- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1998 Commission File Number 0-23977
DUKE CAPITAL CORPORATION
(Exact name of Registrant as Specified in its Charter)
Delaware 51-0282142
(State or Other Jurisdiction of Incorporation) (IRS Employer Identification No.)
422 South Church Street
Charlotte, NC 28202-1904
(Address of Principal Executive Offices)
(Zip code)
704-594-6200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements since May 13, 1998. Yes x No __
All of the Registrant's common shares are directly owned by Duke Energy
Corporation (File No. 1-4928), which files reports and proxy materials pursuant
to the Securities Exchange Act of 1934.
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.
Number of shares of Common Stock, no par value, outstanding at November 13, 1998
1,010
- --------------------------------------------------------------------------------
<PAGE>
DUKE CAPITAL CORPORATION
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1998
INDEX
Item Page
- ---- ----
PART I. FINANCIAL INFORMATION
1. Financial Statements........................................................1
Consolidated Statements of Income for the Three and Nine Months Ended
September 30, 1998 and 1997.............................................1
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1998 and 1997.............................................2
Consolidated Balance Sheets as of September 30, 1998 and December
31, 1997...............................................................3
Notes to Consolidated Financial Statements...............................5
2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.......................................................11
PART II. OTHER INFORMATION
1. Legal Proceedings..........................................................19
5. Other Information..........................................................19
6. Exhibits and Reports on Form 8-K...........................................19
Signatures.................................................................20
i
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
DUKE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In millions)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------- ---------------------------
1998 1997 1998 1997
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Operating Revenues
Sales, trading and marketing of natural gas
and petroleum products $ 1,846.1 $ 2,032.0 $ 5,706.7 $ 5,666.4
Transportation and storage of natural gas 367.8 360.5 1,092.2 1,128.7
Trading and marketing of electricity 1,464.3 984.9 2,419.0 1,179.9
Other 202.8 166.3 650.6 431.8
------------ ------------ ------------ -------------
Total operating revenues 3,881.0 3,543.7 9,868.5 8,406.8
------------ ------------ ------------ -------------
Operating Expenses
Natural gas and petroleum products purchased 1,766.3 1,968.7 5,430.8 5,354.2
Purchased power 1,363.4 978.6 2,307.2 1,173.7
Other operation and maintenance 354.9 312.8 1,042.5 933.5
Depreciation and amortization 107.7 88.6 293.0 250.2
Property and other taxes 25.1 20.6 65.4 76.6
------------ ------------ ------------ -------------
Total operating expenses 3,617.4 3,369.3 9,138.9 7,788.2
------------ ------------ ------------ -------------
Operating Income 263.6 174.4 729.6 618.6
------------ ------------ ------------ -------------
Other Income and Expenses 15.9 3.7 71.8 37.3
------------ ------------ ------------ -------------
Earnings Before Interest and Taxes 279.5 178.1 801.4 655.9
Interest Expense 67.5 55.3 180.3 158.2
Minority Interests 23.7 (1.6) 43.2 10.7
------------ ------------ ------------ -------------
Earnings Before Income Taxes 188.3 124.4 577.9 487.0
Income Taxes 71.8 52.2 206.8 201.7
------------ ------------ ------------ -------------
Income Before Extraordinary Item 116.5 72.2 371.1 285.3
Extraordinary Item (net of tax) - - (8.0) -
------------ ------------ ------------ -------------
Net Income $ 116.5 $ 72.2 $ 363.1 $ 285.3
============ ============ ============ =============
</TABLE>
See Notes to Consolidated Financial Statements.
1
<PAGE>
DUKE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
<TABLE>
<CAPTION>
Nine Months Ended September 30
---------------------------
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 363.1 $ 285.3
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 299.8 256.6
Deferred income taxes 40.7 47.2
(Increase) Decrease in
Receivables (218.8) (303.9)
Inventory (34.7) (8.7)
Other current assets (10.3) 29.7
Increase (Decrease) in
Accounts payable 195.1 213.4
Taxes accrued (8.5) 55.8
Interest accrued (4.1) (16.0)
Other current liabilities (24.1) (119.6)
Other, net (36.6) (32.0)
------------ ------------
Net cash provided by operating activities 561.6 407.8
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (1,216.6) (404.6)
Investment expenditures (236.1) (366.6)
Proceeds from sales and other, net 81.9 78.8
------------ ------------
Net cash used in investing activities (1,370.8) (692.4)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issuance of
Long-term debt 508.6 528.6
Guaranteed preferred beneficial interests in
Company's subordinated notes 581.4 -
Payments for the redemption of long term debt (112.9) (184.4)
Net change in notes payable and commercial paper (70.8) (115.7)
Dividends paid - (72.7)
Other, net 21.6 14.4
------------ ------------
Net cash provided by financing activities 927.9 170.2
------------ ------------
Net increase (decrease) in cash and cash equivalents 118.7 (114.4)
Cash received from business acquisitions 37.9 -
Cash and cash equivalents at beginning of period 94.3 151.4
============ ============
Cash and cash equivalents at end of period $ 250.9 $ 37.0
============ ============
Supplemental Disclosures
Cash paid for interest (net of amount capitalized) $ 180.1 $ 177.1
Cash paid for income taxes $ 200.0 $ 81.4
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
DUKE CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
(unaudited)
----------- -----------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 250.9 $ 94.3
Receivables 1,856.9 1,621.4
Inventory 225.7 182.4
Current portion of natural gas transition costs 100.0 66.9
Unrealized gains on mark to market transactions 769.7 551.3
Other 151.8 140.0
----------- -----------
Total current assets 3,355.0 2,656.3
----------- -----------
Investments and Other Assets
Investments in affiliates 783.4 685.9
Pre-funded pension costs 318.2 302.6
Goodwill, net 504.3 503.6
Notes receivable 236.1 239.6
Unrealized gains on mark to market transactions 368.3 65.5
Other 161.5 89.7
----------- -----------
Total investments and other assets 2,371.8 1,886.9
----------- -----------
Property, Plant and Equipment
Cost 10,856.6 9,696.5
Less accumulated depreciation and amortization 3,843.6 3,631.3
----------- -----------
Net property, plant and equipment 7,013.0 6,065.2
----------- -----------
Regulatory Assets and Deferred Debits
Debt expense 59.8 65.6
Regulatory asset related to income taxes 14.4 16.9
Natural gas transition costs 106.6 193.7
Environmental clean-up costs 91.1 103.6
Other 71.2 108.6
----------- -----------
Total regulatory assets and deferred debits 343.1 488.4
----------- -----------
Total Assets $ 13,082.9 $ 11,096.8
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
DUKE CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions, except share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
(unaudited)
----------- -----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Accounts payable $ 1,545.2 $ 1,338.2
Notes payable and commercial paper 416.9 137.7
Taxes accrued 111.2 119.3
Interest accrued 46.6 50.7
Current portion of natural gas transition liabilities - 35.0
Current portion of environmental clean-up liabilities 14.3 26.4
Current maturities of long-term debt 25.3 22.5
Unrealized losses on mark to market transactions 775.8 537.8
Other 314.9 329.5
----------- -----------
Total current liabilities 3,250.2 2,597.1
----------- -----------
Long-term Debt 3,027.3 2,918.8
----------- -----------
Deferred Credits and Other Liabilities
Deferred income taxes 1,415.0 1,363.9
Natural gas transition liabilities 4.0 78.4
Environmental clean-up liabilities 150.0 157.6
Unrealized losses on mark to market transactions 341.5 50.3
Other 329.7 397.0
----------- -----------
Total deferred credits and other liabilities 2,240.2 2,047.2
----------- -----------
Minority Interests 251.4 168.3
----------- -----------
Guaranteed Preferred Beneficial Interests
in Company's Subordinated Notes 581.3 -
----------- -----------
Common Stockholder's Equity
Common stock, no par, 3,000 shares authorized,
1,010 shares outstanding - -
Paid-in capital 2,769.3 2,765.5
Retained earnings 963.2 599.9
----------- -----------
Total common stockholder's equity 3,732.5 3,365.4
----------- -----------
Total Liabilities and Stockholder's Equity $ 13,082.9 $ 11,096.8
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
DUKE CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General
Duke Capital Corporation (the Company) is a wholly owned subsidiary of Duke
Energy Corporation. 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 Parent and Other Operations.
The Natural Gas Transmission segment is engaged 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.
Parent and Other Operations include the real estate operations of Crescent
Resources, Inc. and communications services. Corporate costs and intersegment
eliminations are also included in the financial results of this segment.
The consolidated financial statements include the accounts of the Company and
all majority-owned subsidiaries. These consolidated financial statements reflect
all normal recurring adjustments that are, in the opinion of management,
necessary to present fairly the financial position and results of operations for
the respective periods. Amounts reported in the Consolidated Statements of
Income are not necessarily indicative of amounts expected for the respective
years due to the effects of seasonal temperature variations on energy
consumption.
Certain amounts for the prior period have been reclassified in the consolidated
financial statements to conform to the current presentation.
2. Related Party Transactions
Certain balances due to or from related parties included in the Consolidated
Balance Sheets at September 30, 1998 and December 31, 1997 are as follows:
- ----------------------------------------------------------
September 30, December 31,
In Millions 1998 1997
- ----------------------------------------------------------
Receivables $ 3.4 $ 17.9
Accounts payable 67.8 52.2
Taxes accrued 34.2 39.9
- ----------------------------------------------------------
5
<PAGE>
3. Business Segments
Business segment financial information follows for the three and nine months
ended September 30, 1998 and 1997. Parent and Other Operations includes
intersegment eliminations.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Earnings
Before
Interest Depreciation Capital and
Total Operating and and Investment
In Millions Revenues Income Taxes Amortization Expenditures
- --------------------------------------------------------------------------------------------------
Three Months Ended September
30, 1998
- -------------------------------
<S> <C> <C> <C> <C> <C>
Natural Gas Transmission $ 375.3 $ 170.6 $ 177.7 $ 58.0 $ 77.5
Energy Services
Field Services 725.5 9.3 7.9 20.4 74.3
Trading and Marketing 2,754.3 30.9 31.6 2.9 2.3
Global Asset Development 110.8 25.1 33.4 13.4 724.4
Other Energy Services 127.5 5.5 5.9 4.0 26.8
Energy Services'
Eliminations (209.9) - - - -
--------------------------------------------------------------------
Total Energy Services 3,508.2 70.8 78.8 40.7 827.8
Parent and Other Operations (2.5) 22.2 23.0 9.0 74.6
--------------------------------------------------------------------
Total Consolidated $3,881.0 $ 263.6 $ 279.5 $ 107.7 $ 979.9
==================================================================================================
- -------------------------------
Three Months Ended September
30, 1997
- -------------------------------
Natural Gas Transmission $ 365.5 $ 132.0 $ 134.6 $ 57.3 $ 72.5
Energy Services
Field Services 738.7 36.1 36.1 17.9 30.1
Trading and Marketing 2,437.5 (6.2) (5.4) 1.9 3.8
Global Asset Development 29.5 2.0 2.1 1.9 31.7
Other Energy Services 96.6 4.7 4.7 1.3 7.7
Energy Services'
Eliminations (125.8) - - - -
--------------------------------------------------------------------
Total Energy Services 3,176.5 36.6 37.5 23.0 73.3
Parent and Other Operations 1.7 5.8 6.0 8.3 314.2
--------------------------------------------------------------------
Total Consolidated $3,543.7 $ 174.4 $ 178.1 $ 88.6 $ 460.0
===================================================================================================
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Earnings
Before Capital
Interest Depreciation and
Total Operating and and Investment
In Millions Revenues Income Taxes Amortization Expenditures
- ---------------------------------------------------------------------------------------------------
Nine Months Ended September
30, 1998
- -------------------------------
<S> <C> <C> <C> <C> <C>
Natural Gas Transmission $1,152.4 $ 512.4 $ 534.1 $ 172.4 $ 201.5
Energy Services
Field Services 2,123.7 38.4 68.4 59.4 205.0
Trading and Marketing 6,492.8 57.6 59.1 7.3 3.9
Global Asset Development 208.3 41.1 57.4 19.2 828.9
Other Energy Services 378.3 14.8 15.3 7.3 39.4
Energy Services'
Eliminations (491.8) - - - -
--------------------------------------------------------------------
Total Energy Services 8,711.3 151.9 200.2 93.2 1,077.2
Parent and Other Operations 4.8 65.3 67.1 27.4 174.0
--------------------------------------------------------------------
Total Consolidated $9,868.5 $ 729.6 $ 801.4 $ 293.0 $ 1,452.7
==================================================================================================
- -------------------------------
Nine Months Ended September
30, 1997
- -------------------------------
Natural Gas Transmission $ 1,174.7 $ 465.7 $ 485.3 $ 171.8 $ 148.2
Energy Services
Field Services 2,208.8 118.7 118.9 52.8 104.4
Trading and Marketing 5,139.5 27.5 28.9 4.8 8.1
Global Asset Development 80.2 (3.4) 6.7 6.4 53.3
Other Energy Services 268.4 14.5 9.4 3.4 32.3
Energy Services'
Eliminations (441.1) - - - -
--------------------------------------------------------------------
Total Energy Services 7,255.8 157.3 163.9 67.4 198.1
Parent and Other Operations (23.7) (4.4) 6.7 11.0 424.9
--------------------------------------------------------------------
Total Consolidated $ 8,406.8 $ 618.6 $ 655.9 $ 250.2 $ 771.2
===================================================================================================
- ----------------------------------------------------------
Identifiable Assets
------------------------
September December
30, 31,
In Millions 1998 1997
- -----------------------------------------------------------
Natural Gas Transmission $ 4,966.6 $ 5,088.9
Energy Services
Field Services 1,963.0 1,979.8
Trading and Marketing 2,580.0 1,857.3
Global Asset Development 1,883.8 987.6
Other Energy Services 319.1 223.2
Energy Services'
Eliminations (61.8) (169.1)
-----------------------------
Total Energy Services 6,684.1 4,878.8
Parent and Other Operations 1,432.2 1,129.1
=============================
Total Consolidated $ 13,082.9 11,096.8
============================================================
</TABLE>
4. Regulatory Matters
Two California electric generating plants, Moss Landing and Oakland, sell
electricity under the terms of Reliability Must Run (RMR) Agreements with the
California Independent System Operator (ISO), which purchases electricity at
FERC regulated rates. The Company has not received final approval from the FERC
with respect to electric rates charged by the two plants, and, therefore, the
rates are subject to partial refund. Management is of the opinion that the final
resolution of this matter will not have a material adverse effect on the
consolidated results of operations or financial position of the Company.
7
<PAGE>
On August 29, 1998, the FERC approved a settlement filed by Texas Eastern
Transmission Corporation (TETCO), a subsidiary of the Company, which will
accelerate recovery of natural gas transition costs and reduce depreciation
expense to more appropriately reflect the estimated useful lives of its
facilities, principally interstate natural gas pipelines. The Company reviewed
the condition of its natural gas pipeline facilities and current maintenance
practices, and concluded that extension of the useful lives was appropriate.
These facilities have a book value of approximately $1.8 billion, net of
accumulated depreciation of $2.6 billion. The weighted average rate of
depreciation will be approximately 1.25%. Implementation of the settlement began
October 1, 1998, and a rate moratorium will be in effect until 2004. The
settlement reduces customer rates as a result of the reduced depreciation
expense offset by the accelerated recovery of natural gas transition costs. The
settlement is not expected to have a material effect on the net results of
operations or financial position of the Company.
5. Property, Plant and Equipment
On July, 1, 1998, a subsidiary of the Company purchased three electric
generating stations in California for $501 million from Pacific Gas & Electric
Company. These power plants have a combined capacity of 2,645 megawatts. Two of
the three plants, Moss Landing and Oakland, are subject to the terms of RMR
Agreements with the California ISO.
6. Long-term Debt
On July 20, 1998, the Company issued $250 million Series A 6 1/4% Senior Notes
due 2005 and $150 million Series B 6 3/4% Senior Notes due 2018.
7. Guaranteed Preferred Beneficial Interests in Company's Subordinated Notes
On June 1, 1998, Duke Capital Financing Trust I (Trust I) issued $250 million of
its 7 3/8% trust preferred securities, at a $7.9 million discount, representing
preferred undivided beneficial interests in the assets of Trust I. On September
15, 1998, Duke Capital Financing Trust II (Trust II) issued $350 million of its
7 3/8% trust preferred securities, at an $11.0 million discount, representing
preferred undivided beneficial interests in the assets of Trust II. Payment of
distributions on these preferred securities is guaranteed by the Company, but
only to the extent the trusts have funds legally and immediately available to
make such distributions. The trusts are statutory business trusts, of which the
Company owns all the common securities. Trust I was established for the purpose
of issuing and selling preferred securities and investing the gross proceeds in
the 7 3/8% Series A Junior Subordinated Notes of the Company due March 31, 2038.
Trust II was established for the purpose of issuing and selling preferred
securities and investing the gross proceeds in the 7 3/8% Series B Junior
Subordinated Notes of the Company due June 30, 2038.
8. Commitments and Contingencies
LITIGATION. 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 County, Texas, 157th
Judicial District, seeking a declaratory judgment that its interpretation of the
Amerada Hess 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.
On September 26, 1997, the judge presiding over the Amerada Hess contract matter
issued a summary judgment in favor of TETCO. Amerada Hess subsequently filed a
notice of appeal of the summary judgment. On July 7, 1998, the Fifth Circuit
Court of Appeals affirmed the lower court's judgment in favor of TETCO. In
August 1998, Amerada Hess and TETCO entered into an agreement terminating the
Amerada Hess Contract effective June 30, 1998. Management is of the opinion that
this matter was resolved on terms favorable to 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 Panhandle Eastern Pipe Line Company (PEPL), a subsidiary of
the Company, in the U.S. District Court for the Western District of Missouri.
The plaintiffs allege that PEPL has
8
<PAGE>
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. 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.
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 Duke Energy LNG
Sales, Inc. (formerly PanEnergy LNG Sales, Inc. and 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 Duke Energy 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 Duke Energy
LNG Sales, Inc.'s assertions of force majeure due to the interruption in the
supply of LNG to Duke Energy LNG Sales, Inc. do not constitute force majeure
under the Contract. 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.
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. On October
20, 1998, the FERC issued an order on ad-valorem tax issues, finding that actual
sellers of gas were primarily liable for refunds and could not be relieved of
that obligation by gas purchasers. The order is subject to further FERC action
on rehearing. The FERC also noted that claims for indemnity or reimbursement
among the parties would be better addressed by the United States District Court
for the Southern District of Texas. 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 other legal, tax and
regulatory proceedings before various courts, regulatory commissions and
governmental agencies regarding matters arising in the ordinary course of
business, some of which involve substantial amounts. Where appropriate for all
of these matters, the Company has made accruals in accordance with Statement of
Financial Accounting Standards No. 5, "Accounting for Contingencies," in order
to provide for such matters. 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.
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. If required to reimburse or indemnify the
producers, 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.
At September 30, 1998, a subsidiary partnership of the MLP had $389.7 million in
First Mortgage Notes outstanding with recourse to the general partner, a
subsidiary of the Company, up to $40 million.
PEPL owns an effective 5.3% 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 held by an affiliate
of Pan-Alberta Gas
9
<PAGE>
Limited. The transportation agreement requires estimated total payments of $63.0
million for the remainder of 1998 through 2001.
In connection with the sale of Petrolane Incorporated (Petrolane) in 1989, Texas
Eastern Corporation (TEC), a subsidiary of the Company, agreed to indemnify
Petrolane against certain obligations for guaranteed leases and environmental
matters. Certain of these lease obligations relate to Petrolane's divestiture of
supermarket operations prior to its acquisition by TEC and as of September 30,
1998 totaled approximately $42.3 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 the second half of 2000,
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 September 30, 1998, the Company had letters of credit and surety bonds of
$138.2 million issued on its behalf related to natural gas transmission
operations, 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. 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. The Company and certain
of its subsidiaries have financial and/or performance guarantees 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.
9. Subsequent Event
The Company, through its wholly owned subsidiaries, PanEnergy Corp (PanEnergy)
and TEC, entered into a Stock Purchase Agreement between PanEnergy, TEC and CMS
Energy Corporation (CMS Energy) dated October 31, 1998. Pursuant to the
agreement, PEPL, Trunkline Gas Company and the storage related to those systems
(collectively, the PEPL Companies), along with Trunkline LNG Company (Trunkline
LNG), will be sold to CMS Energy. The sales price of $2.2 billion involves a
cash payment of $1.9 billion and existing PEPL debt of approximately $300
million. While certain assets and liabilities will be retained, such as the
Houston office building, certain environmental, legal and tax liabilities, and
substantially all intercompany balances, management is of the opinion that these
assets and liabilities will not have a material adverse effect on the
consolidated results of operations or financial position of the Company. The
sale will result in an after tax gain of approximately $700 million and is
contingent upon completion of due diligence and receipt of clearances under the
Hart-Scott-Rodino Act. Closing is anticipated in January 1999.
10
<PAGE>
Total assets of the PEPL Companies and Trunkline LNG were $1.3 billion at
September 30, 1998. Combined operating results of the PEPL Companies and
Trunkline LNG, excluding intercompany transactions, are as follows:
- ----------------------------------------------------
Nine Months Ended
September 30,
--------------------
Dollars In Millions 1998 1997
- ----------------------------------------------------
Operating Revenues $ 323.1 $ 354.7
Operating Expenses 204.1 221.5
--------------------
Operating Income 119.0 133.2
Other Income, Net 10.2 11.4
--------------------
EBIT $ 129.2 $ 144.6
====================================================
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition.
Introduction
Duke Capital Corporation (the Company) is a wholly owned subsidiary of Duke
Energy Corporation (Duke Energy). 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 Parent and Other Operations.
The Natural Gas Transmission segment is engaged 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 (NGL) 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.
Parent and Other Operations include the real estate operations of Crescent
Resources, Inc. (Crescent Resources) and communications services. Corporate
costs and intersegment eliminations are also included in the financial results
of this segment.
Management's Discussion and Analysis should be read in conjunction with the
Consolidated Financial Statements of the Company.
RESULTS OF OPERATIONS
For the quarter ended September 30, 1998, net income increased $44.3 million to
$116.5 million compared to the same period in 1997. The 61.4% increase in net
income was primarily the result of increased energy marketing activities, the
favorable resolution of gas supply realignment cost issues and expansions and
acquisitions. These increases were partially offset by decreased NGL prices and
increased interest expense and minority interest expense.
For the nine months ended September 30, 1998, net income was $363.1 million, net
of an extraordinary loss of $8.0 million, compared to net income of $285.3
million for the same period in 1997. The $77.8 million increase in net income
was primarily the result of increased energy marketing activities, expansions
and acquisitions, gains on sales of assets and the absence of 1997
merger-related costs. These increases were partially offset by decreased NGL
prices and increased interest expense and minority interest expense.
11
<PAGE>
Operating income for the quarter ended September 30, 1998 increased to $263.6
million compared to $174.4 million for the same period in 1997. For the nine
months ended September 30, 1998, operating income increased to $729.6 million
compared to $618.6 million for the same period in 1997. Earnings before interest
and taxes (EBIT) were $279.5 million and $178.1 million for the quarters ended
September 30, 1998 and 1997, respectively. For the nine months ended September
30, 1998, earnings before interest and taxes were $801.4 million and $655.9
million, respectively. Operating income and earnings before interest and taxes,
excluding the effect of a $31.2 million gain on an asset sale by Field Services
in 1998, 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 the explanation of these
results by business segment are discussed thereafter.
Earnings Before Interest and Taxes by Business Segment:
- -------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
-----------------------------------------
In Millions 1998 1997 1998 1997
- -------------------------------------------------------------------------
Natural Gas Transmission $ 177.7 $ 134.6 $ 534.1 $ 485.3
Energy Services
Field Services 7.9 36.1 68.4 118.9
Trading and Marketing 31.6 (5.4) 59.1 28.9
Global Asset Development 33.4 2.1 57.4 6.7
Other Energy Services 5.9 4.7 15.3 9.4
-----------------------------------------
Total Energy Services 78.8 37.5 200.2 163.9
Crescent Resources 32.8 34.1 97.5 72.0
Parent and Other Operations (9.8) (28.1) (30.4) (65.3)
-----------------------------------------
Total Company $ 279.5 $ 178.1 $ 801.4 $ 655.9
=========================================================================
Included in the amounts discussed below are intercompany transactions that do
not have a material impact on consolidated earnings before interest and taxes.
Natural Gas Transmission
- -------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
-----------------------------------------
Dollars In Millions 1998 1997 1998 1997
- -------------------------------------------------------------------------
Operating Revenues $ 375.3 $ 365.5 $ 1,152.4 $ 1,174.7
Operating Expenses 204.7 233.5 640.0 709.0
-----------------------------------------
Operating Income 170.6 132.0 512.4 465.7
Other Income, Net 7.1 2.6 21.7 19.6
=========================================
EBIT $ 177.7 $ 134.6 $ 534.1 $ 485.3
=========================================
Volumes, TBtu a 527 593 1,896 2,079
- -------------------------------------------------------------------------
a Trillion British thermal units
For the quarter ended September 30, 1998, earnings before interest and taxes for
the Natural Gas Transmission segment increased 32.0% compared to the same period
in 1997. Earnings before interest and taxes for the Northeast Pipelines
increased $30.0 million for the quarter ended September 30, 1998 compared to the
prior year quarter, primarily as a result of the favorable resolution of gas
supply realignment cost issues. Earnings before interest and taxes for the
Midwest Pipelines increased $13.1 million for the quarter ended September 30,
1998 compared to the prior year quarter, primarily due to lower operating
expenses in 1998.
For the nine months ended September 30, 1998, earnings before interest and taxes
for the Natural Gas Transmission segment increased $48.8 million over the
comparable period in 1997. Earnings before interest and taxes for the Northeast
Pipelines increased $57.1 million for the nine months ended September 30, 1998
compared to the same period in 1997, primarily as a result of the favorable
resolution of gas supply realignment cost issues and state
12
<PAGE>
property tax rulings, increased market expansion projects and non-recurring 1997
severance costs. These increases were partially offset by a decrease in
throughput primarily as a result of mild winter weather.
For the nine months ended September 30, 1998, earnings before interest and taxes
for the Midwest Pipelines decreased slightly compared to the same period in
1997, primarily due to the favorable resolution of certain regulatory matters in
1997, which was reflected as additional revenue and other income, partially
offset by lower operating expenses in 1998.
Energy Services
Earnings before interest and taxes for Energy Services increased $41.3 million
to $78.8 million in the quarter ended September 30, 1998 compared to the prior
year quarter. For the nine months ended September 30, 1998, earnings before
interest and taxes for Energy Services increased $36.3 million to $200.2 million
compared to the same period in 1997. For the quarter and nine months ended
September 30, 1998, the increase in earnings before interest and taxes is
primarily due to increased earnings of Trading and Marketing and Global Asset
Development, partially offset by decreased earnings of Field Services.
Field Services
- -------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
-----------------------------------------
Dollars In Millions 1998 1997 1998 1997
- -------------------------------------------------------------------------
Operating Revenues $ 725.5 $ 738.7 $ 2,123.7 $ 2,208.8
Operating Expenses 716.2 702.6 2,085.3 2,090.1
-----------------------------------------
Operating Income 9.3 36.1 38.4 118.7
Other Income, Net (1.4) - 30.0 0.2
-----------------------------------------
EBIT $ 7.9 $ 36.1 $ 68.4 $ 118.9
=========================================
Volumes
Natural Gas
Gathered/Processed, TBtu/d a 3.7 3.4 3.7 3.4
Natural Gas Delivered, TBtu/d 0.5 0.4 0.5 0.4
NGL Production, MBbl/d b 115.4 109.7 111.5 108.1
- -------------------------------------------------------------------------
a Trillion British thermal units per day
b Thousand barrels per day
Earnings before interest and taxes for Field Services decreased $28.2 million
for the quarter ended September 30, 1998 compared to the same period in 1997,
primarily due to a decrease in average NGL prices of approximately $0.10 per
gallon, or 29%, from the prior year quarter.
For the nine months ended September 30, 1998, earnings before interest and taxes
for Field Services decreased $50.5 million compared to the same period in 1997,
primarily due to a decrease in average NGL prices of approximately $0.09 per
gallon, or 25%, and increased operating expenses due to growth. The decrease in
earnings before interest and taxes was partially offset by a $31.2 million gain
on the sale of two NGL fractionation facilities in the first quarter of 1998,
which was included in other income and expenses.
13
<PAGE>
Trading and Marketing
- -------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
-----------------------------------------
Dollars In Millions 1998 1997 1998 1997
- -------------------------------------------------------------------------
Operating Revenues $ 2,754.3 $ 2,437.5 $ 6,492.8 $ 5,139.5
Operating Expenses 2,723.4 2,443.7 6,435.2 5,112.0
-----------------------------------------
Operating Income 30.9 (6.2) 57.6 27.5
Other Income, Net 0.7 0.8 1.5 1.4
-----------------------------------------
EBIT $ 31.6 $ (5.4) $ 59.1 $ 28.9
=========================================
Volumes
Natural Gas Marketed, TBtu/d 7.5 7.6 7.5 6.6
Electricity Marketed, GWh a 37,000 36,422 80,426 45,775
- -------------------------------------------------------------------------
a Gigawatt-hours
Earnings before interest and taxes for Trading and Marketing increased $37.0
million for the quarter ended September 30, 1998 compared with the same period
in 1997. The increase results primarily from increased electricity and natural
gas margin rates and increased risk trading margins.
For the nine months ended September 30, 1998, earnings before interest and taxes
for Trading and Marketing increased $30.2 million compared with the same period
in 1997. The increase results primarily from increased electricity and natural
gas volumes marketed, increased electricity margin rates and increased risk
trading margins, partially offset by decreased natural gas margin rates.
Electricity volumes marketed increased primarily as a result of acquiring 100%
ownership of the Duke/Louis Dreyfus, L.L.C. (D/LD) joint venture in June 1997.
Global Asset Development
- -------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
-----------------------------------------
Dollars In Millions 1998 1997 1998 1997
- -------------------------------------------------------------------------
Operating Revenues $ 110.8 $ 29.5 $ 208.3 $ 80.2
Operating Expenses 85.7 27.5 167.2 83.6
-----------------------------------------
Operating Income 25.1 2.0 41.1 (3.4)
Other Income, Net 8.3 0.1 16.3 10.1
-----------------------------------------
EBIT $ 33.4 $ 2.1 $ 57.4 $ 6.7
=========================================================================
Earnings before interest and taxes for Global Asset Development increased $31.3
million for the quarter ended September 30, 1998 compared with the same period
in 1997. The increase results primarily from business expansion and acquisitions
which include the July 1, 1998 purchase of three electric generating stations in
California from Pacific Gas & Electric Company (PG&E), the December 1997
acquisition of an indirect 32.5% ownership interest in American Ref-Fuel
Company, and the completion of Phase I of Bridgeport Energy, a 520-megawatt
combined cycle natural gas fired merchant generation plant, of which the
Corporation is the majority owner.
For the nine months ended September 30, 1998, earnings before interest and taxes
for Global Asset Development increased $50.7 million compared with the same
period in 1997. The increase results primarily from business expansion and
acquisitions, including the July 1, 1998 acquisition of three electric
generating stations in California from PG&E and the December 1997 acquisition of
an indirect 32.5% ownership interest in American Ref-Fuel Company.
14
<PAGE>
Parent and Other Operations
For the quarter ended September 30, 1998, earnings before interest and taxes for
Crescent Resources decreased slightly compared to the same period in 1997. For
the nine months ended September 30, 1998, earnings before interest and taxes for
Crescent Resources increased $25.5 million, primarily as a result of a gain on
land sales in the Jocassee Gorges region of South Carolina and increased project
and lake lot sales.
For the quarter ended September 30, 1998, earnings before interest and taxes for
Parent and Other Operations, excluding Crescent Resources, increased $18.3
million over the same period in 1997, primarily as a result of costs incurred in
1997 for consolidation of the trading and marketing function and restructuring
of contracts. For the nine months ended September 30, 1998, earnings before
interest and taxes for Parent and Other Operations, excluding Crescent
Resources, increased $34.9 million over the same period in 1997, primarily as a
result of the absence of 1997 merger-related costs, partially offset by a 1997
gain on the sale of the Company's interest in the Midland Cogeneration Venture.
Other Impacts on Net Income
For the quarter and nine months ended September 30, 1998, interest expense
increased 22.1% and 14.0% over the comparable periods in 1997 due to higher
average debt balances outstanding.
For the quarter and nine months ended September 30, 1998, minority interests
increased $25.3 million and $32.5 million, respectively, over the comparable
1997 periods. Minority interests include dividends incurred during 1998 for the
Company's trust preferred securities, of which $250 million and $350 million
were issued in June 1998 and September 1998, respectively. See further
discussion of the issuances of trust preferred securities in the Liquidity and
Capital Resources section of Management's Discussion and Analysis.
During the second quarter of 1998, the Company recognized a tax benefit of $11.9
million related to the excess of fair market value over the sales price of the
land in the Jocassee Gorges region of South Carolina sold by Crescent Resources
to the State of South Carolina.
In January 1998, TEPPCO Partners, L.P. (TEPPCO), in which the Company has a 10%
ownership interest, redeemed certain First Mortgage Notes. The Company recorded
a non-cash extraordinary item of $8.0 million, net of income tax of $5.1
million, related to its share of costs of the early retirement of debt.
LIQUIDITY AND CAPITAL RESOURCES
Operating Cash Flow
On August 29, 1998, the FERC approved a settlement from Texas Eastern
Transmission Corporation, a subsidiary of the Company, which will
accelerate recovery of natural gas transition costs and reduce depreciation
expense to more appropriately reflect the estimated useful lives of its
facilities, principally interstate natural gas pipelines. The order was
effective October 1, 1998 and includes a rate moratorium until 2004. Cash flows
from operations are not expected to change for the first two years after
implementation due to the offsetting effect on customer rates of the reduced
depreciation expense and increased recovery of natural gas transition costs.
Once the natural gas transition costs are fully recovered, cash flows from
operations are expected to decrease during 2001 through 2003 by an estimated
total of $270 million. For more information concerning the settlement, see Note
4 to the Consolidated Financial Statements.
Investing Cash Flow
For the nine months ended September 30, 1998, capital and investment
expenditures totaled $1,452.7 million compared with $771.2 million for the same
period in 1997. This increase was primarily due to business expansion by Global
Asset Development, which included the $501 million purchase in July 1998 of
three electric generating stations in California from PG&E and the $128 million
purchase in July 1998 of the Queensland Pipeline, a 389-mile pipeline in
southeast Queensland, Australia, from PG&E Corporation. Business expansion by
Natural Gas Transmission and Field Services also contributed to the increase in
capital and investment expenditures. These
15
<PAGE>
increases were partially offset by Trading and Marketing's acquisition of the
remaining 50% ownership of the D/LD joint venture in June 1997.
During the quarter ended September 30, 1998, the first phase of Bridgeport
Energy, a $265 million, 520-megawatt combined cycle natural gas fired merchant
generation plant of which the Company is the majority owner, was completed.
Phase I represents a 340-megawatt single-cycle facility. Phase II of the
project, which will provide an additional 180 megawatts, is scheduled for
completion in mid-1999.
On October 1, 1998, Global Asset Development broke ground on Maine Independence
Station, a $221 million, 520-megawatt combined cycle natural gas fired merchant
generation plant in Maine. The project is scheduled to begin producing power in
the summer of 2000.
Proceeds from the sales of two NGL fractionation facilities to TEPPCO were $40
million in 1998. Proceeds from the sales of the Company's ownership in
operations in the United Kingdom and its equity interests in certain affiliates
were $85 million in 1997.
Financing Cash Flow
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. The Company is seeking to
significantly grow its Energy Services businesses, which will likely require
additional financing. The Company plans to fund Energy Services growth
opportunities through a combination of internally generated cash and external
debt. Debt financing will be obtained through the Company's commercial paper
program and by accessing the capital markets.
The Company's commercial paper facilities increased to $1.6 billion at September
30, 1998 from $1.3 billion at December 31, 1997 as a result of the Company
renewing its 364-day bank credit facility and increasing the amount available
from $300.0 million to $600.0 million on August 24, 1998. At September 30, 1998
and December 31, 1997, the Company's bank credit facilities totaled $1.7 billion
and $1.4 billion, respectively, of which $1.6 billion and $1.3 billion supported
the commercial paper facilities at September 30, 1998 and December 31, 1997,
respectively. At September 30, 1998, $841.2 million of commercial paper and
$100.0 million under the bank credit facilities were outstanding.
In connection with its plans to access the capital markets, the Company filed a
$1 billion shelf registration statement, which was declared effective by the
Securities and Exchange Commission on May 13, 1998. Subsequently, financing was
obtained under this shelf registration statement on June 1, 1998, when Duke
Capital Financing Trust I (Trust I) issued $250 million of its 7 3/8% trust
preferred securities, at a $7.9 million discount, representing preferred
undivided beneficial interests in the assets of Trust I. Additional financing
was obtained under the shelf registration statement on September 15, 1998, when
Duke Capital Financing Trust II (Trust II) issued $350 million of its 7 3/8%
trust preferred securities, at an $11.0 million discount, representing preferred
undivided beneficial interests in the assets of Trust II. Trust I and Trust II
are business trusts which are treated as subsidiaries of the Company for
financial reporting purposes. Payment of distributions on the trust preferred
securities is guaranteed by the Company, but only to the extent the trusts have
funds legally and immediately available to make such distributions. Trust I's
assets consist of an investment of approximately $258 million in the Company's 7
3/8% Series A Junior Subordinated Notes due 2038. Trust II's assets consist of
an investment of approximately $361 million in the Company's 7 3/8% Series B
Junior Subordinated Notes due 2038.
Additional financing was obtained under the $1 billion shelf registration
statement on July 20, 1998 when the Company issued $250 million Series A 6 1/4%
Senior Notes due 2005 and $150 million Series B 6 3/4% Senior Notes due 2018. In
connection with the issuance of these Senior Notes, the Company entered into
Treasury Rate Lock Agreements during the second quarter to partially hedge its
position. The hedge transactions had a notional amount of $250 million and were
settled on July 15, 1998 resulting in a net payment of $4.1 million.
16
<PAGE>
Global Asset Development's purchase of the Queensland Pipeline was financed by a
$75.0 million loan denominated in Australian dollars due on March 31, 1999. Due
to the short-term nature of this loan, foreign currency risk associated with
this loan is not expected to be material to the Company's consolidated results
of operations or financial position.
CURRENT ISSUES
Dispositions
The Company, through its wholly owned subsidiaries, PanEnergy Corp (PanEnergy)
and Texas Eastern Corporation (TEC), entered into a Stock Purchase Agreement
between PanEnergy, TEC and CMS Energy Corporation (CMS Energy) dated October 31,
1998. Pursuant to the agreement, the Company will sell Panhandle Eastern Pipe
Line Company (PEPL), Trunkline Gas Company and the storage related to those
systems, along with the Trunkline LNG Company, to CMS Energy for $2.2
billion, involving a cash payment of $1.9 billion and existing PEPL debt of
approximately $300 million. While certain assets and liabilities will be
retained, such as the Houston office building, certain environmental, legal and
tax liabilities, and substantially all intercompany balances, management is of
the opinion that these assets and liabilities will not have a material adverse
effect on the consolidated results of operations or financial position of the
Company. The sale will result in an after tax gain of approximately $700 million
and is contingent upon completion of due diligence and receipt of clearances
under the Hart-Scott-Rodino Act. Closing is anticipated in January 1999. For
additional information, see Note 9 to the Consolidated Financial Statements.
Regulatory Matters
On July 29, 1998, the FERC issued a Notice of Proposed Rulemaking (NOPR) on
short-term natural gas transportation services, which proposed an integrated
package of revisions to its regulations governing interstate natural gas
pipelines. "Short term" has been defined in the NOPR as all transactions of less
than one year. Under the proposed approach, cost-based regulation would be
eliminated for short-term transportation and replaced by regulatory policies
intended to maximize competition in the short-term transportation market,
mitigate the ability of companies to exercise residual monopoly power, and
provide opportunities for greater flexibility providing pipeline services. The
proposed changes include initiatives to revise pipeline scheduling procedures,
receipt and delivery point policies, and penalty policies; require pipelines to
auction short-term capacity; improve the FERC's reporting requirements; permit
pipelines to negotiate rates and terms of services; and revise certain rate and
certificate policies that affect competition.
In conjunction with the NOPR, the FERC also issued a Notice of Inquiry (NOI) on
its pricing policies in the existing long-term market and pricing policies for
new capacity. The FERC wants to ensure that its policies are not biased toward
either short-term or long-term service, provide accurate price signals and the
right incentives for pipelines to provide optimal transportation services and
construct facilities that meet future demand, but do not result in over building
and excess capacity. Comments on the NOPR and NOI are due January 22, 1999.
Because these notices are only at a very early stage and any ultimate resolution
is unknown, management cannot estimate the effects of these matters on future
consolidated results of operations or financial position.
Year 2000 Readiness Program
State of Readiness
In 1996, the Company initiated its Year 2000 Readiness Program and began a
formal review of computer-based systems and devices that are used in its
business operations, both domestically and internationally. These systems and
devices include customer information, financial, materials management, and
personnel systems, as well as components of natural gas production, gathering,
processing and transmission, and electric generation, distribution and
transmission.
17
<PAGE>
The Company is using a three-phase approach to address Year 2000 issues: 1)
inventory and preliminary assessment of computer systems, equipment and devices;
2) detailed assessment and remediation planning; and 3) conversion, testing and
contingency planning. The Company is employing a combination of systems repair
and planned systems replacement activities to achieve Year 2000 readiness for
its business and process control systems, equipment and devices. The Company has
substantially completed the first two phases throughout its business operations,
and is in various stages of the third and final phase. The Company's goal is to
have its critical systems, equipment and devices Year 2000 ready by mid-1999.
Business acquisitions routinely involve an analysis of Year 2000 readiness and
are incorporated into the Company's overall program as necessary.
The Company is actively evaluating and tracking Year 2000 readiness of external
third parties with which it has a material relationship. Such third parties
include vendors, customers, governmental agencies, including foreign governments
and agencies, and other business associates. While the Company cannot control
the Year 2000 readiness of third parties, the Company is attempting to assess
the readiness of third parties and any potential implications to the Company.
Alternate suppliers of critical products, goods and services are being
identified, where necessary.
Costs
Management believes it is devoting the resources necessary to achieve Year 2000
readiness in a timely manner. Current estimates for total costs of the program,
including internal labor as well as incremental costs such as consulting and
contract costs, are approximately $8.0 million. These costs exclude replacement
systems that, in addition to being Year 2000 ready, provide significantly
enhanced capabilities which will benefit operations in future periods.
Risks
Management believes it has an effective program in place to manage the risks
associated with the Year 2000 issue in a timely manner. Nevertheless, since it
is not possible to anticipate all future outcomes, especially when third parties
are involved, there could be circumstances in which the Company would
temporarily be unable to deliver energy or energy services to its customers. The
Company believes that the most reasonably likely worst case scenario would be
small, localized interruptions of service, which likely would be rapidly
restored. In addition, there could be a temporary reduction in energy needs of
customers due to their own Year 2000 problems. In the event that such a scenario
occurs, it is not expected to have a material adverse impact on the Company's
consolidated results of operations or financial position.
Contingency Plans
Year 2000 contingency planning is currently underway to assure continuity of
business operations for all periods during which Year 2000 impacts may occur.
The Company is participating in multiple industry efforts to assure effective
Year 2000 contingency plans, and intends to complete its own Year 2000
contingency plans by mid-1999. These plans address various Year 2000 risk
scenarios that cross departmental, business unit and industry lines as well as
specific risks from various internal and external sources, including supplier
readiness.
Based on assessments completed to date and compliance plans in process,
management is of the opinion that Year 2000 issues, including the cost of making
critical systems, equipment and devices ready, will not have a material adverse
effect on the Company's business operation or consolidated results of operations
or financial position. Nevertheless, achieving Year 2000 readiness is subject to
risks and uncertainties, including those described above. While management
believes the possibility is remote, if the Company's internal systems, or the
internal systems of external parties, fail to achieve Year 2000 readiness in a
timely manner, the Company's business, consolidated results of operations or
financial condition could be adversely affected.
18
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
A subsidiary of the Company continues to negotiate a consolidated Compliance
Order with the Colorado Department of Public Health and Environment concerning
alleged record-keeping and reporting air quality permit violations at multiple
Colorado facilities. The consolidated Compliance Order currently assesses a
combined civil penalty in the amount of $250,000 which includes a $137,000
penalty previously assessed against the Greeley facility, notices of violation
issued for seven facilities, and alleged violations at four additional
facilities. The Company intends to voluntarily implement certain additional air
emission controls which will reduce the combined civil penalty to approximately
$50,000. The Company will be responsible for an additional noncompliance penalty
at the Greeley facility in an amount yet to be determined but not expected to
exceed $100,000.
In September 1998, a subsidiary of the Company and the Missouri Department of
Natural Resources reached a settlement agreement related to air quality permit
violations at a natural gas compressor station, which resulted in a payment of
$250,000. An additional environmental administrative proceeding is underway
before the Illinois Environmental Protection Agency relating to a natural gas
compressor station that could result in a fine in excess of $100,000.
Management is of the opinion that the resolution of these matters will not have
a material adverse effect on the consolidated results of operations or financial
position of the Company.
For information concerning material litigation and other contingencies, see Note
8 to the Consolidated Financial Statements.
Item 5. Other Information.
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; achievement of
Year 2000 readiness; and the effect of the Company's accounting policies, in
each case during the periods covered by the forward-looking statements.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
(27) Financial Data Schedule (included in electronic filing only)
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the third quarter of 1998.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
DUKE CAPITAL CORPORATION
November 13, 1998 /s/ Richard J. Osborne
------------------------------
Richard J. Osborne
Vice President and
Chief Financial Officer
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Duke Capital Corporation Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 250900
<SECURITIES> 0
<RECEIVABLES> 1856900
<ALLOWANCES> 0
<INVENTORY> 225700
<CURRENT-ASSETS> 3355000
<PP&E> 10856600
<DEPRECIATION> 3843600
<TOTAL-ASSETS> 13082900
<CURRENT-LIABILITIES> 3250200
<BONDS> 3027300
0
0
<COMMON> 0
<OTHER-SE> 3732500
<TOTAL-LIABILITY-AND-EQUITY> 13082900
<SALES> 8125700
<TOTAL-REVENUES> 9868500
<CGS> 7738000
<TOTAL-COSTS> 8780500
<OTHER-EXPENSES> 358400
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 180300
<INCOME-PRETAX> 801400
<INCOME-TAX> 206800
<INCOME-CONTINUING> 371100
<DISCONTINUED> 0
<EXTRAORDINARY> (8000)
<CHANGES> 0
<NET-INCOME> 363100
<EPS-PRIMARY> 0 <F1>
<EPS-DILUTED> 0 <F1>
<FN>
<F1>Not meaningful since Duke Capital Corporation is a
wholly-owned subsidiary.
</FN>
</TABLE>
