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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 June 30, 2000 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 Identification No.)
of Incorporation)
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, 2000.........................................................1,010
<PAGE>
DUKE CAPITAL CORPORATION
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2000
INDEX
<TABLE>
<CAPTION>
Item Page
---- ----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
1. Financial Statements....................................................................................1
Consolidated Statements of Income and Comprehensive Income for the Three and Six
Months Ended June 30, 2000 and 1999.......................................................1
Consolidated Statements of Cash Flows for the Three and Six Months Ended June 30, 2000
and 1999..................................................................................2
Consolidated Balance Sheets as of June 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..................11
PART II. OTHER INFORMATION
1. Legal Proceedings......................................................................................19
6. Exhibits and Reports on Form 8-K.......................................................................19
Signatures.............................................................................................20
</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.
<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 Six Months Ended
June 30, June 30,
----------------------- -------------------------
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Operating Revenues
Sales, trading and marketing of natural gas
and petroleum products $ 4,670 $ 2,388 $ 8,938 $ 4,402
Trading and marketing of electricity 2,540 667 3,751 1,106
Transportation and storage of natural gas 267 253 526 632
Electric generation 152 58 286 95
Other 290 252 597 518
------- ------- ------- -------
Total operating revenues 7,919 3,618 14,098 6,753
------- ------- ------- -------
Operating Expenses
Natural gas and petroleum products purchased 4,461 2,307 8,501 4,247
Purchased power 2,275 588 3,412 992
Other operation and maintenance 582 377 1,026 792
Depreciation and amortization 159 96 277 185
Property and other taxes 37 23 73 55
------- ------- ------- -------
Total operating expenses 7,514 3,391 13,289 6,271
------- ------- ------- -------
Operating Income 405 227 809 482
Other Income and Expenses 9 15 36 32
------- ------- ------- -------
Earnings Before Interest and Taxes 414 242 845 514
Interest Expense 155 50 268 115
Minority Interests 78 26 98 55
------- ------- ------- -------
Earnings Before Income Taxes 181 166 479 344
Income Taxes 58 32 171 111
------- ------- ------- -------
Income Before Extraordinary Item 123 134 308 233
Extraordinary Gain, net of tax - - - 660
------- ------- ------- -------
Net Income 123 134 308 893
------- ------- ------- -------
Other Comprehensive Income, net of tax
Foreign currency translation adjustments (47) - (48) -
------- ------- ------- -------
Total Comprehensive Income $ 76 $ 134 $ 260 $ 893
======= ======= ======= =======
</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,
------------------------------
2000 1999
------ ------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 308 $ 893
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 286 190
Extraordinary gain, net of tax - (660)
Deferred income taxes 40 39
Transition cost recoveries, net 45 44
(Increase) decrease in
Receivables (1,747) (48)
Inventory 79 (23)
Other current assets (321) (26)
Increase (decrease) in
Accounts payable 2,160 162
Taxes accrued (694) 32
Interest accrued 4 -
Other current liabilities (18) (32)
Other, net (33) (48)
------ ------
Net cash provided by operating activities 109 523
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital and investment expenditures (2,489) (2,487)
Proceeds from sale of subsidiaries - 1,900
Proceeds from sales and other, net (150) 91
------ ------
Net cash used in investing activities (2,639) (496)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issuance of long-term debt 258 399
Payments for the redemption of long-term debt (192) (201)
Net change in notes payable and commercial paper 3,408 (11)
Distributions to minority interests (1,217) -
Other, net (26) (51)
------ ------
Net cash provided by financing activities 2,231 136
------ ------
Net increase (decrease) in cash and cash equivalents (299) 163
Cash received from business acquisitions 90 -
Cash and cash equivalents at beginning of period 585 64
------ ------
Cash and cash equivalents at end of period $ 376 $ 227
===== =====
Supplemental Disclosures
Cash paid for interest, net of amount capitalized $ 266 $ 114
Cash paid for income taxes $ 63 $ 131
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
DUKE CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
(unaudited)
------------------- -------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 376 $ 585
Receivables 4,993 2,957
Inventory 312 267
Current portion of regulatory assets 36 81
Unrealized gains on mark-to-market transactions 4,720 1,118
Other 703 344
------------------- -------------------
Total current assets 11,140 5,352
------------------- -------------------
Investments and Other Assets
Investments in affiliates 1,335 1,299
Pre-funded pension costs 343 340
Goodwill, net 1,146 774
Notes receivable 353 154
Unrealized gains on mark-to-market transactions 1,972 690
Other 1,001 664
------------------- -------------------
Total investments and other assets 6,150 3,921
------------------- -------------------
Property, Plant and Equipment
Cost 15,877 13,642
Less accumulated depreciation and amortization 2,360 2,475
------------------- -------------------
Net property, plant and equipment 13,517 11,167
------------------- -------------------
Regulatory Assets and Deferred Debits 157 160
------------------- -------------------
Total Assets $ 30,964 $ 20,600
=================== ===================
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
DUKE CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions, except share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
(unaudited)
-------- --------
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Accounts payable $ 4,554 $ 2,106
Notes payable and commercial paper 3,543 83
Taxes accrued 63 738
Interest accrued 90 83
Current maturities of long-term debt 310 277
Unrealized losses on mark-to-market transactions 4,782 1,241
Other 579 600
-------- --------
Total current liabilities 13,921 5,128
-------- --------
Long-term Debt 5,397 5,319
-------- --------
Deferred Credits and Other Liabilities
Deferred income taxes 1,643 1,475
Environmental clean-up liabilities 101 101
Unrealized losses on mark-to-market transactions 1,746 438
Other 517 657
-------- --------
Total deferred credits and other liabilities 4,007 2,671
-------- --------
Minority Interests 1,116 1,200
-------- --------
Guaranteed Preferred Beneficial Interests in Subordinated
Notes of Duke Capital Corporation 823 823
-------- --------
Common Stockholder's Equity
Common stock, no par, 3,000 shares authorized,
1,010 shares outstanding - -
Paid-in capital 3,192 3,200
Retained Earnings 2,558 2,261
Accumulated other comprehensive income (50) (2)
-------- --------
Total common stockholder's equity 5,700 5,459
-------- --------
Total Liabilities and Stockholder's Equity $ 30,964 $ 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
o International Energy
o Other Energy Services
o Duke Ventures
Natural Gas Transmission provides interstate transportation and storage of
natural gas for customers primarily in the Mid-Atlantic and New England states.
With the purchase of East Tennessee Natural Gas Company in March 2000, Natural
Gas Transmission also began serving the southeastern region of the U.S. (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.
Field Services gathers, processes, transports and markets natural gas and
produces, transports and markets natural gas liquids. 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.
North American Wholesale Energy's (NAWE) activities include asset operation,
development and management, primarily through Duke Energy North America, LLC, 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
ExxonMobil, a 40% partner in DETM. The operations of the Trading and Marketing
segment were combined by management into NAWE during the second quarter.
International Energy develops, owns and operates energy-related facilities
worldwide providing energy trading, marketing and natural gas and power
development and operations. It conducts its operations through Duke Energy
International, LLC (DEI).
Other Energy Services provides engineering, consulting, construction and
integrated energy solutions worldwide, primarily through Duke Engineering &
Services, Inc., Duke/Fluor Daniel and DukeSolutions, Inc.
Duke Ventures is comprised of 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.
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
5
<PAGE>
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 Standard. 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 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 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, 2000 and December 31, 1999 are as follows:
---------------------------------------- ------------------- ------------------
June 30, December 31,
(In millions) 2000 1999
---------------------------------------- ------------------- ------------------
Receivables $188 $ -
Notes receivable 250 479
Accounts payable 418 284
Taxes accrued (70) 570
---------------------------------------- ------------------- ------------------
4. Business Acquisitions
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 additional information concerning asset and liability valuations
are finalized and the evaluation of certain pre-acquisition contingent
liabilities are completed.
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 and processing business with Phillips to form a new midstream company
named Duke Energy Field Services, LLC (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
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%. During the third quarter, DEFS filed a shelf
registration statement with the Securities and Exchange Commission to offer up
to $2.0 billion of long-term debt securities. DEFS plans to issue approximately
$1.7 billion of long-term debt securities under this shelf registration.
Assets and liabilities acquired have been recorded at preliminary estimated fair
values. During the second quarter, adjustments to the allocated purchase price,
primarily pass through tax basis adjustments that affected deferred tax
liabilities, resulted in an
6
<PAGE>
approximately $70 million reduction in goodwill. Goodwill of approximately $167
million was recorded in connection with the transaction and is being amortized
on a straight-line basis over 20 years.
The parent company of DEFS, Duke Energy Field Services Corporation (DEFS
Corporation), plans to offer a portion of its common stock to the public in
2000, or 2001, in an initial public offering. The proceeds of this offering will
be used to reduce the debt described above. Such an offering is subject to
favorable market conditions. After the offering, the ownership of the Company
and Phillips Petroleum in DEFS Corporation will be reduced accordingly.
East Tennessee Natural Gas Company. In March 2000, the Company 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 have been recorded at preliminary estimated fair
values. There was no goodwill recorded in the transaction.
Dominion Resources' Hydroelectric, Natural Gas and Diesel Power Generation
Businesses. In August 1999, 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 purchase 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, DEI entered a series of transactions to complete a $761 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.
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.
7
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
Business Segment Data (In millions)
--------------------------------------------------------------------------------------------------------------------
Depreciation Capital and
Unaffiliated Intersegment Total and Investment
Revenues Revenues Revenues EBIT Amortization Expenditures
------------ ------------ ------------ ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Three Months Ended
June 30, 2000
Natural Gas Transmission $ 249 $ 32 $ 281 $121 $ 32 $39
Field Services 1,870 285 2,155 68 71 87
North American
Wholesale Energy 5,399 50 5,449 65 14 324
International Energy 249 - 249 84 27 383
Other Energy Services 132 6 138 9 3 5
Duke Ventures 33 - 33 13 4 100
Other Operations a (13) 4 (9) (23) 8 54
Eliminations and
Minority Interests - (377) (377) 77 - -
------------ ------------ ------------ ------------- ------------- --------------
Total Consolidated $7,919 $ - $7,919 $414 $159 $992
---------------------------------- ------------ ------------ ------------ ------------- ------------- --------------
Three Months Ended
June 30, 1999
Natural Gas Transmission $ 237 $ 23 $ 260 $146 $28 $ 65
Field Services 614 168 782 36 36 92
North American
Wholesale Energy 2,527 78 2,605 27 14 262
International Energy 43 12 55 5 6 20
Other Energy Services 159 - 159 (6) 4 2
Duke Ventures 37 - 37 24 3 98
Other Operations (a) 1 5 6 (6) 5 (13)
Eliminations and
Minority Interests - (286) (286) 16 - -
------------ ------------ ------------ ------------- ------------- --------------
Total Consolidated $3,618 $ - $3,618 $242 $96 $ 526
---------------------------------- ------------ ------------ ------------ ------------- ------------- --------------
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
Business Segment Data (In millions)
--------------------------------------------------------------------------------------------------------------------
Depreciation Capital and
Unaffiliated Intersegment Total and Investment
Revenues Revenues Revenues EBIT Amortization Expenditures
------------ ------------ ------------ ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Six Months Ended
June 30, 2000
Natural Gas Transmission $ 501 $ 66 $ 567 $273 $ 61 $467
Field Services 3,144 477 3,621 137 109 215
North American
Wholesale Energy 9,543 192 9,735 148 30 659
International Energy 455 2 457 186 49 830
Other Energy Services 404 9 413 16 6 16
Duke Ventures 67 - 67 30 8 164
Other Operations (a) (16) 26 10 (28) 14 138
Eliminations and
Minority Interests - (772) (772) 83 - -
------------ ------------ ------------ ------------- ------------- --------------
Total Consolidated $14,098 $ - $14,098 $845 $277 $2,489
---------------------------------- ------------ ------------ ------------ ------------- ------------- --------------
Six Months Ended
June 30, 1999
Natural Gas Transmission $ 615 $47 $ 662 $354 $ 69 $ 107
Field Services 848 278 1,126 48 56 1,537
North American
Wholesale Energy 4,839 133 4,972 72 25 353
International Energy 79 21 100 4 12 316
Other Energy Services 313 - 313 (11) 7 10
Duke Ventures 63 - 63 37 6 162
Other Operations (a) (4) 18 14 (27) 10 2
Eliminations and
Minority Interests - (497) (497) 37 - -
------------ ------------ ------------ ------------- ------------- --------------
Total Consolidated $6,753 $ - $ 6,753 $514 $185 $ 2,487
---------------------------------- ------------ ------------ ------------ ------------- ------------- --------------
-------------------------------------------------------------------------------------
Segment Assets (In millions)
-------------------------------------------------------------------------------------
June 30, December 31,
2000 1999
----------------- ------------------
Natural Gas Transmission $ 4,174 $ 3,897
Field Services 6,376 3,739
North American Wholesale Energy 13,228 6,031
International Energy 4,292 4,459
Other Energy Services 786 612
Duke Ventures 1,169 1,031
Other Operations (a) 1,570 1,308
Eliminations (631) (477)
----------------- ------------------
Total Consolidated $30,964 $20,600
------------------------------------------------ ----------------- ------------------
</TABLE>
(a) Includes certain unallocated corporate items.
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 October 2022. The Company also entered into several interest rate
hedges which have a total notional amount of $225 million and will expire in
September 2000. The purpose of the hedges is to lock in treasury rates, ranging
from 5.90% to 6.35%, to reduce exposure to interest rate fluctuations on
planned debt issuances by DEFS.
9
<PAGE>
7. Debt and Credit Facilities
In April 2000, DEFS issued approximately $2.75 billion of commercial paper
associated 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.
Where appropriate, the Company has made accruals in accordance with Statement of
Financial Accounting Standards 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.
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.
10
<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) 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:
o Natural Gas Transmission
o Field Services
o North American Wholesale Energy
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 June 30, 2000, net income was $123 million compared to net
income of $134 million for the same period in 1999. The decrease is primarily
due to a $30 million reduction in income tax expense in the second quarter of
1999. Higher segment profit and loss due to business expansion, as described
below, was partially offset by increased interest and minority interest expense.
For the six months ended June 30, 2000, net income was $308 million compared to
net income of $893 million for the same period in 1999. The decrease was
primarily due to the 1999 extraordinary gain resulting from the sale of the
Midwest Pipelines. The absence of this gain, the tax adjustment in 1999 and
higher interest and minority interest expense in the current year were partially
offset by increased segment profit and loss primarily due to business expansion,
as described by segment below.
Operating income and earnings before interest and taxes (EBIT) for the quarter
ended June 30, 2000 were $405 million and $414 million, respectively, compared
to $227 million and $242 million, respectively, for the same period in 1999. For
the six months ended June 30, 2000, operating income increased $327 million to
$809 million from the same period in 1999. EBIT for the six months ended June
30, 2000 was $845 million compared to $514 million for the same period in 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.
11
<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 Six Months Ended
June 30, June 30,
---------------- --------------- ---------------- ---------------
2000 1999 2000 1999
---------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Natural Gas Transmission $121 $146 $273 $354
Field Services 68 36 137 48
North American
Wholesale Energy 65 27 148 72
International Energy 84 5 186 4
Other Energy Services 9 (6) 16 (11)
Duke Ventures 13 24 30 37
Other Operations (23) (6) (28) (27)
EBIT attributable to
Minority Interests 77 16 83 37
---------------- --------------- ---------------- ---------------
Consolidated EBIT $414 $242 $845 $514
---------------------------------- ---------------- --------------- ---------------- ---------------
</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 Six Months Ended
June 30, June 30,
-------------- -------------- --------------- --------------
(In millions, except where noted) 2000 1999 2000 1999
------------------------------------------------ -------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Operating Revenues $281 $260 $567 $662
Operating Expenses 162 116 308 318
-------------- -------------- --------------- --------------
Operating Income 119 144 259 344
Other Income, Net of Expenses 2 2 14 10
-------------- -------------- --------------- --------------
EBIT $121 $146 $273 $354
============== ============== =============== ==============
Throughput - TBtu (a) 372 340 877 1,151
------------------------------------------------ -------------- -------------- --------------- --------------
</TABLE>
(a) Trillion British thermal units.
For the quarter and six months ended June 30, 2000, EBIT for Natural Gas
Transmission decreased $25 million and $81 million, respectively, compared to
the same periods in 1999. A $28 million benefit in 1999 related to the
completion of certain PCB (polychlorinated biphenyl) and soil clean-up programs
below estimates contributed to the decrease in EBIT for both the quarter and
six-month periods. The decrease for the six-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 and 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 for additional information on the acquisition.
12
<PAGE>
Field Services
<TABLE>
<CAPTION>
------------------------------------------------ ----------------------------- ------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
-------------- -------------- --------------- --------------
(In millions, except where noted) 2000 1999 2000 1999
------------------------------------------------ -------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Operating Revenues $ 2,155 $ 782 $ 3,621 $ 1,126
Operating Expenses 2,044 747 3,437 1,079
-------------- -------------- --------------- --------------
Operating Income 111 35 184 47
Other Income, Net of Expenses - 1 (4) 1
Minority Interest Expense 43 - 43 -
-------------- -------------- --------------- --------------
EBIT $ 68 $ 36 $ 137 $ 48
============== ============== =============== ==============
Natural Gas Gathered and
Processed/Transported, TBtu/d (a) 8.0 5.3 7.0 4.4
Natural Gas Liquid (NGL)
Production, MBbl/d (b) 401.5 214.0 316.3 161.1
Natural Gas Marketed, Tbtu/d 0.5 0.5 0.5 0.4
Average Natural Gas Price per MMBtu (c) $ 3.47 $ 2.14 $ 2.99 $ 1.95
Average NGL Price per Gallon (d) $ 0.47 $ 0.30 $ 0.49 $ 0.27
------------------------------------------------ -------------- -------------- --------------- --------------
</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 $89 million for the quarter
and six months ended June 30, 2000, respectively, compared to the same periods
in 1999. The increase for both periods was primarily due to growth and
acquisitions: including earnings from the combination of Field Services' gas
gathering and processing business with Phillips Petroleum's Gas Gathering,
Processing and Marketing unit (Phillips) in March 2000 (see Note 4 to the
Consolidated Financial Statements for further discussion); incremental earnings
from the acquisition of the natural gas gathering, processing, fractionation and
NGL pipeline business from Union Pacific Resources (UPR) in April 1999; and,
earnings from other recent acquisitions and plant expansions. Improved average
NGL prices, which increased 57% for the quarter and 81% for the six months, when
compared to the prior year, also contributed to the increase in EBIT.
North American Wholesale Energy
<TABLE>
<CAPTION>
------------------------------------------------ ----------------------------- ------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
-------------- -------------- --------------- --------------
(In millions, except where noted) 2000 1999 2000 1999
------------------------------------------------ -------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Operating Revenues $5,449 $ 2,605 $ 9,735 $ 4,972
Operating Expenses 5,347 2,575 9,553 4,885
-------------- -------------- --------------- --------------
Operating Income 102 30 182 87
Other Income, Net of Expenses (9) 11 (5) 18
Minority Interest Expense 28 14 29 33
-------------- -------------- --------------- --------------
EBIT $ 65 $ 27 $ 148 $ 72
============== ============== =============== ==============
Natural Gas Marketed, TBtu/d 10.3 10.0 10.1 10.5
Electricity Marketed, GWh 58,198 22,179 108,551 44,016
Proportional Megawatt Capacity Owned (a) - - 8,473 6,225
------------------------------------------------ -------------- -------------- --------------- --------------
</TABLE>
(a) Includes under construction or under contract.
In the second quarter of 2000, Duke Energy's Trading and Marketing segment was
combined with North American Wholesale Energy (NAWE). See Note 1 to the
Consolidated Financial Statements for additional information. For the quarter
ended June 30, 2000, EBIT for NAWE increased $38 million compared with the same
period in 1999. The increase was attributable to increased earnings from asset
positions and
13
<PAGE>
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 3% and
162%, respectively. Partially offsetting the increase in EBIT were increased
operating and development costs.
NAWE's EBIT increased $76 million for the six months ended June 30, 2000
compared to the same period in 1999. The increase was the result of increased
trading margins due to price volatility in gas and power and a $59 million
increase in income from the sale of interests in generating facilities as a
result of NAWE executing its domestic portfolio management strategy. In
addition, while power marketed increased 147%, the volumes of natural gas 4%.
This income was partially offset by reduced earnings from generation facilities
in California and increased operating and development costs associated with
business expansion.
International Energy
<TABLE>
<CAPTION>
------------------------------------------------ ----------------------------- ------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
-------------- -------------- --------------- --------------
(In millions, except where noted) 2000 1999 2000 1999
------------------------------------------------ -------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Operating Revenues $249 $ 55 $ 457 $100
Operating Expenses 173 51 288 99
-------------- -------------- --------------- --------------
Operating Income 76 4 169 1
Other Income, Net of Expenses 14 3 28 7
Minority Interest Expense 6 2 11 4
-------------- -------------- --------------- --------------
EBIT $ 84 $ 5 $ 186 $ 4
============== ============== =============== ==============
Proportional Megawatt Capacity Owned(a) - - 4,370 906
Proportional Maximum Pipeline
Capacity (a) , MMcf/d (b) - - 321 321
------------------------------------------------ -------------- -------------- --------------- --------------
</TABLE>
(a) Includes under construction or under contract.
(b) Million cubic feet per day.
International Energy's EBIT increased $79 million for the quarter and $182
million for the six months ended June 30, 2000 compared to the same periods in
1999. The increase for both periods is primarily attributable to increased
earnings in Latin America of $70 million and $118 million for the quarter and
six month period, respectively, mainly resulting from new projects (see Note 4
to the Consolidated Financial Statements for a discussion of recent
acquisitions). The increase for the six-month period also included $54 million
from the February 2000 sale of certain assets relating to transportation of
natural gas liquids.
Other Energy Services
<TABLE>
<CAPTION>
------------------------------------------------ ----------------------------- ------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
-------------- -------------- --------------- --------------
(In millions) 2000 1999 2000 1999
------------------------------------------------ -------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Operating Revenues $138 $159 $413 $313
Operating Expenses 129 165 397 324
-------------- -------------- --------------- --------------
EBIT $ 9 $ (6) $ 16 $(11)
------------------------------------------------ -------------- -------------- --------------- --------------
</TABLE>
For the quarter and six months ended June 30, 2000, EBIT for Other Energy
Services increased $15 million and $27 million, respectively, compared to the
same periods in 1999. The increase was primarily due to decreased operating
expenses at Duke Engineering & Services, Inc., and increased earnings from new
business and decreased operating expenses at DukeSolutions, Inc. Earnings growth
from new projects at Duke/Fluor Daniel also contributed to the increase in EBIT
for the six-month period.
14
<PAGE>
Duke Ventures
<TABLE>
<CAPTION>
------------------------------------------------ ----------------------------- ------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
-------------- -------------- --------------- --------------
(In millions) 2000 1999 2000 1999
------------------------------------------------ -------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Operating Revenues $33 $37 $67 $63
Operating Expenses 20 13 37 26
-------------- -------------- --------------- --------------
EBIT $13 $24 $30 $37
------------------------------------------------ -------------- -------------- --------------- --------------
</TABLE>
EBIT for Duke Ventures decreased $11 million and $7 million for the quarter and
six months ended June 30, 2000, respectively, compared with the same periods in
1999. For the quarter, the decrease is primarily attributable to a decline in
developed residential lot sales and surplus land sales by Crescent Resources,
Inc. (Crescent). For the six-month period, the decrease is primarily
attributable to a decline in developed lot sales and commercial project and land
sales by Crescent. The decline in Crescent's EBIT for both periods was partially
offset by decreased operating costs at DukeNet Communications.
Other Impacts on Net Income
Interest expense increased $105 million for the quarter and $153 million for the
six months ended June 30, 2000 compared to the same periods in 1999, due to
higher average debt balances outstanding, resulting from acquisitions and
expansion.
Minority interests increased $52 million and $43 million for the quarter and six
months ended June 30, 2000, respectively, 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 $5
million for the quarter and $11 million for the six-month period due to
additional issuances of the Company's trust preferred securities during 1999.
Minority interest expense related to joint ventures increased $47 million and
$32 million for the quarter and six-month period, respectively, primarily due to
the Field Services' joint venture with Phillips Petroleum (see Note 4 to the
Consolidated Financial Statements for further discussion). Offsetting the
minority interest expense in the six month period was a minority interest
benefit at NAWE's joint venture with ExxonMobil in the first quarter.
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 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 $109 million for the six months ended June
30, 2000 compared to net cash provided by operations of $523 million for the
same period in 1999. The decrease in cash was primarily due to increased tax
payments as a result of the sale of the Midwest Pipelines in 1999.
Investing Cash Flows
Capital and investment expenditures were $2,489 million for the six months ended
June 30, 2000 compared to $2,487 million for the same period in 1999. The
increase in capital and investment expenditures during the period primarily
resulted from current year business expansion for the Natural Gas Transmission,
NAWE and International Energy segments discussed below. This increase in
expenditures was offset by the 1999 $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.
15
<PAGE>
Natural Gas Transmission
In March 2000, the Company 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. See Note 4 to the Consolidated
Financial Statements for further discussion.
North American Wholesale Energy
In the first six months of 2000, Duke Energy North America, LLC (DENA) began
construction of three new 520-megawatt, natural gas-fired, combined cycle
generating plants (the McClain Energy Facility in Oklahoma, and the Hinds Energy
Facility and Attala Energy Facility in Mississippi), and two new 640-megawatt,
natural gas-fired facilities (the Lee County Facility in Illinois and the
Audrain County Facility in Missouri). Duke Energy's capital commitment to these
projects totals approximately $1.2 billion through June 2001. DENA also
continued capital expenditures on projects initiated prior to 2000.
International Energy
In January 2000, Duke Energy International, LLC (DEI) completed a tender offer
to the minority shareholders of Companhia de Geracao de Energia Eletrica
Paranapanema (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%. For
additional information on the Paranapanema acquisition, see Note 4 to the
Consolidated Financial Statements.
In August 1999, DEI announced that it would be acquiring Dominion Resources,
Inc.'s portfolio of hydroelectric, natural gas and diesel power generation
businesses in Argentina, Belize, Bolivia and Peru 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. See Note 4 to the Consolidated Financial
Statements for further discussion.
All projected capital and investment expenditures for the above segments are
subject to periodic review and revision and may vary significantly depending on
a number of factors including, but not limited to, industry restructuring,
regulatory constraints, acquisition opportunities, market volatility and
economic trends.
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.
Under its commercial paper facilities and extendable commercial note program,
the Company had the ability to borrow up to $5.35 billion and $1.55 billion at
June 30, 2000 and December 31, 1999, respectively. The commercial paper
facilities and extendable commercial note program at June 30, 2000 consisted of
$2.55 billion at the Company and $2.8 billion for Duke Energy Field Services,
LLC (DEFS). At June 30, 2000, DEI also had available a combined commercial paper
and medium-term note program for approximately $450 million. At June 30, 2000
and December 31, 1999, the Company's various bank credit and construction
facilities totaled approximately $5.7 billion and $2.5 billion, respectively
(including approximately $301 million and $320 million related to foreign
facilities for the respective periods). At June 30, 2000, approximately $3.9
billion was outstanding under the commercial paper facilities and extendable
commercial note program, and
16
<PAGE>
approximately $543 million of borrowings were outstanding under the bank credit
and construction facilities. 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.
DEFS issued approximately $2.75 billion of commercial paper in April 2000 in
connection with the combination of Field Services' gas gathering and processing
businesses with Phillips. The proceeds were used to make one-time cash
distributions of approximately $1.53 billion to the Company and $1.22 billion to
Phillips Petroleum. The Company used its share of the proceeds to reduce
existing indebtedness and fund business expansion. 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. DEFS plans to issue approximately $1.7
billion of long-term debt securities under this shelf registration.
The parent company of DEFS, Duke Energy Field Services Corporation (DEFS
Corporation), plans to offer a portion of its common stock to the public in
2000, or 2001, in an initial public offering. Such an offering is subject to
favorable market conditions. The proceeds of this offering will be used to
reduce the debt described above. After the offering, the ownership of the
Company and Phillips Petroleum in DEFS Corporation will be reduced accordingly.
See Note 4 to the Consolidated Financial Statements for further discussion.
As of June 30, 2000, the Company and its subsidiaries had the ability to issue
up to $2.1 billion aggregate principal amount of debt and other securities under
shelf registrations filed with the Securities Exchange Commission (SEC). 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. Comprehensive risk management
policies have been established by the Corporate Risk Management Committee (CRMC)
to monitor and manage these market risks. The CRMC is chaired by the Chief
Financial Officer of Duke Energy and is comprised of senior executives of Duke
Energy. The CRMC has responsibility for oversight of interest rate risk, foreign
currency risk, credit risk and energy risk management, including approval of
energy financial exposure limits. A description of the changes in the Company's
market risk since December 31, 1999 follows.
Interest Rate Risk
From time to time the Company may enter into financial derivative instruments
including, but not limited to, swaps, options and treasury rate agreements to
manage and mitigate interest rate risk exposure. See Note 6 to the Consolidated
Financial Statements for additional information.
During June 2000, the Company entered into several fixed-to-floating interest
rate swap agreements for a total notional amount of $328 million, to exchange
fixed rate interest payment obligations to variable rate obligations to take
advantage of current interest rates. The Company also entered into interest rate
hedges for a total notional amount of $225 million. These hedges lock in a
treasury rate to reduce exposure to interest rate fluctuations on planned debt
issuances by DEFS. For additional information, see Note 4 to the Consolidated
Financial Statements.
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 and
processing 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 and
natural gas commodity instruments to hedge NGL prices. Based on a sensitivity
analysis as of June 30, 2000, it was estimated that if NGL prices average one
17
<PAGE>
cent per gallon less in the next twelve months, earnings before income taxes
would decrease by approximately $7 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 1999 Duke Energy
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 $16 million and $7 million at June 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 $9 million for the six
months ended June 30, 2000 and June 30, 1999.
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 June 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, and the Canadian dollar. Based on a sensitivity analysis at
June 30, 2000, a 10% devaluation in the currency exchange rates in Brazil would
reduce the Company's financial position by approximately $96 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 June
30, 2000, a 10% devaluation in other foreign currencies were insignificant to
the Company's consolidated results of operations, financial position or cash
flows.
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) 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 which must be
implemented by September 1, 2000. 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
18
<PAGE>
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 request 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.
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.
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 6 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 second quarter of
2000.
19
<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
August 11, 2000 /s/ Richard J. Osborne
------------------------
Richard J. Osborne
Executive Vice President and
Chief Financial Officer
August 11, 2000 /s/ Sandra P. Meyer
--------------------------------------
Sandra P. Meyer
Controller
20
