- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 1998 Commission File Number 0-23977
DUKE CAPITAL CORPORATION
(Exact name of Registrant as Specified in its Charter)
Delaware 51-0282142
(State or Other Jurisdiction of Incorporation) (IRS Employer Identification No.)
422 South Church Street
Charlotte, NC 28202-1904
(Address of Principal Executive Offices)
(Zip code)
704-594-6200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements since May 13, 1998. Yes x No __
All of the Registrant's common shares are directly owned by Duke Energy
Corporation (File No. 1-4928), which files reports and proxy materials pursuant
to the Securities Exchange Act of 1934.
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.
Number of shares of Common Stock, no par value, outstanding at May 18,
1998.......................................................................1,010
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<PAGE>
DUKE CAPITAL CORPORATION
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1998
INDEX
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Item Page
- ---- ----
PART I. FINANCIAL INFORMATION
1. Financial Statements....................................................................................1
Consolidated Statements of Income for the Three Months Ended March 31, 1998 and 1997................1
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1998 and 1997............2
Consolidated Balance Sheets as of March 31, 1998 and December 31, 1997..............................3
Notes to Consolidated Financial Statements..........................................................5
2. Management's Discussion and Analysis of Results of Operations and Financial Condition...................9
PART II. OTHER INFORMATION
1. Legal Proceedings......................................................................................13
4. Submission of Matters to a Vote of Security Holders....................................................13
5. Other Information......................................................................................13
6. Exhibits and Reports on Form 8-K.......................................................................13
Signatures.............................................................................................14
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
DUKE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In millions)
<TABLE>
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Three Months Ended
March 31
---------------------------------------
1998 1997
---------------------------------------
Operating Revenues
Sales, trading and marketing of natural gas
and petroleum products $ 1,976.0 $ 2,127.3
Transportation and storage of natural gas 387.2 410.0
Trading and marketing of electricity 537.4 82.5
Other 192.0 127.7
----------------- -----------------
Total operating revenues 3,092.6 2,747.5
----------------- -----------------
Operating Expenses
Natural gas and petroleum products purchased 1,868.7 1,968.9
Purchased power 537.7 82.4
Other operation and maintenance 322.1 286.7
Depreciation and amortization 92.2 80.7
Property and other taxes 15.0 30.8
------------------ -----------------
Total operating expenses 2,835.7 2,449.5
------------------ -----------------
Operating Income 256.9 298.0
------------------ -----------------
Other Income and Expenses
Allowance for funds used during construction 0.2 0.3
Other, net 45.8 4.8
------------------ -----------------
Total other income and expenses 46.0 5.1
------------------ -----------------
Earnings Before Interest and Taxes 302.9 303.1
Interest Expense 58.2 52.1
Minority Interests 9.1 10.5
------------------ -----------------
Earnings Before Income Taxes 235.6 240.5
Income Taxes 88.9 94.2
------------------ -----------------
Income Before Extraordinary Item 146.7 146.3
Extraordinary Item (net of tax) (8.0) -
------------------ -----------------
Net Income $ 138.7 $ 146.3
================== =================
</TABLE>
See Notes to Consolidated Financial Statements.
1
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
DUKE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
Three Months Ended
March 31
--------------------------------------
1998 1997
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 138.7 $ 146.3
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 93.5 80.7
Deferred income taxes (6.2) 40.5
Decrease in
Receivables 269.8 235.7
Inventory 35.4 28.8
Other current assets 24.0 39.0
Increase (Decrease) in
Accounts payable (338.4) (261.7)
Taxes accrued 47.3 26.7
Interest accrued (4.8) (7.3)
Other current liabilities (18.5) (3.0)
Other, net 40.9 (12.1)
------------------ -----------------
Net cash provided by operating activities 281.7 313.6
------------------ -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (177.2) (94.0)
Investment expenditures (97.6) (30.5)
Proceeds from sale and other, net 10.9 3.5
------------------ -----------------
Net cash used in investing activities (263.9) (121.0)
------------------ -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issuance of long-term debt 28.0 33.0
Payments for the redemption of long term debt (79.2) (116.4)
Net change in notes payable and commercial paper (15.2) (78.8)
Dividends paid - (36.3)
Other, net (33.8) (40.9)
------------------ -----------------
Net cash used in financing activities (100.2) (239.4)
------------------ -----------------
Net decrease in cash and cash equivalents (82.4) (46.8)
Cash received from business acquisitions 34.5 -
Cash and cash equivalents at beginning of period 94.3 151.4
------------------ -----------------
Cash and cash equivalents at end of period $ 46.4 $ 104.6
================== =================
Supplemental Disclosures
Cash paid for interest (net of amount capitalized) $ 59.3 $ 40.6
Cash paid for income taxes $ 42.1 $ 14.1
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
DUKE CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions)
March 31, December 31,
1998 1997
(unaudited)
----------------- -----------------
ASSETS
Current Assets
Cash and cash equivalents $ 46.4 $ 94.3
Receivables 1,364.4 1,621.4
Inventory 155.6 182.4
Current portion of natural gas transition costs 66.2 66.9
Unrealized gains on mark to market transactions 696.0 551.3
Other 117.0 140.0
------------------ -----------------
Total current assets 2,445.6 2,656.3
------------------ -----------------
Investments and Other Assets
Investments in affiliates 732.7 685.9
Pre-funded pension costs 307.7 302.6
Goodwill, net 516.5 503.6
Notes receivable 240.4 239.6
Other 201.1 155.2
------------------ -----------------
Total investments and other assets 1,998.4 1,886.9
------------------ -----------------
Property, Plant and Equipment
Cost 9,898.0 9,696.5
Less accumulated depreciation and amortization 3,711.0 3,631.3
------------------ ------------------
Net property, plant and equipment 6,187.0 6,065.2
------------------ -----------------
Regulatory Assets and Deferred Debits
Debt expense 63.6 65.6
Regulatory asset related to income taxes 18.6 16.9
Natural gas transition costs 180.9 193.7
Environmental clean-up costs 99.3 103.6
Other 103.1 108.6
------------------ -----------------
Total regulatory assets and deferred debits 465.5 488.4
------------------ -----------------
Total Assets $ 11,096.5 $ 11,096.8
================== =================
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
DUKE CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions, except share amounts)
March 31, December 31,
1998 1997
(unaudited)
----------------- -----------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Accounts payable $ 1,005.0 $ 1,338.2
Notes payable and commercial paper 122.5 137.7
Taxes accrued 166.7 119.3
Interest accrued 45.9 50.7
Current portion of natural gas transition liabilities 35.0 35.0
Current portion of environmental clean-up liabilities 27.3 26.4
Current maturities of long-term debt 20.7 22.5
Unrealized losses on mark to market transactions 690.7 537.8
Other 316.0 329.5
------------------ -----------------
Total current liabilities 2,429.8 2,597.1
------------------ -----------------
Long-term Debt 2,938.9 2,918.8
------------------ -----------------
Deferred Credits and Other Liabilities
Deferred income taxes 1,356.9 1,363.9
Natural gas transition liabilities 63.6 78.4
Environmental clean-up liabilities 153.6 157.6
Other 485.5 447.3
------------------ -----------------
Total deferred credits and other liabilities 2,059.6 2,047.2
------------------ -----------------
Minority Interests 163.0 168.3
------------------ -----------------
Common Stockholder's Equity
Common stock, no par, 3,000 shares authorized;
1,010 shares outstanding - -
Paid-in capital 2,766.7 2,765.5
Retained earnings 738.5 599.9
------------------ ------------------
Total common stockholder's equity 3,505.2 3,365.4
------------------ -----------------
Total Liabilities and Stockholder's Equity $ 11,096.5 $ 11,096.8
================== =================
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
DUKE CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General
Duke Capital Corporation (the Company) is a wholly owned subsidiary of Duke
Energy Corporation. The Company provides financing and credit enhancement
services for its subsidiaries. The Company conducts its operating activities
through its three business segments: Natural Gas Transmission, Energy Services,
and Other Operations.
The Natural Gas Transmission segment is engaged in interstate transportation and
storage of natural gas for customers primarily in the Mid-Atlantic, New England
and Midwest states. The interstate natural gas transmission and storage
operations are also 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.
Other Operations include the real estate operations of Crescent Resources, Inc.
and communications services. Corporate costs and intersegment eliminations are
also included in the financial results of this segment.
The consolidated financial statements include the accounts of the Company and
all majority-owned subsidiaries. These consolidated financial statements reflect
all normal recurring adjustments that are, in the opinion of management,
necessary to present fairly the financial position and results of operations for
the respective periods. Amounts reported in the Consolidated Statements of
Income are not necessarily indicative of amounts expected for the respective
years due to the effects of seasonal temperature variations on energy
consumption.
Certain amounts for the prior period have been reclassified in the consolidated
financial statements to conform to the current presentation.
2. Related Party Transactions
Certain balances due to or from related parties included in the Consolidated
Balance Sheets at March 31, 1998 and December 31, 1997 are as follows:
March 31, December 31,
In Millions 1998 1997
- --------------------------------------- ------------------- -----------------
Receivables $ 8.8 $17.9
Accounts payable 57.7 52.2
Taxes accrued 89.2 39.9
5
<PAGE>
3. Business Segments
Business segment financial information follows for the three months ended March
31, 1998 and 1997. Other Operations includes intersegment eliminations.
<TABLE>
<CAPTION>
<S> <C>
- ------------------------------------- ------------- ------------- ------------- ------------- -------------
Earnings
Before Depreciation Capital and
Total Operating Interest & & Investment
In Millions Revenues Income Taxes Amortization Expenditures
- ------------------------------------- ------------- ------------- ------------- ------------- -------------
Quarter Ended March 31, 1998
- -------------------------------------
Natural Gas Transmission $ 409.7 $199.9 $208.8 $57.9 $ 72.6
Energy Services
Field Services 669.6 16.5 47.7 19.1 69.5
Trading and Marketing 2,011.9 12.3 12.7 2.1 0.8
Global Asset Development 37.4 5.3 9.1 2.4 84.5
Other Energy Services 115.2 7.4 7.4 1.5 3.7
Energy Services' Eliminations (145.6) - - - -
------------- ------------- ------------- ------------- -------------
Total Energy Services 2,688.5 41.5 76.9 25.1 158.5
Other Operations (5.6) 15.5 17.2 9.2 43.7
------------- ------------- ------------- ------------- -------------
Total Consolidated $3,092.6 $256.9 $302.9 $92.2 $274.8
================================== ============= ============= ============= ============= =============
Quarter Ended March 31, 1997
- -------------------------------------
Natural Gas Transmission $ 437.9 $195.9 $206.0 $57.2 $ 15.9
Energy Services
Field Services 772.2 50.8 50.9 17.5 41.8
Trading and Marketing 1,629.5 29.6 30.1 1.3 2.0
Global Asset Development 21.2 (0.4) 0.1 2.3 13.3
Other Energy Services 84.4 3.8 (1.2) 1.1 1.0
Energy Services' Eliminations (187.6) - - - -
------------- ------------- ------------- ------------- -------------
Total Energy Services 2,319.7 83.8 79.9 22.2 58.1
Other Operations (10.1) 18.3 17.2 1.3 50.5
------------- ------------- ------------- ------------- -------------
Total Consolidated $2,747.5 $298.0 $303.1 $80.7 $124.5
===================================== ============= ============= ============= ============= =============
- ------------------------------------- ----------------------------------
Identifiable Assets
----------------------------------
March 31, December 31,
In Millions 1998 1997
- ------------------------------------- ---------------- -----------------
Natural Gas Transmission $ 5,057.4 $ 5,088.9
Energy Services
Field Services 1,964.2 1,979.8
Trading and Marketing 1,747.7 1,857.3
Global Asset Development 1,121.5 987.6
Other Energy Services 222.3 223.2
Energy Services' Eliminations (118.3) (169.1)
---------------- -----------------
Total Energy Services 4,937.4 4,878.8
Other Operations 1,101.7 1,129.1
---------------- -----------------
Total Consolidated $11,096.5 $11,096.8
===================================== ================ =================
</TABLE>
6
<PAGE>
4. Commitments and Contingencies
LITIGATION. On February 18, 1997, Amerada Hess Corporation (Amerada Hess)
notified Texas Eastern Transmission Corporation (TETCO), a subsidiary of the
Company, that it intended to commence substitution of other gas reserves,
deliverability and leases for those dedicated to its natural gas purchase
contract (the Amerada Hess Contract) with TETCO. On the same date, Amerada Hess
also filed a petition in the District Court of Harris County, Texas, 157th
Judicial District, seeking a declaratory judgment that its interpretation of the
Amerada Hess Contract is correct. TETCO filed a declaratory judgment action with
respect to Amerada Hess' contentions in the U.S. District Court for the Eastern
District of Louisiana on February 21, 1997.
On September 26, 1997, the judge presiding over the Amerada Hess contract matter
issued a summary judgment in favor of TETCO. Amerada Hess subsequently filed a
notice of appeal of the summary judgment. 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 Panhandle Eastern Pipe Line Company (PEPL), a subsidiary of
the Company, in the U.S. District Court for the Western District of Missouri.
The plaintiffs allege that PEPL has 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. Based on information currently available to the Company, the Company
believes the resolution of this matter will not have a material adverse effect
on the consolidated results of operations or financial position of the Company.
On May 1, 1997, Citrus Trading Corporation (Citrus) and Enron Capital and Trade
Resources Corporation, as successor to Enron Gas Marketing Corporation, filed
suit in the District Court of Harris County, Texas, against 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. Based on information
currently available to the Company, the Company believes the resolution of this
matter will not have a material adverse effect on the consolidated results of
operations or financial position of the Company.
On May 13, 1997, Anadarko Petroleum Corporation (Anadarko) filed suits against
PEPL and other affiliates, as defendants, both in the U.S. 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. The suit has been stayed
pending resolution by the FERC of ad-valorem tax issues. Based on information
currently available to the Company, the Company believes the resolution of this
matter will not have a material adverse effect on the consolidated results of
operations or financial position of the Company.
The Company and its subsidiaries are also involved in other legal, tax and
regulatory proceedings before various courts, regulatory commissions and
governmental agencies regarding matters arising in the ordinary course of
business, some of which involve substantial amounts. Where appropriate for all
of these matters, the Company has made accruals in accordance with Statement of
Financial Accounting Standards No. 5, "Accounting for
7
<PAGE>
Contingencies," in order to provide for such matters. Management is of the
opinion that the final disposition of these proceedings will not have a material
adverse effect on the consolidated results of operations or financial position
of the Company.
OTHER COMMITMENTS AND CONTINGENCIES. In 1993, the U.S. Department of the
Interior announced its intention to seek additional royalties from gas producers
as a result of payments received by such producers in connection with past
take-or-pay settlements, and buyouts and buydowns of gas sales contracts with
natural gas pipelines. The Company's pipelines, with respect to certain producer
contract settlements, may be contractually required to reimburse or, in some
instances, to indemnify producers against such royalty claims. The potential
liability of the producers to the government and of the pipelines to the
producers involves complex issues of law and fact which are likely to take
substantial time to resolve. If required to reimburse or indemnify the
producers, the Company's pipelines will file with the FERC to recover a portion
of these costs from pipeline customers.
The Company has a 10% ownership interest in TEPPCO Partners, L.P., a master
limited partnership (MLP) that owns and operates a petroleum products pipeline.
At March 31, 1998, a subsidiary partnership of the MLP had $389.7 million in
First Mortgage Notes outstanding with recourse to the general partner, a
subsidiary of the Company, up to $40 million.
PEPL owns an effective 5.3% ownership interest in Northern Border Pipeline
Company (Northern Border). Under the terms of a settlement related to a
transportation agreement between PEPL and Northern Border, PEPL guarantees
payment to Northern Border under a transportation agreement held by an affiliate
of Pan-Alberta Gas Limited. The transportation agreement requires estimated
total payments of $73.2 million for 1998 through 2001.
In connection with the sale of Petrolane Incorporated (Petrolane) in 1989, Texas
Eastern Corporation (TEC), a subsidiary of the Company, agreed to indemnify
Petrolane against certain obligations for guaranteed leases and environmental
matters. Certain of these lease obligations relate to Petrolane's divestiture of
supermarket operations prior to its acquisition by TEC and as of March 31, 1998
totaled approximately $48 million over the remaining terms of the leases, which
expire in 2006.
In January 1998, the Company acquired a 9.8% ownership in Alliance Pipeline.
This pipeline is designed to transport natural gas from western Canada to the
Chicago-area market center for distribution throughout North America. The
pipeline is scheduled to begin commercial operation in the second half of 2000,
provided the necessary U.S. and Canadian regulatory approvals are secured. In
addition to buying an ownership interest in the pipeline project, the Company
has a contractual commitment for 67.25 million cubic feet per day of capacity on
the line over 15 years for an estimated total of $315 million.
As of March 31, 1998, the Company had letters of credit and surety bonds of
$70.2 million issued on its behalf related to natural gas transmission
operations, engineering services contracts, insurance contracts and various
other items.
Periodically, the Company may become involved in contractual disputes with
natural gas transmission customers involving potential or threatened abrogation
of contracts by the customers. If the customers are successful, the Company may
not receive the full value of anticipated benefits under the contracts.
In the normal course of business, certain of the Company's affiliates enter into
various contracts, including agreements for debt, natural gas transmission
service and construction contracts, which contain certain schedule and
performance requirements. Such affiliates use risk management techniques to
mitigate their exposure associated with such contracts. The Company and certain
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.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
INTRODUCTION
Duke Capital Corporation (the Company) is a wholly owned subsidiary of Duke
Energy Corporation (Duke Energy). The Company provides financing and credit
enhancement services for its subsidiaries. The Company conducts its operating
activities through its three business segments: Natural Gas Transmission, Energy
Services and Other Operations.
The Natural Gas Transmission segment is engaged in interstate transportation and
storage of natural gas for customers primarily in the Mid-Atlantic, New England
and Midwest states. The interstate natural gas transmission and storage
operations are subject to the rules and regulations of the Federal Energy
Regulatory Commission (FERC).
The Energy Services segment is comprised of several separate business units:
Field Services gathers and processes natural gas, produces and markets natural
gas liquids (NGL) and transports and trades crude oil; Trading and Marketing
markets natural gas, electricity and other energy-related products; Global Asset
Development develops, owns and operates energy-related facilities worldwide; and
Other Energy Services provides engineering consulting, construction and
integrated energy solutions.
Other Operations include the real estate operations of Crescent Resources, Inc.
(Crescent Resources) and communications services. Corporate costs and
intersegment eliminations are also included in the financial results of this
segment.
Management's Discussion and Analysis should be read in conjunction with the
Consolidated Financial Statements of the Company.
RESULTS OF OPERATIONS
For the three months ended March 31, 1998, net income was $138.7 million, net of
an extraordinary loss of $8.0 million, compared to net income of $146.3 million
for the same period in 1997. Operating income for the three months ended March
31, 1998 decreased to $256.9 million compared to $298.0 million for the same
period in 1997. Earnings before interest and taxes (EBIT) were $302.9 million
and $303.1 million for the three months ended March 31, 1998 and 1997,
respectively. Operating income and earnings before interest and taxes, excluding
the effect of a $31.2 million gain on an asset sale by Field Services in 1998,
are not materially different, and are affected by the same fluctuations for the
Company and each of its business segments. Earnings before interest and taxes by
business segment are summarized below, and the explanation of these results by
business segment are discussed thereafter.
9
<PAGE>
Earnings Before Interest and Taxes by Business Segment:
- ---------------------------------------------- -----------------------------
Three Months Ended
March 31,
-----------------------------
In Millions 1998 1997
- ---------------------------------------------- -------------- --------------
Natural Gas Transmission $ 208.8 $ 206.0
Energy Services
Field Services 47.7 50.9
Trading and Marketing 12.7 30.1
Global Asset Development 9.1 0.1
Other Energy Services 7.4 (1.2)
-------------- --------------
Total Energy Services 76.9 79.9
Crescent Resources 22.4 22.2
Other Operations (5.2) (5.0)
-------------- --------------
Total Company $ 302.9 $ 303.1
============================================== ============== ==============
Included in the amounts discussed below are intercompany transactions that do
not have a material impact on consolidated earnings before interest and taxes.
Natural Gas Transmission
- ---------------------------------------------- -----------------------------
Three Months Ended March 31,
-----------------------------
Dollars In Millions 1998 1997
- ---------------------------------------------- -------------- --------------
Operating Revenues $ 409.7 $ 437.9
Operating Expenses 209.8 242.0
-------------- --------------
Operating Income 199.9 195.9
Other Income, Net 8.9 10.1
-------------- --------------
EBIT $ 208.8 $ 206.0
============== ==============
Volumes, TBtu(a) 778 842
- ---------------------------------------------- -------------- --------------
(a) Trillion British thermal units
Earnings before interest and taxes for the Natural Gas Transmission segment
increased slightly for the three months ended March 31, 1998 compared to the
same period in 1997. Earnings before interest and taxes for the Northeast
Pipelines increased $23.1 million for the three months ended March 31, 1998
compared to the prior year quarter, primarily as a result of a favorable state
property tax ruling in 1998 and a one-time charge for severance costs during the
first quarter of 1997. Increases in market expansion projects were largely
offset by a decrease in throughput as a result of the mild winter weather.
Earnings before interest and taxes for the Midwest Pipelines decreased $20.3
million for the three months ended March 31, 1998 compared to the prior year
quarter, primarily due to a provision reversal in the first quarter of 1997
related to a favorable resolution of certain regulatory matters. Partially
offsetting this decrease were lower operating expenses in the first quarter of
1998.
Energy Services
Earnings before interest and taxes for Energy Services decreased 4% for the
three months ended March 31, 1998 compared to the same period in 1997. For the
three months ended March 31, 1998 and 1997, the decrease in earnings before
interest and taxes was primarily driven by the results of operations of Field
Services and Trading and Marketing.
10
<PAGE>
Field Services
- ---------------------------------------------- -----------------------------
Three Months Ended March 31,
-----------------------------
Dollars In Millions 1998 1997
- ---------------------------------------------- -------------- --------------
Operating Revenues $ 669.6 $ 772.2
Operating Expenses 653.1 721.4
-------------- --------------
Operating Income 16.5 50.8
Other Income, Net 31.2 0.1
-------------- --------------
EBIT $ 47.7 $ 50.9
============== ==============
Volumes
Natural Gas Gathered/Processed, TBtu/d(a) 3.7 3.4
NGL Production, MBbl/d(b) 106.4 106.2
- ---------------------------------------------- -------------- --------------
(a) Trillion British thermal units per day
(b) Thousand barrels per day
Earnings before interest and taxes for Field Services decreased 6% for the three
months ended March 31, 1998 compared to the same period in 1997. For the three
months ended March 31, 1998, a decrease in average NGL prices of 27.5% from the
prior year quarter caused a significant decrease in revenues and operating
income. Offsetting this decrease was a $31.2 million gain on the sale of natural
gas fractionator facilities, which is included in other income and expenses for
the quarter ended March 31, 1998. Operating expenses decreased 9.5% for the
three months ended March 31, 1998 in comparison to the prior quarter, primarily
as a result of decreased natural gas prices.
Trading and Marketing
- ---------------------------------------------- -----------------------------
Three Months Ended March 31,
-----------------------------
Dollars In Millions 1998 1997
- ---------------------------------------------- -------------- --------------
Operating Revenues $ 2,011.9 $ 1,629.5
Operating Expenses 1,999.6 1,599.9
-------------- --------------
Operating Income 12.3 29.6
Other Income, Net 0.4 0.5
-------------- --------------
EBIT $ 12.7 $ 30.1
============== ==============
Volumes
Natural Gas Marketed, TBtu/d 7.9 6.9
Electricity Marketed, GWh(a) 23,892 3,793
- ---------------------------------------------- -------------- --------------
(a) Gigawatt-hours
Earnings before interest and taxes for Trading and Marketing decreased $17.4
million for the three months ended March 31, 1998 compared with the same period
in 1997. The decline results primarily from lower natural gas margin rates and
decreased trading margins caused by a significant decline in energy price
volatility in the first quarter of 1998 compared to the same period in 1997. The
margin decline was partially offset by increased volumes. Electricity volumes
marketed increased primarily as a result of acquiring 100% ownership of the
Duke/Louis Dreyfus, L.L.C. joint venture in June 1997.
Other Impacts on Net Income
For the three months ended March 31, 1998, interest expense increased 12% over
the comparable period in 1997 due to higher average debt balances outstanding.
11
<PAGE>
In January 1998, TEPPCO, in which the Company has a 10% ownership interest,
redeemed certain First Mortgage Notes. The Company recorded a non-cash
extraordinary item of $8 million, net of income tax of $5.1 million, related to
its share of costs of the early retirement of debt.
LIQUIDITY AND CAPITAL RESOURCES
Operating Cash Flow
Operating cash flows decreased $31.9 million for the three months ended March
31, 1998 compared with the same period in 1997 primarily due to changes in
working capital.
On April 28, 1998, Texas Eastern Transmission Corporation (TETCO), a subsidiary
of the Company, 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 the 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.
Investing Cash Flow
Capital and investment expenditures totaled $274.8 million for the three months
ended March 31, 1998, compared with $124.5 million for the same period in 1997.
Increased capital and investment expenditures during the period were primarily
due to business expansion for the Natural Gas Transmission and the Energy
Services segments, specifically Field Services and Global Asset Development.
Financing Cash Flow
Dividends and debt repayments, along with operating and investing requirements,
are expected to be funded by cash from operations, debt and commercial paper
issuances and available credit facilities. The Company is seeking to
significantly grow its Energy Services businesses, which will likely require
additional financing. The Company plans to fund Energy Services growth
opportunities through a combination of internally generated cash and external
debt. Debt financing will be obtained through the Company's commercial paper
program and by accessing the capital markets. In connection with its plans to
access the capital markets, the Company filed a $1 billion shelf registration
statement which was declared effective by the Securities and Exchange
Commission on May 13, 1998.
12
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
For information concerning litigation and other contingencies, see Note 4 to the
Consolidated Financial Statements.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of the security holders of the Company
during the first quarter of 1998.
Item 5. Other Information.
Forward-Looking Statements
From time to time, the Company may make statements regarding its assumptions,
projections, expectations, intentions or beliefs about future events. These
statements are intended as "forward-looking statements" under the Private
Securities Litigation Reform Act of 1995. The Company cautions that assumptions,
projections, expectations, intentions or beliefs about future events may and
often do vary from actual results and the differences between assumptions,
projections, expectations, intentions or beliefs and actual results can be
material. Accordingly, there can be no assurance that actual results will not
differ materially from those expressed or implied by the forward-looking
statements. The following are some of the factors that could cause actual
achievements and events to differ materially from those expressed or implied in
such forward-looking statements: state and federal legislative and regulatory
initiatives that affect cost and investment recovery, have an impact on rate
structures, and affect the speed and degree to which competition enters the
electric and natural gas industries; industrial, commercial and residential
growth in the service territories of the Company and its subsidiaries; the
weather and other natural phenomena; the timing and extent of changes in
commodity prices and interest rates; changes in environmental and other laws and
regulations to which the Company and its subsidiaries are subject or other
external factors over which the Company has no control; the results of financing
efforts; growth in opportunities for the Company's subsidiaries; and the effect
of the Company's accounting policies, in each case during the periods covered by
the forward-looking statements.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
(27) Financial Data Schedule (included in electronic filing
only)
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the first quarter of
1998.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
DUKE CAPITAL CORPORATION
May 20, 1998 /s/ Richard J. Osborne
------------------------
Richard J. Osborne
Vice President and
Chief Financial Officer
14
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Duke
Capital Corporation Quarterly Report on Form 10-Q for the quarter ended March 31,
1998 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0001051116
<NAME> DUKE CAPITAL CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
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<RECEIVABLES> 1364400
<ALLOWANCES> 0
<INVENTORY> 155600
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<PP&E> 9898000
<DEPRECIATION> 3711000
<TOTAL-ASSETS> 11096500
<CURRENT-LIABILITIES> 2429800
<BONDS> 2938900
0
0
<COMMON> 0
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<FN>
<F1> Not meaningful since Duke Capital Corporation is a
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</FN>
</TABLE>
