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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 2000 Commission File Number 0-23977
DUKE CAPITAL CORPORATION
(Exact name of Registrant as Specified in its Charter)
<TABLE>
<CAPTION>
<S> <C>
Delaware 51-0282142
(State or Other Jurisdiction of Incorporation) (IRS Employer Identification No.)
</TABLE>
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.
<TABLE>
<CAPTION>
<S> <C>
Number of shares of Common Stock, no par value, outstanding at October 31, 2000......................1,010
</TABLE>
<PAGE>
DUKE CAPITAL CORPORATION
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2000
INDEX
<TABLE>
<CAPTION>
Item Page
---- ----
PART I. FINANCIAL INFORMATION
<S> <C>
1. Financial Statements....................................................................................1
Consolidated Statements of Income and Comprehensive Income for the Three and Nine
Months Ended September 30, 2000 and 1999..................................................1
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2000
and 1999..................................................................................2
Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999..........................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, filings 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; and the effect of accounting
policies issued periodically by accounting standard-setting bodies.
i
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
DUKE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
(In millions)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2000 1999 2000 1999
-------- ------- --------- -------
Operating Revenues
<S> <C> <C> <C> <C>
Sales, trading and marketing of natural gas
and petroleum products $ 6,177 $ 2,884 $ 15,115 $ 7,286
Trading and marketing of electricity 5,731 1,578 9,482 2,684
Transportation and storage of natural gas 253 253 779 885
Electric generation 175 77 461 172
Gain on sale of equity interest 407 - 407 -
Other 268 306 865 824
------- -------- --------- --------
Total operating revenues 13,011 5,098 27,109 11,851
------- -------- --------- --------
Operating Expenses
Natural gas and petroleum products purchased 6,018 2,830 14,519 7,077
Purchased power 5,332 1,421 8,744 2,413
Other operation and maintenance 576 448 1,602 1,240
Depreciation and amortization 155 106 432 291
Property and other taxes 39 31 112 86
------- -------- --------- --------
Total operating expenses 12,120 4,836 25,409 11,107
------- -------- --------- --------
Operating Income 891 262 1,700 744
Other Income and Expenses 13 19 49 51
------- -------- --------- --------
Earnings Before Interest and Taxes 904 281 1,749 795
Interest Expense 187 84 455 199
Minority Interests Expense 20 20 118 75
------- -------- --------- --------
Earnings Before Income Taxes 697 177 1,176 521
Income Taxes 276 70 447 181
------- -------- --------- --------
Income Before Extraordinary Item 421 107 729 340
Extraordinary Gain, net of tax - - - 660
------- -------- --------- --------
Net Income 421 107 729 1,000
------- -------- --------- --------
Other Comprehensive Income, net of tax (24) - (72) -
------- -------- --------- --------
Total Comprehensive Income $ 397 $ 107 $ 657 $ 1,000
======= ======== ========= ========
</TABLE>
See Notes to Consolidated Financial Statements
1
<PAGE>
DUKE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------
2000 1999
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 729 $ 1,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 441 302
Net (gain) or loss on mark-to-market adjustment (267) 24
Extraordinary gain, net of tax - (660)
Gain on sale of equity interest (407) -
Deferred income taxes 117 78
Transition cost recoveries, net 65 64
(Increase) decrease in
Receivables (4,371) (1,048)
Inventory (48) (75)
Other current assets (626) (1)
Increase (decrease) in
Accounts payable 5,458 868
Taxes accrued (615) 62
Interest accrued 30 (6)
Other current liabilities 536 (41)
Other, net (36) (18)
----- -----
Net cash provided by operating activities 1,006 549
----- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Capital and investment expenditures (4,017) (3,936)
Proceeds from sale of subsidiaries - 1,900
Proceeds from sale of equity interest 400 -
Proceeds from sales and other, net (97) 259
----- -----
Net cash used in investing activities (3,714) (1,777)
----- -----
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issuance of long-term debt
Long-term debt 2,202 1,990
Guaranteed preferred beneficial interests in subordinated notes of
Duke Capital Corporation - 242
Payments for the redemption of long-term debt (641) (201)
Net change in notes payable and commercial paper 1,372 66
Capital contributions from parent 200 -
Distributions to minority interests (1,217) -
Contributions from minority interests 741 -
Other, net 26 (66)
----- -----
Net cash provided by financing activities 2,683 2,031
----- -----
Net increase (decrease) in cash and cash equivalents (25) 803
Cash received from business acquisitions 100 7
Cash and cash equivalents at beginning of period 585 64
----- -----
Cash and cash equivalents at end of period $ 660 $ 874
===== =====
Supplemental Disclosures
Cash paid for interest, net of amount capitalized $ 420 $ 204
Cash paid for income taxes $ 71 $ 177
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
DUKE CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
(unaudited)
----------- ------------
ASSETS
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 660 $ 585
Receivables 7,605 2,957
Inventory 349 267
Current portion of regulatory assets 16 81
Unrealized gains on mark-to-market transactions 4,178 1,118
Other 1,055 344
----------- ------------
Total current assets 13,863 5,352
----------- ------------
Investments and Other Assets
Investments in affiliates 1,329 1,299
Pre-funded pension costs 343 340
Goodwill, net 1,130 774
Notes receivable 408 154
Unrealized gains on mark-to-market transactions 2,637 690
Other 1,522 664
----------- ------------
Total investments and other assets 7,369 3,921
----------- ------------
Property, Plant and Equipment
Cost 16,679 13,642
Less accumulated depreciation and amortization 2,478 2,475
----------- ------------
Net property, plant and equipment 14,201 11,167
----------- ------------
Regulatory Assets and Deferred Debits 196 160
----------- ------------
Total Assets $35,629 $20,600
=========== ============
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
DUKE CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions, except share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
(unaudited)
------------ -----------
LIABILITIES AND STOCKHOLDER'S EQUITY
<S> <C> <C>
Current Liabilities
Accounts payable $ 7,765 $ 2,106
Notes payable and commercial paper 1,489 83
Taxes accrued 232 738
Interest accrued 118 83
Current maturities of long-term debt 446 277
Unrealized losses on mark-to-market transactions 4,166 1,241
Other 1,129 600
------------ -----------
Total current liabilities 15,345 5,128
------------ -----------
Long-term Debt 6,812 5,319
------------ -----------
Deferred Credits and Other Liabilities
Deferred income taxes 1,764 1,475
Environmental clean-up liabilities 124 101
Unrealized losses on mark-to-market transactions 2,253 438
Other 363 657
------------ -----------
Total deferred credits and other liabilities 4,504 2,671
------------ -----------
Guaranteed Preferred Beneficial Interests in Subordinated
Notes of Duke Capital Corporation 823 823
------------ -----------
Minority Interests 1,844 1,200
------------ -----------
Common Stockholder's Equity
Common stock, no par, 3,000 shares authorized,
1,010 shares outstanding
- -
Paid-in capital 3,396 3,200
Retained Earnings 2,979 2,261
Accumulated other comprehensive income (74) (2)
------------ -----------
Total common stockholder's equity 6,301 5,459
------------ -----------
Total Liabilities and Stockholder's Equity $ 35,629 $ 20,600
============ ===========
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
DUKE CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General
Duke Capital Corporation (collectively with its subsidiaries, "the Company") is
a wholly owned subsidiary of Duke Energy Corporation. The Company provides
financing and credit enhancement services for its subsidiaries. The Company
conducts its operating activities through its six business segments:
o Natural Gas Transmission
o Field Services
o North American Wholesale Energy (NAWE)
o International Energy
o Other Energy Services
o Duke Ventures
Natural Gas Transmission conducts its operations primarily through Duke Energy
Gas Transmission Corporation, and provides interstate transportation and storage
of natural gas for customers primarily in the Mid-Atlantic, New England and
Southeastern states. The interstate natural gas transmission and storage
operations are subject to the rules and regulations of the Federal Energy
Regulatory Commission.
Field Services gathers, processes, transports, markets and stores natural gas
and produces, transports and markets natural gas liquids. Field Services'
operations are conducted primarily through Duke Energy Field Services, LLC.
(DEFS), a limited liability company that is 30.3% owned by Phillips Petroleum.
Field Services operates gathering systems in western Canada and eleven
contiguous states that serve major gas-producing regions in the Rocky Mountain,
Permian Basin, Mid-Continent, East Texas-Austin Chalk-North Louisiana and
onshore and offshore Gulf Coast areas.
NAWE's activities include asset development, operation and management, primarily
through Duke Energy North America, LLC, (DENA) as well as commodity sales and
services related to natural gas and power, primarily through Duke Energy Trading
and Marketing (DETM), a joint venture with Exxon Mobil Corporation, a 40%
partner in DETM. NAWE conducts its business throughout the U.S. and western
Canada. The operations of the previously segregated Trading and Marketing
segment were combined by management into NAWE during the second quarter of 2000.
Previous periods have been restated to conform to current period presentation.
International Energy conducts its operations through Duke Energy International,
LLC (DEI). International Energy's activities include asset development,
operation and management of international energy-related facilities, primarily
in Latin America, Asia Pacific and Europe. International Energy also provides
worldwide energy trading and marketing of natural gas and electric power.
Other Energy Services is a combination of certain other businesses that provide
engineering, consulting, construction and integrated energy solutions worldwide,
primarily through Duke Engineering & Services, Inc., Duke/Fluor Daniel and
DukeSolutions, Inc. Duke/Fluor Daniel is a 50/50 partnership between Duke Energy
and Fluor Enterprises, Inc.
Duke Ventures is comprised of other diverse businesses, primarily operating
through Crescent Resources, Inc. (Crescent) and DukeNet Communications
(DukeNet). Crescent develops high quality commercial and residential real estate
projects and manages land holdings primarily in the Southeastern U.S. DukeNet
provides fiber optic and wireless digital networks for industrial, commercial
and residential customers.
5
<PAGE>
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 results of
operations for the respective periods. Amounts reported in the Consolidated
Statements of Income and Comprehensive Income are not necessarily indicative of
amounts expected for the respective annual periods due to the effects of
seasonal temperature variations on energy consumption and the timing of
maintenance of certain electric generating units.
Extraordinary Item. On March 29, 1999, wholly-owned subsidiaries of the Company
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 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.
New Accounting Standards. In June 1998, Statement of Financial Accounting
Standard (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued. The Company is required to adopt this standard by
January 1, 2001. SFAS No. 133 requires that all derivatives be recognized as
either assets or liabilities and measured at fair value, and changes in the fair
value of derivatives are reported in current earnings, unless the derivative is
designated and effective as a hedge. If the intended use of the derivative is to
hedge the exposure to changes in the fair value of an asset, a liability or a
firm commitment, then changes in the fair value of the derivative instrument
will generally be offset in the income statement by changes in the hedged item's
fair value. However, if the intended use of the derivative is to hedge the
exposure to variability in expected future cash flows, then changes in the fair
value of the derivative instrument will generally be reported in Other
Comprehensive Income (OCI). The gains and losses on the derivative instrument
that are reported in OCI will be reclassified to earnings in the periods in
which earnings are impacted by the hedged item.
The Company 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 derivatives"). 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. The Company uses primarily
electric, natural gas and crude oil commodity derivatives.
The Company has conducted a review of its contracts to identify derivative
instruments and document hedging activities. In conducting this review, it was
determined that the Company's derivative instruments were generally highly
effective in offsetting or reducing the risks of the underlying hedged items. In
accordance with the transition provisions of SFAS No.133, management estimates a
net-of-tax cumulative-effect adjustment of $17 million as a reduction in
earnings and a net-of-tax cumulative-effect adjustment reducing OCI and
Stockholder's Equity by $182 million if SFAS No. 133 was implemented at
September 30, 2000. Due to the volatility of the commodities markets, management
cannot determine the actual transition valuation effect on the future
consolidated results of operations or financial position once SFAS No. 133 is
implemented on January 1, 2001. The table below depicts a sensitivity analysis
of increases in commodity prices relating to the Company's contractual
commitments extending out three years.
6
<PAGE>
<TABLE>
<CAPTION>
-------------------------- --------------------------------------- ----------------------------
Transition Adjustment
Commodity Commodity Price Change OCI Increase (Decrease)
(In millions)
-------------------------- --------------------------------------- ----------------------------
<S> <C> <C>
Natural Gas $0.10 increase per MMBtu (a) ($23.3)
Electricity $1.00 increase per MW (b) $22.8
Crude Oil $1.00 increase per Barrel $21.0
-------------------------- --------------------------------------- ----------------------------
</TABLE>
(a) Million British thermal units.
(b) Megawatts
In December 1999, the Securities and Exchange Commission (SEC) released Staff
Accounting Bulletin No. 101 (SAB 101) which provides the SEC staff's views on
revenue recognition policies. The Company has adopted early the provisions of
SAB 101 as of April 1, 2000. The impact of adopting SAB 101 was not material to
the Company's consolidated results of operations or financial position.
Reclassifications. Certain prior period amounts have been reclassified in the
Consolidated Financial Statements to conform to the current presentation.
3. Related Party Transactions
Certain balances due to or from related parties included in the Consolidated
Balance Sheets at September 30, 2000 and December 31, 1999 are as follows:
---------------------------------------- ------------------- ------------------
September 30, December 31,
(In millions) 2000 1999
---------------------------------------- ------------------- ------------------
Receivables $144 $ -
Notes receivable - 479
Accounts payable 386 284
Taxes accrued 92 570
---------------------------------------- ------------------- ------------------
4. Business Acquisitions and Dispositions
For acquisitions accounted for using the purchase method, assets and liabilities
have been consolidated as of the purchase date and earnings from the
acquisitions have been included in consolidated earnings of the Company
subsequent to the purchase date. Assets acquired and liabilities assumed are
recorded at their estimated fair values, and the excess of the purchase price
over the estimated fair value of the net identifiable assets and liabilities
acquired is recorded as goodwill. Purchase price allocations are subject to
adjustment when information concerning asset and liability valuations are
finalized and the evaluation of certain pre-acquisition contingent liabilities
is completed.
Market Hub Partners, LLC (MHP). In September 2000, the Company, through a
wholly-owned subsidiary, completed the approximately $400 million acquisition of
MHP from subsidiaries of NiSource Inc. for approximately $250 million in cash
and the assumption of $150 million in debt with an interest rate of 8 1/4% ($115
million) and 10 3/4% ($35 million). MHP provides natural gas storage services in
Louisiana and Texas with a current capacity of 23 billion cubic feet with
significant expansion capabilities. Assets and liabilities acquired have been
recorded at preliminary estimated fair values. No material amount of goodwill
was recorded in the transaction.
Phillips Petroleum's Gas Gathering, Processing and Marketing Unit (Phillips). In
March 2000, the Company, through a wholly-owned subsidiary, completed the
approximately $1.7 billion transaction that combined Field Services' gas
gathering, processing and marketing business with Phillips to form a new
midstream company named DEFS. In connection with the combination, DEFS issued
approximately $2.75 billion of commercial paper in April 2000. The proceeds were
used to make one-time cash distributions of
7
<PAGE>
approximately $1.53 billion to the Company and $1.22 billion to Phillips
Petroleum. The Company owns approximately 70% of DEFS and Phillips Petroleum
owns approximately 30%.
Assets and liabilities acquired have been recorded at preliminary estimated fair
values. Goodwill of approximately $175 million was recorded in connection with
the transaction and is being amortized on a straight-line basis over 20 years.
During the third quarter, DEFS filed a shelf registration statement with the SEC
to offer up to $2.0 billion of long-term debt securities and then issued $1.7
billion of long-term debt securities under this shelf registration. The proceeds
from these securities were used to reduce the balance of the above-mentioned
commercial paper. As a result, the $2.8 billion commercial paper program was
reduced to $1 billion.
The parent company of DEFS, Duke Energy Field Services Corporation (DEFS
Corporation), may offer a portion of its common stock to the public in 2001, in
an initial public offering. The proceeds of this offering will be used to reduce
its outstanding commercial paper. Such an offering is subject to favorable
market conditions. After an offering, the ownership share of the Company and
Phillips Petroleum in DEFS Corporation would be reduced accordingly.
East Tennessee Natural Gas Company. In March 2000, the Company, through a
wholly-owned subsidiary, completed the approximately $390 million acquisition of
East Tennessee Natural Gas Company from El Paso Energy. East Tennessee Natural
Gas Company owns a 1,100-mile interstate natural gas pipeline system that
crosses the Company's Texas Eastern Transmission Corporation's pipeline and
serves the Southeastern region of the U.S. Assets and liabilities acquired have
been recorded at preliminary estimated fair values. No goodwill was recorded in
the transaction.
Dominion Resources' Hydroelectric, Natural Gas and Diesel Power Generation
Businesses. In August 1999, the Company, through its wholly-owned subsidiary
DEI, reached a definitive agreement to acquire Dominion Resources Inc.'s
1,200-megawatt portfolio of hydroelectric, natural gas and diesel power
generation businesses in Argentina, Belize, Bolivia and Peru (collectively, the
"Dominion acquisitions") for approximately $405 million. The purchases of the
businesses in Belize and Peru were completed in 1999. In March and April 2000,
DEI completed the purchases of the businesses in Argentina and Bolivia,
respectively. Assets and liabilities of the Dominion acquisitions have been
recorded at preliminary estimated fair values. Total goodwill related to these
purchases was $111 million and is being amortized on a straight-line basis over
40 years.
Companhia de Geracao de Energia Eletrica Paranapanema (Paranapanema). In August
1999, the Company, through its wholly-owned subsidiary DEI, entered a series of
transactions to complete the approximately $760 million purchase of a
controlling voting interest and an approximate 44% economic interest in
Paranapanema, an electric generating company in Brazil. In January 2000, the
Company completed a tender offer to the minority shareholders of Paranapanema
and successfully acquired an additional 51% economic interest in the company for
approximately $280 million. This increased the Company's economic ownership from
approximately 44% to approximately 95%. The purchase accounting for the
acquisition of this additional interest included a reduction of the carrying
value of the related assets by approximately $626 million to reflect the
difference in the purchase price from the book value of minority interest
acquired.
Catawba River Associates, LLC (Catawba). In September 2000, the Company formed
Catawba for the purpose of raising funds for certain of the Company's projects
and other assets and sold a non-controlling, preferred interest in Catawba to a
third party for approximately $650 million. Catawba is a limited liability
company with separate existence and identity from its members, and the assets of
Catawba are separate and legally distinct from the Company. The preferred
interest receives a preferred return equal to an adjusted floating reference
rate (approximately 7.6% at September 30, 2000). The financial position, results
of operations and cash flows of Catawba are consolidated with the Company. The
preferred interest and the expense attributable to this interest are included in
Minority Interests and Minority Interest Expense, respectively, on the
Consolidated Financial Statements. The third party
8
<PAGE>
investor in Catawba has committed to invest an additional $375 million under
similar terms subject to the contribution of additional assets and satisfaction
of certain conditions.
BellSouth Carolina PCS. In September 2000, the Company, through its wholly-owned
subsidiary DukeNet, sold its 20% interest in BellSouth Carolina PCS for
approximately $400 million to BellSouth Corporation. The resulting pre-tax gain
was $407 million and is recorded in Operating Revenues.
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)
after deducting minority interests. 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)
--------------------------------------------------------------------------------------------------------------------
Depreciation Capital and
Unaffiliated Intersegment Total and Investment
Revenues Revenues Revenues EBIT Amortization Expenditures
--------------------------------------------------------------------------------
Three Months Ended
September 30, 2000
<S> <C> <C> <C> <C> <C> <C>
Natural Gas Transmission $ 247 $ 32 $ 279 $ 125 $ 33 $ 447
Field Services 2,087 440 2,527 81 67 53
NAWE 9,883 43 9,926 189 16 529
International Energy 270 - 270 81 25 99
Other Energy Services 58 18 76 (69) 3 6
Duke Ventures 464 - 464 444 4 188
Other Operations (a) 2 4 6 8 7 206
Eliminations and
Minority Interests - (537) (537) 45 - -
--------------------------------------------------------------------------------
Total Consolidated $ 13,011 $ - $ 13,011 $ 904 $ 155 $ 1,528
-------------------------------------------------------------------------------------------------------------------
Three Months Ended
September 30, 1999
Natural Gas Transmission $ 237 $ 26 $ 263 $ 128 $ 29 $ 80
Field Services 989 219 1,208 49 34 58
NAWE 3,585 34 3,619 84 12 252
International Energy 98 14 112 20 20 898
Other Energy Services 151 - 151 (47) 4 77
Duke Ventures 65 - 65 28 3 84
Other Operations (a) (27) 9 (18) 1 4 -
Eliminations and
Minority Interests - (302) (302) 18 - -
--------------------------------------------------------------------------------
Total Consolidated $ 5,098 $ - $ 5,098 $ 281 $ 106 $ 1,449
-------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
Business Segment Data (In millions)
--------------------------------------------------------------------------------------------------------------------
Depreciation Capital and
Unaffiliated Intersegment Total and Investment
Revenues Revenues Revenues EBIT Amortization Expenditures
--------------------------------------------------------------------------------
Nine Months Ended
September 30, 2000
<S> <C> <C> <C> <C> <C> <C>
Natural Gas Transmission $ 748 $ 98 $ 846 $ 398 $ 94 $ 914
Field Services 5,231 917 6,148 218 176 268
NAWE 19,426 235 19,661 337 46 1,224
International Energy 725 2 727 267 74 929
Other Energy Services 462 27 489 (53) 9 22
Duke Ventures 531 - 531 474 12 352
Other Operations (a) (14) 30 16 (20) 21 308
Eliminations and
Minority Interests - (1,309) (1,309) 128 - -
--------------------------------------------------------------------------------
Total Consolidated $ 27,109 $ - $27,109 $ 1,749 $ 432 $ 4,017
-------------------------------------------------------------------------------------------------------------------
Nine Months Ended
September 30, 1999
Natural Gas Transmission $ 852 $ 73 $ 925 $ 482 $ 98 $ 187
Field Services 1,837 497 2,334 97 90 1,595
NAWE 8,424 76 8,500 156 37 605
International Energy 177 35 212 24 32 1,214
Other Energy Services 464 - 464 (58) 11 87
Duke Ventures 128 - 128 65 9 246
Other Operations (a) (31) 27 (4) (26) 14 2
Eliminations and
Minority Interests - (708) (708) 55 - -
--------------------------------------------------------------------------------
Total Consolidated $ 11,851 $ - $11,851 $ 795 $ 291 $ 3,936
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
Segment Assets (In millions)
-------------------------------------------------------------------------------------
September 30, December 31,
2000 1999
-----------------------------------
Natural Gas Transmission $ 4,333 $ 3,897
Field Services 6,202 3,739
NAWE 17,008 6,031
International Energy 4,217 4,459
Other Energy Services 689 612
Duke Ventures 1,714 1,031
Other Operations (a) 2,090 1,308
Eliminations (624) (477)
-----------------------------------
Total Consolidated $35,629 $20,600
------------------------------------------------------------------------------------
(a) Includes certain unallocated corporate items.
</TABLE>
6. Risk Management and Financial Instruments
Interest Rate Derivatives. To take advantage of current interest rates, the
Company entered into several fixed-to-floating interest rate swap agreements
during June 2000. The swaps have a total notional amount of $328 million and
will expire in August 2022. In July 2000, the Company entered into a
fixed-to-floating interest rate swap agreeement for a total notional amount of
$77 million and will expire in April 2014.
10
<PAGE>
7. Debt and Credit Facilities
In August 2000, DEFS issued $1.7 billion of notes comprised of $600 million of
7 1/2% notes due 2005, $800 million of 7 7/8% notes due 2010 and $300 million
of 8 1/8% notes due 2030. The proceeds were used to repay a portion of the $2.75
billion of commercial paper issued in connection with the Phillips acquisition.
(see Note 4 to the Consolidated Financial Statements).
8. Commitments and Contingencies
Litigation. The Company and its subsidiaries are involved in legal, tax and
regulatory proceedings before various courts, regulatory commissions and
governmental agencies regarding performance, contracts and other matters arising
in the ordinary course of business, some of which involve substantial amounts.
Management believes that the final disposition of these proceedings will not
have a material adverse effect on consolidated results of operations or
financial position.
Other Commitments and Contingencies. 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.
Management believes that these commitments and contingencies will not have a
material adverse effect on consolidated results of operations or financial
position.
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. The Company provides
financing and credit enhancement services for its subsidiaries. The Company
conducts its operating activities through its six business segments:
o Natural Gas Transmission
o Field Services
o North American Wholesale Energy (NAWE)
o International Energy
o Other Energy Services
o Duke Ventures
See Note 1 to the Consolidated Financial Statements for further descriptions.
Management's Discussion and Analysis should be read in conjunction with the
Consolidated Financial Statements.
RESULTS OF OPERATIONS
For the quarter ended September 30, 2000, net income was $421 million compared
to $107 million for the comparable 1999 period. The increase was primarily due
to a pre-tax gain of $407 million on the sale of the Company's 20% interest in
BellSouth Carolina PCS. Also contributing to the increase was higher segment
earnings due to business expansion, as described by segment below, partially
offset by increased interest expense.
For the nine months ended September 30, 2000, net income was $729 million,
including the above-mentioned pre-tax gain of $407 million. For the comparable
1999 period, net income was $1,000 million, including an after-tax extraordinary
gain of $660 million. The decrease in net income was primarily due to the 1999
extraordinary gain resulting from the sale of the Midwest Pipelines. The absence
of this gain, the absence of a $30 million reduction in income tax expense in
the second quarter of 1999 and higher interest and minority interest expense in
the current year were partially offset by increased segment earnings primarily
due to business expansion, as described below by segment.
Operating income and earnings before interest and taxes (EBIT) for the quarter
ended September 30, 2000 were $891 million and $904 million, respectively,
compared to $262 million and $281 million, respectively, for the same period in
1999. For the nine months ended September 30, 2000, operating income increased
$956 million to $1,700 million from the same period in 1999. EBIT for the nine
months ended September 30, 2000 was $1,749 million compared to $795 million for
1999. Management evaluates each business segment based on an internal measure of
EBIT, after deducting minority interests. Operating income and EBIT are affected
by the same fluctuations for the Company and each of its business segments. The
only notable difference between operating income and EBIT is the inclusion in
EBIT of certain non-operating activities. See Note 5 to the Consolidated
Financial Statements for additional information on business segments.
12
<PAGE>
EBIT is summarized in the following table and is discussed by business segment
thereafter.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
EBIT by Business Segment (In millions)
----------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
-----------------------------------------------------------------
2000 1999 2000 1999
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Natural Gas Transmission $125 $128 $ 398 $482
Field Services 81 49 218 97
North American
Wholesale Energy 189 84 337 156
International Energy 81 20 267 24
Other Energy Services (69) (47) (53) (58)
Duke Ventures 444 28 474 65
Other Operations 8 1 (20) (26)
EBIT attributable to
Minority Interests 45 18 128 55
-----------------------------------------------------------------
Consolidated EBIT $904 $281 $1,749 $795
----------------------------------------------------------------------------------------------------
</TABLE>
Other Operations primarily include certain unallocated corporate costs. 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 Nine Months Ended
September 30, September 30,
-----------------------------------------------------------
(In millions, except where noted) 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating Revenues $279 $263 $846 $925
Operating Expenses 151 139 459 457
-----------------------------------------------------------
Operating Income 128 124 387 468
Other Income, Net of Expenses (3) 4 11 14
-----------------------------------------------------------
EBIT $125 $128 $398 $482
===========================================================
Throughput - Tbtu (a) 346 338 1,223 1,489
-------------------------------------------------------------------------------------------------------------
(a) Trillion British thermal units.
</TABLE>
For the quarter and nine months ended September 30, 2000, EBIT for Natural Gas
Transmission decreased $3 million and $84 million, respectively, compared to the
same periods in 1999. Benefits in 1999, related to the completion of certain PCB
(polychlorinated biphenyl) and soil clean-up programs below estimates,
contributed $10 million and $38 million to the decrease in EBIT for the quarter
and nine-month periods, respectively. The decrease for the current nine-month
period also resulted from the absence of $70 million in 1999 EBIT related to the
Midwest Pipelines, which were sold to CMS Energy Corporation in March 1999. The
decreases in EBIT for both periods were partially offset by increased earnings
from market-expansion projects and joint ventures such as the Maritimes &
Northeast Pipeline, which was placed into service in December 1999, and earnings
from East Tennessee Natural Gas Company, which was acquired in March 2000 (see
Note 4 to the Consolidated Financial Statements).
13
<PAGE>
Field Services
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------------------------------
(In millions, except where noted) 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating Revenues $2,527 $1,208 $6,148 $2,334
Operating Expenses 2,409 1,158 5,846 2,237
------------------------------------------------------------
Operating Income 118 50 302 97
Other Income, Net of Expenses 9 (1) 5 -
Minority Interest Expense 46 - 89 -
------------------------------------------------------------
EBIT $ 81 $ 49 $ 218 $ 97
============================================================
Natural Gas Gathered and
Processed/Transported, TBtu/d (a) 8.2 5.8 7.4 4.9
Natural Gas Liquids (NGL)
Production, MBbl/d (b) 417.0 224.7 349.9 182.5
Natural Gas Marketed, TBtu/d 0.5 0.5 0.5 0.5
Average Natural Gas Price per MMBtu (c) $4.27 $2.59 $3.42 $2.16
Average NGL Price per Gallon (d) $0.55 $0.40 $0.51 $0.31
-------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Trillion British thermal units per day.
(b) Thousand barrels per day.
(c) Million British thermal units.
(d) Does not reflect results of commodity hedges.
EBIT for Field Services increased $32 million and $121 million for the quarter
and nine months ended September 30, 2000, respectively, compared to the same
periods in 1999. The increases in EBIT and volume of activity for both periods
were primarily due to growth and acquisitions, including: the combination of
Field Services' gas gathering, processing and marketing business with Phillips
Petroleum's Gas Gathering, Processing and Marketing unit (Phillips) in March
2000 (see Note 4 to the Consolidated Financial Statements); the acquisition of
the natural gas gathering, processing, fractionation and NGL pipeline business
from Union Pacific Resources (UPR) in April 1999; and, other recent acquisitions
and plant expansions. Improved average NGL prices, which increased 38% for the
quarter and 65% for the nine months, when compared to the prior year, also
contributed significantly to the increase in EBIT.
NAWE
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
-----------------------------------------------------------
(In millions, except where noted) 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating Revenues $9,926 $3,619 $19,661 $8,500
Operating Expenses 9,743 3,531 19,296 8,325
-----------------------------------------------------------
Operating Income 183 88 365 175
Other Income, Net of Expenses (2) 3 (7) 21
Minority Interest (Benefit) Expense (8) 7 21 40
-----------------------------------------------------------
EBIT $ 189 $ 84 $ 337 $ 156
===========================================================
Natural Gas Marketed, TBtu/d 12.0 10.4 11.7 10.4
Electricity Marketed, GWh 89,967 34,131 198,518 78,147
Proportional Megawatt Capacity Owned (a) 7,925 5,909
-------------------------------------------------------------------------------------------------------------
(a) Includes under construction or under contract at period end.
</TABLE>
14
<PAGE>
In the second quarter of 2000, the Company's Trading and Marketing segment was
combined with NAWE. See Note 1 to the Consolidated Financial Statements for
additional information. For the quarter ended September 30, 2000, EBIT for NAWE
increased $105 million compared with the same period in 1999. The increase was
attributable to increased earnings from generation assets and favorable trading
margins due to price volatility in natural gas and power. In addition, NAWE
increased its volumes of natural gas and power marketed by 15% and 164%,
respectively. Partially offsetting the increase in EBIT were increased operating
and development costs and a net decrease of $26 million in income when compared
to 1999 from the sale of interests in generating facilities as a result of NAWE
executing its domestic portfolio management strategy.
NAWE's EBIT increased $181 million for the nine months ended September 30, 2000
compared to the same period in 1999. The increase was the result of increased
earnings from asset positions, increased trading margins due to price volatility
in gas and power and a net $49 million increase in income over the prior year
from the sale of interests in generating facilities. In addition, the volumes of
natural gas and power marketed increased 13% and 154%, respectively. These
increases were partially offset by increased operating and development costs
associated with business expansion.
International Energy
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------------------------------
(In millions, except where noted) 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating Revenues $ 270 $ 112 $ 727 $ 212
Operating Expenses 189 87 477 186
------------------------------------------------------------
Operating Income 81 25 250 26
Other Income, Net of Expenses 7 6 35 13
Minority Interest Expense 7 11 18 15
------------------------------------------------------------
EBIT $ 81 $ 20 $ 267 $ 24
============================================================
Proportional Megawatt Capacity Owned (a) 4,394 2,019
Proportional Maximum Pipeline
Capacity (a) , MMcf/d (b) 321 321
-------------------------------------------------------------------------------------------------------------
(a) Includes under construction or under contract at period end.
(b) Million cubic feet per day.
</TABLE>
International Energy's EBIT increased $61 million for the quarter and $243
million for the nine months ended September 30, 2000 compared to the same
periods in 1999. The increase for both periods was primarily attributable to
increased earnings in Latin America, mainly resulting from new projects (see
Note 4 to the Consolidated Financial Statements for a discussion of recent
acquisitions). The increase for the nine-month period also included $54 million
from the February 2000 sale of certain assets relating to the transportation of
NGLs.
Other Energy Services
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------------------------------
(In millions) 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating Revenues $ 76 $151 $489 $464
Operating Expenses 145 198 542 522
------------------------------------------------------------
EBIT $(69) $ (47) $ (53) $ (58)
-------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
For the quarter ended September 30, 2000, EBIT for Other Energy Services
decreased $22 million, compared to the same period in 1999. The results for the
quarter include a loss on a project recorded by Duke/Fluor Daniel (D/FD) of
approximately $42 million. Duke Engineering & Services, Inc. (DE&S) also
recorded an approximately $27 million charge during the quarter to reflect a
more conservative revenue recognition approach on its projects. This DE&S charge
was offset by a $38 million charge in 1999, comprised primarily of expenses for
severance and office closings associated with repositioning the company for
growth. The current year charges were also partially offset by increased
earnings at DukeSolutions, Inc. (DukeSolutions) from new business activity and
decreased operating expenses.
For the nine months ended September 30, 2000, EBIT for Other Energy Services
increased $5 million. This increase is the result of the effect of the third
quarter activity listed above, more than offset by earnings from new business
activity and decreased operating expenses at DukeSolutions, and earnings related
to new projects at D/FD.
Duke Ventures
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------------------------------
(In millions) 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating Revenues $464 $65 $531 $128
Operating Expenses 20 37 57 63
------------------------------------------------------------
EBIT $444 $28 $474 $ 65
-------------------------------------------------------------------------------------------------------------
</TABLE>
EBIT for Duke Ventures increased $416 million and $409 million for the quarter
and nine months ended September 30, 2000, respectively, compared with the same
periods in 1999. This increase is primarily attributable to the sale by DukeNet
Communications of its 20% interest in BellSouth Carolina PCS to BellSouth
Corporation for a pre-tax gain of $407 million. Increased gains on commercial
project sales by Crescent Resources, Inc. also contributed to the increased
earnings for the quarter but had no impact on the nine-month period.
Other Impacts on Net Income
Interest expense increased $103 million for the quarter and $256 million for the
nine months ended September 30, 2000 compared to the same periods in 1999, due
to higher average debt balances outstanding, resulting from acquisitions and
expansion.
Minority interest expense remained the same for the quarter but increased $43
million for the nine months ended September 30, 2000, compared to the same
periods in 1999. Included in minority interests is expense related to regular
distributions on issuances of the Company's trust preferred securities. This
expense increased $2 million for the quarter and $13 million for the nine-month
period due to additional issuances of the Company's trust preferred securities
during 1999.
Minority interest expense related to joint ventures decreased $2 million for the
quarter but increased $30 million for the nine-month period. The increase for
the current nine-month period includes minority interest expense related to
Field Services' joint venture with Phillips Petroleum (see Note 4 to the
Consolidated Financial Statements). Also contributing to the change for the
nine-month period was decreased minority interest expense at NAWE related to its
joint venture with Exxon Mobil Corporation and increased minority interest
expense at International Energy related to its 1999 and 2000 acquisitions.
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.
16
<PAGE>
The sale of the Midwest Pipelines closed in March 1999 and resulted in a $660
million extraordinary gain, net of income tax of $404 million. For further
discussion on the sale, see Note 2 to the Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Operating Cash Flows
Net cash provided by operations was $1,006 million for the nine months ended
September 30, 2000 compared to $549 million for the same period in 1999. The
increase in cash was primarily due to increased accounts payable due to
increased trading and marketing volumes, offset by increased tax payments made
in 2000 as a result of the earlier sale of the Midwest Pipelines.
Investing Cash Flows
Net cash used in investing activities was $3,714 million for the nine months
ended September 30, 2000 compared to $1,777 million for the same period in 1999.
The primary use of cash in investing activities for capital and investment
expenditures reflect development and expansion expenditures, refurbishment and
upgrades to existing assets and the acquisition of various businesses and
assets. Significant acquisitions in 2000 include approximately $390 million for
the acquisition of East Tennessee Natural Gas Company, approximately $280
million for the acquisition of additional minority interests in Companhia de
Geracao de Energia Eletrica Paranapanema and approximately $250 million for the
acquisition of Market Hub Partners. See Note 4 to the Consolidated Financial
Statements for further information on significant acquisitions. In 1999, the
primary acquisition was the $1.35 billion acquisition of the natural gas
gathering, processing, fractionation and NGL pipeline business from UPR, as well
as UPR's NGL marketing activities.
Offsetting the capital and investing expenditures were the cash proceeds from
the current period sale of the Company's 20% interest in BellSouth Carolina PCS
to BellSouth Corporation for $400 million (see Note 4 to the Consolidated
Financial Statements) and the 1999 sale of the Midwest Pipelines business for
$1.9 billion.
Financing Cash Flows
The Company plans to continue to significantly grow several of its business
segments: Field Services, NAWE, International Energy and Other Energy Services.
These growth opportunities, along with debt repayments and operating
requirements, are expected to be funded by cash from operations, external
financing and the proceeds from certain asset sales. Funding requirements met by
external financing and proceeds from the sale of assets are dependent upon the
opportunities presented and favorable market conditions. Management believes the
Company has adequate financial resources to meet its future needs.
In April 2000, Duke Energy Field Services, LLC (DEFS) issued approximately $2.75
billion of commercial paper associated with the Phillips acquisition. In August
2000, DEFS issued $1.7 billion of notes comprised of $600 million of 7 1/2%
notes due 2005, $800 million of 7 7/8% notes due 2010 and $300 million of 8 1/8%
notes due 2030, reducing the DEFS commercial paper balance (see Note 4 to the
Consolidated Financial Statements).
In September 2000, the Company formed Catawba River Associates, LLC (Catawba)
and sold a non-controlling, preferred interest in Catawba to a third party for
approximately $650 million. The preferred interest receives a preferred return
equal to an adjusted floating reference rate (approximately 7.6% at September
30, 2000). Third party investor
17
<PAGE>
in Catawba has committed to invest an additional $375 million under similar
terms subject to the contribution of additional assets and satisfaction of
certain conditions. See Note 3 to the Consolidated Financial Statements for
further discussion.
Under its commercial paper facilities and extendable commercial note programs
(ECNs), the Company had the ability to borrow up to $3.96 billion and $2.05
billion at September 30, 2000 and December 31, 1999, respectively.
A summary of the available commercial paper and ECNs as of September 30, 2000 is
as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
(In billions) Duke Capital DEFS Duke Energy Total
Corporation International
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial Paper $1.55 $1.00 (a) $0.41(b) $2.96
ECNs 1.00 - - 1.00
-------------------------------------------------------------------
Total $2.55 $1.00 $0.41 $3.96
-------------------------------------------------------------------------------------------
</TABLE>
(a) Original availability of $2.8 billion was reduced upon DEFS' issuance of
$1.7 billion in notes.
(b) Includes ability to issue medium term notes.
The amount of the Company's bank credit and construction facilities available at
September 30, 2000 and December 31, 1999, was approximately $3.9 billion and
$2.5 billion, respectively. Certain of the credit facilities support the
issuance of commercial paper; therefore, the issuance of commercial paper
reduces the amount available under these credit facilities. At September 30,
2000, approximately $1.9 billion was outstanding under the commercial paper
facilities and (ECNs), and approximately $337 million of borrowings were
outstanding under the bank credit and construction facilities.
The parent company of DEFS, Duke Energy Field Services Corporation (DEFS
Corporation), may offer a portion of its common stock to the public in 2001, in
an initial public offering. The proceeds of this offering will be used to reduce
its outstanding commercial paper. Such an offering is subject to favorable
market conditions. After an offering, the ownership share of the Company and
Phillips Petroleum in DEFS Corporation would be reduced accordingly. See Note 4
to the Consolidated Financial Statements for further discussion.
As of September 30, 2000, the Company and its subsidiaries had the ability to
issue up to $2.5 billion aggregate principal amount of debt and other securities
under shelf registrations filed with the Securities and Exchange Commission.
Such securities may be issued as First and Refunding Mortgage Bonds, Senior
Notes, Subordinated Notes or Preferred Securities.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Risk Policies
The Company is exposed to market risks associated with interest rates, commodity
prices, equity prices and foreign exchange rates. The established comprehensive
risk management policies are currently monitored and maintained by the Chief
Risk Officer (CRO) to monitor and manage these market risks. The Company's
Policy Committee is responsible for the overall approval of market risk
management policies and the delegation of approval and authorization levels. The
Policy Committee is comprised of senior executives that receive periodic updates
from the CRO on market risk positions, corporate exposures and overall results
of the Company's risk management activities. The CRO has responsibility for
oversight of interest rate risk, foreign currency risk, credit risk and energy
risk management, including monitoring of energy financial exposure limits. A
description of the changes in the Company's market risk since December 31, 1999
follows.
18
<PAGE>
Interest Rate Risk
From time to time the Company may enter into financial derivative instruments
including, but not limited to, swaps, options and treasury rate agreements to
manage and mitigate interest rate risk exposure. See Note 6 to the Consolidated
Financial Statements for additional information.
The Company entered into several fixed-to-floating interest rate swap agreements
for a total notional amount of $328 million in June 2000 and entered into a
fixed-to-floating interest rate swap agreement for a total notional amount of
$77 million in July 2000. These swaps exchange fixed rate interest payment
obligations to variable rate obligations to take advantage of current interest
rates.
Commodity Price Risk
In March 2000, the Company's exposure to market fluctuations in the prices of
NGLs increased as a result of the Company combining its gas gathering,
processing and marketing business with Phillips to form a new midstream company.
See Note 4 to the Consolidated Financial Statements for additional information
on the combination. The Company closely monitors the risks associated with NGL
price changes on its future operations, and where appropriate, uses crude oil
commodity instruments to hedge NGL prices. Based on a sensitivity analysis as of
September 30, 2000, it was estimated that if NGL prices average one cent per
gallon less in the next twelve months, earnings before income taxes would
decrease by approximately $5 million, after considering the effect of the
Company's commodity hedge positions.
The risk in the Company's 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
daily 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. For additional information on the DER computations, see the Quantitative
and Qualitative Disclosures About Market Risk section in the Company's 1999 Form
10-K filing.
The estimated potential one-day favorable or unfavorable impact on earnings
before income taxes related to commodity derivatives held for trading purposes
was approximately $10 million and $7 million at September 30, 2000 and December
31, 1999, respectively. The average estimated potential one-day favorable or
unfavorable impact on earnings before income taxes related to commodity
derivatives held for trading purposes was approximately $10 million and $7
million for the nine months ended September 30, 2000 and 1999, respectively.
Foreign Operations Risk
The Company is exposed to foreign currency risk, sovereign risk and other
foreign operations risk that arise from investments in international affiliates
and businesses owned and operated in foreign countries. To mitigate risks
associated with foreign currency fluctuations, when possible, contracts are
denominated in or indexed to the U.S. dollar or may be hedged through debt
denominated in the foreign currency. The Company also uses foreign currency
derivatives, where possible, to manage its risk related to foreign currency
fluctuations. To monitor its currency exchange rate risks, the Company uses
sensitivity analysis, which measures the impact of a devaluation of the foreign
currencies to which it has exposure.
At September 30, 2000, the Company's primary foreign currency exchange rate
exposures were the Brazilian Real, the Peruvian Nuevo Sol, the Australian
dollar, the El Salvadorian Colon, the Argentine Peso, the European Euro, and the
Canadian dollar. Based on a sensitivity analysis at September 30, 2000, a 10%
devaluation in the currency exchange rates in Brazil would reduce the Company's
financial position by approximately $100 million and would not significantly
affect the Company's consolidated results of operations or cash flows over the
next twelve months. Based on a sensitivity analysis at September 30, 2000, a 10%
devaluation in other foreign currencies were insignificant to the Company's
consolidated results of operations, financial position or cash flows.
19
<PAGE>
CURRENT ISSUES
Natural Gas Competition. Wholesale Competition. On February 9, 2000, the Federal
Energy Regulatory Commission (FERC) issued Order 637 which sets forth revisions
to its regulations governing short-term natural gas transportation services and
policies governing the regulation of interstate natural gas pipelines. "Short
term" has been defined as all transactions of less than one year. Among the
significant actions taken are the lifting of the price cap for short-term
capacity release by pipeline customers for an experimental 2 1/2 -year period
ending September 1, 2002 and requiring that interstate pipelines file pro forma
tariff sheets to (i) provide for nomination equality between capacity release
and primary pipeline capacity; (ii) implement imbalance management services (for
which interstate pipelines may charge fees) while at the same time reducing the
use of operational flow orders and penalties and (iii) provide segmentation
rights if operationally feasible. Order 637 also narrows the right of first
refusal to remove economic biases perceived in the current rule. Order 637
imposes significant new reporting requirements for interstate pipelines that
were implemented by the Company during the third quarter. The stated FERC goal
of these reporting requirements is to increase transparency of transactions on a
real-time basis and to provide additional information on pipeline organizational
structure. Additionally, Order 637 permits pipelines to propose peak/off-peak
rates and term-differentiated rates, and encourages pipelines to propose
experimental capacity auctions. By Order 637-A issued in February 2000, the FERC
generally denied requests for rehearing and several parties, including the
Company, have filed appeals in the District of Columbia Court of Appeals seeking
court review of various aspects of the Order. During the third quarter, the
Company's interstate pipelines made the required pro forma tariff sheet filings.
These filings are currently subject to review and approval by the FERC.
Because the ultimate resolution of the foregoing proceeding is unknown,
management cannot estimate the effects of these matters on future consolidated
results of operations or financial position.
20
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Illinois Environmental Protection Agency has initiated an environmental
enforcement proceeding against a former subsidiary of the Company relating to
alleged air quality permit violations at a natural gas compressor station. The
Company has agreed to indemnify the purchaser of this former subsidiary against
liability for any penalty or fines resulting from these alleged violations. This
proceeding could result in a penalty in excess of $100,000.
For additional information concerning litigation and other contingencies, see
Note 8 to the Consolidated Financial Statements, "Commitments and
Contingencies."
Management believes that the resolution of this matter will not have a material
adverse effect on consolidated results of operations or financial position.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
(27) Financial Data Schedule (included in electronic filing only)
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the third quarter of
2000.
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
November 13, 2000 /s/ Richard J. Osborne
---------------------------------------
Richard J. Osborne
Executive Vice President and
Chief Financial Officer
November 13, 2000 /s/ Sandra P. Meyer
---------------------------------------
Sandra P. Meyer
Controller
22
