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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 SEPTEMBER 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 October 31,
1999......................1,010
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DUKE CAPITAL CORPORATION
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1999
INDEX
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ITEM PAGE
- ---- ----
PART I. FINANCIAL INFORMATION
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1. Financial Statements....................................................................................1
Consolidated Statements of Income for the Three and Nine Months Ended September 30,
1999 and 1998................................................................................1
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1999 and 1998.........2
Consolidated Balance Sheets as of September 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..................13
PART II. OTHER INFORMATION
1. Legal Proceedings......................................................................................23
6. Exhibits and Reports on Form 8-K.......................................................................23
Signatures.............................................................................................24
</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.
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<TABLE>
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
DUKE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In millions)
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating Revenues
Sales, trading and marketing of natural gas
and petroleum products $ 2,884 $ 1,846 $ 7,286 $ 5,707
Transportation and storage of natural gas 253 368 885 1,092
Trading and marketing of electricity 1,578 1,421 2,684 2,376
Other 401 246 996 693
------ ------ ------- ------
Total operating revenues 5,116 3,881 11,851 9,868
------ ------ ------- ------
Operating Expenses
Natural gas and petroleum products purchased 2,830 1,767 7,077 5,431
Purchased power 1,421 1,363 2,413 2,307
Other operation and maintenance 448 354 1,240 1,043
Depreciation and amortization 106 108 291 293
Property and other taxes 31 25 86 65
------ ------ ------- ------
Total operating expenses 4,836 3,617 11,107 9,139
------ ------ ------- ------
Operating Income 280 264 744 729
Other Income and Expenses 1 16 51 72
------ ------ ------- ------
Earnings Before Interest and Taxes 281 280 795 801
Interest Expense 84 67 199 180
Minority Interests 20 24 75 43
------ ------ ------- ------
Earnings Before Income Taxes 177 189 521 578
Income Taxes 70 72 181 207
------ ------ ------- ------
Income Before Extraordinary Item 107 117 340 371
Extraordinary Gain (Loss), net of tax - - 660 (8)
------ ------ ------- ------
Net Income $ 107 $ 117 $ 1,000 $ 363
====== ====== ======= ======
</TABLE>
See Notes to Consolidated Financial Statements.
1
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<TABLE>
<CAPTION>
DUKE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
Nine Months Ended
September 30,
-------------
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 1,000 $ 363
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 302 300
Extraordinary (gain) loss, net of tax (660) 8
Deferred income taxes 78 41
Transition cost recoveries (payments), net 64 (55)
(Increase) decrease in
Receivables (1,048) (219)
Inventory (75) (35)
Other current assets (1) (10)
Increase (decrease) in
Accounts payable 868 195
Taxes accrued 62 (8)
Interest accrued (6) (4)
Other current liabilities (41) (24)
Other, net 6 10
------- -------
Net cash provided by operating activities 549 562
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital and investment expenditures (3,936) (1,453)
Proceeds from sale of subsidiaries 1,900 -
Proceeds from sales and other, net 259 82
------- -------
Net cash used in investing activities (1,777) (1,371)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issuance of
Long-term debt 1,990 509
Guaranteed preferred beneficial interests in subordinated notes of
Duke Capital Corporation 242 581
Payments for the redemption of long-term debt (201) (113)
Net change in notes payable and commercial paper 66 (71)
Other, net (66) 22
------- -------
Net cash provided by financing activities 2,031 928
------- -------
Net increase in cash and cash equivalents 803 119
Cash received from business acquisitions 7 38
Cash and cash equivalents at beginning of period 64 94
------- -------
Cash and cash equivalents at end of period $ 874 $ 251
======= =======
Supplemental Disclosures
Cash paid for interest, net of amount capitalized $ 204 $ 180
Cash paid for income taxes $ 177 $ 200
</TABLE>
See Notes to Consolidated Financial Statements.
2
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<TABLE>
<CAPTION>
DUKE CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions)
September 30, December 31,
1999 1998
(unaudited)
----------------- ------------------
ASSETS
Current Assets
<S> <C> <C>
Cash and cash equivalents $ 874 $ 64
Receivables 3,099 1,767
Inventory 259 214
Current portion of natural gas transition costs 100 100
Unrealized gains on mark-to-market transactions 601 1,457
Other 175 218
------------- ---------------
Total current assets 5,108 3,820
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Investments and Other Assets
Investments in affiliates 1,384 902
Pre-funded pension costs 340 340
Goodwill, net 586 495
Notes receivable 158 244
Unrealized gains on mark-to-market transactions 573 396
Other 386 169
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Total investments and other assets 3,427 2,546
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Property, Plant and Equipment
Cost 12,814 11,020
Less accumulated depreciation and amortization 2,368 3,866
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Net property, plant and equipment 10,446 7,154
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Regulatory Assets and Deferred Debits
Debt expense 43 58
Regulatory asset related to income taxes 17 15
Natural gas transition costs 16 80
Environmental clean-up costs 33 87
Other 76 96
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Total regulatory assets and deferred debits 185 336
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Total Assets $ 19,166 $ 13,856
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</TABLE>
See Notes to Consolidated Financial Statements.
3
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<TABLE>
<CAPTION>
DUKE CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions, except share amounts)
September 30, December 31,
1999 1998
(unaudited)
----------- ------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
<S> <C> <C>
Accounts payable $ 2,371 $ 1,406
Notes payable and commercial paper 95 29
Taxes accrued 859 159
Interest accrued 48 57
Current maturities of long-term debt 500 258
Unrealized losses on mark-to-market transactions 665 1,387
Other 403 466
------- -------
Total current liabilities 4,941 3,762
------- -------
Long-term Debt 4,728 2,884
------- -------
Deferred Credits and Other Liabilities
Deferred income taxes 1,324 1,460
Environmental clean-up liabilities 110 148
Unrealized losses on mark-to-market transactions 400 362
Other 568 334
------- -------
Total deferred credits and other liabilities 2,402 2,304
------- -------
Minority Interests 1,193 253
------- -------
Guaranteed Preferred Beneficial Interests in Subordinated
Notes of Duke Capital Corporation 823 580
------- -------
Common Stockholder's Equity
Common stock, no par, 3,000 shares authorized,
1,010 shares outstanding - -
Paid-in capital 2,968 2,969
Retained Earnings 2,111 1,104
------- -------
Total common stockholder's equity 5,079 4,073
------- -------
Total Liabilities and Stockholder's Equity $ 19,166 $ 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, transports 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 primarily markets natural gas, electricity and other
energy-related products across North America. The Company owns a 60% interest in
Trading and Marketing's energy trading operations, with Mobil Corporation owning
a 40% minority interest. This segment also includes limited hydrocarbon
exploration and production activities that are wholly owned by the Company.
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 (Duke Energy International).
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
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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 annual periods 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. 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
September 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 September 30, 1999 and December 31, 1998 are as follows:
- ---------------------------------------- ------------------- ------------------
September 30, December 31,
IN MILLIONS 1999 1998
- ---------------------------------------- ------------------- ------------------
Receivables $ 126 $ 6
Accounts payable 101 129
Taxes accrued 683 73
- ---------------------------------------- ------------------- ------------------
4. BUSINESS ACQUISITIONS/DISPOSITIONS
PARANAPANEMA, GENERADORA ACAJUTLA S.A. DE C.V. AND GENERADORA SALVADORENA, S.A.
DE C.V. During the third quarter, the Company, through its wholly owned
subsidiary, Duke Energy International, completed two acquisitions in South
America. In August 1999, Duke Energy International completed the $692 million
purchase, excluding acquisition costs, of a controlling voting interest and an
approximate 40% economic interest in an electric generating company in Brazil,
Companhia de Geracao de Energia Eletrica Paranapanema (Paranapanema). In
September 1999, Duke Energy International completed the $125 million purchase,
excluding acquisition costs, of controlling interests in two El Salvadorian
generating companies, Generadora Acajutla S.A. de C.V. and Generadora
Salvadorena, S.A. de C.V.
Both of these acquisitions were accounted for using the purchase method, and the
assets and liabilities of the acquisitions were consolidated as of the purchase
date. Earnings from the acquisitions have been consolidated subsequent to the
purchase date. Assets acquired and liabilities assumed have been recorded at
their preliminary estimated fair values, and the excess of the purchase price
over the estimated fair value of the net assets has been recorded as goodwill
and is being amortized over the estimated useful lives. The final purchase price
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allocation and estimated life of goodwill are subject to adjustment when
additional information concerning asset and liability valuations is finalized
and the evaluation of certain pre-acquisition contingent liabilities has been
completed.
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 the acquisition. The
excess of the purchase price over the fair value of the net identifiable assets
and liabilities acquired of $135 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 environmental contamination at certain
UPR facilities. In September 1999, the Company transferred liability and risk
for soil and groundwater contamination to a third party that will take
responsibility for environmental remediation and provide financial management
and program oversight. Additional environmental matters may also require
corrective action. The estimated cost to enter into the contract and remediate
the remaining conditions at September 30, 1999 is $58 million, of which $34
million remains as a liability at September 30, 1999 in Environmental Clean-up
Liabilities on the Consolidated Balance Sheets. The adjustment to the
environmental accrual was reflected as an adjustment to goodwill. Any other
remaining adjustments to estimated amounts recorded in conjunction with the UPR
acquisition will also 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
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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.
<TABLE>
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BUSINESS SEGMENT DATA (In millions)
- -----------------------------------------------------------------------------------------------------
Capital and
Unaffiliated Intersegment Total Investment
Revenues Revenues Revenues EBIT Expenditures
------------ ------------ ------------ ------------- -------------
THREE MONTHS ENDED
SEPTEMBER 30, 1999
<S> <C> <C> <C> <C> <C>
Natural Gas Transmission $ 237 $ 26 $ 263 $128 $ 80
Field Services 989 219 1,208 49 58
Trading and Marketing 3,490 131 3,621 (6) 6
Global Asset Development 211 93 304 128 1,144
Other Energy Services 151 - 151 (47) 77
Real Estate Operations 43 - 43 32 82
Other Operations (a) (5) 9 4 (3) 2
Eliminations - (478) (478) - -
------------ ------------ ------------ ------------- -------------
Total Consolidated $5,116 $ - $5,116 $281 $1,449
- ------------------------------- ------------ ------------ ------------ ------------- -------------
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, 1998
<S> <C> <C> <C> <C> <C>
Natural Gas Transmission $ 354 $ 21 $ 375 $178 $ 78
Field Services 569 156 725 7 74
Trading and Marketing 2,727 27 2,754 31 2
Global Asset Development 70 41 111 33 724
Other Energy Services 127 - 127 6 26
Real Estate Operations 41 - 41 33 73
Other Operations (a) (7) 12 5 (8) 3
Eliminations - (257) (257) - -
------------ ------------ ------------ ------------- -------------
Total Consolidated $3,881 $ - $3,881 $280 $980
- ------------------------------- ------------ ------------ ------------ ------------- -------------
</TABLE>
8
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<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
BUSINESS SEGMENT DATA, CONTINUED (In millions)
- -----------------------------------------------------------------------------------------------------
Capital and
Unaffiliated Intersegment Total Investment
Revenues Revenues Revenues EBIT Expenditures
------------ ------------ ------------ ------------- -------------
NINE MONTHS ENDED
SEPTEMBER 30, 1999
<S> <C> <C> <C> <C> <C>
Natural Gas Transmission $ 852 $ 73 $ 925 $482 $ 187
Field Services 1,837 497 2,334 97 1,595
Trading and Marketing 8,208 245 8,453 50 37
Global Asset Development 393 133 526 185 1,782
Other Energy Services 464 - 464 (58) 87
Real Estate Operations 109 - 109 78 235
Other Operations (a) (12) 27 15 (39) 13
Eliminations - (975) (975) - -
------------ ------------ ------------ ------------- -------------
Total Consolidated $11,851 $ - $11,851 $795 $3,936
- ---------------------------------- ------------ ------------ ------------ ------------- -------------
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1998
<S> <C> <C> <C> <C> <C>
Natural Gas Transmission $1,075 $ 77 $1,152 $534 $ 202
Field Services 1,701 422 2,123 68 205
Trading and Marketing 6,439 54 6,493 59 4
Global Asset Development 165 43 208 57 829
Other Energy Services 377 1 378 15 39
Real Estate Operations 120 - 120 97 163
Other Operations (a) (9) 14 5 (29) 11
Eliminations - (611) (611) - -
------------ ------------ ------------ ------------- -------------
Total Consolidated $9,868 $ - $9,868 $801 $1,453
- ---------------------------------- ------------ ------------ ------------ ------------- -------------
<CAPTION>
- -------------------------------------------------------------------
SEGMENT ASSETS (In millions)
- -------------------------------------------------------------------
September December 31,
30, 1999 1998
---------------- ---------------
<S> <C> <C>
Natural Gas Transmission $ 3,884 $ 4,996
Field Services 3,702 1,893
Trading and Marketing 3,669 3,233
Global Asset Development 5,336 2,061
Other Energy Services 449 376
Real Estate Operations 962 724
Other Operations (a) 1,624 759
Eliminations (460) (186)
---------------- ---------------
Total Consolidated $19,166 $13,856
- ---------------------------------- ---------------- ---------------
(a)Includes communication services and certain unallocated corporate items.
</TABLE>
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 resulting in a net loss of $4
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million which is included in the Consolidated Statements of Income as Other
Income and Expenses.
In connection with the September 1999 issuance of Senior Notes totaling $1.5
billion, the Company entered into Treasury Rate Lock Agreements in August 1999
to mitigate interest rate movements during the negotiation and marketing of the
debt issuance. The agreements, with a notional principal amount of $400 million,
were settled on September 21, 1999, and resulted in proceeds of approximately $3
million, which will be amortized to interest expense over the life of the
underlying debt issuance.
7. DEBT AND CREDIT FACILITIES
In September 1999, the Company issued $500 million of 7 1/4% Senior Notes due
2004, $500 million of 7 1/2% Senior Notes due 2009 and $500 million of 8% Senior
Notes due 2019.
In relation to the acquisition of Paranapanema, the Company assumed
approximately $456 million of non-recourse debt, denominated in Brazilian reals,
due in 2013. The interest rate on the debt assumed is 10.0% and the principal is
indexed annually to inflation.
In January 1999, the Company obtained a three-year medium term foreign facility
that allows borrowings up to approximately $350 million, of which approximately
$97 million was outstanding at September 30, 1999. This facility has a variable
interest rate that approximated 5.4% as of September 30, 1999.
The Company borrowed approximately $300 million in both Australian and New
Zealand dollars in March 1999 to fund asset purchases in these countries. This
bridge financing expired in July 1999 but has been extended through December 31,
1999. These notes have variable interest rates that approximated 5.3% as of
September 30, 1999.
In September 1999, Duke Energy Australia Pty Ltd, an indirect subsidiary of
the Company, established a combined commercial paper and medium-term note
program in the amount of approximately $500 million. The program is denominated
in Australian dollars and is guaranteed by the Company. Issuances form this
program will be used to refund the $300 million bridge financing and fund
on-going construction expenditures for the Eastern Gas Pipeline.
8. GUARANTEED PREFERRED BENEFICIAL INTERESTS IN SUBORDINATED NOTES OF DUKE
CAPITAL CORPORATION
In August 1999, Duke Capital Financing Trust III (Trust III) issued $250 million
of its 8 3/8% trust preferred securities at an approximate $8 million discount,
representing preferred undivided beneficial interests in the assets of Trust
III. Trust III is a business trust and is treated as a subsidiary of the Company
for financial reporting purposes. Payment of distributions on the preferred
securities is guaranteed by the Company but only to the extent that Trust III
has funds legally and immediately available to make such distributions. The
proceeds from the issuance of the trust preferred securities were invested in
junior subordinated notes of the Company.
9. 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
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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 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.
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.
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.
11
<PAGE>
10. SUBSEQUENT EVENTS
In August 1999, Duke Energy International announced that it 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 have total gross generating capacity of approximately 1,200 megawatts.
In October 1999, Duke Energy International completed the purchase of the
businesses in Belize and Peru. The completion of the remaining purchases are
subject to receiving appropriate governmental consents and approvals and are
expected to close by mid-2000.
In October 1999, Duke Energy International successfully acquired additional
ownership interests in Egenor, a hydroelectric and thermal generation business
in Peru from two other parties for $152 million in cash and certain other assets
in South America. The purchase increased Duke Energy International's ownership
in Egenor from approximately 30% to 90%.
12
<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. See Note 1 to the
Consolidated Financial Statements for further descriptions.
Management's Discussion and Analysis should be read in conjunction with the
Consolidated Financial Statements.
RESULTS OF OPERATIONS
For the quarter ended September 30, 1999, net income was $107 million. For the
comparable 1998 period, net income was $117 million. For the nine months ended
September 30, 1999, net income was $1,000 million, including an after-tax
extraordinary gain of $660 million, compared to net income of $363 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 September 30, 1999 increased to $280
million compared to $264 million for the same period in 1998. Operating income
for the nine months ended September 30, 1999 was $744 million compared to $729
million for the same period in 1998. Earnings before interest and taxes (EBIT)
were $281 million and $280 million for the three months ended September 30, 1999
and 1998, respectively. For the nine months ended September 30, 1999 and 1998,
EBIT was $795 million and $801 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 non-operating gains and losses in Other Income and Expenses on the
Consolidated Statements of Income. Operating gains and losses are included in
Operating Revenues and Operating Expenses for Global Asset Development and Real
Estate operations as they are an integral part of their business operations.
EBIT by business segment are summarized in the following table and are discussed
by business segment thereafter.
13
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
EBIT BY BUSINESS SEGMENT (In millions)
- ---------------------------------- -------------------------------- --------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
---------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
1999 1998 1999 1998
---------------- --------------- ---------------- ---------------
<CAPTION>
<S> <C> <C> <C> <C>
Natural Gas Transmission $128 $178 $482 $534
Field Services 49 7 97 68
Trading and Marketing (6) 31 50 59
Global Asset Development 128 33 185 57
Other Energy Services (47) 6 (58) 15
Real Estate Operations 32 33 78 97
Other Operations (a) (3) (8) (39) (29)
---------------- --------------- ---------------- ---------------
Consolidated EBIT $281 $280 $795 $801
- ---------------------------------- ---------------- --------------- ---------------- ---------------
(a)Includes communication services, water services and certain unallocated
corporate items.
Included in the amounts discussed hereafter are intercompany transactions that
are eliminated in the Consolidated Financial Statements.
<CAPTION>
NATURAL GAS TRANSMISSION
- ------------------------------------------------ ----------------------------- ------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
-------------- -------------- --------------- --------------
(In millions, except where noted) 1999 1998 1999 1998
- ------------------------------------------------ -------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Operating Revenues $263 $375 $925 $1,152
Operating Expenses 139 205 457 640
-------------- -------------- --------------- --------------
Operating Income 124 170 468 512
Other Income, Net of Expenses 4 8 14 22
-------------- -------------- --------------- --------------
EBIT $128 $178 $482 $ 534
============== ============== =============== ==============
Throughput - TBtu (a) 338 527 1,489 1,896
- ------------------------------------------------ -------------- -------------- --------------- --------------
(a) Trillion British thermal units
</TABLE>
For the quarter and nine months ended September 30, 1999, EBIT for the Natural
Gas Transmission segment decreased $50 million and $52 million, respectively,
compared to the same periods in 1998. Due to the sale of the Midwest Pipelines
to CMS Energy Corporation (CMS) on March 29, 1999, EBIT for the Midwest
Pipelines decreased $37 million and $91 million for the quarter and nine months
ended September 30, 1999, respectively, compared to the prior year.
EBIT for the Northeast Pipelines decreased $13 million for the quarter ended
September 30, 1999 compared to the same period in 1998. The decrease is
primarily due to last year's resolution of gas supply realignment cost issues
("GSR issues") which resulted in $39 million of EBIT in 1998. Partially
offsetting this decrease was increased earnings from market-expansion projects
and joint ventures, lower operating expenses and a $10 million benefit related
to the completion of certain PCB (polychlorinated biphenyl) and soil clean-up
programs ("PCB programs").
For the nine months ended September 30, 1999, Northeast Pipelines' EBIT
increased $39 million compared to the same period in 1998. The increase is
primarily the result of increased earnings from market-expansion projects and
joint ventures and lower operating expenses. Benefits totaling $38 million
related to the completion of PCB programs also increased EBIT in 1999. Partially
offsetting these contributions to EBIT were the non-recurrence of the 1998
resolution of the GSR issues and a 1998 refund from a state property tax ruling.
14
<PAGE>
<TABLE>
<CAPTION>
FIELD SERVICES
- ------------------------------------------------ ----------------------------- ------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
-------------- -------------- --------------- --------------
(In millions, except where noted) 1999 1998 1999 1998
- ------------------------------------------------ -------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Operating Revenues $1,208 $725 $2,334 $2,123
Operating Expenses 1,158 716 2,237 2,085
-------------- -------------- --------------- --------------
Operating Income 50 9 97 38
Other Income, Net of Expenses (1) (2) - 30
-------------- -------------- --------------- --------------
EBIT $ 49 $ 7 $ 97 $ 68
============== ============== =============== ==============
Natural Gas Gathered and
Processed/Transported, TBtu/d(a) 5.8 3.7 4.9 3.7
Natural Gas Liquids (NGL)
Production, MBbl/d(b) 224.7 115.4 182.5 111.5
Natural Gas Marketed, TBtu/d 0.5 0.5 0.5 0.5
Average Natural Gas Price per MMBtu(c) $2.59 $1.99 $2.16 $2.13
Average NGL Price per Gallon $0.40 $0.24 $0.31 $0.27
- ------------------------------------------------ -------------- -------------- --------------- --------------
(a)Trillion British thermal units per day
(b)Thousand barrels per day
(c)Million British thermal units
</TABLE>
For the quarter ended September 30, 1999, EBIT for Field Services increased $42
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 $0.16 per gallon from the prior year quarter also
contributed to the increase.
For the nine months ended September 30, 1999, EBIT for Field Services increased
$29 million compared to the same period in 1998. The increase is primarily the
result of the UPR acquisition and increased average NGL prices. These
improvements were partially offset by a $31 million gain on the sale of two NGL
fractionation facilities in 1998, which is included in other income.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
TRADING AND MARKETING
- ------------------------------------------------ ----------------------------- ------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
-------------- -------------- --------------- --------------
(In millions, except where noted) 1999 1998 1999 1998
- ------------------------------------------------ -------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Operating Revenues $3,621 $2,754 $8,453 $6,493
Operating Expenses 3,628 2,723 8,409 6,435
-------------- -------------- --------------- --------------
Operating Income (7) 31 44 58
Other Income, Net of Expenses 1 - 6 1
-------------- -------------- --------------- --------------
EBIT $ (6) $ 31 $ 50 $ 59
============== ============== =============== ==============
Natural Gas Marketed, TBtu/d 10.4 7.5 10.4 7.5
Electricity Marketed, GWh 34,131 37,000 78,147 80,426
- ------------------------------------------------ -------------- -------------- --------------- --------------
</TABLE>
EBIT for Trading and Marketing decreased $37 million for the three months ended
September 30, 1999 compared with the same period in 1998. The decrease is
largely due to lower natural gas and electricity trading margins, and decreased
volatility in these respective commodity markets when compared to 1998 when the
volatility was unusually high.
15
<PAGE>
For the nine months ended September 30, 1999, EBIT for Trading and Marketing
decreased $9 million compared to the same period in 1998. The decrease is
primarily the result of lower natural gas trading margins, offset slightly by
higher electricity trading margins.
<TABLE>
<CAPTION>
GLOBAL ASSET DEVELOPMENT
- ------------------------------------------------ ----------------------------- ------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
-------------- -------------- --------------- --------------
(In millions, except where noted) 1999 1998 1999 1998
- ------------------------------------------------ -------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Operating Revenues $304 $111 $526 $208
Operating Expenses 166 86 369 167
-------------- -------------- --------------- --------------
Operating Income 138 25 157 41
Other Income, Net of Expenses (10) 8 28 16
============== ============== =============== ==============
EBIT $128 $ 33 $185 $ 57
============== ============== =============== ==============
<CAPTION>
As of September 30,
------------------------------
1999 1998
--------------- --------------
<S> <C> <C>
Proportional MW (a) Capacity Owned(b) 7,928 4,435
Proportional Maximum Pipeline(b)
Capacity, Tbtu 112 45
- ------------------------------------------------ -------------- -------------- --------------- --------------
(a)Megawatts
(b)Includes under construction or under contract
</TABLE>
For the quarter and nine months ended September 30, 1999, EBIT for Global Asset
Development increased $95 million and $128 million, respectively, compared with
the same periods in 1998. These increases are primarily due to $63 million in
income from the sale of partial interests in generating stations in Madison,
Ohio and Vermillion, Indiana. Contributions from new projects in South America,
Australia and California also contributed to the increases. Partially offsetting
these increases were higher operating expenses due to increased development
costs and business expansion. Additionally, included in EBIT for the nine months
ended 1999, is income related to the sale of the Mecklenburg Cogeneration
facility and option fee income related to the sale of a partial ownership
interest in the Bridgeport facility.
<TABLE>
<CAPTION>
<S> <C> <C>
OTHER ENERGY SERVICES
- ------------------------------------------------ ----------------------------- ------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
-------------- -------------- --------------- --------------
(In millions) 1999 1998 1999 1998
- ------------------------------------------------ -------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Operating Revenues $151 $127 $464 $378
Operating Expenses 198 122 522 364
-------------- -------------- --------------- --------------
Operating Income (47) 5 (58) 14
Other Income, Net of Expenses - 1 - 1
-------------- -------------- --------------- --------------
EBIT $ (47) $ 6 $ (58) $ 15
- ------------------------------------------------ -------------- -------------- --------------- --------------
</TABLE>
For the quarter and nine months ended September 30, 1999, EBIT for Other Energy
Services decreased $53 million and $73 million, respectively, compared to the
same periods in 1998. The decreases in EBIT are primarily the result of a $38
million charge, including expenses associated with severance and office
closings, at Duke Engineering & Services, Inc. associated with repositioning the
company for growth. Continued increased development activity at DukeSolutions,
Inc. and decreased earnings from projects of Duke Engineering & Services, Inc.
also contributed to the decreased EBIT.
16
<PAGE>
<TABLE>
<CAPTION>
REAL ESTATE OPERATIONS
- ------------------------------------------------ ----------------------------- ------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
-------------- -------------- --------------- --------------
(In millions) 1999 1998 1999 1998
- ------------------------------------------------ -------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Operating Revenues $43 $41 $109 $120
Operating Expenses 11 8 31 23
-------------- -------------- --------------- --------------
EBIT $32 $33 $ 78 $ 97
- ------------------------------------------------ -------------- -------------- --------------- --------------
</TABLE>
For the quarter ended September 30, 1999, EBIT for Real Estate Operations
decreased $1 million when compared with the same period in 1998. This decrease
resulted primarily from a reduction in lake lot sales and project sales,
partially offset by increased developed lot sales.
For the nine months ended September 30, 1999, EBIT for Real Estate Operations
decreased $19 million when compared with the same period in 1998. This decrease
is due primarily to a lake lot sales program completed during 1998 and the 1998
gain on the sale of land in the Jocassee Gorges region to the state of South
Carolina, partially offset by the 1999 gain on the sale of land in the Jocassee
Gorges region to the state of North Carolina.
OTHER IMPACTS ON NET INCOME
For the quarter ended September 30, 1999, minority interest decreased $4 million
compared the same period in 1998. The decrease was primarily the result of
reduced minority interests in 1999 compared to 1998 related to the trading and
marketing joint venture with Mobil Corporation, net of increases in regular
distributions paid on new issuances of the Company's trust preferred securities.
For the nine months ended September 30, 1999, minority interest increased $32
million compared to the same period in 1998. This increase is due primarily to
regular distributions paid on new issuances of the Company's trust preferred
securities. Partially offsetting this increase was the reduced minority
interests related 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 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 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 $3,936 million for the
nine months ended September 30, 1999 compared to approximately $1,453 million
for the same period in 1998. Increased capital and investment expenditures
during the period primarily resulted from business expansion for the Field
Services and Global Asset Development segments discussed below.
17
<PAGE>
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. In September 1999, the
Company transferred liability and risk for soil and groundwater contamination to
a third party that will take responsibility for environmental remediation and
provide financial management and program oversight. Additional environmental
matters may also require corrective action. The cost to enter into the contract
and remediate the remaining conditions was approximately $58 million, of which
$34 million remains as a liability at September 30, 1999 in Environmental
Clean-up Liabilities on the Consolidated Balance Sheets.
GLOBAL ASSET DEVELOPMENT
In January 1999, Global Asset Development's international business unit, Duke
Energy International, LLC (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.
In August 1999, Duke Energy International completed the $692 million purchase,
excluding acquisition costs, of a controlling voting interest and an approximate
40% economic interest in Companhia de Geracao de Energia Eletrica Paranapanema
(Paranapanema). Paranapanema is Brazil's eleventh largest electric generating
company, owning and operating 2,307 megawatts of hydroelectric generation
facilities.
In September 1999, Duke Energy International completed the $125 million
purchase, excluding acquisition costs, of controlling interests in two El
Salvadorian generating companies, Generadora Acajutla S.A. de C.V. and
Generadora Salvadorena, S.A. de C.V. The El Salvadorian generating companies
currently own 275 megawatts of thermal power generation. Expansion 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 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. In October 1999, Duke
Energy International successfully completed the purchase of additional ownership
interests in the hydroelectric and thermal generation business in Peru from two
other parties for approximately $152 million in cash and certain other assets.
See Note 10 to the Consolidated Financial Statements for further discussion.
Global Asset Development's domestic business unit, Duke Energy North America,
LLC has begun construction of three new power generation plants: the Hidalgo
Energy project, a 510-megawatt, gas-fired merchant plant in south Texas; 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 and engineering 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 Company's capital commitment to these three
projects totals approximately $465 million.
18
<PAGE>
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 produce natural gas to partially offset the short gas
position of the Company's power generation assets and to increase production
volumes that will be beneficial to Field Services, Trading and Marketing, and
Natural Gas Transmission. Duke Energy Hydrocarbons has contracted to participate
in limited drilling programs comprising 27 prospects in the Gulf of Mexico.
Drilling began in the second quarter with additional drilling continuing for the
remainder of 1999.
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 certain asset
sales, most notably the sale of the Midwest Pipelines.
Included in financings for the first nine 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. This bridge financing expired in July 1999, but has been extended
through December 31, 1999. These notes have variable interest rates that
approximated 5.3% as of September 30, 1999. Global Asset Development also
assumed approximately $456 million of non-recourse debt, denominated in
Brazilian reals, due in 2013, in relation to the acquisition of Paranapanema in
the third quarter. The interest rate on the debt assumed is 10.0% and the
principal is indexed annually to inflation.
In September 1999, the Company issued $500 million of 7 1/4% Senior Notes due
2004, $500 million of 7 1/2% Senior Notes due 2009 and $500 million of 8% Senior
Notes due 2019. The proceeds from the sale of these notes will be used for
general corporate purposes, including reducing commercial paper indebtedness
incurred in connection with recent acquisitions of electric power generating
assets in Brazil and elsewhere in South and Central America.
Also, during the year, the Company's business trusts, which are treated as
wholly owned subsidiaries for financial reporting purposes, issued a total of
$250 million of trust preferred securities. (See Note 8 to the Consolidated
Financial Statements.)
Under its commercial paper facilities, the Company had the ability to borrow up
to $1.55 billion at both September 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 September 30, 1999
and $1.7 billion at December 31, 1998. At September 30, 1999, approximately $569
million was outstanding under the commercial paper facilities and approximately
$97 million of borrowings were outstanding under the bank credit facilities.
19
<PAGE>
In September 1999, Duke Energy Australia Pty Ltd, an indirect subsidiary of the
Company, established a combined commerical paper and medium-term note program in
the amount of approximately $500 million. The program is denominated in
Australian dollars and is guaranteed by the Company. Issuances from this program
will be used to refund the $300 million bridge financing and fund on-going
construction expenditures for the Eastern Gas Pipeline.
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. A description of the changes in the Company's market risk since
December 31, 1998 follows.
INTEREST RATE RISK
From time to time the Company may enter into financial derivative instruments
including, but not limited to, swaps, options, and treasury rate agreements to
manage and mitigate interest rate risk exposure. (See Note 6 to the Consolidated
Financial Statements.)
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 of commercial paper to a fixed rate, mitigating the
risk of future interest rate increases.
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 a portion of
its commodity price risk exposure, primarily NGLs. As of September 30, 1999, if
NGL prices average one cent per gallon less in the next twelve months, earnings
before income taxes will decrease by approximately $6 million, after considering
the effect of the Company's commodity hedge positions.
FOREIGN OPERATIONS 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.
The Company is exposed to foreign currency risk, sovereign risk and other
foreign operations risk that arise from investments in international affiliates
and businesses owned and operated in foreign countries. Since December 31, 1998,
the Company has made additional investments in foreign countries. At September
30, 1999, the Company's primary foreign currency exchange rate exposures are the
20
<PAGE>
Brazilian real, the Australian dollar and the Canadian dollar. Investments in
other foreign countries are not material. To mitigate risks associated with
foreign currency fluctuations, when possible, contracts are denominated in or
indexed to the U.S. dollar or may be hedged through debt denominated in the
foreign currency. The Company also uses foreign currency swaps, where possible,
to manage its risk related to foreign currency fluctuations. To monitor its
currency exchange rate risks, the Company uses sensitivity analysis, which
measures the impact of a devaluation of the foreign currencies to which it has
exposure. Based on the sensitivity analysis at September 30, 1999, a 10%
devaluation in the currency exchange rates in Brazil would reduce the Company's
financial position by $65 million and would not materially affect the Company's
consolidated results of operations or cash flows over the next twelve months.
Based on the sensitivity analysis at September 30, 1999, a 10% devaluation in
other foreign currencies would not materially affect the Company's consolidated
results of operations, financial position or cash flows.
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 transmision.
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
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. All business units, with the exception of Global Asset
Development's Duke Energy International, have achieved Year 2000 readiness of
their critical systems, equipment and devices as of September 30, 1999. Duke
Energy International has recently acquired assets that it is integrating into
its overall Year 2000 program and process. Duke Energy International has
extended its Year 2000 readiness date to November 1999.
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
21
<PAGE>
contract costs, are approximately $8 million, of which approximately $6 million
had been incurred as of September 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 caused by their own Year 2000 problems. If such a scenario occurs,
management does not expect it 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 to
the recently acquired assets, contingency plans are being addressed in
conjunction with the readiness efforts for those assets. Contingency 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 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.
22
<PAGE>
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 has agreed to indemnify the purchaser of this former subsidiary against
liability for any penalty or fines resulting from 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 9 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 August 6, 1999 contained
disclosures under Item 5, Other Events, and Item 7, Financial Statements, Pro
Forma Financial Information and Exhibits.
23
<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
November 11, 1999 /s/ Richard J. Osborne
-------------------------------
Richard J. Osborne
Vice President and
Chief Financial Officer
November 11, 1999 /s/ Sandra P. Meyer
-------------------------------
Sandra P. Meyer
Controller
24
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Duke
Capital Corporation Quarterly Report on Form 10-Q for the quarter ended
September 30, 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 874,000
<SECURITIES> 0
<RECEIVABLES> 3,099,000
<ALLOWANCES> 0
<INVENTORY> 259,000
<CURRENT-ASSETS> 5,108,000
<PP&E> 12,814,000
<DEPRECIATION> 2,368,000
<TOTAL-ASSETS> 19,166,000
<CURRENT-LIABILITIES> 4,941,000
<BONDS> 4,728,000
0
0
<COMMON> 0
<OTHER-SE> 5,079,000
<TOTAL-LIABILITY-AND-EQUITY> 19,166,000
<SALES> 9,970,000
<TOTAL-REVENUES> 11,851,000
<CGS> 9,490,000
<TOTAL-COSTS> 10,730,000
<OTHER-EXPENSES> 377,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 199,000
<INCOME-PRETAX> 521,000
<INCOME-TAX> 181,000
<INCOME-CONTINUING> 340,000
<DISCONTINUED> 0
<EXTRAORDINARY> 660,000
<CHANGES> 0
<NET-INCOME> 1,000,000
<EPS-BASIC> 0<F1>
<EPS-DILUTED> 0<F1>
<FN>
<F1>Not meaningful since Duke Capital Corporation is a wholly-owned subsidiary.
</FN>
</TABLE>
