company available for distribution to such holders.
Item 12. Indemnification of Directors and Officers.
The Company's Restated Certificate of Incorporation provides that each
person who was or is made a party or is threatened to be made a party to or is
involved in any action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that such person, or a
person of whom such person is the legal representative, is or was a
18
<PAGE>
director or officer of the Company or is or was serving at the request of the
Company as a director, officer, employee or agent of another corporation or of a
partnership, joint venture, trust or other enterprise, including service with
respect to employee benefit plans, whether the basis of such proceeding is
alleged action in an official capacity as a director, officer employee or agent
or in any other capacity while serving as a director, officer, employee or
agent, will be indemnified and held harmless by the Company to the fullest
extent authorized by the Delaware General Corporation Law, as the same exists or
may hereafter be amended (but, in the case of any such amendment, only to the
extent that such amendment permits the Company to provide broader
indemnification rights than said law permitted the Company to provide prior to
such amendment), against all expense, liability and loss reasonably incurred or
suffered by such person in connection therewith. Such right to indemnification
includes the right to have the Company pay the expenses incurred in defending
any such proceeding in advance of its final disposition, subject to the
provisions of the Delaware General Corporation Law. Such rights are not
exclusive of any other right which any person may have or thereafter acquire
under any statute, provision of the Restated Certificate of Incorporation,
By-Law, agreement, vote of stockholders or disinterested directors or otherwise.
No repeal or modification of such provision will in any way diminish or
adversely affect the rights of any director, officer, employee or agent of the
Company thereunder in respect of any occurrence or matter arising prior to any
such repeal or modification. The Restated Certificate of Incorporation also
specifically authorizes the Company to maintain insurance and to grant similar
indemnification rights to employees or agents of the Company.
The Restated Certificate of Incorporation also provides that a director of
the Company will not be personally liable to the Company or its stockholders for
monetary damages for the breach of fiduciary duty as a director, except, if
required by the Delaware General Corporation Law as amended from time to time,
for liability (i) for any breach of the director's duty of loyalty to the
Company or the stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of the law, (iii)
under Section 174 of the Delaware General Corporation Law, which concerns
unlawful payments of dividends, stock purchases or redemptions, or (iv) for any
transaction from which the director derived an improper personal benefit.
Neither the amendment nor repeal of such provision will eliminate or reduce the
effect of such provision in respect of any matter occurring, or any cause of
action, suit or claim that, but for such provision, would accrue or arise prior
to such amendment or repeal.
While the Restated Certificate of Incorporation provides directors with
protection from awards for monetary damages for breaches of their duty of care,
it does not eliminate such duty. Accordingly, the Restated Certificate of
Incorporation will have no effect on the availability of equitable remedies such
as an injunction or rescission based on a director's breach of his or her duty
of care.
19
<PAGE>
Item 13. Financial Statements and Supplementary Data.
PART I. AUDITED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996
AND 1995
Independent Auditors' Report
Duke Capital Corporation:
We have audited the accompanying consolidated balance sheet of Duke
Capital Corporation (formerly Church Street Capital Corporation) and
subsidiaries (the Company) as of December 31, 1997 and the related
consolidated statements of income, common stockholder's equity, and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on the financial statements based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides 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,
1997, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
We previously audited and reported on the consolidated balance sheet of Church
Street Capital Corporation as of December 31, 1996 and the related consolidated
statements of income and retained earnings, and of cash flows for each of the
two years in the period then ended, prior to their restatment for the 1997
pooling of interests described in Note 1 to the consolidated financial
statements. The contribution of Church Street Capital Corporation and
subsidiaries to revenues and net income represented 3% and 10% for 1996 and 3%
and 13% for 1995 of the respective restated totals. Separate financial
statements of PanEnergy Corp and subsidiaries included in the restated
consolidated balance sheet as of December 31, 1996 and the related restated
consolidated statements of income, common stockholder's equity, and cash flows
for each of the two years in the period then ended, were audited and reported on
separately by other auditors. We also audited the combination of the
accompanying consolidated balance sheet as of December 31, 1996 and of the
related consolidated statments of income, common stockholder's equity, and cash
flows for each of the two years in the period then ended, after restatement for
the 1997 pooling of interests; in our opinion, such consolidated statements have
been properly combined on the basis described in Note 1 to the consolidated
financial statements.
/s/ Deloitte & Touche LLP
Charlotte, North Carolina
February 13, 1998
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
PanEnergy Corp:
We have audited the consolidated balance sheet of PanEnergy Corp and
Subsidiaries as of December 31, 1996, and the related consolidated statements
of income, common stockholders' equity, and cash flows for the year ended
December 31, 1996 and 1995 (not presented herein). These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of PanEnergy
Corp and Subsidiaries as of December 31, 1996 and the results of their
operations and their cash flows for the years ended December 31, 1996 and 1995
in conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
----------------------------------------
Houston, Texas
January 16, 1997
20
<PAGE>
DUKE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In millions)
<TABLE>
<CAPTION>
Years Ended December 31
--------------------------------------------
1997 1996 1995
--------------------------------------------
<S> <C> <C> <C>
Operating Revenues
Natural gas and petroleum products
Sales, trading and marketing of natural gas
and petroleum products $ 8,150.7 $ 5,848.0 $ 3,397.2
Transportation and storage of natural gas 1,503.5 1,522.9 1,500.6
Trading and marketing of electricity 1,664.9 77.8 9.8
Other 595.7 367.4 280.1
--------- --------- ---------
Total operating revenues 11,914.8 7,816.1 5,187.7
--------- --------- ---------
Operating Expenses
Natural gas and petroleum products purchased 7,705.2 5,414.3 3,119.3
Purchased power 1,658.1 78.1 11.9
Other operation and maintenance 1,278.7 1,061.5 890.6
Depreciation and amortization 342.0 308.5 285.0
Property and other taxes 95.0 84.4 87.1
--------- --------- ---------
Total operating expenses 11,079.0 6,946.8 4,393.9
--------- --------- ---------
Operating Income 835.8 869.3 793.8
--------- --------- ---------
Other Income and Expenses
Allowance for funds used during construction 3.0 1.9 3.7
Other, net 33.7 18.2 14.3
--------- --------- ---------
Total other income and expenses 36.7 20.1 18.0
--------- --------- ---------
Earnings Before Interest and Taxes 872.5 889.4 811.8
Interest Expense 214.2 232.1 239.5
Minority Interests 21.4 6.2 --
--------- --------- ---------
Earnings Before Income Taxes 636.9 651.1 572.3
Income Taxes 256.6 252.1 224.2
--------- --------- ---------
Income Before Extraordinary Item 380.3 399.0 348.1
Extraordinary Item (net of tax) -- 16.7 --
--------- --------- ---------
Net Income $ 380.3 $ 382.3 $ 348.1
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
21
<PAGE>
DUKE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
<TABLE>
<CAPTION>
Years Ended December 31
-------------------------------------------
1997 1996 1995
-------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 380.3 $ 382.3 $ 348.1
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 349.5 325.9 302.0
Deferred income taxes 132.5 103.6 116.4
Extraordinary item, net of tax -- 16.7 --
Natural gas transition cost recoveries (35.6) 90.9 (85.2)
(Increase) Decrease in
Receivables (240.8) (648.4) (169.0)
Inventory (11.4) 4.6 (11.7)
Other current assets (6.0) 10.8 95.0
Increase (Decrease) in
Accounts payable 197.8 582.0 40.8
Taxes accrued 32.8 14.7 17.4
Interest accrued (9.0) (9.4) 4.1
Other current liabilities (45.6) (6.9) (4.6)
Other, net (46.1) 65.3 (80.3)
-------- -------- --------
Net cash provided by operating activities 698.4 932.1 573.0
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (613.8) (788.1) (523.0)
Investment expenditures (673.4) (173.0) (96.9)
Proceeds from sales and other 108.6 96.1 78.6
-------- -------- --------
Net cash used in investing activities (1,178.6) (865.0) (541.3)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issuance of
Long-term debt 947.6 327.6 259.8
Common stock 6.0 11.8 16.5
Payments for the redemption of long term debt (200.2) (523.9) (335.3)
Net change in notes payable and commercial paper (221.4) 209.1 145.0
Capital contributions from parent -- 65.0 --
Dividends paid (82.6) (142.5) (149.5)
Other, net (26.3) (15.6) (2.0)
-------- -------- --------
Net cash provided by (used in) financing activities 423.1 (68.5) (65.5)
-------- -------- --------
Net decrease in cash and cash equivalents (57.1) (1.4) (33.8)
Cash and cash equivalents at beginning of year 151.4 152.8 186.6
-------- -------- --------
Cash and cash equivalents at end of year $ 94.3 $ 151.4 $ 152.8
======== ======== ========
Supplemental Disclosures
Cash paid for interest (net of amounts capitalized) $ 222.4 $233.0 $230.6
Cash paid for income taxes $112.1 $ 85.8 $ 89.8
</TABLE>
See Notes to Consolidated Financial Statements.
22
<PAGE>
DUKE CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions)
<TABLE>
<CAPTION>
December 31
-----------------------
1997 1996
-----------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 94.3 $ 151.4
Receivables 1,621.4 1,254.3
Inventory 182.4 171.0
Current portion of natural gas transition costs 66.9 67.9
Unrealized gains on mark to market transactions 551.3 397.2
Other 140.0 134.0
--------- ---------
Total current assets 2,656.3 2,175.8
--------- ---------
Investments and Other Assets
Investments in affiliates 685.9 502.9
Pre-funded pension costs 302.6 280.6
Goodwill, net 503.6 222.1
Notes receivable 239.6 63.5
Other 155.2 90.3
--------- ---------
Total investments and other assets 1,886.9 1,159.4
--------- ---------
Property, Plant and Equipment
Cost 9,696.5 9,189.0
Less accumulated depreciation and amortization 3,631.3 3,388.3
--------- ---------
Net property, plant and equipment 6,065.2 5,800.7
--------- ---------
Regulatory Assets and Deferred Debits
Debt expense 65.6 74.2
Regulatory asset related to income taxes 16.9 4.5
Natural gas transition costs 193.7 250.0
Environmental clean-up costs 103.6 153.2
Other 108.6 133.9
--------- ---------
Total regulatory assets and deferred debits 488.4 615.8
--------- ---------
Total Assets $11,096.8 $ 9,751.7
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
23
<PAGE>
DUKE CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions)
<TABLE>
<CAPTION>
December 31
----------------------------
1997 1996
----------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Accounts payable $ 1,338.2 $ 996.1
Notes payable and commercial paper 137.7 359.1
Taxes accrued 119.3 86.5
Interest accrued 50.7 59.7
Current portion of natural gas transition liabilities 35.0 84.4
Current portion of environmental clean-up liabilities 26.4 32.4
Current maturities of long-term debt 22.5 175.1
Unrealized losses on mark to market transactions 537.8 388.5
Other 329.5 375.1
--------- ---------
Total current liabilities 2,597.1 2,556.9
--------- ---------
Long-term Debt 2,918.8 2,028.2
--------- ---------
Deferred Credits and Other Liabilities
Deferred income taxes 1,363.9 1,226.9
Natural gas transition liabilities 78.4 121.9
Environmental clean-up liabilities 157.6 188.9
Other 447.3 485.3
--------- ---------
Total deferred credits and other liabilities 2,047.2 2,023.0
--------- ---------
Minority Interests 168.3 83.4
--------- ---------
Commitments and Contingencies
Common Stockholder's Equity
Common stock, no par, 3,000 shares authorized;
1,010 shares outstanding -- --
Paid-in-capital 2,765.5 2,744.7
Retained earnings 599.9 315.5
--------- ---------
Total common stockholder's equity 3,365.4 3,060.2
--------- ---------
Total Liabilities and Stockholder's Equity $11,096.8 $ 9,751.7
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
24
<PAGE>
DUKE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
(In millions)
<TABLE>
<CAPTION>
Years Ended December 31
----------------------------------------------------
1997 1996 1995
----------------------------------------------------
<S> <C> <C> <C>
Common Stock
Balance at beginning of year $ -- $ -- $ --
-------- -------- ---------
Balance at end of year -- -- --
-------- -------- ---------
Paid-in-Capital
Balance at beginning of year 2,744.7 2,656.6 2,618.6
Dividend reinvestment and employee benefits 6.7 23.1 18.5
Capital infusion from parent 9.9 65.0 17.0
Other capital stock transactions, net 4.2 -- 2.5
-------- -------- -------
Balance at end of year 2,765.5 2,744.7 2,656.6
-------- -------- -------
Retained Earnings
Balance at beginning of year 315.5 75.7 (122.9)
Net income 380.3 382.3 348.1
Dividends declared (82.6) (142.5) (149.5)
Other capital stock transactions, net (13.3) -- --
-------- -------- -------
Balance at end of year 599.9 315.5 75.7
-------- -------- -------
Total Common Stockholder's Equity $3,365.4 $3,060.2 $2,732.3
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
25
<PAGE>
Duke Capital Corporation
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1997, 1996 and 1995
NOTE 1. NATURE OF OPERATIONS
Duke Capital Corporation (the Company) (formerly Church Street Capital Corp.) is
a wholly owned subsidiary of Duke Energy Corporation (Duke Energy). On June 18,
1997, Duke Power Company (Duke Power) changed its name to Duke Energy
Corporation in accordance with the terms of a merger agreement with PanEnergy
Corp (PanEnergy), pursuant to which PanEnergy became a wholly owned subsidiary
of Duke Energy (the merger). Subsequently, the common stock of PanEnergy was
contributed by Duke Energy to the Company, which served as the parent company of
Duke Energy's non-utility operations under the name Church Street Capital Corp.
The combination of the Company and PanEnergy was accounted for as a pooling of
interests and, accordingly, the consolidated financial statements for periods
prior to the combination were restated to include the operations of PanEnergy.
Operating revenues and net income previously reported by the separate companies
and the combined amounts presented in the accompanying consolidated financial
statements for the years ended December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
Duke Capital
In Millions Corporation PanEnergy Adjustments Combined
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996
Operating revenues $ 271.7 $ 7,505.6 $ 38.8 $ 7,816.1
Net income before extraordinary item 37.9 361.1 -- 399.0
Net income 37.9 344.4 -- 382.3
1995
Operating revenues $ 169.6 $ 4,967.5 $ 50.6 $ 5,187.7
Net income 44.5 303.6 -- 348.1
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The adjustment to operating revenues reflects a reclassification of PanEnergy's
equity in earnings of unconsolidated affiliates from other income to revenues to
be consistent with the Company's financial statement presentation.
The Company provides financing and credit enhancement services for its
subsidiaries. The Company conducts its operating activities through its
three business segments:
Natural Gas Transmission - Interstate transportation and storage of natural gas
for customers in the Mid-Atlantic, New England and Midwest states. The
interstate natural gas transmission and storage operations of the Company's
wholly owned subsidiaries Texas Eastern Transmission Corporation (TETCO),
Algonquin Gas Transmission Company (Algonquin), Panhandle Eastern Pipe Line
Company (PEPL), and Trunkline Gas Company (Trunkline) are subject to the rules
and regulations of the Federal Energy Regulatory Commission (FERC).
Energy Services - Comprised of several separate business units: Field Services -
gathers and processes natural gas, produces and markets natural gas liquids and
transports and trades crude oil; Trading and Marketing - markets natural gas,
electricity and other energy-related products; Global Asset Development -
develops, owns and operates energy-related facilities worldwide; and Other
Energy Services - provides engineering consulting, construction and integrated
energy solutions.
Other Operations - Includes the real estate operations of Crescent Resources,
Inc. and the communications services of DukeNet Communications, Inc., wholly
owned subsidiaries of the Company. Corporate costs and intersegment eliminations
are also reflected in the financial results of this segment.
26
<PAGE>
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation. The consolidated financial statements reflect consolidation of
all of the Company's majority owned subsidiaries after the elimination of
intercompany transactions. Investments in other entities that are not majority
owned and where the Company has significant influence over operations are
accounted for using the equity method.
The consolidated financial statements are prepared in conformity with generally
accepted accounting principles appropriate in the circumstances to reflect in
all material respects the substance of events and transactions which should be
included. In preparing these statements, management makes informed judgments and
estimates of the expected effects of events and transactions that are currently
being reported. However, actual results could differ from these estimates.
Consolidated Statements of Cash Flows. All liquid investments with maturities at
date of purchase of three months or less are considered cash equivalents.
Cash flows from investing activities include investments in real estate
development projects. Proceeds from the sale of residential real estate
development projects are included in cash flows from operating activities.
Proceeds from the sale of commercial real estate development projects are
included in cash flows from investing activities.
Inventory. Inventory consists primarily of materials and supplies, and gas held
for transmission, processing and sales commitments. Inventory is recorded at the
lower of cost or market, primarily using the average cost method.
Commodity Derivative Instruments. The Company, primarily through its
subsidiaries, holds and issues instruments that reduce exposure to market
fluctuations in the price and transportation costs of natural gas, petroleum
products and electric power marketed. The Company uses futures, swaps and
options to manage and hedge price and location risk related to market exposures.
In order to qualify as a hedge, the price movements in the commodity derivatives
must be highly correlated with the underlying hedged commodity. Gains and losses
related to commodity derivatives which qualify as hedges of commodity
commitments are recognized in income when the underlying hedged physical
transaction closes (the deferral method) and are included in Natural Gas and
Petroleum Products Purchased or Purchased Power in the Consolidated Statements
of Income. Gains and losses related to such instruments, to the extent not yet
settled in cash, are reported as Current Assets or Liabilities, as appropriate,
in the Consolidated Balance Sheets until recognized in income. If the derivative
instrument 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.
In addition to non-trading activities, the Company also engages in the trading
of commodity derivatives and therefore experiences net open positions. Gains and
losses on derivatives utilized for trading are recognized in income on a current
basis (the mark to market method) and are also included in Natural Gas and
Petroleum Products Purchased or Purchased Power in the Consolidated Statements
of Income.
Goodwill Amortization. The Company amortizes goodwill related to the purchases
of Duke/Louis Dreyfus, L.L.C. (D/LD) and Texas Eastern Corporation (TEC), and
certain other natural gas gathering, transmission and processing facilities and
engineering consulting businesses on a straight-line basis over 10 years, 40
years, and 15 years, respectively. Accumulated amortization of goodwill at
December 31, 1997 and 1996 was $123.6 million and $99.7 million, respectively.
Property, Plant and Equipment. Property, plant and equipment is stated at
original cost. The Company capitalizes all construction-related direct labor and
materials, as well as indirect construction costs. Indirect costs include
general engineering, taxes and the cost of money. The cost of renewals and
betterments that extend the useful life of property is also capitalized. The
cost of repairs and replacements is charged to expense. Depreciation is
generally computed using the straight-line method. The Company's composite
weighted-average depreciation rates, were 3.50, 3.37 and 3.33 percent for 1997,
1996 and 1995, respectively.
At the time property, plant and equipment maintained by the Company's regulated
operations are retired, the original cost plus the cost of retirement, less
salvage, is charged to accumulated depreciation and amortization. When entire
regulated operating units are sold or non-regulated properties are retired or
sold, the property and related accumulated depreciation and amortization
accounts are reduced and any gain or loss is recorded in income, unless
otherwise required by the FERC.
27
<PAGE>
Unamortized Debt Premium, Discount and Expense. Expenses incurred in connection
with the issuance of presently outstanding long-term debt, and premiums and
discounts relating to such debt, are amortized over the terms of the respective
issues.
Also, 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 these items.
Environmental Expenditures. Expenditures that relate to an existing condition
caused by past operations, and do not contribute to current or future revenue
generation, are expensed. Environmental expenditures relating to current or
future revenues are expensed or capitalized as appropriate. Liabilities are
recorded when environmental assessments and/or clean-ups are probable and the
costs can be reasonably estimated. Certain of these environmental assessments
and clean-up costs have been deferred and are included in Regulatory Assets and
Deferred Debits as they are expected to be recovered from Natural Gas
Transmission customers.
Cost-Based Regulation. The regulated operations of the Company are subject to
the provisions of Statement of Financial Accounting Standards (SFAS) No. 71,
"Accounting for the Effects of Certain Types of Regulation." Accordingly, the
Company records certain assets and liabilities that result from the effects of
the ratemaking process that would not be recorded under generally accepted
accounting principles for non-regulated entities. The regulatory assets and
regulatory liabilities of the Company are classified as Regulatory Assets and
Deferred Debits and Deferred Credits and Other Liabilities, respectively, in the
Consolidated Balance Sheets. The Company regularly evaluates the continued
applicability of SFAS No. 71, considering such factors as the impact of
competition and necessity to discount cost based rates charged to customers.
Increased competition might require entities to reduce their asset balances to
reflect a market basis less than cost and would also require entities to write
off their associated regulatory assets. Management cannot predict the potential
impact, if any, of increased competition on the Company's future
financial position and results of operations. However, the Company
continues to position itself to effectively meet these challenges by
maintaining prices that are competitive.
Revenues. The Company recognizes revenues on transportation and storage of
natural gas as service is provided and on sales of natural gas and petroleum
products in the period of delivery. When rate cases associated with the
transportation of natural gas are pending final FERC approval, a portion of the
revenues collected by the interstate natural gas pipelines is subject to
possible refund. The Company has established reserves where required for such
cases.
The Company recognizes revenues from engineering and consulting services
provided through costs plus fee contracts based on the costs incurred during the
period plus a pro rata portion of the total fee earned. Revenues from services
provided through fixed price contracts are recognized using the
percentage-of-completion method, primarily based on contract costs to date
compared with the total estimated contract costs.
The Company recognizes profits from sales of residential real estate development
projects at closing. Profit is recognized under the accrual method using
estimates of average gross profit per developed lot within the project based on
total estimated project costs. Gains on commercial real estate development
projects are recognized under the accrual method. Gains on land trades are
recognized based on the fair market value of the land received, adjusted for any
cash consideration, as compared to the cost of the land traded.
Allowance for Funds Used During Construction (AFUDC). AFUDC represents the
estimated debt and equity costs of capital funds necessary to finance the
construction of new regulated facilities. AFUDC is a non-cash item and is
recognized as a cost of Property, Plant and Equipment, with offsetting credits
to Other Income and Expenses and to Interest Expense. After construction is
completed, the Company is permitted to recover these costs, including a fair
return, through their inclusion in rate base and in the provision for
depreciation.
Rates used for capitalization of deferred returns and AFUDC by the Company's
regulated operations are calculated in compliance with FERC rules.
Income Taxes. Prior to the merger, Duke Power and PanEnergy filed separate
consolidated federal income tax returns. Subsequent to the merger, Duke Energy
and its subsidiaries file a consolidated federal income tax return. Federal
income taxes
28
<PAGE>
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.
Reclassifications. Certain amounts have been reclassified in the consolidated
financial statements to conform to the current presentation.
NOTE 3. BUSINESS COMBINATIONS AND ACQUISITIONS
Duke/Louis Dreyfus, L.L.C. (D/LD). On June 17, 1997, the Company acquired the
remaining 50% ownership interest in D/LD from affiliates of Louis Dreyfus Corp.
for $247 million. D/LD markets electric power, natural gas and energy-related
services to utilities, municipalities and other large energy users in North
America. The acquisition was accounted for by the purchase method, and the
assets and liabilities and results of operations of D/LD have been consolidated
in the Company's financial statements since the date of purchase. The purchase
price substantially represents goodwill.
Duke/UAE L.L.C. During December 1997, a wholly owned subsidiary of the Company
formed a joint venture with UAE Ref-Fuel L.L.C. (UAE), a wholly owned subsidiary
of United American Energy Corp. The Company owns a 65% interest in the joint
venture, with UAE owning a 35% minority interest. The joint venture acquired a
50% ownership interest in American Ref-Fuel Company, a waste-to-energy firm with
operations primarily in New York and New Jersey. Thus, the Company has an
indirect 32.5% ownership interest in American Ref-Fuel Company and provided $237
million of investment and financing to the venture.
Duke Energy Trading and Marketing, L.L.C. On August 1, 1996, a wholly owned
subsidiary of the Company formed a natural gas and power marketing joint venture
with Mobil Corporation (Mobil) affiliates. The marketing company (DETM) conducts
business as Duke Energy Trading and Marketing, L.L.C. (formerly PanEnergy
Trading and Market Services, L.L.C.) in the United States and as Duke Energy
Marketing L.P. (formerly PanEnergy Marketing L.P.) in Canada. The Company
operates the joint venture and owns a 60% interest, with Mobil owning a 40%
minority interest.
29
<PAGE>
NOTE 4. BUSINESS SEGMENTS
Business segment financial information follows for each of the three years in
the period ended December 31, 1997. Other Operations include intersegment
eliminations.
<TABLE>
<CAPTION>
Earnings
Before
Unaffiliated Intersegment Total Operating Interest Depreciation &
In Millions Revenues Revenues Revenues Income & Taxes Amortization
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997
Natural Gas Transmission $ 1,467.8 $ 104.3 $ 1,572.1 $ 607.7 $ 624.4 $ 229.6
Energy Services
Trading and Marketing 7,411.0 77.7 7,488.7 42.7 44.4 7.0
Field Services 2,480.5 574.1 3,054.6 156.7 157.0 71.4
Global Asset Development 109.2 14.2 123.4 (6.4) 4.5 8.7
Other Energy Services 342.8 32.8 375.6 23.2 18.2 5.8
Energy Services' Eliminations -- (655.1) (655.1) -- -- --
---------------------------------------------------------------------------------------
Total Energy Services 10,343.5 43.7 10,387.2 216.2 224.1 92.9
Other Operations 103.5 (148.0) (44.5) 11.9 24.0 19.5
---------------------------------------------------------------------------------------
Total Consolidated $11,914.8 $ -- $11,914.8 $ 835.8 $ 872.5 $ 342.0
- ------------------------------------------------------------------------------------------------------------------------------------
1996
Natural Gas Transmission $ 1,470.2 $ 86.1 $ 1,556.3 $ 583.8 $ 595.5 $ 228.2
Energy Services
Trading and Marketing 3,773.5 40.5 3,814.0 56.3 57.9 3.8
Field Services 2,215.6 420.9 2,636.5 149.4 151.6 58.7
Global Asset Development 65.0 6.6 71.6 (1.2) -- 6.9
Other Energy Services 182.8 21.4 204.2 19.9 20.0 3.5
Energy Services' Eliminations -- (456.5) (456.5) -- -- --
---------------------------------------------------------------------------------------
Total Energy Services 6,236.9 32.9 6,269.8 224.4 229.5 72.9
Other Operations 109.0 (119.0) (10.0) 61.1 64.4 7.4
---------------------------------------------------------------------------------------
Total Consolidated $ 7,816.1 $ -- $ 7,816.1 $ 869.3 $ 889.4 $ 308.5
- ------------------------------------------------------------------------------------------------------------------------------------
1995
Natural Gas Transmission $ 1,480.3 $ 53.1 $ 1,533.4 $ 562.3 $ 567.6 $ 228.5
Energy Services
Trading and Marketing 1,838.3 28.4 1,866.7 20.0 17.1 2.3
Field Services 1,607.1 184.3 1,791.4 96.8 106.1 40.3
Global Asset Development 75.3 4.0 79.3 24.9 26.8 6.8
Other Energy Services 94.5 0.8 95.3 23.6 23.7 0.8
Energy Services' Eliminations -- (216.9) (216.9) -- -- --
---------------------------------------------------------------------------------------
Total Energy Services 3,615.2 0.6 3,615.8 165.3 173.7 50.2
Other Operations 92.2 (53.7) 38.5 66.2 70.5 6.3
---------------------------------------------------------------------------------------
Total Consolidated $ 5,187.7 $ -- $ 5,187.7 $ 793.8 $ 811.8 $ 285.0
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
In Millions Capital and Investment Expenditures Identifiable Assets
- ----------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Natural Gas Transmission $ 247.3 $ 194.0 $ 230.5 $ 5,088.9 $ 5,216.4
Energy Services
Trading and Marketing 17.9 6.6 15.3 1,857.3 1,403.5
Field Services 156.5 530.8 187.2 1,979.8 1,769.4
Global Asset Development 348.3 34.8 53.5 987.6 522.3
Other Energy Services 47.2 39.1 1.0 223.2 130.1
Energy Services' Eliminations -- -- -- (169.1) (247.0)
-------------------------------------------------------------------------
Total Energy Services 569.9 611.3 257.0 4,878.8 3,578.3
Other Operations 470.0 155.8 132.4 1,129.1 957.0
-------------------------------------------------------------------------
Total Consolidated $ 1,287.2 $ 961.1 $ 619.9 $11,096.8 $ 9,751.7
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 5. REGULATORY MATTERS
FERC Order 636 and Natural Gas Transition Costs. The Company's interstate
natural gas pipelines primarily provide transportation and storage services
pursuant to FERC Order 636. Order 636 allows pipelines to recover eligible costs
resulting from implementation of the order (transition costs). In 1994, the FERC
approved TETCO's settlement resolving regulatory issues related primarily to
Order 636 transition costs and a number of other issues related to services
prior to Order 636. TETCO's liability for transition costs is estimated based on
the amount of producers' natural gas reserves and other factors. TETCO's final
and nonappealable settlement provides for the recovery of certain of these
transition costs from customers through volumetric and reservation charges
through 2002 and beyond, if necessary. Pursuant to the settlement, TETCO will
absorb a certain portion of the transition costs, the amount of which continues
to be subject to change dependent upon natural gas prices and deliverability
levels. In 1995, based upon producers' discoveries of additional natural gas
reserves, TETCO increased the estimated liabilities for transition costs by
$125.8 million. Under the terms of the existing settlement, regulatory assets
were increased $85.8 million for amounts expected to be collected from customers
and TETCO recognized a $40 million charge to operating expenses ($26 million
after tax).
On July 16, 1996, the U.S. Court of Appeals for the District of Columbia upheld,
in general, all aspects of Order 636 and remanded certain issues for further
explanation. One of the issues remanded for further explanation is whether
pipelines should be entitled to recover 100% of gas supply realignment (GSR)
costs. On February 27, 1997, FERC issued an order reaffirming the right of
interstate pipelines to recover 100% of GSR costs. This matter is
substantially mitigated by TETCO's transition cost settlements.
The Company believes the exposure associated with gas purchase contract
commitments is substantially mitigated by transition cost recoveries pursuant to
customer settlements, Order 636 and other mechanisms, and that this issue will
not have a material adverse effect on the consolidated results of operations or
financial position of the Company.
Jurisdictional Transportation and Sales Rates.. On April 1, 1992 and November 1,
1992, PEPL placed into effect, subject to refund, general rate increases. On
February 26, 1997, the FERC approved PEPL's settlement agreement which provided
final resolution of refund matters and established prospective rates. The
agreement terminated other actions relating to these proceedings as well as
PEPL's restructuring of rates and transition cost recoveries related to FERC
Order 636. The settlement will not have a material impact on future operating
revenues or financial position of the Company.
As a result of the resolution of these and certain other proceedings, PEPL
refunded $37.8 million to customers in 1997 and recorded earnings before
interest and taxes of $32.7 million, $8 million, and $20.6 million in 1997, 1996
and 1995, respectively.
31
<PAGE>
NOTE 6. INCOME TAXES
Income tax expense as presented in the Consolidated Statements of Income is
summarized as follows:
In Millions 1997 1996 1995
- --------------------------------------------------------------------------------
Current income taxes
Federal $ 95.7 $ 122.5 $ 89.7
State 28.4 26.0 18.1
-------------------------------
Total current income taxes 124.1 148.5 107.8
-------------------------------
Deferred income taxes, net
Federal 122.2 90.1 97.8
State 10.3 13.5 18.6
-------------------------------
Total deferred income taxes, net 132.5 103.6 116.4
-------------------------------
Total income tax expense $ 256.6 $ 252.1 $ 224.2
- --------------------------------------------------------------------------------
Total income tax differs from the amount computed by applying the federal income
tax rate of 35% to income before income taxes. The reasons for this difference
are as follows:
<TABLE>
<CAPTION>
In Millions 1997 1996 1995
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax, computed at the statutory rate $ 222.9 $ 227.8 $ 200.3
Adjustments resulting from:
State income tax, net of federal income tax effect 25.0 25.7 23.8
Other items, net 8.7 (1.4) 0.1
------------------------------
Total income tax expense $ 256.6 $ 252.1 $ 224.2
- -------------------------------------------------------------------------------------
Effective tax rate 40.3% 38.7% 39.2%
</TABLE>
The tax effects of temporary differences that resulted in deferred income tax
assets and liabilities, and a description of the significant items that created
these differences as of December 31, 1997 and 1996, are as follows:
<TABLE>
<CAPTION>
In Millions 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Deferred credits and other liabilities $ 286.6 $ 321.4
Alternative minimum tax credit carryforward 30.3 72.6
Other 7.7 --
---------------------
Total deferred income tax assets 324.6 394.0
Valuation allowance and other tax reserves (146.1) (141.1)
---------------------
Net deferred income tax assets 178.5 252.9
---------------------
Investments and other assets (130.3) (91.1)
Prefunded pension cost (105.9) (98.2)
Property, plant and equipment (1,007.0) (961.4)
Regulatory assets and deferred debits (135.3) (119.5)
Natural gas transition costs (67.8) (87.5)
Other -- (31.3)
---------------------
Total deferred income tax liabilities (1,446.3) (1,389.0)
---------------------
State deferred income tax, net of federal tax effect (96.1) (90.8)
---------------------
Net deferred income tax liability $(1,363.9) $(1,226.9)
- --------------------------------------------------------------------------------
</TABLE>
The alternative minimum tax credit carryforward can be carried forward
indefinitely.
In 1990, PanEnergy established a provision for certain tax issues related to the
purchase of TEC, which resulted in an increase in goodwill and deferred income
tax liability. Following discussions with the Internal Revenue Service,
PanEnergy revised its estimates in 1995 and 1996 with respect to these issues.
As a result, the related goodwill and deferred income tax liability were reduced
by approximately $40 million and $100 million in 1996 and 1995, respectively. If
tax benefits relating to the valuation allowance for deferred income tax assets
and other tax reserves are recognized subsequent to December 31, 1997,
approximately $29.4 million will be allocated as an adjustment to goodwill.
NOTE 7. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Financial Instruments. In 1996, TETCO received $98.6 million from the financing
of the right to collect certain Order 636 natural gas transition costs, with
limited recourse. At December 31, 1997 and 1996, $52.8 million and $87.3
million, respectively, remained outstanding related to the transition cost
recovery rights and were included in Other Current
32
<PAGE>
Liabilities in the Consolidated Balance Sheets. In the opinion of management,
the probability that the Company will be required to perform under the recourse
provisions is remote.
During 1997, the Company terminated its agreement to sell accounts receivable,
which was entered into in 1996. Also in 1997, the LNG settlement receivables
sale agreement, which was entered into in 1993, expired, as all the receivables
were collected. Amounts outstanding at December 31, 1996 under these agreements
were $100 million and $29.9 million, respectively.
Fair Value of Financial Instruments. The Company's financial instruments include
$2,941.3 million and $2,203.3 million of long-term debt with an approximate fair
value of $3,078.7 million and $2,344 million as of December 31, 1997 and 1996,
respectively. The majority of these estimated fair value amounts of long-term
debt were obtained from independent parties. Judgment is required in
interpreting market data to develop the estimates of fair value. Accordingly,
the estimates determined as of December 31, 1997 and 1996 are not necessarily
indicative of the amounts the Company could have realized in current market
exchanges.
The fair value of cash and cash equivalents, notes receivable, and notes payable
and commercial paper are not materially different from their carrying amounts
because of the short-term nature of these instruments or the stated rates
approximating market rates.
The following financial instruments have no book value associated with them and
there are no fair values readily determinable since quoted market prices are not
available: guarantees made to affiliates or recourse provisions from affiliates
and sales agreements for trade accounts receivables, LNG project settlement and
Order 636 natural gas transition cost recovery.
Commodity Derivative Instruments. At December 31, 1997 and 1996, the Company
held or issued several instruments that reduce exposure to market fluctuations
relative to price and transportation costs of natural gas, electricity and
petroleum products. The Company's market exposure, primarily within DETM and
D/LD, arises from natural gas storage inventory balances and fixed-price
purchase and sale commitments that extend for periods of up to 9 years. The
Company uses futures, swaps and options to manage and hedge price and location
risk related to these market exposures.
DETM and D/LD also provide risk management services to their customers through a
variety of energy commodity instruments, including forward contracts involving
physical delivery of an energy commodity, energy commodity futures,
over-the-counter swap agreements and options. In addition to hedging activities,
the Company also engages in the trading of such instruments, and therefore
experiences net open positions. The Company manages open positions with strict
policies which limit its exposure to market risk and require daily reporting to
management of potential financial exposure. These policies include statistical
risk tolerance limits using historical price movements to calculate a daily
earnings at risk as well as a total Value-at-Risk (VAR) measurement. The
weighted-average life of the Company's commodity risk portfolio was
approximately 7 months at December 31, 1997.
Energy commodity futures involve the buying or selling of natural gas,
electricity or other energy-related commodities at a fixed price.
Over-the-counter swap agreements require the Company to receive or make payments
based on the difference between a specified price and the actual price of the
underlying commodity. The Company uses futures and swaps to manage margins on
underlying fixed-price purchase or sale commitments for physical quantities of
natural gas, electricity and other energy-related commodities. Energy commodity
options held to mitigate price risk provide the right, but not the requirement,
to buy or sell energy-related commodities at a fixed price. The Company utilizes
options to manage margins and to limit overall price risk exposure. DETM and
D/LD account for these activities using the mark to market method of accounting.
At December 31, 1997 and 1996, the Company had outstanding futures, swaps and
options for an absolute notional contract quantity of 4,810 billion cubic feet
(Bcf) and 3,425 Bcf of natural gas, respectively, some of which were in place to
offset the risk of price fluctuations under fixed-price commitments for
purchasing and delivering natural gas. At December 31, 1997 and 1996,
outstanding futures, swaps and options related to electric contracts and other
energy-related commodities were not material. The gains, losses and costs
related to those commodity instruments that qualify as a hedge are not
recognized until the underlying physical transaction occurs. At December 31,
1997 and 1996, the Company had current unrecognized net gains of $13.5 million
and $8.7 million, respectively, related to commodity instruments. The fair value
of energy commodity swaps held at December 31, 1997 was a liability of $158.6
million.
33
<PAGE>
During 1997, 1996 and 1995, the Company recognized net gains of $33.6 million,
$25.4 million, and $10.5 million, respectively, from trading activities. The
values of energy commodity futures, swaps and options held for trading purposes
were as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------- --------------------------
In Millions Assets Liabilities Assets Liabilities
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fair value at year end $1,626 $1,470 $833 $941
Notional amount at year end 2,009 1,825 407 530
Average fair value for the year 595 700 588 653
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Market and Credit Risk. New York Mercantile Exchange (Exchange) traded futures
and option contracts are guaranteed by the Exchange and have nominal credit
risk. On all other transactions described above, the Company is exposed to
credit risk in the event of nonperformance by the counterparties. For each
counterparty, the Company analyzes the financial condition prior to entering
into an agreement, establishes credit limits and monitors the appropriateness of
these limits on an ongoing basis. The change in market value of Exchange-traded
futures and options contracts requires daily cash settlement in margin accounts
with brokers. Swap contracts and most other over-the-counter instruments are
generally settled at the expiration of the contract term and may be subject to
margin requirements with the counterparty.
NOTE 8. INVESTMENT IN AFFILIATES
Certain investments, where the Company's ownership in domestic and international
affiliates is 50 percent or less, are accounted for by the equity method. These
investments include undistributed earnings of $20.6 million in 1997 and $49.7
million in 1996. The Company's proportionate share of net income from these
affiliates for the years ended December 31, 1997, 1996 and 1995 was $38.4
million, $32.7 million, and $59.8 million, respectively. These amounts are
reflected in Other Operating Revenues in the Consolidated Statements of Income.
Investment in affiliates as of December 31, 1997 and 1996 includes the
following:
In Millions 1997 1996
- --------------------------------------------------------------------------------
Natural Gas Transmission - domestic $ 67.5 $ 46.5
-------------------------
Energy Services
Field Services - domestic 159.8 129.6
Global Asset Development
Domestic 174.5 14.5
International 207.8 183.5
Other Energy Services
Domestic 15.9 49.5
International 9.7 1.4
-------------------------
Total Energy Services 567.7 378.5
-------------------------
Other Operations
Domestic 38.1 65.3
International 12.6 12.6
-------------------------
Total Other Operations 50.7 77.9
-------------------------
Total Investments in Affiliates $685.9 $502.9
- --------------------------------------------------------------------------------
Natural Gas Transmission. Investments primarily include ownership interests in
natural gas pipeline joint ventures which transport gas from Canada to the
United States.
Field Services. Among other investments, Field Services holds an interest in a
partnership which owns natural gas gathering systems in the Gulf of Mexico, a
master limited partnership that owns and operates a petroleum pipeline, and a
joint venture that provides gathering, processing and marketing services for
natural gas producers in Oklahoma.
Global Asset Development. Global Asset Development has investments in various
natural gas and electric generation and transmission facilities world wide, and
in a joint venture that owns and operates a methanol plant and a MTBE (methyl
tertiary butyl ether) plant in Jubail, Saudi Arabia.
34
<PAGE>
Other Energy Services. Investments include the participation in various
construction and support activities for fossil-fueled generating plants.
Other Operations. This segment holds investments in various real estate
development projects and a joint venture that provides wireless personal
communication services.
Summarized combined balance sheet and income statement information of the
entities that are accounted for using the equity method are as follows:
In Millions 1997 1996 1995
- --------------------------------------------------------------------------------
Assets
Current Assets $ 642.0 $1,025.2 $ 617.0
Noncurrent Assets 5,867.8 5,660.5 5,090.2
----------------------------------
Total Assets $6,509.8 $6,685.7 $5,707.2
----------------------------------
Liabilities and Equity
Current Liabilities $ 757.4 $ 879.3 $ 468.5
Noncurrent Liabilities 3,257.2 3,461.4 3,376.0
Equity 2,495.2 2,345.0 1,862.7
----------------------------------
Total Liabilities and Equity $6,509.8 $6,685.7 $5,707.2
----------------------------------
Income
Operating Revenues $ 905.0 $3,133.2 $1,391.2
Operating Expenses 702.8 2,494.1 667.1
Net Income 72.4 160.1 236.2
- --------------------------------------------------------------------------------
The Company had outstanding loans to certain affiliates of $87.1 million and
$2.9 million at December 31, 1997 and 1996, respectively.
NOTE 9. PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment by classification as of December 31,
1997 and 1996 is as follows:
In Millions 1997 1996
- --------------------------------------------------------------------------------
Natural Gas Plant In Service
Transmission $6,094.4 $5,994.1
Gathering 812.5 643.0
Processing 502.4 508.4
Underground storage 488.8 450.6
LNG facilities and vessels 751.7 751.0
General plant 310.7 348.7
Construction work in progress 159.9 126.7
--------------------------
Total natural gas plant in service 9,120.4 8,822.5
--------------------------
Other Property and Equipment 576.1 366.5
--------------------------
Total Property, Plant and Equipment 9,696.5 9,189.0
Less accumulated depreciation and amortization 3,631.3 3,388.3
--------------------------
Net property, plant and equipment $6,065.2 $5,800.7
- --------------------------------------------------------------------------------
35
<PAGE>
A summary of accumulated depreciation for property, plant and equipment by
classification as of December 31, 1997 and 1996 is as follows:
In Millions 1997 1996
- --------------------------------------------------------------------------------
Natural Gas Plant In Service $ 3,602.9 $ 3,365.8
Other Property and Equipment 28.4 22.5
--------------------------
Total Accumulated Depreciation $ 3,631.3 $ 3,388.3
- --------------------------------------------------------------------------------
NOTE 10. DEBT AND CREDIT FACILITIES
The following credit facilities were available to the Company at December 31,
1997 and 1996:
<TABLE>
<CAPTION>
In Millions 1997 1996
- ---------------------------------------------------------------------------------------------------------------
Credit Credit
Facilities Outstanding Facilities Outstanding
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
364-day facilities $ 300.0 $ -- $ 400.0 $ --
Four-year revolving facilities(a) 125.0 77.0 235.0 42.0
Five-year revolving facilities 950.0 -- 400.0 --
---------------------------------------------------------------
Total Consolidated $1,375.0 $ 77.0 $1,035.0 $ 42.0
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The outstanding balance was included in long-term debt.
The 364-day and five-year credit facilities support the Company's commercial
paper facilities of $1.25 billion and $400 million at December 31, 1997 and
1996, respectively. Amounts outstanding under the commercial paper facilities at
December 31, 1997 and 1996 were as follows:
In Millions 1997 1996
- --------------------------------------------------------------------------------
Total commercial paper outstanding $933.7 $102.2
Less portion classified as short-term 133.7 102.2
------------------------------
Portion classified as long-term debt $800.0 $ --
- --------------------------------------------------------------------------------
In addition to amounts borrowed under the credit facilities and commercial paper
facilities, the Company had $251.9 million of short-term borrowings from banks
outstanding at December 31, 1996. Also, at December 31, 1997 and 1996, the
Company had a note payable to an affiliate of $4 million and $5 million,
respectively.
A summary of short-term debt is as follows:
<TABLE>
<CAPTION>
Dollars in Millions 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Amount outstanding at end of year $ 137.7 $ 359.1 $ 150.0
Weighted-average rate at end of year 6.03% 6.10% 6.28%
Maximum amount outstanding during the year $ 732.8 $ 359.1 $ 150.0
Average amount outstanding during the year $ 357.5 $ 131.1 $ 64.3
Weighted-average interest rate for the year - computed on a daily basis 5.64% 5.95% 6.28%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
36
<PAGE>
Long-term debt outstanding as of December 31, 1997 and 1996 consisted of the
following:
<TABLE>
<CAPTION>
Dollars in Millions Year Due 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Duke Capital Corp.
Commercial paper, 6.03% weighted-average rate at December 31, 1997 $ 800.0 $ --
PanEnergy
Bonds:
7 3/4% 2022 328.0 328.0
8 5/8% Debentures 2025 100.0 100.0
Notes:
9.55%, maturing serially 1996 - 1999 27.5 41.3
9.9%, maturing serially 2000 - 2003 45.0 45.0
7% - 8 5/8% 1999 - 2006 450.0 450.0
Notes converted or matured during 1997 - 124.5
TETCO
Notes:
8% - 10 3/8% 2000 - 2004 500.0 500.0
Medium term, Series A, 7.64%-9.07% 1999 - 2012 100.0 100.0
Algonquin
9.13% Notes 2001 - 2003 100.0 100.0
PEPL
7 7/8% Notes 2004 100.0 100.0
7.2% - 7.95% Debentures 2023 - 2024 200.0 200.0
Crescent Resources, Inc.(a)
Construction and mortgage loans, 6.02% - 7.10% 1998 - 2011 116.7 76.0
Revolving credit facilities, 6.30% and 5.95% weighted-average rate at 2001 77.0 42.0
December 31, 1997 and 1996, respectively
Unamortized debt discount and premium, net (2.9) (3.5)
--------------------------
Total long-term debt 2,941.3 2,203.3
Current maturities of long-term debt (22.5) (175.1)
--------------------------
Total long-term portion $2,918.8 $2,028.2
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Substantial amounts of Crescent Resources, Inc.'s real estate development
projects, land and buildings are pledged as collateral.
The annual maturities of consolidated long-term debt at December 31, 1997 were
$22.5 million, $182.0 million, $221.8 million, $249.2 million and $186.6 million
for 1998 through 2002, respectively.
On October 1, 1996, TETCO redeemed its $150 million, 10% debentures and its $100
million, 10 1/8% debentures due 2011. TETCO recorded a non-cash
extraordinary item of $16.7 million (net of income tax of $10.3 million)
related to the unamortized discount on this early retirement of debt.
NOTE 11. COMMITMENTS AND CONTINGENCIES
Future Construction Costs. The Company plans to maintain its regulated
facilities, and pursue business expansion of its regulated operations as
opportunities arise. Projected 1998 capital and investment expenditures for the
Natural Gas Transmission segment, including AFUDC, are approximately $300
million. These projections are subject to periodic review and revisions. Actual
expenditures incurred may vary from such estimates due to various factors,
including business expansion opportunities, environmental matters and cost and
availability of capital.
The Energy Services segment plans to spend approximately $100 million in 1998
for required capital expenditures at its existing facilities. In addition, the
Company is seeking to significantly grow its Energy Services businesses,
primarily through the Global Asset Development business unit. One opportunity
includes the 520-megawatt combined cycle natural gas fired merchant generation
plant in Bridgeport, Connecticut already under construction.
37
<PAGE>
Another growth opportunity includes the recently announced agreement to purchase
from Pacific Gas & Electric Company three power plants in California. The power
plants have a combined capacity of 2,645 megawatts. The purchase price is
estimated at approximately $500 million and this transaction is expected to
close during 1998. Other similar initiatives in 1998 will likely require
significant capital and investment expenditures which will be subject to
periodic review and revision and may vary significantly depending on the
value-added opportunities presented.
Projected capital and investment expenditures for 1998 of the Other Operations
segment are approximately $200 million. These projected capital and investment
expenditures are also subject to periodic review and revision and may vary
significantly depending on the value-added opportunities presented.
Environmental. The Company is subject to federal, state and local regulations
regarding air and water quality, hazardous and solid waste disposal, and other
environmental matters.
TETCO is currently conducting PCB (polychlorinated biphenyl) assessment and
clean-up programs at certain of its compressor station sites under conditions
stipulated by a U.S. Consent Decree. The programs include on- and off-site
assessment, installation of on-site source control equipment and groundwater
monitoring wells, and on- and off-site clean-up work. TETCO expects to complete
these clean-up programs during 1998. Groundwater monitoring activities will
continue at several sites beyond 1998.
The Company has also identified environmental contamination at certain sites on
the PEPL and Trunkline systems and is undertaking clean-up programs at these
sites. The contamination resulted from the past use of lubricants containing
PCBs and the prior use of wastewater collection facilities and other on-site
disposal areas. Soil and sediment testing, to date, has detected no significant
off-site contamination. The Company has communicated with the Environmental
Protection Agency and appropriate state regulatory agencies on these matters.
Environmental clean-up programs are expected to continue until 2002.
At December 31, 1997 and 1996, the Company had accrued liabilities for remaining
estimated clean-up costs on the TETCO, PEPL and Trunkline systems which are
included in Environmental Clean-up Liabilities in the Consolidated Balance
Sheets. These cost estimates represent gross clean-up costs expected to be
incurred, have not been discounted or reduced by customer recoveries and do not
include fines, penalties or third-party claims. Costs to be recovered from
customers are included in the Consolidated Balance Sheets as of December 31,
1997 and 1996, as Regulatory Assets and Deferred Debits.
In 1987, the Commonwealth of Kentucky instituted a suit in state court against
TETCO, alleging improper disposal of PCBs at TETCO's three compressor station
sites in Kentucky. This suit is still pending. In 1996, TETCO completed clean-up
of these sites under the U.S. Consent Decree.
The federal and state clean-up programs are not expected to interrupt or
diminish the Company's ability to deliver natural gas to customers. Based on the
Company's experience to date and costs incurred for clean-up operations,
management believes the resolution of matters relating to the environmental
issues discussed above will not have a material adverse effect on the
consolidated results of operations or financial position of the Company.
Litigation. In December 1996, TETCO received notification that Marathon
Oil Company (Marathon) intended to commence substitution of other gas
reserves, deliverability and leases for those dedicated to a certain natural
gas purchase contract (the Marathon Contract) with TETCO. In TETCO's view,
the tendered substitute gas reserves, deliverability and leases are not
subject to the Marathon Contract; therefore TETCO filed a declaratory
judgment action on December 17, 1996 in the U.S. District Court for the
Eastern District of Louisiana seeking a ruling that Marathon's
interpretation of the Marathon Contract is incorrect. Marathon filed a
counterclaim seeking a declaratory judgment enforcing its interpretation of
the Marathon Contract. On January 7, 1997, Marathon filed an answer and a
counterclaim to TETCO's complaint seeking declaratory judgment enforcing its
interpretation of the Marathon Contract.
On February 18, 1997, Amerada Hess Corporation (Amerada Hess) notified TETCO
that it intended to commence substitution of other gas reserves, deliverability
and leases for those dedicated to its natural gas purchase contract (the Amerada
Hess Contract) with TETCO. On the same date, Amerada Hess also filed a petition
in the District Court of Harris
38
<PAGE>
County, Texas, 157th Judicial District, seeking a declaratory judgment that its
interpretation of the Amerada Hess Contract, which covers the same leases and
reserves as the Marathon Contract, is correct. TETCO filed a declaratory
judgment action with respect to Amerada Hess' contentions in the U.S. District
Court for the Eastern District of Louisiana on February 21, 1997. The two
actions have been transferred to the judge presiding over the Marathon Contract
matter.
On September 26, 1997, the judge presiding over the Marathon and Amerada Hess
contract matters issued summary judgments in both actions in favor of TETCO.
Marathon and Amerada Hess subsequently filed notices of appeal of the summary
judgments. On January 5, 1998, TETCO entered into an agreement with Marathon
settling all issues associated with the Marathon Contract. The potential
liability of the Company associated with the Amerada Hess Contract should TETCO
be contractually obligated to purchase natural gas based upon the substitute gas
reserves, deliverability and leases, and the effect of transition cost
recoveries pursuant to TETCO's Order 636 settlement involves numerous complex
legal and factual matters which will take a substantial period of time to
resolve. However, the Company does not believe that Amerada Hess will prevail on
its appeal of the lower court's summary judgment. Management is of the opinion
that the final disposition of this matter will not have a material adverse
effect on the consolidated results of operations or financial position of the
Company.
On April 25, 1997, a group of affiliated plaintiffs that own and/or operate
various pipeline and marketing companies and partnerships primarily in Kansas
filed suit against PEPL in the U.S. District Court for the Western District of
Missouri. The plaintiffs allege that PEPL has engaged in unlawful and
anti-competitive conduct with regard to requests for interconnects with the PEPL
system for service to the Kansas City area. Asserting that PEPL has violated the
antitrust laws and tortiously interfered with the plaintiffs' contracts with
third parties, the plaintiffs seek compensatory and punitive damages in
unspecified amounts. Periodically, similar disputes arise with other natural gas
marketers and pipeline companies concerning interconnections and other issues
involving access to the Company's natural gas transmission systems. Management
is of the opinion that the final disposition of these proceedings will not have
a material adverse effect on the consolidated results of operations or financial
position of the Company.
On May 1, 1997, Citrus Trading Corporation (Citrus) and Enron Capital and
Trade Resources Corporation, as successor to Enron Gas Marketing Corporation,
filed suit in the District Court of Harris County, Texas, against PanEnergy LNG
Sales, Inc. (formerly Pan National Gas Sales, Inc.), a subsidiary of the
Company, alleging breach of a gas purchase contract (the Contract) for
regasified LNG entered into between Citrus and Pan National Gas Sales, Inc.
Plaintiffs allege that PanEnergy LNG Sales, Inc. failed to deliver LNG pursuant
to the terms of the Contract. The plaintiffs seek compensatory damages in
unspecified amounts for losses allegedly incurred as a result of the contract
breach as well as a declaratory judgment that PanEnergy LNG Sales Inc.'s
assertions of force majeure due to the interruption in the supply of LNG to
PanEnergy LNG Sales, Inc. do not constitute force majeure under the Contract.
While this matter is in the early stages of litigation, based on infomation
currently available to the Company, the Company believes the resolution of this
matter will not have a material adverse effect on the consolidated results of
operations or financial position of the Company.
On May 13, 1997, Anadarko Petroleum Corporation (Anadarko) filed suits against
PEPL and other affiliates, as defendants, both in the United States District
Court for the Southern District of Texas and State District Court of Harris
County, Texas. Anadarko claims that it was effectively indemnified by the
defendants against any responsibility for refunds of Kansas ad valorem taxes
which are due purchasers of gas from Anadarko, retroactive to 1983. While this
matter is in the early stages of litigation, based on information currently
available to the Company, the Company believes the resolution of this matter
will not have a material adverse effect on the consolidated results of
operations or financial position of the Company.
The Company and its subsidiaries are also involved in legal, tax and regulatory
proceedings before various courts, regulatory commissions and governmental
agencies regarding matters arising in the ordinary course of business, some of
which involve substantial amounts. Where appropriate, the Company has made
accruals in accordance with SFAS No. 5, "Accounting for Contingencies," in order
to provide for such matters. Management is of the opinion that the final
disposition of these matters will not have a material adverse effect on the
consolidated results of operations or financial position of the Company.
Other Commitments and Contingencies. In 1993, the U.S. Department of the
Interior announced its intention to seek additional royalties from gas
producers as a result of payments received by such producers in
connection with past take-or-pay settlements, and buyouts and buydowns of
gas sales contracts with natural gas pipelines. The Company's pipelines, with
respect to certain producer contract settlements, may be contractually
required to reimburse or, in some instances, to indemnify producers against
such royalty claims. The potential liability of the producers to the
government and of the pipelines to the producers involves complex issues
of law and fact which are likely to take substantial time to resolve. On
August 27, 1996, the U.S. Court of Appeals for the District of Columbia
overturned a lower court ruling in favor of the government in litigation
brought on behalf of producers. The Department's petition for rehearing was
denied in November 1996. The Department may continue to seek further appelate
review. If the Company's pipelines ultimately have to reimburse or indemnify
the producer, the Company's pipelines will file with the FERC to recover a
portion of these costs from pipeline customers.
The Company has a 10% ownership interest in TEPPCO Partners, L.P., a master
limited partnership (MLP) that owns and operates a petroleum products pipeline.
A subsidiary partnership of the MLP had $326.5 million in First Mortgage Notes
outstanding at December 31, 1997 with recourse to the general partner, a
subsidiary of the Company.
39
<PAGE>
PEPL owns an effective 5.4% ownership interest in Northern Border Pipeline
Company (Northern Border). Under the terms of a settlement related to a
transportation agreement between PEPL and Northern Border, PEPL
guarantees payment to Northern Border under a transportation agreement by an
affiliate of Pan-Alberta Gas Limited. The transportation agreement
requires estimated total payments of $50.9 million for 1998 through 2001.
In connection with the sale of Petrolane in 1989, TEC agreed to indemnify
Petrolane against certain obligations for guaranteed leases and environmental
matters. Certain of the lease obligations relate to Petrolane's divestiture of
supermarket operations prior to its acquisition by TEC and as of December 31,
1997 total approximately $50.9 million over the remaining terms of the leases,
which expire in 2006.
In January 1998, the Company acquired a 9.8% ownership in Alliance Pipeline.
This pipeline is designed to transport natural gas from western Canada to the
Chicago-area market center for distribution throughout North America. The
pipeline is scheduled to begin commercial operation in late 1999, provided the
necessary U.S. and Canadian regulatory approvals are secured. In addition to
buying an ownership interest in the pipeline project, the Company has a
contractual commitment for 67.25 million cubic feet per day of capacity on the
line over 15 years for an estimated total of $315 million.
As of December 31, 1997, the Company had letters of credit and surety bonds of
$59 million issued on its behalf related to natural gas transmission operations,
real estate development projects, engineering services contracts, insurance
contracts and various other items.
Periodically, the Company may become involved in contractual disputes with
natural gas transmission customers involving potential or threatened abrogation
of contracts by the customers, including, for example, attempted transfers of
contractual obligations to less creditworthy subsidiaries of the customers. If
the customers are successful, the Company may not receive the full value of
anticipated benefits under the contracts.
In the normal course of business, certain of the Company's affiliates enter into
various contracts, including agreements for debt, natural gas transmission
service and construction contracts, which contain certain schedule and
performance requirements. Such affiliates use risk management techniques to
mitigate their exposure associated with such contracts. Certain subsidiaries of
the Company have guaranteed performance by such affiliates under some of these
contracts.
Management is of the opinion that these commitments and contingencies will not
have a material adverse effect on the consolidated results of operations or the
financial position of the Company.
Leases. The Company utilizes assets under operating leases in several areas of
operations. Consolidated rental expense amounted to $41.7 million, $49.7
million, and $34.7 million in 1997, 1996, and 1995, respectively. Future minimum
rental payments under the Company's various operating leases for the years 1998
through 2002 are $38.5 million, $32.9 million, $26.2 million, $21 million and
$15.1 million, respectively.
NOTE 12. STOCK BASED COMPENSATION
Stock Options and Awards. Effective with the merger, each share of PanEnergy
common stock outstanding immediately prior to the merger was converted into the
right to receive 1.0444 shares of Duke Energy common stock. Each option to
purchase PanEnergy common stock that was outstanding prior to the merger was
assumed by Duke Energy and became exercisable upon the same terms as under the
applicable PanEnergy stock option plan and option agreement, except that such
options became an option to purchase shares of Duke Energy's common stock,
appropriately adjusted. Each award of restricted shares of PanEnergy common
stock outstanding and not vested prior to the merger was assumed by Duke Energy
and such restricted shares of PanEnergy common stock were exchanged for
restricted shares of Duke Energy common stock.
The Company does not plan to issue additional stock options or awards under
PanEnergy stock option and award plans. Future issuances of stock options and
awards may be granted to key employees of Duke Energy and its subsidiaries
under Duke Energy's 1996 Stock Incentive Plan.
40
<PAGE>
Under Duke Energy's plan, each option granted equals the market price of Duke
Energy common stock on the date of grant. Vesting periods range from one to
five years with a maximum exercise term of 10 years.
In 1997, the Company granted 115,615 shares of performance-based stock awards
with an average grant date fair value of $44 per share. The Company recognized
compensation expense of $4.4 million in 1997, $8.3 million in 1996 and none in
1995 for such stock awards. The Company follows the intrinsic value method of
accounting for common stock awards issued to employees.
NOTE 13. BENEFIT PLANS
Retirement Plans. Duke Energy and its subsidiaries have multiple
non-contributory defined benefit retirement plans covering most employees with a
minimum service requirements. Certain employees of the Company participate in
either the PanEnergy plan or the Duke Energy plan.
The PanEnergy plan provides 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.
A cash balance plan participant accumulates a benefit based upon a percentage
of current salary, which varies with age and years of service, and interest
credits.
Other Company employees participate in Duke Energy's non-contributory defined
benefit retirement plan. Effective January 1, 1997, this plan was amended to a
plan under which benefits are based upon a cash balance formula. Prior to
January 1, 1997, retirement plan benefits were based on an age-related formula,
which took into account years of benefit accrual service and the employee's
highest average eligible earnings.
Both the Company's 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 members. On December 30, 1997 assets and related liabilities of $235.6
million and $204 million, respectively, for certain PanEnergy participants were
transferred to the Duke Energy plan. As a result of this transfer, no
contributions to the Duke Energy plan were necessary in 1997.
The fair market value of Duke Energy's plan assets were $2,724.7 million and
$2,445.3 million for December 31, 1997 and 1996, respectively. The accumulated
benefit obligation was $2,030.2 million and $1,841.6 million for December 31,
1997 and 1996, respectively. The amount of pre-funded pension cost allocated to
the Company as of December 31, 1997 and 1996 was $302.6 million and $280.6
million, respectively.
Assumptions used in Duke Energy's pension and other postretirement benefits
accounting (reflecting weighted-averages across plans) include:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Percent (%) 1997 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 7.25 7.50 7.50
Salary increase 4.15 4.80 4.81
Expected long-term rate of return on plan assets 9.25 9.18 9.18
- ---------------------------------------------------------------------------------------
</TABLE>
The Company's net periodic pension benefit, including amounts allocated by
Duke Energy, for the years ended December 31, 1997, 1996 and 1995, was
$19.1 million, $18.8 million and $17.9 million, respectively.
Duke Energy and PanEnergy also sponsor employee savings plans, which cover
substantially all employees. The Company expensed plan contributions, including
amounts allocated by Duke Energy, of $18.9 million, $14.3 million and $14
million in 1997, 1996 and 1995, respectively.
Postretirement Benefits. Duke Energy and most of its subsidiaries provide
certain health care and life insurance benefits for retired employees on a
contributory and non-contributory basis. Employees become eligible for these
benefits when they have met certain age and service requirements at retirement,
as defined in the plans.
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 $266.2 million and $225.3 million at December 31,
1997 and 1996, respectively. The accumulated postretirement benefit obligation
was $667.0 million and $641.7 million at December 31, 1997 and 1996,
respectively.
41
<PAGE>
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, 1997, 1996 and 1995,
was $17 million, $16.2 million and $15.3 million, respectively.
The weighted-average health care cost trend rate used to estimate postretirement
benefits was 7.75% in 1997. This rate is expected to decrease, with a
4.75% weighted-average ultimate trend rate expected to be achieved by 2005. The
effect of a 1% increase in the assumed health care cost trend rate for each
future year would result in a $2.4 million increase in the annual aggregate
postretirement benefit cost and an $29.5 million increase in Duke
Energy's accumulated postretirement benefit obligation at December 31, 1997.
NOTE 14. RELATED PARTY TRANSACTIONS
Certain balances due to or due from related parties included in the Consolidated
Balance Sheets at December 31, 1997 and 1996 are as follows:
- -------------------------------------
IN MILLIONS 1997 1996
- -------------------------------------
Receivables $17.9 $ 1.4
Accounts payable 52.2 14.1
Taxes accrued 39.9 1.1
- -------------------------------------
Operating revenues of $18.0 million, $23.3 million and $10.7 million related to
intercompany sales to Duke Energy are included in the Consolidated Statements of
Income for the years ended December 31, 1997, 1996 and 1995, respectively.
RESPONSIBILITY FOR FINANCIAL STATEMENTS
The financial statements of Duke Energy Corporation are prepared by
management, which is responsible for their integrity and objectivity. The
statements are prepared in conformity with generally accepted accounting
principles appropriate in the circumstances to reflect in all material respects
the substance of events and transactions which should be included. The other
information in the annual report is consistent with the financial statements.
In preparing these statements, management makes informed judgments and
estimates of the expected effects of events and transactions that are currently
being reported.
The Corporation'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, the Corporation's 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
Corporation's accounting controls are continually reviewed for effectiveness.
In addition, written policies, standards and procedures, and a strong internal
audit program augment the Corporation's accounting controls.
JEFFREY L. BOYER
Controller
42
<PAGE>
PART II. QUARTERLY FINANCIAL DATA (unaudited)
<TABLE>
<CAPTION>
First Second Third Fourth
In Millions Quarter(a) Quarter(a) Quarter(a) Quarter(a) Total(a)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997
Operating revenues $2,747.5 $2,115.6 $3,543.7 $3,508.0 $11,914.8
Operating income 298.0 146.2 174.4 217.2 835.8
Net income 146.3 66.8 72.2 95.0 380.3
1996
Operating revenues $1,747.9 $1,490.3 $1,891.9 $2,686.0 $7,816.1
Operating income 237.1 196.7 184.0 251.5 869.3
Income before extraordinary item 112.8 90.1 85.0 111.1 399.0
Net income 112.8 90.1 85.0 94.4 382.3
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Financial information reflects accounting for the combination of the
Company with PanEnergy Corp as a pooling of interests. As a result, the
financial information gives effect to the combination as if it had occurred
January 1, 1996.
Amounts reported on a quarterly basis are not necessarily indicative of
amounts expected for the respective years due to the effects of seasonal
temperature variations on energy consumption.
43
<PAGE>
Item 14. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Prior to the June 18, 1997 merger of PanEnergy Corp and Duke Power Company,
PanEnergy Corp and subsidiaries were audited by KPMG Peat Marwick LLP.
Subsequent to the merger, PanEnergy Corp and subsidiaries were audited by
Deloitte & Touche LLP. There were no disagreements on accounting and financial
disclosure with KPMG Peat Marwick LLP.
Item 15. Financial Statements and Exhibits.
(a) Financial Statements
The following financial statements are filed herewith as part of Item 13,
Financial Statements and Supplementary Data.
Part I. Audited Financial Statements for the Years Ended December 31,
1997, 1996 and 1995
Independent Auditor's Report
Consolidated Statements of Income
Consolidated Statements of Cash Flows
Consolidated Balance Sheets
Consolidated Statements of Stockholder's Equity
Notes to Consolidated Financial Statements
Part II. Quarterly Financial Data
(b) Exhibits
Exhibits filed herewith are designated by an asterisk (*); all exhibits not
so designated are incorporated herein by reference to a prior filing, as
indicated.
Items constituting managements contracts or compensatory plans or
arrangements are designated by a double asterisk (**).
Exhibit No. Description
*3.1 Restated Certificate of Incorporation of registrant
*3.2 By-Laws of registrant
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 of
the year ended December 31, 1997, File No. 4928, as
Exhibit 10-S).
4.2 $300,000,000 364-day Credit Agreement, dated as of August
25, 1997,among the registrant, the banks listed therein
and The Chase Manhattan Bank, as Administrative Agent
(file with Form 10-K of Duke Energy Corporation for the
year ended December 31, 1997, File No. 4928, as Exhibit
10-T).
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** 1977 Non-Qualified Stock Option Plan of Panhandle Eastern
Corporation, as amended through December 3, 1986 (and
related Agreement) (filed with Form 10-K of Panhandle
Eastern Corporation for the year ended December 31, 1986,
File No. 1-8157, as Exhibit 10(f)).
10.3** 1982 Key Employee Stock Option Plan of Panhandle Eastern
Corporation, as amended through December 3, 1986 (and
related Agreement) (filed with Form 10-K of Panhandle
Eastern Corporation for the year ended December 31, 1986,
File No. 1-8157, as Exhibit 10(g)).
10.4** Employees Savings Plan of Panhandle Eastern Corporation
and Participating Affiliates (filed with Form 10-K of
Panhandle Eastern Corporation for the year ended December
31, 1990, File No. 1-8157, as Exhibit 10.12).
10.5** Panhandle Eastern Corporation 1994 Long Term Incentive
Plan (filed with Form 10-K of Panhandle Eastern
Corporation for the year ended December 31, 1993, File No.
1-8157, as Exhibit 10.18).
10.6** Amendment to Panhandle Eastern Corporation 1994 Long Term
Incentive Plan (filed with Form 10-Q of PanEnergy Corp for
the quarter ended June 30, 1996, File No. 1-8157, as
Exhibit 10.40).
*12 Computation of Ratios of Earnings to Fixed Charges
*21 Subsidiaries of the registrant
*27 Financial Data Schedule
99 PanEnergy's Annual Report on Form 10-K for the year ended
December 31, 1996 (File No. 1-8157), previously filed
with the Securities and Exchange Commission pursuant to
the Securities Exchange Act of 1934, as amended, is
hereby incorporated by reference.
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.
44
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date: March 31, 1998 DUKE CAPITAL CORPORATION
(Registrant)
By: /s/ Richard J. Osborne
------------------------------------------
Richard J. Osborne
Vice President and Chief Financial Officer
By: /s/ Jeffrey L. Boyer
------------------------------------------
Jeffrey L. Boyer
Controller
45
EXHIBIT 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
DUKE CAPITAL CORPORATION
The name of the Corporation (which is hereinafter referred to
as the Corporation) is "Duke Capital Corporation."
The original Certificate of Incorporation was filed with the
Secretary of State of the State of Delaware on February 1, 1985, under the name
"Church Street Capital Corp." Such Certificate of Incorporation was amended on
August 14, 1997.
This Restated Certificate of Incorporation has been duly
proposed by resolutions adopted and declared advisable by the Board of Directors
of the Corporation, duly adopted by the sole stockholder of the Corporation and
duly executed and acknowledged by the officers of the Corporation in accordance
with Sections 103, 242 and 245 of the General Corporation Law of the State of
Delaware.
The text of the Certificate of Incorporation of the
Corporation is hereby amended and restated to read in its entirety as follows:
Article I
Name
The name of the corporation (which is hereinafter referred to
as the "Corporation") is: Duke Capital Corporation.
Article II
Registered Agent
The address of the Corporation's registered office in the
State of Delaware is Suite 1300, 1105 North Market Street, Wilmington, Delaware
19801. The name of the Corporation's registered agent at such address is
Delaware Corporate Management, Inc.
<PAGE>
Article III
Purpose
The purpose of the Corporation shall be to engage in any
lawful act or activity for which corporations may be organized and incorporated
under the General Corporation Law of the State of Delaware (the "DGCL").
Article IV
Capital Stock
Section 1. The Corporation shall be authorized to issue
103,000 shares of capital stock, of which 3,000 shares shall be shares of common
stock, without par value ("Common Stock"), and 100,000 shares shall be shares of
preferred stock, $1.00 par value ("Preferred Stock").
Section 2. The Preferred Stock may be issued from time to time
in one or more series. The Board of Directors is hereby authorized to provide
for the issuance of shares of Preferred Stock in series and, by filing a
certificate pursuant to the DGCL (hereinafter referred to as a "Preferred Stock
Designation"), to establish from time to time the number of shares to be
included in each such series, and to fix the designation, powers, privileges,
preferences and rights of the shares of each such series and the qualifications,
limitations and restrictions thereof. The authority of the Board of Directors
with respect to each series shall include, but not be limited to, determination
of the following:
(a) the designation of the series, which may be by
distinguishing number, letter or title;
(b) the number of shares of the series, which number the Board
of Directors may thereafter (except where otherwise provided in the
Preferred Stock Designation) increase or decrease (but not below the
number of shares thereof then outstanding);
(c) whether dividends, if any, shall be cumulative or
noncumulative, and, in the case of shares of any series having
cumulative dividend rights, the date or dates or method of determining
the date or dates from which dividends on the shares of such series
shall be cumulative;
(d) the rate of any dividends (or method of determining such
dividends) payable to the holders of the shares of such series, any
conditions upon which such dividends shall be paid and the date or
dates or the method for determining the date or dates upon which such
dividends shall be payable;
<PAGE>
(e) the price or prices (or method of determining such price
or prices) at which, the form of payment of such price or prices (which
may be cash, property or rights, including securities of the same or
another corporation or other entity) for which, the period or periods
within which and the terms and conditions upon which the shares of such
series may be redeemed, in whole or in part, at the option of the
Corporation or at the option of the holder or holders thereof or upon
the happening of a specified event or events, if any;
(f) the obligation, if any, of the Corporation to purchase or
redeem shares of such series pursuant to a sinking fund or otherwise
and the price or prices at which, the form of payment of such price or
prices (which may be cash, property or rights, including securities of
the same or another corporation or other entity) for which, the period
or periods within which and the terms and conditions upon which the
shares of such series shall be redeemed or purchased, in whole or in
part, pursuant to such obligation;
(g) the amount payable out of the assets of the Corporation to
the holders of shares of the series in the event of any voluntary or
involuntary liquidation, dissolution or winding up of the affairs of
the Corporation;
(h) provisions, if any, for the conversion or exchange of the
shares of such series, at any time or times at the option of the holder
or holders thereof or at the option of the Corporation or upon the
happening of a specified event or events, into shares of any other
class or classes or any other series of the same or any other class or
classes of stock, or any other security, of the Corporation, or any
other corporation or other entity, and the price or prices or rate or
rates of conversion or exchange and any adjustments applicable thereto,
and all other terms and conditions upon which such conversion or
exchange may be made;
(i) restrictions on the issuance of shares of the same series
or of any other class or series, if any; and
(j) the voting rights, if any, of the holders of shares of the
series.
Section 3. The Common Stock shall be subject to the express
terms of the Preferred Stock and any series thereof. The holders of shares of
Common Stock shall be entitled to one vote for each such share upon all
proposals presented to the stockholders on which the holders of Common Stock are
entitled to vote. Except as otherwise provided by law or by the resolution or
resolutions adopted by the Board of Directors designating the rights, powers and
preferences of any series of Preferred Stock, the Common Stock shall have the
exclusive right to vote for the election of directors and for all other
purposes, and holders of Preferred Stock shall not be entitled to receive notice
of any meeting of stockholders at which they are not entitled to vote. The
number of authorized shares of Preferred Stock may be
<PAGE>
increased or decreased (but not below the number of shares thereof then
outstanding) by the affirmative vote of the holders of a majority of the
outstanding Common Stock, without a vote of the holders of the Preferred Stock,
or of any series thereof, unless a vote of any such holders is required pursuant
to any Preferred Stock Designation. The Corporation shall be entitled to treat
the person in whose name any share of its stock is registered as the owner
thereof for all purposes and shall not be bound to recognize any equitable or
other claim to, or interest in, such share on the part of any other person,
whether or not the Corporation shall have notice thereof, except as expressly
provided by applicable law.
Article V
Stockholder Action
Effective as of the time at which Duke Energy Corporation
shall cease to be the beneficial owner of a majority of the then outstanding
shares of Common Stock (the "Trigger Date"), any action required or permitted to
be taken by the stockholders of the Corporation must be effected at a duly
called annual or special meeting of such holders and may not be effected by any
consent in writing by such holders. Effective as of the Trigger Date, except as
otherwise required by law and subject to the rights of the holders of any class
or series of stock having a preference over the Common Stock as to dividends or
upon liquidation, special meetings of stockholders of the Corporation for any
purpose or purposes may be called only by the Board of Directors pursuant to a
resolution stating the purpose or purposes thereof approved by a majority of the
total number of directors which the Corporation would have if there were no
vacancies (the "Whole Board") or by the Chairman of the Board of Directors of
the Corporation, and, effective as of the Trigger Date, any power of
stockholders to call a special meeting is specifically denied. No business other
than that stated in the notice shall be transacted at any special meeting.
Notwithstanding anything contained in this Certificate of Incorporation to the
contrary, the affirmative vote of the holders of at least 80% of the voting
power of all shares of the Corporation entitled to vote generally in the
election of directors (the "Voting Stock") then outstanding, voting together as
a single class, shall be required to alter, amend, adopt any provision
inconsistent with or repeal this Article V.
Article VI
Election of Directors
Unless and except to the extent that the By-Laws of the
Corporation shall so require, the election of directors of the Corporation need
not be by written ballot.
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Article VII
Board of Directors
Section 1. Number, Election and Terms. Except as otherwise
fixed by or pursuant to the provisions of Article IV hereof relating to the
rights of the holders of any class or series of stock having a preference over
the Common Stock as to dividends or upon liquidation to elect additional
directors under specified circumstances, the number of the directors of the
Corporation shall not be less than three nor more than sixteen, as may be fixed
from time to time exclusively pursuant to a resolution adopted by a majority of
the Whole Board. Effective as of the Trigger Date, the directors, other than
those who may be elected by the holders of any class or series of stock having a
preference over the Common Stock as to dividends or upon liquidation, shall be
classified, with respect to the time for which they severally hold office, into
three classes, as nearly equal in number as possible, one class to be originally
elected for a term expiring at the first annual meeting of stockholders after
the Trigger Date, another class to be originally elected for a term expiring at
the second annual meeting of stockholders after the Trigger Date, and another
class to be originally elected for a term expiring at the third annual meeting
of stockholders after the Trigger Date, with each class to hold office until its
successor is duly elected and qualified. At each succeeding annual meeting of
stockholders, directors elected to succeed those directors whose terms then
expire shall be elected for a term of office to expire at the third succeeding
annual meeting of stockholders after their election, with each director to hold
office until such person's successor shall have been duly elected and qualified.
Section 2. Stockholder Nomination of Director Candidates;
Stock- holder Proposal of Business. Advance notice of stockholder nominations
for the election of directors and of the proposal of business by stockholders
shall be given in the manner provided in the By-Laws of the Corporation, as
amended and in effect from time to time.
Section 3. Newly Created Directorships and Vacancies.
Effective as of the Trigger Date, except as otherwise provided for or fixed by
or pursuant to the provisions of Article IV hereof relating to the rights of the
holders of any class or series of stock having a preference over the Common
Stock as to dividends or upon liquidation to elect directors under specified
circumstances, newly created directorships resulting from any increase in the
number of directors and any vacancies on the Board of Directors resulting from
death, resignation, disqualification, removal or other cause shall be filled by
the affirmative vote of a majority of the remaining directors then in office,
even though less than a quorum of the Board of Directors, and not by the
stockholders. Any director elected in accordance with the preceding sentence
shall hold office for the remainder of the full term of the class of directors
in which the new directorship was created or the vacancy occurred and until such
director's successor shall have been duly elected and qualified. No decrease in
the number of directors constituting the Board of Directors shall shorten the
term of any incumbent director.
<PAGE>
Section 4. Removal. Effective as of the Trigger Date, subject
to the rights of any class or series of stock having a preference over the
Common Stock as to dividends or upon liquidation to elect directors under
specified circumstances, any director may be removed from office only for cause
by the affirmative vote of the holders of at least a majority of the voting
power of all Voting Stock then outstanding, voting together as a single class.
"Cause" for removal of a director under this Section 4 means fraudulent or
dishonest acts, or gross abuse of authority in the discharge of duties to the
Corporation, and must be established after written notice of specific charges
and an opportunity to meet and refute such charges.
Section 5. Amendment, Repeal, Etc. Notwithstanding anything
contained in this Certificate of Incorporation to the contrary, the affirmative
vote of the holders of at least 80% of the voting power of all Voting Stock then
outstanding, voting together as a single class, shall be required to alter,
amend, adopt any provision inconsistent with or repeal this Article VII.
Article VIII
By-Laws
The By-Laws may be altered or repealed and new By-Laws may be
adopted (1) at any annual or special meeting of stockholders, by the affirmative
vote of the holders of a majority of the voting power of the stock issued and
outstanding and entitled to vote thereat; provided, however, that any proposed
alteration or repeal of, or the adoption of any By-Law inconsistent with,
Section 2.2, 2.7 or 2.11 of Article II of the By-Laws or with Section 3.2, 3.9
or 3.11 of Article III of the By-Laws or this sentence, by the stockholders
shall require the affirmative vote of the holders of at least 80% of the voting
power of all Voting Stock then outstanding, voting together as a single class;
and provided, further, however, that in the case of any such stockholder action
at a special meeting of stockholders, notice of the proposed alteration, repeal
or adoption of the new By-Law or By-Laws must be contained in the notice of such
special meeting, or (2) by the affirmative vote of a majority of the Whole
Board.
Notwithstanding anything contained in this Certificate of
Incorporation to the contrary, the affirmative vote of the holders of at least
80% of the voting power of all Voting Stock then outstanding, voting together as
a single class shall be required to alter, amend, adopt any provision
inconsistent with or repeal this Article VIII.
<PAGE>
Article IX
Amendment of Certificate of Incorporation
The Corporation reserves the right at any time from time to
time to amend, alter, change or repeal any provision contained in this
Certificate of Incorporation, and any other provisions authorized by the laws of
the State of Delaware at the time in force may be added or inserted, in the
manner now or hereafter prescribed by law; and, except as set forth in Article
X, all rights, preferences and privileges of whatsoever nature conferred upon
stockholders, directors or any other persons whomsoever by and pursuant to this
Certificate of Incorporation in its present form or as hereafter amended are
granted subject to the right reserved in this Article. Notwithstanding anything
contained in this Certificate of Incorporation to the contrary, the affirmative
vote of the holders of at least 80% of the Voting Stock then outstanding, voting
together as a single class, shall be required to alter, amend, adopt any
provision inconsistent with or repeal Article V, VII, VIII or this sentence.
Article X
Limited Liability; Indemnification
Section 1. Limited Liability of Directors. A director of the
Corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except, if required by the DGCL, as amended from time to time, for liability (i)
for any breach of the director's duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the DGCL or (iv) for any transaction from which the director derived an improper
personal benefit. Neither the amendment nor repeal of Section 1 of this Article
X shall eliminate or reduce the effect of Section 1 of this Article X in respect
of any matter occurring, or any cause of action, suit or claim that, but for
Section 1 of this Article X, would accrue or arise, prior to such amendment or
repeal.
Section 2. Indemnification and Insurance.
(a) Right to Indemnification. Each person who was or is made a
party or is threatened to be made a party to or is involved in any action, suit
or proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that such person, or a
person of whom such person is the legal representative, is or was a director or
officer of the Corporation or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation or
of a partnership, joint venture, trust or other enterprise, including service
with respect to employee benefit plans, whether the basis of such proceeding is
alleged action in an official capacity as a director, officer, employee or agent
or in any other capacity while serving as a director, officer, employee or
agent, shall be indemnified and held harmless by the Corporation to the fullest
extent authorized by the
<PAGE>
DGCL, as the same exists or may hereafter be amended (but, in the case of any
such amendment, only to the extent that such amendment permits the Corporation
to provide broader indemnification rights than said law permitted the
Corporation to provide prior to such amendment), against all expense, liability
and loss (including attorneys' fees, judgments, fines, amounts paid or to be
paid in settlement, and excise taxes or penalties arising under the Employee
Retirement Income Security Act of 1974, as in effect from time to time)
reasonably incurred or suffered by such person in connection therewith, and such
indemnification shall continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of such person's
heirs, executors and administrators; provided, however, that, except as provided
in paragraph (b) hereof, the Corporation shall indemnify any such person seeking
indemnification in connection with a proceeding (or part thereof) initiated by
such person only if such proceeding (or part thereof) was authorized by the
Board of Directors. The right to indemnification conferred in this Section shall
be a contract right and shall include the right to have the Corporation pay the
expenses incurred in defending any such proceeding in advance of its final
disposition, any advance payments to be paid by the Corporation within 20
calendar days after the receipt by the Corporation of a statement or statements
from the claimant requesting such advance or advances from time to time;
provided, however, that, if and to the extent the DGCL requires, the payment of
such expenses incurred by a director or officer in such person's capacity as a
director or officer (and not in any other capacity in which service was or is
rendered by such person while a director or officer, including, without
limitation, service to an employee benefit plan) in advance of the final
disposition of a proceeding shall be made only upon delivery to the Corporation
of an undertaking, by or on behalf of such director or officer, to repay all
amounts so advanced if it shall ultimately be determined that such director or
officer is not entitled to be indemnified under this Section or otherwise. The
Corporation may, to the extent authorized from time to time by the Board of
Directors, grant rights to indemnification, and rights to have the Corporation
pay the expenses incurred in defending any proceeding in advance of its final
disposition, to any employee or agent of the Corporation to the fullest extent
of the provisions of this Article with respect to the indemnification and
advancement of expenses of directors and officers of the Corporation.
(b) Right of Claimant to Bring Suit. If a claim under
paragraph (a) of this Section is not paid in full by the Corporation within 30
calendar days after a written claim has been received by the Corporation, the
claimant may at any time thereafter bring suit against the Corporation to
recover the unpaid amount of the claim and, if successful in whole or in part,
the claimant shall be entitled to be paid also the expense of prosecuting such
claim. It shall be a defense to any such action (other than an action brought to
enforce a claim for expenses incurred in defending any proceeding in advance of
its final disposition where the required undertaking, if any is required, has
been tendered to the Corporation) that the claimant has not met the standard of
conduct which makes it permissible under the DGCL for the Corporation to
indemnify the claimant for the amount claimed, but the burden of proving such
defense shall be on the Corporation. Neither the failure of the Corporation
(including its Board of Directors, independent legal counsel or its
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the
<PAGE>
circumstances because the claimant has met the applicable standard of conduct
set forth in the DGCL, nor an actual determination by the Corporation (including
its Board of Directors, independent legal counsel or its stockholders) that the
claimant has not met such applicable standard of conduct, shall be a defense to
the action or create a presumption that the claimant has not met the applicable
standard of conduct.
(c) Non-Exclusivity of Rights. The right to indemnification
and the payment of expenses incurred in defending a proceeding in advance of its
final disposition conferred in this Section shall not be exclusive of any other
right which any person may have or hereafter acquire under any statute,
provision of the Certificate of Incorporation, By-Law, agreement, vote of
stockholders or disinterested directors or otherwise. No repeal or modification
of this Article shall in any way diminish or adversely affect the rights of any
director, officer, employee or agent of the Corporation hereunder in respect of
any occurrence or matter arising prior to any such repeal or modification.
(d) Insurance. The Corporation may maintain insurance, at its
expense, to protect itself and any director, officer, employee or agent of the
Corporation or another corporation, partnership, joint venture, trust or other
enterprise against any such expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under the DGCL.
(e) Severability. If any provision or provisions of this
Article X shall be held to be invalid, illegal or unenforceable for any reason
whatsoever: (1) the validity, legality and enforceability of the remaining
provisions of this Article X (including, without limitation, each portion of any
paragraph of this Article X containing any such provision held to be invalid,
illegal or unenforceable, that is not itself held to be invalid, illegal or
unenforceable) shall not in any way be affected or impaired thereby; and (2) to
the fullest extent possible, the provisions of this Article X (including,
without limitation, each such portion of any paragraph of this Article X
containing any such provision held to be invalid, illegal or unenforceable)
shall be construed so as to give effect to the intent manifested by the
provision or provisions held invalid, illegal or unenforceable.
IN WITNESS WHEREOF, said Duke Capital Corporation has caused
this Restated Certificate of Incorporation to be signed by its President and
attested by its Secretary this 30th day of March, 1998.
Attest:
- --------------------------------- -----------------------------------
Robert S. Lilien Richard B. Priory
Secretary President
EXHIBIT 3.2
BY-LAWS
OF
DUKE CAPITAL CORPORATION
Article I
Offices and Records
Section I.1. Delaware Office. The principal office of the
Corporation in the State of Delaware shall be located in the City of Wilmington,
County of New Castle, and the name and address of its registered agent is
Delaware Corporate Management, Inc.
Section I.2. Other Offices. The Corporation may have such
other offices, either within or without the State of Delaware, as the Board of
Directors may designate or as the business of the Corporation may from time to
time require.
Section I.3. Books and Records. The books and records of the
Corporation may be kept outside the State of Delaware at such place or places as
may from time to time be designated by the Board of Directors.
Article II
Stockholders
Section II.1. Annual Meeting. The annual meeting of the
stockholders of the Corporation shall be held on such date and at such time as
may be fixed by resolution of the Board of Directors.
Section II.2 Special Meeting. Except as otherwise required by
law and subject to the rights of the holders of any class or series of stock
having a preference over the Common Stock as to dividends or upon liquidation,
special meetings of stockholders of the Corporation for any purpose or purposes
may be called only by:
(i) the Board of Directors pursuant to a resolution stating
the purpose or purposes thereof approved by a majority of the total
number of directors which the Corporation would have if there were no
vacancies (the "Whole Board") or
(ii) by the Chairman of the Board of Directors of the
Corporation.
No business other than that stated in the notice shall be transacted at any
special meeting.
Section II.3. Place of Meeting. The Board of Directors or the
Chairman of the Board, as the case may be, may designate the place of meeting
for any annual meeting or for any special meeting of the stockholders. If no
designation is so made, the place of meeting shall be the principal office of
the Corporation.
<PAGE>
Section II.4. Notice of Meeting. Written or printed notice,
stating the place, day and hour of the meeting and the purpose or purposes for
which the meeting is called, shall be delivered by the Corporation not less than
10 calendar days nor more than 60 calendar days before the date of the meeting,
either personally or by mail, to each stockholder of record entitled to vote at
such meeting. If mailed, such notice shall be deemed to be delivered when
deposited in the United States mail with postage thereon prepaid, addressed to
the stockholder at such person's address as it appears on the stock transfer
books of the Corporation. Such further notice shall be given as may be required
by law. Only such business shall be conducted at a special meeting of
stockholders as shall have been brought before the meeting pursuant to the
Corporation's notice of meeting. Meetings may be held without notice if all
stockholders entitled to vote are present, or if notice is waived by those not
present in accordance with Section 6.4 of these By-Laws. Any previously
scheduled meeting of the stockholders may be postponed, and any special meeting
of the stockholders may be canceled, by resolution of the Board of Directors
upon public notice given prior to the date previously scheduled for such meeting
of stockholders.
Section II.5. Quorum and Adjournment; Voting. Except as
otherwise provided by law or by the Certificate of Incorporation, the holders of
a majority of the voting power of all outstanding shares of the Corporation
entitled to vote generally in the election of directors (the "Voting Stock"),
represented in person or by proxy, shall constitute a quorum at a meeting of
stockholders, except that when specified business is to be voted on by a class
or series of stock voting as a class, the holders of a majority of the shares of
such class or series shall constitute a quorum of such class or series for the
transaction of such business. The chairman of the meeting may adjourn the
meeting from time to time, whether or not there is such a quorum. No notice of
the time and place of adjourned meetings need be given except as required by
law. The stockholders present at a duly called meeting at which a quorum is
present may continue to transact business until adjournment, notwithstanding the
withdrawal of enough stockholders to leave less than a quorum.
Section II.6. Proxies. At all meetings of stockholders, a
stockholder may vote by proxy executed in writing (or in such manner prescribed
by the General Corporation Law of the State of Delaware (the "DGCL")) by the
stockholder, or by such person's duly authorized attorney-in-fact.
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<PAGE>
Section II.7. Notice of Stockholder Business and Nominations.
(A) Annual Meetings of Stockholders.
(1) Nominations of persons for election to the Board of
Directors of the Corporation and the proposal of business to be
considered by the stockholders may be made at an annual meeting of
stockholders (a) pursuant to the Corporation's notice of meeting
pursuant to Section 2.4 of these By-Laws, (b) by or at the direction of
the Board of Directors, (c) by any stockholder of the Corporation who
was a stockholder of record at the time of giving of notice provided
for in this By-Law, who is entitled to vote at the meeting and who
complies with the notice procedures set forth in this By-Law, or (d)
prior to the Trigger Date (as defined in the Certificate of
Incorporation), by Duke Energy Corporation.
(2) For nominations or other business to be properly brought
before an annual meeting by a stockholder pursuant to clause (c) of
paragraph (A)(1) of this By-Law, the stockholder must have given timely
notice thereof in writing to the Secretary of the Corporation and such
other business must otherwise be a proper matter for stockholder
action. To be timely, a stockholder's notice shall be delivered to the
Secretary at the principal executive offices of the Corporation not
later than the close of business on the 90th calendar day nor earlier
than the close of business on the 120th calendar day prior to the first
anniversary of the preceding year's annual meeting; provided, however,
that in the event that the date of the annual meeting is more than 30
calendar days before or more than 60 calendar days after such
anniversary date, notice by the stockholder to be timely must be so
delivered not earlier than the close of business on the 120th calendar
day prior to such annual meeting and not later than the close of
business on the later of the 90th calendar day prior to such annual
meeting or the 10th calendar day following the calendar day on which
public announcement of the date of such meeting is first made by the
Corporation. In no event shall the public announcement of an
adjournment of an annual meeting commence a new time period for the
giving of a stockholder's notice as described above. Such stockholder's
notice shall set forth (a) as to each person whom the stockholder
proposes to nominate for election or reelection as a director, all
information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors in an election
contest, or is otherwise required, in each case pursuant to Regulation
14A under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and Rule 14a-11 thereunder (including such person's
written consent to being named in the proxy statement as a nominee and
to serving as a director if elected); (b) as to any other business that
the stockholder proposes to bring before the meeting, a brief
description of the business desired to be brought before the meeting,
the reasons for conducting such business at the meeting and any
material interest in such business of such stockholder and the
beneficial owner, if any, on whose behalf the proposal is made; and (c)
as to the stockholder giving the notice and the beneficial owner, if
any, on whose
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<PAGE>
behalf the nomination or proposal is made (i) the name and address of
such stockholder, as they appear on the Corporation's books, and of
such beneficial owner and (ii) the class and number of shares of the
Corporation which are owned beneficially and of record by such
stockholder and such beneficial owner.
(3) Notwithstanding anything in the second sentence of
paragraph (A)(2) of this By-Law to the contrary, in the event that the
number of directors to be elected to the Board of Directors of the
Corporation is increased and there is no public announcement by the
Corporation naming all of the nominees for director or specifying the
size of the increased Board of Directors at least 100 calendar days
prior to the first anniversary of the preceding year's annual meeting,
a stockholder's notice required by this By-Law shall also be considered
timely, but only with respect to nominees for any new positions created
by such increase, if it shall be delivered to the Secretary at the
principal executive offices of the Corporation not later than the close
of business on the 10th calendar day following the day on which such
public announcement is first made by the Corporation.
(B) Special Meetings of Stockholders. Only such business shall
be conducted at a special meeting of stockholders as shall have been
brought before the meeting pursuant to the Corporation's notice of
meeting under Section 2.4 of these By-Laws. Nominations of persons for
election to the Board of Directors may be made at a special meeting of
stockholders at which directors are to be elected pursuant to the
Corporation's notice of meeting (a) by or at the direction of the Board
of Directors, (b) provided that the Board of Directors has determined
that directors shall be elected at such meeting, by any stockholder of
the Corporation who is a stockholder of record at the time of giving of
notice provided for in this By-Law, who shall be entitled to vote at
the meeting and who complies with the notice procedures set forth in
this By-Law, or (c) prior to the Trigger Date, by Duke Energy
Corporation. In the event the Corporation calls a special meeting of
stockholders for the purpose of electing one or more directors to the
Board of Directors, any stockholder may nominate a person or persons
(as the case may be) for election to such position(s) as specified in
the Corporation's notice of meeting pursuant to clause (b) if the
stockholder's notice required by paragraph (A)(2) of this By-Law shall
be delivered to the Secretary at the principal executive offices of the
Corporation not earlier than the close of business on the 120th
calendar day prior to such special meeting and not later than the close
of business on the later of the 90th calendar day prior to such special
meeting or the 10th calendar day following the day on which public
announcement is first made of the date of the special meeting and of
the nominees proposed by the Board of Directors to be elected at such
meeting. In no event shall the public announcement of an adjournment of
a special meeting commence a new time period for the giving of a
stockholder's notice as described above.
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<PAGE>
(C) General.
(1) Only such persons who are nominated in accordance with the
procedures set forth in this By-Law shall be eligible to serve as
directors and only such business shall be conducted at a meeting of
stockholders as shall have been brought before the meeting in
accordance with the procedures set forth in this By-Law. Except as
otherwise provided by law, the Certificate of Incorporation or these
By-Laws, the Chairman of the meeting shall have the power and duty to
determine whether a nomination or any business proposed to be brought
before the meeting was made or proposed, as the case may be, in
accordance with the procedures set forth in this By-Law and, if any
proposed nomination or business is not in compliance with this By-Law,
to declare that such defective proposal or nomination shall be
disregarded.
(2) For purposes of this By-Law, "public announcement" shall
mean disclosure in a press release reported by the Dow Jones News
Service, Associated Press or comparable national news service or in a
document publicly filed by the Corporation with the Securities and
Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange
Act.
(3) Notwithstanding the foregoing provisions of this By-Law, a
stockholder shall also comply with all applicable requirements of the
Exchange Act and the rules and regulations thereunder with respect to
the matters set forth in this By-Law. Nothing in this By-Law shall be
deemed to affect any rights (i) of stockholders to request inclusion of
proposals in the Corporation's proxy statement pursuant to Rule 14a-8
under the Exchange Act or (ii) of the holders of any series of
Preferred Stock to elect directors under an applicable Preferred Stock
Designation (as defined in the Certificate of Incorporation).
Section II.8. Procedure for Election of Directors; Required
Vote. Election of directors at all meetings of the stockholders at which
directors are to be elected shall be by ballot, and, subject to the rights of
the holders of any series of Preferred Stock to elect directors under an
applicable Preferred Stock Designation, a plurality of the votes cast thereat
shall elect directors. Except as otherwise provided by law, the Certificate of
Incorporation, Preferred Stock Designation or these By-Laws, in all matters
other than the election of directors, the affirmative vote of a majority of the
voting power of the shares present in person or represented by proxy at the
meeting and entitled to vote on the matter shall be the act of the stockholders.
Section II.9. Inspectors of Elections; Opening and Closing the
Polls. Effective as of the Trigger Date, the Board of Directors by resolution
shall appoint, or shall authorize an officer of the Corporation to appoint, one
or more inspectors, which inspector or inspectors may include individuals who
serve the Corporation in other capacities, including, without limitation, as
officers, employees, agents or representatives, to act at the meetings of
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<PAGE>
stockholders and make a written report thereof. One or more persons may be
designated as alternate inspector(s) to replace any inspector who fails to act.
If no inspector or alternate has been appointed to act or is able to act at a
meeting of stockholders, the Chairman of the meeting shall appoint one or more
inspectors to act at the meeting. Each inspector, before discharging such
person's duties, shall take and sign an oath faithfully to execute the duties of
inspector with strict impartiality and according to the best of such person's
ability. The inspector(s) shall have the duties prescribed by law. The Chairman
of the meeting shall fix and announce at the meeting the date and time of the
opening and the closing of the polls for each matter upon which the stockholders
will vote at a meeting.
Section II.10. Conduct of Meetings. The Board of Directors may
to the extent not prohibited by law adopt such rules and regulations for the
conduct of the meeting of stockholders as it shall deem appropriate. Except to
the extent inconsistent with such rules and regulations as adopted by the Board
of Directors, the chairman of any meeting of stockholders shall have the right
and authority to prescribe such rules, regulations and procedures and to do all
such acts as, in the judgment of such chairman, are appropriate for the proper
conduct of the meeting. Such rules, regulations or procedures, whether adopted
by the Board of Directors or prescribed by the chairman of the meeting, may to
the extent not prohibited by law include, without limitation, the following: (i)
the establishment of an agenda or order of business for the meeting; (ii) rules
and procedures for maintaining order at the meeting and the safety of those
present; (iii) limitations on attendance at or participation in the meeting to
stockholders of record of the Corporation, their duly authorized and constituted
proxies or such other persons as the chairman of the meeting shall determine;
(iv) restrictions on entry to the meeting after the time fixed for the
commencement thereof; and (v) limitations on the time allotted to questions or
comments by participants. The date and time of the opening and the closing of
the polls for each matter upon which the stockholders will vote at a meeting
shall be announced at the meeting by the person presiding over the meeting.
Unless, and to the extent determined by the Board of Directors or the chairman
of the meeting, meetings of stockholders shall not be required to be held in
accordance with the rules of parliamentary procedure.
Section II.11. No Stockholder Action by Written Consent.
Effective as of the Trigger Date, any action required or permitted to be taken
by the stockholders of the Corporation must be effected at a duly called annual
or special meeting of such holders and may not be effected by any consent in
writing by such holders.
Article III
Board of Directors
Section III.1. General Powers. The business and affairs of the
Corporation shall be managed under the direction of the Board of Directors. In
addition to the powers and authorities by these By-Laws expressly conferred upon
them, the Board of Directors may exercise all such powers of the Corporation and
do all such lawful acts and things as are not by statute, by the Certificate of
Incorporation or by these By-Laws required to be exercised or done by the
stockholders.
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Section III.2. Number; Qualifications and Tenure. Except as
otherwise fixed by or pursuant to the provisions of Article IV of the
Certificate of Incorporation relating to the rights of the holders of any class
or series of stock having a preference over the Common Stock as to dividends or
upon liquidation to elect additional directors under specified circumstances,
the number of the directors of the Corporation shall not be less than three nor
more than sixteen, as may be fixed from time to time exclusively pursuant to a
resolution adopted by a majority of the Whole Board. A director must be a
stockholder of the Corporation. Effective as of the Trigger Date, the directors,
other than those who may be elected by the holders of any class or series of
stock having a preference over the Common Stock as to dividends or upon
liquidation, shall be classified, with respect to the time for which they
severally hold office, into three classes, as nearly equal in number as
possible, one class to be originally elected for a term expiring at the first
annual meeting of stockholders after the Trigger Date, another class to be
originally elected for a term expiring at the second annual meeting of
stockholders after the Trigger Date, and another class to be originally elected
for a term expiring at the third annual meeting of stockholders after the
Trigger Date, with each class to hold office until its successor is duly elected
and qualified. At each succeeding annual meeting of stockholders, directors
elected to succeed those directors whose terms then expire shall be elected for
a term of office to expire at the third succeeding annual meeting of
stockholders after their election, with each director to hold office until such
person's successor shall have been duly elected and qualified.
Section III.3. Regular Meetings. A regular meeting of the
Board of Directors shall be held without other notice than this By-Law
immediately after, and at the same place as, the annual meeting of stockholders.
The Board of Directors may, by resolution, provide the time and place for the
holding of additional regular meetings without other notice than such
resolution.
Section III.4. Special Meetings. Special meetings of the Board
of Directors shall be called at the request of the Chairman of the Board or a
majority of the Board of Directors then in office. The person or persons
authorized to call special meetings of the Board of Directors may fix the place
and time of the meetings.
Section III.5. Notice. Notice of any special meeting of
directors shall be given to each director at such person's business or residence
in writing by hand delivery, first-class or overnight mail or courier service,
telegram or facsimile transmission, or orally by telephone. If mailed by
first-class mail, such notice shall be deemed adequately delivered when
deposited in the United States mail so addressed, with postage thereon prepaid,
at least 5 calendar days before such meeting. If by telegram, overnight mail or
courier service, such notice shall be deemed adequately delivered when the
telegram is delivered to the telegraph company or the notice is delivered to the
overnight mail or courier service company at least 24 hours before such meeting.
If by facsimile transmission, such notice shall be deemed adequately delivered
when the notice is transmitted at least 12 hours before such meeting. If by
telephone or by hand delivery, the notice shall be given at least 12 hours prior
to the time set
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for the meeting. Neither the business to be transacted at, nor the purpose of,
any regular or special meeting of the Board of Directors need be specified in
the notice of such meeting, except for amendments to these By-Laws, as provided
under Section 9.1. A meeting may be held at any time without notice if all the
directors are present or if those not present waive notice of the meeting either
before or after such meeting.
Section III.6. Action by Consent of Board of Directors. Any
action required or permitted to be taken at any meeting of the Board of
Directors or of any committee thereof may be taken without a meeting if all
members of the Board of Directors or committee, as the case may be, consent
thereto in writing, and the writing or writings are filed with the minutes of
proceedings of the Board of Directors or committee.
Section III.7. Conference Telephone Meetings. Members of the
Board of Directors or any committee thereof may participate in a meeting of the
Board of Directors or such committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and such participation in a meeting shall
constitute presence in person at such meeting.
Section III.8. Quorum. Subject to Section 3.9, a whole number
of directors equal to at least a majority of the Whole Board shall constitute a
quorum for the transaction of business, but if at any meeting of the Board of
Directors there shall be less than a quorum present, a majority of the directors
present may adjourn the meeting from time to time without further notice. The
act of the majority of the directors present at a meeting at which a quorum is
present shall be the act of the Board of Directors. The directors present at a
duly organized meeting may continue to transact business until adjournment,
notwithstanding the withdrawal of enough directors to leave less than a quorum.
Section III.9. Vacancies. Effective as of the Trigger Date,
except as otherwise provided for or fixed by or pursuant to the provisions of
Article IV of the Certificate of Incorporation relating to the rights of the
holders of any class or series of stock having a preference over the Common
Stock as to dividends or upon liquidation to elect directors under specified
circumstances, newly created directorships resulting from any increase in the
number of directors and any vacancies on the Board of Directors resulting from
death, resignation, disqualification, removal or other cause shall be filled by
the affirmative vote of a majority of the remaining directors then in office,
even though less than a quorum of the Board of Directors. Any director elected
in accordance with the preceding sentence shall hold office for the remainder of
the full term of the class of directors in which the new directorship was
created or the vacancy occurred and until such director's successor shall have
been duly elected and qualified. No decrease in the number of directors
constituting the Board of Directors shall shorten the term of any incumbent
director.
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Section III.10 Executive and Other Committees. (a) The Board
of Directors may, by resolution adopted by a majority of the Whole Board,
designate an Executive Committee to exercise, subject to applicable provisions
of law, all the powers of the Board of Directors in the management of the
business and affairs of the Corporation when the Board of Directors is not in
session, including without limitation the power to declare dividends, to
authorize the issuance of the Corporation's capital stock and to adopt a
certificate of ownership and merger pursuant to Section 253 of the DGCL, and
may, by resolution similarly adopted, designate one or more other committees.
The Executive Committee and each such other committee shall consist of two or
more directors of the Corporation. The Board of Directors may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee. Any such committee,
other than the Executive Committee (the powers of which are expressly provided
for herein), may to the extent permitted by law exercise such powers and shall
have such responsibilities as shall be specified in the designating resolution.
In the absence or disqualification of any member of such committee or
committees, the member or members thereof present at any meeting and not
disqualified from voting, whether or not constituting a quorum, may unanimously
appoint another member of the Board of Directors to act at the meeting in place
of any such absent or disqualified member. Each committee shall keep written
minutes of its proceedings and shall report such proceedings to the Board of
Directors when required.
(b) A majority of any committee may determine its action and
fix the time and place of its meetings unless the Board of Directors shall
otherwise provide. Notice of such meetings shall be given to each member of the
committee in the manner provided for in Section 3.5 of these By-Laws. The Board
of Directors shall have power at any time to fill vacancies in, to change the
membership of, or to dissolve any such committee. Nothing herein shall be deemed
to prevent the Board of Directors from appointing one or more committees
consisting in whole or in part of persons who are not directors of the
Corporation; provided, however, that no such committee shall have or may
exercise any authority of the Board of Directors.
Section III.11. Removal. Effective as of the Trigger Date,
subject to the rights of any class or series of stock having a preference over
the Common Stock as to dividends or upon liquidation to elect directors under
specified circumstances, any director may be removed from office only for cause
by the affirmative vote of the holders of at least a majority of the voting
power of all Voting Stock then outstanding, voting together as a single class.
"Cause" for removal of a director under this Section 3.11 means fraudulent or
dishonest acts, or gross abuse of authority in the discharge of duties to the
Corporation, and must be established after written notice of specific charges
and an opportunity to meet and refute such charges.
Section III.12. Records. The Board of Directors shall cause to
be kept a record containing the minutes of the proceedings of the meetings of
the Board of Directors and of the stockholders, appropriate stock books and
registers and such books of records and accounts as may be necessary for the
proper conduct of the business of the Corporation.
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Article IV
Officers
Section IV.1. Elected Officers. The elected officers of the
Corporation shall be a Chairman of the Board, a President, a Secretary, a
Treasurer, and such other officers (including, without limitation, Executive
Vice Presidents, Senior Vice Presidents and Vice Presidents) as the Board of
Directors from time to time may deem proper. The Chairman of the Board shall be
chosen from among the directors. All officers elected by the Board of Directors
shall each have such powers and duties as generally pertain to their respective
offices, subject to the specific provisions of this Article IV. Such officers
shall also have such powers and duties as from time to time may be conferred by
the Board of Directors or by any committee thereof. The Board of Directors or
any committee thereof may from time to time elect, or the Chairman of the Board
may appoint, such other officers (including one or more Vice Presidents,
Controllers, Assistant Secretaries and Assistant Treasurers), as may be
necessary or desirable for the conduct of the business of the Corporation. Such
other officers and agents shall have such duties and shall hold their offices
for such terms as shall be provided in these By-Laws or as may be prescribed by
the Board of Directors or such committee or by the Chairman of the Board, as the
case may be.
Section IV.2. Election and Term of Office. The elected
officers of the Corporation shall be elected annually by the Board of Directors
at the regular meeting of the Board of Directors held after the annual meeting
of the stockholders. If the election of officers shall not be held at such
meeting, such election shall be held as soon thereafter as convenient. Each
officer shall hold office until such person's successor shall have been duly
elected and shall have qualified or until such person's death or until he shall
resign or be removed pursuant to Section 4.8.
Section IV.3. Chairman of the Board; Chief Executive Officer.
The Chairman of the Board shall preside at all meetings of the stockholders and
of the Board of Directors and shall be the Chief Executive Officer of the
Corporation. The Chairman of the Board shall be responsible for the general
management of the affairs of the Corporation and shall perform all duties
incidental to such person's office which may be required by law and all such
other duties as are properly required of him by the Board of Directors. He shall
make reports to the Board of Directors and the stockholders and shall see that
all orders and resolutions of the Board of Directors and of any committee
thereof are carried into effect. The Chairman of the Board may also serve as
President, if so elected by the Board of Directors. The directors also may elect
a Vice-Chairman to act in the place of the Chairman upon his or her absence or
inability to act.
Section IV.4. President. The President shall act in a general
executive capacity and shall assist the Chairman of the Board in the
administration and operation of the Corporation's business and general
supervision of its policies and affairs. The President, if he is also a
director, shall, in the absence of or because of the inability to act of the
Chairman of the
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Board, perform all duties of the Chairman of the Board and preside at all
meetings of stockholders and of the Board of Directors.
Section IV.5. Vice Presidents. Each Executive Vice President
and Senior Vice President and any Vice President shall have such powers and
shall perform such duties as shall be assigned to him by the Board of Directors
or the Chairman of the Board.
Section IV.6. Treasurer. (a) The Treasurer shall exercise
general supervision over the receipt, custody and disbursement of corporate
funds. The Treasurer shall cause the funds of the Corporation to be deposited in
such banks as may be authorized by the Board of Directors, or in such banks as
may be designated as depositories in the manner provided by resolution of the
Board of Directors. The Treasurer shall, in general, perform all duties incident
to the office of the Treasurer and shall have such further powers and duties and
shall be subject to such directions as may be granted or imposed from time to
time by the Board of Directors or the Chairman of the Board.
(b) Assistant Treasurers shall have such of the authority and
perform such of the duties of the Treasurer as may be provided in these By-Laws
or assigned to them by the Board of Directors, the Chairman of the Board or the
Treasurer. Assistant Treasurers shall assist the Treasurer in the performance of
the duties assigned to the Treasurer, and in assisting the Treasurer, each
Assistant Treasurer shall for such purpose have the powers of the Treasurer.
During the Treasurer's absence or inability, the Treasurer's authority and
duties shall be possessed by such Assistant Treasurer or Assistant Treasurers as
the Board of Directors or the Chairman of the Board may designate.
Section IV.7. Secretary. (a) The Secretary shall keep or cause
to be kept, in one or more books provided for that purpose, the minutes of all
meetings of the Board of Directors, the committees of the Board of Directors and
the stockholders. The Secretary shall see that all notices are duly given in
accordance with the provisions of these By-Laws and as required by law; shall be
custodian of the records and the seal of the Corporation and affix and attest
the seal to all stock certificates of the Corporation (unless the seal of the
Corporation on such certificates shall be a facsimile, as hereinafter provided)
and affix and attest the seal to all other documents to be executed on behalf of
the Corporation under its seal; and shall see that the books, reports,
statements, certificates and other documents and records required by law to be
kept and filed are properly kept and filed; and in general, shall perform all
the duties incident to the office of Secretary and such other duties as from
time to time may be assigned to the Secretary by the Board of Directors or the
Chairman of the Board.
(b) Assistant Secretaries shall have such of the authority and
perform such of the duties of the Secretary as may be provided in these By-Laws
or assigned to them by the Board of Directors, the Chairman of the Board or the
Secretary. Assistant Secretaries shall assist the Secretary in the performance
of the duties assigned to the Secretary, and in assisting the Secretary, each
Assistant Secretary shall for such purpose have the powers of the Secretary.
During the Secretary's absence or inability, the Secretary's authority and
duties shall
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be possessed by such Assistant Secretary or Assistant Secretaries as the Board
of Directors or the Chairman of the Board may designate.
Section IV.8. Removal. Any officer elected, or agent
appointed, by the Board of Directors may be removed by the affirmative vote of a
majority of the Whole Board whenever, in their judgment, the best interests of
the Corporation would be served thereby. Any officer or agent appointed by the
Chairman of the Board may be removed by him whenever, in the judgment of the
Chairman of the Board, the best interests of the Corporation would be served
thereby. No elected officer shall have any contractual rights against the
Corporation for compensation by virtue of such election beyond the date of the
election of such person's successor, such person's death, such person's
resignation or such person's removal, whichever event shall first occur, except
as otherwise provided in an employment contract or under an employee deferred
compensation plan.
Section IV.9. Vacancies. A newly created elected office and a
vacancy in any elected office because of death, resignation or removal may be
filled by the Board of Directors for the unexpired portion of the term at any
meeting of the Board of Directors. Any vacancy in an office appointed by the
Chairman of the Board because of death, resignation or removal may be filled by
the Chairman of the Board.
Article V
Stock Certificates and Transfers
Section V.1. Stock Certificates and Transfers. The interest of
each stockholder of the Corporation shall be evidenced by certificates for
shares of stock in such form as the appropriate officers of the Corporation may
from time to time prescribe. The shares of the stock of the Corporation shall be
transferred on the books of the Corporation by the holder thereof in person or
by such person's attorney, upon surrender for cancellation of certificates for
at least the same number of shares, with an assignment and power of transfer
endorsed thereon or attached thereto, duly executed, with such proof of the
authenticity of the signature as the Corporation or its agents may reasonably
require. The certificates of stock shall be signed, countersigned and registered
in such manner as the Board of Directors may by resolution prescribe, which
resolution may permit all or any of the signatures on such certificates to be in
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate has ceased to be
such officer, transfer agent or registrar before such certificate is issued, it
may be issued by the Corporation with the same effect as if he were such
officer, transfer agent or registrar at the date of issue. Notwithstanding the
foregoing provisions regarding share certificates, the proper officers of the
Corporation may provide that some or all of any or all classes or series of the
Corporation's common or any preferred shares may be uncertificated shares.
Section V.2. Lost, Stolen or Destroyed Certificates. No
certificate for shares of stock in the Corporation shall be issued in place of
any certificate alleged to have been lost, destroyed or stolen, except on
production of such evidence of such loss, destruction or
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theft and on delivery to the Corporation of a bond of indemnity in such amount,
upon such terms and secured by such surety, as the Board of Directors or any
financial officer may in its or such person's discretion require.
Article VI
Miscellaneous Provisions
Section VI.1. Fiscal Year. The fiscal year of the Corporation
shall begin on the first day of January and end on the thirty-first day of
December of each year.
Section VI.2. Dividends. The Board of Directors may from time
to time declare, and the Corporation may pay, dividends on its outstanding
shares in the manner and upon the terms and conditions provided by law and the
Certificate of Incorporation.
Section VI.3. Seal. The corporate seal shall have inscribed
thereon the words "Corporate Seal," the year of incorporation and the word
"Delaware."
Section VI.4. Waiver of Notice. Whenever any notice is
required to be given to any stockholder or director of the Corporation under the
provisions of the DGCL or these By-Laws, a waiver thereof in writing, signed by
the person or persons entitled to such notice, whether before or after the time
stated therein, shall be deemed equivalent to the giving of such notice. Neither
the business to be transacted at, nor the purpose of, any annual or special
meeting of the stockholders or the Board of Directors or committee thereof need
be specified in any waiver of notice of such meeting.
Section VI.5. Audits. The accounts, books and records of the
Corporation shall be audited upon the conclusion of each fiscal year by an
independent certified public accountant selected by the Board of Directors, and
it shall be the duty of the Board of Directors to cause such audit to be done
annually.
Section VI.6. Resignations. Any director or any officer,
whether elected or appointed, may resign at any time by giving written notice of
such resignation to the Chairman of the Board or the Secretary, and such
resignation shall be deemed to be effective as of the close of business on the
date said notice is received by the Chairman of the Board or the Secretary, or
at such later time as is specified therein. No formal action shall be required
of the Board of Directors or the stockholders to make any such resignation
effective.
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Article VII
Contracts, Proxies, Etc.
Section VII.1. Contracts. Except as otherwise required by law,
the Certificate of Incorporation, a Preferred Stock Designation, or these
By-Laws, any contracts or other instruments may be executed and delivered in the
name and on the behalf of the Corporation by such officer or officers of the
Corporation as the Board of Directors may from time to time direct. Such
authority may be general or confined to specific instances as the Board of
Directors may determine. The Chairman of the Board, the President or any
Executive Vice President, Senior Vice President or Vice President may execute
bonds, contracts, deeds, leases and other instruments to be made or executed for
or on behalf of the Corporation. Subject to any restrictions imposed by the
Board of Directors, the Chairman of the Board, the President or any Executive
Vice President, Senior Vice President or Vice President of the Corporation may
delegate contractual powers to others under such person's jurisdiction, it being
understood, however, that any such delegation of power shall not relieve such
officer of responsibility with respect to the exercise of such delegated power.
Section VII.2. Proxies. Unless otherwise provided by
resolution adopted by the Board of Directors, the Chairman of the Board, the
President or any Executive Vice President, Senior Vice President or Vice
President may from time to time appoint an attorney or attorneys or agent or
agents of the Corporation, in the name and on behalf of the Corporation, to cast
the votes which the Corporation may be entitled to cast as the holder of stock
or other securities in any other corporation, any of whose stock or other
securities may be held by the Corporation, at meetings of the holders of the
stock or other securities of such other corporation, or to consent in writing,
in the name of the Corporation as such holder, to any action by such other
corporation, and may instruct the person or persons so appointed as to the
manner of casting such votes or giving such consent, and may execute or cause to
be executed in the name and on behalf of the Corporation and under its corporate
seal or otherwise, all such written proxies or other instruments as he may deem
necessary or proper in the premises.
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Article VIII
Emergency Provisions
Section VIII.1. General. The provisions of this Article shall
be operative only during a national emergency declared by the President of the
United States or the person performing the President's functions, or in the
event of a nuclear, atomic or other attack on the United States or on a locality
in which the Corporation conducts its principal business or customarily holds
meetings of its Board of Directors or its stockholders, or during the existence
of any other catastrophic event or similar emergency, as a result of which a
quorum of the Board of Directors cannot readily be assembled for action. Said
provisions in such event shall override all other By-Laws of the Corporation in
conflict with any provisions of this Article, and shall remain operative during
such emergency, but thereafter shall be inoperative; provided that all actions
taken in good faith pursuant to such provisions shall thereafter remain in full
force and effect unless and until revoked by action taken pursuant to the
provisions of the By-Laws other than those contained in this Article.
Section VIII.2. Unavailable Directors. All directors of the
Corporation who are not available to perform their duties as directors by reason
of physical or mental incapacity or for any other reason or who are unwilling to
perform their duties or whose whereabouts are unknown shall automatically cease
to be directors, with like effect as if such persons had resigned as directors,
so long as such unavailability continues.
Section VIII.3. Authorized Number of Directors. The authorized
number of directors shall be the number of directors remaining after eliminating
those who have ceased to be directors pursuant to Section 8.2, or the minimum
number required by law, whichever number is greater.
Section VIII.4. Quorum. The number of directors necessary to
constitute a quorum shall be one-third of the authorized number of directors as
specified in Section 8.3, or such other minimum number as, pursuant to the law
or lawful decree then in force, it is possible for the by-laws of a corporation
to specify.
Section VIII.5. Creation of Emergency Committee. In the event
the number of directors remaining after eliminating those who have ceased to be
directors pursuant to Section 8.2 is less than the minimum number of authorized
directors required by law, then until the appointment of additional directors to
make up such required minimum, all the powers and authorities which the Board of
Directors could by law delegate, including all powers and authorities which the
Board of Directors could delegate to a committee, shall be automatically vested
in an emergency committee, and the emergency committee shall thereafter manage
the affairs of the Corporation pursuant to such powers and authorities and shall
have all other powers and authorities as may by law or lawful decree be
conferred on any person or body of persons during a period of emergency.
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Section VIII.6. Constitution of Emergency Committee. The
emergency committee shall consist of all the directors remaining after
eliminating those who have ceased to be directors pursuant to Section 8.2,
provided that such remaining directors are not less than three in number. In the
event such remaining directors are less than three in number, the emergency
committee shall consist of three persons, who shall be the remaining director or
directors and either one or two officers or employees of the Corporation, as the
remaining director or directors may in writing designate. If there is no
remaining director, the emergency committee shall consist of the three most
senior officers of the Corporation who are available to serve and, if and to the
extent that officers are not available, the most senior employees of the
Corporation. Seniority shall be determined in accordance with any designation of
seniority in the minutes of the proceedings of the Board of Directors and, in
the absence of such designation, shall be determined by rate of remuneration.
Section VIII.7. Powers of Emergency Committee. The emergency
committee, once appointed, shall govern its own procedures and shall have power
to increase the number of members thereof beyond the original number, and in the
event of a vacancy or vacancies therein, arising at any time, the remaining
member or members of the emergency committee shall have the power to fill such
vacancy or vacancies. In the event at any time after its appointment all members
of the emergency committee shall die or resign or become unavailable to act for
any reason whatsoever, a new emergency committee shall be appointed in
accordance with the foregoing provisions of this Article 8.
Section VIII.8. Directors Becoming Available. Any person who
has ceased to be a director pursuant to the provisions of Section 8.2 and who
thereafter becomes available to serve as a director shall automatically become a
member of the emergency committee.
Section VIII.9. Election of Board of Directors. The emergency
committee shall, as soon after its appointment as is practicable, take all
requisite action to secure the election of a board of directors, and upon such
election all the powers and authorities of the emergency committee shall cease.
Section VIII.10. Termination of Emergency Committee. In the
event, after the appointment of an emergency committee, a sufficient number of
persons who ceased to be directors pursuant to Section 8.2 become available to
serve as directors, so that if they had not ceased to be directors as aforesaid,
there would be sufficient directors to constitute the minimum number of
directors required by law, then all such persons shall automatically be deemed
to be reappointed as directors, and the powers and authorities of the emergency
committee shall terminate.
Section VIII.11. Nonexclusive Powers. The emergency powers
provided in this Article 8 shall be in addition to any powers provided by law.
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Article IX
Amendments
Section IX.1. Amendments. The By-Laws may be altered or
repealed and new By-Laws may be adopted (1) at any annual or special meeting of
stockholders by the affirmative vote of the holders of a majority of the voting
power of the stock issued and outstanding and entitled to vote thereat;
provided, however, that any proposed alteration or repeal of, or the adoption of
any By-Law inconsistent with, Section 2.2, 2.7 or 2.11 of Article II or Section
3.2, 3.9 or 3.11 of Article III of the By-Laws by the stockholders shall require
the affirmative vote of the holders of at least 80% of the voting power of all
Voting Stock then outstanding, voting together as a single class; and provided,
further, however, that, in the case of any such stockholder action at a special
meeting of stockholders, notice of the proposed alteration, repeal or adoption
of the new By-Law or By-Laws must be contained in the notice of such special
meeting or (2) by the affirmative vote of a majority of the Whole Board.
# # #
17
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
- --------------------------------------------------------------------------------
Dollars in Millions Years Ended December 31
- --------------------------------------------------------------------------------
1997(a) 1996(a) 1995(a) 1994(a) 1993(a)
-------------------------------------------
Earnings before income taxes $636.9 $651.1 $572.3 $448.5 $321.6
Fixed charges 234.7 253.6 264.2 263.2 298.5
-------------------------------------------
Total $871.6 $904.7 $836.5 $711.7 $620.1
===========================================
Fixed charges:
Interest on debt $224.3 $237.5 $252.9 $253.2 $289.2
Interest component of rentals 10.4 16.1 11.3 10.0 9.3
-------------------------------------------
Fixed charges $234.7 $253.6 $264.2 $263.2 $298.5
===========================================
Ratio of earnings to fixed charges 3.7 3.6 3.2 2.7 2.1
- --------------------------------------------------------------------------------
(a) Financial information reflects accounting for the combination with PanEnergy
Corp as a pooling of interests. As a result, the financial information gives
effect to the merger as if it had occurred on January 1, 1993.
EXHIBIT 21
LIST OF SUBSIDIARIES
The following is a list of certain subsidiaries of the registrant and
their respective states of incorporation (100% owned unless otherwise
indicated):
Algonquin Gas Transmission Company (Delaware)
Crescent Resources, Inc. (South Carolina)
Duke Energy Field Services, Inc. (Colorado)
Duke Energy Natural Gas Corporation (Delaware)
Duke Energy Trading and Marketing, L.L.C. (Delaware) (60% owned)
Duke Engineering and Services, Inc. (North Carolina)
PanEnergy Corp (Delaware)
Panhandle Eastern Pipe Line Company (Delaware)
Texas Eastern Transmission Corporation (Delaware)
Trunkline Gas Company (Delaware)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Duke
Capital Corporation Annual Report on Form 10 for the year ended December 31,
1997 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0001051116
<NAME> DUKE CAPITAL CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 94,300
<SECURITIES> 0
<RECEIVABLES> 1,621,400
<ALLOWANCES> 0
<INVENTORY> 182,400
<CURRENT-ASSETS> 2,656,300
<PP&E> 9,696,500
<DEPRECIATION> 3,631,300
<TOTAL-ASSETS> 11,096,800
<CURRENT-LIABILITIES> 2,597,100
<BONDS> 2,918,800
0
0
<COMMON> 0
<OTHER-SE> 3,365,400
<TOTAL-LIABILITY-AND-EQUITY> 11,096,800
<SALES> 9,815,600
<TOTAL-REVENUES> 11,914,800
<CGS> 9,363,300
<TOTAL-COSTS> 10,642,000
<OTHER-EXPENSES> 437,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 214,200
<INCOME-PRETAX> 872,500
<INCOME-TAX> 256,600
<INCOME-CONTINUING> 380,300
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 380,300
<EPS-PRIMARY> 0 <F1>
<EPS-DILUTED> 0 <F1>
<FN>
<F1>Not meaningful since Duke Capital Corporation is a
wholly-owned subsidiary.
</FN>
</TABLE>
