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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 MARCH 31, 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 of Incorporation) (IRS Employer Identification No.)
526 SOUTH CHURCH STREET
CHARLOTTE, NC 28202-1904
(Address of Principal Executive Offices)
(Zip code)
704-594-6200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No [ ]
All of the Registrant's common shares are directly owned by Duke Energy
Corporation (File No. 1-4928), which files reports and proxy materials pursuant
to the Securities Exchange Act of 1934.
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.
Number of shares of Common Stock, no par value, outstanding at
April 28, 2000...........................................................1,010
<PAGE>
DUKE CAPITAL CORPORATION
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2000
INDEX
<TABLE>
<CAPTION>
ITEM PAGE
- ---- ----
PART I. FINANCIAL INFORMATION
<S> <C> <C>
1. Financial Statements....................................................................................1
Consolidated Statements of Income and Comprehensive Income for the Three Months Ended
March 31, 2000 and 1999....................................................................1
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2000 and 1999............2
Consolidated Balance Sheets as of March 31, 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..................10
</TABLE>
PART II. OTHER INFORMATION
<TABLE>
<CAPTION>
<S> <C> <C>
1. Legal Proceedings......................................................................................18
6. Exhibits and Reports on Form 8-K.......................................................................18
Signatures.............................................................................................19
</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)
Three Months Ended
March 31,
--------------------
2000 1999
------- -------
OPERATING REVENUES
Sales, trading and marketing of natural gas
and petroleum products $ 4,268 $ 2,014
Trading and marketing of electricity 1,211 439
Transportation and storage of natural gas 259 379
Electric generation 134 37
Other 253 266
------- -------
Total operating revenues 6,125 3,135
------- -------
OPERATING EXPENSES
Natural gas and petroleum products purchased 4,040 1,940
Purchased power 1,137 404
Other operation and maintenance 444 415
Depreciation and amortization 118 89
Property and other taxes 36 32
------- -------
Total operating expenses 5,775 2,880
------- -------
OPERATING INCOME 350 255
OTHER INCOME AND EXPENSES 81 17
------- -------
EARNINGS BEFORE INTEREST AND TAXES 431 272
INTEREST EXPENSE 113 65
MINORITY INTERESTS 20 29
------- -------
EARNINGS BEFORE INCOME TAXES 298 178
INCOME TAXES 113 79
------- -------
INCOME BEFORE EXTRAORDINARY ITEM 185 99
EXTRAORDINARY GAIN, NET OF TAX - 660
------- -------
NET INCOME 185 759
------- -------
OTHER COMPREHENSIVE INCOME, NET OF TAX
Foreign currency translation adjustments (1) -
------- -------
TOTAL COMPREHENSIVE INCOME $ 184 $ 759
======= =======
See Notes to Consolidated Financial Statements.
1
<PAGE>
DUKE CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 185 $ 759
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 119 95
Extraordinary (gain) loss, net of tax - (660)
Deferred income taxes 7 (5)
Transition cost recoveries (payments), net 24 23
(Increase) decrease in
Receivables (71) 55
Inventory 22 19
Other current assets (30) (3)
Increase (decrease) in
Accounts payable 641 (58)
Taxes accrued (491) 70
Interest accrued 26 (11)
Other current liabilities (125) (4)
Other, net (167) 47
-------- --------
Net cash provided by operating activities 140 327
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital and investment expenditures (1,497) (1,961)
Proceeds from sale of subsidiaries - 1,900
Proceeds from sales and other, net 87 20
-------- --------
Net cash used in investing activities (1,410) (41)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issuance of
Long-term debt 144 318
Guaranteed preferred beneficial interests in subordinated notes of
Duke Capital Corporation
Payments for the redemption of long-term debt (171) (26)
Net change in notes payable and commercial paper 1,065 (20)
Other, net (3) (58)
-------- --------
Net cash provided by financing activities 1,035 214
-------- --------
Net increase in cash and cash equivalents (235) 500
Cash received from business acquisitions 6 -
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 585 64
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 356 $ 564
======== ========
SUPPLEMENTAL DISCLOSURES
Cash paid for interest, net of amount capitalized $ 84 $ 78
Cash paid for income taxes $ 39 $ 65
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
DUKE CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
(unaudited)
------------------- ------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 356 $ 585
Receivables 3,295 2,957
Inventory 281 267
Current portion of regulatory assets 57 81
Unrealized gains on mark-to-market transactions 1,281 1,118
Other 454 344
------------------- ------------------
Total current assets 5,724 5,352
------------------- ------------------
INVESTMENTS AND OTHER ASSETS
Investments in affiliates 1,316 1,299
Pre-funded pension costs 340 340
Goodwill, net 997 774
Notes receivable 353 154
Unrealized gains on mark-to-market transactions 936 690
Other 662 664
------------------- ------------------
Total investments and other assets 4,604 3,921
------------------- ------------------
PROPERTY, PLANT AND EQUIPMENT
Cost 15,523 13,642
Less accumulated depreciation and amortization 2,201 2,475
------------------- ------------------
Net property, plant and equipment 13,322 11,167
------------------- ------------------
REGULATORY ASSETS AND DEFERRED DEBITS 165 160
------------------- ------------------
TOTAL ASSETS $ 23,815 $ 20,600
=================== ==================
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
DUKE CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
(unaudited)
----------- ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,891 $ 2,106
Notes payable and commercial paper 1,205 83
Taxes accrued 261 738
Interest accrued 110 83
Current maturities of long-term debt 299 277
Unrealized losses on mark-to-market transactions 1,404 1,241
Other 1,694 600
----------- ------------
Total current liabilities 7,864 5,128
----------- ------------
LONG-TERM DEBT 5,306 5,319
----------- ------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 1,834 1,475
Environmental clean-up liabilities 88 101
Unrealized losses on mark-to-market transactions 576 438
Other 634 657
----------- ------------
Total deferred credits and other liabilities 3,132 2,671
----------- ------------
MINORITY INTERESTS 1,052 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 3,196 3,200
Retained Earnings 2,445 2,261
Accumulated other comprehensive income (3) (2)
----------- ------------
Total common stockholder's equity 5,638 5,459
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 23,815 $ 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 seven business segments:
o Natural Gas Transmission
o Field Services
o Trading and Marketing
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 operated
gathering systems in western Canada and eleven contiguous states that serve
major gas-producing regions in the Rocky Mountain, Permian basin, Mid-Continent
and onshore and offshore Gulf Coast areas. On March 31, 2000 Field Services
completed its combination with Phillips Petroleum's Gas Gathering, Processing
and Marketing unit. See Note 4 to the Consolidated Financial Statements for
additional information.
Trading and Marketing markets natural gas, electricity and other energy-related
products across North America. The Company owns a 60% interest in Trading and
Marketing's energy trading operations, with Exxon Mobil Corporation owning a 40%
minority interest. This segment also includes certain other trading activities
and limited hydrocarbon exploration and production activities that are wholly
owned by the Company.
North American Wholesale Energy develops, owns and operates power generation
facilities in North America providing merchant wholesale power. It conducts its
operations through Duke Energy North America, LLC.
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), DukeNet
Communications (DukeNet) and Duke Capital Partners. Crescent develops high
quality commercial and residential real estate projects and manages land
holdings in the southeastern U.S. DukeNet provides fiber optic and wireless
digital networks for industrial, commercial and residential customers. Duke
Capital Partners is a newly formed, wholly owned finance company that plans to
provide
5
<PAGE>
lending, investment banking and asset management services to the wholesale and
commercial energy markets.
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.
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.
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 March 31, 2000 and December 31, 1999 are as follows:
- ---------------------------------------- ------------------- ------------------
March 31, December 31,
IN MILLIONS 2000 1999
- ---------------------------------------- ------------------- ------------------
Receivables $ 69 $ -
Notes receivable 250 479
Accounts payable 298 284
Taxes accrued 118 570
- ---------------------------------------- ------------------- ------------------
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. Final 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 has been completed.
PHILLIPS PETROLEUM GAS GATHERING, PROCESSING AND MARKETING UNIT. On March 31,
2000, the Company, through its wholly owned subsidiary, Duke Energy Field
Services, Inc., completed the approximately $2.1 billion transaction that
combined its gas gathering and processing business (Field Services) with
Phillips Petroleum's Gas Gathering, Processing and Marketing unit 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 on April 3, 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. At March 31, 2000, the cash distribution payable to Phillips
Petroleum was accrued and included in Other
6
<PAGE>
Current Liabilities on the Consolidated Balance Sheet. The Company owns
approximately 70% of DEFS and Phillips Petroleum owns approximately 30%.
Assets and liabilities acquired from Phillips Petroleum have been recorded at
preliminary fair values. Goodwill of approximately $237 million was recorded in
connection with the transaction and is being amortized over 20 years.
The parent company of DEFS, Duke Energy Field Services Corporation (DEFS
Corporation), plans to offer approximately 19% of its common stock to the public
in 2000 in an initial public offering. The proceeds of the offering will be used
to reduce the debt described above. DEFS Corporation has filed a registration
statement related to the offering with the Securities and Exchange Commission.
Such an offering is conditioned upon favorable market conditions. After the
offering, Duke Energy and Phillips Petroleum will own 59% and 22%, respectively,
of DEFS Corporation.
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 fair values; there
was no amount allocated to goodwill.
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 for approximately $405 million. The purchases of the businesses in Belize
and Peru were completed in 1999. In March 2000, DEI completed the purchase of
the businesses in Argentina. Assets and liabilities of the Argentina businesses
have been recorded at preliminary fair values; there was no amount allocated to
goodwill.
In April 2000, DEI completed the purchase of Dominion Resources' Latin America
portfolio by finalizing the purchase of the generation business in Bolivia.
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)
- -----------------------------------------------------------------------------------------------------
Capital and
Unaffiliated Intersegment Total Investment
Revenues Revenues Revenues EBIT Expenditures
------------ ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDED
MARCH 31, 2000
Natural Gas Transmission $ 252 $ 34 $ 286 $152 $ 428
Field Services 1,274 192 1,466 69 128
Trading and Marketing 4,040 372 4,412 27 97
North American
Wholesale Energy 104 38 142 56 238
International Energy 152 2 154 102 447
Other Energy Services 272 3 275 7 11
Duke Ventures 34 - 34 17 64
Other Operations (a) (3) 22 19 (5) 84
Eliminations and
Minority Interests - (663) (663) 6 -
------------ ------------ ------------ ------------- -------------
Total Consolidated $6,125 $ - $6,125 $431 $ 1,497
- ---------------------------------- ------------ ------------ ------------ ------------- -------------
THREE MONTHS ENDED
MARCH 31, 1999
Natural Gas Transmission $ 378 $ 24 $ 402 $208 $ 42
Field Services 234 110 344 12 1,445
Trading and Marketing 2,242 44 2,286 18 5
North American
Wholesale Energy 70 11 81 27 86
International Energy 36 9 45 (1) 296
Other Energy Services 154 - 154 (5) 8
Duke Ventures 26 - 26 13 64
Other Operations (a) (5) 13 8 (21) 15
Eliminations and
Minority Interests - (211) (211) 21 -
------------ ------------ ------------ ------------- -------------
Total Consolidated $ 3,135 $ - $3,135 $272 $ 1,961
- ---------------------------------- ------------ ------------ ------------ ------------- -------------
- -------------------------------------------------------------------
SEGMENT ASSETS (In millions)
- -------------------------------------------------------------------
March 31, December 31,
2000 1999
---------------- ---------------
Natural Gas Transmission $ 4,183 $ 3,897
Field Services 6,356 3,739
Trading and Marketing 4,864 3,823
North American
Wholesale Energy 2,102 2,220
International Energy 3,831 4,459
Other Energy Services 747 612
Duke Ventures 1,083 1,031
Other Operations (a) 1,476 1,308
Eliminations (827) (489)
---------------- ---------------
Total Consolidated $23,815 $20,600
- ---------------------------------- ---------------- ---------------
(a) Includes certain unallocated corporate items.
</TABLE>
8
<PAGE>
6. 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 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.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
INTRODUCTION
Duke Capital Corporation (collectively with its subsidiaries, "the Company") is
a wholly owned subsidiary of Duke Energy Corporation (Duke Energy). The Company
provides financing and credit enhancement services for its subsidiaries. The
Company conducts its operating activities through its seven business segments:
o Natural Gas Transmission
o Field Services
o Trading and Marketing
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 three months ended March 31, 2000, net income was $185 million compared
to net income of $759 million for the same period in 1999. The decrease in net
income was primarily due to the 1999 after-tax extraordinary gain of $660
million resulting from the sale of the Midwest Pipelines. The absence of this
gain and higher interest expense in the current year were partially offset by
increased segment profit and loss described by segment below.
Operating income for the three months ended March 31, 2000 was $350 million
compared to $255 million for the same period in 1999. Earnings before interest
and taxes (EBIT) were $431 million and $272 million for the three months ended
March 31, 2000 and 1999, respectively. Management evaluates each business
segment based on an internal measure of earnings before interest and taxes,
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.
10
<PAGE>
EBIT is summarized in the following table and is discussed by business segment
thereafter.
- ------------------------------------------------------------------------
EBIT by Business Segment (In millions)
- ------------------------------------------------------------------------
Three Months Ended
March 31,
----------------------------
2000 1999
-------------- -------------
Natural Gas Transmission $152 $208
Field Services 69 12
Trading and Marketing 27 18
North American Wholesale Energy 56 27
International Energy 102 (1)
Other Energy Services 7 (5)
Duke Ventures 17 13
Other Operations (5) (21)
EBIT attributable to Minority Interests 6 21
-------------- -------------
Consolidated EBIT $431 $272
- ------------------------------------------- -------------- -------------
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
- ------------------------------------------- -----------------------------
Three Months Ended
March 31,
----------------------------
(In millions, except where noted) 2000 1999
- ------------------------------------------- -------------- -------------
Operating Revenues $286 $402
Operating Expenses 146 202
-------------- -------------
Operating Income 140 200
Other Income, Net of Expenses 12 8
-------------- -------------
EBIT $152 $208
============== =============
Throughput - TBtu (a) 505 811
- --------------------------------------------------------------------------------
(a) Trillion British thermal units.
Natural Gas Transmission's EBIT decreased $56 million for the three months ended
March 31, 2000 compared to the same period in 1999. The decrease mainly resulted
from the absence of $70 million in 1999 earnings related to the Midwest
Pipelines, which were sold to CMS Energy Corporation on March 29, 1999. This
decrease was partially offset by a $14 million increase in EBIT, primarily
attributable to increased earnings from market-expansion projects and joint
ventures, including the Maritimes & Northeast Pipeline which was placed into
service in December 1999. EBIT also increased as a result of 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.
11
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FIELD SERVICES
<TABLE>
<CAPTION>
- --------------------------------------------------------------- -----------------------------
Three Months Ended
March 31,
-------------- -------------
<S> <C> <C>
(In millions, except where noted) 2000 1999
- --------------------------------------------------------------- -------------- -------------
Operating Revenues $1,466 $344
Operating Expenses 1,393 332
-------------- -------------
Operating Income 73 12
Other Income, Net of Expenses (4) -
-------------- -------------
EBIT $ 69 $ 12
============== =============
Natural Gas Gathered and Processed/Transported, TBtu/d (a) 6.0 3.4
Natural Gas Liquid (NGL) Production, MBbl/d (b) 231.2 107.6
Natural Gas Marketed, TBtu/d 0.5 0.4
Average Natural Gas Price per MMBtu (c) $2.52 $1.75
Average NGL Price per Gallon (d) $0.50 $0.23
- --------------------------------------------------------------- -------------- -------------
</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.
For the three months ended March 31, 2000, EBIT for Field Services increased $57
million compared to the same period in 1999. The increase was primarily due to
the acquisition of the natural gas gathering, processing, fractionation and NGL
pipeline business from Union Pacific Resources (UPR) in April 1999, and other
asset purchases since the first quarter of 1999. Improved average NGL prices,
which increased $0.27 per gallon from the prior year, also contributed to the
increase in EBIT.
At the end of March 2000, the transaction that combined Field Services' gas
gathering and processing business with Phillips Petroleum's Gas Gathering,
Processing and Marketing unit to form a new midstream company, named Duke Energy
Field Services, LLC. was completed. See Note 4 to the Consolidated Financial
Statements for further discussion.
TRADING AND MARKETING
- ----------------------------------------- -----------------------------
Three Months Ended
March 31,
-------------- -------------
(In millions, except where noted) 2000 1999
- ----------------------------------------- -------------- -------------
Operating Revenues $4,412 $2,286
Operating Expenses 4,390 2,257
-------------- -------------
Operating Income 22 29
Other Income, Net of Expenses 2 4
Minority Interest (Benefit) Expense (3) 15
-------------- -------------
EBIT $ 27 $ 18
============== =============
Natural Gas Marketed, TBtu/d 12.0 11.0
Electricity Marketed, Gigawatt-hours 50,353 21,837
- ----------------------------------------- -------------- -------------
For the three months ended March 31, 2000, Trading and Marketing's EBIT
increased $9 million from the comparable 1999 period. The increase was mainly
due to increased earnings from new acquisitions and new businesses, including
securing additional gas through additional investment in Canada and adding
fertilizer as another commodity to the trading portfolio. Partially offsetting
the increase were lower natural
12
<PAGE>
gas and electricity trading margins. Lower natural gas and electricity trading
margins at the Exxon Mobil Corporation (Exxon Mobil) joint venture resulted in a
minority interest benefit for the first quarter of 2000.
NORTH AMERICAN WHOLESALE ENERGY
- ---------------------------------------- -----------------------------
Three Months Ended
March 31,
-----------------------------
(In millions, except where noted) 2000 1999
- ---------------------------------------- -------------- -------------
Operating Revenues $142 $81
Operating Expenses 84 53
-------------- -------------
Operating Income 58 28
Other Income, Net of Expenses 2 3
Minority Interest Expense 4 4
-------------- -------------
EBIT $ 56 $27
============== =============
Proportional Megawatt Capacity Owned (a) 6,889 5,012
- ---------------------------------------- -------------- -------------
(a) Includes under construction or under contract.
North American Wholesale Energy's EBIT increased $29 million for the three
months ended March 31, 2000 compared to the same period in 1999. The increase
was primarily attributable to a $49 million increase in income from the sale of
interests and investments in generating facilities as a result of North American
Wholesale Energy executing its domestic portfolio management strategy. This
income was partially offset by reduced earnings from generation facilities in
California and increased development costs associated with business expansion.
INTERNATIONAL ENERGY
- ---------------------------------------------------- ---------------------------
Three Months Ended
March 31,
-------------- ------------
(In millions, except where noted) 2000 1999
- ---------------------------------------------------- -------------- ------------
Operating Revenues $154 $45
Operating Expenses 115 48
-------------- ------------
Operating Income 39 (3)
Other Income, Net of Expenses 68 4
Minority Interest Expense 5 2
-------------- ------------
EBIT $102 $(1)
============== ============
Proportional Megawatt Capacity Owned (a) 4,205 906
Proportional Maximum Pipeline Capacity (a), MMcf/d (b) 332 332
- ---------------------------------------------------- -------------- ------------
(a) Includes under construction or under contract.
(b) Million cubic feet per day.
EBIT for International Energy increased $103 million for the three months ended
March 31, 2000 compared to the same period in 1999. The increase included $54
million in other income from the sale of liquefied natural gas ships. Earnings
from new projects in Latin America and Australia also contributed $48 million to
the increase.
13
<PAGE>
OTHER ENERGY SERVICES
- -------------------------------------------- -----------------------------
Three Months Ended
March 31,
-----------------------------
(In millions) 2000 1999
- -------------------------------------------- -------------- -------------
Operating Revenues $ 275 $ 154
Operating Expenses 268 159
-------------- -------------
EBIT $ 7 $ (5)
- -------------------------------------------- -------------- -------------
For the three months ended March 31, 2000, EBIT for Other Energy Services
increased $12 million compared to the same period in 1999. The increase was
primarily due to decreased operating expenses at Duke Engineering & Services,
Inc. and DukeSolutions, Inc. and earnings growth from new projects at Duke/Fluor
Daniel.
DUKE VENTURES
- -------------------------------------------- -----------------------------
Three Months Ended
March 31,
-----------------------------
(In millions) 2000 1999
- -------------------------------------------- -------------- -------------
Operating Revenues $34 $26
Operating Expenses 17 13
-------------- -------------
EBIT $17 $13
- -------------------------------------------- -------------- -------------
Duke Ventures' EBIT increased $4 million for the three months ended March 31,
2000 compared to the same period in 1999. The increase primarily resulted from
reduced operating losses for the PCS business at DukeNet Communications.
OTHER IMPACTS ON NET INCOME
For the three months ended March 31, 2000, interest expense increased $48
million compared to the same period in 1999, due to higher average debt balances
outstanding, resulting from acquisitions and expansion.
Minority interests decreased $9 million for the three months ended March 31,
2000 compared to the same period in 1999. This change is the net result of
increased expense related to regular distributions on additional issuances of
the Company's trust preferred securities during 1999 and decreases in minority
interest expense related primarily to Trading and Marketing's joint venture,
discussed previously, and International Energy's reduced investments in Brazil
as a result of its tender offer (see Note 4 to the Consolidated Financial
Statements).
The sale of the Midwest Pipelines closed on March 29, 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 $140 million for the three months ended
March 31, 2000 compared to $327 million for the same period in 1999. The
decrease in cash was primarily due to increased tax payments as a result of the
1999 sale of the Midwest Pipelines, offset by increased accounts payable.
14
<PAGE>
INVESTING CASH FLOWS
Capital and investment expenditures were $1,497 million for the three months
ended March 31, 2000 compared to $1,961 million for the same period in 1999. The
decrease in capital and investment expenditures during the period primarily
resulted from 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. This decrease in expenditures was offset by current
year business expansion for the Natural Gas Transmission, North American
Wholesale Energy and International Energy segments discussed below.
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 quarter of 2000, Duke Energy North America (DENA) began
construction of three new 500-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. The Company's capital
commitment to these projects totals approximately $680 million through June
2001. DENA also continued capital expenditures on projects initiated prior to
2000.
INTERNATIONAL ENERGY
In January 2000, Duke Energy International (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 of 2000, DEI completed the purchase of the businesses in
Argentina and completed the purchase of the business in Bolivia in April 2000.
See Note 4 to the Consolidated Financial Statements for further discussion.
DEI also announced its first acquisition in Europe when it reached agreement
with Exxon Mobil to purchase 100% of Mobil Europe Gas Inc., a leading
independent gas marketing company in the Netherlands for approximately $230
million. The acquisition closed early second quarter 2000. DEI plans to expand
its European operations into both gas and power trading in the near future.
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.
15
<PAGE>
FINANCING CASH FLOWS
The Company plans to continue to significantly grow several of its business
segments: Field Services, Trading and Marketing, North American Wholesale
Energy, International Energy and Other Energy Services. These growth
opportunities, along with, debt repayments and operating and investing
requirements, are expected to be funded by cash from operations, external
financing, and the proceeds from certain asset sales. Funding requirements met
by external financing, and proceeds from the sale of assets are dependant upon
the opportunities presented and favorable market conditions. Management believes
the Company has adequate financial resources to meet its future needs.
In relation to the acquisition of generation businesses in Argentina in March of
2000, the Company entered into a $75 million, one-year bridge loan.
Under its commercial paper facilities, the Company had the ability to borrow up
to $1.55 billion at both March 31, 2000 and December 31, 1999. At March 31,
2000, DEI also had available a combined commercial paper and medium-term note
program for approximately $500 million and Duke Energy Field Services LLC had a
$2.8 billion commercial paper facility. See Note 4 to the Consolidated Financial
Statements for further discussion. At March 31, 2000 and December 31, 1999,
respectively, the Company's various bank credit and construction facilities
totaled approximately $5.7 billion and $2.5 billion, respectively (including
approximately $307 million and $320 million related to foreign facilities for
the respective periods). At March 31, 2000, approximately $1.6 billion was
outstanding under the commercial paper facilities and approximately $520 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.
As of March 31, 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 and Exchange Commission. Such
securities may be issued as First and Refunding Mortgage Bonds, Senior Notes,
Subordinated Notes or Preferred Securities.
In connection with the combination of Field Services' gas gathering and
processing businesses with Phillips Petroleum's Gas Processing and Marketing
unit, the new company issued approximately $2.75 billion of commerical 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 used its share of the proceeds to reduce existing
indebtedness. The new company plans to offer approximately 19% of its common
stock to the public in 2000 in an initial public offering. Proceeds from the
offering will be used to reduce the debt described above. A registration
statement related to the offering has been filed with the Securities and
Exchange Commission. Such an offering is conditioned upon favorable market
conditions. See Note 4 to the Consolidated Financial Statements for further
discussion.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
RISK POLICIES
The Company is exposed to market risks associated with interest rates, commodity
prices, and foreign exchange rates. Comprehensive risk management policies have
been established by Duke Energy's Corporate Risk Management Committee (CRMC) to
monitor and control these market risks. The CRMC is chaired by the Chief
Financial Officer 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.
16
<PAGE>
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 gatherings and
processing business with Phillips Petroleum's Gas Gathering, Processing and
Marketing unit 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 March 31,
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 $10 million, after considering the effect of the Company's
commodity hedge positions.
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 March 31, 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 the
sensitivity analysis at March 31, 2000, a 10% devaluation in the currency
exchange rates in Brazil would reduce the Company's financial position by
approximately $123 million and would not significantly affect the Company's
consolidated results of operations or cash flows over the next twelve months.
Based on the sensitivity analysis at March 31, 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 propose peak/off-peak rates and
term-differentiated rates, and encourages pipelines to propose experimental
capacity auctions. Order 637 is subject to requests for rehearing and possible
court appeal. Because the ultimate resolution of the foregoing proceedings is
unknown, management cannot estimate the effects of these matters on future
consolidated results of operations or financial position.
17
<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 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 first quarter of
2000.
18
<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
May 12, 2000 /s/ David L. Hauser
------------------------
David L. Hauser
Vice President and
Treasurer
May 12, 2000 /s/ Sandra P. Meyer
------------------------
Sandra P. Meyer
Controller
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Duke Capital Corporation Quarterly Report on Form 10-Q for the
quarter ended March 31, 2000 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0001051116
<NAME> DUKE CAPITAL CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 356000
<SECURITIES> 0
<RECEIVABLES> 3295000
<ALLOWANCES> 0
<INVENTORY> 281000
<CURRENT-ASSETS> 5724000
<PP&E> 15523000
<DEPRECIATION> 2201000
<TOTAL-ASSETS> 23815000
<CURRENT-LIABILITIES> 7864000
<BONDS> 5306000
0
0
<COMMON> 0
<OTHER-SE> 5638000
<TOTAL-LIABILITY-AND-EQUITY> 23815000
<SALES> 5479000
<TOTAL-REVENUES> 6125000
<CGS> 5177000
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<OTHER-EXPENSES> 154000
<LOSS-PROVISION> 0
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<EPS-BASIC> 0 <F1>
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<FN>
<F1>Not meaningful since Duke Capital Corporation is a wholly-owned subsidiary.
</FN>
</TABLE>
