==============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 1999 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.)
526 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 for the past 90 days. 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 July 31,
1999.........................1,010
<PAGE>
DUKE CAPITAL CORPORATION
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1999
INDEX
<TABLE>
<CAPTION>
Item Page
PART I. FINANCIAL INFORMATION
<S> <C>
1. Financial Statements......................................................................................1
Consolidated Statements of Income for the Three and Six Months Ended June 30, 1999 and 1998............1
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1999 and 1998.................2
Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998..................................3
Notes to Consolidated Financial Statements.............................................................5
2. Management's Discussion and Analysis of Results of Operations and Financial Condition....................12
PART II. OTHER INFORMATION
1. Legal Proceedings........................................................................................21
6. Exhibits and Reports on Form 8-K.........................................................................21
Signatures...............................................................................................22
</TABLE>
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
From time to time, the Company's reports and other public announcements may
include assumptions, projections, expectations, intentions or beliefs about
future events. These statements are intended as "forward-looking statements"
under the Private Securities Litigation Reform Act of 1995. The Company cautions
that assumptions, projections, expectations, intentions or beliefs about future
events may and often do vary from actual results and the differences between
assumptions, projections, expectations, intentions or beliefs and actual results
can be material. Accordingly, there can be no assurance that actual results will
not differ materially from those expressed or implied by the forward-looking
statements. Some of the factors that could cause actual achievements and events
to differ materially from those expressed or implied in such forward-looking
statements include state, federal and foreign legislative and regulatory
initiatives that affect cost and investment recovery, have an impact on rate
structures and affect the speed and degree to which competition enters the
natural gas industry; industrial, commercial and residential growth in the
service territories of the Company's subsidiaries; the weather and other
natural phenomena; the timing and extent of changes in commodity prices,
interest rates and foreign currency exchange rates; changes in environmental and
other laws and regulations to which the Company is subject or other external
factors over which the Company has no control; the results of financing efforts,
including the Company's ability to obtain financing on favorable terms, which
can be affected by the Company's credit rating and general economic conditions;
growth in opportunities for the Company's business units; achievement of year
2000 readiness; and the effect of accounting policies issued periodically by
accounting standard-setting bodies.
i
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
DUKE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ -----------------------
1999 1998 1999 1998
------------------------ -----------------------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Sales, trading and marketing of natural gas
and petroleum products $ 2,388 $ 1,885 $ 4,402 $ 3,861
Transportation and storage of natural gas 253 337 632 724
Trading and marketing of electricity 667 418 1,106 955
Other 310 255 595 448
--------- -------- --------- -----------
Total operating revenues 3,618 2,895 6,735 5,988
--------- -------- --------- -----------
OPERATING EXPENSES
Natural gas and petroleum products purchased 2,307 1,795 4,247 3,664
Purchased power 588 406 992 944
Other operation and maintenance 377 367 792 689
Depreciation and amortization 96 93 185 185
Property and other taxes 23 25 55 40
--------- -------- --------- -----------
Total operating expenses 3,391 2,686 6,271 5,522
--------- -------- --------- -----------
OPERATING INCOME 227 209 464 466
--------- -------- --------- -----------
OTHER INCOME AND EXPENSES 15 10 50 56
--------- -------- --------- -----------
EARNINGS BEFORE INTEREST AND TAXES 242 219 514 522
INTEREST EXPENSE 50 55 115 113
MINORITY INTERESTS 26 10 55 19
--------- -------- --------- -----------
EARNINGS BEFORE INCOME TAXES 166 154 344 390
INCOME TAXES 32 46 111 135
--------- -------- --------- -----------
INCOME BEFORE EXTRAORDINARY ITEM 134 108 233 255
EXTRAORDINARY GAIN (LOSS), NET OF TAX - - 660 (8)
--------- -------- --------- -----------
NET INCOME $ 134 $ 108 $ 893 $ 247
========= ======== ========= ===========
See Notes to Consolidated Financial Statements.
1
<PAGE>
DUKE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN MILLIONS)
Six Months Ended
June 30,
-----------------------
1999 1998
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 893 $ 247
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 190 191
Extraordinary (gain) loss, net of tax (660) 8
Deferred income taxes 39 (2)
Transition cost recoveries, net 44 1
(Increase) decrease in
Receivables (48) 341
Inventory (23) (33)
Other current assets (26) 38
Increase (decrease) in
Accounts payable 162 (354)
Taxes accrued 32 47
Interest accrued - (1)
Other current liabilities (32) (34)
Other, net (48) 17
-------- --------
Net cash provided by operating activities 523 466
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital and investment expenditures (2,487) (473)
Proceeds from sale of subsidiaries 1,900 -
Proceeds from sales and other, net 91 37
-------- --------
Net cash used in investing activities (496) (436)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issuance of long-term debt 399 32
Guaranteed preferred beneficial interests in subordinated notes
of Duke Capital Corporation - 242
Payments for the redemption of long-term debt (201) (106)
Net change in notes payable and commercial paper (11) (288)
Other, net (51) 9
-------- --------
Net cash provided by (used in) financing activities 136 (111)
-------- --------
Net increase (decrease) in cash and cash equivalents 163 (81)
Cash received from business acquisitions - 35
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 64 94
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 227 $ 48
======== ========
SUPPLEMENTAL DISCLOSURES
Cash paid for interest, net of amount capitalized $ 114 $ 110
Cash paid for income taxes $ 131 $ 58
See Notes to Consolidated Financial Statements.
2
<PAGE>
DUKE CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
June 30, December 31,
1999 1998
(unaudited)
------------- -------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 227 $ 64
Receivables 1,889 1,767
Inventory 197 214
Current portion of natural gas transition costs 100 100
Unrealized gains on mark-to-market transactions 1,710 1,457
Other 178 218
------------- -------------
Total current assets 4,301 3,820
------------- -------------
INVESTMENTS AND OTHER ASSETS
Investments in affiliates 1,228 902
Pre-funded pension costs 340 340
Goodwill, net 628 495
Notes receivable 224 244
Unrealized gains on mark-to-market transactions 1,249 396
Other 329 169
------------- -------------
Total investments and other assets 3,998 2,546
------------- -------------
PROPERTY, PLANT AND EQUIPMENT
Cost 9,969 11,020
Less accumulated depreciation and amortization 1,917 3,866
------------- -------------
Net property, plant and equipment 8,052 7,154
------------- -------------
REGULATORY ASSETS AND DEFERRED DEBITS
Debt expense 45 58
Regulatory asset related to income taxes 16 15
Natural gas transition costs 36 80
Environmental clean-up costs 36 87
Other 78 96
------------- -------------
Total regulatory assets and deferred debits 211 336
------------- -------------
TOTAL ASSETS $ 16,562 $ 13,856
============= =============
See Notes to Consolidated Financial Statements.
3
<PAGE>
DUKE CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
June 30, December 31,
1999 1998
(unaudited)
------------- -------------
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,641 $ 1,406
Notes payable and commercial paper 18 29
Taxes accrued 789 159
Interest accrued 55 57
Current maturities of long-term debt 553 258
Unrealized losses on mark-to-market transactions 1,696 1,387
Other 396 466
------------- -------------
Total current liabilities 5,148 3,762
------------- -------------
LONG-TERM DEBT 2,618 2,884
------------- -------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 1,278 1,460
Environmental clean-up liabilities 215 148
Unrealized losses on mark-to-market transactions 1,119 362
Other 316 334
------------- -------------
Total deferred credits and other liabilities 2,928 2,304
------------- -------------
MINORITY INTERESTS 280 253
------------- -------------
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN SUBORDINATED
NOTES OF DUKE CAPITAL CORPORATION 580 580
------------- -------------
COMMON STOCKHOLDER'S EQUITY
Common stock, no par, 3,000 shares authorized,
1,010 shares outstanding - -
Paid-in capital 2,999 2,969
Retained earnings 2,009 1,104
------------- -------------
Total common stockholder's equity 5,008 4,073
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 16,562 $ 13,856
============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
DUKE CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
Duke Capital Corporation (collectively with its subsidiaries, "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 six business segments:
o Natural Gas Transmission
o Field Services
o Trading and Marketing
o Global Asset Development
o Other Energy Services
o Real Estate Operations
These segments were defined as a result of the Company adopting Statement of
Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an
Enterprise and Related Information," in December 1998.
Natural Gas Transmission, through its Northeast Pipelines, provides interstate
transportation and storage of natural gas for customers primarily in the
Mid-Atlantic and New England states. Until the sale of the Midwest Pipelines on
March 29, 1999, Natural Gas Transmission also provided interstate transportation
and storage services in the Midwest states. See further discussion of the sale
of the Midwest Pipelines in Note 4 to the Consolidated Financial Statements. The
interstate natural gas transmission and storage operations are subject to the
rules and regulations of the Federal Energy Regulatory Commission (FERC).
Field Services gathers, processes, transports and markets natural gas and
produces and markets natural gas liquids (NGLs). Field Services operates
gathering systems in western Canada and ten contiguous states that serve major
gas-producing regions in the Rocky Mountain, Permian Basin, Mid-Continent and
onshore and offshore Gulf Coast areas.
Trading and Marketing markets natural gas, electricity and other energy-related
products across North America. The Company owns a 60% interest in Trading and
Marketing's operations, with Mobil Corporation owning a 40% minority interest.
Global Asset Development develops, owns and operates energy-related facilities
worldwide. Global Asset Development conducts its operations primarily through
Duke Energy North America, LLC (formerly Duke Energy Power Services, LLC) and
Duke Energy International, LLC.
Other Energy Services provides engineering, consulting, construction and
integrated energy solutions worldwide, primarily through Duke Engineering &
Services, Inc., Duke/Fluor Daniel and DukeSolutions, Inc.
Real Estate Operations conducts its business through Crescent Resources, Inc.,
which develops high quality commercial and residential real estate projects and
manages forest holdings in the southeastern United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION. 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
5
<PAGE>
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.
COMMODITY INSTRUMENTS. Effective January 1, 1999, the Company adopted Emerging
Issues Task Force Consensus No. 98-10, "Accounting for Contracts Involved in
Energy Trading and Risk Management Activities" for certain energy forward
contracts. This accounting standard requires entities involved in energy trading
activities to record energy trading contracts using the mark-to-market method of
accounting. Under this methodology, the contracts are adjusted to market value,
and the gains and losses are recognized in current period income and are
included in the Consolidated Statements of Income as Natural Gas and Petroleum
Products Purchased. In prior years, these contracts were accounted for under the
accrual method of accounting. Under this methodology, gains and losses were
recognized as the contract settled. While implementation of this accounting
standard affected certain components of financial position, the cumulative
effect of the change in accounting method on the Consolidated Statements of
Income for the period ended June 30, 1999 was not material.
EXTRAORDINARY ITEM. For a description of the 1999 extraordinary item, see
Note 4 to the Consolidated Financial Statements.
In January 1998, TEPPCO Partners, L.P., in which a subsidiary of the Company has
a 2% general partner interest and a 19.1% limited partner interest, redeemed
certain First Mortgage Notes. A non-cash extraordinary loss of $8 million, net
of income tax of $5 million, was recorded related to costs of the early
retirement of debt.
RECLASSIFICATIONS. Certain amounts have been reclassified in the Consolidated
Financial Statements to conform to the current presentation.
3. RELATED PARTY TRANSACTIONS
Certain balances due to or from related parties included in the Consolidated
Balance Sheets at June 30, 1999 and December 31, 1998 are as follows:
- ------------------------------------------------------
June 30, December 31,
In Millions 1999 1998
- ------------------------------------------------------
Receivables $ - $ 6
Accounts payable 119 129
Taxes accrued 644 73
- ------------------------------------------------------
4. BUSINESS ACQUISITIONS/DISPOSITIONS
UNION PACIFIC RESOURCES' GATHERING, PROCESSING AND MARKETING OPERATIONS. On
March 31, 1999, the Company, through its wholly owned subsidiary, Duke Energy
Field Services, Inc., completed the $1.35 billion acquisition of the natural gas
gathering, processing, fractionation and NGL pipeline business from Union
Pacific Resources (UPR), as well as UPR's natural gas and NGL marketing
activities (collectively, "the UPR acquisition"). The UPR acquisition was
accounted for by the purchase method. The assets and liabilities of the UPR
acquisition were consolidated in the Company's financial statements as of March
31, 1999 and earnings have been consolidated subsequent to that date. The excess
of the purchase price over the fair value of the net identifiable assets and
liabilities acquired of $158 million has been recorded as goodwill and is being
amortized on a straight-line basis over 15 to 20 years.
The Company assumed responsibility for certain environmental liabilities
associated with the UPR acquisition. During due diligence procedures prior to
the acquisition, the Company identified
6
<PAGE>
environmental contamination at certain UPR facilities. Soil and groundwater
contamination at the identified UPR sites will be addressed in conjunction with
the Company's remediation plans. Also, other environmental matters, such as the
status of air emission permits at some facilities, may require corrective
action. The estimated cost to remediate these conditions at June 30, 1999 is
$157 million, which is included in Environmental Clean-up Liabilities on the
Consolidated Balance Sheets. The total estimated amount of environmental
liabilities is currently being refined. Under the terms of the purchase
agreement, certain environmental liabilities in excess of $40 million will be
considered a reduction in the purchase price. To the extent that changes in the
estimated environmental liabilities do not result in a purchase price
adjustment, the change will be reflected as an adjustment to goodwill. Other
adjustments to estimated amounts recorded in conjunction with the UPR
acquisition also will be recorded as an adjustment to goodwill. However,
management believes that any change in the estimated costs will not have a
material adverse effect on the consolidated results of operations or financial
position.
PEPL COMPANIES AND TRUNKLINE LNG. On March 29, 1999, the Company, through its
wholly owned subsidiaries, PanEnergy Corp and Texas Eastern Corporation, sold
Panhandle Eastern Pipe Line Company (PEPL), Trunkline Gas Company and additional
storage related to those systems (collectively, the PEPL Companies), which
substantially comprised the Midwest Pipelines, along with Trunkline LNG Company
(Trunkline LNG), to CMS Energy Corporation (CMS). The sales price of $2.2
billion involved cash proceeds of $1.9 billion and CMS' assumption of existing
PEPL debt of approximately $300 million. The sale resulted in an extraordinary
gain of $660 million, net of income tax of $404 million. Under the terms of the
agreement with CMS, the Company is retaining certain assets and liabilities,
such as the Houston office building, certain environmental, legal and tax
liabilities, and substantially all intercompany balances. Management believes
that the retention of these items will not have a material adverse effect on
consolidated results of operations or financial position.
- -------------------------------------------------------------
COMBINED OPERATING RESULTS OF THE PEPL COMPANIES AND TRUNKLINE LNG
FOR THE PERIOD FROM JANUARY 1, 1999 THROUGH MARCH 28, 1999(a) (In millions)
- -------------------------------------------------------------
Operating Revenues $126
Operating Expenses 57
Other Income, Net 4
---------------
Earnings Before Interest and Taxes $ 73
- -------------------------------------------------------------
(a) Excludes intercompany building rental revenue, allocated corporate expenses,
building depreciation and certain other costs to be retained by the Company.
7
<PAGE>
5. BUSINESS SEGMENTS
The Company's reportable segments are strategic business units that offer
different products and services and are each managed separately. Management
evaluates segment performance based on earnings before interest and taxes
(EBIT). Segment EBIT, presented in the accompanying table, includes intersegment
sales accounted for at prices representative of unaffiliated party transactions.
Segment assets are provided as additional information in the accompanying table
and are net of intercompany advances, intercompany notes receivable and
investments in subsidiaries.
- ----------------------------------------------------------------------
BUSINESS SEGMENT DATA (In millions)
- ----------------------------------------------------------------------
Capital and
Unaffiliated Intersegment Total Investment
Revenues Revenues Revenues EBIT Expenditures
--------------------------------------------------------
THREE MONTHS ENDED
JUNE 30, 1999
Natural Gas Transmission $ 237 $ 23 $ 260 $146 $ 65
Field Services 614 168 782 36 92
Trading and Marketing 2,476 70 2,546 24 26
Global Asset Development 94 20 114 25 256
Other Energy Services 159 - 159 (6) 2
Real Estate Operations 38 - 38 28 93
Other Operations (a) - 5 5 (11) (8)
Eliminations - (286) (286) - -
--------------------------------------------------------
Total Consolidated $ 3,618 $ - $ 3,618 $242 $526
- --------------------------------------------------------------------------------
THREE MONTHS ENDED
JUNE 30, 1998
Natural Gas Transmission $ 342 $ 25 $ 367 $147 $ 51
Field Services 602 126 728 13 61
Trading and Marketing 1,709 18 1,727 15 1
Global Asset Development 59 1 60 15 20
Other Energy Services 135 1 136 2 9
Real Estate Operations 49 - 49 42 48
Other Operations (a) (1) - (1) (15) 8
Eliminations - (171) (171) - -
--------------------------------------------------------
Total Consolidated $2,895 $ - $ 2,895 $219 $198
- --------------------------------------------------------------------------------
8
<PAGE>
- ----------------------------------------------------------------------
BUSINESS SEGMENT DATA, CONTINUED (In millions)
- ----------------------------------------------------------------------
Capital and
Unaffiliated Intersegment Total Investment
Revenues Revenues Revenues EBIT Expenditures
--------------------------------------------------------
SIX MONTHS ENDED
JUNE 30, 1999
Natural Gas Transmission $ 615 $ 47 $ 662 $354 $ 107
Field Services 848 278 1,126 48 1,537
Trading and Marketing 4,718 114 4,832 56 31
Global Asset Development 182 40 222 57 638
Other Energy Services 313 - 313 (11) 10
Real Estate Operations 66 - 66 46 153
Other Operations (a) (7) 18 11 (36) 11
Eliminations - (497) (497) - -
--------------------------------------------------------
Total Consolidated $ 6,735 $ - $ 6,735 $514 $2,487
- --------------------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30, 1998
Natural Gas Transmission $ 721 $ 56 $ 777 $356 $ 124
Field Services 1,132 266 1,398 61 131
Trading and Marketing 3,712 27 3,739 28 2
Global Asset Development 95 2 97 24 105
Other Energy Services 250 1 251 9 13
Real Estate Operations 79 - 79 64 90
Other Operations (a) (1) 1 - (20) 8
Eliminations - (353) (353) - -
--------------------------------------------------------
Total Consolidated $5,988 $ - $ 5,988 $522 $ 473
- --------------------------------------------------------------------------------
- ------------------------------------------------
SEGMENT ASSETS (In millions)
- ------------------------------------------------
June 30, December 31,
1999 1998
----------------------
Natural Gas Transmission $ 3,862 $ 4,996
Field Services 3,581 1,893
Trading and Marketing 4,653 3,233
Global Asset Development 2,615 2,061
Other Energy Services 393 376
Real Estate Operations 858 724
Other Operations (a) 1,029 759
Eliminations (429) (186)
----------------------
Total Consolidated $16,562 $13,856
- ------------------------------------------------
(a) Includes communication services and certain unallocated corporate items.
6. RISK MANAGEMENT AND FINANCIAL INSTRUMENTS
FOREIGN CURRENCY DERIVATIVES. On February 18, 1999, the Company announced its
intent to make a concurrent cash tender offer in Chilean pesos in Chile and the
United States for 51% of the outstanding shares of Empresa Nacional de
Electricidad S.A. (Endesa-Chile) for an estimated total cash outlay of
approximately $2.1 billion based on current exchange rates. In anticipation of
the purchase of Endesa-Chile, the Company entered into foreign currency forward
and swap contracts to obtain Chilean pesos for the purchase. On April 21, 1999,
following a competitive counter offer, the Company reached the conclusion that
Endesa-Chile could not be acquired on terms favorable to the Company's
shareholder and withdrew the tender offer. During the second quarter 1999, all
the forward and swap contracts were settled
9
<PAGE>
resulting in a net loss of $4 million which is included in the Consolidated
Statement of Income as Other Income and Expenses.
7. DEBT AND CREDIT FACILITIES
Associated with the purchase of certain assets in Australia and New Zealand, the
Company borrowed approximately $300 million in both Australian and New Zealand
dollars during the first quarter of 1999. The six month bridge financing
expired in July 1999, but has been extended through December 31, 1999. These
notes have variable interest rates that approximated 5.4% as of June 30, 1999.
During the second quarter 1999, the Company obtained a three-year medium term
foreign facility that allows borrowings up to approximately $350 million. This
facility has a variable interest rate that approximated 5.4% as of June 30,
1999.
8. COMMITMENTS AND CONTINGENCIES
Litigation. Under the terms of the agreement with CMS discussed in Note 4 to the
Consolidated Financial Statements, the Company is retaining certain legal and
tax liabilities including the following matters.
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, a former subsidiary of the Company, in the U.S.
District Court for the Western District of Missouri. The plaintiffs alleged that
PEPL had 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 had violated the antitrust laws and tortiously
interfered with the plaintiffs' business expectancies, the plaintiffs pursued
compensatory and punitive damages. In February 1999, this case was settled. The
court entered an order dismissing the case on March 3, 1999. The settlement did
not have a material adverse effect on consolidated results of operations or
financial position.
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. Pursuing only the federal court claim, Anadarko claims that it
was effectively indemnified by the defendants against any responsibility for
refunds of Kansas ad valorem taxes which are due purchasers of gas from
Anadarko, retroactive to 1983. On October 20, 1998 and January 15, 1999, the
FERC issued orders on ad valorem tax issues, finding that first sellers of gas
were primarily liable for refunds. The FERC also noted that claims for indemnity
or reimbursement among the parties would be better addressed by the United
States District Court for the Southern District of Texas. The Company believes
the resolution of this matter will not have a material adverse effect on
consolidated results of operations or financial position.
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, the
Company has made accruals in accordance with SFAS No. 5, "Accounting for
Contingencies," to provide for such matters. Management believes that the final
disposition of these proceedings will not have a material adverse effect on
consolidated results of operations or financial position.
ENVIRONMENTAL. In June 1999, the Environmental Protection Agency certified that
Texas Eastern Transmission Corporation (TETCO), a wholly owned subsidiary of the
Company, had completed clean up of PCB (polychlorinated biphenyl) contaminated
sites under conditions stipulated by a U.S. Consent Decree in 1989. Due to the
completion of the program ahead of schedule and under budget, the estimated
liability and amounts to be recovered from customers were reduced resulting in a
$28 million reduction in expense in June 1999. TETCO is required to continue
groundwater monitoring on a number of sites for at least the next two years. The
estimated cost of such monitoring is not material.
10
<PAGE>
OTHER COMMITMENTS AND CONTINGENCIES. 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 2000. 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.
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.
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 subsidiaries and
affiliates enter into various contracts for energy services that contain certain
schedule and performance requirements. Risk management techniques are used to
mitigate the exposure associated with such contracts. The Company and certain
subsidiaries of the Company have guaranteed performance under some of these
contracts. In addition, the Company and certain subsidiaries of the Company have
guaranteed debt agreements of affiliates and have provided surety bonds and
letters of credit.
Management believes that these commitments and contingencies will not have a
material adverse effect on consolidated results of operations or financial
position.
9. SUBSEQUENT EVENTS
In July 1999, Duke Energy International successfully bid for a controlling
voting interest and an approximate 40% economic interest in Companhia de Geracao
de Energia Eletrica Paranapanema (Paranapanema) for approximately $690 million.
Paranapanema is Brazil's eleventh largest electric generating company, operating
2,307 megawatts of hydroelectric generation facilities. Duke Energy
International advanced the funds for the purchase, financed by commercial paper,
and will assume operational control of Paranapanema in August 1999.
In July 1999, Duke Energy International also reached agreement to obtain
controlling interest in two El Salvadorian generating companies, Generadora
Acajutla S.A. de C.V. and Generadora Salvadorena, S.A. de C.V. for approximately
$125 million. The El Salvadorian generating companies currently control 275
megawatts of thermal power generation. Duke Energy International will assume
operation of the companies in September and modernization construction of
approximately $75 million will begin prior to the end of the year with
completion scheduled for late 2001.
In August 1999, Duke Energy International announced that it has reached a
definitive agreement with Dominion Resources, Inc. to acquire its portfolio of
hydroelectric, natural gas and diesel power generation businesses in Argentina,
Belize, Bolivia and Peru for approximately $405 million. The businesses being
purchased total approximately 1,200 megawatts of gross generation capacity. The
transaction is expected to be completed before the end of 1999 and is subject to
receiving appropriate governmental consents and approvals.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
INTRODUCTION
Duke Capital Corporation (collectively with its subsidiaries, "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 six
business segments:
o Natural Gas Transmission
o Field Services
o Trading and Marketing
o Global Asset Development
o Other Energy Services
o Real Estate Operations
These segments were defined as a result of the Company adopting Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information," in December 1998.
Natural Gas Transmission, through its Northeast Pipelines, provides interstate
transportation and storage of natural gas for customers primarily in the
Mid-Atlantic and New England states. Until the sale of the Midwest Pipelines on
March 29, 1999, Natural Gas Transmission also provided interstate transportation
and storage services in the Midwest states. For further discussion of the sale
of the Midwest Pipelines, see Note 4 to the Consolidated Financial Statements.
The interstate natural gas transmission and storage operations are subject to
the rules and regulations of the Federal Energy Regulatory Commission (FERC).
Field Services gathers, processes, transports and markets natural gas and
produces and markets natural gas liquids (NGLs). Field Services operates
gathering systems in western Canada and ten contiguous states that serve major
gas-producing regions in the Rocky Mountain, Permian Basin, Mid-Continent and
onshore and offshore Gulf Coast areas.
Trading and Marketing markets natural gas, electricity and other energy-related
products across North America. The Company owns a 60% interest in Trading and
Marketing's operations, with Mobil Corporation owning a 40% minority interest.
Global Asset Development develops, owns and operates energy-related facilities
worldwide. Global Asset Development conducts its operations primarily through
Duke Energy North America, LLC (Duke Energy North America, formerly Duke Energy
Power Services, LLC) and Duke Energy International, LLC (Duke Energy
International).
Other Energy Services provides engineering, consulting, construction and
integrated energy solutions worldwide, primarily through Duke Engineering &
Services, Inc. (Duke Engineering & Services), Duke/Fluor Daniel and
DukeSolutions, Inc. (DukeSolutions).
Real Estate Operations conducts its business through Crescent Resources, Inc.,
which develops high quality commercial and residential real estate projects and
manages forest holdings in the southeastern United States.
Management's Discussion and Analysis should be read in conjunction with the
Consolidated Financial Statements.
12
<PAGE>
RESULTS OF OPERATIONS
For the quarter ended June 30, 1999, net income was $134 million. For the
comparable 1998 period, net income was $108 million. For the six months ended
June 30, 1999, net income was $893 million, including an after-tax extraordinary
gain of $660 million, compared to net income of $247 million for the same period
in 1998. The increase in net income is primarily due to the 1999 extraordinary
gain, which resulted from the sale of the Midwest Pipelines.
Operating income for the three months ended June 30, 1999 increased to $227
million compared to $209 million for the same period in 1998. Operating income
for the six months ended June 30, 1999 was $464 million compared to $466 million
for the same period in 1998. Earnings before interest and taxes (EBIT) were $242
million and $219 million for the three months ended June 30, 1999 and 1998,
respectively. For the six months ended June 30, 1999 and 1998, EBIT was $514
million and $522 million, respectively. Operating income and EBIT are affected
by the same fluctuations for the Company and each of its business segments. The
only notable variable between the two amounts is the inclusion in EBIT of gains
on sales of assets in Other Income and Expenses on the Consolidated Statements
of Income. Gains on sales of assets include a $14 million gain on an investment
sale by Global Asset Development for the six months ended June 30, 1999 and a
$31 million gain on an asset sale by Field Services for the six months ended
June 30, 1998. EBIT by business segment is summarized below, and is discussed by
business segment thereafter.
- ---------------------------------------------------------------------
EBIT BY BUSINESS SEGMENT (In millions)
- ---------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------------------
1999 1998 1999 1998
---------------------------------------------
Natural Gas Transmission $146 $147 $354 $356
Field Services 36 13 48 61
Trading and Marketing 24 15 56 28
Global Asset Development 25 15 57 24
Other Energy Services (6) 2 (11) 9
Real Estate Operations 28 42 46 64
Other Operations (a) (11) (15) (36) (20)
---------------------------------------------
Consolidated EBIT $242 $219 $514 $522
- ---------------------------------------------------------------------
(a) Includes communication services and certain unallocated corporate items.
Included in the amounts discussed hereafter are intercompany transactions that
are eliminated in the Consolidated Financial Statements.
NATURAL GAS TRANSMISSION
- ---------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------------
(In millions, except where
noted) 1999 1998 1999 1998
- ---------------------------------------------------------------------------
Operating Revenues $260 $367 $662 $777
Operating Expenses 116 225 318 435
------------------------------------------
Operating Income 144 142 344 342
Other Income, Net of Expenses 2 5 10 14
------------------------------------------
EBIT $146 $147 $354 $356
==========================================
Throughput - TBtu (a) 340 591 1,151 1,369
- ---------------------------------------------------------------------------
(a) Trillion British thermal units
13
<PAGE>
For the quarter and six months ended June 30, 1999, EBIT for the Natural Gas
Transmission segment decreased $1 million and $2 million, respectively, compared
to the same periods in 1998.
EBIT for the Northeast Pipelines increased $46 million for the quarter and $52
million for the six months ended June 30, 1999 compared to the prior year. These
increases are the result of increased income from market-expansion projects and
joint ventures and lower operating expenses. Also contributing to the increase
in EBIT was a $28 million benefit from EPA certification of completion of Texas
Eastern Transmission Corporation's PCB (polychlorinated biphenyl) assessment and
soil clean-up program in accordance with the Consent Decree issued in 1989. The
soil clean-up program was finished ahead of schedule and below original cost
estimates. Partially offsetting the benefits in the six month period was the
non-recurrence of a 1998 refund from a state property tax ruling.
Due to the sale of the Midwest Pipelines to CMS Energy Corporation (CMS) on
March 29, 1999, EBIT for the Midwest Pipelines decreased $47 million and $54
million for the quarter and six months ended June 30, 1999, respectively,
compared to the prior year.
FIELD SERVICES
- ---------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------------
(In millions, except where
noted) 1999 1998 1999 1998
- ---------------------------------------------------------------------------
Operating Revenues $782 $728 $1,126 $1,398
Operating Expenses 747 716 1,079 1,369
------------------------------------------
Operating Income 35 12 47 29
Other Income, Net of Expenses 1 1 1 32
------------------------------------------
EBIT $ 36 $ 13 $ 48 $ 61
==========================================
Natural Gas Gathered and
Processed/Transported, TBtu/d (a) 5.3 3.7 4.4 3.7
NGL Production, MBbl/d (b) 214.0 112.8 161.1 109.6
Natural Gas Marketed, TBtu/d 0.5 0.3 0.4 0.3
Average Natural Gas Price per
MMBtu (c) $2.14 $2.19 $1.95 $2.20
Average NGL Price per Gallon $0.30 $0.27 $0.27 $0.28
- ---------------------------------------------------------------------------
(a) Trillion British thermal units per day
(b) Thousand barrels per day
(c) Million British thermal units
For the quarter ended June 30, 1999, EBIT for Field Services increased $23
million compared to the same period in 1998. A significant portion of the
increase resulted from the March 31, 1999 acquisition of the natural gas
gathering, processing, fractionation and NGL pipeline business from Union
Pacific Resources (UPR), (collectively, the "UPR acquisition"). Improved average
NGL prices, which were up $0.03 per gallon, or 11.1%, from the prior year
quarter, and higher processing margins due to lower average natural gas prices,
also contributed significantly to increased EBIT.
For the six months ended June 30, 1999, EBIT for Field Services decreased $13
million compared to the same period in 1998. The decrease resulted primarily
from a $31 million gain on the sale of two NGL fractionation facilities in 1998,
which is included in other income. Additionally, gross revenues and expenses
decreased as a result of the November 1998 sale of Duke Energy Transport and
Trading Co., which gathered, stored, transported and marketed crude oil and
operated two NGL pipelines, to TEPPCO Partners, L.P., a company in which the
Company has a 21.1% ownership interest. Offsetting these decreases were results
of the UPR acquisition and improved NGL prices and processing margins.
14
<PAGE>
TRADING AND MARKETING
- ---------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------------
(In millions, except where
noted) 1999 1998 1999 1998
- ---------------------------------------------------------------------------
Operating Revenues $2,546 $1,727 $4,832 $3,739
Operating Expenses 2,524 1,712 4,781 3,712
------------------------------------------
Operating Income 22 15 51 27
Other Income, Net of Expenses 2 - 5 1
------------------------------------------
EBIT $ 24 $ 15 $ 56 $ 28
==========================================
Natural Gas Marketed, TBtu/d 10.0 7.2 10.5 7.5
Electricity Marketed, GWh 22,179 19,534 44,016 43,426
- ---------------------------------------------------------------------------
EBIT for Trading and Marketing increased $9 million or 60.0%, for the three
months ended June 30, 1999 compared with the same period in 1998. The increase
results primarily from higher electricity trading margins and from growing
contributions from more complex structured transactions. This increase was
slightly offset by lower natural gas trading margins and higher operating
expenses resulting from business growth.
For the six months ended June 30, 1998, EBIT for Trading and Marketing increased
$28 million compared to the same period in 1998. The increase is primarily due
to higher electricity and natural gas trading margins, partially offset by
higher operating expenses resulting from business growth.
GLOBAL ASSET DEVELOPMENT
- ---------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------------
(In millions, except where
noted) 1999 1998 1999 1998
- ---------------------------------------------------------------------------
Operating Revenues $114 $60 $222 $97
Operating Expenses 102 49 203 81
------------------------------------------
Operating Income 12 11 19 16
Other Income, Net of Expenses 13 4 38 8
------------------------------------------
EBIT $ 25 $15 $ 57 $24
==========================================
Proportional MW(a) Capacity
Owned (b) - - 7,131 3,893
Proportional Maximum Pipeline
Capacity (b), TBtu - - 112 4
- ---------------------------------------------------------------------------
(a) Megawatts
(b) Includes under construction or under contract
For the quarter ended June 30, 1999, EBIT for Global Asset Development increased
$10 million, or 66.7%, compared with the same period in 1998. The increase is
primarily due to contributions from projects in California, Connecticut,
Australia and Chile that were acquired since June 1998. Partially offsetting
these increases were higher operating expenses due to increased development
costs and business expansion. Additionally, other income includes option fee
income from the sale of a portion of the ownership interest in the Bridgeport
Energy facility.
For the six months ended June 30, 1999, EBIT for Global Asset Development
increased $33 million compared with the same period in 1998. The increase is
primarily due to contributions from new projects in California, Connecticut,
Australia and Chile, partially offset by higher operating expenses due to
business growth. Increases in EBIT also resulted from a $14 million gain on the
sale of the Mecklenburg
15
<PAGE>
Cogeneration facility in March 1999 and option fee income related to the
Bridgeport Energy facility, both of which are included in other income.
OTHER ENERGY SERVICES
- ---------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------------
(In millions) 1999 1998 1999 1998
- ---------------------------------------------------------------------------
Operating Revenues $159 $136 $313 $251
Operating Expenses 165 134 324 242
------------------------------------------
EBIT $ (6) $ 2 $(11) $ 9
- ---------------------------------------------------------------------------
For the quarter ended June 30, 1999, EBIT for Other Energy Services decreased $8
million compared with the same period in 1998, primarily due to increased
business development activity at DukeSolutions.
For the six months ended June 30, 1999, EBIT for Other Energy Services decreased
$20 million compared with the same period in 1998, primarily due to decreased
earnings from projects of Duke Engineering & Services and increased development
activity at DukeSolutions.
REAL ESTATE OPERATIONS
- ---------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------------
(In millions) 1999 1998 1999 1998
- ---------------------------------------------------------------------------
Operating Revenues $38 $49 $66 $79
Operating Expenses 11 7 21 15
------------------------------------------
Operating Income 27 42 45 64
Other Income, Net of Expenses 1 - 1 -
------------------------------------------
EBIT $28 $42 $46 $64
- ---------------------------------------------------------------------------
For the quarter and six months ended June 30, 1999, EBIT for Real Estate
Operations decreased $14 million and $18 million, respectively, when compared
with the same periods in 1998. This resulted primarily from a reduction in land
sales, including the 1998 gain on the sale of land in the Jocassee Gorges region
of South Carolina, and decreased project sales. These decreases were partially
offset by increased developed lot sales.
OTHER IMPACTS ON NET INCOME
Minority interest increased $16 million and $36 million for the quarter and six
months ended June 30, 1999, respectively, over the comparable periods in 1998.
The increases were due primarily to dividends incurred for the Company's trust
preferred securities, $250 million and $350 million of which were issued in June
1998 and September 1998, respectively. Excluding these dividends, minority
interests relate primarily to the trading and marketing joint venture with Mobil
Corporation.
As a result of favorable resolution of several income tax issues and the
utilization of certain capital loss carryforwards due to the sale of the Midwest
Pipelines, income tax provisions aggregating $30 million were reduced during the
second quarter of 1999.
The sale of the Midwest Pipelines to CMS closed on March 29, 1999 and resulted
in a $660 million extraordinary gain, net of income tax of $404 million. (See
further discussion in Liquidity and Capital Resources, Investing Cash Flows
section below and in Note 4 to the Consolidated Financial Statements.) In
January 1998, TEPPCO Partners L.P., in which the Company has a 21.1% ownership
interest, redeemed
16
<PAGE>
certain First Mortgage Notes which resulted in the Company recording a non-cash
extraordinary loss of $8 million, net of income tax of $5 million, related to
its share of costs of the early retirement of debt.
LIQUIDITY AND CAPITAL RESOURCES
INVESTING CASH FLOWS
Capital and investment expenditures were approximately $2,487 million for the
six months ended June 30, 1999 compared to approximately $473 million for the
same period in 1998. Increased capital and investment expenditures during the
period were primarily due to business expansion for the Field Services and
Global Asset Development segments discussed below.
FIELD SERVICES
On March 31, 1999, Field Services completed the $1.35 billion acquisition of the
natural gas gathering, processing, fractionation and NGL pipeline business from
UPR along with its natural gas and NGL marketing activities (collectively "the
UPR acquisition"). Additionally, the Company assumed responsibility for certain
environmental liabilities associated with the UPR acquisition. During due
diligence procedures prior to the acquisition, the Company identified
environmental contamination at certain UPR facilities. Soil and groundwater
contamination at the identified UPR sites will be addressed in conjunction with
the Company's remediation plans. Also, other environmental matters, such as the
status of air emission permits at some facilities, may require corrective
action. The estimated cost to remediate these conditions at June 30, 1999 is
$157 million, which is included in Environmental Clean-up Liabilities on the
Consolidated Balance Sheets.
GLOBAL ASSET DEVELOPMENT
On January 22, 1999, Global Asset Development's international business unit,
Duke Energy International, completed the $315 million purchase of power
generation and transmission assets in western Australia and New Zealand from
Broken Hill Proprietary Company Limited (BHP), including an ownership interest
in a pipeline in western Australia. This acquisition also includes a development
proposal for a cogeneration plant and a portfolio of international and
Australian-based projects.
Global Asset Development's domestic business unit, Duke Energy North America,
began construction of the Hidalgo Energy project located in south Texas, which
is targeted to begin commercial operation in mid-2000. For the 510-megawatt,
gas-fired merchant plant, Duke/Fluor Daniel will serve as the construction
contractor, a Duke Energy Natural Gas Transmission pipeline will deliver the
natural gas supply, and Trading and Marketing will provide energy management
services and market the plant's output.
Duke Energy North America will be constructing two new energy plants: the
Madison Generating Station, a 640-megawatt, gas-fired merchant peaking plant in
Butler County, Ohio; and, the Vermillion Generating Station, a 640-megawatt,
gas-fired merchant peaking plant in Vermillion County, Indiana. Duke/Fluor
Daniel will serve as the construction contractor for the plants, a Duke Energy
Natural Gas Transmission pipeline will deliver the natural gas supply and
Trading and Marketing will provide energy management services and market the
plants' output. The Madison Generating Station will cost approximately $250
million and is planned to begin commercial operation by late 2000. The
Vermillion Generation Station will cost approximately $260 million and is
planned to begin commercial operation by late 2000.
In July 1999, Duke Energy International successfully bid for a controlling
voting interest and an approximate 40% economic interest in Companhia de Geracao
de Energia Eletrica Paranapanema (Paranapanema) for approximately $690 million.
Paranapanema is Brazil's eleventh largest electric generating company, operating
2,307 megawatts of hydroelectric generation facilities. Duke Energy
17
<PAGE>
International advanced the funds for the purchase, financed by commercial paper,
and will assume operational control of Paranapanema in August 1999.
In July 1999, Duke Energy International also reached agreement to obtain
controlling interest in two El Salvadorian generating companies, Generadora
Acajutla S.A. de C.V. and Generadora Salvadorena, S.A. de C.V. for approximately
$125 million. The El Salvadorian generating companies currently control 275
megawatts of thermal power generation. Duke Energy International will assume
operation of the companies in September and modernization construction of
approximately $75 million will begin prior to the end of the year with
completion scheduled for late 2001.
In August 1999, Duke Energy International announced that it has reached a
definitive agreement with Dominion Resources, Inc. to acquire its portfolio of
hydroelectric, natural gas and diesel power generation businesses in Argentina,
Belize, Bolivia and Peru for approximately $405 million. The businesses being
purchased total approximately 1,200 megawatts of gross generation capacity. The
transaction is expected to be completed before the end of 1999 and is subject to
receiving appropriate governmental consents and approvals.
TRADING AND MARKETING
During the second quarter of 1999, Trading and Marketing formed a new
subsidiary, Duke Energy Hydrocarbons, to invest capital in limited hydrocarbon
exploration and production prospects through non-operating working interests.
The Company's intent is to generate a natural gas hedge position to offset the
short gas position of the Company's power generation assets and to increase
production volumes that will be beneficial to Field Services and Trading and
Marketing. To date, Duke Energy Hydrocarbons has contracted to participate in
two drilling programs, for a total of 20 wells, in the Gulf of Mexico. Limited
drilling began in the second quarter with additional drilling expected to begin
later this year.
NATURAL GAS TRANSMISSION
On March 29, 1999, the Company, through its wholly owned subsidiaries, PanEnergy
Corp and Texas Eastern Corporation, sold Panhandle Eastern Pipe Line Company
(PEPL), Trunkline Gas Company and additional storage related to those systems,
which substantially comprised the Midwest Pipelines, along with Trunkline LNG
Company, to CMS. The sales price of $2.2 billion included cash proceeds of $1.9
billion and CMS' assumption of existing PEPL debt of approximately $300 million.
FINANCING CASH FLOWS
The Company plans to continue to significantly grow several of its business
segments: Field Services, Trading and Marketing, Global Asset Development and
Other Energy Services. These growth opportunities, along with dividends, debt
repayments and operating and investing requirements, are expected to be funded
by cash from operations, external financing and the proceeds from the sale of
the Midwest Pipelines.
Included in financings for the first six months of 1999 are bank borrowings of
Global Asset Development related to the purchase and development of assets in
Australia and New Zealand. Approximately $300 million of these borrowings
occurred in the first quarter and related to the purchase of BHP's portfolio of
energy assets. The six month bridge financing expired in July 1999, but has been
extended through December 31, 1999. These notes have variable interest rates
that approximated 5.4% as of June 30, 1999.
Under its commercial paper facilities, the Company had the ability to borrow up
to $1.55 billion at both June 30, 1999 and December 31, 1998. The Company's
various bank credit facilities totaled approximately $2.0 billion (including
approximately $330 million related to foreign facilities) at June 30, 1999 and
$1.7 billion at December 31, 1998. At June 30, 1999, $499 million was
outstanding under the commercial paper facilities and approximately $80 million
of borrowings were outstanding under the bank credit facilities.
18
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
RISK POLICIES
The Company is exposed to market risks associated with commodity prices,
interest rates, equity prices and foreign exchange rates. Comprehensive risk
management policies have been established by Duke Energy's Corporate Risk
Management Committee (CRMC) to monitor and control these market risks. The CRMC
is chaired by the Chief Financial Officer and primarily comprises senior
executives. The CRMC has responsibility for oversight of all corporate energy
risk management and approving energy financial exposure limits, as well as
responsibility for oversight of interest rate risk, foreign currency risk and
credit risk. Changes in the Company's market risk since December 31, 1998
follows.
COMMODITY PRICE RISK
As a result of Field Services' acquisition from UPR on March 31, 1999, the
Company's exposure to market fluctuations in the prices of NGLs increased. The
Company has a program in place that analyzes and actively hedges the Company's
commodity price risk exposure, primarily NGLs. As of June 30, 1999, if NGL
prices average one cent per gallon less in 1999, earnings before income taxes
will decrease by approximately $10 million, after considering the effect of the
Company's commodity hedge positions.
FOREIGN OPERATIONS RISK AND INTEREST RATE RISK
On February 18, 1999, the Company announced its intent to make a concurrent cash
tender offer in Chilean pesos in Chile and the United States for 51% of the
outstanding shares of Empresa Nacional de Electricidad S.A. (Endesa-Chile) for
an estimated total cash outlay of approximately $2.1 billion based on current
exchange rates. In anticipation of the purchase of Endesa-Chile, the Company
entered into foreign currency forward and swap contracts to obtain Chilean pesos
for the purchase. Exposures to foreign currency risks associated with these
instruments were managed through established policies and procedures. (See Note
6 to the Consolidated Financial Statements.) On April 21, 1999, following a
competitive counter offer, the Company reached the conclusion that Endesa-Chile
could not be acquired on terms favorable to the Company's shareholder and
withdrew the tender offer. The forward and swap contracts were settled with a
net loss of $4 million recorded during the second quarter of 1999.
To manage the interest rate risk associated with the Company's variable rate
commercial paper, the Company entered into several fixed rate swap transactions
for a total notional amount of $500 million in July 1999. The swaps effectively
convert the variable rate nature of commercial paper to a fixed rate, mitigating
the risk of future interest rate increases.
CURRENT ISSUES
YEAR 2000 READINESS PROGRAM
STATE OF READINESS
The Company initiated its Year 2000 Readiness Program in 1996 and began a formal
review of computer-based systems and devices that are used in its business
operations both domestically and internationally. These systems and devices
include customer information, financial, materials management and personnel
systems, as well as components of natural gas production, gathering, processing
and transmission, and electric generation, distribution and transmission.
The Company's goal is to provide energy services reliably and safely to its
customers - now, on January 1, 2000 and beyond. By "Year 2000 ready," the
Company means that it has executed the Year 2000 approach described below and
management believes the business will not suffer a material adverse impact to
19
<PAGE>
consolidated financial results caused by Year 2000 events. However, the Year
2000 issue is complex and the Year 2000 readiness of customers, suppliers and
others beyond our control can affect our business operations.
The Company is using a three-phase approach to address Year 2000 issues: 1)
inventory and preliminary assessment of computer systems, equipment and devices;
2) detailed assessment and remediation planning; and 3) conversion, testing and
contingency planning. The Company is employing a combination of systems repair,
planned systems replacement activities, systems retirement and workarounds to
achieve Year 2000 readiness for its business and process control systems,
equipment and devices. Field Services, Other Energy Services, and Global Asset
Development plan to have their existing critical systems, equipment and devices
Year 2000 ready by September 30,1999. All other business units, including
Natural Gas Transmission, achieved Year 2000 readiness of their critical
systems, equipment and devices as of June 30, 1999. Global Asset Development has
recently announced acquisitions which may extend the Year 2000 readiness date
beyond September 30, 1999 for those acquired assets.
The Company is monitoring the Year 2000 readiness of key third parties. Third
parties include vendors, customers, U.S. governmental agencies, foreign
governments and agencies, and other business associates. While the Year 2000
readiness of third parties cannot be controlled, the Company is attempting to
assess the readiness of key third parties and potential implications to its
operations. Alternate suppliers of critical products, goods and services are
being identified, where necessary.
The Company conducts an analysis of Year 2000 issues for potential acquisitions.
COSTS
Management believes it is devoting the resources necessary to achieve Year 2000
readiness in a timely manner. Current estimates for total costs of the program,
including internal labor as well as incremental costs such as consulting and
contract costs, are approximately $8 million, of which approximately $4.1
million had been incurred as of June 30, 1999. These costs exclude replacement
systems that, in addition to being Year 2000 ready, provide significantly
enhanced capabilities which will benefit operations in future periods.
RISKS
Management believes it has an effective program in place to manage the risks
associated with the Year 2000 issue in a timely manner. Nevertheless, since it
is not possible to anticipate all future outcomes, especially when third parties
are involved, there could be circumstances in which the Company would
temporarily be unable to deliver energy or energy services to its customers.
Management believes that the most reasonably likely worst case scenario would be
small, localized interruptions of service, which likely would be rapidly
restored. In addition, there could be a temporary reduction in energy needs of
customers due to their own Year 2000 problems. In the event that such a scenario
occurs, it is not expected to have a material adverse impact on consolidated
results of operations or financial position.
CONTINGENCY PLANS
Year 2000 contingency planning addresses continuity of business operations for
all periods during which Year 2000 impacts may occur. The Company is
participating in multiple industry efforts to facilitate effective Year 2000
contingency plans, and has completed its own Year 2000 contingency plans as of
June 30, 1999. These plans address various Year 2000 risk scenarios that cross
departmental, business unit and industry lines as well as specific risks from
various internal and external sources, including supplier readiness.
Based on Year 2000 readiness efforts and contingency plans in place, management
believes that Year 2000 issues, including the cost of making critical systems,
equipment and devices ready, will not have a material
20
<PAGE>
adverse effect on the Company's business operation or consolidated results of
operations or financial position. Nevertheless, achieving Year 2000 readiness is
subject to risks and uncertainties, including those described above. While
management believes the possibility is remote, if the Company's internal
systems, or the internal systems of external parties, fail to achieve Year 2000
readiness in a timely manner, the Company's business, consolidated results of
operations or financial condition could be adversely affected.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Illinois Environmental Protection Agency has initiated an environmental
enforcement proceeding against a former subsidiary of the Company relating to
alleged air quality permit violations at a natural gas compressor station. The
Company retained the liabilities for these alleged violations. This proceeding
could result in a penalty in excess of $100,000. Management believes that the
resolution of this matter will not have a material adverse effect on
consolidated results of operations or financial position.
For additional information concerning litigation and other contingencies, see
Note 8 to the Consolidated Financial Statements, "Commitments and
Contingencies."
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
A Current Report on Form 8-K filed on June 1, 1999 contained disclosures
under Item 2, Acquisition or Disposition of Assets.
21
<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 thereunto duly authorized.
DUKE CAPITAL CORPORATION
(Registrant)
/s/ Richard J. Osborne
--------------------------
Richard J. Osborne
Vice President and
Chief Financial Officer
/s/ Jeffrey L. Boyer
--------------------------
Jeffrey L. Boyer
August 10, 1999 Controller
22
<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 June 30, 1999 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 227,000
<SECURITIES> 0
<RECEIVABLES> 1,889,000
<ALLOWANCES> 0
<INVENTORY> 197,000
<CURRENT-ASSETS> 4,301,000
<PP&E> 9,969,000
<DEPRECIATION> 1,917,000
<TOTAL-ASSETS> 16,562,000
<CURRENT-LIABILITIES> 5,148,000
<BONDS> 2,618,000
0
0
<COMMON> 0
<OTHER-SE> 5,008,000
<TOTAL-LIABILITY-AND-EQUITY> 16,562,000
<SALES> 5,508,000
<TOTAL-REVENUES> 6,735,000
<CGS> 5,239,000
<TOTAL-COSTS> 6,031,000
<OTHER-EXPENSES> 240,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 115,000
<INCOME-PRETAX> 344,000
<INCOME-TAX> 111,000
<INCOME-CONTINUING> 233,000
<DISCONTINUED> 0
<EXTRAORDINARY> 660,000
<CHANGES> 0
<NET-INCOME> 893,000
<EPS-BASIC> 0 <F1>
<EPS-DILUTED> 0 <F1>
<FN>
<F1>Not meaningful since Duke Capital Corporation is a
wholly-owned subsidiary.
</FN>
</TABLE>
