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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10/A
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)
<TABLE>
<CAPTION>
<S> <C>
Delaware 51-0282142
(State or other jurisdiction of incorporation) (I.R.S. Employer Identification No.)
422 South Church Street
Charlotte, NC 28202-1904
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: 704-594-6200
Securities to be registered pursuant to Section 12(b) of the Act:
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<CAPTION>
Name of each exchange on which
Title of each class to be so registered each class is to be registered
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<S> <C>
None Not applicable
</TABLE>
Securities to be registered pursuant to Section 12(g) of the Act:
Title of Class
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Common Stock, without par value
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DUKE CAPITAL CORPORATION
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
TABLE OF CONTENTS
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<CAPTION>
Item Page
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1. Business .................................................................................... 1
General ..................................................................................... 1
Natural Gas Transmission .................................................................... 1
Energy Services ............................................................................. 3
Other Operations ............................................................................ 6
Environmental Matters ....................................................................... 6
Foreign Operations and Export Sales ......................................................... 7
Employees and Management .................................................................... 7
Forward-Looking Statements .................................................................. 7
Operating Statistics ........................................................................ 8
2. Financial Information ....................................................................... 9
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 ................................................... 19
13. Financial Statements and Supplementary Data ................................................. 19
Part I. Audited Financial Statements for the Years Ended December 31, 1997, 1996 and 1995 ... 19
Independent Auditors' Report ................................................................ 21
Consolidated Statements of Income ........................................................... 22
Consolidated Statements of Cash Flows ....................................................... 23
Consolidated Balance Sheets ................................................................. 24
Consolidated Statements of Common Stockholder's Equity ...................................... 26
Notes to Consolidated Financial Statements .................................................. 27
Part II. Quarterly Financial Data ........................................................... 46
14. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ........ 46
15. Financial Statements and Exhibits ........................................................... 46
(a) Financial Statements .................................................................... 46
(b) Exhibits ................................................................................ 46
Signatures .................................................................................. 48
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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 similar to 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 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.
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[MAP OF UNITED STATES DEPICTING STORAGE FIELD LOCATIONS 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
tilities 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 owns and operates a
transmission system consisting of approximately 1,000 miles of pipeline
extending from the Canadian border through Montana to Iowa.
2
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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 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.
3
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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).
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."
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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 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
5
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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.
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.
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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.
FOREIGN OPERATIONS AND EXPORT SALES
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."
EMPLOYEES AND MANAGEMENT
The officers and directors of the Company consist of certain executive
officers of Duke Energy. Additionally, the Company's business units maintain
their own management structure. Duke Energy has entered into employment
agreements with certain key executives and the Company's business units have
entered into employment agreements with individuals where considered
appropriate.
At December 31, 1997, the Company had approximately 8,400 employees.
Approximately 500 employees are represented by the Oil, Chemical and Atomic
Workers International Union, AFL-CIO. Approximately 350 of these employees are
in a bargaining unit with which the Company has a labor agreement expiring in
May 1999. The remaining approximately 150 employees are in a bargaining unit
with which the Company has ongoing negotiations.
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". 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. 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."
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OPERATING STATISTICS
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<CAPTION>
Years Ended December 31
------------------------------------------------
1997 1996 1995 1994 1993
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<S> <C> <C> <C> <C> <C>
Natural Gas Transmission
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
===== ===== ===== ===== ======
Energy Services
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 -- --
</TABLE>
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(a) Trillion British thermal units
(b) Trillion British thermal units per day
(c) Thousand barrels per day
(d) Gigawatt-hours
8
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Item 2. Financial Information.
SELECTED FINANCIAL DATA
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<CAPTION>
1997(a) 1996(a) 1995(a) 1994(a) 1993(a)
-------------- ------------- ------------- ------------- -------------
In Millions
<S> <C> <C> <C> <C> <C>
Income Statement
Operating Revenues ...................... $ 11,914.8 $ 7,816.1 $ 5,187.7 $ 4,753.1 $ 4,420.2
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 Sheet
Total Assets ............................ $ 11,096.8 $ 9,751.7 $ 8,225.8 $ 7,983.9 $ 7,965.7
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 similar to a pooling of interests. As a result, the
financial information gives effect to the combination as if it had
occurred on January 1, 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 similar to
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 changes
9
<PAGE>
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:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
In Millions
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
Net income for 1997 is net of a full year of the minority interest
associated with the joint venture with Mobil Corporation (Mobil) 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.
10
<PAGE>
Natural Gas Transmission
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
Dollars in Millions
<S> <C> <C> <C>
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
========== ========== ==========
Volumes, TBtu(a) ...................... 2,862 2,939 2,703
</TABLE>
- ---------
(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
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
Dollars In Millions
<S> <C> <C> <C>
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
========== ========== ==========
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
</TABLE>
- ---------
(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.
11
<PAGE>
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 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
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
Dollars in Millions
<S> <C> <C> <C>
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
========== ========== ==========
Volumes
Natural Gas Marketed, TBtu/d ......... 6.9 5.5 3.6
Electricity Marketed, GWh(a) ......... 64,650 4,229 513
</TABLE>
- ---------
(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
(including increased purchased power expense) 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.
12
<PAGE>
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.
On October 1, 1996, a subsidiary of the Company redeemed its $150 million,
10% debentures and its $100 million, 10 1/8% 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 aproximately
$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.
13
<PAGE>
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 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.
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'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, which would be utilized to fund
the operations of Natural Gas Transmission. As noted previously, the Company is
seeking to significantly grow its Energy Services businesses, which will likely
require significant 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. In connection
with its plans to access the capital markets, the Company has filed a $1
billion shelf registration with the Securities and Exchange Commission
concurrently with this Form 10.
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.)
14
<PAGE>
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 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 2 to the Consolidated Financial Statements,
"Summary of Significant Accounting Policies" and 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 a 95%
confidence level and 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 Company's historical simulation emphasizes the most
recent market activity, which is considered the most relevant predictor of
future market movements for natural gas, electricity and petroleum products.
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.
15
<PAGE>
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.
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.
16
<PAGE>
Rate Matters. On April 28, 1998, TETCO filed with the FERC a proposed
settlement to accelerate recovery of natural gas transition costs and to 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. The proposed settlement reduces customer rates as a result of
reduced depreciation expense offset by the accelerated recovery of natural gas
transition costs. TETCO anticipates implementation of the proposed settlement
as early as August 1998. The proposed settlement is not expected to have a
material effect on the net results of operations or financial position of the
Company. As a result of the proposed settlement, 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.
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". 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.
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."
17
<PAGE>
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.
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.
18
<PAGE>
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 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.
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.
19
<PAGE>
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 to reflect the
1997 combination with PanEnergy Corp similar to a 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 to reflect the 1997 combination with PanEnergy
Corp similar to a 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
20
<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
21
<PAGE>
DUKE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------------------------
1997 1996 1995
------------- ------------- -------------
In Millions
<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.
22
<PAGE>
DUKE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31
-------------------------------------
1997 1996 1995
------------- ----------- -----------
In Millions
<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.
23
<PAGE>
DUKE CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
-------------------------
1997 1996
------------- -----------
In Millions
<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.
24
<PAGE>
DUKE CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS -- Continued
<TABLE>
<CAPTION>
December 31
-------------------------
1997 1996
------------- -----------
In Millions
<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.
25
<PAGE>
DUKE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
Years Ended December 31
--------------------------------------
1997 1996 1995
------------ ------------ ------------
In Millions
<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.
26
<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 similar to 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
Corporation PanEnergy Adjustments Combined
------------- ------------- ------------- -------------
In Millions
<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.
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
27
<PAGE>
DUKE CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
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. See Note 3 for a description of
the D/LD acquisition. Goodwill recorded as of December 31, 1997 and 1996
related to the 1989 TEC acquisition was $244.8 million. 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.
Impairment of Long-Lived Assets. The recoverability of long-lived assets
and intangible assets are reviewed whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable. Such
evaluation is based on various analyses, including undiscounted cash flow
projections.
28
<PAGE>
DUKE CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
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
29
<PAGE>
DUKE CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
taxes have been provided by the Company on the basis of its separate company
income and deductions in accordance with established practices of the
consolidated group.
Deferred income taxes have been provided for temporary differences.
Temporary differences occur when events and transactions recognized for
financial reporting result in taxable or tax-deductible amounts in different
periods.
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.
30
<PAGE>
DUKE CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
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 &
Revenues Revenues Revenues Income & Taxes Amortization
-------------- -------------- ------------- ----------- ---------- ---------------
In Millions
<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>
31
<PAGE>
DUKE CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 4. BUSINESS SEGMENTS -- Continued
<TABLE>
<CAPTION>
Capital and Investment Expenditures Identifiable Assets
----------------------------------- ---------------------------
1997 1996 1995 1997 1996
----------- ----------- ----------- ------------- -------------
In Millions
<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.
32
<PAGE>
DUKE CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 6. INCOME TAXES
Income tax expense as presented in the Consolidated Statements of Income
is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- ----------
In Millions
<S> <C> <C> <C>
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
======= ======== =======
</TABLE>
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>
1997 1996 1995
----------- ----------- -----------
Dollars In Millions
<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>
1997 1996
------------- -------------
In Millions
<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.
33
<PAGE>
DUKE CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 6. INCOME TAXES -- Continued
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 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
34
<PAGE>
DUKE CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 7. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT -- Continued
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.
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
---------------------- ---------------------
Assets Liabilities Assets Liabilities
-------- ------------- -------- ------------
In Millions
<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:
35
<PAGE>
DUKE CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 8. INVESTMENT IN AFFILIATES -- Continued
<TABLE>
<CAPTION>
1997 1996
---------- ----------
In Millions
<S> <C> <C>
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
======= =======
</TABLE>
Natural Gas Transmission. Investments primarily include ownership
interests in natural gas pipeline joint ventures which transport gas from
Canada to the United States. Investments include an indirect 5.4% ownership in
Northern Border Pipeline Company.
Field Services. Among other investments, Field Services holds a 37%
interest in a partnership which owns natural gas gathering systems in the Gulf
of Mexico (Dauphin Island Gathering Partners), 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. Significant investments include a 32.5% indirect interest in American
Ref-Fuel Company, a 9.76% indirect interest in Hidroelectrica Piedra del Aguila
S.A., a 21.9% interest in Aguaytia Energy del Peru S.R. Ltda. and a 25%
indirect interest in National Methanol Company, which owns and operates a
methanol plant and a MTBE (methyl tertiary butyl ether) plant in Jubail, Saudi
Arabia.
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 20% interest in the BellSouth PCS L.P. joint
venture, which provides wireless personal communication services.
36
<PAGE>
DUKE CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 8. INVESTMENT IN AFFILIATES -- Continued
Summarized combined balance sheet and income statement information of the
entities that are accounted for using the equity method are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------- -----------
In Millions
<S> <C> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
In Millions
<S> <C> <C>
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
========== ==========
</TABLE>
A summary of accumulated depreciation for property, plant and equipment by
classification as of December 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
In Millions
<S> <C> <C>
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
========== ==========
</TABLE>
37
<PAGE>
DUKE CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 10. DEBT AND CREDIT FACILITIES
The following credit facilities were available to the Company at December
31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
-------------------------- -------------------------
Credit Credit
Facilities Outstanding Facilities Outstanding
------------ ------------- ------------ ------------
In Millions
<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:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
In Millions
<S> <C> <C>
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 $ --
======== ========
</TABLE>
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>
1997 1996 1995
----------- ----------- -----------
Dollars in Millions
<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>
38
<PAGE>
DUKE CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 10. DEBT AND CREDIT FACILITIES -- Continued
Long-term debt outstanding as of December 31, 1997 and 1996 consisted of
the following:
<TABLE>
<CAPTION>
Year Due 1997 1996
----------- ----------- ------------
Dollars in Millions
<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
December 31, 1997 and 1996, respectively .............................. 2001 77.0 42.0
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.
39
<PAGE>
DUKE CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 11. COMMITMENTS AND CONTINGENCIES -- Continued
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. 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.
40
<PAGE>
DUKE CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 11. COMMITMENTS AND CONTINGENCIES -- Continued
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, 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,
41
<PAGE>
DUKE CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 11. COMMITMENTS AND CONTINGENCIES -- Continued
"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. 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 $78.3 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
42
<PAGE>
DUKE CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 11. COMMITMENTS AND CONTINGENCIES -- Continued
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.
Under Duke Energy's plan, each option granted equals the market price of
Duke Energy common stock on the date of grant. Vesting periods for stock
options and awards range from one to five years with a maximum exercise term of
10 years. Duke Energy follows the intrinsic value method of accounting for
stock options issued to employees.
In 1997, Duke Energy granted 115,615 shares of performance-based stock
awards with an average grant date fair value of $44 per share. Compensation
expense of $4.4 million in 1997, $8.3 million in 1996 and none in 1995 was
recognized for such stock awards.
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.
43
<PAGE>
DUKE CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 13. BENEFIT PLANS -- Continued
Assumptions used in Duke Energy's pension and other postretirement
benefits accounting (reflecting weighted-averages across plans) include:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
Percent (%)
<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.
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:
<TABLE>
<CAPTION>
1997 1996
---------- ---------
In Millions
<S> <C> <C>
Receivables .............. $ 17.9 $ 1.4
Accounts payable ......... 52.2 14.1
Taxes accrued ............ 39.9 1.1
</TABLE>
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.
44
<PAGE>
RESPONSIBILITY FOR FINANCIAL STATEMENTS
The financial statements of Duke Capital 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
45
<PAGE>
PART II. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter(a) Quarter(a) Quarter(a) Quarter(a) Total(a)
------------ ------------ ------------ ------------ --------------
In Millions
<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 similar to 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.
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 (**).
<TABLE>
<CAPTION>
Exhibit No. Description
- ------------- -----------------------------------------------------------------------------------
<S> <C>
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 Adminis-
trative Agent (filed with Form 10-K of Duke Energy Corporation for the year ended
December 31, 1997, File No. 1-4928, as Exhibit 10-S).
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
- ------------- -----------------------------------------------------------------------------------
<S> <C>
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 Adminis-
trative Agent (file with Form 10-K of Duke Energy Corporation for the year ended
December 31, 1997, File No. 1-4928, 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.
</TABLE>
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.
47
<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: May 8, 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
48
