<PAGE>
FILED PURSUANT TO RULE 424(b)(2)
REGISTRATION NO. 333-85995
Prospectus Supplement
(To Prospectus dated September 3, 1999)
Duke Capital Corporation
a subsidiary of Duke Energy Corporation
$1,500,000,000 1999 Global Series
$500,000,000
7 1/4% Senior Notes due 2004
$500,000,000
7 1/2% Senior Notes due 2009
$500,000,000
8% Senior Notes due 2019
Interest payable April 1 and October 1
The 2004 Notes will mature on October 1, 2004, the 2009 Notes will mature on
October 1, 2009 and the 2019 Notes will mature on October 1, 2019. Interest on
the Notes will accrue from September 28, 1999. We may redeem some or all of the
Notes at any time. The redemption prices of the Notes are described under the
heading "Description of the Notes--Optional Redemption" beginning on page S-7
of this Prospectus Supplement. We will issue the Notes in minimum denominations
of $1,000 increased in integral multiples of $1,000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this Prospectus Supplement or the accompanying
Prospectus. Any representation to the contrary is a criminal offense.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Price to Discounts and Proceeds to
Public Commissions Duke Capital
- --------------------------------------------------------
<S> <C> <C> <C>
Per 2004 Note 99.842% .350% 99.492%
- --------------------------------------------------------
Total $499,210,000 $1,750,000 $497,460,000
- --------------------------------------------------------
Per 2009 Note 99.197% .450% 98.747%
- --------------------------------------------------------
Total $495,985,000 $2,250,000 $493,735,000
- --------------------------------------------------------
Per 2019 Note 99.358% .875% 98.483%
- --------------------------------------------------------
Total $496,790,000 $4,375,000 $492,415,000
</TABLE>
- --------------------------------------------------------------------------------
We have applied to list the Notes on the Luxembourg Stock Exchange in
accordance with the Rules of the Luxembourg Stock Exchange.
We expect that delivery of the Notes will be made to investors on or about
September 28, 1999, only through The Depository Trust Company, the Euroclear
system or Cedelbank.
Joint Bookrunners
Merrill Lynch & Co. J.P. Morgan & Co.
Banc of America Securities LLC Barclays Capital
Goldman, Sachs & Co. Lehman Brothers
Morgan Stanley Dean Witter Warburg Dillon Read LLC
September 21, 1999
<PAGE>
You should rely only on the information contained or incorporated by reference
in this Prospectus Supplement and the accompanying Prospectus. We have not, and
the Underwriters have not, authorized any other person to provide you with
different information. If anyone provides you with different or inconsistent
information, you should not rely on it. If this Prospectus Supplement is
inconsistent with the accompanying Prospectus, you should rely on this
Prospectus Supplement. We are not, and the Underwriters are not, making an
offer to sell these securities in any jurisdiction where the offer or sale is
not permitted. You should assume that the information in this Prospectus
Supplement and the accompanying Prospectus is accurate as of the respective
dates on the front of those documents only. Our business, financial condition,
results of operations and prospects may have changed since those dates.
The distribution of this Prospectus Supplement and the accompanying Prospectus
and the offering of the Notes in certain jurisdictions may be restricted by
law. This Prospectus Supplement and the accompanying Prospectus do not
constitute an offer, or an invitation on our behalf or on behalf of the
Underwriters or any of them, to subscribe to or purchase any of the Notes, and
may not be used for or in connection with an offer or solicitation by anyone,
in any jurisdiction in which such an offer or solicitation is not authorized or
to any person to whom it is unlawful to make such an offer or solicitation. See
"Underwriting."
TABLE OF CONTENTS
Prospectus Supplement
<TABLE>
<CAPTION>
Page
----
<S> <C>
Forward-Looking Statements................................................. S-3
Duke Capital Corporation................................................... S-4
Use of Proceeds............................................................ S-5
Capitalization............................................................. S-5
Directors and Executive Officers........................................... S-6
Description of the Notes................................................... S-6
Material Federal Income Tax Considerations................................. S-14
Underwriting............................................................... S-17
Validity of the Securities................................................. S-18
General Information........................................................ S-18
Prospectus
About This Prospectus...................................................... 2
Where You Can Find More Information........................................ 2
Duke Capital Corporation................................................... 4
Use of Proceeds............................................................ 7
The Trusts................................................................. 7
Description of the Senior Notes............................................ 8
Description of the Junior Subordinated Notes............................... 18
Description of the Preferred Securities.................................... 27
Description of the Guarantees.............................................. 28
Accounting Treatment....................................................... 31
Plan of Distribution....................................................... 31
Experts.................................................................... 32
Validity of the Securities................................................. 32
</TABLE>
Annexes
Annual Report of Duke Capital on Form 10-K for the Year Ended December 31,
1998
Quarterly Report of Duke Capital on Form 10-Q for the Quarter Ended June
30, 1999
S-2
<PAGE>
This Prospectus Supplement and the accompanying Prospectus include particulars
given in compliance with the rules governing the listing of securities on the
Luxembourg Stock Exchange for the purpose of giving information with regard to
Duke Capital. We accept full responsibility for the accuracy of the information
contained in this Prospectus Supplement and the accompanying Prospectus and
confirm, having made all reasonable inquiries, that, to the best of our
knowledge and belief, there are no other facts the omission of which would make
any statement herein misleading in any material respect.
In this Prospectus Supplement "we," "our," "us," and "Duke Capital" refer to
Duke Capital Corporation. All references in this Prospectus Supplement and the
accompanying Prospectus to "$" and "dollars" are to the currency of the United
States of America.
FORWARD-LOOKING STATEMENTS
This Prospectus Supplement and the accompanying Prospectus contain or
incorporate by reference statements that do not directly or exclusively relate
to historical facts. Such statements are "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. You can
typically identify forward-looking statements by the use of forward-looking
words, such as "may," "will," "could," "project," "believe," "anticipate,"
"expect," "estimate," "continue," "potential," "plan," "forecast" and the like.
Those statements represent Duke Capital's intentions, plans, expectations,
assumptions and beliefs about future events and are subject to risks,
uncertainties and other factors. Many of those factors are outside Duke
Capital's control and could cause actual results to differ materially from the
results expressed or implied by those forward-looking statements. Those factors
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 at and degree to which competition enters the
natural gas industry;
. industrial, commercial and residential growth in the service territories
of Duke Capital'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 Duke
Capital and its subsidiaries are subject or other external factors over
which Duke Capital has no control;
. the results of financing efforts, including Duke Capital's ability to
obtain financing on favorable terms, which can be affected by various
factors, including its credit ratings and general economic conditions;
. growth in opportunities for Duke Capital's subsidiaries;
. achievement of Year 2000 readiness by Duke Capital, its subsidiaries and
the customers and suppliers of those subsidiaries; and
. the effect of accounting policies issued periodically by accounting
standard-setting bodies.
In light of these risks, uncertainties and assumptions, the forward-looking
events referred to in this Prospectus Supplement and the accompanying
Prospectus might not occur. Neither Duke Capital nor the Underwriters
undertakes any obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
S-3
<PAGE>
DUKE CAPITAL CORPORATION
Duke Capital, a wholly owned subsidiary of Duke Energy Corporation, was
organized under the laws of the State of Delaware on February 1, 1985 and
conducts, through subsidiaries, its operating activities through six business
segments:
. Natural Gas Transmission
. Field Services
. Trading and Marketing
. Global Asset Development
. Other Energy Services
. Real Estate Operations
Natural Gas Transmission, through Texas Eastern Transmission Corporation and
Algonquin Gas Transmission Company, provides interstate transportation and
storage of natural gas for customers primarily in the Mid-Atlantic and New
England states.
Field Services gathers, processes, transports and markets natural gas and
produces and markets natural gas liquids. Field Services operates gathering
systems in western Canada and ten contiguous states in the United States that
serve major gas-producing regions in the Rocky Mountains, 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. Duke Energy owns a 60% interest in Trading and
Marketing, 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 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 develops commercial and residential real estate projects
and manages forest holdings in the southeastern United States. Real Estate
Operations conducts its business through Crescent Resources, Inc.
For more detailed information concerning the business, financial condition and
results of operations of Duke Capital, prospective investors are urged to read
its annual report on Form 10-K for the year ended December 31, 1998 and its
quarterly report on Form 10-Q for the quarter ended June 30, 1999 and the other
reports and information incorporated by reference in this Prospectus Supplement
and the accompanying Prospectus. The annual report for the year ended December
31, 1998 and the quarterly report for the quarter ended June 30, 1999 are
attached as annexes to this Prospectus Supplement and the accompanying
Prospectus.
S-4
<PAGE>
USE OF PROCEEDS
The net proceeds of approximately $1,483,610,000 from the sale of the Notes
(less expenses incurred by us in connection with this offering) 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 America and Central America.
For a description of those acquisitions, see pages 11 and 17-18 in the
quarterly report on Form 10-Q for the quarter ended June 30, 1999, which is
attached as an annex to this Prospectus Supplement and the accompanying
Prospectus.
CAPITALIZATION
The following table presents the capitalization on a consolidated basis of Duke
Capital as of June 30, 1999 and, for purposes of this presentation, as adjusted
to give effect to (1) the issuance of $250 million in aggregate liquidation
amount of trust preferred securities (and related junior subordinated notes) on
August 18, 1999, (2) estimated minority interests and debt assumed in the
Brazilian acquisition referred to under "Use of Proceeds" and (3) the offering
of the Notes. No other change in the consolidated capitalization of Duke
Capital since June 30, 1999 is reflected therein. Since June 30, 1999, there
has not been any material adverse change in the information set forth below,
except as may be described elsewhere in this Prospectus Supplement, in the
accompanying Prospectus or in any of the documents incorporated by reference
therein. You should read this table together with Duke Capital's consolidated
financial statements, including the notes to such financial statements, which
are incorporated by reference in this Prospectus Supplement and the
accompanying Prospectus.
<TABLE>
<CAPTION>
June 30, 1999 June 30, 1999
Actual As Adjusted
------------- -------------
(millions)
<S> <C> <C> <C> <C>
Debt:
Commercial Paper................................ $ 499 5% $ 499 4%
Short-term Debt................................. 18 -- 18 --
Long-term Debt, including Current Maturities.... 431 5% 431 4%
Long-term Debt of Subsidiaries, including
Current Maturities............................. 2,241 26% 2,691 23%
Notes offered hereby............................ -- 1,500 13%
------- --------
Total Debt.................................... 3,189 36% 5,139 44%
------- --------
Minority Interests................................ -- -- 850 7%
------- --------
Trust Preferred Securities........................ 580 7% 830 7%
------- --------
Stockholder's Equity:
Paid-in Capital................................. 2,999 2,999
Retained Earnings............................... 2,009 2,009
------- --------
Total Stockholder's Equity.................... 5,008 57% 5,008 42%
------- --------
Total Capitalization........................ $ 8,777 100% $ 11,827 100%
======= ========
</TABLE>
Duke Capital is authorized to issue 3,000 shares of Common Stock without par
value, of which 1,010 shares were issued and outstanding on June 30, 1999, and
100,000 shares of Preferred Stock of the par value of $100 per share, of which
none is issued and outstanding. All outstanding shares of Common Stock of Duke
Capital are owned by Duke Energy.
S-5
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of Duke Capital are as follows:
<TABLE>
<CAPTION>
Directors Principal Occupation
<C> <S>
Richard B. Priory Chairman of the Board and President of Duke Capital and
Duke Energy
Fred J. Fowler Vice President of Duke Capital and Group President, Energy
Transmission, of Duke Energy
Robert S. Lilien Senior Vice President, Diversified Operations, of Duke
Energy
Richard J. Osborne Vice President and Chief Financial Officer of Duke Capital
and Executive Vice President and Chief Financial Officer of
Duke Energy
Harvey J. Padewer Vice President of Duke Capital and Group President, Energy
Services, of Duke Energy
<CAPTION>
Executive Officers
<C> <S>
Richard B. Priory Chairman of the Board and President
Fred J. Fowler Vice President
Harvey J. Padewer Vice President
Richard J. Osborne Vice President and Chief Financial Officer
David L. Hauser Vice President and Treasurer
Ellen T. Ruff Secretary and General Counsel
Sandra P. Meyer Controller
</TABLE>
The business address of Duke Capital's directors and executive officers is 526
South Church Street, Charlotte, North Carolina 28202.
DESCRIPTION OF THE NOTES
The following description of the Notes is only a summary and is not intended to
be comprehensive. The description should be read together with the description
of the general terms and provisions of our Senior Notes provided under the
caption "Description of the Senior Notes" in the accompanying Prospectus. The
term "2004 Notes" refers to the 7 1/4% Senior Notes due 2004, the term "2009
Notes" refers to the 7 1/2% Senior Notes due 2009 and the term "2019 Notes"
refers to the 8% Senior Notes due 2019. The term "Notes" refers to the 2004
Notes, the 2009 Notes and the 2019 Notes, collectively.
General
The 2004 Notes, the 2009 Notes and the 2019 Notes will be issued as a series of
Senior Notes under our Senior Indenture, entitled the 1999 Global Series. The
2004 Notes will bear interest at the rate of 7 1/4% per annum and will mature
on October 1, 2004. The 2009 Notes will bear interest at the rate of 7 1/2% per
annum and will mature on October 1, 2009. The 2019 Notes will bear interest at
the rate of 8% per annum and will mature on October 1, 2019. The 2004 Notes,
the 2009 Notes and the 2019 Notes will each be limited in aggregate principal
amount to $500,000,000. The Notes will be payable at 100% of their principal
amounts, plus accrued interest, at their respective maturities.
S-6
<PAGE>
We will pay interest on the Notes in arrears on each April 1 and October 1,
beginning April 1, 2000, to the person or persons in whose names the Notes are
registered at the close of business on the fifteenth calendar day before the
relevant interest payment date, except that we will pay interest payable at
maturity or on a redemption date to the person or persons to whom principal is
payable. In the event that any date on which interest is payable is not a
Business Day, we will pay such interest on the next Business Day (without any
interest or other payment due to the delay). "Business Day," when used with
respect to any place of payment for the Notes, means a day other than (i) a
Saturday or a Sunday, (ii) a day on which banking institutions in that place of
payment are authorized or obligated by law or executive order to remain closed
or (iii) a day on which the corporate trust office of the trustee under the
Senior Indenture (the "Senior Indenture Trustee") is closed for business. The
Chase Manhattan Bank, a New York corporation, is the Senior Indenture Trustee.
The Chase Manhattan Bank will also serve as the principal paying agent for the
Notes (the "Paying Agent") and will be the registrar (the "Registrar") and the
principal transfer agent (the "Transfer Agent") for the Notes. The office of
The Chase Manhattan Bank for these purposes is currently located at 55 Water
Street, New York, New York 10041. Chase Manhattan Bank Luxembourg S.A. will
initially serve as Luxembourg paying agent (the "Luxembourg Paying Agent" and a
"Paying Agent") and as Luxembourg transfer agent (the "Luxembourg Transfer
Agent"). The office of Chase Manhattan Bank Luxembourg S.A. is currently
located at 5 rue Plaetis, L-2338 Luxembourg.
Ranking
The Notes will be our direct, unsecured and unsubordinated obligations. The
Notes will rank equal in priority with all of our other unsecured and
unsubordinated indebtedness and senior in right of payment to all of our
existing and future subordinated debt. At August 31, 1999, we had outstanding
approximately $1,500,000,000 of unsecured and unsubordinated indebtedness. The
Senior Indenture contains no restrictions on the amount of additional
indebtedness that we may issue under it.
We conduct our business through subsidiaries. Accordingly, our ability to meet
our obligations under the Notes is dependent on the earnings and cash flows
from those subsidiaries and the ability of those subsidiaries to pay dividends
or to advance or repay funds to us.
Optional Redemption
We will have the right to redeem the Notes, in whole or in part at any time, on
at least 30 days' but no more than 60 days' prior written notice mailed to the
registered holders of the Notes to be redeemed. The respective redemption
prices will be equal to the greater of (1) 100% of the principal amount of the
2004 Notes, the 2009 Notes or the 2019 Notes, as the case may be, to be
redeemed and (2) the sum, as determined by the Quotation Agent (as defined
below), of the present values of the principal amount of the Notes to be
redeemed and the remaining scheduled payments of interest thereon from the
redemption date to the respective maturity date (the "Remaining Life")
discounted from their respective scheduled payment dates to the redemption date
on a semiannual basis (assuming a 360-day year consisting of twelve 30-day
months) at the Treasury Rate (as defined below) plus 15 basis points (in the
case of the 2004 Notes), 20 basis points (in the case of the 2009 Notes) or 25
basis points (in the case of the 2019 Notes), plus, in any such case, accrued
and unpaid interest on the principal amount being redeemed to such redemption
date. If less than all of the Notes are to be redeemed, the Trustee will select
the Notes or portions of Notes to be redeemed by such method as the Trustee
shall deem fair and appropriate. The Trustee may select for redemption Notes
and portions of Notes in amounts of whole multiples of $1,000.
If money sufficient to pay the redemption price of and accrued interest on the
Notes (or portions thereof) to be redeemed on the redemption date is deposited
with the Paying Agent on or before the redemption date and certain other
conditions are satisfied, then on and after such redemption date, interest will
cease to accrue on such Notes (or such portion thereof) called for redemption.
In the event that any redemption date is not a Business Day, we will pay the
redemption price on the next Business Day without any interest or other payment
due to the delay.
S-7
<PAGE>
"Comparable Treasury Issue" means the United States Treasury security selected
by the Quotation Agent as having a maturity comparable to the Remaining Life
that would be utilized, at the time of selection, and in accordance with
customary financial practice, in pricing new issues of corporate debt
securities of comparable maturity with the Remaining Life.
"Comparable Treasury Price" means, with respect to any redemption date, the
average of two Reference Treasury Dealer Quotations for such redemption date.
"Quotation Agent" means the Reference Treasury Dealers appointed by Duke
Capital.
"Reference Treasury Dealer" means each of Merrill Lynch Government Securities
Inc. and J.P. Morgan Securities Inc., and their successors; provided, however,
that if any of the foregoing shall cease to be a primary U.S. Government
securities dealer in New York City (a "Primary Treasury Dealer"), Duke Capital
shall substitute therefor another Primary Treasury Dealer.
"Reference Treasury Dealer Quotation" means, with respect to each Reference
Treasury Dealer and any redemption date, the average, as determined by the
Senior Indenture Trustee, of the bid and asked prices for the Comparable
Treasury Issue (expressed in each case as a percentage of its principal amount)
quoted in writing to the Senior Indenture Trustee by such Reference Treasury
Dealer at 5:00 p.m., New York City time, on the third Business Day preceding
such redemption date.
"Treasury Rate" means, with respect to any redemption date, the rate per annum
equal to the semiannual yield to maturity of the Comparable Treasury Issue
(expressed as a percentage of its principal amount) equal to the Comparable
Treasury Price for such redemption date.
Purchase by Duke Capital
Duke Capital may at any time, and from time to time, purchase Notes at any
price or prices in the open market or otherwise.
Defeasance and Covenant Defeasance
The 2004 Notes, the 2009 Notes and the 2019 Notes will each be subject to
Defeasance and Covenant Defeasance as described in the Senior Indenture. See
"Description of the Senior Notes--Defeasance and Covenant Defeasance" in the
accompanying Prospectus.
Book-Entry System
The 2004 Notes, the 2009 Notes and the 2019 Notes will each be issued in the
form of one or more fully registered global notes ("Global Notes") which will
be deposited with, or on behalf of, The Depository Trust Company ("DTC" or the
"Depositary") as the securities depositary, and registered in the name of Cede
& Co., DTC's nominee. Beneficial interests in the Global Notes will be
represented through book-entry accounts of financial institutions acting on
behalf of, beneficial owners as direct and indirect participants in DTC (a
"participant"). Investors may elect to hold interests in the Global Notes
through either DTC (in the United States) or Cedelbank or Morgan Guaranty Trust
Company of New York, Brussels Office, as operator of the Euroclear system (in
Europe) if they are participants of such systems, or indirectly through
organizations which are participants in such systems. Cedelbank and Euroclear
will hold interests on behalf of their participants through customers'
securities accounts in Cedelbank's and Euroclear's names on the books of their
respective depositaries, which in turn will hold such interests in customers'
securities accounts in the names of their respective depositaries (the "U.S.
Depositaries") on the books of DTC. Citibank, N.A. will act as the U.S.
Depositary for Cedelbank, and The Chase Manhattan Bank will act as the U.S.
Depositary for Euroclear. Except under the circumstances described below, the
Notes will not be issuable in definitive form. The laws of some states of the
United States of America require that certain purchasers of securities take
physical delivery of such securities in definitive form. Such limits and such
laws may impair the ability to transfer beneficial interests in the Global
Notes.
S-8
<PAGE>
So long as the Depositary or its nominee is the registered owner of the Global
Notes, the Depositary or such nominee, as the case may be, will be considered
the sole owner or holder of the Notes represented by the Global Notes for all
purposes under the Senior Indenture. Except as provided below, owners of
beneficial interests in the Global Notes will not be entitled to have Notes
represented by the Global Notes registered in their names, will not receive or
be entitled to receive physical delivery of Notes in definitive form and will
not be considered the owners or holders thereof under the Senior Indenture.
Principal and interest payments on Notes registered in the name of the
Depositary or its nominee will be made to the Depositary or its nominee, as the
case may be, as the registered owner of the Global Notes. None of Duke Capital,
the Senior Indenture Trustee, any Paying Agent, any Transfer Agent or the
Registrar for the Notes will have any responsibility or liability for any
aspect of the records relating to or payments made on account of beneficial
interests in the Global Notes or for maintaining, supervising or reviewing any
records relating to such beneficial interests.
We expect that the Depositary or its nominee, upon receipt of any payment of
principal or interest, will credit the participants' accounts with payments in
amounts proportionate to their respective beneficial interests in the principal
amounts of the Global Notes as shown on the records of the Depositary or its
nominee. We also expect that payments by participants to owners of beneficial
interests in the Global Notes held through such participants will be governed
by standing instructions and customary practices, as is now the case with
securities held for the accounts of customers in bearer form or registered in
"street name," and will be the responsibility of such participants.
If the Depositary is at any time unwilling or unable to continue as depositary
and a successor Depositary is not appointed by us within 90 days, or if at any
time the Depositary ceases to be a clearing agency registered under the
Securities Exchange Act of 1934, as amended, when the Depositary is required to
be registered to act as such and no successor Depositary is appointed by the
Corporation within 90 days, we will issue Notes in definitive form in exchange
for the Global Notes. In addition, we may at any time and in our sole
discretion determine not to have Notes represented by Global Notes and, in such
event, will issue Notes in definitive form in exchange for the Global Notes. In
any such instance, an owner of a beneficial interest in the Global Notes will
be entitled to physical delivery in definitive form of Notes represented by the
Global Notes equal in principal amount to such beneficial interest and to have
such Notes registered in its name. Notes so issued in definitive form will be
issued as registered Notes in denominations of $1,000 and integral multiples
thereof. Definitive Notes can be transferred by presentation for registration
to the Registrar or the Luxembourg Transfer Agent and must be duly endorsed by
the holder or its attorney duly authorized in writing, or accompanied by a
written instrument or instruments of transfer in form satisfactory to us and
the Registrar or the Luxembourg Transfer Agent duly executed by the holder or
its attorney duly authorized in writing. We may require payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed in
connection with any exchange or registration of transfer of definitive Notes.
Payments of principal, premium, if any, and interest due at maturity or upon
redemption of Notes in definitive form will be made at the office of the Paying
Agent or the Luxembourg Paying Agent to the person to whom principal is payable
upon surrender of such Notes. Payments of interest will be made, at our option,
subject to such surrender where applicable, (1) by check mailed to the address
of the person entitled thereto as such address appears in the security register
or (2) by wire transfer at such place and to such account at a banking
institution in the United States as may be designated in writing to the Senior
Indenture Trustee at least sixteen days prior to the date for payment by the
person entitled thereto.
The Depositary has advised us as follows: the Depositary is a limited-purpose
trust company organized under the New York Banking Law, a "banking
organization" within the meaning of the New York Banking Law, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the New
York Uniform Commercial Code, and a "clearing agency" registered pursuant to
the provisions of Section 17A of the Securities Exchange Act of 1934, as
amended. The Depositary holds securities deposited with it by its participants
and facilitates the settlement of transactions among its participants in such
securities through electronic computerized book-entry changes in accounts of
the participants, thereby eliminating the need for physical movement of
securities certificates. The Depositary's participants include securities
brokers and dealers (including the underwriters),
S-9
<PAGE>
banks, trust companies, clearing corporations and certain other organizations,
some of whom (and/or their representatives) own the Depositary. Access to the
Depositary's book-entry system is also available to others, such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a participant, either directly or indirectly.
The Depositary has also advised us that the Depositary's management is aware
that some computer applications, systems, and the like for processing data
("Systems") that are dependent upon calendar dates, including dates before, on
and after January 1, 2000, may encounter "Year 2000 problems." The Depositary
has informed participants and other members of the financial community that it
has developed and is implementing a program so that its Systems, as the same
relate to the timely payment of distributions (including principal and income
payments) to securityholders, book-entry deliveries, and settlement of trades
within DTC ("DTC Services"), continue to function appropriately. This program
includes a technical assessment and a remediation plan, each of which is
complete. Additionally, the Depositary's plan includes a testing phase, which
is expected to be completed within appropriate time frames. However, the
Depositary's ability to perform its services properly is also dependent upon
other parties, including but not limited to issuers and their agents, as well
as third-party vendors from whom the Depositary licenses software and hardware,
and third-party vendors on whom the Depositary relies for information or the
provision of services, including telecommunication and electrical utility
service providers, among others. The Depositary has informed the financial
community that it is contacting, and will continue to contact, third-party
vendors from whom the Depositary acquires services to impress upon them the
importance of such services being Year 2000 compliant, and to determine the
extent of their efforts for Year 2000 remediation and, as appropriate, testing
of their services. In addition, DTC is in the process of developing such
contingency plans as it deems appropriate.
According to the Depositary, the foregoing information with respect to the
Depositary has been provided to the financial community for informational
purposes only and is not intended to serve as a representation, warranty or
contract modification of any kind.
Cedelbank has advised us that it is incorporated under the laws of Luxembourg
as a professional depositary. Cedelbank holds securities for its customers
("Cedelbank Customers") and facilitates the clearance and settlement of
securities transactions between Cedelbank Customers through electronic book-
entry changes in accounts of Cedelbank Customers, thereby eliminating the need
for physical movement of certificates. Cedelbank provides to Cedelbank
Customers, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Cedelbank interfaces with domestic markets in several
countries. As a bank, Cedelbank is subject to regulation by the Luxembourg
Commission for the Supervision of the Financial Sector (Commission de
Surveillance du Secteur Financier). Cedelbank Customers are recognized
financial institutions around the world, including underwriters, securities
brokers and dealers, banks, trust companies, clearing corporations and certain
other organizations and may include the Underwriters. Indirect access to
Cedelbank is also available to others, such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial relationship with a
Cedelbank Customer either directly or indirectly.
Distributions with respect to Notes held beneficially through Cedelbank will be
credited to cash accounts of Cedelbank Customers in accordance with its rules
and procedures, to the extent received by the U.S. Depositary for Cedelbank.
Euroclear has advised us that it was created in 1968 to hold securities for
participants of Euroclear ("Euroclear Participants") and to clear and settle
transactions between Euroclear Participants through simultaneous electronic
book-entry delivery against payment, thereby eliminating the need for physical
movement of certificates and any risk from lack of simultaneous transfers of
securities and cash. Euroclear includes various other services, including
securities lending and borrowing and interfaces with domestic markets in
several countries. Euroclear is operated by the Brussels, Belgium office of
Morgan Guaranty Trust Company of New York (the "Euroclear Operator"), under
contract with Euroclear Clearance Systems S.C., a Belgian cooperative
corporation (the
S-10
<PAGE>
"Cooperative"). All operations are conducted by the Euroclear Operator, and all
Euroclear securities clearance accounts and Euroclear cash accounts are
accounts with the Euroclear Operator, not the Cooperative. The Cooperative
establishes policy for Euroclear on behalf of Euroclear Participants. Euroclear
Participants include banks (including central banks), securities brokers and
dealers and other professional financial intermediaries and may include the
Underwriters. Indirect access to Euroclear is also available to other firms
that clear through or maintain a custodial relationship with a Euroclear
Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking corporation
which is a member bank of the Federal Reserve System. As such, it is regulated
and examined by the Board of Governors of the Federal Reserve System and the
New York State Banking Department, as well as the Belgian Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator are
governed by the Terms and Conditions Governing Use of Euroclear and the related
Operating Procedures of the Euroclear System, and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities
and cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions with respect to Notes held beneficially through Euroclear will be
credited to the cash accounts of Euroclear Participants in accordance with the
Terms and Conditions, to the extent received by the U.S. Depositary for
Euroclear.
Euroclear has also advised us that investors that acquire, hold and transfer
interests in the Notes by book-entry through accounts with the Euroclear
Operator or any other securities intermediary are subject to the laws and
contractual provisions governing their relationship with their intermediary, as
well as the laws and contractual provisions governing the relationship between
such an intermediary and each other intermediary, if any, standing between
themselves and the Global Notes.
Under Belgian law, the Euroclear Operator is required to pass on the benefits
of ownership in any interests in securities on deposit with it (such as
dividends, voting rights and other entitlements) to any person credited with
such interests in securities on its records.
We will maintain a paying and transfer agent in Luxembourg as long as the Notes
are listed on the Luxembourg Stock Exchange. For as long as the Notes are
listed on the Luxembourg Stock Exchange, we will publish any changes as to the
identity or location of the Luxembourg Paying Agent or the Luxembourg Transfer
Agent in a leading daily newspaper in Luxembourg, which is expected to be the
Luxemburger Wort.
Global Clearing and Settlement Procedures
Initial settlement for the Notes will be made in immediately available funds.
Secondary market trading between DTC participants will occur in the ordinary
way in accordance with DTC rules and will be settled in immediately available
funds using the Depositary's Same-Day Funds Settlement System. Secondary market
trading between Cedelbank Customers and/or Euroclear Participants will occur in
the ordinary way in accordance with the applicable rules and operating
procedures of Cedelbank and Euroclear and will be settled using the procedures
applicable to conventional eurobonds in immediately available funds.
Cross-market transfers between persons holding directly or indirectly through
DTC, on the one hand, and directly or indirectly through Cedelbank Customers or
Euroclear Participants, on the other, will be effected in DTC in accordance
with DTC rules on behalf of the relevant European international clearing system
by the applicable U.S. Depositary; however, such cross-market transactions will
require delivery of instructions to the relevant
S-11
<PAGE>
European international clearing system by the counterparty in such system in
accordance with its rules and procedures and within its established deadlines
(European time). The relevant European international clearing system will, if
the transaction meets its settlement requirements, deliver instructions to the
applicable U.S. Depositary to take action to effect final settlement on its
behalf by delivering or receiving Notes in DTC, and making or receiving payment
in accordance with normal procedures for same-day funds settlement applicable
to DTC. Cedelbank Customers and Euroclear Participants may not deliver
instructions directly to their respective U.S. Depositaries.
Because of time-zone differences, credits of Notes received in Cedelbank or
Euroclear as a result of a transaction with a DTC participant will be made
during subsequent securities settlement processing and dated the business day
following the DTC settlement date. Such credits or any transactions in Notes
settled during such processing will be reported to the relevant Cedelbank
Customers or Euroclear Participants on such business day. Cash received in
Cedelbank or Euroclear as a result of sales of Notes by or through a Cedelbank
Customer or a Euroclear Participant to a DTC participant will be received with
value on the DTC settlement date but will be available in the relevant
Cedelbank or Euroclear cash account only as of the business day following
settlement in DTC.
Although DTC, Cedelbank and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of the Notes among participants of DTC,
Cedelbank and Euroclear, they are under no obligation to perform or continue to
perform such procedures and such procedures may be discontinued at any time.
Payment of Additional Amounts
We will, subject to the exceptions and limitations set forth below, pay as
additional interest on the Notes such additional amounts as are necessary so
that the net payment by us or a Paying Agent of the principal of and interest
on the Notes to a person that is not a U.S. Holder (as defined in "Material
Federal Income Tax Considerations" below), after deduction for any present or
future tax, assessment or governmental charge of the United States or a
political subdivision or taxing authority thereof or therein, imposed by
withholding with respect to the payment, will not be less than the amount that
would have been payable in respect of the Notes had no such withholding or
deduction been required.
Our obligation to pay additional amounts shall not apply:
(1) to a tax, assessment or governmental charge that is imposed or
withheld solely because the holder, or a fiduciary, settlor, beneficiary,
member or shareholder of the holder if the holder is an estate, trust,
partnership or corporation, or a person holding a power over an estate or
trust administered by a fiduciary holder:
(a) is or was present or engaged in trade or business in the United
States or has or had a permanent establishment in the United States;
(b) has a current or former relationship with the United States,
including a relationship as a citizen or resident thereof;
(c) is or has been a foreign or domestic personal holding company, a
passive foreign investment company, a controlled foreign corporation
with respect to the United States, or a corporation that has accumulated
earnings to avoid United States federal income tax, a private foundation
or other tax-exempt organization, or a bank receiving interest on an
extension of credit made pursuant to a loan agreement entered into in
the ordinary course of its trade or business; or
(d) is or was a "10-percent shareholder" of Duke Capital as defined in
Section 871(h)(3) of the United States Internal Revenue Code of 1986
(the "Code") or any successor provision;
(2) to any holder that is not the sole beneficial owner of the Notes, or
a portion thereof, or that is a fiduciary or partnership, but only to the
extent that the beneficial owner, a beneficiary or settlor with respect
S-12
<PAGE>
to the fiduciary, or a member of the partnership would not have been
entitled to the payment of an additional amount had such beneficial owner,
beneficiary, settlor or member received directly its beneficial or
distributive share of the payment;
(3) to a tax, assessment or governmental charge that is imposed or
withheld solely because the holder or any other person failed to comply
with certification, identification or information reporting requirements
concerning the nationality, residence, identity or connection with the
United States of the holder or beneficial owner of the Notes, if compliance
is required by statute, by regulation of the United States Treasury
Department or by an applicable income tax treaty to which the United States
is a party as a precondition to exemption from such tax, assessment or
other governmental charge;
(4) to a tax, assessment or governmental charge that is imposed other
than by withholding by Duke Capital or a paying agent from the payment;
(5) to a tax, assessment or governmental charge that is imposed or
withheld solely because of a change in law, regulation, or administrative
or judicial interpretation that becomes effective more than 15 days after
the payment becomes due or is duly provided for, whichever occurs later;
(6) to an estate, inheritance, gift, sales, excise, transfer, wealth or
personal property tax or a similar tax, assessment or governmental charge;
(7) to any tax, assessment or other governmental charge any paying agent
must withhold from any payment of principal of or interest on any Note, if
such payment can be made without such withholding by any other paying
agent; or
(8) in the case of any combination of the above items.
The Notes are subject in all cases to any tax, fiscal or other law or
regulation or administrative or judicial interpretation applicable. Except as
specifically provided under this heading "--Payment of Additional Amounts" and
under the heading "--Redemption Upon a Tax Event," we do not have to make any
payment with respect to any tax, assessment or governmental charge imposed by
any government or a political subdivision or taxing authority.
Redemption Upon a Tax Event
If (a) we become or will become obligated to pay additional amounts as
described herein under the heading "--Payment of Additional Amounts" as a
result of any change in, or amendment to, the laws (or any regulations or
rulings promulgated thereunder) of the United States (or any political
subdivision or taxing authority thereof or therein), or any change in, or
amendment to, any official position regarding the application or interpretation
of such laws, regulations or rulings, which change or amendment is announced or
becomes effective on or after the date of this Prospectus Supplement, or (b) a
taxing authority of the United States takes an action on or after the date of
this Prospectus Supplement, whether or not with respect to us or any of our
affiliates, that results in a substantial likelihood that we will or may be
required to pay such additional amounts, then we may, at our option, redeem, as
a whole, but not in part, the Notes on any interest payment date on not less
than 30 nor more than 60 days' prior written notice, at a redemption price
equal to 100% of their principal amount, together with interest accrued thereon
to the date fixed for redemption; provided that we determine, in our business
judgment, that the obligation to pay such additional amounts cannot be avoided
by the use of reasonable measures available to us, not including substitution
of the obligor under the Notes. No redemption pursuant to (b) above may be made
unless we and the Senior Indenture Trustee shall have received an opinion of
independent counsel to the effect that an act taken by a taxing authority of
the United States results in a substantial likelihood that we will or may be
required to pay the additional amounts described herein under the heading "--
Payment of Additional Amounts" and we shall have delivered to the Senior
Indenture Trustee a certificate, signed by a duly authorized officer, stating
that based on such opinion we are entitled to redeem the Notes pursuant to
their terms.
S-13
<PAGE>
Notices
Notices to holders of the Notes regarding redemption of Notes and as otherwise
required pursuant to the provisions of the Senior Indenture will be sent by
mail to the registered holders and will be published, so long as the Notes are
listed on the Luxembourg Stock Exchange, in a daily newspaper of general
circulation in Luxembourg. Notices regarding redemption of Notes will be made
at least 30 but not more than 60 days before the date fixed for redemption. It
is expected that publication will be made in Luxembourg in the Luxemburger
Wort. Any such notice shall be deemed to have been given on the date of such
publication or, if published more than once, on the date of the first such
publication.
Governing Law
The Senior Indenture and the Notes will be governed by, and construed in
accordance with, the laws of the State of New York of the United States of
America, without regard to conflicts of laws principles thereof.
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
Following is the opinion of our counsel, Dewey Ballantine LLP, as to the
material United States federal income tax consequences of the purchase,
ownership and disposition of Notes by holders that acquire the Notes on their
original issue at their initial offering price. It does not address all tax
consequences that may be important to a holder in light of the holder's
circumstances or to holders subject to special rules, such as financial
institutions, real estate investment trusts, regulated investment companies,
insurance companies, tax-exempt organizations, dealers in securities or
currencies, traders in securities that elect to mark to market, individual
retirement and other tax deferred accounts, persons that do not hold the Notes
as capital assets, and persons engaging in straddles or hedges relating to the
Notes. This discussion is based on legal authorities that are subject to change
at any time in a manner that could adversely affect holders. Prospective
investors in the Notes should consult their own tax advisors with regard to the
application of the tax considerations discussed below to their own situations
as well as the application of any state, local or other tax laws.
For purposes of this summary, the term "U.S. Holder" means a beneficial owner
of Notes that is (i) a citizen or resident of the United States, (ii) a
corporation, partnership or other entity created or organized in or under the
laws of the United States or any political subdivision thereof, (iii) an estate
the income of which is subject to United States federal income taxation
regardless of its source or (iv) a trust if (a) a court within the United
States is able to exercise primary supervision over the administration of the
trust and (b) one or more U.S. persons have the authority to control all
substantial decisions of the trust. The term "Non-U.S. Holder" means a
beneficial owner of Notes other than a U.S. Holder.
Interest paid on the Notes will be taxable to a U.S. Holder as ordinary
interest income at the time that such interest is accrued or received in
accordance with the holder's method of tax accounting. Duke Capital expects
that the Notes will not be issued with original issue discount within the
meaning of the Code.
Upon a sale, retirement or other taxable disposition of Notes, a U.S. Holder
will recognize gain or loss equal to the difference between the amount realized
on the sale, retirement or other disposition and the holder's adjusted tax
basis in the Notes. Any portion of the amount received upon disposition of the
Notes that is attributable to accrued interest will be treated as interest
income to the holder and will not be treated as part of the amount realized for
purposes of determining gain or loss on the disposition of the Notes. Any
recognized gain or loss will be capital gain or loss and will be long-term
capital gain or loss if the holding period for the Notes is more than one year
at the time of sale, retirement or other disposition.
The Notes will be subject to Defeasance and Covenant Defeasance. See
"Description of the Senior Notes--Defeasance and Covenant Defeasance" in the
accompanying Prospectus. Under current United States federal income tax law, a
Defeasance would be treated as an exchange of the relevant Notes in which U.S.
Holders of
S-14
<PAGE>
those Notes might recognize gain or loss. In addition, the amount, timing and
character of amounts that holders would thereafter be required to include in
income might be different from that which would be includible in the absence of
that Defeasance. Unless accompanied by other changes in the terms of the Notes,
a Covenant Defeasance should not be treated as a taxable exchange.
Certain Federal Tax Considerations Applicable to Non-U.S. Holders
Under present United States federal income and estate tax law, and subject to
the discussion below concerning backup withholding:
(a) payments of principal of and interest on the Notes by Duke Capital to
a Non-U.S. Holder will not be subject to United States withholding tax;
provided that, in the case of interest, (i) the holder does not actually or
constructively own 10% or more of the total combined voting power of all
classes of stock of Duke Capital entitled to vote, is not a controlled
foreign corporation related to Duke Capital through stock ownership, is not
a private foundation or other tax-exempt organization, and is not a bank
receiving interest on an extension of credit made pursuant to a loan
agreement entered into in the ordinary course of its trade or business and
(ii) the beneficial owner of the Notes certifies under penalties of perjury
that the owner is not a United States person and provides the owner's name
and address;
(b) a holder of Notes that is a Non-U.S. Holder will generally not be
subject to United States federal income tax on gain realized on the sale,
exchange or redemption of Notes if such gain is not effectively connected
with a United States trade or business and, in the case of a Non-U.S.
Holder who is an individual, such holder is not present in the United
States for a total of 183 days or more during the taxable year in which
such gain is realized, is not subject to tax under Section 877 of the Code
as an expatriate of the United States and is not treated as a resident of
the United States for the taxable year in which the gain is recognized
under Section 6013(g) or 6013(h) of the Code; and
(c) Notes held by an individual who at the time of death is not a citizen
or resident of, or domiciled in, the United States will not be subject to
United States federal estate tax as a result of such individual's death,
provided that any interest thereon would be eligible for exemption from
withholding tax under (a) were such interest received by the individual at
the time of death (without regard to the certification described in
(a)(ii)) and would not be effectively connected with a United States trade
or business.
If certain requirements are satisfied, the certification described in (a)(ii)
above may be provided by a securities clearing organization, a bank, or other
financial institution that holds customers' securities in the ordinary course
of its trade or business. Under recently adopted United States Treasury
regulations, which generally are effective for payments made after December 31,
2000, subject to certain transition rules, the certification may also be
provided by a qualified intermediary on behalf of one or more beneficial owners
or other intermediaries, provided that such intermediary has entered into a
withholding agreement with the Internal Revenue Service and certain other
conditions are met. A Non-U.S. Holder that is not exempt from tax under the
rules described above will generally be subject to United States federal
withholding tax at a rate of 30% unless the interest is effectively connected
with the conduct of a United States trade or business, in which case the
interest will be subject to the United States federal income tax on net income
that applies to United States persons generally. Non-U.S. Holders should
consult applicable tax treaties, which may provide different rules.
Backup Withholding and Information Reporting
U.S. Holders will generally be required to furnish a social security number or
other taxpayer identification number in order to avoid "backup withholding" on
payments of interest on the Notes and payment of the proceeds of the
disposition of the Notes. Any amount so withheld will be allowed as a credit
against the U.S. Holder's federal income tax liability, provided that the
required information is provided to the Internal Revenue Service.
Under current Treasury Regulations, backup withholding will not apply to
payments to Non-U.S. Holders of principal or interest on Notes, provided that
the certification described in (a)(ii) above is received and that Duke
S-15
<PAGE>
Capital or its paying agent, as the case may be, does not have actual knowledge
that the payee is a United States person.
Under current Treasury Regulations, in the case of payments of principal or
interest made to or through the foreign office of a custodian, nominee or other
agent acting on behalf of a beneficial owner of a Note, such custodian, nominee
or other agent will not be required to apply backup withholding to such
payments made to such beneficial owner and generally will not be subject to
information reporting requirements. However, if such custodian, nominee or
other agent is a United States person, a controlled foreign corporation for
United States tax purposes, or a foreign person 50% or more of the gross income
of which is effectively connected with a United States trade or business for a
specified period of time or, with respect to payments made after December 31,
2000, a foreign partnership that, at any time during its taxable year, is 50%
or more owned by United States persons or is engaged in a United States trade
or business, such custodian, nominee or other agent may be subject to certain
information reporting requirements with respect to such payments unless it has
in its records documentary evidence that the beneficial owner is not a United
States person and certain conditions are met or the beneficial owner otherwise
establishes an exemption. Backup withholding may apply to any payment which
such custodian, nominee or other agent is required to report if such custodian,
nominee or other agent has actual knowledge that the payee is a United States
person.
Under current Treasury Regulations, payments on the sale, exchange or other
disposition of a Note made to or through a foreign office of a broker generally
will not be subject to backup withholding. However, if such broker is a United
States person, a controlled foreign corporation for United States tax purposes,
or a foreign person 50% or more of the gross income of which is effectively
connected with a United States trade or business for a specified period of
time, or, with respect to payments made after December 31, 2000, a foreign
partnership that, at any time during its taxable year, is 50% or more owned by
United States persons or is engaged in a United States trade or business,
information reporting will be required unless the broker has in its records
documentary evidence that the beneficial owner is not a United States person
and certain other conditions are met or the beneficial owner otherwise
establishes an exemption. Backup withholding may apply to any payment which
such broker is required to report if such broker has actual knowledge that the
payee is a United States person. Payments to or through the United States
office of a broker will be subject to backup withholding and information
reporting unless the holder certifies, under penalties of perjury, that it is
not a United States person or otherwise establishes an exemption.
S-16
<PAGE>
UNDERWRITING
We are selling the Notes to the Underwriters named below, for whom Merrill
Lynch, Pierce, Fenner & Smith Incorporated and J.P. Morgan Securities Inc. are
acting as representatives, under an Underwriting Agreement dated as of the date
of this Prospectus Supplement. The Underwriters, and the amount of the Notes
each of them has severally agreed to purchase from us, are as follows:
<TABLE>
<CAPTION>
Principal Amount Principal Amount Principal Amount
Name of 2004 Notes of 2009 Notes of 2019 Notes
---- ---------------- ---------------- ----------------
<S> <C> <C> <C>
Merrill Lynch, Pierce,
Fenner & Smith
Incorporated.. $212,500,000 $212,500,000 $212,500,000
J.P. Morgan Securities
Inc. ................. 212,500,000 212,500,000 212,500,000
Banc of America Securi-
ties LLC.............. 12,500,000 12,500,000 12,500,000
Barclays Bank PLC...... 12,500,000 12,500,000 12,500,000
Goldman, Sachs & Co. .. 12,500,000 12,500,000 12,500,000
Lehman Brothers Inc. .. 12,500,000 12,500,000 12,500,000
Morgan Stanley & Co.
Incorporated.......... 12,500,000 12,500,000 12,500,000
Warburg Dillon Read
LLC................... 12,500,000 12,500,000 12,500,000
------------ ------------ ------------
Total............... $500,000,000 $500,000,000 $500,000,000
============ ============ ============
</TABLE>
Under the terms and conditions of the Underwriting Agreement, if the
Underwriters take any of the Notes, then they are obligated to take and pay for
all of the Notes.
The Underwriters have advised us that they initially propose to offer the Notes
to the public at the prices stated on the cover page of this Prospectus
Supplement and to certain dealers at a price less a concession of .250% (in the
case of the 2004 Notes), .300% (in the case of the 2009 Notes) and .500% (in
the case of the 2019 Notes) of the principal amount of such Notes. The
Underwriters may allow, and such dealers may reallow, a discount of .225% (in
the case of the 2004 Notes), .250% (in the case of the 2009 Notes) and .250%
(in the case of the 2019 Notes) of the principal amount of such Notes to
certain other dealers. After the initial offering of the Notes, the
Underwriters may change the initial public offering prices, the concessions to
selected dealers and the allowances to other dealers.
The Notes are offered for sale in those jurisdictions in the United States,
Europe and Asia where it is legal to make such offers. Only offers and sales of
the Notes in the United States, as part of the initial distribution thereof or
in connection with resales thereof under circumstances where this Prospectus
Supplement and the Prospectus must be delivered, are made pursuant to the
Registration Statement of which the Prospectus, as supplemented by this
Prospectus Supplement, is a part.
Each Underwriter, severally and not jointly, has represented and agreed that it
will comply with all applicable laws and regulations in force in any
jurisdiction outside of the United States in which it purchases, offers, sells
or delivers the Notes or possesses or distributes this Prospectus Supplement
and the accompanying Prospectus, and will obtain any consent, approval or
permission required of it for the purchase, offer or sale by it of the Notes
under the laws and regulations in force in any jurisdiction outside of the
United States to which it is subject or in which it makes such purchases,
offers or sales.
Each Underwriter, severally and not jointly, has represented and agreed that:
. it has not offered or sold, and will not offer or sell, any Notes to
persons in the United Kingdom prior to the expiry of the period of six
months from the issue date of the Notes, except to persons whose
ordinary activities involve them in acquiring, holding, managing or
disposing of investments (as principal or agent) for the purposes of
their businesses or otherwise in circumstances which have not resulted,
and will not result in, an offer to the public in the United Kingdom
within the meaning of the Public Offers of Securities Regulations 1995;
S-17
<PAGE>
. it has only issued or passed on, and will only issue or pass on, in the
United Kingdom any document received by it in connection with the issue
of the Notes to a person who is of a kind described in Article 11(3) of
the Financial Services Act 1986 (Investment Advertisements) (Exemptions)
Order 1996, as amended, or is a person to whom such document may
otherwise lawfully be issued or passed on; and
. it has complied and will comply with all applicable provisions of the
Financial Services Act 1986 with respect to anything done by it in
relation to any Notes in, from or otherwise involving the United
Kingdom.
Although we have applied to list the Notes on the Luxembourg Stock Exchange,
the Notes are a new issue of securities with no established trading market. No
assurance can be given as to the liquidity of, or the trading markets for, the
Notes. The Underwriters have advised us that they intend to make a market in
the Notes, but they are not obligated to do so and may discontinue such market-
making at any time without notice.
Purchasers of the Notes may be required to pay stamp taxes and other charges in
accordance with the laws and practices of the country of purchase in addition
to the price to the public set forth on the cover page of this Prospectus
Supplement.
In connection with the offering of the Notes, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Notes. Specifically, the Underwriters may overallot in connection with the
offering of Notes, creating a short position in Notes for their own account. In
addition, the Underwriters may bid for, and purchase, Notes in the open market
to cover short positions or to stabilize the price of Notes. Finally, the
Underwriters may reclaim selling concessions allowed for distributing Notes in
the offering, if the Underwriters repurchase previously distributed Notes in
transactions to cover short positions, in stabilizing transactions or
otherwise. Any of these activities may stabilize or maintain the market price
of Notes above independent market levels. The Underwriters are not required to
engage in any of these activities and may end any of these activities at any
time.
Duke Capital estimates that its expenses in connection with this offering,
excluding underwriting discounts and commissions, will be approximately
$800,000. The representatives will reimburse Duke Capital for certain of these
expenses.
Duke Capital has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
Certain of the Underwriters and their affiliates engage in transactions with,
and, from time to time, have performed services for Duke Capital or its
affiliates in the ordinary course of business and may do so in the future.
VALIDITY OF THE SECURITIES
Dewey Ballantine LLP will pass on the validity of the Notes and certain related
matters on behalf of Duke Capital. Sullivan & Cromwell will pass on the
validity of the Notes for the Underwriters.
GENERAL INFORMATION
Application has been made to list the Notes on the Luxembourg Stock Exchange.
In connection with the listing application, the Restated Certificate of
Incorporation and the By-Laws of Duke Capital and a legal notice relating to
the issuance of the Notes have been deposited prior to listing with Greffier en
Chef du Tribunal d'Arrondissement de et a Luxembourg, where copies thereof may
be obtained upon request. Copies of the above documents together with this
Prospectus Supplement, the accompanying Prospectus, the Senior Indenture and
Duke Capital's current annual and quarterly reports, as well as all future
annual reports and quarterly reports,
S-18
<PAGE>
so long as any of the Notes are outstanding, will be made available at the main
office of Kredietbank S.A. Luxembourgeoise in Luxembourg. Kredietbank S.A.
Luxembourgeoise will act as intermediary between the Luxembourg Stock Exchange
and Duke Capital and the holders of the Notes. In addition, copies of the
annual reports and quarterly reports of Duke Capital may be obtained free of
charge at such office.
There has been no material adverse change in the financial position of Duke
Capital since December 31, 1998.
The independent accountants of Duke Capital are Deloitte & Touche LLP,
Charlotte, North Carolina.
Other than as may be disclosed or contemplated in the documents incorporated
herein by reference, neither Duke Capital nor any of its subsidiaries is
involved in litigation, arbitration, or administrative proceedings relating to
claims or amounts that are material in the context of the issue of the Notes,
and Duke Capital is not aware of any such litigation, arbitration, or
administrative proceedings pending or threatened.
The consolidated financial statements of Duke Capital include, among others,
PanEnergy Corp, Texas Eastern Transmission Corporation, TE Resources, Inc., and
Duke Energy Natural Gas Corporation, each of which represents at least 10% of
the capital and reserves or accounts for at least 10% of the net income of Duke
Capital. The registered office of each of these wholly owned subsidiaries is
c/o The Corporation Trust Company, 1209 Orange Street, Wilmington, DE 19801.
Duke Capital does not publish nonconsolidated financial statements.
Resolutions relating to the issue and sale of the Notes were adopted by the
Board of Directors of Duke Capital on September 28, 1998 and August 20, 1999.
The 2004 Notes have been assigned Euroclear and Cedel Common Code No. 10230594,
International Security Identification Number (ISIN) US 26439RAG11 and CUSIP No.
26439RAG1.
The 2009 Notes have been assigned Euroclear and Cedel Common Code No.
102159160, International Security Identification Number (ISIN) US 26439RAF38
and CUSIP No. 26439RAF3.
The 2019 Notes have been assigned Euroclear and Cedel Common Code No. 10247250,
International Security Identification Number (ISIN) US 26439RAH93 and CUSIP No.
26439RAH9.
S-19
<PAGE>
[This Page Intentionally Left Blank]
<PAGE>
PROSPECTUS
$2,000,000,000
Duke Capital Corporation
a subsidiary of Duke Energy Corporation
Senior Notes
Junior Subordinated Notes
----------------
Duke Capital Financing Trust IV
Duke Capital Financing Trust V
Duke Capital Financing Trust VI
Trust Preferred Securities
Guaranteed, to the extent described herein, by
Duke Capital Corporation
a subsidiary of Duke Energy Corporation
----------------
This Prospectus contains summaries of the general terms of these
securities. You will find the specific terms of these securities, and the
manner in which they are being offered, in supplements to this Prospectus. You
should read this Prospectus and the applicable Prospectus Supplement carefully
before you invest.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this Prospectus. Any representation to the contrary is
a criminal offense.
The date of this Prospectus is September 3, 1999.
<PAGE>
ABOUT THIS PROSPECTUS
This Prospectus is part of a Registration Statement that Duke Capital,
Duke Capital Financing Trust IV, Duke Capital Financing Trust V and Duke
Capital Financing Trust VI filed with the Securities and Exchange Commission
("SEC") utilizing a "shelf" registration process. Under the shelf registration
process, Duke Capital may issue Senior Notes and Junior Subordinated Notes and
Duke Capital Financing Trust IV, Duke Capital Financing Trust V and Duke
Capital Financing Trust VI may issue trust preferred securities in one or more
offerings up to a total dollar amount of $2,000,000,000. The trust preferred
securities that Duke Capital Financing Trust IV, Duke Capital Financing Trust V
and Duke Capital Financing Trust VI may issue are called "Preferred Securities"
in this Prospectus.
This Prospectus provides general descriptions of the Senior Notes, Junior
Subordinated Notes and Preferred Securities. Each time Senior Notes, Junior
Subordinated Notes or Preferred Securities are sold, a Prospectus Supplement
will provide specific information about the terms of that offering. The
Prospectus Supplement may also add, update or change information contained in
this Prospectus. The Registration Statement filed with the SEC includes
exhibits that provide more details about the matters discussed in this
Prospectus. You should read this Prospectus, the related exhibits filed with
the SEC and any Prospectus Supplement, together with the additional information
described under the next caption, "Where You Can Find More Information."
WHERE YOU CAN FIND MORE INFORMATION
Duke Capital files annual, quarterly and special reports and other
information with the SEC. You may read and copy any document Duke Capital files
at the SEC's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the SEC's toll-free telephone number at 1-800-
SEC-0330 for further information about the operation of the public reference
rooms. Duke Capital's SEC filings are available on the SEC's Web site at
http://www.sec.gov.
The SEC allows Duke Capital to "incorporate by reference" the information
Duke Capital files with it, which means that Duke Capital can disclose
important information to you by referring you to those documents. The
information incorporated by reference is an important part of this Prospectus
and should be read with the same care. Information that Duke Capital files
later with the SEC will automatically update and supersede that information.
The following documents are incorporated in and made a part of this
Prospectus by reference:
Duke Capital's annual report on Form 10-K for the year ended December 31,
1998;
Duke Capital's quarterly reports on Form 10-Q for the quarters ended
March 31, 1999 and June 30, 1999; and
Duke Capital's current reports on Form 8-K filed on January 26, 1999,
February 24, 1999, June 1, 1999 and August 6, 1999.
Any documents that Duke Capital files with the SEC in the future under
Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 will
also be incorporated by reference into this Prospectus until all of the
securities being registered are sold.
2
<PAGE>
You may request a copy of these filings at no cost by writing or calling
Duke Capital at the following address or at one of the following telephone
numbers:
Investor Relations Department
Duke Capital Corporation
P.O. Box 1005
Charlotte, North Carolina 28201
(704) 382-3853 or (800) 488-3853 (toll-free)
3
<PAGE>
DUKE CAPITAL CORPORATION
Duke Capital is a wholly owned subsidiary of Duke Energy Corporation,
which, under the name of Duke Power Company, completed a merger with PanEnergy
Corp on June 18, 1997 and changed its name to its present form. As a result,
PanEnergy became a wholly owned subsidiary of Duke Energy. Subsequent to the
merger, Duke Energy contributed all of the common stock of PanEnergy to Duke
Capital, which, under the name of Church Street Capital Corp., served as the
parent company of Duke Energy's non-utility operations. The combination of Duke
Capital and PanEnergy was accounted for similar to a pooling of interests and,
accordingly, the consolidated financial statements for periods prior to the
combination were restated to include the operations of PanEnergy. Duke Capital
provides financing and credit enhancement services for its subsidiaries and
conducts its operating activities through six business segments:
. Natural Gas Transmission
. Field Services
. Trading and Marketing
. Global Asset Development
. Other Energy Services
. Real Estate Operations
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.
Field Services gathers, processes, transports and markets natural gas and
produces and markets natural gas liquids. Field Services operates gathering
systems in western Canada and ten contiguous states in the United States that
serve major gas-producing regions in the Rocky Mountains, 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. Duke Energy owns a 60% interest in
Trading and Marketing, 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 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 develops commercial and residential real estate
projects and manages forest holdings in the southeastern United States. Real
Estate Operations conducts its business through Crescent Resources, Inc.
The foregoing information about Duke Capital and its business segments is
only a general summary and is not intended to be comprehensive. For additional
information about Duke Capital and its business segments you should refer to
the information described under the caption "Where You Can Find More
Information."
4
<PAGE>
Duke Capital's principal executive offices are located at 526 South
Church Street, Charlotte, North Carolina 28202, telephone (704) 594-6200.
Recent Financial Data
The following shows only selected consolidated financial information. You
should refer to the financial statements included in the documents incorporated
by reference in this Prospectus for additional information. See "Where You Can
Find More Information."
<TABLE>
<CAPTION>
Six Months
Ended June 30, Year Ended December 31,
------------------ -----------------------
1999 1998 1998 1997(1) 1996(1)
------- ------- ------- ------- -------
(unaudited)
(millions)
<S> <C> <C> <C> <C> <C>
Income Statement Data
Operating Revenues...... $ 6,735 $ 5,988 $13,059 $11,915 $7,816
Operating Expenses...... 6,271 5,522 12,023 11,079 6,947
------- ------- ------- ------- ------
Operating Income..... 464 466 1,036 836 869
Other Income, Net....... 50 56 101 37 20
------- ------- ------- ------- ------
Earnings Before Interest
and Taxes.............. 514 522 1,137 873 889
Interest Expense........ 115 113 237 214 232
Income Before Extraordi-
nary Item.............. 233 255 519 380 399
Net Income.............. 893(2) 247 511 380 382
</TABLE>
- --------
(1) Data reflects accounting for the combination of Duke Capital with
PanEnergy on June 30, 1997 similar to a pooling of interests. As a result,
the data gives effect to the combination as if it had occurred as of
January 1, 1996.
(2) Reflects a one-time after-tax extraordinary gain of approximately $660
million attributable to the sale of certain pipeline operations on March
29, 1999.
<TABLE>
<CAPTION>
As of
June As of December 31,
30, --------------------------
1999 1998 1997(1) 1996(1)
------- ---------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data (millions)
Property, Plant and Equipment, Net.... $ 8,052 $ 7,154 $ 6,065 $5,801
Total Assets.......................... 16,562 13,856 11,097 9,752
Short-Term Debt....................... 18 29 138 359
Long-Term Debt, including current por-
tion................................. 3,171 3,142 2,942 2,203
Trust Preferred Securities............ 580 580 -- --
Stockholder's Equity.................. 5,008 4,073 3,366 3,060
</TABLE>
- --------
(1) Data reflects accounting for the combination of Duke Capital with
PanEnergy on June 30, 1997 similar to a pooling of interests. As a
result, the data gives effect to the combination as if it had occurred as
of December 31, 1996.
5
<PAGE>
Financial Ratios
(unaudited)
<TABLE>
<CAPTION>
Six Months
Ended June 30, Year Ended December 31,
-------------- ------------------------------------
1999 1998 1998 1997(1) 1996(1) 1995(1) 1994(1)
------- ------- ---- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to
Fixed Charges........... 3.6 4.2 4.2 3.7 3.6 3.2 2.7
</TABLE>
For purposes of this ratio (a) earnings consist of income from continuing
operations before income taxes and fixed charges, and (b) fixed charges consist
of all interest deductions and the interest component of rentals.
- --------
(1) Data reflects accounting for the combination of Duke Capital with
PanEnergy on June 30, 1997 similar to a pooling of interests. As a result,
the data gives effect to the combination as if it had occurred as of
January 1, 1994.
6
<PAGE>
USE OF PROCEEDS
Each Trust will invest the proceeds it receives from the sale of the
Preferred Securities in Junior Subordinated Notes. Unless the applicable
Prospectus Supplement states otherwise, Duke Capital will use the net proceeds
that it receives from such investment and any proceeds that it receives from
sales of its Senior Notes or other sales of the Junior Subordinated Notes for
general corporate purposes, including capital expenditures, working capital,
debt repayments and advances to affiliates.
If Duke Capital does not use the proceeds of the Senior Notes or the
Junior Subordinated Notes, or the net proceeds of the Preferred Securities,
immediately, it may temporarily invest them in short-term interest-bearing
obligations or deposit them with banks.
THE TRUSTS
Duke Capital formed each Trust as a statutory business trust under
Delaware law. Each Trust's business is defined in a trust agreement executed by
Duke Capital, as depositor, and Chase Manhattan Bank Delaware. Each trust
agreement will be amended when Preferred Securities are issued under it and
will be in substantially the form filed as an exhibit to the Registration
Statement. Each amended trust agreement is called a "Trust Agreement" in this
Prospectus.
The Preferred Securities and the Common Securities of each Trust
represent undivided beneficial interests in the assets of that Trust. The
Preferred Securities and the Common Securities together are sometimes called
the "Trust Securities" in this Prospectus.
The trustees of each Trust will conduct that Trust's business and
affairs. Duke Capital, as the holder of the Common Securities of each Trust,
will appoint the trustees of that Trust. The trustees of each Trust will
consist of:
. two officers of Duke Capital as Administrative Trustees;
. The Chase Manhattan Bank as Property Trustee; and
. Chase Manhattan Bank Delaware as Delaware Trustee.
The Prospectus Supplement relating to the Preferred Securities of a Trust
will provide further information concerning that Trust.
No separate financial statements of any Trust are included in this
Prospectus. Duke Capital considers that such statements would not be material
to holders of the Preferred Securities because no Trust has any independent
operations and the sole purpose of each Trust is investing the proceeds of the
sale of its Trust Securities in Junior Subordinated Notes. Duke Capital does
not expect that any of the Trusts will be filing annual, quarterly or special
reports with the SEC.
The principal place of business of each Trust will be c/o Duke Capital
Corporation, 526 South Church Street, Charlotte, North Carolina 28202,
telephone (704) 594-6200.
7
<PAGE>
DESCRIPTION OF THE SENIOR NOTES
Duke Capital will issue the Senior Notes in one or more series under its
Senior Indenture dated as of April 1, 1998 between Duke Capital and The Chase
Manhattan Bank, as Trustee, as supplemented from time to time. The Senior
Indenture is called the "Senior Indenture" in this Prospectus. The Trustee
under the Senior Indenture is called the "Senior Indenture Trustee" in this
Prospectus. The Senior Indenture is an exhibit to the Registration Statement.
Duke Capital conducts its business through subsidiaries. Accordingly, its
ability to meet its obligations under the Senior Notes is dependent on the
earnings and cash flows of those subsidiaries and the ability of those
subsidiaries to pay dividends or to advance or repay funds to Duke Capital. In
addition, the rights that Duke Capital and its creditors would have to
participate in the assets of any such subsidiary upon the subsidiary's
liquidation or recapitalization will be subject to the prior claims of the
subsidiary's creditors. Certain subsidiaries of Duke Capital have incurred
substantial amounts of debt in the expansion of their businesses and Duke
Capital anticipates that they will continue to do so.
The following description of the Senior Notes is only a summary and is
not intended to be comprehensive. For additional information you should refer
to the Senior Indenture.
General
The Senior Indenture does not limit the amount of Senior Notes that Duke
Capital may issue under it. Duke Capital may issue Senior Notes from time to
time under the Senior Indenture in one or more series by entering into
supplemental indentures or by its Board of Directors or a duly authorized
committee authorizing the issuance. The form of supplemental indenture to the
Senior Indenture is an exhibit to the Registration Statement.
The Senior Notes of a series need not be issued at the same time, bear
interest at the same rate or mature on the same date.
The Senior Indenture does not protect the holders of Senior Notes if Duke
Capital engages in a highly leveraged transaction.
Provisions Applicable to Particular Series
The Prospectus Supplement for a particular series of Senior Notes will
specify the terms of that series, including, if applicable:
. the title of the series;
. any limit on the principal amount of the Senior Notes of the series;
. the date or dates on which principal is payable or the method for
determining the date or dates, and any right that Duke Capital has to
change the date on which principal is payable;
. the interest rate or rates, if any, or the method for determining the
rate or rates, and the date or dates from which interest will accrue;
. any interest payment dates and the regular record date for the
interest payable on each interest payment date, if any;
8
<PAGE>
. whether Duke Capital may extend the interest payment periods and, if
so, the terms of the extension;
. the place or places where payments will be made, if other than the
principal corporate trust office of the Senior Indenture Trustee;
. any obligation that Duke Capital has to redeem the Senior Notes
through a sinking fund or to purchase the Senior Notes through a
purchase fund or at the option of the holder;
. whether Duke Capital has the option to redeem the Senior Notes and, if
so, the terms of its redemption option;
. whether the provisions described under the caption "Defeasance and
Covenant Defeasance" will not apply to the Senior Notes;
. the currency in which payments will be made if other than U.S.
dollars, and the manner of determining the equivalent of those amounts
in U.S. dollars;
. if payments may be made, at Duke Capital's election or at the holder's
election, in a currency other than that in which the Senior Notes are
stated to be payable, then the currency in which those payments may be
made, the terms and conditions of the election and the manner of
determining those amounts;
. the portion of the principal payable upon acceleration of maturity, if
other than the entire principal;
. whether the Senior Notes will be issuable as global securities and, if
so, the securities depositary;
. any changes in the events of default or covenants with respect to the
Senior Notes;
. any index or formula used for determining principal, premium or
interest;
. if the principal payable on the maturity date will not be determinable
on one or more dates prior to the maturity date, the amount which will
be deemed to be such principal amount or the manner of determining it;
and
. any other terms.
Unless Duke Capital states otherwise in the applicable Prospectus
Supplement, Duke Capital will issue the Senior Notes only in fully registered
form, without coupons, and there will be no service charge for any registration
of transfer or exchange of the Senior Notes. Duke Capital may, however, require
payment to cover any tax or other governmental charge payable in connection
with any transfer or exchange. Transfers and exchanges of the Senior Notes may
be made at The Chase Manhattan Bank, 55 Water Street, New York, New York 10041.
The Senior Notes will be issuable in denominations of $1,000 and any
integral multiples of $1,000, unless Duke Capital states otherwise in the
applicable Prospectus Supplement.
Duke Capital may offer and sell the Senior Notes, including original
issue discount Senior Notes, at a substantial discount below their principal
amount. The applicable Prospectus Supplement will describe special United
States federal income tax and any other considerations applicable to those
securities. In addition, the applicable Prospectus Supplement may describe
certain special United States federal income tax or other considerations, if
any, applicable to any Senior Notes which are denominated in a currency other
than U.S. dollars.
9
<PAGE>
Global Securities
Duke Capital may issue some or all of the Senior Notes as book-entry
securities. Any such book-entry securities will be represented by one or more
fully registered global certificates. Duke Capital will register each global
security with, or on behalf of, a securities depositary identified in the
applicable Prospectus Supplement. Each global certificate will be deposited
with the securities depositary or its nominee or a custodian for the securities
depositary.
As long as the securities depositary or its nominee is the registered
holder of a global security representing Senior Notes, that person will be
considered the sole owner and holder of the global security and the Senior
Notes it represents for all purposes. Except in limited circumstances, owners
of beneficial interests in a global security:
. may not have the global security or any Senior Notes it represents
registered in their names;
. may not receive or be entitled to receive physical delivery of
certificated Senior Notes in exchange for the global security; and
. will not be considered the owners or holders of the global security or
any Senior Notes it represents for any purposes under the Senior Notes
or the Senior Indenture.
Duke Capital will make all payments of principal and any premium and
interest on a global security to the securities depositary or its nominee as
the holder of the global security. The laws of some jurisdictions require that
certain purchasers of securities take physical delivery of securities in
definitive form. These laws may impair the ability to transfer beneficial
interests in a global security.
Ownership of beneficial interests in a global security will be limited to
institutions having accounts with the securities depositary or its nominee,
which are called "participants" in this discussion, and to persons that hold
beneficial interests through participants. When a global security representing
Senior Notes is issued, the securities depositary will credit on its book
entry, registration and transfer system the principal amounts of Senior Notes
the global security represents to the accounts of its participants. Ownership
of beneficial interests in a global security will be shown only on, and the
transfer of those ownership interests will be effected only through, records
maintained by:
. the securities depositary, with respect to participants' interests;
and
. any participant, with respect to interests the participant holds on
behalf of other persons.
Payments participants make to owners of beneficial interests held through
those participants will be the responsibility of those participants. The
securities depositary may from time to time adopt various policies and
procedures governing payments, transfers, exchanges and other matters relating
to beneficial interests in a global security. None of the following will have
any responsibility or liability for any aspect of the securities depositary's
or any participant's records relating to beneficial interests in a global
security representing Senior Notes, for payments made on account of those
beneficial interests or for maintaining, supervising or reviewing any records
relating to those beneficial interests:
. Duke Capital;
. the Senior Indenture Trustee; or
. an agent of either of the above.
10
<PAGE>
Redemption
Any provisions relating to the redemption of Senior Notes will be set
forth in the applicable Prospectus Supplement. Unless Duke Capital states
otherwise in the applicable Prospectus Supplement, Duke Capital may redeem
Senior Notes only upon notice mailed at least 30 but not more than 60 days
before the date fixed for redemption. Unless Duke Capital states otherwise in
the applicable Prospectus Supplement, that notice may state that the redemption
will be conditional upon the Senior Indenture Trustee, or the applicable Paying
Agent, receiving sufficient funds to pay the principal, premium and interest on
those Senior Notes on the date fixed for redemption and that if the Senior
Indenture Trustee or the applicable Paying Agent does not receive those funds,
the redemption notice will not apply, and Duke Capital will not be required to
redeem those Senior Notes.
Duke Capital will not be required to:
. issue, register the transfer of, or exchange any Senior Notes of a
series during the period beginning 15 days before the date the notice
is mailed identifying the Senior Notes of that series that have been
selected for redemption; or
. register the transfer of, or exchange any Senior Note of that series
selected for redemption except the unredeemed portion of a Senior Note
being partially redeemed.
Consolidation, Merger, Conveyance or Transfer
The Senior Indenture provides that Duke Capital may consolidate or merge
with or into, or convey or transfer all or substantially all of its properties
and assets to, another corporation or other entity. Any successor must,
however, assume Duke Capital's obligations under the Senior Indenture and the
Senior Notes issued under it, and Duke Capital must deliver an officers'
certificate and an opinion of counsel to the Senior Indenture Trustee that
affirm compliance with all conditions in the Senior Indenture relating to the
transaction. When those conditions are satisfied, the successor will succeed to
and be substituted for Duke Capital under the Senior Indenture, and Duke
Capital will be relieved of its obligations under the Senior Indenture and the
Senior Notes issued under it.
Modification; Waiver
Duke Capital may amend or modify the Senior Indenture with the consent of
the holders of a majority of the outstanding Senior Notes of all series of
Senior Notes issued under it that are affected by the amendment or
modification, voting as one class. The consent of the holder of each
outstanding Senior Note affected is, however, required to:
. change the maturity date of the principal, or any installment of
principal or interest on that Senior Note;
. reduce the principal amount, the interest rate or any premium payable
upon redemption on that Senior Note;
. reduce the amount of principal due and payable upon acceleration of
maturity;
. change the currency of payment of principal, premium or interest on
that Senior Note;
. impair the right to institute suit to enforce any such payment on or
after the maturity date or redemption date;
11
<PAGE>
. reduce the percentage in principal amount of Senior Notes of any
series required to amend or modify the Senior Indenture, to waive
compliance with certain restrictive provisions of the Senior Indenture
or to waive certain defaults; or
. with certain exceptions, modify the provisions of the Senior Indenture
governing amendments of the Senior Indenture or governing waiver of
covenants or past defaults.
In addition, Duke Capital may supplement the Senior Indenture to create new
series of Senior Notes and for certain other purposes, without the consent of
any holders of Senior Notes issued under the Senior Indenture.
The holders of a majority of the outstanding Senior Notes of any series
may waive, for that series, Duke Capital's compliance with certain restrictive
provisions of the Senior Indenture under which those Senior Notes were issued.
The holders of a majority of the outstanding Senior Notes of all series under
the Senior Indenture with respect to which a default has occurred and is
continuing, all holders of those series voting as one class, may waive that
default for all those series, except a default in the payment of principal or
any premium or interest on any Senior Note or a default with respect to a
covenant or provision which cannot be amended or modified without the consent
of the holder of each outstanding Senior Note of the series affected.
If certain payments on a series of Senior Notes are insured by a
financial guaranty insurance policy or other policy, terms other than those
that are described in the preceding paragraph may apply to that series.
Events of Default
The following are events of default under the Senior Indenture with
respect to any series of Senior Notes, unless Duke Capital states otherwise in
the applicable Prospectus Supplement:
. failure to pay principal of or any premium on any Senior Note of that
series when due;
. failure to pay any interest on any Senior Note of that series, when
due, that continues for 60 days; for this purpose, the date on which
interest is due is the date on which Duke Capital is required to make
payment following any deferral of interest payments by it under the
terms of Senior Notes that permit such deferrals;
. failure to make any sinking fund payment when required for any Senior
Note of that series that continues for 60 days;
. failure to perform any covenant in the Senior Indenture (other than a
covenant expressly included solely for the benefit of other series)
that continues for 90 days after the Senior Indenture Trustee or the
holders of at least 33% of the outstanding Senior Notes of that series
give Duke Capital written notice of the default; and
. certain bankruptcy, insolvency or reorganization events with respect
to Duke Capital.
In the case of the fourth event of default listed above, the Senior Indenture
Trustee may extend the grace period. In addition, if holders of a particular
series have given a notice of default, then holders of at least the same
percentage of Senior Notes of that series, together with the Senior Indenture
Trustee, may also extend the grace period. The grace period will be
automatically extended if Duke Capital has initiated and is diligently pursuing
corrective action.
12
<PAGE>
Additional events of default may be established for a particular series
and, if established, will be described in the applicable Prospectus Supplement.
If an event of default with respect to Senior Notes of a series occurs
and is continuing, then the Senior Indenture Trustee or the holders of at least
33% of the outstanding Senior Notes of that series may declare the principal
amount of all Senior Notes of that series to be immediately due and payable.
However, that event of default will be considered waived at any time after the
declaration but before a judgment for payment of the money due has been
obtained if:
. Duke Capital has paid or deposited with the Senior Indenture Trustee
all overdue interest, the principal and any premium due otherwise than
by the declaration and any interest on such amounts, and any interest
on overdue interest, to the extent legally permitted, in each case
with respect to that series, and all amounts due to the Senior
Indenture Trustee under the Senior Indenture; and
. all events of default with respect to that series, other than the
nonpayment of the principal which became due solely by virtue of the
declaration, have been cured or waived.
The Senior Indenture Trustee is under no obligation to exercise any of
its rights or powers at the request or direction of any holders of Senior Notes
unless those holders have offered the Senior Indenture Trustee security or
indemnity against the costs, expenses and liabilities which it might incur as a
result. The holders of a majority of the outstanding Senior Notes of any series
have, with certain exceptions, the right to direct the time, method and place
of conducting any proceedings for any remedy available to the Senior Indenture
Trustee or the exercise of any power of the Senior Indenture Trustee with
respect to those Senior Notes. The Senior Indenture Trustee may withhold notice
of any default, except a default in the payment of principal or interest, from
the holders of any series if the Senior Indenture Trustee in good faith
considers it in the interest of the holders to do so.
The holder of any Senior Note will have an absolute and unconditional
right to receive payment of the principal, any premium and, within certain
limitations, any interest on that Senior Note on its maturity date or
redemption date and to enforce those payments.
If certain payments on a series of Senior Notes are insured by a
financial guaranty insurance policy or other policy, terms other than those
that are described in the preceding three paragraphs may apply to that series.
Duke Capital is required to furnish each year to the Senior Indenture
Trustee an officers' certificate to the effect that it is not in default under
the Senior Indenture or, if there has been a default, specifying the default
and its status.
Payments; Paying Agent
The paying agent will pay the principal of any Senior Notes only if those
Senior Notes are surrendered to it. Unless Duke Capital states otherwise in the
applicable Prospectus Supplement, the paying agent will pay interest on Senior
Notes, subject to such surrender, where applicable, at its office or, at Duke
Capital's option:
. by wire transfer to an account at a banking institution in the United
States that is designated in writing to the Senior Indenture Trustee
at least 16 days prior to the date of payment by the person entitled
to that interest; or
13
<PAGE>
. by check mailed to the address of the person entitled to that interest
as that address appears in the security register for those Senior
Notes.
Unless Duke Capital states otherwise in the applicable Prospectus
Supplement, the Senior Indenture Trustee will act as paying agent for the
Senior Notes, and the principal corporate trust office of the Senior Indenture
Trustee will be the office through which the paying agent acts. Duke Capital
may, however, change or add paying agents or approve a change in the office
through which a paying agent acts.
Any money that Duke Capital has paid to a paying agent for principal or
interest on any Senior Notes which remains unclaimed at the end of two years
after that principal or interest has become due will be repaid to Duke Capital
at its request. After repayment to Duke Capital, holders should look only to
Duke Capital for those payments.
Negative Pledge
While any of the Senior Notes remain outstanding, Duke Capital will not,
and will not permit any Principal Subsidiary (as defined below) to, create, or
permit to be created or to exist, any mortgage, lien, pledge, security interest
or other encumbrance upon any Principal Property (as defined below) of Duke
Capital or of a Principal Subsidiary or upon any shares of stock of any
Principal Subsidiary, whether such Principal Property is, or shares of stock
are, owned on or acquired after the date of the Senior Indenture, to secure any
indebtedness for borrowed money of Duke Capital, unless the Senior Notes then
outstanding are equally and ratably secured for so long as any such
indebtedness is so secured.
The foregoing restriction does not apply with respect to, among other
things:
. purchase money mortgages, or other purchase money liens, pledges,
security interests or encumbrances upon property that Duke Capital or
any Principal Subsidiary acquired after the date of the Senior
Indenture;
. mortgages, liens, pledges, security interests or other encumbrances
existing on any property or shares of stock at the time Duke Capital
or any Principal Subsidiary acquired it or them, including those which
exist on any property or shares of stock of an entity with which Duke
Capital or any Principal Subsidiary is consolidated or merged or which
transfers or leases all or substantially all of its properties to Duke
Capital or any Principal Subsidiary;
. mortgages, liens, pledges, security interests or other encumbrances
upon any property of Duke Capital or any Principal Subsidiary or
shares of stock of any Principal Subsidiary that existed on the date
of the initial issuance of Senior Notes or upon the property or shares
of stock of any corporation existing at the time that corporation
became a Principal Subsidiary;
. pledges or deposits to secure performance in connection with bids,
tenders, contracts (other than contracts for the payment of money) or
leases to which Duke Capital or any Principal Subsidiary is a party;
. liens created by or resulting from any litigation or proceeding which
at the time is being contested in good faith by appropriate
proceedings;
14
<PAGE>
. liens incurred in connection with the issuance of bankers' acceptances
and lines of credit, bankers' liens or rights of offset and any
security given in the ordinary course of business to banks or others
to secure any indebtedness payable on demand or maturing within 12
months of the date that such indebtedness is originally incurred;
. liens incurred in connection with repurchase, swap or other similar
agreements (including commodity price, currency exchange and interest
rate protection agreements);
. liens securing industrial revenue or pollution control bonds;
. liens, pledges, security interests or other encumbrances on any
property arising in connection with any defeasance, covenant
defeasance or in-substance defeasance of indebtedness of Duke Capital
or any Principal Subsidiary;
. liens created in connection with, and created to secure, a non-
recourse obligation;
. mortgages, liens, pledges, security interests or other encumbrances in
favor of the United States of America, any state, any foreign country
or any department, agency or instrumentality or political subdivision
of any such jurisdiction, to secure partial, progress, advance or
other payments pursuant to any contract or statute or to secure any
indebtedness incurred for the purpose of financing all or any part of
the purchase price or the cost of constructing or improving the
property subject to such mortgages;
. indebtedness which Duke Capital or any Principal Subsidiary may issue
in connection with the consolidation or merger of Duke Capital or any
Principal Subsidiary with or into any other entity, which may be an
affiliate of Duke Capital or any Principal Subsidiary, in exchange or
in substitution for secured indebtedness of that entity ("Third Party
Debt") which by its terms (1) is secured by a mortgage on all or a
portion of the property of that entity, (2) prevents that entity from
incurring secured indebtedness, unless the Third Party Debt is secured
equally and ratably with such secured indebtedness or (3) prevents
that entity from incurring secured indebtedness;
. indebtedness of any entity which Duke Capital or any Principal
Subsidiary is required to assume in connection with a consolidation or
merger of that entity, with respect to which any property of Duke
Capital or any Principal Subsidiary is subjected to a mortgage, lien,
pledge, security interest or other encumbrance;
. mortgages, liens, security interests or other encumbrances on property
held or used by Duke Capital or any Principal Subsidiary in connection
with the exploration for, or development, gathering, production,
storage or marketing of, natural gas, oil or other minerals (including
liquefied gas and synthetic gas);
. mortgages, liens, pledges, security interests and other encumbrances
in favor of Duke Capital, one or more Principal Subsidiaries, one or
more wholly owned Subsidiaries (as defined below) of Duke Capital or
any of the foregoing in combination;
. mortgages, liens, pledges, security interests or other encumbrances
upon any property acquired, constructed, developed or improved by Duke
Capital or any Principal Subsidiary after the date of the Senior
Indenture which are created before, at the time of, or within 18
months after such acquisition--or in the case of property constructed,
developed or improved, after the completion of the construction,
development or improvement and commencement of full commercial
operation of that property, whichever is later--to
15
<PAGE>
secure or provide for the payment of any part of its purchase price or
cost; provided that, in the case of such construction, development or
improvement, the mortgages, liens, pledges, security interests or other
encumbrances shall not apply to any property that Duke Capital or any
Principal Subsidiary owns other than real property that is unimproved
up to that time; and
. the replacement, extension or renewal of any mortgage, lien, pledge,
security interest or other encumbrance described above; or the
replacement, extension or renewal (not exceeding the principal amount
of indebtedness so secured together with any premium, interest, fee or
expense payable in connection with any such replacement, extension or
renewal) of the indebtedness so secured; provided that such
replacement, extension or renewal is limited to all or a part of the
same property that secured the mortgage, lien, pledge, security
interest or other encumbrance replaced, extended or renewed, plus
improvements on it or additions or accessions to it.
In addition, Duke Capital or any Principal Subsidiary may create or assume any
other mortgage, lien, pledge, security interest or other encumbrance not
excepted in the Senior Indenture without Duke Capital equally and ratably
securing the Senior Notes, if immediately after that creation or assumption,
the principal amount of indebtedness for borrowed money of Duke Capital that
all such other mortgages, liens, pledges, security interests and other
encumbrances secure does not exceed an amount equal to 10% of Duke Capital's
common stockholder's equity as shown on its consolidated balance sheet for the
accounting period occurring immediately before the creation or assumption of
that mortgage, lien, pledge, security interest or other encumbrance.
For purposes of the preceding paragraphs, the following terms have these
meanings: "Principal Property" means any natural gas pipeline, natural gas
gathering system, natural gas storage facility, natural gas processing plant
or other plant or facility located in the United States that in the opinion of
the Board of Directors or management of Duke Capital is of material importance
to the business conducted by Duke Capital and its consolidated subsidiaries
taken as a whole; "Principal Subsidiary" means any Subsidiary of Duke Capital
that owns a Principal Property; and "Subsidiary" means, as to any entity, a
corporation of which more than 50% of the outstanding shares of stock having
ordinary voting power (other than stock having such power only by reason of
contingency) is at the time owned, directly or indirectly, through one or more
intermediaries, or both, by such entity.
Defeasance and Covenant Defeasance
The Senior Indenture provides that Duke Capital may be:
. discharged from its obligations, with certain exceptions, with respect
to any series of Senior Notes, such a discharge being called a
"Defeasance" in this Prospectus; and
. released from its obligations under certain restrictive covenants
especially established with respect to any series of Senior Notes,
including the obligations described above under the caption "Negative
Pledge," such a release being called a "Covenant Defeasance" in this
Prospectus.
Duke Capital must satisfy certain conditions to effect a Defeasance or
Covenant Defeasance. Those conditions include the irrevocable deposit with the
Senior Indenture Trustee, in trust, of money or
16
<PAGE>
government obligations which through their scheduled payments of principal and
interest would provide sufficient money to pay the principal and any premium
and interest on those Senior Notes on the maturity dates of those payments or
upon redemption.
Following a Defeasance, payment of the Senior Notes defeased may not be
accelerated because of an event of default under the Senior Indenture.
Following a Covenant Defeasance, the payment of Senior Notes may not be
accelerated by reference to the covenants from which Duke Capital has been
released. A Defeasance may occur after a Covenant Defeasance.
Under current United States federal income tax laws, a Defeasance would
be treated as an exchange of the relevant Senior Notes in which holders of
those Senior Notes might recognize gain or loss. In addition, the amount,
timing and character of amounts that holders would thereafter be required to
include in income might be different from that which would be includible in the
absence of that Defeasance. Duke Capital urges investors to consult their own
tax advisors as to the specific consequences of a Defeasance, including the
applicability and effect of tax laws other than United States federal income
tax laws.
Under current United States federal income tax law, unless accompanied by
other changes in the terms of the Senior Notes, a Covenant Defeasance should
not be treated as a taxable exchange.
Concerning the Senior Indenture Trustee
The Chase Manhattan Bank is the Senior Indenture Trustee and the Trustee
under the Subordinated Indenture. Duke Capital and certain of its affiliates
maintain deposit accounts and banking relationships with The Chase Manhattan
Bank. The Chase Manhattan Bank also serves as trustee under other indentures
pursuant to which securities of Duke Capital and of certain of its affiliates
are outstanding.
The Senior Indenture Trustee will perform only those duties that are
specifically set forth in the Senior Indenture unless an event of default under
the Senior Indenture occurs and is continuing. In case an event of default
occurs and is continuing, the Senior Indenture Trustee will exercise the same
degree of care as a prudent individual would exercise in the conduct of his or
her own affairs. Subject to those provisions, the Senior Indenture Trustee is
under no obligation to exercise any of its powers under the Senior Indenture at
the request of any holder of Senior Notes unless that holder offers reasonable
indemnity to the Senior Indenture Trustee against the costs, expenses and
liabilities which it might incur as a result.
17
<PAGE>
DESCRIPTION OF THE JUNIOR SUBORDINATED NOTES
Duke Capital will issue the Junior Subordinated Notes in one or more
series under its Subordinated Indenture dated as of April 1, 1998 between Duke
Capital and The Chase Manhattan Bank, as Trustee, as supplemented from time to
time. The Subordinated Indenture is called the "Subordinated Indenture" in this
Prospectus. The Trustee under the Subordinated Indenture is called the
"Subordinated Indenture Trustee" in this Prospectus. The Subordinated Indenture
is an exhibit to the Registration Statement.
The Junior Subordinated Notes are unsecured obligations of Duke Capital
and are junior in right of payment to "Senior Indebtedness" of Duke Capital.
You may find a description of the subordination provisions of the Junior
Subordinated Notes, including a description of Senior Indebtedness of Duke
Capital, under the caption "Subordination."
Duke Capital conducts its business through subsidiaries. Accordingly, its
ability to meet its obligations under the Junior Subordinated Notes is
dependent on the earnings and cash flows of those subsidiaries and the ability
of those subsidiaries to pay dividends or to advance or repay funds to Duke
Capital. In addition, the rights that Duke Capital and its creditors would have
to participate in the assets of any such subsidiary upon the subsidiary's
liquidation or recapitalization will be subject to the prior claims of the
subsidiary's creditors. Certain subsidiaries of Duke Capital have incurred
substantial amounts of debt in the expansion of their businesses and Duke
Capital anticipates that they will continue to do so.
The following description of the Junior Subordinated Notes is only a
summary and is not intended to be comprehensive. For additional information you
should refer to the Subordinated Indenture.
General
The Subordinated Indenture does not limit the amount of Subordinated
Notes, including Junior Subordinated Notes, that Duke Capital may issue under
it. Duke Capital may issue Subordinated Notes, including Junior Subordinated
Notes, from time to time under the Subordinated Indenture in one or more series
by entering into supplemental indentures or by its Board of Directors or a duly
authorized committee authorizing the issuance. The form of supplemental
indenture to the Subordinated Indenture is an exhibit to the Registration
Statement.
The Junior Subordinated Notes of a series need not be issued at the same
time, bear interest at the same rate or mature on the same date.
The Subordinated Indenture does not protect the holders of Junior
Subordinated Notes if Duke Capital engages in a highly leveraged transaction.
Provisions Applicable to Particular Series
The Prospectus Supplement for a particular series of Junior Subordinated
Notes will specify the terms of that series, including, if applicable:
. the title of the series;
. any limit on the principal amount of the Junior Subordinated Notes of
the series;
18
<PAGE>
. the date or dates on which principal is payable or the method for
determining the date or dates, and any right that Duke Capital has to
change the date on which principal is payable;
. the interest rate or rates, if any, or the method for determining the
rate or rates, and the date or dates from which interest will accrue;
. any interest payment dates and the regular record date for the
interest payable on each interest payment date, if any;
. whether Duke Capital may extend the interest payment periods and, if
so, the terms of the extension;
. the place or places where payments will be made, if other than the
principal corporate trust office of the Subordinated Indenture
Trustee;
. any obligation that Duke Capital has to redeem the Junior Subordinated
Notes through a sinking fund or to purchase the Junior Subordinated
Notes through a purchase fund or at the option of the holder;
. whether Duke Capital has the option to redeem the Junior Subordinated
Notes and, if so, the terms of its redemption option;
. whether the provisions described under the caption "Defeasance and
Covenant Defeasance" will not apply to the Junior Subordinated Notes;
. the currency in which payments will be made if other than U.S.
dollars, and the manner of determining the equivalent of those amounts
in U.S. dollars;
. if payments may be made, at Duke Capital's election or at the holder's
election, in a currency other than that in which the Junior
Subordinated Notes are stated to be payable, then the currency in
which those payments may be made, the terms and conditions of the
election and the manner of determining those amounts;
. the portion of the principal payable upon acceleration of maturity, if
other than the entire principal;
. whether the Junior Subordinated Notes will be issuable as global
securities and, if so, the securities depositary;
. any changes in the events of default or covenants with respect to the
Junior Subordinated Notes;
. any index or formula used for determining principal, premium or
interest;
. if the principal payable on the maturity date will not be determinable
on one or more dates prior to the maturity date, the amount which will
be deemed to be such principal amount or the manner of determining it;
. the subordination of the Junior Subordinated Notes to any other of
Duke Capital's indebtedness, including other series of Subordinated
Notes; and
. any other terms.
The interest rate and interest and other payment dates of each series of
Junior Subordinated Notes issued to a Trust will correspond to the rate at
which distributions will be paid and the distribution and other payment dates
of the Preferred Securities of that Trust.
19
<PAGE>
Unless Duke Capital states otherwise in the applicable Prospectus
Supplement, Duke Capital will issue the Junior Subordinated Notes only in fully
registered form without coupons, and there will be no service charge for any
registration of transfer or exchange of the Junior Subordinated Notes. Duke
Capital may, however, require payment to cover any tax or other governmental
charge payable in connection with any transfer or exchange. Transfers and
exchanges of the Junior Subordinated Notes may be made at The Chase Manhattan
Bank, 55 Water Street, New York, New York 10041.
The Junior Subordinated Notes will be issuable in denominations of $1,000
and any integral multiples of $1,000, unless Duke Capital states otherwise in
the applicable Prospectus Supplement.
Global Securities
Duke Capital may issue some or all of the Junior Subordinated Notes as
book-entry securities. Any such book-entry securities will be represented by
one or more fully registered global certificates. Duke Capital will register
each global security with, or on behalf of, a securities depositary identified
in the applicable Prospectus Supplement. Each global certificate will be
deposited with the securities depositary or its nominee or a custodian for the
securities depositary.
As long as the securities depositary or its nominee is the registered
holder of a global security representing Junior Subordinated Notes, that person
will be considered the sole owner and holder of the global security and the
Junior Subordinated Notes it represents for all purposes. Except in limited
circumstances, owners of beneficial interests in a global security:
. may not have the global security or any Junior Subordinated Notes it
represents registered in their names;
. may not receive or be entitled to receive physical delivery of
certificated Junior Subordinated Notes in exchange for the global
security; and
. will not be considered the owners or holders of the global security or
any Junior Subordinated Notes it represents for any purposes under the
Junior Subordinated Notes or the Subordinated Indenture.
Duke Capital will make all payments of principal and any premium and
interest on a global security to the securities depositary or its nominee as
the holder of the global security. The laws of some jurisdictions require that
certain purchasers of securities take physical delivery of securities in
definitive form. These laws may impair the ability to transfer beneficial
interests in a global security.
Ownership of beneficial interests in a global security will be limited to
institutions having accounts with the securities depositary or its nominee,
which are called "participants" in this discussion, and to persons that hold
beneficial interests through participants. When a global security representing
Junior Subordinated Notes is issued, the securities depositary will credit on
its book-entry, registration and transfer system the principal amounts of
Junior Subordinated Notes the global security represents to the accounts of its
participants. Ownership of beneficial interests in a global security will be
shown only on, and the transfer of those ownership interests will be effected
only through, records maintained by:
. the securities depositary, with respect to participants' interests;
and
. any participant, with respect to interests the participant holds on
behalf of other persons.
20
<PAGE>
Payments participants make to owners of beneficial interests held through
those participants will be the responsibility of those participants. The
securities depositary may from time to time adopt various policies and
procedures governing payments, transfers, exchanges and other matters relating
to beneficial interests in a global security. None of the following will have
any responsibility or liability for any aspect of the securities depositary's
or any participant's records relating to beneficial interests in a global
security representing Junior Subordinated Notes, for payments made on account
of those beneficial interests or for maintaining, supervising or reviewing any
records relating to those beneficial interests:
. Duke Capital;
. the Subordinated Indenture Trustee;
. the Trust (if the Junior Subordinated Notes are issued to a Trust); or
. any agent of any of the above.
Redemption
Any provisions relating to the redemption of Junior Subordinated Notes
will be set forth in the applicable Prospectus Supplement. Unless Duke Capital
states otherwise in the applicable Prospectus Supplement, Duke Capital may
redeem Junior Subordinated Notes only upon notice mailed at least 30 but not
more than 60 days before the date fixed for redemption.
Duke Capital will not be required to:
. issue, register the transfer of, or exchange any Junior Subordinated
Notes of a series during the period beginning 15 days before the date
the notice is mailed identifying the Junior Subordinated Notes of that
series that have been selected for redemption; or
. register the transfer of, or exchange any Junior Subordinated Note of
that series selected for redemption except the unredeemed portion of a
Junior Subordinated Note being partially redeemed.
Consolidation, Merger, Conveyance or Transfer
The Subordinated Indenture provides that Duke Capital may consolidate or
merge with or into, or convey or transfer all or substantially all of its
properties and assets to, another corporation or other entity. Any successor
must, however, assume Duke Capital's obligations under the Subordinated
Indenture and the Subordinated Notes, including the Junior Subordinated Notes,
issued under it, and Duke Capital must deliver an officers' certificate and an
opinion of counsel to the Subordinated Indenture Trustee that affirm compliance
with all conditions in the Subordinated Indenture relating to the transaction.
When those conditions are satisfied, the successor will succeed to and be
substituted for Duke Capital under the Subordinated Indenture, and Duke Capital
will be relieved of its obligations under the Subordinated Indenture and the
Subordinated Notes issued under it.
Modification; Waiver
Duke Capital may amend or modify the Subordinated Indenture with the
consent of the holders of a majority of the outstanding Subordinated Notes of
all series issued under it that are affected by the
21
<PAGE>
amendment or modification, voting as one class. The consent of the holder of
each outstanding Subordinated Note affected is, however, required to:
. change the maturity date of the principal, or any installment of
principal or interest on that Subordinated Note;
. reduce the principal amount, the interest rate or any premium payable
upon redemption on that Subordinated Note;
. reduce the amount of principal due and payable upon acceleration of
maturity;
. change the currency of payment of principal, premium or interest on
that Subordinated Note;
. impair the right to institute suit to enforce any such payment on or
after the maturity date or redemption date;
. reduce the percentage in principal amount of Subordinated Notes of any
series required to amend or modify the Subordinated Indenture, to
waive compliance with certain restrictive provisions of the
Subordinated Indenture or to waive certain defaults; or
. with certain exceptions, modify the provisions of the Subordinated
Indenture governing amendments of the Subordinated Indenture or
governing waiver of covenants or past defaults.
In addition, Duke Capital may supplement the Subordinated Indenture to create
new series of Junior Subordinated Notes and for certain other purposes, without
the consent of any holders of Subordinated Notes, including Junior Subordinated
Notes.
The holders of a majority of the outstanding Junior Subordinated Notes of
any series may waive, for that series, Duke Capital's compliance with certain
restrictive provisions of the Subordinated Indenture under which those Junior
Subordinated Notes were issued. The holders of a majority of the outstanding
Subordinated Notes of all series under the Subordinated Indenture with respect
to which a default has occurred and is continuing, all holders of those series
voting as one class, may waive that default for all those series, except a
default in the payment of principal or any premium or interest on any
Subordinated Note or a default with respect to a covenant or provision which
cannot be amended or modified without the consent of the holder of each
outstanding Subordinated Note of the series affected.
Duke Capital may not amend the Subordinated Indenture to change the
subordination of any outstanding Junior Subordinated Notes without the consent
of each holder of Senior Indebtedness that the amendment would adversely
affect.
Events of Default
The following are events of default under the Subordinated Indenture with
respect to any series of Junior Subordinated Notes, unless Duke Capital states
otherwise in the applicable Prospectus Supplement:
. failure to pay principal of or any premium on any Junior Subordinated
Note of that series when due;
22
<PAGE>
. failure to pay any interest on any Junior Subordinated Note of that
series, when due, that continues for 60 days; for this purpose, the
date on which interest is due is the date on which Duke Capital is
required to make payment following any deferral of interest payments
by it under the terms of Junior Subordinated Notes that permit such
deferrals;
. failure to make any sinking fund payment when required for any Junior
Subordinated Note of that series that continues for 60 days;
. failure to perform any covenant in the Subordinated Indenture (other
than a covenant expressly included solely for the benefit of other
series) that continues for 90 days after the Subordinated Indenture
Trustee or the holders of at least 33% of the outstanding Junior
Subordinated Notes of that series give Duke Capital written notice of
the default; and
. certain bankruptcy, insolvency or reorganization events with respect
to Duke Capital.
In the case of the fourth event of default listed above, the Subordinated
Indenture Trustee may extend the grace period. In addition, if holders of a
particular series have given a notice of default, then holders of at least the
same percentage of Junior Subordinated Notes of that series, together with the
Subordinated Indenture Trustee, may also extend the grace period. The grace
period will be automatically extended if Duke Capital has initiated and is
diligently pursuing corrective action.
Additional events of default may be established for a particular series
and, if established, will be described in the applicable Prospectus Supplement.
If an event of default with respect to Junior Subordinated Notes of a
series occurs and is continuing, then the Subordinated Indenture Trustee or the
holders of at least 33% of the outstanding Junior Subordinated Notes of that
series may declare the principal amount of all Junior Subordinated Notes of
that series to be immediately due and payable. However, that event of default
will be considered waived at any time after the declaration but before a
judgment for payment of the money due has been obtained if:
. Duke Capital has paid or deposited with the Subordinated Indenture
Trustee all overdue interest, the principal and any premium due
otherwise than by the declaration and any interest on such amounts,
and any interest on overdue interest, to the extent legally permitted,
in each case with respect to that series, and all amounts due to the
Subordinated Indenture Trustee under the Subordinated Indenture; and
. all events of default with respect to that series, other than the
nonpayment of the principal which became due solely by virtue of the
declaration, have been cured or waived.
A holder of Preferred Securities may institute a legal proceeding
directly against Duke Capital, without first instituting a legal proceeding
against the Property Trustee of the Trust under which those Preferred
Securities were issued or any other person or entity, for enforcement of
payment to that holder of principal or interest on an equivalent amount of
Junior Subordinated Notes of the related series on or after the due dates
specified in those Junior Subordinated Notes.
The Subordinated Indenture Trustee is under no obligation to exercise any
of its rights or powers at the request or direction of any holders of Junior
Subordinated Notes unless those holders have offered the Subordinated Indenture
Trustee security or indemnity against the costs, expenses
23
<PAGE>
and liabilities which it might incur as a result. The holders of a majority of
the outstanding Junior Subordinated Notes of any series have, with certain
exceptions, the right to direct the time, method and place of conducting any
proceedings for any remedy available to the Subordinated Indenture Trustee or
the exercise of any power of the Subordinated Indenture Trustee with respect
to those Junior Subordinated Notes. The Subordinated Indenture Trustee may
withhold notice of any default, except a default in the payment of principal
or interest, from the holders of any series if the Subordinated Indenture
Trustee in good faith considers it in the interest of the holders to do so.
The holder of any Junior Subordinated Note will have an absolute and
unconditional right to receive payment of the principal, any premium and,
within certain limitations, any interest on that Junior Subordinated Note on
its maturity date or redemption date and to enforce those payments.
Duke Capital is required to furnish each year to the Subordinated
Indenture Trustee an officers' certificate to the effect that it is not in
default under the Subordinated Indenture or, if there has been a default,
specifying the default and its status.
Payments; Paying Agent
The paying agent will pay the principal of any Junior Subordinated Notes
only if those Junior Subordinated Notes are surrendered to it. Unless Duke
Capital states otherwise in the applicable Prospectus Supplement, the paying
agent will pay interest on Junior Subordinated Notes, subject to such
surrender, where applicable, at its office or, at Duke Capital's option:
. by wire transfer to an account at a banking institution in the United
States that is designated in writing to the Subordinated Indenture
Trustee at least 16 days prior to the date of payment by the person
entitled to that interest; or
. by check mailed to the address of the person entitled to that interest
as that address appears in the security register for those Junior
Subordinated Notes.
Unless Duke Capital states otherwise in the applicable Prospectus
Supplement, the Subordinated Indenture Trustee will act as paying agent for
the Junior Subordinated Notes, and the principal corporate trust office of the
Subordinated Indenture Trustee will be the office through which the paying
agent acts. Duke Capital may, however, change or add paying agents or approve
a change in the office through which a paying agent acts.
Any money that Duke Capital has paid to a paying agent for principal or
interest on any Junior Subordinated Notes which remains unclaimed at the end
of two years after that principal or interest has become due will be repaid to
Duke Capital at its request. After repayment to Duke Capital, holders should
look only to Duke Capital for those payments.
Defeasance and Covenant Defeasance
The Subordinated Indenture provides that Duke Capital may be:
. discharged from its obligations, with certain exceptions, with respect
to any series of Junior Subordinated Notes, such a discharge being
called a "Defeasance" in this Prospectus; and
. released from its obligations under certain restrictive covenants
especially established with respect to a series of Junior Subordinated
Notes, such a release being called a "Covenant Defeasance" in this
Prospectus.
24
<PAGE>
Duke Capital must satisfy certain conditions to effect a Defeasance or
Covenant Defeasance. Those conditions include the irrevocable deposit with the
Subordinated Indenture Trustee, in trust, of money or government obligations
which through their scheduled payments of principal and interest would provide
sufficient money to pay the principal and any premium and interest on those
Junior Subordinated Notes on the maturity dates of those payments or upon
redemption. Following a Defeasance, payment of the Junior Subordinated Notes
defeased may not be accelerated because of an event of default under the
Subordinated Indenture.
Under current United States federal income tax laws, a Defeasance would
be treated as an exchange of the relevant Junior Subordinated Notes in which
holders of those Junior Subordinated Notes might recognize gain or loss. In
addition, the amount, timing and character of amounts that holders would
thereafter be required to include in income might be different from that which
would be includible in the absence of that Defeasance. Duke Capital urges
investors to consult their own tax advisors as to the specific consequences of
a Defeasance, including the applicability and effect of tax laws other than
United States federal income tax laws.
Junior Subordinated Notes issued to a Trust will not be subject to
Covenant Defeasance.
Subordination
Each series of Junior Subordinated Notes will be subordinate and junior
in right of payment, to the extent set forth in the Subordinated Indenture, to
all Senior Indebtedness as defined below. If:
. Duke Capital makes a payment or distribution of any of its assets to
creditors upon its dissolution, winding-up, liquidation or
reorganization, whether in bankruptcy, insolvency or otherwise;
. a default beyond any grace period has occurred and is continuing with
respect to the payment of principal, interest or any other monetary
amounts due and payable on any Senior Indebtedness; or
. the maturity of any Senior Indebtedness has been accelerated because
of a default on that Senior Indebtedness,
then the holders of Senior Indebtedness generally will have the right to
receive payment, in the case of the first instance, of all amounts due or to
become due upon that Senior Indebtedness, and, in the case of the second and
third instances, of all amounts due on that Senior Indebtedness, or Duke
Capital will make provision for those payments, before the holders of any
Junior Subordinated Notes have the right to receive any payments of principal
or interest on their Junior Subordinated Notes.
"Senior Indebtedness" means, with respect to any series of Junior
Subordinated Notes, the principal, premium, interest and any other payment in
respect of any of the following:
. all of Duke Capital's indebtedness that is evidenced by notes,
debentures, bonds or other securities Duke Capital sells for money or
other obligations for money borrowed;
. all indebtedness of others of the kinds described in the preceding
category which Duke Capital has assumed or guaranteed or which Duke
Capital has in effect guaranteed through an agreement to purchase,
contingent or otherwise; and
25
<PAGE>
. all renewals, extensions or refundings of indebtedness of the kinds
described in either of the preceding two categories.
Any such indebtedness, renewal, extension or refunding, however, will not
be Senior Indebtedness if the instrument creating or evidencing it or the
assumption or guarantee of it provides that it is not superior in right of
payment to or is equal in right of payment with those Junior Subordinated
Notes. Senior Indebtedness will be entitled to the benefits of the
subordination provisions in the Subordinated Indenture irrespective of the
amendment, modification or waiver of any term of the Senior Indebtedness.
Future series of Subordinated Notes which are not Junior Subordinated
Notes may rank senior to outstanding series of Junior Subordinated Notes and
would constitute Senior Indebtedness with respect to those series.
The Subordinated Indenture does not limit the amount of Senior
Indebtedness that Duke Capital may issue. As of June 30, 1999, Duke Capital's
Senior Indebtedness totaled approximately $1,950,000,000.
Concerning the Subordinated Indenture Trustee
The Chase Manhattan Bank is the Subordinated Indenture Trustee and the
Trustee under the Senior Indenture Trustee. Duke Capital and certain of its
affiliates maintain deposit accounts and banking relationships with The Chase
Manhattan Bank. The Chase Manhattan Bank also serves as trustee under other
indentures pursuant to which securities of Duke Capital and of certain of its
affiliates are outstanding.
The Subordinated Indenture Trustee will perform only those duties that
are specifically set forth in the Subordinated Indenture unless an event of
default under the Subordinated Indenture occurs and is continuing. In case an
event of default occurs and is continuing, the Subordinated Indenture Trustee
will exercise the same degree of care as a prudent individual would exercise in
the conduct of his or her own affairs. Subject to those provisions, the
Subordinated Indenture Trustee is under no obligation to exercise any of its
powers under the Subordinated Indenture at the request of any holder of Junior
Subordinated Notes unless that holder offers reasonable indemnity to the
Subordinated Indenture Trustee against the costs, expenses and liabilities
which it might incur as a result.
26
<PAGE>
DESCRIPTION OF THE PREFERRED SECURITIES
Each Trust may issue only one series of Preferred Securities. The Trust
Agreement of each Trust will authorize the Administrative Trustees to issue the
Preferred Securities of that Trust on behalf of that Trust. For additional
information you should refer to the applicable Trust Agreement. The form of
Trust Agreement is an exhibit to the Registration Statement.
You should refer to the applicable Prospectus Supplement for the terms of
any series of Preferred Securities, including:
. the title of the series;
. the number of Preferred Securities of the series;
. the yearly distribution rate, or the method of determining that rate,
and the date or dates on which distributions will be payable;
. the date or dates, or method of determining the date or dates, from
which distributions will be cumulative;
. the amount that will be paid out of the assets of the Trust to the
holders of the Preferred Securities upon the voluntary or involuntary
dissolution, winding-up or termination of the Trust;
. any obligation that the Trust has to purchase or redeem the Preferred
Securities, and the price at which, the period within which, and the
terms and conditions upon which the Trust will purchase or redeem
them;
. any voting rights of the Preferred Securities that are in addition to
those legally required, including any right that the holders of the
Preferred Securities have to approve certain actions under or
amendments to the Trust Agreement;
. any right that the Trust has to defer distributions on the Preferred
Securities in the event the interest payment period on the related
Junior Subordinated Notes is extended; and
. any other rights, preferences, privileges, limitations or restrictions
upon the Preferred Securities of the series.
Duke Capital will guarantee each series of Preferred Securities to the
extent described below under the caption "Description of the Guarantees."
The applicable Prospectus Supplement will describe any material United
States federal income tax considerations that apply to the Preferred
Securities.
27
<PAGE>
DESCRIPTION OF THE GUARANTEES
Duke Capital will execute the Guarantees from time to time for the
benefit of the holders of the Preferred Securities of the respective Trusts.
The Chase Manhattan Bank will act as Guarantee Trustee under each Guarantee.
The Guarantee Trustee will hold each Guarantee for the benefit of the holders
of the Preferred Securities to which it relates.
The following description of the Guarantees is only a summary and is not
intended to be comprehensive. The form of Guarantee is an exhibit to the
Registration Statement.
General
Duke Capital will irrevocably and unconditionally agree under each
Guarantee to pay the Guarantee Payments that are defined below, to the extent
specified in that Guarantee, to the holders of the Preferred Securities to
which the Guarantee relates, to the extent that the Guarantee Payments are not
paid by or on behalf of the related Trust. Duke Capital is required to pay the
Guarantee Payments to the extent specified in the relevant Guarantee regardless
of any defense, right of set-off or counterclaim that Duke Capital may have or
may assert against any person.
The following payments and distributions on the Preferred Securities of a
Trust are Guarantee Payments:
. any accrued and unpaid distributions required to be paid on the
Preferred Securities of the Trust, but only to the extent that the
Trust has funds legally and immediately available for those
distributions;
. the redemption price for any Preferred Securities that the Trust calls
for redemption, including all accrued and unpaid distributions to the
redemption date, but only to the extent that the Trust has funds
legally and immediately available for the payment; and
. upon a dissolution, winding-up or termination of the Trust, other than
in connection with the distribution of Junior Subordinated Notes to
the holders of Trust Securities of the Trust or the redemption of all
the Preferred Securities of the Trust, the lesser of:
. the sum of the liquidation amount and all accrued and unpaid
distributions on the Preferred Securities of the Trust to the
payment date, to the extent that the Trust has funds legally and
immediately available for the payment; and
. the amount of assets of the Trust remaining available for
distribution to holders of the Preferred Securities of the Trust
in liquidation of the Trust.
Duke Capital may satisfy its obligation to make a Guarantee Payment by
making that payment directly to the holders of the related Preferred Securities
or by causing the Trust to make the payment to those holders.
Each Guarantee will be a full and unconditional guarantee, subject to
certain subordination provisions, of the Guarantee Payments with respect to the
related Preferred Securities from the time of issuance of those Preferred
Securities, except that the Guarantee will only apply to the payment of
distributions and other payments on the Preferred Securities when the Trust has
sufficient funds legally and immediately available to make those distributions
or other payments.
28
<PAGE>
If Duke Capital does not make the required payments on the Junior
Subordinated Notes that the Property Trustee holds under a Trust, that Trust
will not make the related payments on its Preferred Securities.
Subordination
Duke Capital's obligations under each Guarantee will be unsecured
obligations of Duke Capital. Those obligations will rank:
. subordinate and junior in right of payment to all of Duke Capital's
other liabilities, other than obligations or liabilities that rank
equal in priority or subordinate by their terms;
. equal in priority with the most senior preferred stock that Duke
Capital may issue and similar guarantees; and
. senior to Duke Capital's common stock.
Duke Capital has no preferred stock outstanding that will rank equal in
priority with the Guarantees. Duke Capital has common stock outstanding that
will rank junior to the Guarantees.
Each Guarantee will be a guarantee of payment and not of collection. This
means that the guaranteed party may institute a legal proceeding directly
against Duke Capital, as guarantor, to enforce its rights under the Guarantee
without first instituting a legal proceeding against any other person or
entity.
The terms of the Preferred Securities will provide that each holder of
the Preferred Securities, by accepting those Preferred Securities, agrees to
the subordination provisions and other terms of the related Guarantee.
Amendments and Assignment
Duke Capital may amend each Guarantee without the consent of any holder
of the Preferred Securities to which that Guarantee relates if the amendment
does not materially and adversely affect the rights of those holders. Duke
Capital may otherwise amend each Guarantee with the approval of the holders of
at least 66 2/3% of the outstanding Preferred Securities to which that
Guarantee relates.
Termination
Each Guarantee will terminate and be of no further effect when:
. the redemption price of the Preferred Securities to which the
Guarantee relates is fully paid;
. Duke Capital distributes the related Junior Subordinated Notes to the
holders of those Preferred Securities; or
. the amounts payable upon liquidation of the related Trust are fully
paid.
Each Guarantee will remain in effect or will be reinstated if at any time
any holder of the related Preferred Securities must restore payment of any sums
paid to that holder with respect to those Preferred Securities or under that
Guarantee.
29
<PAGE>
Events of Default
An event of default will occur under any Guarantee if Duke Capital fails
to perform any of its payment obligations under that Guarantee. The holders of
a majority of the Preferred Securities of any series may waive any such event
of default and its consequences on behalf of all of the holders of the
Preferred Securities of that series. The Guarantee Trustee is obligated to
enforce the Guarantee for the benefit of the holders of the Preferred
Securities of a series if an event of default occurs under the related
Guarantee.
The holders of a majority of the Preferred Securities to which a
Guarantee relates have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Guarantee Trustee
with respect to that Guarantee or to direct the exercise of any trust or power
that the Guarantee Trustee holds under that Guarantee. Any holder of the
related Preferred Securities may institute a legal proceeding directly against
Duke Capital to enforce that holder's rights under the Guarantee without first
instituting a legal proceeding against the Guarantee Trustee or any other
person or entity.
Concerning the Guarantee Trustee
The Chase Manhattan Bank is the Guarantee Trustee. It is also the
Property Trustee, the Subordinated Indenture Trustee and the Senior Indenture
Trustee. Duke Capital and certain of its affiliates maintain deposit accounts
and banking relationships with The Chase Manhattan Bank. The Chase Manhattan
Bank also serves as trustee under other indentures pursuant to which securities
of Duke Capital and certain of its affiliates are outstanding.
The Guarantee Trustee will perform only those duties that are
specifically set forth in each Guarantee unless an event of default under the
Guarantee occurs and is continuing. In case an event of default occurs and is
continuing, the Guarantee Trustee will exercise the same degree of care as a
prudent individual would exercise in the conduct of his or her own affairs.
Subject to those provisions, the Guarantee Trustee is under no obligation to
exercise any of its powers under any Guarantee at the request of any holder of
the related Preferred Securities unless that holder offers reasonable indemnity
to the Guarantee Trustee against the costs, expenses and liabilities which it
might incur as a result.
Agreements as to Expenses and Liabilities
Duke Capital will enter into an Agreement as to Expenses and Liabilities
under each Trust Agreement. Each Agreement as to Expenses and Liabilities will
provide that Duke Capital will, with certain exceptions, irrevocably and
unconditionally guarantee the full payment of any indebtedness, expenses or
liabilities of the related Trust to each person or entity to whom that Trust
becomes indebted or liable. The exceptions are the obligations of the Trust to
pay to the holders of the related Preferred Securities or other similar
interests in that Trust the amounts due to the holders under the terms of those
Preferred Securities or those similar interests.
30
<PAGE>
ACCOUNTING TREATMENT
Each Trust will be treated as a subsidiary of Duke Capital for financial
reporting purposes. Accordingly, Duke Capital's consolidated financial
statements will include the accounts of each Trust. The Preferred Securities,
along with other trust preferred securities that Duke Capital guarantees on an
equivalent basis, will be presented as a separate line item in Duke Capital's
consolidated balance sheets, entitled "Guaranteed Preferred Beneficial
Interests in Subordinated Notes of Duke Capital Corporation." Duke Capital will
record distributions that each Trust pays on the Preferred Securities as an
expense in its consolidated statement of income.
PLAN OF DISTRIBUTION
The Senior Notes, the Junior Subordinated Notes and the Preferred
Securities may be sold in any of three ways:
. through underwriters or dealers;
. directly to a limited number of institutional purchasers or to a
single purchaser; or
. through agents.
The applicable Prospectus Supplement will describe the terms under which
the Senior Notes, the Junior Subordinated Notes or the Preferred Securities are
offered, including:
. the names of any underwriters, dealers or agents;
. the purchase price and the net proceeds from the sale;
. any underwriting discounts and other items constituting underwriters'
compensation;
. any initial public offering price; and
. any discounts or concessions allowed, re-allowed or paid to dealers.
Any underwriters or dealers may from time to time change any initial
public offering price and any discounts or concessions allowed, re-allowed or
paid to dealers.
If underwriters participate in the sale of the Senior Notes, the Junior
Subordinated Notes or the Preferred Securities, those underwriters will acquire
the Senior Notes, Junior Subordinated Notes or Preferred Securities for their
own account and may resell them in one or more transactions, including
negotiated transactions, at a fixed public offering price or at varying prices
determined at the time of the sale.
Unless Duke Capital states otherwise in the applicable Prospectus
Supplement, the obligations of any underwriter to purchase the Senior Notes,
the Junior Subordinated Notes or the Preferred Securities will be subject to
conditions, and the underwriter will be obligated to purchase all the Senior
Notes, Junior Subordinated Notes or Preferred Securities offered, except that
in some cases involving a default by an underwriter, less than all of the
Senior Notes, Junior Subordinated Notes or Preferred Securities offered may be
purchased. If the Senior Notes, the Junior Subordinated Notes or the Preferred
Securities are sold through an agent, the applicable Prospectus Supplement will
state the name and any commission that may be paid to the agent. Unless Duke
Capital states otherwise in the Prospectus Supplement, that agent will be
acting on a best-efforts basis for the period of its appointment.
31
<PAGE>
Agents and underwriters may be entitled to indemnification against
certain civil liabilities, including liabilities under the Securities Act of
1933, under agreements entered into with the applicable Trust and Duke Capital.
Underwriters and their affiliates may engage in transactions with, and,
from time to time, perform services for, the Trusts and Duke Capital or their
affiliates in the ordinary course of their business.
The Senior Notes, the Junior Subordinated Notes and the Preferred
Securities may or may not be listed on a national securities exchange.
EXPERTS
Duke Capital's consolidated financial statements as of December 31, 1998
and 1997 and for each of the three years in the period ended December 31, 1998,
except PanEnergy and subsidiaries as of and for the period ended December 31,
1996, included in Duke Capital's annual report on Form 10-K for the year ended
December 31, 1998, which are incorporated by reference in this Prospectus, have
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
report which is incorporated by reference in this Prospectus. The financial
statements of PanEnergy and subsidiaries (consolidated with Duke Capital's
financial statements) as of and for the year ended December 31, 1996 have been
audited by KPMG LLP, independent certified public accountants, as stated in
their report incorporated by reference in this Prospectus. Those financial
statements are incorporated in this Prospectus in reliance upon the respective
reports of such firms given upon their authority as experts in accounting and
auditing.
VALIDITY OF THE SECURITIES
Richards, Layton & Finger, P.A., special Delaware counsel to Duke Capital
and the Trusts, will issue opinions about the validity of the Preferred
Securities under Delaware law on behalf of Duke Capital and the Trusts. Dewey
Ballantine LLP will issue opinions about the validity of the Senior Notes, the
Junior Subordinated Notes and the Guarantees and certain related matters on
behalf of Duke Capital. Counsel named in the applicable Prospectus Supplement
will issue opinions about the validity of the Senior Notes, the Junior
Subordinated Notes and the Guarantees on behalf of any underwriters, dealers or
agents.
32
<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(D) of the Securities Exchange
Act OF 1934
For the fiscal year ended December 31, 1998 or
[_] Transition Report Pursuant to Section 13 or 15(D) of the Securities
Exchange Act of 1934
For the transition period from __________ to _________
Commission File Number 0-23977
DUKE CAPITAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware 51-0282142
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
526 South Church Street, Charlotte, North Carolina 28202-1904
(Address of Principal Executive Offices) (Zip Code)
704-594-6200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(B) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
7 3/8% Quarterly Income Preferred New York Stock Exchange, Inc.
Securities issued by Duke Capital
Financing Trust I and guaranteed
by Duke Capital Corporation
7 3/8% Trust Originated Preferred New York Stock Exchange, Inc.
Securities issued by Duke Capital
Financing Trust II and guaranteed
by Duke Capital Corporation
Securities registered pursuant to Section 12(G) of the Act:
Title of class
--------------
Common Stock, without par value
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 and (2) has been subject to such filing requirements for
the past 90 days. Yes X No ___
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The Registrant meets the conditions set forth in General Instruction (I)(1)(a)
and (b) of Form 10-K and is therefore filing this Form 10-K with the reduced
disclosure format. Items 4, 10, 11, 12 and 13 have been omitted in accordance
with Instruction I(2)(c).
All of the Registrant's common shares are directly owned by Duke Energy
Corporation (File No. 1-4928), which files reports and proxy material pursuant
to the Securities Exchange Act of 1934, as amended.
Estimated aggregate market value of the voting stock held by nonaffiliates of
the registrant at February 26, 1999......................................None
Number of shares of Common Stock, without par value, outstanding at
February 26, 1999.......................................................1,010
================================================================================
<PAGE>
DUKE CAPITAL CORPORATION
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item Page
- ---- ----
<S> <C>
PART I.
1. Business.............................................................................. 1
General............................................................................. 1
Natural Gas Transmission............................................................ 2
Field Services...................................................................... 5
Trading and Marketing............................................................... 7
Global Asset Development............................................................ 8
Other Energy Services............................................................... 10
Real Estate Operations.............................................................. 10
Environmental Matters............................................................... 10
Foreign Operations and Export Sales ................................................ 11
Employees and Management............................................................ 11
Operating Statistics................................................................ 12
2. Properties............................................................................ 12
3. Legal Proceedings..................................................................... 13
PART II.
5. Market for Registrant's Common Equity and Related Stockholder Matters................. 14
6. Selected Financial Data............................................................... 14
7. Management's Discussion and Analysis of Results of Operations and Financial Condition.. 14
7A. Quantitative and Qualitative Disclosures About Market Risk............................. 25
8. Financial Statements and Supplementary Data............................................ 26
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure... 54
PART IV.
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...................... 54
Signatures............................................................................ 56
</TABLE>
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
From time to time, the Company may make statements regarding its assumptions,
projections, expectations, intentions or beliefs about future events. These
statements are intended as "forward-looking statements" under the Private
Securities Litigation Reform Act of 1995. The Company cautions that assumptions,
projections, expectations, intentions or beliefs about future events may and
often do vary from actual results, and the differences between assumptions,
projections, expectations, intentions or beliefs and actual results can be
material. Accordingly, there can be no assurance that the actual results will
not differ materially from those expressed or implied by the forward-looking
statements. For a discussion of some factors that could cause actual
achievements and events to differ materially from those expressed or implied in
such forward-looking statements, see "Management's Discussion and Analysis of
Results of Operations and Financial Condition, Current Issues -- Forward-Looking
Statements."
<PAGE>
PART I.
Item 1. Business.
GENERAL
Duke Capital Corporation (collectively with its subsidiaries, the
"Company") is a wholly owned subsidiary of Duke Energy Corporation (Duke Energy)
and serves as the parent for certain of Duke Energy's non-utility and other
operations. The Company provides financing and credit enhancement services for
its subsidiaries and conducts its operations through six business segments:
. Natural Gas Transmission
. Field Services
. Trading and Marketing
. Global Asset Development
. Other Energy Services
. 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."
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 expected sale of the Midwest
Pipelines in early 1999, Natural Gas Transmission also provides interstate
transportation and storage services in the Midwest states. See further
discussion of the proposed sale of the Midwest Pipelines in Note 11 to the
Consolidated Financial Statements, "Commitments and Contingencies." 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 (NGL). Field Services operates
gathering systems in ten states that serve major gas-producing regions in the
Rocky Mountain, Permian Basin, Mid-Continent and 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 Power Services, LLC (Duke Energy Power Services) 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.
On June 18, 1997, Duke Energy completed a stock-for-stock merger with
PanEnergy Corp (PanEnergy). Subsequently Duke Energy contributed the common
stock of PanEnergy to the Company. The combination of the Company and PanEnergy
was accounted for similar to a pooling of interests; therefore, the Consolidated
Financial Statements and other financial information included in this annual
report for periods prior to the combination include the combined historical
financial results of the Company and PanEnergy. (See Note 2 to the Consolidated
Financial Statements, "Business Combinations.")
Certain terms used to describe the Company's business are explained below.
British Thermal Unit (Btu). A standard unit for measuring thermal energy or heat
commonly used as a gauge for the energy content of natural gas and other fuels.
Brownfield Development. The development of a new power generating facility on a
site with existing industrial assets, typically power generating assets.
1
<PAGE>
Cogeneration Facility. A facility that produces electric energy and useful
thermal energy for industrial, commercial, heating or cooling purposes.
Combined Cycle. The combination of one or more gas turbines and steam turbines
in an electric generation plant. An electric generating technology in which
electricity is produced from otherwise lost waste heat exiting from one or more
gas turbines.
Cubic Foot (cf). The most common unit of measurement of gas volume; the amount
of natural gas required to fill a volume of one cubic foot under stated
conditions of temperature, pressure and water vapor.
Federal Energy Regulatory Commission (FERC). The agency that regulates the
transportation of electricity and natural gas in interstate commerce and
authorizes the buying and selling of energy commodities at market-based rates.
Gathering System. Pipeline, processing and related facilities that access
production and other sources of natural gas supplies for delivery to mainline
transmission systems.
Generation. The process of transforming other forms of energy, such as nuclear
or fossil fuels, into electricity. Also, the amount of electric energy produced,
expressed in megawatt-hours.
Greenfield Development. The development of a new power generating facility.
Independent System Operator (ISO). Ensures non-discriminatory access to a
regional transmission system, providing all customers access to the power
exchange and clearing all bilateral contract requests for use of the electric
transmission system. Also responsible for maintaining bulk electric system
reliability.
Jurisdictional. Facilities and activities subject to the primary regulatory
oversight of FERC or state regulatory agencies.
Liquefied Natural Gas (LNG). Natural gas that has been converted to a liquid by
cooling it to -260 degrees Fahrenheit.
Merchant Plant. A power plant that sells directly to wholesale customers without
its output necessarily being committed to long-term power sales agreements.
Natural Gas. A naturally occurring mixture of hydrocarbon and non-hydrocarbon
gases found in porous geological formations beneath the earth's surface, often
in association with petroleum. The principal constituent is methane.
Natural Gas Liquids (NGLs). Liquid hydrocarbons extracted during the processing
of natural gas. Principal commercial NGLs include butanes, propane, natural
gasoline and ethane.
Natural Gas/Power Marketer. An entity which buys and sells a commodity or
commodities at either fixed or index prices. More sophisticated trader/marketing
entities also provide comprehensive energy management services, such as
capacity, supply, storage and price risk management.
Throughput. The amount of natural gas transported through a pipeline system.
Transmission System (Natural Gas). An interconnected group of natural gas
pipelines and associated facilities for transporting natural gas in bulk between
points of supply and delivery points to industrial customers, local distribution
companies, or for delivery to other natural gas transmission systems.
A discussion of the current business and operations of each of the
Company's segments follows. The Northeast Pipelines are an essential part of
Natural Gas Transmission's strategy to advance projects that provide expanded
services to meet the specific needs of customers. The proposed sale of the
Midwest Pipelines allows Natural Gas Transmission to focus on regions, such as
the northeastern U.S., with increasing demand for gas. The Company plans to
significantly grow several of its other business segments: Field Services,
Trading and Marketing, Global Asset Development and Other Energy Services. For
further discussion of the operating outlook of the Company and its segments, see
"Management's Discussion and Analysis of Results of Operations and Financial
Condition, Current Issues -- Operations Outlook." For financial information
concerning the Company's business segments, see Note 3 to the Consolidated
Financial Statements, "Business Segments."
The Company is a Delaware corporation with its principal executive offices
located at 526 South Church Street, Charlotte, NC 28202-1904. The telephone
number is 704-594-6200.
NATURAL GAS TRANSMISSION
Natural Gas Transmission consists of the Northeast Pipelines, which
includes Texas Eastern Transmission Corporation (TETCO) and Algonquin Gas
Transmission Company (Algonquin), and the Midwest Pipelines, which includes
Panhandle
2
<PAGE>
Eastern Pipe Line Company (PEPL) and Trunkline Gas Company (Trunkline). PEPL and
Trunkline, along with additional storage related to those systems, are expected
to be sold to CMS Energy Corporation in early 1999. See further discussion of
the sale in "Management's Discussion and Analysis of Results of Operations and
Financial Condition, Liquidity and Capital Resources."
For 1998, consolidated natural gas deliveries by Natural Gas Transmission's
interstate pipelines totaled 2,593 TBtu (Trillion British thermal units),
compared to 2,862 TBtu in 1997, which represented approximately 12% of the
natural gas consumed in the United States. The Northeast Pipelines and the
Midwest Pipelines natural gas deliveries were 1,459 TBtu and 1,141 TBtu,
respectively, in 1998, with 7 TBtu of intercompany transportation. A substantial
majority of the delivered volumes of Natural Gas Transmission's interstate
pipelines represents gas transported under long-term firm service agreements
with local distribution company (LDC) customers in the pipelines' market areas.
Firm transportation services are also provided under contract to gas marketers,
producers, other pipelines, electric power generators and a variety of end-
users. In addition, the pipelines provide both firm and interruptible
transportation to customers on a short-term or seasonal basis. See natural gas
deliveries statistics under "Business, Operating Statistics." Demand for gas
transmission of Natural Gas Transmission's interstate pipeline systems is
seasonal, with the highest throughput occurring during the colder periods in the
first and fourth quarters.
In 1998, Natural Gas Transmission's fully interconnected interstate
pipeline system consisted of approximately 20,700 miles and received natural gas
from most major North American producing regions for delivery to markets
throughout the Northeast and Midwest states. The proposed sale of the Midwest
Pipelines would result in a reduction of approximately 10,400 miles in the
Company's interstate pipeline systems.
[MAP OF UNITED STATES ILLUSTRATING NATURAL GAS TRANSMISSION'S
INTERSTATE PIPELINES AND STORAGE AREAS]
3
<PAGE>
Northeast Pipelines
TETCO's major customers are located in Pennsylvania, New Jersey and New
York, and include LDCs serving the Pittsburgh, Philadelphia, Newark and New York
City metropolitan areas. Algonquin's major customers include LDCs and electric
power generators located in the Boston, Hartford, New Haven, Providence and Cape
Cod areas.
TETCO also provides firm and interruptible open-access storage services.
Storage is offered as a stand-alone unbundled service or as part of a no-notice
bundled service. TETCO's storage services utilize two joint venture storage
facilities in Pennsylvania and one wholly owned and operated storage field in
Maryland. TETCO0 also leases storage capacity. TETCO's certificated working
capacity in these three fields is 70 Billion cubic feet (Bcf), and the combined
working gas in storage was 61 Bcf on December 31, 1998. Algonquin owns no
storage fields.
Investments include a 37.5% ownership interest in Maritimes & Northeast
Pipeline and a 9.8% ownership interest in Alliance Pipeline. Maritimes &
Northeast pipelines is expected to be completed in late 1999 and will deliver
natural gas to markets in the Canadian Maritimes provinces and the northeastern
United States from a supply basin offshore Nova Scotia. The 1,900 mile Alliance
Pipeline project will deliver Canadian gas from Fort St. John, British Columbia
into the Chicago area by mid- to late 2000.
Midwest Pipelines
PEPL's major customers include 20 utilities located in the Midwest market
area that encompasses large portions of Michigan, Ohio, Indiana, Illinois and
Missouri. Trunkline's major customers include eight utilities located in
portions of Tennessee, Missouri, Illinois, Indiana and Michigan.
PEPL also owns and operates three underground storage fields located in
Illinois, Michigan and Oklahoma with working gas capacity of 31 Bcf. PEPL has
received FERC approval to transfer these storage fields to its subsidiary, Pan
Gas Storage Company (Pan Gas) and has filed for an effective transfer date of
April 1, 1999. Pan Gas is also the owner and operator of a 26 Bcf storage field
in Kansas. Trunkline owns and operates one 13 Bcf storage field in Louisiana.
Since the implementation of Order 636, each of PEPL, Trunkline and Pan Gas
provide firm and interruptible storage on an open-access basis. In addition to
owning and operating storage fields, PEPL also leases storage capacity. PEPL and
Trunkline have retained the right to use up to 15 Bcf and 10 Bcf, respectively,
of their storage capacity for system needs. See further discussion of Order 636
in "Business, Natural Gas Transmission -- Regulation."
For a discussion of the proposed sale of the Midwest pipelines, see Note 11
1 to the Consolidated Financial Statements, "Commitments and Contingencies --
Other Commitments and Contingencies."
Competition
The Company's interstate pipeline subsidiaries compete with other
interstate and intrastate pipeline companies in the transportation and storage
of natural gas. The principal elements of competition among pipelines are rates,
terms of service, and flexibility and reliability of service.
In the Mid-Atlantic and New England markets, TETCO competes directly with
Transcontinental Gas Pipe Line Corporation, Tennessee Gas Pipeline Company
(TGPC), Iroquois Gas Transmission System (Iroquois), CNG Transmission
Corporation and Columbia Gas Transmission Corporation. Algonquin competes
directly in certain market areas with TGPC and Iroquois. PEPL and Trunkline
compete directly with ANR Pipeline Company, Natural Gas Pipeline Company of
America and Texas Gas Transmission Corporation in the Midwest market area.
Natural gas competes with other forms of energy available to the Company's
customers and end-users, including electricity, coal and fuel oils. The primary
competitive factor is price. Changes in the availability or price of natural gas
and other forms of energy, the level of business activity, conservation,
legislation and governmental regulations, the capability to convert to
alternative fuels, and other factors, including weather, affect the demand for
natural gas in the areas served by the Company.
4
<PAGE>
Regulation
The FERC has authority to regulate rates and charges for natural gas
transported in or stored for interstate commerce or sold by a natural gas
company in interstate commerce for resale. The FERC also has authority over the
construction and operation of pipeline and related facilities utilized in the
transportation and sale of natural gas in interstate commerce, including the
extension, enlargement or abandonment of such facilities. TETCO, Algonquin,
PEPL, Trunkline and Pan Gas hold certificates of public convenience and
necessity issued by the FERC, authorizing them to construct and operate the
pipelines, facilities and properties now in operation for which such
certificates are required, and to transport and store natural gas in interstate
commerce. For further discussion of regulatory matters, see "Management's
Discussion and Analysis of Results of Operations and Financial Condition,
Liquidity and Capital Resources -- Operating Cash Flows" and Note 4 to the
Consolidated Financial Statements, "Regulatory Matters -- Natural Gas
Transmission."
Natural Gas Transmission's pipelines operate as open-access transporters of
natural gas. In 1992, the FERC issued Order 636, which requires open-access
pipelines to provide firm and interruptible transportation services on an equal
basis for all gas supplies, whether purchased from the pipeline or from another
gas supplier. To implement this requirement, Order 636 provided, among other
things, for mandatory unbundling of services that historically had been provided
by pipelines into separate open-access transportation, sales and storage
services. Order 636 allows pipelines to recover eligible costs, known as
"transition costs," resulting from the implementation of Order 636. For further
discussion of Order 636, see Note 4 to the Consolidated Financial Statements,
"Regulatory Matters -- Natural Gas Transmission."
Natural Gas Transmission is subject to the jurisdiction of the EPA and
state environmental agencies. For a discussion of environmental regulation, see
"Business, Environmental Matters." Natural Gas Transmission is also subject to
the Natural Gas Pipeline Safety Act of 1968, which regulates gas pipeline and
LNG plant safety requirements, and to the Hazardous Liquid Pipeline Safety Act
of 1979, which regulates oil and petroleum pipelines.
FIELD SERVICES
Field Services gathers, processes, transports and markets natural gas and
produces and markets NGLs. Field Services owns and operates approximately 20,000
miles of natural gas gathering systems, including intrastate pipelines, and 32
natural gas processing plants in the United States. Field Services also has
ownership interests in 12 other natural gas processing plants in the United
States.
Field Services gathers natural gas from production wellheads through
gathering systems located in ten states that serve major gas-producing regions
in the Rocky Mountain, Permian Basin, Mid-Continent and Gulf Coast (offshore and
onshore) areas. Field Services' gathering operations also include several
intrastate pipeline systems and two natural gas storage facilities.
5
<PAGE>
The map below includes Field Services' natural gas gathering systems,
including intrastate pipelines, offices and supply areas. The map also includes
the intrastate systems of the Natural Gas Transmission segment.
[MAP ILLUSTRATING FIELD SERVICES' GATHERING AND
PROCESSING FACILITIES, OFFICES & SUPPLY AREAS]
Field Services' NGL processing operations involve the extraction of NGLs
from natural gas and, at certain facilities, the fractionation of the NGLs into
their individual components (ethane, propane, butane and natural gasoline). The
natural gas used in Field Services' processing operations is generally gathered
on its own gathering system or from the natural gas stream on the Company's
transmission system. NGLs are sold by Field Services to a variety of customers
ranging from large, multi-national petrochemical and refining companies to
small, family-owned retail propane distributors. NGL sales are based upon
current market-related prices. Field Services also produces helium at the
National Helium Corporation facility in Liberal, Kansas.
Field Services' operating results are significantly impacted by changes in
NGL prices, which declined approximately 25.7% in 1998 compared to 1997. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition, Quantitative and Qualitative Disclosures About Market Risk" for a
discussion of Field Services' exposure to changes in commodity prices.
In 1998, Field Services sold assets related to its crude oil gathering and
marketing business, including 1,800 miles of intrastate crude oil pipelines in
the Mid-Continent and South Texas areas and 450 miles of intrastate NGL
pipelines in the
6
<PAGE>
Texas Gulf Coast area, to TEPPCO Partners, L.P. (TEPPCO) in exchange for an
additional ownership interest in TEPPCO. As a result of the sale, the Company
now has a 2% general partner interest and a 19.1% limited partner interest in
TEPPCO, a publicly owned master limited partnership that transports refined
products and liquefied petroleum gases through a 4,300 mile pipeline system.
Field Services expects to complete the $1.35 billion acquisition of the
natural gas gathering, processing, fractionation and NGL pipeline business of
Union Pacific Resources (UPR), including its natural gas and NGL marketing
activities, on or about March 31, 1999. This acquisition will add approximately
7,200 miles of pipeline to the Company's existing gathering systems and increase
the number of processing plants that the Company operates and/or has ownership
interests in. Under the purchase agreement, much of UPR's U.S. production will
be gathered and processed by the Company for a minimum of ten years. UPR will
also dedicate for five years most of its natural gas and NGL production to the
Company to market.
See certain operating statistics of Field Services under "Business,
Operating Statistics." Activities of Field Services can fluctuate in response to
the seasonality affecting natural gas.
Competition
Field Services competes with major integrated oil companies, major
interstate pipelines, national and local natural gas gatherers, brokers,
marketers and distributors for natural gas supplies, in gathering and processing
natural gas and in marketing and transporting natural gas and NGLs. Competition
for natural gas supplies is primarily based on efficiency, reliability,
availability of transportation and the ability to obtain a satisfactory price
for the producer's natural gas. Competition for customers is based primarily
upon reliability and price of delivered natural gas and NGLs.
Regulation
The intrastate pipelines owned by the Field Services group are subject to
state regulation and, to the extent they provide services under Section 311 of
the Natural Gas Policy Act of 1978 (NGPA), are also subject to FERC regulation.
The natural gas gathering activities of the Field Services group are generally
not subject to regulation by the FERC, but are subject to state regulation.
Field Services is subject to the jurisdiction of the EPA and state
environmental agencies. For a discussion of environmental regulation, see
"Business, Environmental Matters." Certain operations of Field Services are
subject to the jurisdiction of the Department of Transportation and certain
similar state agencies whose regulations have incorporated certain provisions of
the Natural Gas Pipeline Safety Act of 1968, the Hazardous Liquid Pipeline
Safety Act of 1979, and subsequent amendments.
TRADING AND MARKETING
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 (Mobil) owning a 40%
minority interest.
Trading and Marketing was formed in August 1996 as a natural gas and power
marketing joint venture with Mobil. Operations were expanded in June 1997 when a
wholly owned subsidiary of the Company acquired from affiliates of Louis Dreyfus
Corp. the remaining 50% ownership interest in Duke/Louis Dreyfus, L.L.C. (D/LD),
which the Company did not already own.
Trading and Marketing markets natural gas primarily to local distribution
companies, electric power generators, including Global Asset Development's
generation facilities, municipalities, industrial end-users and energy marketing
companies. Trading and Marketing markets electricity to investor owned
utilities, municipal power generators and other power marketers. Operations are
primarily in the United States and, to a lesser extent, in Canada, and are
serviced through 16 offices or operating centers.
Natural gas marketing operations encompass both on-system and off-system
sales. With respect to on-system sales, Trading and Marketing generally
purchases natural gas from Field Services' facilities and delivers the gas to an
intrastate or interstate pipeline for redelivery to another customer. Natural
Gas Transmission's pipelines are utilized for deliveries when prudent. With
respect to off-system sales, Trading and Marketing purchases natural gas from
producers, pipelines and other suppliers not connected with the Company's
facilities for resale to customers. Substantially all of Mobil's United States
and Canadian natural gas production is committed to be marketed through Trading
and Marketing through 2006.
7
<PAGE>
With respect to electricity marketing operations, Trading and Marketing
purchases electricity from third-party suppliers and from Global Asset
Development's generation facilities in California and Connecticut for resale to
customers.
Trading and Marketing has a portfolio of short-term and long-term sales
agreements with customers, the vast majority of which incorporate market-
sensitive pricing terms. Long-term gas purchase agreements with producers,
principally entered into in connection with on-system sales, also generally
include market-sensitive pricing provisions. Purchases and sales of off-system
gas and electricity supply are normally made under short-term contracts.
Purchase and sales commitments involving significant price and location risk are
generally hedged with commodity futures, swaps and options. For information
concerning Trading and Marketing's risk-management activities, see "Management's
Discussion and Analysis of Results of Operations and Financial Condition,
Quantitative and Qualitative Disclosures About Market Risk -- Commodity Price
Risk" and Note 7 to the Consolidated Financial Statements, "Risk Management and
Financial Instruments -- Commodity Instruments -- Trading."
Trading and Marketing also provides energy management services, such as
supply and market aggregation, peaking services, dispatching, balancing,
transportation, storage, tolling, contract negotiation and administration, as
well as energy commodity risk management products and services.
See certain operating statistics of Trading and Marketing under "Business,
Operating Statistics." Activities of Trading and Marketing can fluctuate in
response to the seasonality affecting both electricity and natural gas.
Competition
Trading and Marketing competes with major integrated oil companies, major
interstate pipelines and their marketing affiliates, brokers, marketers and
distributors and electric utilities and other electric power marketers for
natural gas supplies and in marketing natural gas, electricity and other energy
commodities. Competition in the energy marketing business is driven by the price
of commodities and services delivered, along with the quality and reliability of
services provided.
Regulation
The energy marketing activities of Trading and Marketing may, in certain
circumstances, be subject to the jurisdiction of the FERC. Current FERC policies
permit Trading and Marketing entities subject to FERC jurisdiction to market
natural gas and electricity at market-based rates.
GLOBAL ASSET DEVELOPMENT
Global Asset Development develops, owns and operates energy-related
facilities worldwide. Global Asset Development conducts its operations primarily
through Duke Energy Power Services and Duke Energy International.
Deregulation of energy markets in the United States and abroad is providing
substantial opportunities for Global Asset Development to capitalize on its
broad capabilities. Global Asset Development is an active participant in
competitive power markets worldwide. Global Asset Development owns and operates
approximately 4,100 megawatts of generation, including projects under
construction, and has ownership interests in approximately 3,800 megawatts of
generation, including projects under construction. Global Asset Development also
owns and operates approximately 900 miles of pipeline systems in Australia,
including projects planned for construction, and has ownership interests in
approximately 1,000 miles of pipeline systems, including projects under
construction.
Duke Energy Power Services
Duke Energy Power Services develops, owns and operates largely unregulated
electric generation projects across the United States. Duke Energy Power
Services focuses on acquisitions of existing energy production facilities,
greenfield and brownfield development opportunities and operating energy assets
throughout North America.
In 1998, Duke Energy Power Services completed the purchase of three
electric generating plants in California from Pacific Gas & Electric Company
(PG&E). Two of these electric generating plants sell electricity under the terms
of Reliability Must Run Agreements with the California Independent System
Operator, which purchases electricity at FERC regulated rates. The plants have a
combined net operating capacity of 2,645 megawatts. Pursuant to California's
electric restructuring law, Duke Energy Power Services entered into a contract
with PG&E to operate and maintain the facilities for two years following the
sale. Energy and capacity from the plants is being sold into the California
power exchange and under separate contracts.
8
<PAGE>
Other investments include a 32.5% indirect ownership interest in American
Ref-Fuel Company, which owns five waste-to-energy facilities in New York, New
Jersey, Massachusetts and Connecticut. Such facilities process about four
million tons of municipal solid waste per year and have an aggregate generating
capacity of 286 megawatts.
Projects under construction include: the second phase of the Bridgeport
Energy Project, a 520-megawatt combined cycle natural gas-fired merchant
generation plant in Connecticut; the Maine Independence Station, a 520-megawatt
combined cycle natural gas-fired merchant generation plant in Maine which is
scheduled to begin producing power in the summer of 2000; and the Hidalgo
project, a 510-megawatt power plant to be built in south Texas, which is
targeted to begin producing power in mid-2000.
In January 1999, Duke Energy Power Services agreed to a ten-year lease with
the Port of San Diego to operate and eventually replace the 706-megawatt South
Bay Power plant. The Port of San Diego will acquire this facility from San Diego
Gas & Electric Company. Duke Energy Power Services expects to close on the lease
valued at over $110 million by mid-1999. This plant's capacity is excluded from
the generation amounts previously discussed above.
Duke Energy International
Duke Energy International develops, owns and operates energy projects
worldwide. Projects involve natural gas exploration, production, processing,
transportation and supply. Additionally, projects include generation, delivery
and marketing of electric power and thermal energy. Duke Energy International's
regional target areas are Asia Pacific, South America and Europe.
In 1998, Duke Energy International completed the purchase of the Queensland
Pipeline, a 389-mile pipeline in southeast Queensland, Australia. Additional
opportunities in Australia include the purchase of the rights to develop and
operate the 500-mile Eastern Gas Pipeline project in eastern Australia.
Construction of this pipeline project is scheduled to begin in July 1999 and
completion is expected by mid-2000. Also, Duke Energy International purchased
power generation and transmission assets in western Australia and New Zealand,
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. This transaction
closed on January 22, 1999.
Duke Energy International's investments include a 25% indirect ownership
interest in National Methanol Company, which owns and operates a methanol and
MTBE (methyl tertiary butyl ether) plant in Saudi Arabia, and a 42.86% indirect
ownership interest in PT Puncakjaya, a 389-megawatt power generation facility in
Indonesia. Investments in South America include, among others: a 9.76% indirect
ownership interest in Hidroelectrica Piedra del Aguila S.A., a 1,400-megawatt
hydroelectric generating facility in Argentina; a 51.5% indirect ownership
interest in Electroquil, S.A., a 168-megawatt diesel-fired generating facility
in Ecuador; a 24% indirect ownership interest in Sociedad Electrica de Santiago
S.A., a 370-megawatt gas-fired generating facility in Chile; a 21.9% indirect
ownership interest in Aguaytia Energy LLC, an integrated natural gas and power
project in Peru; and a 99% indirect ownership interest in PanEnergy Exploration
and Production (Peru) Ltd. Duke Energy International also operates two liquefied
natural gas (LNG) ships which have been chartered to Nigeria LNG Limited for
22.5 years starting in 1999.
In February 1999, the Company, through its wholly owned subsidiary Duke
Energy International, L.L.C., commenced 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). The estimated total
cash outlay is approximately $2.1 billion based on current exchange rates. The
tender offers are contingent upon, among other things, certain Endesa-Chile
shareholder approvals. If all approvals are obtained and the other conditions to
the tender offers are satisfied or waived, the transactions are expected to be
completed during the second quarter of 1999. Endesa-Chile controls 10,247
megawatts of generating capacity in Argentina, Brazil, Chile, Colombia and Peru.
Competition and Regulation
Global Asset Development experiences substantial competition from utility
companies in the United States and abroad and from independent companies.
Global Asset Development is subject to the Natural Gas Pipeline Safety Act
of 1968, which regulates LNG plant safety requirements.
Global Asset Development is subject to international, federal, state and
local environmental regulations. For a discussion of environmental regulation,
see "Business, Environmental Matters."
9
<PAGE>
OTHER ENERGY SERVICES
Other Energy Services provides engineering, consulting, construction and
integrated energy solutions worldwide, primarily through Duke Engineering &
Services, Duke/Fluor Daniel and DukeSolutions.
Duke Engineering & Services specializes in energy and environmental
projects and provides comprehensive engineering, quality assurance, project and
construction management and operating and maintenance services for all phases of
hydroelectric, nuclear and renewable power generation projects worldwide.
Duke/Fluor Daniel, operating through several entities, provides full
service siting, permitting, licensing, engineering, procurement, construction,
start-up, operating and maintenance services for fossil-fired plants, both
domestically and internationally. Subsidiaries of the Company and Fluor Daniel,
Inc. each own 50% of Duke/Fluor Daniel.
DukeSolutions provides integrated energy solutions to industrial,
commercial, institutional, governmental and wholesale customers and focuses on
increasing customers' efficiency, productivity and profitability through energy
cost savings.
Other Energy Services experiences substantial competition from utility
companies in the United States or abroad and from independent companies.
Other Energy Services is subject to the jurisdiction of the EPA and
international, state and local environmental agencies. For a discussion of
environmental regulation, see "Business, Environmental Matters."
REAL ESTATE OPERATIONS
Real Estate Operations conducts its business through Crescent Resources
Inc., which develops commercial and residential real estate projects and manages
forest holdings in the southeastern United States. At December 31, 1998, Real
Estate Operations owned 4.2 million square feet of commercial space, of which
76% was leased, with an additional 1.7 million square feet under construction.
At December 31, 1998, the commercial portfolio included 2.3 million square feet
of warehouse space, 1.8 million square feet of office space and 0.1 million
square feet of retail space. In 1998, commercial buildings totaling 1.3 million
square feet and 850 residential developed lots were sold. At December 31, 1998,
Real Estate Operations had approximately 200,000 acres of land under its
management.
ENVIRONMENTAL MATTERS
The Company is subject to international, federal, state and local
regulations with regard to air and water quality, hazardous and solid waste
disposal and other environmental matters. Certain environmental regulations
affecting the Company include:
. The Clean Air Act Amendments of 1990;
. State Implementation Plans, which were issued by the EPA to 22 states and
the District of Columbia related to existing and new national ambient air
quality standards for ozone;
. The Federal Water Pollution Control Act Amendments of 1987, which require
permits for facilities that discharge treated wastewater into the
environment; and
. The Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA), which can require any individual or entity which may have owned
or operated a disposal site, as well as transporters or generators of
hazardous wastes which were sent to such site, to share in remediation
costs for the site.
For further discussion of environmental matters involving the Company,
including possible liability and capital costs, see "Management's Discussion and
Analysis of Results of Operations and Financial Condition, Current Issues --
Environmental" and Note 11 to the Consolidated Financial Statements,
"Commitments and Contingencies -- Environmental." Except as set forth therein,
compliance with international, federal, state and local provisions which have
been enacted or adopted regulating the discharge of materials into the
environment, or otherwise protecting the environment, is not expected to have a
material adverse effect on the consolidated results of operations or financial
position of the Company.
10
<PAGE>
FOREIGN OPERATIONS AND EXPORT SALES
Foreign operations and export sales are not material to the Company's
business as a whole. For a discussion of risks associated with the Company's
foreign operations, see "Management's Discussion and Analysis of Results Of
Operations and Financial Condition, Quantitative and Qualitative Disclosures
About Market Risk -- Foreign Operations Risk" and Note 15 to the Consolidated
Financial Statements, "Subsequent Events (Unaudited)."
EMPLOYEES AND MANAGEMENT
At December 31, 1998, the Company had approximately 9,300 employees.
Approximately 500 employees are represented by the Oil, Chemical and Atomic
Workers International Union, AFL-CIO. Approximately 300 of these employees and
their bargaining unit will transfer to CMS Energy upon the sale of the Midwest
Pipelines in early 1999. The remaining employees represented by the Oil,
Chemical and Atomic Workers International Union, AFL-CIO are in a separate
bargaining unit. Terms of their contract are still being negotiated.
The officers and directors of the Company consist of certain executive
officers of Duke Energy. Duke Energy has entered into employment agreements with
certain key executives. Additionally, the Company's business units maintain
their own management structure.
11
<PAGE>
OPERATING STATISTICS
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------
1998 1997 1996 1995 1994
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Natural Gas Transmission
Throughput Volumes, TBtu(a):
Northeast Pipelines
TETCO.................................................. 1,148 1,300 1,349 1,234 1,194
Algonquin.............................................. 311 341 327 331 288
-------- ------- ------- ------- -------
Total Northeast Pipelines.......................... 1,459 1,641 1,676 1,565 1,482
Midwest Pipelines
PEPL................................................... 560 659 687 663 626
Trunkline.............................................. 581 620 632 519 560
-------- ------- ------- ------- -------
Total Midwest Pipelines........................... 1,141 1,279 1,319 1,182 1,186
Intercompany eliminations................................ (7) (58) (56) (44) (91)
-------- ------- ------- ------- -------
Total Natural Gas Transmission.................... 2,593 2,862 2,939 2,703 2,577
======== ======= ======= ======= =======
Other Operating Statistics
Natural Gas Gathered and Processed/Transported, TBtu/d(b).. 3.6 3.4 2.9 1.9 1.6
NGL Production, MBb1/d(c) ................................. 110.2 108.2 78.5 54.8 49.4
Average Natural Gas Price per MMBtu(d)..................... $ 2.11 $ 2.59 $ 2.59 $ 1.64 $ 1.90
Average NGL Price per Gallon .............................. $ 0.26 $ 0.35 $ 0.39 $ 0.33 $ 0.31
Natural Gas Marketed(e), TBtu/d............................ 8.4 7.3 6.0 3.7 2.7
Electricity Marketed, Gwh(f) .............................. 98,991 64,650 4,229 513 -
</TABLE>
______________
(a) Trillion British thermal units
(b) Trillion British thermal units per day
(c) Thousand barrels per day
(d) Million British thermal units
(e) Includes volumes of Trading and Marketing and Field Services
(f) Gigawatt-hours
Item 2. Properties.
NATURAL GAS TRANSMISSION
TETCO's gas transmission system extends approximately 1,700 miles from
producing fields in the Gulf Coast region of Texas and Louisiana to Ohio,
Pennsylvania, New Jersey and New York. It consists of two parallel systems, one
consisting of three large-diameter parallel pipelines and the other consisting
of from one to three large-diameter pipelines over its length. TETCO's system,
including its gathering systems, has 73 compressor stations.
TETCO also owns and operates two offshore Louisiana gas supply systems,
which extend over 100 miles into the Gulf of Mexico and consist of 490 miles of
pipeline.
Algonquin's transmission system connects with TETCO's facilities in New
Jersey, and extends through New Jersey, New York, Connecticut, Rhode Island and
Massachusetts. The system consists of approximately 250 miles of pipeline with
six compressor stations.
PEPL's transmission system, which consists of four large-diameter parallel
pipelines and 13 mainline compressor stations, extends a distance of
approximately 1,300 miles from producing areas in the Anadarko Basin of Texas,
Oklahoma and Kansas through the states of Missouri, Illinois, Indiana and Ohio
into Michigan.
Trunkline's transmission system extends approximately 1,400 miles from the
Gulf Coast areas of Texas and Louisiana through the states of Arkansas,
Mississippi, Tennessee, Kentucky, Illinois and Indiana to a point on the
Indiana-Michigan border. The system consists principally of three large-diameter
parallel pipelines, 18 mainline compressor stations and one offshore compressor
platform.
Trunkline also owns and operates two offshore Louisiana gas supply systems
consisting of 337 miles of pipeline extending approximately 81 miles into the
Gulf of Mexico.
12
<PAGE>
The PEPL and Trunkline properties are included in the proposed sale of the
Midwest Pipelines, which is expected to close in early 1999.
For information concerning natural gas storage properties, see "Business,
Natural Gas Transmission."
FIELD SERVICES
For information regarding the properties of Field Services, see "Business,
Field Services."
GLOBAL ASSET DEVELOPMENT
Duke Energy Power Services owns several electric generating stations,
including three in California and one in Connecticut (95.9% ownership) currently
under expansion. These power plants have a combined capacity of 3,165 MW. For
more information regarding electric generating stations, see "Business, Global
Asset Development -- Duke Energy Power Services."
A subsidiary of the Company owns a marine terminal, storage and
regasification facility for LNG located in Louisiana. This LNG facility is
operated by Duke Energy International and is included in the proposed sale of
the Midwest Pipelines as previously discussed. The design output capacity of the
facility is approximately 700 million cubic feet per day and its storage
capacity is approximately 1.8 million barrels, which approximates 6 Bcf. See
further information regarding the properties of Duke Energy International at
"Business, Global Asset Development -- Duke Energy International."
REAL ESTATE OPERATIONS
For information regarding the properties of Real Estate Operations, see
"Business, Real Estate Operations."
OTHER
None of the properties used in connection with the Company's other business
activities are considered material to the Company's operations as a whole.
Item 3. Legal Proceedings.
On January 8, 1999, a subsidiary of the Company agreed to a Compliance
Order on Consent (Consent Order) with the Colorado Department of Public Health
and Environment concerning alleged air quality permit reporting and record-
keeping violations at the Greeley Natural Gas Processing Plant and several other
Colorado facilities. This Consent Order superseded an earlier Compliance Order
and Assessment of Civil Penalty for the Greeley Natural Gas Processing Plant.
This Consent Order assesses a civil and noncompliance penalty of $54,000 and
requires supplemental environmental projects of $525,000 that involve
implementing additional air emission controls to reduce air emissions below
standards.
The Illinois Environmental Protection Agency has indicated to a subsidiary
of the Company that it intends to initiate an environmental enforcement
proceeding relating to alleged air quality permit violations at a natural gas
compressor station. This proceeding could result in a penalty in excess of
$100,000.
Management believes that the resolution of these matters will not have a
material adverse effect on consolidated results of operations or financial
position.
See Note 11 to the Consolidated Financial Statements, "Commitments and
Contingencies" and "Management's Discussion and Analysis of Results of
Operations and Financial Condition, Current Issues -- Environmental" for further
discussion of legal proceedings.
13
<PAGE>
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
All of the outstanding common stock of the Company is, as of the date
hereof, owned by Duke Energy. There is no market for the Company's common stock.
Dividends on the Company's common stock will be paid when declared by the Board
of Directors. At present, the Company has no plans to pay a dividend on the
common stock.
Item 6. Selected Financial Data.
<TABLE>
<CAPTION>
1998 1997(a) 1996(a) 1995(a) 1994(a)
--------- --------- --------- --------- ---------
In millions
<S> <C> <C> <C> <C> <C>
Income Statement
Operating revenues.................. $13,059 $11,915 $ 7,816 $5,188 $4,753
Operating expenses.................. 12,023 11,079 6,947 4,394 4,071
--------- --------- --------- --------- ---------
Operating income.................... 1,036 836 869 794 682
Other income and expenses........... 101 37 20 18 (2)
--------- --------- --------- --------- ---------
Earnings before interest and taxes.. 1,137 873 889 812 680
Interest expense.................... 237 214 232 240 232
Minority interests.................. 71 22 6 - -
--------- --------- --------- --------- ---------
Earnings before income taxes........ 829 637 651 572 448
Income taxes........................ 310 257 252 224 181
--------- --------- --------- --------- ---------
Income before extraordinary item.... 519 380 399 348 267
Extraordinary loss.................. (8) - (17) - -
--------- --------- --------- --------- ---------
Net income.......................... $ 511 $ 380 $ 382 $ 348 $ 267
========= ========= ========= ========= =========
Balance sheet
Total assets........................ $13,856 $11,097 $ 9,752 $8,226 $7,984
Long-term debt...................... $ 2,884 $ 2,919 $ 2,028 $2,215 $2,446
</TABLE>
________________
(a) Financial information reflects accounting for the 1997 combination of the
Company with PanEnergy Corp similar to a pooling of interests. As a result,
the financial information gives effect to the combination as if it had
occured on January 1, 1994.
Item 7. 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)
and serves as the parent for certain of Duke Energy's non-utility and other
operations. The Company provides financing and credit enhancement services for
its subsidiaries and conducts its operations through six business segments:
. Natural Gas Transmission
. Field Services
. Trading and Marketing
. Global Asset Development
. Other Energy Services
. 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."
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 expected sale of the Midwest
Pipelines in early 1999, Natural Gas Transmission also provides interstate
transportation and storage services in the midwest states. See further
discussion of the proposed sale of the Midwest Pipelines in the Liquidity and
Capital Resources section of Management's Discussion and Analysis. The
interstate natural gas transmission and storage operations are subject to the
rules and regulations of the Federal Energy Regulatory Commission (FERC).
14
<PAGE>
Field Services gathers, processes, transports and markets natural gas and
produces and markets natural gas liquids (NGL). Field Services operates
gathering systems in ten states that serve major gas-producing regions in the
Rocky Mountain, Permian Basin, Mid-Continent and 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 Power Services, LLC (Duke Energy Power Services) 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.
On June 18, 1997, Duke Energy completed a stock-for-stock merger with
PanEnergy Corp (PanEnergy). Subsequently, Duke Energy contributed the common
stock of PanEnergy to the Company. The combination of the Company and PanEnergy
was accounted for similar to a pooling of interests; therefore, the Consolidated
Financial Statements and other financial information included in this annual
report for periods prior to the combination include the combined historical
financial results of the Company and PanEnergy. (See Note 2 to the Consolidated
Financial Statements, "Business Combinations".)
Management's Discussion and Analysis should be read in conjunction with the
Consolidated Financial Statements.
RESULTS OF OPERATIONS
In 1998, net income increased 34.5% over 1997, to $511 million, net of an
extraordinary loss of $8 million. The increase in net income was primarily due
to increased energy marketing activities, expansions and acquisitions, gains on
sales of assets and the absence of non-recurring merger related costs incurred
in 1997. These increases were partially offset by decreased NGL prices and
increased minority interests.
Net income in 1997 decreased slightly as compared to 1996, from $382
million in 1996 to $380 million in 1997. The decrease was due primarily to
increases in non-recurring merger related costs incurred in 1997, Trading and
Marketing operations due primarily to growth and amortization of goodwill
associated with the purchase of the remaining 50% ownership interest of the
Duke/Louis Dreyfus joint venture (see Note 2 to the Consolidated Financial
Statements, "Business Combinations"). These increases were offset by Natural
Gas Transmission's market-expansion projects placed in service and an
extraordinary item related to the early retirement of debt in 1996.
Operating income for 1998 was $1,036 million compared to $836 million in
1997 and $869 million in 1996. Earnings before interest and taxes (EBIT) were
$1,137 million, $873 million and $889 million for 1998, 1997 and 1996,
respectively. Operating income and earnings before interest and taxes, excluding
the effect of gains on asset sales of $34 million by Field Services in 1998, are
affected by the same fluctuations for the Company and each of its business
segments. Earnings before interest and taxes by business segment are summarized
below and are discussed by business segment thereafter.
Earnings Before Interest and Taxes by Business Segment
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1998 1997 1996
------ ------ ------
In millions
<S> <C> <C> <C>
Natural Gas Transmission......................... $ 702 $ 624 $ 595
Field Services .................................. 76 157 152
Trading and Marketing............................ 122 44 58
Global Asset Development ........................ 80 5 --
Other Energy Services............................ 10 18 20
Real Estate Operations........................... 142 98 88
Other Operations................................. 5 (73) (24)
------ ------ ------
Consolidated EBIT ............................... $1,137 $ 873 $ 889
====== ====== ======
</TABLE>
15
<PAGE>
Other Operations primarily includes communication services, water services
and certain unallocated corporate costs. Included in the amounts discussed below
are intercompany transactions that are eliminated in the Consolidated Financial
Statements.
Natural Gas Transmission
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1998 1997 1996
------- ------- -------
Dollars in millions
<S> <C> <C> <C>
Operating Revenues ......................... $1,528 $1,572 $1,556
Operating Expenses ......................... 864 964 973
------- ------- -------
Operating Income ........................... 664 608 583
Other Income, Net of Expenses .............. 38 16 12
------- ------- -------
EBIT........................................ $ 702 $ 624 $ 595
======= ======= =======
Volumes, Throughput -- TBtu (a)............. 2,593 2,862 2,939
</TABLE>
______________
(a) Trillion British thermal units
Earnings before interest and taxes for Natural Gas Transmission increased
$78 million in 1998 over 1997. Earnings before interest and taxes for Northeast
Pipelines increased $56 million to $476 million in 1998 compared to 1997,
primarily as a result of the favorable resolution of regulatory issues related
to gas supply realignment costs, favorable state property tax rulings and
increased market expansion projects. These increases were partially offset by a
decrease in throughput primarily as a result of mild winter weather.
In 1998, earnings before interest and taxes for Midwest Pipelines increased
10.8% compared to 1997, primarily due to a gain on the sale of the general
partner interests in Northern Border Partners, L.P. and non-recurring 1997
litigation expenses. These increases were partially offset by the favorable
resolution of certain regulatory matters in 1997, which was reflected as
additional revenue and other income. See the Liquidity and Capital Resources -
Investing Cash Flows section of Management's Discussion and Analysis for a
discussion of the expected sale of the Midwest Pipelines in early 1999. (See
also Note 11 to the Consolidated Financial Statements, "Commitments and
Contingencies.")
Earnings before interest and taxes for Natural Gas Transmission increased
4.9% in 1997 over 1996, with increases in earnings at Northeast Pipelines and
Midwest Pipelines of 5.3% and 4.0%, respectively. Earnings before interest and
taxes for the Northeast Pipelines increased primarily due to market-expansion
projects placed in service.
For the Midwest Pipelines, earnings before interest and taxes increased
primarily due to the favorable resolution of certain regulatory matters in 1997
in amounts in excess of those resolved in 1996, which was reflected as
additional revenue and other income. This increase was partially offset by 1997
litigation expenses.
Field Services
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1998 1997 1996
------- ------- -------
Dollars in Millions
<S> <C> <C> <C>
Operating Revenues............................................... $2,639 $3,055 $2,637
Operating Expenses............................................... 2,598 2,898 2,487
------- ------- -------
Operating Income................................................. 41 157 150
Other Income, Net of Expenses.................................... 35 - 2
------- ------- -------
EBIT ............................................................ $ 76 $ 157 $ 152
======= ======= =======
Volumes
Natural Gas Gathered and Processed/Transported, TBtu/d (a)....... 3.6 3.4 2.9
Natural Gas Marketed, TBtu/d..................................... 0.4 0.4 0.5
NGL Production, MBbl/d (b)....................................... 110.2 108.2 78.5
</TABLE>
______________
(a) Trillion British thermal units per day
(b) Thousand barrels per day
16
<PAGE>
In 1998, earnings before interest and taxes for Field Services decreased
$81 million compared to 1997, primarily due to a decrease in average NGL prices
of approximately $0.09 per gallon, or 25.7%. The decrease in earnings before
interest and taxes was partially offset by $34 million of gains on sales of
assets which are included in other income.
Earnings before interest and taxes for Field Services increased 3.3% in
1997 over 1996, primarily due to higher volumes as a result of acquisitions in
1996. Natural gas gathered and processed volumes increased 17.2%, and NGL
production increased 37.8% in 1997 compared to 1996. Partially offsetting these
increases were lower NGL prices of approximately $0.04 per gallon, or 8%, and
higher natural gas prices.
Trading and Marketing
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1998 1997 1996
------- ------- ------
Dollars in millions
<S> <C> <C> <C>
Operating Revenues............................. $ 8,785 $ 7,489 $3,814
Operating Expenses ............................ 8,665 7,446 3,758
------- ------- ------
Operating Income .............................. 120 43 56
Other Income, Net of Expenses.................. 2 1 2
------- ------- ------
EBIT........................................... $ 122 $ 44 $ 58
======= ======= ======
Volumes
Natural Gas Marketed, TBtu/d................... 8.0 6.9 5.5
Electricity Marketed, GWh(a)................... 98,991 64,650 4,229
</TABLE>
_____________
(a) Gigawatt-hour
In 1998, earnings before interest and taxes for Trading and Marketing
increased $78 million over 1997. The increase resulted primarily from increased
financial trading margins and electricity margins, partially offset by increased
expenses due to business growth. Electricity volumes marketed increased
primarily as a result of acquiring the remaining 50% ownership interest in the
Duke/Louis Dreyfus, L.L.C. (D/LD) joint venture in June 1997.
Earnings before interest and taxes for Trading and Marketing decreased $14
million in 1997 compared to 1996. The acquisition of the remaining 50% ownership
interest in the D/LD joint venture in 1997, coupled with a full year of
operations of the joint venture with Mobil Corporation formed in August 1996,
accounted for the significant increases in Trading and Marketing revenues,
related operating expenses (including increased purchased power expense) and
volumes in 1997 over 1996. Increased natural gas volumes marketed of 25.5% in
1997, in addition to increased natural gas margins from trading activities, were
largely offset by the emerging electric power trading and marketing activities.
Higher operating expenses, due primarily to increased personnel levels and
system development costs to provide the necessary infrastructure for growth in
the trading and marketing business, resulted in a decrease in earnings before
interest and taxes in 1997 as compared to 1996.
Global Asset Development
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1998 1997 1996
------ ------ ------
In millions
<S> <C> <C> <C>
Operating Revenues..................... $ 319 $ 123 $ 72
Operating Expenses..................... 261 129 73
------ ------ ------
Operating Income (Loss) ............... 58 (6) (1)
Other Income, Net of Expenses.......... 22 11 1
------ ------ ------
EBIT................................... $ 80 $ 5 $ --
====== ====== ======
</TABLE>
In 1998, earnings before interest and taxes for Global Asset Development
increased $75 million over 1997. The increase results primarily from business
expansion and acquisitions, including Duke Energy Power Services' July 1, 1998
acquisition of three electric generating stations in California from Pacific Gas
& Electric Company (PG&E) and December 1997 acquisition of an indirect 32.5%
ownership interest in American Ref-Fuel Company. Duke Energy International also
contributed to the increase in earnings before interest and taxes in 1998
compared to 1997 through an expansion to the PT Puncakjaya
17
<PAGE>
power generation facility in Indonesia. This increase was partially offset by
decreased earnings resulting from lower prices at National Methanol, a methanol
and MTBE (methyl tertiary butyl ether) plant in Saudi Arabia.
In 1997, earnings before interest and taxes increased slightly compared to
1996, due primarily to business expansion and acquisitions, including the
December 1997 acquisition of an ownership interest in American Ref-Fuel Company,
and a gain on the sale of an investment. These increases were partially offset
by increased expenses due to business growth.
<TABLE>
<CAPTION>
Other Energy Services
Years Ended December 31,
--------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Operating Revenues............................. $ 521 $ 376 $ 204
Operating Expenses............................. 511 353 184
------ ------ ------
Operating Income............................... 10 23 20
Other Income, Net of Expenses.................. -- (5) --
------ ------ ------
EBIT........................................... $ 10 $ 18 $ 20
====== ====== ======
</TABLE>
In 1998, earnings before interest and taxes for Other Energy Services
decreased $8 million compared to 1997, primarily due to decreased earnings of
Duke Engineering & Services. Earnings before interest and taxes for Other Energy
Services decreased $2 million in 1997 compared to 1996, primarily as a result of
start-up expenses of DukeSolutions partially offset by increased earnings of
Duke Engineering & Services due to growth.
Real Estate Operations
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1998 1997 1996
------ ------ ------
In millions
<S> <C> <C> <C>
Operating Revenues............................. $ 181 $ 124 $ 114
Operating Expenses............................. 39 26 26
------ ------ ------
Operating Income............................... 142 98 88
Other Income, Net of Expenses.................. -- -- --
------ ------ ------
EBIT........................................... $ 142 $ 98 $ 88
====== ====== ======
</TABLE>
In 1998, earnings before interest and taxes for Real Estate Operations
increased 44.9% compared to 1997, primarily as a result of increased project and
lake lot sales and a gain on land sales in the Jocassee Gorges region of South
Carolina. Earnings before interest and taxes for Real Estate Operations
increased 11.4% in 1997 over 1996, primarily due to gains associated with bulk
land sales in 1997.
Other Operations
Earnings before interest and taxes for Other Operations increased in 1998
compared to 1997, primarily as a result of the absence of non-recurring 1997
merger-related costs and the favorable resolution of certain contingent items in
1998. The increase in earnings before interest and taxes was partially offset by
a 1997 gain on the sale of the ownership interest in the Midland Cogeneration
Venture.
Earnings before interest and taxes for Other Operations declined $49
million in 1997 compared to 1996. Contributing to the decrease were increased
merger-related expenses in 1997 compared to 1996 and the 1997 amortization of
goodwill associated with the purchase of the remaining 50% ownership interest in
the D/LD joint venture. This decline was partially offset by the sale of the
ownership interest in the Midland Cogeneration Venture in 1997.
Other Impacts on Net Income
Interest expense increased 10.7% in 1998 over 1997 due to higher average
debt balances outstanding. In 1997, interest expense decreased $18 million, or
7.8%, as compared to 1996 as a result of lower interest rates.
18
<PAGE>
In 1998, minority interests increased $49 million compared to 1997. This
increase includes 1998 dividends for trust preferred securities that were issued
in 1998. See further discussion of the issuances of trust preferred securities
in Management's Discussion and Analysis of Results of Operations and Financial
Condition, Liquidity and Capital Resources. Excluding these dividends, minority
interests relate primarily to the trading and marketing joint venture with Mobil
Corporation formed in August 1996.
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 that debt.
On October 1, 1996, a subsidiary of the Company redeemed its $150 million,
10% debentures and its $100 million, 10 1/8% debentures, both due 2011. A non-
cash extraordinary loss of $17 million, net of income tax of $10 million, was
recorded related to the unamortized discount on this early retirement of debt.
LIQUIDITY AND CAPITAL RESOURCES
Operating Cash Flows. Assets and liabilities recorded in the Consolidated
Balance Sheets related to natural gas transition cost recoveries and the related
cash flow impacts are affected by state and federal regulatory initiatives and
specific agreements. For more information see Note 4 to the Consolidated
Financial Statements, "Regulatory Matters."
On August 29, 1998, the FERC approved a settlement from Texas Eastern
Transmission Corporation (TETCO), a subsidiary of the Company, which will
accelerate recovery of natural gas transition costs and reduce depreciation
expense to more appropriately reflect the estimated useful lives of its
facilities, principally interstate natural gas pipelines. The order was
effective October 1, 1998 and includes a rate moratorium until 2004. Cash flows
from operations are not expected to change for the first two years after
implementation due to the offsetting effect on customer rates of the reduced
depreciation expense and increased recovery of natural gas transition costs.
When the natural gas transition costs are fully recovered, cash flows from
operations are expected to decrease during 2001 through 2003 by an estimated
total of $270 million. For more information concerning the settlement, see Note
4 to the Consolidated Financial Statements, "Regulatory Matters."
Investing Cash Flows. Capital and investment expenditures were
approximately $1.9 billion in 1998 compared to approximately $1.3 billion in
1997. This increase was primarily due to business expansion by Global Asset
Development, which included Duke Energy Power Services' $501 million purchase of
three electric generating stations in California from PG&E and the completion of
the first phase of Bridgeport Energy, a $265 million, 520-megawatt combined
cycle natural gas-fired merchant generation plant. Business expansion for
Natural Gas Transmission and Field Services also contributed to the increase in
capital and investment expenditures. The increase was partially offset by the
acquisition of the remaining 50% ownership of the D/LD joint venture in June
1997.
Capital and investment expenditures in 1997 included the acquisition of the
remaining 50% ownership interest in the D/LD joint venture for $247 million,
which substantially represented goodwill, and Global Asset Development's
acquisition of an ownership interest in American Ref-Fuel Company for $237
million. The increase in capital and investment expenditures in 1997 over 1996
also included increased business expansion for the Natural Gas Transmission
segment. These increases were partially offset by the 1996 acquisition of
certain assets from Mobil Corporation.
Projected 1999 capital and investment expenditures for Natural Gas
Transmission, including allowance for funds used during construction, are
approximately $400 million and do not include projections related to the Midwest
Pipelines which are expected to be sold in early 1999. These projections include
the completion of the Maritimes & Northeast Pipeline project, which will deliver
natural gas to markets in the Canadian Maritimes provinces and the northeastern
United States from a supply basin offshore Nova Scotia. These projections also
include other market expansion projects and costs relating to existing assets.
The Company plans to continue to significantly grow several of its business
segments: Field Services, Global Asset Development, Trading and Marketing and
Other Energy Services. Expansion opportunities for Field Services include the
planned $1.35 billion acquisition of the natural gas gathering, processing,
fractionation and NGL pipeline business of Union Pacific Resources along with
its natural gas and NGL marketing activities. The transaction is expected to
close in the first half of 1999.
Expansion opportunities for Global Asset Development's international
division, Duke Energy International, include the $315 million purchase of power
generation and transmission assets in western Australia and New Zealand,
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. This transaction
closed on January 22, 1999.
19
<PAGE>
Also, Duke Energy International recently purchased the rights to develop
and operate the 500-mile Eastern Gas Pipeline project in eastern Australia.
Construction of this $270 million pipeline project is scheduled to begin in July
1999 and completion is expected by the middle of 2000.
Expansion opportunities for Global Asset Development's domestic division,
Duke Energy Power Services, include the continuation of greenfield projects,
such as the Bridgeport Energy project and the Maine Independence Station, a
520-megawatt combined cycle natural gas-fired merchant generation plant in Maine
which is scheduled to begin producing power in the summer of 2000. Other
expansion opportunities include the Hidalgo project, a 510-megawatt power plant
to be built in south Texas, which is targeted to begin producing power in mid-
2000. Other similar initiatives in 1999 for both Duke Energy International and
Duke Energy Power Services will likely require significant capital and
investment expenditures, which will be subject to periodic review and revision
and may vary significantly depending on the value-added opportunities presented.
Projected 1999 capital and investment expenditures for Trading and
Marketing, Other Energy Services and Real Estate Operations are approximately
$30 million, $90 million and $300 million, respectively. All projected capital
and investment expenditures are subject to periodic review and revision and may
vary significantly depending on acquisition opportunities, market volatility,
economic trends and the value-added opportunities presented.
In October 1998, the Company, through its wholly owned subsidiaries,
PanEnergy and Texas Eastern Corporation, entered into an agreement to sell
Panhandle Eastern Pipe Line Company (PEPL), Trunkline Gas Company (Trunkline)
and additional storage related to those systems, which substantially comprise
the Midwest Pipelines, along with Trunkline LNG Company, to CMS Energy
Corporation. The sales price of $2.2 billion involves cash proceeds of $1.9
billion and the assumption of existing PEPL debt of approximately $300 million.
The sale is expected to close in early 1999 and will result in an after-tax gain
of approximately $700 million. The sale is contingent upon receipt of clearances
under the Hart-Scott-Rodino Act.
Financing Cash Flows. The Company's consolidated capital structure at
December 31, 1998, including short-term debt, was 40.5% debt, 7.4% trust
preferred securities and 52.1% common equity. Fixed charges coverage, calculated
using the Securities and Exchange Commission method, was 4.2 times, 3.7 times
and 3.6 times for 1998, 1997 and 1996, respectively.
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 debt repayments
and operating and investing requirements, are expected to be funded by cash from
operations, external debt financing and the proceeds from the sale of the
Midwest Pipelines.
In July 1998, the Company issued $400 million of Senior Unsecured Notes.
Also during 1998, the Company's business trusts, which are treated as wholly
owned subsidiaries of the Company for financial reporting purposes, issued $600
million of trust preferred securities. (See Note 10 to the Consolidated
Financial Statements, "Guaranteed Preferred Beneficial Interests in Subordinated
Notes of Duke Capital.")
Under its commercial paper facilities, the Company had the ability to
borrow up to $1.55 billion and $1.25 billion as of December 31, 1998 and 1997,
respectively. At December 31, 1998 and 1997, the Company's various bank credit
facilities totaled approximately $1.7 billion and $1.4 billion, respectively. At
December 31, 1998, $526 million was outstanding under the commercial paper
facilities and $100 million was outstanding under the bank credit facilities.
As of December 31, 1998, the Company and its subsidiaries, excluding PEPL,
had authority to issue up to $100 million aggregate principal amount of debt
under shelf registrations filed with the Securities and Exchange Commission. On
January 27, 1999, the Company filed a $1 billion shelf registration statement,
which was declared effective by the Securities and Exchange Commission on
February 10, 1999.
Quantitative and Qualitative Disclosures About Market Risk
Risk Policies. The Company is exposed to market risks associated with
commodity prices, interest rates 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.
20
<PAGE>
Interest Rate Risk. The Company is exposed to risk resulting from changes
in interest rates as a result of its issuance of variable-rate debt, fixed-rate
debt and trust preferred securities and commercial paper, as well as interest
rate lock agreements. The Company manages its interest rate exposure by
limiting its variable-rate and fixed-rate exposure to a certain percentage of
total capitalization, as set by policy, and by monitoring the effects of market
changes in interest rates. (See Notes 1, 6, 9 and 10 to the Consolidated
Financial Statements.)
If market interest rates average 1% higher (lower) in 1999 than in 1998,
interest expense would increase (decrease), and earnings before income taxes
would decrease (increase) by approximately $7 million. Comparatively, had
interest rates averaged 1% higher (lower) in 1998 than in 1997, interest expense
would have increased (decreased), and earnings before income taxes would have
decreased (increased) by approximately $11 million. These amounts were
determined by considering the impact of the hypothetical interest rates on the
variable-rate securities outstanding as of December 31, 1998 and 1997. In the
event of a significant change in interest rates, management would likely take
actions to manage its exposure to the change. However, due to the uncertainty of
the specific actions that would be taken and their possible effects, the
sensitivity analysis assumes no changes in the Company's financial structure.
Commodity Price Risk. The Company, substantially through its subsidiaries,
is exposed to the impact of market fluctuations in the price and transportation
costs of natural gas, electricity and petroleum products marketed. The Company
employs established policies and procedures to manage its risks associated with
these market fluctuations using various commodity derivatives, including
futures, swaps and options. (See Notes 1 and 6 to the Consolidated Financial
Statements, "Summary of Significant Accounting Policies" and "Risk Management
and Financial Instruments.") The risk in the commodity trading portfolio is
measured on a daily basis utilizing a Value-at-Risk model to determine the
maximum potential one-day favorable or unfavorable Daily Earnings at Risk (DER).
The DER is monitored in comparison to established thresholds. Other measures are
also utilized to monitor the risk in the commodity trading portfolio on a
monthly and annual basis.
The DER computations are based on a historical simulation, which utilizes
price movements over a specified period to simulate forward price curves in the
energy markets to estimate the favorable or unfavorable impact of one-day's
price movement on the existing portfolio. The historical simulation emphasizes
the most recent market activity, which is considered the most relevant predictor
of future market movements for natural gas, electricity and petroleum products.
The DER computations utilize several key assumptions, including a 95% confidence
level for the resultant price movement and the holding period specified for the
calculation. The Company's calculation includes commodity derivative instruments
and forwards held for trading purposes and excludes the effects of embedded
physical options in the trading portfolio. At December 31, 1998 and 1997, the
estimated potential one-day favorable or unfavorable impact on earnings before
income taxes related to commodity instruments held for trading purposes was
approximately $10 million and $2 million, respectively. During 1998, the average
estimated potential one-day favorable or unfavorable impact on earnings before
income taxes related to commodity instruments held for trading purposes was
approximately $5 million. The increase in 1998 compared to 1997 is a result of
an increase in the authorized energy financial exposure limit, which was
approved by the CRMC. Changes in markets inconsistent with historical trends
could cause actual results to exceed predicted limits. Market risks associated
with commodity derivatives held for purposes other than trading were not
material at December 31, 1998 and 1997.
Subsidiaries of the Company are also exposed to market fluctuations in the
prices of NGLs related to their ongoing gathering and processing operating
activities. The Company closely monitors the risks associated with NGL price
changes on its future operations, and where appropriate, uses crude oil and
natural gas commodity instruments to hedge NGL prices. If NGL prices averaged
one cent per gallon less in 1998, earnings before income taxes would have
decreased by approximately $8 million. The Company generally does not maintain
a material inventory of NGLs or actively trade commodity derivatives related to
NGLs.
Foreign Operations Risk. The Company is exposed to foreign currency risk,
sovereign risk and other foreign operations risks arising from equity
investments in international affiliates and businesses owned and operated in
foreign countries. At December 31, 1998 the Company had more than $100 million
invested in Australia. Investments in other foreign countries were not material
at December 31, 1998 or 1997. In order to mitigate risks associated with foreign
currency fluctuations, the majority of contracts entered into by the Company or
its affiliates are denominated in or indexed to the U.S. dollar or may be hedged
through issuance of debt denominated in the foreign currency. The Company also
uses foreign currency swaps, where appropriate, to manage its risk related to
foreign currency fluctuations. Other exposures to foreign currency risk,
sovereign risk or other foreign operations risk are periodically reviewed by
management and were not material to consolidated results of operations or
financial position during 1998 or 1997.
21
<PAGE>
CURRENT ISSUES
Operations Outlook. The Company's business strategy is to develop regional
centers of energy assets involving gas, electric generation and marketing in the
United States and internationally. In the United States, the Company is
aggressively investing in new pipelines and power plants in the Northeast, Gulf
Coast and West. Internationally, the Company is focusing on opportunities in
Asia Pacific, South America and Europe.
The Northeast Pipelines are an essential part of Natural Gas Transmission's
strategy to advance projects that provide expanded services to meet the specific
needs of customers. The proposed sale of the Midwest Pipelines allows Natural
Gas Transmission to focus on regions, such as the northeastern U.S., with
increasing demand for gas. Northeast pipeline projects will provide
transportation from new supplies in both eastern and western Canada in addition
to traditional domestic supply basins.
The Company plans to significantly grow several of its business segments:
Field Services, Trading and Marketing, Global Asset Development and Other Energy
Services. Deregulation of energy markets in the United States and abroad is
providing substantial opportunities for these segments to capitalize on their
broad capabilities. Field Services will expand through the purchase of the
natural gas gathering, processing, fractionation and NGL pipeline business from
Union Pacific Resources along with its natural gas and NGL marketing activities.
Global Asset Development expects to continue strong growth through
acquisitions, construction of greenfield projects and expansion of existing
facilities as value-added opportunities present themselves. The Company's
combination of assets and capabilities that span the energy value chain have
contributed to Global Asset Development's successful combination of natural gas
pipeline capabilities, power generation, energy marketing and other services.
This demonstrated domestic strategy is now being deployed internationally in the
Asia Pacific area and in South America. Other Energy Services seeks to grow with
types of services including comprehensive energy efficiencies in food, textile
and government facilities.
The strong real estate market in the Southeast continues to present
substantial growth opportunities for Real Estate Operations. In 1998, Real
Estate Operations initiated development of significant office and industrial
facilities in each of its established markets to capitalize on market
conditions.
While the proposed sale of the Midwest Pipelines will provide an
opportunity to deploy capital into areas of higher growth, the Company expects
to experience some near-term earnings pressure as a result of the sale. The
Company believes that its strategy of developing regional centers of energy
assets will return long-term growth and increase shareholder value.
Natural Gas Competition. Wholesale Competition. On July 29, 1998, the FERC
issued a Notice of Proposed Rulemaking (NOPR) on short-term natural gas
transportation services, which proposed an integrated package of revisions to
its regulations governing interstate natural gas pipelines. "Short term" has
been defined in the NOPR as all transactions of less than one year. Under the
proposed approach, cost-based regulation would be eliminated for short-term
transportation and replaced by regulatory policies intended to maximize
competition in the short-term transportation market, mitigate the ability of
companies to exercise residual monopoly power and provide opportunities for
greater flexibility providing pipeline services. The proposed changes include
initiatives to revise pipeline scheduling procedures, receipt and delivery point
policies and penalty policies, and require pipelines to auction short-term
capacity. Other proposed changes would improve the FERC's reporting
requirements, permit pipelines to negotiate rates and terms of services, and
revise certain rate and certificate policies that affect competition.
In conjunction with the NOPP, the FERC also issued a Notice of Inquiry
(NOI) on its pricing policies in the existing long-term market and pricing
policies for new capacity. The FERC seeks comments on whether its policies are
biased toward either short-term or long-term service, provide accurate price
signals and the right incentives for pipelines to provide optimal transportation
services and construct facilities that meet future demand and do not result in
over-building and excess capacity. Comments on the NOPR and NOI are due in April
1999.
Because these notices are at a very early stage and ultimate resolution is
unknown, management cannot estimate the effects of these matters on future
consolidated results of operations or financial position.
Retail Competition. The Company currently does not provide retail natural
gas service, but changes in regulation to allow retail competition could affect
the Company's natural gas transportation contracts with local distribution
companies. Natural gas retail deregulation is in the very early stages of
development, and management cannot estimate the effects of this matter on future
consolidated results of operations or financial position.
Environmental. The Company is subject to international, federal, state and
local regulations regarding air and water quality, hazardous and solid waste
disposal and other environmental matters.
22
<PAGE>
Superfund Sites. Subsidiaries of the Company are considered by regulators
to be a potentially responsible party and may be subject to future liability at
six federal Superfund sites and one state Superfund site. While the cost of
remediation of the remaining sites may be substantial, the Company will share in
any liability associated with remediation of contamination at such sites with
other potentially responsible parties. Management believes that resolution of
these matters will not have a material adverse effect on consolidated results of
operations or financial position.
PCB (Polychlorinated Biphenyl) Assessment and Clean-up Programs. TETCO, a
wholly owned subsidiary of the Company, is currently conducting PCB assessment
and clean-up programs at certain of its compressor station sites under
conditions stipulated by a U.S. Consent Decree. The programs include on- and
off-site assessment, installation of on-site source control equipment and
groundwater monitoring wells and on- and off-site clean-up work. TETCO completed
the soil clean-up programs during 1998, subject to regulatory approval.
Groundwater monitoring activities will continue at several sites beyond 1999.
In 1987, the Commonwealth of Kentucky instituted a suit in state court
against TETCO, alleging improper disposal of PCBs at TETCO's three compressor
station sites in Kentucky. This suit is still pending. In 1996, TETCO completed
clean-up of these sites under the U.S. Consent Decree.
The Company has also identified environmental contamination at certain
sites on the PEPL and Trunkline systems and has undertaken clean-up programs at
these sites. The contamination resulted from the past use of lubricants in
compressed air systems containing PCBs and the prior use of wastewater
collection facilities and other on-site disposal areas. Soil and sediment
testing, to date, has detected no significant off-site contamination. The
Company has communicated with the Environmental Protection Agency (EPA) and
appropriate state regulatory agencies on these matters. Under the terms of the
agreement with CMS Energy Corporation, the Company is obligated to complete the
PEPL and Trunkline clean-up programs at certain agreed-upon sites. These clean-
up programs are expected to continue until 2001.
At December 31, 1998 and 1997, remaining estimated clean-up costs on the
TETCO, PEPL and Trunkline systems were accrued and included in the Consolidated
Balance Sheets Other Current Liabilities and Environmental Clean-up Liabilities.
These cost estimates represent gross clean-up costs expected to be incurred,
have not been discounted or reduced by customer recoveries and generally do not
include fines, penalties or third-party claims. Costs expected to be recovered
from customers have been deferred and are included in the Consolidated Balance
Sheets as Environmental Clean-up Costs.
The federal and state clean-up programs are not expected to interrupt or
diminish the Company's ability to deliver natural gas to customers. Based on the
Company's experience to date and costs incurred for clean-up operations,
management believes the resolution of matters relating to the environmental
issues discussed above will not have a material adverse effect on consolidated
results of operations or financial position.
Air Quality Control. In December 1997, the United Nations held negotiations
in Kyoto, Japan to determine how to achieve worldwide stabilization of
greenhouse gas emissions, including carbon dioxide emissions from fossil-fired
generating facilities and methane from natural gas operations. Further
negotiations in November 1998 in Buenos Aires, Argentina, resulted in a work
plan to complete the operational details of the Kyoto agreement by late 2000.
The Company is taking steps to prepare for possible action on greenhouse gas
emissions and has completed a greenhouse gas emissions inventory. Implications
of greenhouse gas emissions are being integrated into planning processes.
Because this matter is in the early stages of discussion, management cannot
estimate the effects on future consolidated results of operations or financial
position.
Litigation and Contingencies. For information concerning litigation and
other commitments and contingencies, see Note 11 to the Consolidated Financial
Statements, "Commitments and Contingencies."
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 is using a three-phase approach to address year 2000 issues: 1)
inventory and preliminary assessment of computer systems, equipment and devices;
2) detailed assessment and remediation planning, and 3) conversion, testing and
contingency planning. The Company is employing a combination of systems repair
and planned systems replacement activities to achieve year 2000 readiness for
its business and process control systems, equipment and devices. The Company has
substantially completed the first two phases throughout its business operations,
and is in various stages of the third and final
23
<PAGE>
phase. The Company's goal is to have its critical systems, equipment and devices
year 2000 ready by mid-1999. Business acquisitions routinely involve an
analysis of year 2000 readiness and are incorporated into the overall program as
necessary.
The Company is actively evaluating and tracking year 2000 readiness of
external third parties with which it has a material relationship. Such third
parties include vendors, customers, 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 third parties and any potential implications to its
operations. Alternate suppliers of critical products, goods and services are
being identified, where necessary.
Costs. Management believes it is devoting the resources necessary to
achieve year 2000 readiness in a timely manner. Current estimates for total
costs of the program, including internal labor as well as incremental costs such
as consulting and contract costs, are approximately $8 million, of which
approximately $2 million had been incurred as of December 31, 1998. 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 is currently underway to
assure continuity of business operations for all periods during which year 2000
impacts may occur. The Company is participating in multiple industry efforts to
assure effective year 2000 contingency plans, and intends to complete its own
year 2000 contingency plans by mid-1999. These plans address various year 2000
risk scenarios that cross departmental, business unit and industry lines as well
as specific risks from various internal and external sources, including supplier
readiness.
Based on assessments completed to date and compliance plans in process,
management 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.
New Accounting Standard. In September 1998, Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued. The Company is required to adopt this standard
by January 1, 2000. SFAS No. 133 requires that all derivatives be recognized as
either assets or liabilities and measured at fair value, and it defines the
accounting for changes in the fair value of the derivatives depending on the
intended use of the derivative. The Company is currently reviewing the expected
impact of SFAS No. 133 on consolidated results of operations and financial
position.
Subsequent Event. On February 18, 1999, Duke Energy 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 Endesa-Chile. The estimated total
cash outlay is approximately $2.1 billion based on current exchange rates. The
offers will be contingent upon, among other things, certain Endesa-Chile
shareholder approvals. If all approvals are obtained, the transactions are
expected to be completed during the second quarter of 1999. Endesa-Chile
controls and operates 10,247 megawatts of generating capacity in Argentina,
Brazil, Chile, Colombia and Peru.
Forward-Looking Statements. From time to time, the Company may make
statements regarding its assumptions, projections, expectations, intentions or
beliefs about future events. These statements are intended as "forward-looking
statements" under the Private Securities Litigation Reform Act of 1995. The
Company cautions that assumptions, projections, expectations, intentions or
beliefs about future events may and often do vary from actual results and the
differences between assumptions, projections, expectations, intentions or
beliefs and actual results can be material. Accordingly, there can be no
assurance that actual results will not differ materially from those expressed or
implied by the forward-looking statements. Factors that could cause actual
achievements and events to differ materially from those expressed or implied in
such forward-looking statements include state and federal legislative and
regulatory initiatives that affect cost and investment recovery,
24
<PAGE>
have an impact on rate structures and affect the speed and degree to which
competition enters the electric and natural gas industries; industrial,
commercial and residential growth in the service territories of the Company and
its subsidiaries; the weather and other natural phenomena; the timing and extent
of changes in commodity prices and interest rates; changes in environmental and
other laws and regulations to which the Company and its subsidiaries are subject
or other external factors over which the Company has no control; the results of
financing efforts; growth in opportunities for the Company's business units;
achievement of year 2000 readiness; and the effect of accounting policies issued
periodically by accounting standard-setting bodies.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
See "Management's Discussion and Analysis of Results of Operations and
Financial Condition, Quantitative and Qualitative Disclosures About Market
Risk."
25
<PAGE>
Item 8. Financial Statements And Supplementary Data.
DUKE CAPITAL CORPORATION
Consolidated Statements of Income
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1997 1996
------- ------- ------
In millions
<S> <C> <C> <C>
Operating Revenues
Sales, trading and marketing of natural gas and petroleum products... $ 7,854 $ 8,151 $5,848
Transportation and storage of natural gas............................ 1,450 1,504 1,523
Trading and marketing of electricity................................. 2,788 1,665 78
Other................................................................ 967 595 367
------- ------- ------
Total operating revenues.......................................... 13,059 11,915 7,816
------- ------- ------
Operating Expenses
Natural gas and petroleum products purchased......................... 7,497 7,705 5,414
Purchased power...................................................... 2,602 1,658 78
Other operation and maintenance...................................... 1,450 1,279 1,062
Depreciation and amortization........................................ 385 342 309
Property and other taxes............................................. 89 95 84
------- ------- ------
Total operating expenses.......................................... 12,023 11,079 6,947
------- ------- ------
Operating Income...................................................... 1,036 836 869
Other Income and Expenses............................................. 101 37 20
------- ------- ------
Earnings Before Interest and Taxes.................................... 1,137 873 889
Interest Expense...................................................... 237 214 232
Minority Interests.................................................... 71 22 6
------- ------- ------
Earnings Before Income Taxes.......................................... 829 637 651
Income Taxes.......................................................... 310 257 252
------- ------- ------
Income Before Extraordinary Item...................................... 519 380 399
Extraordinary Loss, net of tax........................................ (8) - (17)
------- ------- ------
Net Income............................................................ $ 511 $ 380 $ 382
======= ======= ======
</TABLE>
See Notes to Consolidated Financial Statements.
26
<PAGE>
DUKE CAPITAL CORPORATION
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1998 1997 1996
------- ------- --------
In millions
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income........................................................................ $ 511 $ 380 $ 382
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization................................................... 397 349 326
Deferred income taxes........................................................... 70 133 103
Transition cost (payments) recoveries, net...................................... (28) (36) 91
(Increase) decrease in
Receivables................................................................... (101) (241) (648)
Inventory..................................................................... (32) (11) 4
Other current assets.......................................................... (50) (6) 11
Increase (decrease) in
Accounts payable.............................................................. 56 198 582
Taxes accrued................................................................. 40 33 15
Interest accrued.............................................................. 6 (9) (9)
Other current liabilities..................................................... 101 (46) (7)
Other, net...................................................................... (40) (46) 82
------- ------- --------
Net cash provided by operating activities................................... 930 698 932
------- ------- --------
Cash Flows from Investing Activities
Capital expenditures.............................................................. (1,573) (614) (788)
Investment expenditures........................................................... (341) (673) (173)
Proceeds from sales and other, net................................................ 115 109 96
------- ------- --------
Net cash used in investing activities....................................... (1,799) (1,178) (865)
------- ------- --------
Cash Flows from Financing Activities
Proceeds from the issuance of
Long-term debt.................................................................. 590 947 327
Guaranteed preferred beneficial interests in subordinated notes of Duke Capital
Corporation.................................................................... 581 -- --
Common stock.................................................................... -- 6 12
Payments for the redemption of long-term debt..................................... (78) (200) (524)
Net change in notes payable and commercial paper.................................. (498) (221) 209
Capital contributions from parent................................................. 200 -- 65
Dividends paid.................................................................... -- (83) (142)
Other, net........................................................................ 6 (26) (16)
------- ------- --------
Net cash provided by (used in) financing activities......................... 801 423 (69)
------- ------- --------
Net decrease in cash and cash equivalents........................................... (68) (57) (2)
Cash received from business acquisitions............................................ 38 -- --
Cash and Cash Equivalents at beginning of year...................................... 94 151 153
------- ------- --------
Cash and Cash Equivalents at end of year............................................ $ 64 $ 94 $ 151
======= ======= ========
Supplemental Disclosures
Cash paid for interest, net of amount capitalized................................. $ 224 $ 222 $ 233
Cash paid for income taxes........................................................ $ 192 4 112 $ 86
</TABLE>
See Notes to Consolidated Financial Statements.
27
<PAGE>
DUKE CAPITAL CORPORATION
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
------------------
1998 1997
------- ---------
In millions
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents........................... $ 64 $ 94
Receivables......................................... 1,767 1,621
Inventory........................................... 214 183
Current portion of natural gas transition costs..... 100 67
Unrealized gains on mark to market transactions..... 1,457 551
Other............................................... 218 140
------- ---------
Total current assets............................. 3,820 2,656
------- ---------
Investments and Other Assets
Investments in affiliates........................... 902 686
Pre-funded pension costs............................ 340 302
Goodwill, net....................................... 495 504
Notes receivable.................................... 244 240
Unrealized gains on mark to market transactions..... 396 66
Other............................................... 169 89
------- ---------
Total investments and other assets............... 2,546 1,887
------- ---------
Property, Plant and Equipment
Cost................................................ 11,020 9,696
Less accumulated depreciation and amortization...... 3,866 3,631
------- ---------
Net property, plant and equipment................ 7,154 6,065
------- ---------
Regulatory Assets and Deferred Debits
Debt expense........................................ 58 66
Regulatory asset related to income taxes............ 15 17
Natural gas transition costs........................ 80 194
Environmental clean-up costs........................ 87 104
Other............................................... 96 108
------- ---------
Total regulatory assets and deferred debits...... 336 489
------- ---------
Total Assets........................................ $13,856 $11,097
======= =========
</TABLE>
See Notes to Consolidated Financial Statements.
28
<PAGE>
DUKE CAPITAL CORPORATION
Consolidated Balance Sheets -- Continued
<TABLE>
<CAPTION>
December 31,
----------------------------
1998 1997
----------- -------------
In millions
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Accounts payable.............................................................. $ 1,406 $ 1,338
Notes payable and commercial paper............................................ 29 138
Taxes accrued................................................................. 159 119
Interest accrued.............................................................. 57 51
Current maturities of long-term debt.......................................... 258 23
Unrealized losses on mark to market transactions.............................. 1,387 538
Other......................................................................... 466 390
----------- -------------
Total current liabilities................................................... 3,762 2,597
----------- -------------
Long-term Debt.................................................................. 2,884 2,919
----------- -------------
Deferred Credits and Other Liabilities
Deferred income taxes......................................................... 1,460 1,364
Natural gas transition liabilities............................................ 4 78
Environmental clean-up liabilities............................................ 148 158
Unrealized losses on mark to market transactions.............................. 362 50
Other......................................................................... 330 397
----------- -------------
Total deferred credits and other liabilities................................ 2,304 2,047
----------- -------------
Minority Interests.............................................................. 253 168
----------- -------------
Guaranteed Preferred Beneficial Interests in Subordinated Notes of Duke Capital
Corporation................................................................... 580 --
----------- -------------
Common Stockholder's Equity
Common stock, no par, 3,000 shares authorized; 1,010 shares outstanding....... -- --
Paid-in capital............................................................... 2,969 2,766
Retained earnings............................................................. 1,104 600
----------- -------------
Total common stockholder's equity........................................... 4,073 3,366
----------- -------------
Total Liabilities and Stockholder's Equity.................................... $ 13,856 $ 11,097
=========== =============
</TABLE>
See Notes to Consolidated Financial Statements.
29
<PAGE>
DUKE CAPITAL CORPORATION
Consolidated Statements of Common Stockholder's Equity
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1998 1997 1996
---------- ---------- -----------
In millions
<S> <C> <C> <C>
Common Stock
Balance at beginning of year........................................... $ -- $ -- $ --
---------- ---------- -----------
Balance at end of year................................................ -- -- --
---------- ---------- -----------
Paid-in Capital
Balance at beginning of year........................................... 2,766 2,745 2,657
Dividend reinvestment and employee benefits............................ -- 7 23
Capital infusion from parent........................................... 200 10 65
Other capital stock transactions, net.................................. 3 4 --
---------- ---------- -----------
Balance at end of year................................................ 2,969 2,766 2,745
---------- ---------- -----------
Retained Earnings
Balance at beginning of year........................................... 600 316 76
Net income............................................................. 511 380 382
Dividends declared..................................................... -- (83) (142)
Other capital stock transactions, net.................................. (7) (13) --
---------- ---------- -----------
Balance at end of year................................................ 1,104 600 316
---------- ---------- -----------
Total Common Stockholder's Equity....................................... $ 4,073 $ 3,366 $ 3,061
========== ========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
30
<PAGE>
DUKE CAPITAL
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1998, 1997 and 1996
Note 1. Summary of Significant Accounting Policies
Consolidation. Duke Capital Corporation (formally Church Street Capital
Corp.) (collectively with its subsidiaries, the "Company") is a wholly owned
subsidiary of Duke Energy Corporation (Duke Energy). The consolidated financial
statements include the accounts of all of the Company's majority-owned
subsidiaries after the elimination of significant intercompany transactions and
balances. Investments in other entities that are not controlled by the Company,
but where it has significant influence over operations, are accounted for using
the equity method.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Although these estimates are based on management's knowledge
of current and expected future events, actual results could differ from those
estimates.
Consolidated Statements of Cash Flows. All liquid investments with
maturities at date of purchase of three months or less are considered cash
equivalents.
Cash flows from investing activities include investments in real estate
development projects. Proceeds from the sale of residential real estate
development projects are included in cash flows from operating activities.
Proceeds from the sale of commercial real estate development projects are
included in cash flows from investing activities.
Inventory. Inventory consists primarily of materials and supplies and gas
held for transmission, processing and sales commitments. Inventory is recorded
at the lower of cost or market, primarily using the average cost method.
Commodity Derivatives. The Company, primarily through its subsidiaries,
manages its exposure to risk from existing contractual commitments and provides
risk management services to its customers and suppliers through forward
contracts, futures, over-the-counter swap agreements and options.
Commodity derivatives and certain forward contracts utilized for trading
purposes are accounted for using the mark-to-market method. Under this
methodology, these instruments 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 or Purchased Power. Unrealized gains and losses are recorded in the
Consolidated Balance Sheets as Unrealized Gains or Losses on Mark to Market
Transactions.
Futures, over-the-counter swap agreements and options are also utilized for
non-trading purposes to hedge the impact of market fluctuations in the price and
transportation costs of natural gas, electricity and other energy-related
products. In order to qualify as a hedge, the price movements in the commodity
derivatives must be highly correlated with the underlying hedged commodity.
Under the deferral method of accounting, gains and losses related to commodity
derivatives which qualify as hedges of commodity commitments are recognized in
income when the underlying hedged physical transaction closes and are included
in the Consolidated Statements of Income as Natural Gas and Petroleum Products
Purchased or Purchased Power. Deferred gains and losses related to such
instruments are reported in the Consolidated Balance Sheets as Current Assets or
Liabilities until recognized in income. If the commodity derivative is no longer
sufficiently correlated to the underlying commodity, or if the underlying
commodity transaction closes earlier than anticipated, the deferred gains or
losses are recognized in income.
Derivative Financial Instruments. The Company utilizes interest rate lock
agreements to hedge interest rate risk associated with new debt issuances. Under
the deferral method of accounting, gains or losses on such agreements, when
settled, are deferred in the Consolidated Balance Sheets as Long-term Debt and
are amortized in the Consolidated Statements of Income as an adjustment to
interest expense.
The Company enters into foreign currency swap agreements to manage foreign
currency risks associated with energy contracts denominated in foreign
currencies. These agreements are accounted for under the mark-to-market method.
See previous discussion of the mark-to-market method in the Commodity
Derivatives section.
31
<PAGE>
DUKE CAPITAL
Notes to Consolidated Financial Statements -- Continued
Note 1. Summary of Significant Accounting Policies -- Continued
Goodwill Amortization. Goodwill related to the purchases of Duke/Louis
Dreyfus, L.L.C. (D/LD); Texas Eastern Corporation (TEC); and other natural gas
gathering, transmission and processing facilities and engineering consulting
businesses is amortized on a straight-line basis over 10 years, 40 years and 15
years, respectively. See Note 2 for a description of the D/LD acquisition.
Goodwill recorded as of December 31, 1998 and 1997 related to the 1989 TEC
acquisition was $245 million. Accumulated amortization of goodwill at December
31, 1998 and 1997 was $166 million and $124 million, respectively.
Property, Plant and Equipment. Property, plant and equipment are stated at
original cost. The Company capitalizes all construction-related direct labor and
material costs, as well as indirect construction costs. Indirect costs include
general engineering, taxes and the cost of money. The cost of renewals and
betterments that extend the useful life of property, plant and equipment is also
capitalized. The cost of repairs and replacements is charged to expense as
incurred. Depreciation is generally computed using the straight-line method. The
composite weighted-average depreciation rates were 3.5%, 3.5% and 3.4% for 1998,
1997 and 1996, respectively.
When property, plant and equipment maintained by the Company's regulated
operations are retired, the original cost plus the cost of retirement, less
salvage, is charged to accumulated depreciation and amortization. When entire
regulated operating units are sold or non-regulated properties are retired or
sold, the property and related accumulated depreciation and amortization
accounts are reduced, and any gain or loss is recorded in income, unless
otherwise required by the Federal Energy Regulatory Commission (FERC).
Impairment of Long-Lived Assets. The recoverability of long-lived assets
and intangible assets are reviewed whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable. Such
evaluation is based on various analyses, including undiscounted cash flow
projections.
Unamortized Debt Premium, Discount and Expense. Premiums, discounts and
expenses incurred in connection with the issuance of presently outstanding long-
term debt are amortized over the terms of the respective issues. Any call
premiums or unamortized expenses associated with refinancing higher-cost debt
obligations used to finance regulated assets and operations are amortized
consistent with regulatory treatment of those items.
Environmental Expenditures. Environmental expenditures that relate to an
existing condition caused by past operations and do not contribute to current or
future revenue generation are expensed. Environmental expenditures relating to
current or future revenues are expensed or capitalized as appropriate.
Liabilities are recorded when environmental assessments and/or clean-ups are
probable and the costs can be reasonably estimated. Certain of these
environmental assessments and clean-up costs are expected to be recovered from
Natural Gas Transmission customers and have, therefore, been deferred and are
included in the Consolidated Balance Sheets as Environmental Clean-up Costs.
Cost-Based Regulation. The Company's regulated operations are subject to
the provisions of Statement of Financial Accounting Standards (SFAS) No. 71,
"Accounting for the Effects of Certain Types of Regulation." Accordingly,
certain assets and liabilities that result from the regulated ratemaking process
are recorded that would not be recorded under generally accepted accounting
principles for non-regulated entities. These regulatory assets and liabilities
are classified in the Consolidated Balance Sheets as Regulatory Assets and
Deferred Debits and Deferred Credits and Other Liabilities, respectively. The
applicability of SFAS No. 71 is routinely evaluated, and factors such as the
impact of competition and the necessity to discount cost based rates charged to
customers are considered. Increasing competition might require companies to
reduce their asset balances to reflect a market basis less than cost and to
write off their associated regulatory assets. Management cannot predict the
potential impact, if any, of increasing competition on future financial position
or results of operations. However, the Company continues to position itself to
effectively meet these challenges by maintaining competitive prices.
Revenues. Revenues on transportation and storage of natural gas are
recognized as service is provided. Revenues on sales of natural gas and
petroleum products are recognized in the period of delivery. When rate cases are
pending final approval, a portion of the revenues is subject to possible refund.
Reserves have been established where required for such cases.
32
<PAGE>
DUKE CAPITAL
Notes to Consolidated Financial Statements -- Continued
Note 1. Summary of Significant Accounting Policies -- Continued
The Company recognizes revenues from engineering and consulting services
provided through costs plus fee contracts based on the costs incurred during the
period plus a pro rata portion of the total fee earned. Revenues from services
provided through fixed price contracts are recognized using the percentage-of-
completion method, primarily based on contract costs to date compared with the
total estimated contract costs.
The Company recognizes profits from sales of residential real estate
development projects at closing. Profit is recognized under the accrual method
using estimates of average gross profit per developed lot within the project
based on total estimated project costs. Gains on commercial real estate
development projects are recognized under the accrual method. Gains on land
trades are recognized based on the fair market value of the land received,
adjusted for any cash consideration, as compared to the cost of the land traded.
Allowance for Funds Used During Construction (AFUDC). AFUDC represents the
estimated debt and equity costs of capital funds necessary to finance the
construction of new regulated facilities. AFUDC is a non-cash item and is
recognized as a cost of Property, Plant and Equipment, with offsetting credits
to Other Income and Expenses and to Interest Expense. After construction is
completed, the Company is permitted to recover these costs, including a fair
return, through their inclusion in rate base and in the provision for
depreciation. Rates used for capitalization of AFUDC by the Company's regulated
operations are calculated in compliance with FERC rules.
Income Taxes. Duke Energy and its subsidiaries file a consolidated federal
income tax return. Federal income taxes have been provided by the Company on the
basis of its separate company income and deductions in accordance with
established practices of the consolidated group. Deferred income taxes have been
provided for temporary differences. Temporary differences occur when events and
transactions recognized for financial reporting result in taxable or tax-
deductible amounts in different periods. Investment tax credits have been
deferred and are being amortized over the estimated useful lives of the related
properties.
Extraordinary Items. In January 1998, TEPPCO Partners, L.P. (TEPPCO), 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.
On October 1, 1996, Texas Eastern Transmission Corporation (TETCO), a
subsidiary of the Company, redeemed $150 million, 10% debentures and $100
million, 10 1/8% debentures due 2011. TETCO recorded a non-cash extraordinary
item of $17 million, net of income tax of $10 million, related to the
unamortized discount on this early retirement of debt.
Reclassifications. Certain amounts have been reclassified in the
Consolidated Financial Statements to conform to the current presentation.
New Accounting Standard. In September 1998, SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," was issued. The Company is
required to adopt this standard by January 1, 2000. SFAS No. 133 requires that
all derivatives be recognized as either assets or liabilities and measured at
fair value, and it defines the accounting for changes in the fair value of the
derivatives depending on the intended use of the derivative. The Company is
currently reviewing the expected impact of SFAS No. 133 on consolidated results
of operations and financial position.
Note 2. Business Combinations
PanEnergy Corp (PanEnergy). On June 18, 1997, Duke Power Company (Duke
Power) changed its name to Duke Energy Corporation and completed a stock-for-
stock merger with PanEnergy. Subsequently, the common stock of PanEnergy was
contributed by Duke Energy to the Company. The combination of the Company and
PanEnergy was accounted for similar to a pooling of interests; therefore, the
Consolidated Financial Statements and other financial information included in
this Annual Report for periods prior to the combination include the combined
historical financial results of the Company and PanEnergy.
33
<PAGE>
DUKE CAPITAL
Notes to Consolidated Financial Statements -- Continued
Note 2. Business Combinations -- Continued
Operating revenues and net income previously reported by the separate
companies and the combined amounts presented in the accompanying Consolidated
Statements of Income are as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1996
----------------------------------------------
Duke Capital PanEnergy Adjustments Combined
------------ --------- ----------- --------
In millions
<S> <C> <C> <C> <C>
Operating revenues................ $272 $7,505 $ 39 $7,816
Income before extraordinary item.. $ 38 $ 361 - $ 399
Net income........................ $ 38 $ 344 - $ 382
</TABLE>
The adjustment to operating revenues is a reclassification of PanEnergy's
equity in earnings of unconsolidated affiliates from other income to revenues to
be consistent with the Company's financial statement presentation.
Duke/Louis Dreyfus, L.L.C. On June 17, 1997, the Company acquired the
remaining 50% ownership interest in D/LD from affiliates of Louis Dreyfus Corp.
for $247 million. D/LD markets electric power, natural gas and energy-related
services to utilities, municipalities and other large energy users in North
America. The acquisition was accounted for by the purchase method, and the
assets and liabilities and results of operations of D/LD have been consolidated
in the Company's financial statements since the date of purchase. The purchase
price substantially represents goodwill.
Duke/UAE L.L.C. During December 1997, a wholly owned subsidiary of the
Company formed a joint venture with UAE Ref-Fuel L.L.C. (UAE), a wholly owned
subsidiary of United American Energy Corp. The Company owns a 65% interest in
the joint venture, with UAE owning a 35% minority interest. The joint venture
acquired a 50% ownership interest in American Ref-Fuel Company, a waste-to-
energy firm with operations primarily in New York and New Jersey. Thus, the
Company has an indirect 32.5% ownership interest in American Ref-Fuel Company
and provided $237 million of investment and financing to the venture.
Duke Energy Trading and Marketing, L.L.C. On August 1, 1996, a wholly owned
subsidiary of the Company formed a natural gas and power marketing joint venture
with Mobil Corporation affiliates. The marketing company conducts business as
Duke Energy Trading and Marketing, L.L.C. in the United States and as Duke
Energy Marketing L.P. in Canada. The Company operates the joint venture and owns
a 60% interest, with Mobil Corporation owning a 40% minority interest.
Note 3. Business Segments
The Company is an integrated energy and energy services provider with the
ability to offer physical delivery and management of both electricity and
natural gas throughout the United States and abroad. The Company provides these
and other services through six business segments:
. Natural Gas Transmission
. Field Services
. Trading and Marketing
. Global Asset Development
. Other Energy Services
. Real Estate Operations
These segments were defined as a result of the Company adopting SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information."
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 expected sale of the Midwest
Pipelines in early 1999, Natural Gas Transmission also provides interstate
transportation and storage services in the midwest states. See further
discussion of the proposed sale of the Midwest Pipelines in Note 11 to the
Consolidated Financial Statements. The interstate natural gas transmission and
storage operations are also subject to the rules and regulations of the FERC.
34
<PAGE>
DUKE CAPITAL
Notes to Consolidated Financial Statements -- Continued
Note 3. Business Segments -- Continued
Field Services gathers, processes, transports and markets natural gas and
produces and markets NGLs. Field Services operates gathering systems in ten
states that serve major gas-producing regions in the Rocky Mountain, Permian
Basin, Mid-Continent and Gulf Coast areas.
Trading and Marketing markets natural gas, electricity and other energy-
related products across North America. Duke Energy 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 Power Services, LLC (Duke Energy Power Services) 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 commercial and residential real estate projects and manages
forest holdings in the southeastern United States.
35
<PAGE>
DUKE CAPITAL
Notes to Consolidated Financial Statements -- Continued
Note 3. Business Segments -- Continued
Business Segment Data
<TABLE>
<CAPTION>
Depreciation Capital and
Unaffiliated Intersegment Total and Investment Segment
Revenues Revenues Revenues EBIT Amortization Expenditures Assets
------------ ------------ -------- -------- ------------ ------------ ---------
In millions
<S> <C> <C> <C> <C> <C> <C> <C>
Year Ended December 31, 1998
Natural Gas Transmission............. $ 1,426 $ 102 $ 1,528 $ 702 $215 $ 290 $ 4,996
Field Services....................... 2,094 545 2,639 76 80 304 1,893
Trading and Marketing................ 8,614 171 8,785 122 11 8 3,233
Global Asset Development............. 237 82 319 80 31 1,027 2,061
Other Energy Services................ 521 -- 521 10 12 41 376
Real Estate Operations............... 181 -- 181 142 6 217 724
Other Operations..................... (14) 26 12 5 30 27 759
Eliminations......................... -- (926) (926) -- -- -- (186)
------- ----- ------- ------ ---- ------ -------
Total Consolidated................. $13,059 $ -- $13,059 $1,137 $385 $1,914 $13,856
======= ===== ======= ====== ==== ====== =======
Year Ended December 31, 1997
Natural Gas Transmission............. $ 1,468 $ 104 $ 1,572 $ 624 $229 $ 247 $ 5,059
Field Services....................... 2,481 574 3,055 157 71 157 1,855
Trading and Marketing................ 7,411 78 7,489 44 7 18 1,857
Global Asset Development............. 109 14 123 5 9 348 988
Other Energy Services................ 361 15 376 18 6 47 223
Real Estate Operations............... 124 -- 124 98 4 223 594
Other Operations..................... (39) -- (39) (73) 16 247 855
Eliminations......................... -- (785) (785) -- -- -- (334)
------- ----- ------- ------ ---- ------ -------
Total Consolidated................. $11,915 $ -- $11,915 $ 873 $342 $1,287 $11,097
======= ===== ======= ====== ==== ====== =======
Year Ended December 31, 1996
Natural Gas Transmission............. $ 1,470 $ 86 $ 1,556 $ 595 $228 $ 194 $ 5,186
Field Services....................... 2,216 421 2,637 152 59 531 1,709
Trading and Marketing................ 3,773 41 3,814 58 4 7 1,404
Global Asset Development............. 65 7 72 -- 7 35 522
Other Energy Services................ 203 1 204 20 3 39 130
Real Estate Operations............... 114 -- 114 88 4 115 446
Other Operations..................... (25) -- (25) (24) 4 40 655
Eliminations......................... -- (556) (556) -- -- -- (300)
------- ----- ------- ------ ---- ------ -------
Total Consolidated................. $ 7,816 $ -- $ 7,816 $ 889 $309 $ 961 $ 9,752
======= ===== ======= ====== ==== ====== =======
</TABLE>
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 earnings before interest and taxes, 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.
Other Operations primarily includes communication services and certain
unallocated corporate costs.
Note 4. Regulatory Matters
Natural Gas Transmission. The Company's interstate natural gas pipelines
primarily provide transportation and storage services pursuant to FERC Order
636. Order 636 allows pipelines to recover eligible costs resulting from
implementation of the order (transition costs). In 1994, the FERC approved
TETCO's settlement resolving regulatory issues related primarily to Order 636
transition costs and a number of other issues related to services prior to Order
636. Under the 1994
36
<PAGE>
DUKE CAPITAL
Notes to Consolidated Financial Statements -- Continued
Note 4. Regulatory Matters -- Continued
settlement, TETCO's liability for transition costs was estimated based on the
amount of producers' natural gas reserves and other factors. This settlement
provided for the recovery of certain of these transition costs from customers
through volumetric and reservation charges. In 1995, based upon producers'
discoveries of additional natural gas reserves, TETCO increased the estimated
liabilities for transition costs by $126 million, increased regulatory assets by
$86 million for amounts expected to be collected from customers and recognized a
$40 million charge to operating expenses ($26 million after tax). In 1998, TETCO
favorably resolved all remaining gas purchase contracts, recognizing $39 million
of income ($24 million after tax).
On August 29, 1998, the FERC approved a settlement filed by TETCO, which
accelerates recovery of natural gas transition costs and reduces depreciation
expense to more appropriately reflect the estimated useful lives of its
facilities, principally interstate natural gas pipelines. Prior to the
settlement, the Company reviewed the condition of its natural gas pipeline
facilities and current maintenance practices, and concluded that extension of
the useful lives was appropriate. These facilities have a book value of
approximately $1.8 billion, net of accumulated depreciation of $2.6 billion. The
new weighted average rate of depreciation for storage and transportation plant
is approximately 1.25%. Implementation of the settlement began October 1, 1998,
and a rate moratorium will be in effect until 2004. The settlement reduces
customer rates as a result of the reduced depreciation expense offset through
2001 by the accelerated recovery of natural gas transition costs. The settlement
is not expected to have a material effect on the net results of operations or
financial position of the Company.
On April 1, 1992 and November 1, 1992, Panhandle Eastern Pipe Line Company
(PEPL) placed into effect, subject to refund, general rate increases. On
February 26, 1997, the FERC approved PEPL's settlement agreement which provided
final resolution of refund matters and established prospective rates. The
agreement terminated other actions relating to these proceedings as well
as PEPL's restructuring of rates and transition cost recoveries related to FERC
Order 636. The settlement will not have a material impact on future operating
revenues or financial position of the Company. As a result of the resolution of
these and certain other proceedings, PEPL refunded $38 million to customers in
1997 and recorded earnings before interest and taxes of $33 million and $8
million in 1997 and 1996, respectively.
Global Asset Development. Two California electric generating plants, Moss
Landing and Oakland, sell electricity under the terms of Reliability Must Run
(RMR) Agreements with the California Independent System Operator (ISO), which
purchases electricity at FERC regulated rates. The Company has not received
final approval from the FERC with respect to the electric rates charged by the
two plants, and, therefore, the rates are subject to partial refund. Management
believes that the final resolution of this matter will not have a material
adverse effect on consolidated results of operations or financial position.
Note 5. Income Taxes
Income Tax Expense
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------
1998 1997 1996
-------- --------- ---------
In millions
<S> <C> <C> <C>
Current income taxes
Federal.............................. $200 $ 96 $123
State................................ 40 28 26
---- ---- ----
Total current income taxes......... 240 124 149
---- ---- ----
Deferred income taxes, net
Federal.............................. 59 122 90
State................................ 11 11 13
---- ---- ----
Total deferred income taxes, net... 70 133 103
---- ---- ----
Total income tax expense............... $310 $257 $252
==== ==== ====
</TABLE>
37
<PAGE>
DUKE CAPITAL
Notes to Consolidated Financial Statements -- Continued
Note 5. Income Taxes -- Continued
Income Tax Expense Reconciliation to Statutory Rate
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------
1998 1997 1996
---------- --------- ---------
In millions
<S> <C> <C> <C>
Income tax, computed at the statutory rate of 35%.......... $ 290 $ 223 $ 228
Adjustments resulting from:
State income tax, net of federal income tax effect....... 33 25 26
Other items, net......................................... (13) 9 (2)
----- ----- -----
Total income tax expense................................... $ 310 $ 257 $ 252
===== ===== =====
Effective tax rate......................................... 37.3% 40.3% 38.7%
</TABLE>
Net Deferred Income Tax Liability Components
<TABLE>
<CAPTION>
December 31,
------------------------------
1998 1997
----------- ---------
In millions
<S> <C> <C>
Deferred credits and other liabilities........................... $ 108 $ 286
Alternative minimum tax credit carryforward (a).................. 30 30
Other............................................................ 7 8
------- -------
Total deferred income tax assets............................... 145 324
Valuation allowance.............................................. (52) (47)
------- -------
Net deferred income tax assets................................. 93 277
------- -------
Investments and other assets..................................... (109) (130)
Prefunded pension costs.......................................... (103) (106)
Property, plant and equipment.................................... (1,025) (1,007)
Regulatory assets and deferred debits............................ (91) (135)
Natural gas transition costs..................................... (62) (68)
Other............................................................ (66) (99)
------- -------
Total deferred income tax liabilities.......................... (1,456) (1,545)
------- -------
State deferred income tax, net of federal tax effect............. (97) (96)
------- -------
Net deferred income tax liability................................ $(1,460) $(1,364)
======= =======
</TABLE>
_______________________
(a) The alternative minimum tax credit carryforward can be carried
forward indefinitely.
In 1990, PanEnergy established a provision for certain tax issues related
to the purchase of TEC, which resulted in an increase in goodwill and deferred
income tax liability. If tax benefits relating to the valuation allowance for
deferred income tax assets and other tax reserves are recognized subsequent to
December 31, 1998, approximately $29 million will be allocated as an adjustment
to goodwill.
Note 6. Risk Management and Financial Instruments
The Company, primarily through Trading and Marketing, manages its exposure
to risk from existing contractual commitments and provides risk management
services to its customers through forward contracts, futures, over-the-counter
swap agreements and options (collectively, "commodity instruments"). Energy
commodity forward contracts involve physical delivery of an energy commodity.
Energy commodity futures involve the buying or selling of natural gas,
electricity or other energy-related commodities at a fixed price. Over-the-
counter swap agreements require the Company to receive or make payments based on
the difference between a specified price and the actual price of the underlying
commodity. Energy commodity options held to mitigate price risk provide the
right, but not the requirement, to buy or sell energy-related commodities at a
fixed price.
38
<PAGE>
DUKE CAPITAL
Notes to Consolidated Financial Statements -- Continued
Note 6. Risk Management and Financial Instruments -- Continued
Commodity Instruments -- Trading. The Company engages in the trading of
commodity instruments, and therefore experiences net open positions. The Company
manages open positions with strict policies which limit its exposure to market
risk and require daily reporting to management of potential financial exposure.
These policies include statistical risk tolerance limits using historical price
movements to calculate a daily earnings at risk measurement. The weighted-
average life of the Company's commodity risk portfolio was approximately 11
months at December 31, 1998. During 1998, 1997 and 1996, net gains of $114
million, $34 million and $25 million, respectively, were recognized from trading
natural gas commodity derivatives. During 1998, net gains of $14 million were
recognized from trading electricity commodity instruments. Net gains related to
trading electricity commodity instruments were not material during 1997 and
1996. As of December 31, 1998 and 1997, the absolute notional contract quantity
of natural gas commodity derivatives held for trading purposes was 11,149
billion cubic feet (Bcf) and 5,408 Bcf, respectively. As of December 31, 1998,
the absolute notional contract quantity of electricity commodity instruments
held for trading purposes was 112,867 gigawatt hours (GWh). As of December 31,
1997, outstanding electricity commodity instruments were not material. At
December 31, 1998 and 1997, other outstanding energy-related commodity
derivatives held for trading purposes were not material.
Commodity Instruments -- Trading
<TABLE>
<CAPTION>
1998 1997
--------------------- --------------------
Assets Liabilities Assets Liabilities
-------- ----------- ------- -----------
In millions
<S> <C> <C> <C> <C>
Fair value at December 31........ $1,853 $1,749 $617 $588
Average fair value for the year.. 685 646 384 369
</TABLE>
Commodity Derivatives -- Non-Trading. At December 31, 1998 and 1997, the
Company held or issued several derivatives that reduce exposure to market
fluctuations relative to price and transportation costs of natural gas,
electricity and petroleum products. The Company's market exposure arises from
natural gas storage inventory balances and fixed-price purchase and sale
commitments that extend for periods of up to eight years. Futures, swaps and
options are used to manage and hedge price and location risk related to these
market exposures. Futures and swaps are also used to manage margins on
underlying fixed-price purchase or sale commitments for physical quantities of
natural gas, electricity and other energy-related commodities. Options are
utilized to manage margins and to limit overall price risk exposure. The gains,
losses and costs related to those commodity derivatives that qualify as a hedge
are not recognized until the underlying physical transaction closes. At December
31, 1998, the Company had deferred net gains of $10 million related to commodity
derivative hedges. As of December 31, 1998, the absolute notional contract
quantity of commodity derivatives held for non-trading purposes was 218 Bcf of
natural gas and 9,764 GWh of electricity. Commodity derivatives held for non-
trading purposes were not material at December 31, 1997.
Foreign Currency Derivatives. Trading and Marketing enters into foreign
currency swap agreements to manage foreign currency risks associated with energy
contracts denominated in foreign currencies. The agreements, with a notional
contract amount of approximately $120 million, begin in the year 2000 and extend
to the year 2005. The weighted average fixed exchange rate for the agreements is
1.472 Canadian dollars to U.S. dollars. The fair value of these agreements was
not material at December 31, 1998.
Market and Credit Risk. New York Mercantile Exchange (Exchange) traded
futures and option contracts are guaranteed by the Exchange and have nominal
credit risk. On all other transactions previously described, the Company is
exposed to credit risk in the event of nonperformance by the counterparties. For
each counterparty, the Company analyzes the financial condition prior to
entering into an agreement, establishes credit limits and monitors the
appropriateness of these limits on an ongoing basis. The change in market value
of exchange-traded futures and options contracts requires daily cash settlement
in margin accounts with brokers. Swap contracts and most other over-the-counter
instruments are generally settled at the expiration of the contract term and
may be subject to margin requirements with the counterparty.
Financial Instruments. In 1996, TETCO received $99 million from the
financing of the right to collect certain Order 636 natural gas transition
costs, with limited recourse. At December 31, 1998 and 1997, $17 million and $53
million, respectively, remained outstanding related to the transition cost
recovery rights and were included in the Consolidated Balance
39
<PAGE>
DUKE CAPITAL
Notes to Consolidated Financial Statements -- Continued
Note 6. Risk Management and Financial Instruments -- Continued
Sheets as Other Current Liabilities and Deferred Credits and Other Liabilities.
Management believes the probability that the Company will be required to perform
under the recourse provisions is remote.
The fair value of financial instruments is summarized in the following
table. Judgment is required in interpreting market data to develop the estimates
of fair value. Accordingly, the estimates determined as of December 31, 1998 and
1997 are not necessarily indicative of the amounts the Company could have
realized in current market exchanges. The majority of the estimated fair value
amounts were obtained from independent parties.
Financial Instruments
<TABLE>
<CAPTION>
1998 1997
------------------------- ------------------------
Approximate Approximate
Book Value Fair Value Book Value Fair Value
---------- ----------- ---------- -----------
In millions
<S> <C> <C> <C> <C>
Long-term debt (a).................................. $3,142 $3,341 $2,942 $3,079
Guaranteed preferred beneficial interests in
subordinated notes of the Company................. 580 590 - -
</TABLE>
_____________
(a) Includes current maturities.
The fair value of cash and cash equivalents, notes receivable and notes
payable and commercial paper are not materially different from their carrying
amounts because of the short-term nature of these instruments or because the
stated rates approximate market rates.
Guarantees made to affiliates or recourse provisions from affiliates and
the sales agreement for Order 636 natural gas transition cost recovery have no
book value associated with them, and there are no fair values readily
determinable since quoted market prices are not available.
Note 7. Investment in Affiliates
Investments in domestic and international affiliates which are not
controlled by the Company but where the Company has significant influence over
operations are accounted for by the equity method. These investments include
undistributed earnings of $5 million and $21 million in 1998 and 1997,
respectively. The Company's share of net income from these affiliates are
reflected in the Consolidated Statements of Income as Other Operating Revenues.
Natural Gas Transmission. Investments primarily include ownership interests
in natural gas pipeline joint ventures which transport gas from Canada to the
United States. Investments include a 37.5% ownership interest in Maritimes &
Northeast Pipeline and a 9.8% ownership interest in Alliance Pipeline.
Field Services. Investments primarily include a 37% interest in a
partnership which owns natural gas gathering systems in the Gulf of Mexico
(Dauphin Island Gathering Partners) and a 21.1% interest in TEPPCO.
Global Asset Development. Global Asset Development has investments in
various natural gas and electric generation and transmission facilities
worldwide. Significant investments include a 32.5% indirect interest in American
Ref-Fuel Company, a 9.76% indirect interest in Hidroelectrica Piedra del Aguila
S.A., and a 25% indirect interest in National Methanol Company, which owns and
operates a methanol and MTBE (methyl tertiary butyl ether) plant in Jubail,
Saudi Arabia.
Other Energy Services. Investments include the participation in various
construction and support activities for fossil-fueled generating plants.
Real Estate Operations. Investments include various real estate development
projects.
Other Operations. Investments include a 20% interest in the BellSouth PCS
L.P. joint venture, which provides wireless personal communication services.
40
<PAGE>
DUKE CAPITAL
Notes to Consolidated Financial Statements -- Continued
Note 7. Investment in Affiliates -- Continued
Investment in Affiliates
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997 December 31, 1996
------------------------------ ------------------------------ -------------------------------
Domestic International Total Domestic International Total Domestic International Total
-------- ------------- ----- -------- ------------- ----- -------- ------------- -----
In millions
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Natural Gas Transmission.... $104 $ 37 $141 $ 67 $ -- $ 67 $ 46 $ -- $ 46
Field Services.............. 303 -- 303 160 -- 160 130 -- 130
Global Asset Development.... 171 223 394 174 208 382 14 184 198
Other Energy Services....... 19 23 42 16 10 26 50 1 51
Real Estate Operations...... 5 -- 5 2 -- 2 5 -- 5
Other Operations............ 17 -- 17 36 13 49 60 13 73
---- ---- ---- ---- ---- ---- ---- ---- ----
Total....................... $619 $283 $902 $455 $231 $686 $305 $198 $503
==== ==== ==== ==== ==== ==== ==== ==== ====
<CAPTION>
Equity in Earnings of Investment
December 31, 1998 December 31, 1997 December 31, 1996
------------------------------ ------------------------------ -------------------------------
Domestic International Total Domestic International Total Domestic International Total
-------- ------------- ----- -------- ------------- ----- -------- ------------- -----
In millions
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Natural Gas Transmission.... $ 14 $ 3 $ 17 $ 8 $-- $ 8 $ 5 $ -- $ 5
Field Services.............. 9 -- 9 19 -- 19 12 -- 12
Global Asset Development.... 50 18 68 8 21 29 6 19 25
Other Energy Services....... 1 13 14 4 8 12 19 2 21
Real Estate Operations...... -- -- -- -- -- -- -- -- --
Other Operations............ (29) -- (29) (30) -- (30) (31) 1 (30)
---- ---- ---- --- --- ---- ---- ---- ----
Total....................... $ 45 $ 34 $ 79 $ 9 $29 $ 38 $ 11 $ 22 $ 33
==== ==== ==== === === ==== ==== ==== ====
</TABLE>
Summarized Combined Financial Information of Unconsolidated Subsidiaries
<TABLE>
<CAPTION>
December 31,
------------------------------
1998 1997 1996
-------- -------- --------
In millions
<S> <C> <C> <C>
Balance Sheet
Current Assets................................................................................ $ 848 $ 642 $1,025
Noncurrent Assets............................................................................. 7,340 5,868 5,661
Current Liabilities........................................................................... 1,084 758 879
Noncurrent Liabilities........................................................................ 3,884 3,257 3,462
------ ------ ------
Net Assets.................................................................................. $3,220 $2,495 $2,345
====== ====== ======
Income Statement
Operating Revenues............................................................................ $1,667 $ 905 $3,133
Operating Expenses............................................................................ 1,166 703 2,494
Net Income.................................................................................... 263 72 160
</TABLE>
The Company had outstanding notes receivable from certain affiliates of $80
million and $87 million at December 31, 1998 and 1997, respectively.
41
<PAGE>
DUKE CAPITAL
Notes to Consolidated Financial Statements -- Continued
Note 8. Property, Plant and Equipment
Property, Plant And Equipment
December 31,
-----------------
1998 1997
------- -------
In millions
Natural gas transmission..................... $ 6,194 $ 6,094
Gathering and processing .................... 1,409 1,315
Construction work in progress................ 469 351
Other property and equipment................. 2,948 1,936
------- -------
Total Property, Plant and Equipment........ $11,020 $ 9,696
======= =======
Accumulated Depreciation
December 31,
-----------------
1998 1997
------- -------
In millions
Natural gas transmission..................... $ 2,585 $ 2,459
Gathering and processing..................... 482 444
Other........................................ 799 728
------- -------
Total Accumulated Depreciation............. $ 3,866 $ 3,631
======= =======
On July 1, 1998, a subsidiary of Duke Energy purchased three electric
generating stations in California for $501 million from Pacific Gas & Electric
Company. These stations have a combined capacity of 2,645 megawatts. Two of the
three plants, Moss Landing and Oakland, are subject to the terms of RMR
Agreements with the California ISO. The cost of these facilities is included
within "Other property and equipment" above.
42
<PAGE>
DUKE CAPITAL
Notes to Consolidated Financial Statements -- Continued
NOTE 9. Debt and Credit Facilities
Long-term Debt
<TABLE>
<CAPTION>
December 31,
------------------
Year Due 1998 1997
------------ -------- --------
In millions
<S> <C> <C> <C>
Duke Capital Corporation
Senior Notes:
6 1/4%................................................................. 2005 $ 250 $ --
6 3/4%................................................................. 2018 150 --
Commercial paper, 5.73% and 6.03% weighted-average rate at December 31,
1998 and 1997, respectively............................................ 500 800
Other debt................................................................ 24 --
PanEnergy
Bonds:
7 3/4%................................................................. 2022 328 328
8 5/8% Debentures...................................................... 2025 100 100
Notes:
9.55% - 9.9%, maturing serially........................................ 1998 - 2003 59 73
7% - 8 5/8%............................................................ 1999 - 2006 450 450
TETCO
Notes:
8% - 10 3/8%........................................................... 2000 - 2004 500 500
Medium term, Series A, 7.64 - 9.07%.................................... 1999 - 2012 100 100
Algonquin Gas Transmission Company
9.13% Notes............................................................... 2003 100 100
Panhandle Eastern Pipe Line Company (PEPL)
7 7/8% Note............................................................... 2004 100 100
7.2% - 7.95% Debentures................................................... 2023 - 2024 200 200
Crescent Resources, Inc (a)
Construction and mortgage loans, 5.21% - 7. 10%........................... 1998 - 2011 69 117
Revolving credit facilities, 5.98% and 6.30% weighted-average rate at
December 31, 1998 and 1997, respectively............................... 2001 100 77
Global Asset Development
5.2% - 18% Notes.......................................................... 1999 - 2004 111 --
Other debt of subsidiaries................................................ 13 --
Unamortized debt discount and premium, net................................ (12) (3)
------ ------
Total long-term debt...................................................... 3,142 2,942
Current maturities of long-term debt ..................................... (258) (23)
------ ------
Total long-term portion................................................... $2,884 $2,919
====== ======
</TABLE>
______________
(a) Substantial amounts of Crescent Resources' real estate development
projects, land and buildings were pledged as collateral.
The annual maturities of consolidated long-term debt at December 31, 1998
were $258 million, $208 million, $234 million, $127 million and $270 million for
1999 through 2003, respectively. Such payments exclude $628 million of long-term
debt that matures after 2003 which have call options whereby the Company has the
option to repay the debt early. Based on the years in which the Company may
first exercise their redemption options, $328 million could potentially be
repaid in 2002, $200 million in 2003 and $100 million thereafter.
43
<PAGE>
DUKE CAPITAL
Notes to Consolidated Financial Statements -- Continued
Note 9. Debt and Credit Facilities -- Continued
Credit Facilities
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------
1998 1997
------------------------ ------------------------
Credit Credit
Facilities Outstanding Facilities Outstanding
---------- ----------- ---------- -----------
In millions
<S> <C> <C> <C> <C>
364-day facilities (a)......................................... $ 600 $ -- $ 300 $--
Four-year revolving facilities................................. 125 100 125 77
Five-year revolving facilities (a)............................. 950 -- 950 --
------ ---- ------ ---
Total Consolidated............................................. $1,675 $100 $1,375 $77
====== ==== ====== ===
</TABLE>
___________
(a) Supported commercial paper facilities.
Notes Payable and Commercial Paper
December 31,
--------------
1998 1997
------ ------
In millions
Credit facilities outstanding........................... $ 100 $ 77
Note payable............................................ 4 4
Commercial paper outstanding............................ 525 934
----- ------
629 1,015
Less portion classified as long-term
Credit facilities..................................... (100) (77)
Commercial paper...................................... (500) (800)
----- ------
Portion classified as short-term........................ $ 29 $ 138
===== ======
The weighted average interest rate on outstanding short-term notes payable
and commercial paper at December 31, 1998 and 1997 was 5.73% and 6.03%,
respectively.
Note 10. Guaranteed Preferred Beneficial Interests in Subordinated Notes of Duke
Capital
The Company has formed business trusts for which it owns all the respective
common securities. The trusts issue and sell preferred securities and invest the
gross proceeds in assets of the trusts. Substantially all the assets of each
trust are junior subordinated notes issued by the Company.
Trust Preferred Securities
<TABLE>
<CAPTION>
December 31,
--------------
Issued Rate 1998 1997 Junior Subordinated Notes
------ ---- ---- ---- -------------------------
In millions
<S> <C> <C> <C> <C>
1998.................................... 7 3/8% $250 -- 7 3/8% Series A due 2038
1998.................................... 7 3/8% 350 -- 7 3/8% Series B due 2038
Unamortized debt discount............... (20) --
---- ---
$580 --
==== ===
</TABLE>
These trust preferred securities represent preferred undivided beneficial
interests in the assets of the respective trusts. Payment of distributions on
these preferred securities is guaranteed by the Company, but only to the extent
the trusts have funds legally and immediately available to make such
distributions. Dividends of $18 million related to the trust preferred
securities have been included in the Consolidated Statements of Income as
Minority Interests for the year ended December 31, 1998.
44
<PAGE>
DUKE CAPITAL
Notes To Consolidated Financial Statements -- Continued
Note 11. Commitments and Contingencies
Future Construction Costs. Projected 1999 capital and investment
expenditures for Natural Gas Transmission, including allowance for funds used
during construction, are approximately $400 million and do not include
projections related to the Midwest Pipelines which are expected to be sold in
early 1999. These projections include the completion of the Maritimes &
Northeast Pipeline project, which will deliver natural gas to markets in the
Canadian Maritimes provinces and the northeastern United States from a supply
basin offshore Nova Scotia. These projections also include other market
expansion projects and costs relating to existing assets.
The Company plans to continue to significantly grow several of its business
segments: Field Services, Global Asset Development, Trading and Marketing and
Other Energy Services. Expansion opportunities for Field Services include the
planned $1.35 billion acquisition of the natural gas gathering, processing,
fractionation and NGL pipeline business of Union Pacific Resources along with
its natural gas and NGL marketing activities. The transaction is expected to
close in the first half of 1999.
Expansion opportunities for Global Asset Development's international
division, Duke Energy International, include the $315 million purchase of power
generation and transmission assets in western Australia and New Zealand,
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. This transaction
closed on January 22, 1999.
Also, Duke Energy International recently purchased the rights to develop
and operate the 500-mile Eastern Gas Pipeline project in eastern Australia.
Construction of this $270 million pipeline project is scheduled to begin in July
1999 and completion is expected by the middle of 2000.
Expansion opportunities for Global Asset Development's domestic division,
Duke Energy Power Services, include the continuation of greenfield projects,
such as the Bridgeport Energy project and the Maine Independence Station, a
520-megawatt combined cycle natural gas-fired merchant generation plant in Maine
which is scheduled to begin producing power in the summer of 2000. Other
expansion opportunities include the Hidalgo project, a 510-megawatt power plant
to be built in south Texas, which is targeted to begin producing power in mid-
2000. Other similar initiatives in 1999 for both Duke Energy International and
Duke Energy Power Services will likely require significant capital and
investment expenditures, which will be subject to periodic review and revision
and may vary significantly depending on the value-added opportunities presented.
Projected 1999 capital and investment expenditures for Trading and
Marketing, Other Energy Services and Real Estate Operations are approximately
$30 million, $90 million and $300 million, respectively. All projected capital
and investment expenditures are subject to periodic review and revision and may
vary significantly depending on acquisition opportunities, market volatility,
economic trends and the value-added opportunities presented.
Environmental. The Company is subject to international, federal, state and
local regulations regarding air and water quality, hazardous and solid waste
disposal and other environmental matters.
TETCO is currently conducting PCB (polychlorinated biphenyl) assessment and
clean-up programs at certain of its compressor station sites under conditions
stipulated by a U.S. Consent Decree. The programs include on- and off-site
assessment, installation of on-site source control equipment and groundwater
monitoring wells and on- and off-site clean-up work. TETCO completed the soil
clean-up programs during 1998, subject to regulatory approval. Groundwater
monitoring activities will continue at several sites beyond 1999.
In 1987, the Commonwealth of Kentucky instituted a suit in state court
against TETCO, alleging improper disposal of PCBs at TETCO's three compressor
station sites in Kentucky. This suit is still pending. In 1996, TETCO completed
clean-up of these sites under the U.S. Consent Decree.
The Company has also identified environmental contamination at certain
sites on the PEPL and Trunkline Gas Company (Trunkline) systems and has
undertaken clean-up programs at these sites. The contamination resulted from the
past use of lubricants in compressed air systems containing PCBs and the prior
use of wastewater collection facilities and other on-site disposal areas. Soil
and sediment testing, to date, has detected no significant off-site
contamination. The Company has communicated with the Environmental Protection
Agency and appropriate state regulatory agencies on these matters.
45
<PAGE>
DUKE CAPITAL
Notes to Consolidated Financial Statements -- Continued
Note 11. Commitments and Contingencies -- Continued
Under the terms of the agreement with CMS Energy Corporation discussed in Other
Commitments and Contingencies below, the Company is obligated to complete the
PEPL and Trunkline clean-up programs at certain agreed-upon sites. These clean-
up programs are expected to continue until 2001.
At December 31, 1998 and 1997, remaining estimated clean-up costs on the
TETCO, PEPL and Trunkline systems have been accrued and are included in the
Consolidated Balance Sheets as Other Current Liabilities and Environmental
Clean-up Liabilities. These cost estimates represent gross clean-up costs
expected to be incurred, have not been discounted or reduced by customer
recoveries and generally do not include fines, penalties or third-party claims.
Costs to be recovered from customers are included in the Consolidated Balance
Sheets as of December 31, 1998 and 1997, as Environmental Clean-up Costs.
The federal and state clean-up programs are not expected to interrupt or
diminish the Company's ability to deliver natural gas to customers. Based on
experience to date and costs incurred for clean-up operations, management
believes the resolution of matters relating to the environmental issues
discussed above will not have a material adverse effect on consolidated results
of operations or financial position.
Litigation. On May 1, 1997, Citrus Trading Corporation (Citrus) and Enron
Capital and Trade Resources Corporation, as successor to Enron Gas Marketing
Corporation, filed suit in the District Court of Harris County, Texas, against
Duke Energy LNG Sales, Inc. (formerly PanEnergy LNG Sales, Inc. and Pan National
Gas Sales, Inc.), a subsidiary of the Company, alleging breach of a gas purchase
contract (the Contract) for regasified LNG entered into between Citrus and Pan
National Gas Sales, Inc. Plaintiffs alleged that Duke Energy LNG Sales, Inc.
failed to deliver LNG pursuant to the terms of the Contract. The plaintiffs
sought compensatory damages in unspecified amounts for losses allegedly incurred
as a result of the contract breach as well as a declaratory judgment that Duke
Energy LNG Sales, Inc.'s assertions of force majeure due to the interruption in
the supply of LNG to Duke Energy LNG Sales, Inc. did not constitute force
majeure under the Contract. A settlement was executed and the case was dismissed
in December 1998.
Under the terms of the agreement with CMS Energy Corporation discussed in
Other Commitments and Contingencies below, the Company is retaining certain
legal and tax liabilities, including the two matters specifically discussed
below.
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 subsidiary of the Company, in the U.S. District Court
for the Western District of Missouri. The plaintiffs allege that PEPL has
engaged in unlawful and anti-competitive conduct with regard to requests for
interconnects with the PEPL system for service to the Kansas City area.
Asserting that PEPL has violated the antitrust laws and tortiously interfered
with the plaintiffs' business expectancies, the plaintiffs seek compensatory and
punitive damages. Based on information currently available to the Company,
management believes that the resolution of this matter will 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," in order 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.
46
<PAGE>
DUKE CAPITAL
Notes to Consolidated Financial Statements -- Continued
Note 11. Commitments and Contingencies -- Continued
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 which contain
certain schedule and performance requirements. Risk management techniques are
used to mitigate their exposure associated with such contracts. Certain
subsidiaries of the Company have guaranteed performance under some of these
contracts. In addition, as of December 31, 1998, the Company and certain
subsidiaries of the Company have guaranteed debt agreements of affiliates and
have issued 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.
The Company, through its wholly owned subsidiaries, PanEnergy and TEC,
entered into an agreement to sell PEPL, Trunkline and additional storage related
to those systems (collectively, the PEPL Companies), which substantially
comprise the Midwest Pipelines, along with Trunkline LNG Company (Trunkline
LNG), to CMS Energy Corporation (CMS Energy). The sales price of $2.2 billion
involves cash proceeds of $1.9 billion and the assumption of existing PEPL debt
of approximately $300 million. Management believes that the retention of certain
assets and liabilities, such as the Houston office building, certain
environmental, legal and tax liabilities, and substantially all intercompany
balances, will not have a material adverse effect on consolidated results of
operations or financial position. The sale will result in an after-tax gain of
approximately $700 million and is contingent upon receipt of clearances under
the Hart-Scott-Rodino Act. Closing is expected in early 1999. Total assets of
the PEPL Companies and Trunkline LNG were $1.2 billion at December 31, 1998.
Combined 1998 Operating Results of the PEPL Companies and Trunkline LNG (a)
In millions
-----------
Operating Revenues.................................... $482
Operating Expenses.................................... 278
Other Income, Net..................................... 10
----
Earnings Before Interest and Taxes.................. $214
====
_________
(a) Excludes intercompany building rental revenue, allocated corporate
expenses, building depreciation and certain other costs to be
retained by the Company.
Leases. The Company utilizes assets under operating leases in several areas
of operations. Consolidated rental expense amounted to $41 million, $42 million
and $50 million in 1998, 1997 and 1996, respectively. Future minimum rental
payments under the Company's various operating leases for the years 1999 through
2003 are $43 million, $37 million, $28 million, $19 million and $12 million,
respectively.
47
<PAGE>
DUKE CAPITAL
Notes to Consolidated Financial Statements -- Continued
Note 12. Stock-Based Compensation
The Company participates in Duke Energy's 1998 Stock Incentive Plan, under
which stock options for up to fifteen million shares of common stock may be
granted to key employees. The exercise price of each option granted under the
plan equals the market price of Duke Energy's common stock on the date of grant.
Vesting periods range from one to five years with a maximum exercise term of ten
years.
Effective with the merger, each share of PanEnergy common stock,
outstanding immediately prior to the merger, was converted into the right to
receive 1.0444 shares of Duke Energy common stock. Each option to purchase
PanEnergy common stock, outstanding prior to the merger, was assumed by Duke
Energy and became exercisable upon the same terms as under the applicable
PanEnergy stock option plan and option agreement, except that these options
became options to purchase shares of Duke Energy common stock, appropriately
adjusted.
Note 13. Employee Benefit Plans
Retirement Plans. Duke Energy and its subsidiaries have maintained multiple
non-contributory defined benefit retirement plans covering most employees with
minimum service requirements. Certain employees of the Company participate in
either the PanEnergy plan or the Duke Energy plan.
Through December 31, 1998 the PanEnergy plan provided retirement benefits
(i) for eligible employees of certain subsidiaries that are generally based on
an employee's years of benefit accrual service and highest average eligible
earnings, and (ii) for eligible employees of certain other subsidiaries under a
cash balance formula. A cash balance plan participant accumulates a retirement
benefit based upon a percentage, which may vary with age and years of service,
of current eligible earnings and current interest credits. Effective January 1,
1999, the benefit formula under the plan, for all eligible employees, was
changed to a cash balance formula.
Other Company employees participate in the Duke Energy non-contributory
defined benefit retirement plan. Effective January 1, 1997, this plan was
amended to base a plan participant's benefit on a cash balance formula. Prior to
January 1, 1997, the Duke Energy retirement plan benefits were based on an age-
related formula, which took into account the participant's years of benefit
accrual service and highest average eligible earnings.
In connection with the expected 1999 sale of the Midwest Pipelines to CMS
Energy, benefit accruals under the PanEnergy plan were frozen on December 31,
1998 for all participants who, as a result of the sale, will become employees of
CMS Energy and its subsidiaries. Once the transfer of benefit obligation and
related assets of the affected participants to CMS Energy is completed, the plan
will be merged into the Duke Energy Plan.
The Company's Policy and Duke Energy's policy is to fund amounts, as
necessary, on an actuarial basis to provide assets sufficient to meet benefits
to be paid to plan participants. On December 30, 1997 assets and related
liabilities of $236 million and $204 million, respectively, for certain
PanEnergy participants were transferred to the Duke Energy plan. As a result of
this transfer, no contributions to the Duke Energy plan were necessary in 1998
or 1997.
The fair market value of Duke Energy's plan assets was $2,922 million and
$2,725 million for December 31, 1998 and 1997, respectively. The projected
benefit obligation was $2,540 million and $2,372 million for December 31, 1998
and 1997, respectively. The amount of pre-funded pension cost allocated to the
Company as of December 31, 1998 and 1997 was $337 million and $303 million,
respectively.
Assumptions Used for Pension and Other Postretirement Benefits Accounting
(a)
1998 1997 1996
---- ---- ----
Percent
Discount rate..................................... 6.75 7.25 7.50
Salary increase................................... 4.67 4.15 4.80
Expected long-term rate of return on plan assets.. 9.25 9.25 9.18
Assumed tax rate, where applicable ............... 39.60 39.60 39.60
___________
(a) Reflects weighted averages across all plans.
48
<PAGE>
DUKE CAPITAL
Notes to Consolidated Financial Statements -- Continued
Note 13. Employee Benefit Plans -- Continued
The Company's net periodic pension benefit, including amounts allocated by
Duke Energy, for the years ending December 31, 1998, 1997 and 1996 was $37
million, $19 million and $19 million, respectively. In 1998, a significant
amount of lump sum payouts was made from the plan resulting in a settlement gain
of $10 million.
Duke Energy and PanEnergy also sponsor employee savings plans, which cover
substantially all employees. The Company expensed plan contributions, including
amounts allocated by Duke Energy, of $21 million, $19 million and $14 million in
1998, 1997 and 1996, respectively.
Other Postretirement Benefits. Duke Energy and most of its subsidiaries
provide certain health care and life insurance benefits for retired employees on
a contributory and non-contributory basis. Employees become eligible for these
benefits if they have met certain age and service requirements at retirement, as
defined in the plans. Under plan amendments effective late 1998 and early 1999,
health care benefits for future retirees were changed to limit employer
contributions and medical coverage.
Benefit costs are accrued over the active service period of employees to
the date of full eligibility for the benefits. The net unrecognized transition
obligation, resulting from the implementation of accrual accounting, is being
amortized over approximately 20 years. With respect to the entire plan, the fair
value of the plan assets was $305 million and $266 million at December 31, 1998
and 1997, respectively. The accumulated postretirement benefit obligation was
$625 million and $667 million at December 31, 1998 and 1997, respectively.
It is the Company's and Duke Energy's general policy to fund accrued
postretirement health care costs. Duke Energy funds postretirement benefits
through various mechanisms, including retired lives reserves, voluntary
employee's beneficiary association trusts and 401(h) funding.
The Company's net periodic postretirement benefit cost, including amounts
allocated by Duke Energy, for the years ended December 31, 1998, 1997 and 1996,
was $19 million, $17 million and $16 million, respectively.
For measurement purposes, a 5% weighted average rate of increase in the per
capita cost of covered health care benefits was assumed for 1998. The rate was
assumed to decrease gradually to 4.75% for 2005 and remain at that level
thereafter. Assumed health care cost trend rates have a significant effect on
the amounts reported for the health care plans.
Duke Energy's Sensitivity to Changes in Assumed Health Care Cost Trend
Rates
<TABLE>
<CAPTION>
1-Percentage- 1-Percentage-
Point Increase Point Decrease
---------------- ----------------
In millions
<S> <C> <C>
Effect on total of service and interest cost components.... $ 3 $ (2)
Effect on postretirement benefit obligation................ $30 $(28)
</TABLE>
Note 14. Related Party Transactions
Certain balances due to or due from related parties included in the
Consolidated Balance Sheets at December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
In millions
<S> <C> <C>
Receivables................................ $ 6 $ 18
Accounts payable........................... 129 52
Taxes accrued.............................. 73 40
</TABLE>
Operating revenues of $85 million, $18 million and $23 million related to
intercompany sales to Duke Energy are included in the Consolidated Statements of
Income for the years ended December 31, 1998, 1997 and 1996, respectively.
49
<PAGE>
DUKE CAPITAL
Notes to Consolidated Financial Statements -- Continued
Note 15. Subsequent Event (Unaudited)
On February 18, 1999, Duke Energy 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 Endesa-Chile. The estimated total cash outlay is
approximately $2.1 billion based on current exchange rates. The offers will be
contingent upon, among other things, certain Endesa-Chile shareholder approvals.
If all approvals are obtained, the transactions are expected to be completed
during the second quarter of 1999. Endesa-Chile controls and operates 10,247
megawatts of generating capacity in Argentina, Brazil, Chile, Colombia and Peru.
Note 16. Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
First Quarter Second Quarter Third Quarter Fourth Quarter Total
------------- -------------- ------------- -------------- -------
In millions
<S> <C> <C> <C> <C> <C>
1998
Operating revenues............................. $3,093 $2,895 $3,881 $3,190 $13,059
Operating income............................... 257 209 264 306 1,036
EBIT........................................... 303 219 280 335 1,137
Income before extraordinary item............... 147 108 117 147 519
Net income..................................... 139 108 117 147 511
1997
Operating revenues............................. $2,747 $2,116 $3,544 $3,508 $11,915
Operating income............................... 298 146 175 217 836
EBIT........................................... 303 175 178 217 873
Net income..................................... 146 67 72 95 380
</TABLE>
50
<PAGE>
Independent Auditors' Report
Duke Capital Corporation:
We have audited the accompanying consolidated balance sheets of Duke
Capital Corporation (formerly Church Street Capital Corporation) and
subsidiaries (the Company) as of December 31, 1998 and 1997, and the related
consolidated statements of income, common stockholder's equity, and cash flows
for the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on the
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31,
1998 and 1997, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
We previously audited and reported on the consolidated statements of
income, retained earnings, and cash flows of Church Street Capital Corporation
for the year ended December 31, 1996, prior to their restatement for the 1997
combination with PanEnergy Corp similar to a pooling of interests described in
Note 2 to the consolidated financial statements. The contribution of Church
Street Capital Corporation and subsidiaries to revenues and net income
represented 3% and 10% for 1996 of the respective restated totals. Separate
financial statements of PanEnergy Corp and subsidiaries included in the restated
consolidated statements of income, common stockholder's equity, and cash flows
for the year ended December 31, 1996, were audited and reported on separately by
other auditors. We also audited the combination of the accompanying consolidated
statements of income, common stockholder's equity, and cash flows for the year
ended December 31, 1996, after restatement for the 1997 combination with
PanEnergy Corp similar to a pooling of interests; in our opinion, such
consolidated statements have been properly combined on the basis described in
Note 2 to the consolidated financial statements.
/s/ Deloitte & Touche LLP
Charlotte, North Carolina
February 12, 1999
51
<PAGE>
Independent Auditors' Report
The Board of Directors
PanEnergy Corp:
We have audited the consolidated statements of income, common stockholders'
equity, and cash flows of PanEnergy Corp and subsidiaries for the year ended
December 31, 1996 (not presented herein). These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of PanEnergy Corp and subsidiaries for the year ended December 31, 1996 in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
Houston, Texas
January 16, 1997
52
<PAGE>
Responsibility for Financial Statements
The financial statements of Duke Capital Corporation (the Company) are
prepared by management, which is responsible for their integrity and
objectivity. The statements are prepared in conformity with generally accepted
accounting principles appropriate in the circumstances to reflect in all
material respects the substance of events and transactions which should be
included. The other information in the annual report is consistent with the
financial statements. In preparing these statements, management makes informed
judgments and estimates of the expected effects of events and transactions that
are currently being reported.
The Company's system of internal accounting control is designed to provide
reasonable assurance that assets are safeguarded and transactions are executed
according to management's authorization. Internal accounting controls also
provide reasonable assurance that transactions are recorded properly, so that
financial statements can be prepared according to generally accepted accounting
principles. In addition, accounting controls provide reasonable assurance that
errors or irregularities which could be material to the financial statements are
prevented or are detected by employees within a timely period as they perform
their assigned functions. The Company's accounting controls are continually
reviewed for effectiveness. In addition, written policies, standards and
procedures, and a strong internal audit program augment the Company's accounting
controls.
/s/ Jeffrey L. Boyer
Jeffrey L. Boyer
Controller
53
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Consolidated Financial Statements and Supplemental Financial Data included
in Part II of this annual report are as follows:
Consolidated Financial Statements
Consolidated Statements of Income for the Years Ended December 31, 1998,
1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Common Stockholder's Equity for the Years Ended
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
Independent Auditors Reports
Quarterly Financial Data (unaudited) (included in Note 16 to the Consolidated
Financial Statements)
All schedules are omitted because of the absence of the conditions under which
they are required or because the required information is included in the
financial statements or notes thereto.
(b) Reports on Form 8-K
A Current Report on Form 8-K filed on November 5, 1998 contained disclosures
under Item 5, Other Events, and Item 7, Financial Statements, Pro Forma
Financial Information and Exhibits.
A Current Report on Form 8-K filed on December 1, 1998 contained disclosures
under Item 5, Other Events, and Item 7, Financial Statements, Pro Forma
Financial Information and Exhibits.
(c) Exhibits
Exhibits filed herewith are designated by an asterisk (*). All exhibits not so
designated are incorporated by reference to a prior filing, as indicated. Items
constituting management contracts or compensatory plans or arrangements are
designated by a double asterisk (**).
Exhibit No. Description
----------- -----------
3.1 Restated Certificate of Incorporation of registrant (filed with
registrant's Form 10, as amended, File No. 0-23977).
3.2 By-Laws of registrant (filed with registrant's Form 10, as
amended, File No. 0-23977).
4.1 $950,000,000 Five-Year Credit Agreement dated as of August 25,
1997, among the registrant, the banks listed therein and The
Chase Manhattan Bank, as Administrative Agent (filed with Form
10-K of Duke Energy Corporation for the year ended December 31,
1997, File No. 1-4928, as Exhibit 10-S).
4.2 $600,000,000 364-Day Credit Agreement dated as of August 24,
1998, among the registrant, the banks listed therein and The
Chase Manhattan Bank, as Administrative Agent (filed with Form
10-K of Duke Energy Corporation for the year ended December 31,
1998, File No. 1-4928, as Exhibit 10-T).
10.1 Formation Agreement between PanEnergy Trading and Market
Services, Inc. and Mobil Natural Gas, Inc. dated May 29, 1996
(filed with Form 10-K of PanEnergy Corp for the year ended
December 31, 1996, File No. 1-8157, as Exhibit 2.02).
10.2** 1977 Non-Qualified Stock Option Plan of Panhandle Eastern
Corporation, as amended through December 3, 1986 (and related
Agreement) (filed with Form 10-K of Panhandle Eastern Corporation
for the year ended December 31, 1986, File No. 1-8157, as Exhibit
10(f)).
10.3** 1982 Key Employee Stock Option Plan of Panhandle Eastern
Corporation, as amended through December 3, 1986 (and related
Agreement) (filed with Form 10-K of Panhandle Eastern Corporation
for the year ended December 31, 1986, File No. 1-8157, as Exhibit
10(g)).
54
<PAGE>
Exhibit No. Description
----------- -----------
10.4** Employees Savings Plan of Panhandle Eastern Corporation and
Participating Affiliates (filed with Form 10-K of Panhandle
Eastern Corporation for the year ended December 31, 1990, File
No. 1-8157, as Exhibit 10.12).
10.5** Panhandle Eastern Corporation 1994 Long Term Incentive Plan
(filed with Form 10-K of Panhandle Eastern Corporation for the
year ended December 31, 1993, File No. 1-8157, as Exhibit
10.18).
10.6** Amendment to Panhandle Eastern Corporation 1994 Long Term
Incentive Plan (filed with Form 10-Q of PanEnergy Corp for the
quarter ended June 30, 1996, File No. 1-8157, as Exhibit
10.40).
10.7 Stock Purchase Agreement between PanEnergy Corp, Texas Eastern
Corporation and CMS Energy Corporation, dated as of
October 31, 1998 (filed as Exhibit 10 to Form 8-K of Duke
Energy Corporation, File No. 1-4928, filed November 5, 1998).
10.8 Merger and Purchase Agreement among Union Pacific Resources
Company, Union Pacific Fuels, Inc., Duke Energy Field
Services, Inc. and DEFS Merger Sub Corp., dated as of
November 20, 1998 (filed as Exhibit 10 to Form 8-K of Duke
Energy Corporation, File No. 1-4928, filed December 1, 1998).
12* Computation of Ratios of Earnings to Fixed Charges.
23(a)* Consent of Deloitte & Touche LLP.
23(b)* Consent of KPMG LLP.
27* Financial Data Schedule.
99 PanEnergy's Annual Report on Form 10-K for the year ended
December 31, 1996 (File No. 1-8157), previously filed with the
Securities and Exchange Commission pursuant to the Securities
Exchange Act of 1934, as amended, is hereby incorporated by
reference.
Undertaking
The registrant hereby undertakes, pursuant to Regulation S-K, Item 601(b),
paragraph (4)(iii), to furnish to the Securities and Exchange Commission upon
request all constituent instruments defining the rights of holders of long-term
debt of the registrant and its consolidated subsidiaries not filed herewith for
the reason that the total amount of securities authorized under any of such
instruments does not exceed 10% of the total consolidated assets of the
registrant and its consolidated subsidiaries.
55
<PAGE>
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 19, 1999
DUKE CAPITAL CORPORATION
(Registrant)
By: /s/ Richard B. Priory
-----------------------------------
Richard B. Priory
Chairman of the Board and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
(i) Principal executive officer:
By: /s/ Richard B. Priory
-------------------------------------------
Richard B. Priory
Chairman of the Board and President
(ii) Principal financial officer:
By: /s/ Richard J. Osborne
-------------------------------------------
Richard J. Osborne
Vice President and Chief Financial Officer
(iii) Principal accounting officer:
By: /s/ Jeffrey L. Boyer
-------------------------------------------
Jeffrey L. Boyer
Controller
(iv) A majority of the Directors:
By: /s/ Richard B. Priory
-------------------------------------------
Richard B. Priory
By: /s/ Harvey J. Padewer
-------------------------------------------
Harvey J. Padewer
By: /s/ Fred J. Fowler
-------------------------------------------
Fred J. Fowler
Robert S. Lilien
Richard J. Osborne
Date: March 19, 1999
56
<PAGE>
================================================================================
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 (IRS Employer
of Incorporation) 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
- ---- ----
<S> <C>
PART I. FINANCIAL INFORMATION
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 1. 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
============ ============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
1
<PAGE>
DUKE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
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
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
DUKE CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
(unaudited)
--------------- ---------------
<S> <C> <C>
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
=============== ===============
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
DUKE CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions, except share amounts)
<TABLE>
<CAPTION>
June 30,
1999 December 31,
(unaudited) 1998
------------ ------------
<S> <C> <C>
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:
. Natural Gas Transmission
. Field Services
. Trading and Marketing
. Global Asset Development
. Other Energy Services
. 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:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
June 30, December 31,
In Millions 1999 1998
- -------------------------------------------------------------------------
<S> <C> <C>
Receivables $ - $ 6
Accounts payable 119 129
Taxes accrued 644 73
- -------------------------------------------------------------------------
</TABLE>
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.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Combined Operating Results of the PEPL Companies and Trunkline LNG
For the Period From January 1, 1999 through March 28, 1999a (In millions)
- --------------------------------------------------------------------------------
<S> <C>
Operating Revenues $ 126
Operating Expenses 57
Other Income, Net 4
----------
Earnings Before Interest and Taxes $ 73
- --------------------------------------------------------------------------------
</TABLE>
/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.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Business Segment Data (In millions)
- ----------------------------------------------------------------------------------------------------------
Capital and
Unaffiliated Intersegment Total Investment
Revenues Revenues Revenues EBIT Expenditures
-----------------------------------------------------------------------
Three Months Ended
June 30, 1999
<S> <C> <C> <C> <C> <C>
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
- ----------------------------------------------------------------------------------------------------------
<CAPTION>
Three Months Ended
June 30, 1998
<S>
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
- ----------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Business Segment Data, continued (In millions)
- -------------------------------------------------------------------------------------------------------------------------
Capital and
Unaffiliated Intersegment Total Investment
Revenues Revenues Revenues EBIT Expenditures
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
Segment Assets (In millions)
- --------------------------------------------------------------------------
June 30, December 31,
1999 1998
---------------------------------------
<S> <C> <C>
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
- --------------------------------------------------------------------------
</TABLE>
/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:
. Natural Gas Transmission
. Field Services
. Trading and Marketing
. Global Asset Development
. Other Energy Services
. 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.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
EBIT by Business Segment (In millions)
- ----------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------------------------------
1999 1998 1999 1998
---------------------------------------------------------
<S> <C> <C> <C> <C>
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
- ----------------------------------------------------------------------------------------------
</TABLE>
/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
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
-----------------------------------------------------
(In millions, except where noted) 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- --------------------------------------------------------------------------------------------------------
</TABLE>
/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
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
-----------------------------------------------------------
(In millions, except where noted) 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
-----------------------------------------------------------------------------------------------------------
</TABLE>
/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
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------------
(In millions, except where noted) 1999 1998 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- --------------------------------------------------------------------------------
</TABLE>
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
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------------------
(In millions, except where noted) 1999 1998 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- --------------------------------------------------------------------------------
</TABLE>
/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 $(1l) $ 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 nonoperating 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 $15 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 computerbased 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
19
<PAGE>
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. 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.
20
<PAGE>
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 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.
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
<PAGE>
PRINCIPAL OFFICE OF
DUKE CAPITAL CORPORATION
526 South Church Street
Charlotte, North Carolina 28202
TRUSTEE, PRINCIPAL PAYING AGENT AND REGISTRAR
The Chase Manhattan Bank
450 West 33rd Street
New York, New York 10001
LUXEMBOURG PAYING AND TRANSFER AGENT
Chase Manhattan Bank Luxembourg S.A.
5 rue Plaetis
L-2338 Luxembourg
LISTING AGENT
Kredietbank S.A. Luxembourgeoise
43 Boulevard Royal
L-2955 Luxembourg
LEGAL ADVISORS
To Duke Capital Corporation To the Underwriters
as to United States Law as to United States Law
Dewey Ballantine LLP Sullivan & Cromwell
1301 Avenue of the Americas 125 Broad Street
New York, New York 10019 New York, New York 10004
INDEPENDENT AUDITORS
Deloitte & Touche LLP
1100 Carillon
227 West Trade Street
Charlotte, North Carolina 28202
