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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED SEPTEMBER 30, 1999 COMMISSION FILE NUMBER 1-4928
DUKE ENERGY CORPORATION
(Exact name of Registrant as Specified in its Charter)
NORTH CAROLINA 56-0205520
(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 and (2) has been subject to such filing requirements for
the past 90 days. Yes x No __
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Number of shares of Common Stock, without par value, outstanding at October 31,
1999......365,683,068
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<PAGE>
DUKE ENERGY CORPORATION
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1999
INDEX
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<CAPTION>
ITEM PAGE
- ----- ----
PART I. FINANCIAL INFORMATION
<S> <C> <C>
1. Financial Statements....................................................................................1
Consolidated Statements of Income for the Three and Nine Months Ended September 30,
1999 and 1998................................................................................1
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1999 and 1998.........2
Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998..........................3
Notes to Consolidated Financial Statements..........................................................5
2. Management's Discussion and Analysis of Results of Operations and Financial Condition..................13
PART II. OTHER INFORMATION
1. Legal Proceedings......................................................................................26
4. Submission of Matters to a Vote of Security Holders....................................................26
6. Exhibits and Reports on Form 8-K.......................................................................26
Signatures.............................................................................................27
</TABLE>
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
From time to time, Duke Energy's reports and other public announcements may
include assumptions, projections, expectations, intentions or beliefs about
future events. These statements are intended as "forward-looking statements"
under the Private Securities Litigation Reform Act of 1995. Duke Energy 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
electric and natural gas industries; industrial, commercial and residential
growth in the service territories of Duke Energy and its subsidiaries; the
weather and other natural phenomena; the timing and extent of changes in
commodity prices, interest rates and foreign currency exchange rates; changes in
environmental and other laws and regulations to which Duke Energy and its
subsidiaries are subject or other external factors over which Duke Energy has no
control; the results of financing efforts, including Duke Energy's ability to
obtain financing on favorable terms, which can be affected by Duke Energy's
credit rating and general economic conditions; growth in opportunities for Duke
Energy's business units; achievement of year 2000 readiness; and the effect of
accounting policies issued periodically by accounting standard-setting bodies.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
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<CAPTION>
DUKE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------- -----------------------------------
1999 1998 1999 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Sales, trading and marketing of natural gas
and petroleum products $ 2,983 $ 1,846 $ 7,385 $ 5,707
Transportation and storage of natural gas 253 368 885 1,092
Generation, transmission and distribution of
electricity 1,546 1,430 3,756 3,563
Trading and marketing of electricity 1,578 1,421 2,684 2,376
Other 334 234 835 689
---------------- ---------------- ---------------- ----------------
Total operating revenues 6,694 5,299 15,545 13,427
---------------- ---------------- ---------------- ----------------
OPERATING EXPENSES
Natural gas and petroleum products purchased 2,924 1,767 7,171 5,431
Fuel used in electric generation 227 243 587 590
Net interchange and purchased power 1,536 1,469 2,685 2,565
Other operation and maintenance 772 660 2,065 1,905
Depreciation and amortization 246 238 704 684
Property and other taxes 105 96 291 269
---------------- ---------------- ---------------- ----------------
Total operating expenses 5,810 4,473 13,503 11,444
---------------- ---------------- ---------------- ----------------
OPERATING INCOME 884 826 2,042 1,983
---------------- ---------------- ---------------- ----------------
OTHER INCOME AND EXPENSES
Deferred returns and allowance for funds
used during construction 22 22 62 68
Other, net 2 23 55 80
---------------- ---------------- ---------------- ----------------
Total other income and expenses 24 45 117 148
---------------- ---------------- ---------------- ----------------
EARNINGS BEFORE INTEREST AND TAXES 908 871 2,159 2,131
INTEREST EXPENSE 153 139 405 385
MINORITY INTERESTS 31 30 99 62
---------------- ---------------- ---------------- ----------------
EARNINGS BEFORE INCOME TAXES 724 702 1,655 1,684
INCOME TAXES 283 274 619 648
---------------- ---------------- ---------------- ----------------
INCOME BEFORE EXTRAORDINARY ITEM 441 428 1,036 1,036
EXTRAORDINARY GAIN (LOSS), NET OF TAX - - 660 (8)
---------------- ---------------- ---------------- ----------------
NET INCOME 441 428 1,696 1,028
---------------- ---------------- ---------------- ----------------
DIVIDENDS AND PREMIUMS ON REDEMPTIONS OF
PREFERRED AND PREFERENCE STOCK 5 4 15 16
---------------- ---------------- ---------------- ----------------
EARNINGS AVAILABLE FOR COMMON STOCKHOLDERS $ 436 $ 424 $ 1,681 $ 1,012
================ ================ ================ ================
COMMON STOCK DATA
Weighted average shares outstanding 365 361 364 361
Earnings per share (before extraordinary item)
Basic $ 1.20 $ 1.18 $ 2.80 $ 2.83
Dilutive $ 1.19 $ 1.17 $ 2.80 $ 2.82
Earnings per share
Basic $ 1.20 $ 1.18 $ 4.62 $ 2.81
Dilutive $ 1.19 $ 1.17 $ 4.61 $ 2.80
Dividends per share $ - $ - $ 1.65 $ 1.65
</TABLE>
See Notes to Consolidated Financial Statements.
1
<PAGE>
<TABLE>
<CAPTION>
DUKE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN MILLIONS)
Nine Months Ended
September 30,
----------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,696 $ 1,028
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 836 809
Extraordinary (gain) loss, net of tax (660) 8
Deferred income taxes 20 (20)
Purchased capacity levelization 77 65
Transition cost recoveries (payments), net 64 (55)
(Increase) decrease in
Receivables (1,106) (288)
Inventory (78) (73)
Other current assets (11) 10
Increase (decrease) in
Accounts payable 687 (2)
Taxes accrued 356 324
Interest accrued 5 (7)
Other current liabilities (101) (27)
Other, net 4 (16)
--------------- ---------------
Net cash provided by operating activities 1,789 1,756
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital and investment expenditures (4,433) (1,838)
Proceeds from sale of subsidiaries 1,900 -
Decommissioning, retirements and other 238 43
--------------- ---------------
Net cash used in investing activities (2,295) (1,795)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issuance of
Long-term debt 2,382 776
Guaranteed preferred beneficial interests in subordinated notes of
Duke Energy Corporation or Subsidiaries 484 581
Common stock and stock options 106 91
Payments for the redemption of
Long-term debt (643) (230)
Preferred and preference stock (20) (180)
Net change in notes payable and commercial paper (114) (103)
Dividends paid (616) (610)
Other (100) 15
--------------- ---------------
Net cash provided by financing activities 1,479 340
--------------- ---------------
Net increase in cash and cash equivalents 973 301
Cash received from business acquisitions 7 38
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 80 109
--------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,060 $ 448
=============== ===============
SUPPLEMENTAL DISCLOSURES
Cash paid for interest, net of amount capitalized $ 381 $ 373
Cash paid for income taxes $ 393 $ 434
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
<TABLE>
<CAPTION>
DUKE ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
September 30, December 31,
1999 1998
(Unaudited)
------------------- ------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,060 $ 80
Receivables 3,580 2,318
Inventory 590 543
Current portion of natural gas transition costs 100 100
Current portion of purchased capacity costs 135 99
Unrealized gains on mark-to-market transactions 612 1,457
Other 195 228
------------------- ------------------
Total current assets 6,272 4,825
------------------- ------------------
INVESTMENTS AND OTHER ASSETS
Investments in affiliates 1,384 902
Nuclear decommissioning trust funds 654 580
Pre-funded pension costs 320 332
Goodwill, net 727 495
Notes receivable 158 244
Unrealized gains on mark-to-market transactions 573 396
Other 503 283
------------------- ------------------
Total investments and other assets 4,319 3,232
------------------- ------------------
PROPERTY, PLANT AND EQUIPMENT
Cost 29,413 27,128
Less accumulated depreciation and amortization 9,240 10,253
------------------- ------------------
Net property, plant and equipment 20,173 16,875
------------------- ------------------
REGULATORY ASSETS AND DEFERRED DEBITS
Purchased capacity costs 535 648
Debt expense 227 253
Regulatory asset related to income taxes 506 506
Natural gas transition costs 16 80
Environmental clean-up costs 33 87
Other 268 300
------------------- ------------------
Total regulatory assets and deferred debits 1,585 1,874
------------------- ------------------
TOTAL ASSETS $ 32,349 $ 26,806
=================== ==================
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
<TABLE>
<CAPTION>
DUKE ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
September 30, December 31,
1999 1998
(Unaudited)
-------------- -------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,538 $ 1,754
Notes payable and commercial paper 95 209
Taxes accrued 1,113 119
Interest accrued 111 109
Current maturities of long-term debt and preferred stock 925 707
Unrealized losses on mark-to-market transactions 665 1,387
Other 519 642
-------------- -------------
Total current liabilities 5,966 4,927
-------------- -------------
LONG-TERM DEBT 8,092 6,272
-------------- -------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 3,549 3,733
Investment tax credit 229 242
Nuclear decommissioning costs externally funded 654 580
Environmental clean-up liabilities 110 148
Unrealized losses on mark-to-market transactions 400 362
Other 1,154 907
-------------- -------------
Total deferred credits and other liabilities 6,096 5,972
-------------- -------------
MINORITY INTERESTS 1,193 253
-------------- -------------
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN SUBORDINATED
NOTES OF DUKE ENERGY CORPORATION OR SUBSIDIARIES 1,404 919
-------------- -------------
PREFERRED AND PREFERENCE STOCK
Preferred and preference stock with sinking fund requirements 84 104
Preferred and preference stock without sinking fund requirements 209 209
-------------- -------------
Total preferred and preference stock 293 313
-------------- -------------
COMMON STOCKHOLDERS' EQUITY
Common stock, no par, 1 billion shares authorized; 365 million and 363 million
shares outstanding at September 30, 1999 and December 31, 1998, respectively 4,519 4,449
Retained earnings 4,786 3,701
-------------- -------------
Total common stockholders' equity 9,305 8,150
-------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 32,349 $ 26,806
============== =============
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
DUKE ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
Duke Energy Corporation (collectively with its subsidiaries, "Duke Energy") is
an integrated energy and energy services provider with the ability to offer
physical delivery and management of both electricity and natural gas throughout
the United States and abroad. Duke Energy provides these and other services
through seven business segments:
o Electric Operations
o Natural Gas Transmission
o Field Services
o Trading and Marketing
o Global Asset Development
o Other Energy Services
o Real Estate Operations
These segments were defined as a result of Duke Energy adopting Statement of
Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an
Enterprise and Related Information," in December 1998.
Electric Operations generates, transmits, distributes and sells electric energy
in central and western North Carolina and the western portion of South Carolina
(doing business as Duke Power or Nantahala Power and Light). These electric
operations are subject to the rules and regulations of the Federal Energy
Regulatory Commission (FERC), the North Carolina Utilities Commission and the
Public Service Commission of South Carolina.
Natural Gas Transmission, through its Northeast Pipelines, provides interstate
transportation and storage of natural gas for customers primarily in the
Mid-Atlantic and New England states. Until the sale of the Midwest Pipelines on
March 29, 1999, Natural Gas Transmission also provided interstate transportation
and storage services in the midwest states. See further discussion of the sale
of the Midwest Pipelines in Note 3 to the Consolidated Financial Statements. The
interstate natural gas transmission and storage operations are also subject to
the rules and regulations of the FERC.
Field Services gathers, processes, transports and markets natural gas and
produces, transports and markets natural gas liquids (NGLs). Field Services
operates gathering systems in western Canada and ten contiguous states that
serve major gas-producing regions in the Rocky Mountain, Permian Basin,
Mid-Continent and onshore and offshore Gulf Coast areas.
Trading and Marketing primarily markets natural gas, electricity and other
energy-related products across North America. Duke Energy owns a 60% interest in
Trading and Marketing's energy trading operations, with Mobil Corporation owning
a 40% minority interest. This segment also includes limited hydrocarbon
exploration and production activities that are wholly owned by Duke Energy.
Global Asset Development develops, owns and operates energy-related facilities
worldwide. Global Asset Development conducts its operations primarily through
Duke Energy North America, LLC (formerly Duke Energy Power Services, LLC) and
Duke Energy International, LLC (Duke Energy International).
Other Energy Services provides engineering, consulting, construction and
integrated energy solutions worldwide, primarily through Duke Engineering &
Services, Inc., Duke/Fluor Daniel and DukeSolutions, Inc.
5
<PAGE>
Real Estate Operations conducts its business through Crescent Resources, Inc.,
which develops high quality commercial and residential real estate projects and
manages forest holdings in the southeastern United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION. The Consolidated Financial Statements include the accounts of
Duke Energy 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 are not necessarily indicative of amounts expected for the
respective annual periods due to the effects of seasonal temperature variations
on energy consumption and the timing of maintenance of certain electric
generating units.
COMMODITY INSTRUMENTS. Effective January 1, 1999, Duke Energy adopted Emerging
Issues Task Force Consensus No. 98-10, "Accounting for Contracts Involved in
Energy Trading and Risk Management Activities" for certain energy forward
contracts. This accounting standard requires entities involved in energy trading
activities to record energy trading contracts using the mark-to-market method of
accounting. Under this methodology, the contracts are adjusted to market value,
and the gains and losses are recognized in current period income and are
included in the Consolidated Statements of Income as Natural Gas and Petroleum
Products Purchased. While implementation of this accounting standard affected
certain components of financial position, the cumulative effect of the change in
accounting method on the Consolidated Statements of Income for the period ended
September 30, 1999 was not material.
EARNINGS PER COMMON SHARE. Basic earnings per share is based on a simple
weighted average of common shares outstanding. Dilutive earnings per share
reflects the potential dilution that could occur if securities or other
agreements to issue common stock, such as stock options, were exercised or
converted into common stock. The numerator for the calculation of basic and
dilutive earnings per share is earnings available for common stockholders.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
DENOMINATOR FOR EARNINGS PER SHARE (In millions)
- ---------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Denominator for basic earnings per share
(weighted average shares outstanding) 365 361 364 361
Assumed exercise of dilutive stock options 1 1 1 1
------------ ------------ ------------ ------------
Denominator for dilutive earnings per share 366 362 365 362
- ---------------------------------------------------------------------------------------------------
</TABLE>
EXTRAORDINARY ITEM. For a description of the 1999 extraordinary item, see Note 3
to the Consolidated Financial Statements.
In January 1998, TEPPCO Partners, L.P., in which a subsidiary of Duke Energy has
a 2% general partner interest and a 19.1% limited partner interest, redeemed
certain First Mortgage Notes. A non-cash extraordinary loss of $8 million, net
of income tax of $5 million, was recorded related to costs of the early
retirement of debt. Earnings per common share for 1998 were reduced by $0.02 as
a result of this charge.
RECLASSIFICATIONS. Certain amounts have been reclassified in the Consolidated
Financial Statements to conform to the current presentation.
6
<PAGE>
3. BUSINESS ACQUISITIONS/DISPOSITIONS
PARANAPANEMA, GENERADORA ACAJUTLA S.A. DE C.V. AND GENERADORA SALVADORENA, S.A.
DE C.V. During the third quarter, Duke Energy, through its wholly owned
subsidiary, Duke Energy International, completed two acquisitions in South
America. In August 1999, Duke Energy International completed the $692 million
purchase, excluding acquisition costs, of a controlling voting interest and an
approximate 40% economic interest in an electric generating company in Brazil,
Companhia de Geracao de Energia Eletrica Paranapanema (Paranapanema). In
September 1999, Duke Energy International completed the $125 million purchase,
excluding acquisition costs, of controlling interests in two El Salvadorian
generating companies, Generadora Acajutla S.A. de C.V. and Generadora
Salvadorena, S.A. de C.V.
Both of these acquisitions were accounted for using the purchase method, and the
assets and liabilities of the acquisitions were consolidated as of the purchase
date. Earnings from the acquisitions have been consolidated subsequent to the
purchase date. Assets acquired and liabilities assumed have been recorded at
their preliminary estimated fair values, and the excess of the purchase price
over the estimated fair value of the net assets has been recorded as goodwill
and is being amortized over the estimated useful lives. The final purchase price
allocation and estimated life of goodwill are subject to adjustment when
additional information concerning asset and liability valuations is finalized
and the evaluation of certain pre-acquisition contingent liabilities has been
completed.
UNION PACIFIC RESOURCES' GATHERING, PROCESSING AND MARKETING OPERATIONS. On
March 31, 1999, Duke Energy, through its wholly owned subsidiary, Duke Energy
Field Services, Inc., completed the $1.35 billion acquisition of the natural gas
gathering, processing, fractionation and NGL pipeline business from Union
Pacific Resources (UPR), as well as UPR's natural gas and NGL marketing
activities (collectively, "the UPR acquisition"). The UPR acquisition was
accounted for by the purchase method. The assets and liabilities of the UPR
acquisition were consolidated in Duke Energy's financial statements as of March
31, 1999 and earnings have been consolidated subsequent to the acquisition. The
excess of the purchase price over the fair value of the net identifiable assets
and liabilities acquired of $135 million has been recorded as goodwill and is
being amortized on a straight-line basis over 15 to 20 years.
Duke Energy assumed responsibility for certain environmental liabilities
associated with the UPR acquisition. During due diligence procedures prior to
the acquisition, Duke Energy identified environmental contamination at certain
UPR facilities. In September 1999, Duke Energy transferred liability and risk
for soil and groundwater contamination to a third party that will take
responsibility for environmental remediation and provide financial management
and program oversight. Additional environmental matters may also require
corrective action. The cost to enter into the contract and remediate the
remaining conditions was approximately $58 million, of which $34 million remains
as a liability at September 30, 1999 in Environmental Clean-up Liabilities on
the Consolidated Balance Sheets. The adjustment to the environmental accrual was
reflected as an adjustment to goodwill. Any other remaining adjustments to
estimated amounts recorded in conjunction with the UPR acquisition will also be
recorded as an adjustment to goodwill. However, management believes that any
change in the estimated costs will not have a material adverse effect on the
consolidated results of operations or financial position.
PEPL COMPANIES AND TRUNKLINE LNG. On March 29, 1999, Duke Energy, through its
wholly owned subsidiaries, PanEnergy Corp and Texas Eastern Corporation, sold
Panhandle Eastern Pipe Line Company (PEPL), Trunkline Gas Company and additional
storage related to those systems (collectively, the PEPL Companies), which
substantially comprised the Midwest Pipelines, along with Trunkline LNG Company
(Trunkline LNG), to CMS Energy Corporation (CMS). The sales price of $2.2
billion involved cash proceeds of $1.9 billion and CMS' assumption of existing
PEPL debt of approximately $300 million. The sale resulted in an extraordinary
gain of $660 million, net of income tax of $404 million, and an increase in
earnings per basic share of $1.82. Under the terms of the agreement with CMS,
Duke Energy is retaining certain assets and liabilities, such as the Houston
office building, certain environmental, legal and tax
7
<PAGE>
liabilities, and substantially all intercompany balances. Management believes
that the retention of these items will not have a material adverse effect on
consolidated results of operations or financial position.
<TABLE>
<CAPTION>
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COMBINED OPERATING RESULTS OF THE PEPL COMPANIES AND TRUNKLINE LNG FOR THE
PERIOD FROM JANUARY 1, 1999 THROUGH MARCH 28, 1999(a) (In millions)
- -----------------------------------------------------------------------------------------
<S> <C>
Operating Revenues $126
Operating Expenses 57
Other Income, Net 4
---------------------
Earnings Before Interest and Taxes $ 73
- -----------------------------------------------------------------------------------------
</TABLE>
(a) Excludes intercompany building rental revenue, allocated corporate expenses,
building depreciation and certain other costs to be retained by Duke Energy.
4. BUSINESS SEGMENTS
Duke Energy's reportable segments are strategic business units that offer
different products and services and are each managed separately. Management
evaluates segment performance based on earnings before interest and taxes
(EBIT). Segment EBIT, presented in the accompanying table, includes intersegment
sales accounted for at prices representative of unaffiliated party transactions.
Segment assets are provided as additional information in the accompanying table
and are net of intercompany advances, intercompany notes receivable and
investments in subsidiaries.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
BUSINESS SEGMENT DATA (In millions)
- -----------------------------------------------------------------------------------------------------
Capital and
Unaffiliated Intersegment Total Investment
Revenues Revenues Revenues EBIT Expenditures
------------ ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDED
SEPTEMBER 30, 1999
Electric Operations $1,503 $ - $1,503 $617 $ 194
Natural Gas Transmission 237 26 263 128 80
Field Services 989 219 1,208 49 58
Trading and Marketing 3,589 131 3,720 (6) 6
Global Asset Development 211 93 304 128 1,144
Other Energy Services 125 26 151 (47) 77
Real Estate Operations 43 - 43 32 82
Other Operations (a) (3) 9 6 7 2
Eliminations - (504) (504) - -
------------ ------------ ------------ ------------- -------------
Total Consolidated $6,694 $ - $6,694 $908 $1,643
- -----------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
SEPTEMBER 30, 1998
Electric Operations $1,438 $ - $1,438 $591 $ 146
Natural Gas Transmission 354 21 375 178 78
Field Services 569 156 725 7 74
Trading and Marketing 2,727 27 2,754 31 2
Global Asset Development 70 41 111 33 724
Other Energy Services 104 23 127 6 26
Real Estate Operations 41 - 41 33 73
Other Operations (a) (4) 12 8 (8) 5
Eliminations - (280) (280) - -
------------ ------------ ------------ ------------- -------------
Total Consolidated $5,299 $ - $5,299 $871 $1,128
- -----------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
BUSINESS SEGMENT DATA, CONTINUED (In millions)
- -----------------------------------------------------------------------------------------------------
Capital and
Unaffiliated Intersegment Total Investment
Revenues Revenues Revenues EBIT Expenditures
------------ ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
NINE MONTHS ENDED
SEPTEMBER 30, 1999
Electric Operations $ 3,659 $ - $ 3,659 $1,343 $ 497
Natural Gas Transmission 852 73 925 482 187
Field Services 1,837 497 2,334 97 1,595
Trading and Marketing 8,307 245 8,552 50 37
Global Asset Development 393 133 526 185 1,782
Other Energy Services 394 70 464 (58) 87
Real Estate Operations 109 - 109 78 235
Other Operations (a) (6) 27 21 (18) 13
Eliminations - (1,045) (1,045) - -
------------ ------------ ------------ ------------- -------------
Total Consolidated $15,545 $ - $15,545 $2,159 $4,433
- -----------------------------------------------------------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30, 1998
Electric Operations $ 3,608 $ - $ 3,608 $1,331 $ 386
Natural Gas Transmission 1,075 77 1,152 534 202
Field Services 1,701 422 2,123 68 205
Trading and Marketing 6,439 54 6,493 59 4
Global Asset Development 165 43 208 57 829
Other Energy Services 320 58 378 15 39
Real Estate Operations 120 - 120 97 163
Other Operations (a) (1) 14 13 (30) 10
Eliminations - (668) (668) - -
------------ ------------ ------------ ------------- -------------
Total Consolidated $13,427 $ - $13,427 $2,131 $1,838
- -----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
SEGMENT ASSETS (In millions)
- -------------------------------------------------------------------
September December 31,
30, 1999 1998
---------------- ---------------
<S> <C> <C>
Electric Operations $13,144 $12,953
Natural Gas Transmission 3,884 4,996
Field Services 3,702 1,893
Trading and Marketing 3,832 3,233
Global Asset Development 5,336 2,061
Other Energy Services 449 376
Real Estate Operations 962 724
Other Operations (a) 1,824 968
Eliminations (784) (398)
---------------- ---------------
Total Consolidated $32,349 $26,806
- -------------------------------------------------------------------
</TABLE>
(a) Includes communication services, water services and certain unallocated
corporate items.
5. RISK MANAGEMENT AND FINANCIAL INSTRUMENTS
FOREIGN CURRENCY DERIVATIVES. On February 18, 1999, Duke Energy announced its
intent to make a concurrent cash tender offer in Chilean pesos in Chile and the
United States for 51% of the outstanding shares of Empresa Nacional de
Electricidad S.A. (Endesa-Chile) for an estimated total cash outlay of
9
<PAGE>
approximately $2.1 billion based on current exchange rates. In anticipation of
the purchase of Endesa-Chile, Duke Energy entered into foreign currency forward
and swap contracts to obtain Chilean pesos for the purchase. On April 21, 1999,
following a competitive counter offer, Duke Energy reached the conclusion that
Endesa-Chile could not be acquired on terms favorable to Duke Energy's
shareholders and withdrew the tender offer. During the second quarter 1999, all
the forward and swap contracts were settled resulting in a net loss of $4
million which is included in the Consolidated Statement of Income as Other
Income and Expenses.
INTEREST RATE DERIVATIVES. To manage the interest rate risk associated with Duke
Energy's variable rate commercial paper, Duke Energy entered into interest rate
swap agreements in July of 1999. Under these swap agreements, Duke Energy will
pay a fixed interest rate of 4.95% and in turn will receive a variable interest
amount based on an index for the daily average of one-month commercial paper.
The swaps have a notional amount of $500 million and will expire on March 30,
2000. On March 30, 2000, the dealer has the one time right to extend the swaps
for an additional five years at the weighted average rate of 5.96%.
In connection with the September 1999 issuance of Senior Notes totaling $1.5
billion, Duke Energy entered into Treasury Rate Lock Agreements in August 1999
to mitigate interest rate movements during the negotiation and marketing of the
debt issuance. The agreements, with a notional principal amount of $400 million,
were settled on September 21, 1999, and resulted in proceeds of approximately $3
million, which will be amortized to interest expense over the life of the
underlying debt issuance.
6. DEBT AND CREDIT FACILITIES
In September 1999, Duke Energy (through Duke Capital Corporation, a wholly owned
subsidiary of Duke Energy) issued $500 million of 7 1/4% Senior Notes due 2004,
$500 million of 7 1/2% Senior Notes due 2009 and $500 million of 8% Senior Notes
due 2019. Duke Energy issued $200 million Series B 5 3/8% Senior Notes due 2009
and $200 million Series C 6.60% Senior Notes due 2038 in January 1999 and March
1999, respectively.
In relation to the acquisition of Paranapanema, Duke Energy assumed
approximately $456 million of non-recourse debt, denominated in Brazilian reals,
due in 2013. The interest rate on the debt assumed is 10.0% and the principal is
indexed annually to inflation.
In March, 1999, Duke Energy obtained a three-year medium term foreign facility
that allows borrowings up to approximately $350 million, of which approximately
$97 million was outstanding at September 30, 1999. This facility has a variable
interest rate that approximated 5.4% as of September 30, 1999.
Duke Energy borrowed approximately $300 million in both Australian and New
Zealand dollars in January 1999 to fund asset purchases in these
countries. This bridge financing expired in July 1999 but has been
extended through December 31, 1999. These notes have variable interest rates
that approximated 5.3% as of September 30, 1999.
In September 1999, Duke Energy Australia Pty Ltd, an indirect subsidiary of Duke
Energy, established a combined commercial paper and medium-term note program in
the amount of approximately $500 million. The program is denominated in
Australian dollars and is guaranteed by Duke Capital. Issuances from this
program will be used to refund the $300 million bridge financing and fund
on-going construction expenditures for the Eastern Gas Pipeline.
7. GUARANTEED PREFERRED BENEFICIAL INTERESTS IN SUBORDINATED NOTES OF DUKE
ENERGY OR SUBSIDIARIES
In August 1999, Duke Capital Financing Trust III (Trust III) issued $250 million
of its 8 3/8% trust preferred securities at an approximate $8 million discount,
representing preferred undivided beneficial interests in the assets of Trust
III. In June 1999, Duke Energy Capital Trust II (Trust II) issued $250 million
of its 7.20% trust preferred securities at an approximate $8 million discount,
representing preferred undivided beneficial interests in the assets of Trust II.
Trust III and Trust II are business trusts and are treated as subsidiaries of
Duke Energy for financial reporting purposes. Payment of distributions on the
preferred securities is guaranteed by Duke Capital Corporation and Duke Energy
but only to the extent that Trust III and Trust II have funds legally and
immediately available to make such distributions. The
10
<PAGE>
proceeds from the issuance of the trust preferred securities were invested in
junior subordinated notes of the respective companies.
8. COMMON STOCK
At Duke Energy's annual meeting of shareholders held on April 15, 1999,
shareholders approved an amendment to the Articles of Incorporation to increase
the authorized common stock from 500 million to 1 billion shares.
During the quarters ended June 30, 1999 and 1998, the Corporation's board of
directors declared second and third quarter dividends of $0.55 per share per
quarter, for a total of $1.10 per share of dividends declared. During the third
quarters of 1999 and 1998 no dividends were declared.
9. COMMITMENTS AND CONTINGENCIES
LITIGATION. Under the terms of the agreement with CMS discussed in Note 3 to the
Consolidated Financial Statements, Duke Energy is retaining certain legal and
tax liabilities including the following matter. On April 25, 1997, a group of
affiliated plaintiffs that own and/or operate various pipeline and marketing
companies and partnerships primarily in Kansas filed suit against PEPL, a former
subsidiary of Duke Energy, in the U.S. District Court for the Western District
of Missouri. The plaintiffs alleged that PEPL had engaged in unlawful and
anti-competitive conduct with regard to requests for interconnects with the PEPL
system for service to the Kansas City area. Asserting that PEPL had violated the
antitrust laws and tortiously interfered with the plaintiffs' business
expectancies, the plaintiffs pursued compensatory and punitive damages. In
February 1999, this case was settled. The court entered an order dismissing the
case on March 3, 1999. The settlement did not have a material adverse effect on
consolidated results of operations or financial position.
Duke Energy and its subsidiaries are also involved in other legal, tax and
regulatory proceedings before various courts, regulatory commissions and
governmental agencies regarding matters arising in the ordinary course of
business, some of which involve substantial amounts. Where appropriate, Duke
Energy has made accruals in accordance with SFAS No. 5, "Accounting for
Contingencies," to provide for such matters. Management believes that the final
disposition of these proceedings will not have a material adverse effect on
consolidated results of operations or financial position.
ENVIRONMENTAL. In June 1999, the Environmental Protection Agency certified that
Texas Eastern Transmission Corporation (TETCO), a wholly owned subsidiary of
Duke Energy, had completed clean up of PCB (polychlorinated biphenyl)
contaminated sites under conditions stipulated by a U.S. Consent Decree in 1989.
Due to the completion of the project under budget, the estimated liability and
amounts to be recovered from customers were reduced resulting in a $28 million
reduction in expense in June 1999. TETCO is required to continue groundwater
monitoring on a number of sites for at least the next two years. The estimated
cost of such monitoring is not material.
OTHER COMMITMENTS AND CONTINGENCIES. Periodically, Duke Energy 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, Duke Energy may not receive the full value of
anticipated benefits under the contracts.
In the normal course of business, certain of Duke Energy's subsidiaries and
affiliates enter into various contracts for energy services that contain certain
schedule and performance requirements. Risk management techniques are used to
mitigate the exposure associated with such contracts. Certain subsidiaries of
Duke Energy have guaranteed performance under some of these contracts. In
addition, certain subsidiaries of Duke Energy have guaranteed debt agreements of
affiliates and have provided surety bonds and letters of credit.
11
<PAGE>
Management believes that these commitments and contingencies will not have a
material adverse effect on consolidated results of operations or financial
position.
10. SUBSEQUENT EVENTS
In August 1999, Duke Energy International announced that it reached a definitive
agreement with Dominion Resources, Inc. to acquire its portfolio of
hydroelectric, natural gas and diesel power generation businesses in Argentina,
Belize, Bolivia and Peru for approximately $405 million. The businesses being
purchased have total gross generating capacity of approximately 1,200 megawatts.
In October 1999, Duke Energy International completed the purchase of the
businesses in Belize and Peru. The completion of the remaining purchases are
subject to receiving appropriate governmental consents and approvals and are
expected to close by mid-2000.
In October 1999, Duke Energy International successfully acquired additional
ownership interests in Egenor, a hydroelectric and thermal generation business
in Peru from two other parties for $152 million in cash and certain other assets
in South America. The purchase increased Duke Energy International's ownership
in Egenor from approximately 30% to 90%.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
INTRODUCTION
Duke Energy Corporation (collectively with its subsidiaries, "Duke Energy") is
an integrated energy and energy services provider with the ability to offer
physical delivery and management of both electricity and natural gas throughout
the United States and abroad. Duke Energy provides these and other services
through seven business segments:
o Electric Operations
o Natural Gas Transmission
o Field Services
o Trading and Marketing
o Global Asset Development
o Other Energy Services
o Real Estate Operations
These segments were defined as a result of Duke Energy adopting Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information," in December 1998. See Note 1 to the
Consolidated Financial Statements for further descriptions.
Management's Discussion and Analysis should be read in conjunction with the
Consolidated Financial Statements.
RESULTS OF OPERATIONS
For the quarter ended September 30, 1999, earnings available for common
stockholders were $436 million, or $1.20 per basic share. For the comparable
1998 period, earnings available for common stockholders were $424 million, or
$1.18 per basic share.
For the nine months ended September 30, 1999, earnings available for common
stockholders were $1,681 million, or $4.62 per basic share, including an
after-tax extraordinary gain of $660 million, or $1.82 per basic share. For the
comparable 1998 period, earnings available for common stockholders were $1,012
million, or $2.81 per basic share, net of an after-tax extraordinary loss of $8
million, or $0.02 per basic share. The increase in earnings available for common
stockholders is primarily due to the 1999 extraordinary gain resulting from the
sale of the Midwest Pipelines.
Operating income and earnings before interest and taxes (EBIT) for the quarter
ended September 30, 1999 were $884 million and $908 million, respectively,
compared to $826 million and $871 million, respectively, for the same period in
1998. Operating income and EBIT for the nine months ended September 30, 1999
were $2,042 million and $2,159 million, respectively, compared to $1,983 million
and $2,131 million, respectively, for the same period in 1998. Operating income
and EBIT are affected by the same fluctuations for Duke Energy and each of its
business segments. The only notable variable between the two amounts is the
inclusion in EBIT of non-operating gains and losses in Other Income and Expenses
on the Consolidated Statements of Income. Operating gains and losses are
included in Operating Revenues and Operating Expenses for Global Asset
Development and Real Estate operations as they are an integral part of their
business operations. EBIT by business segment are summarized in the following
table and are discussed by business segment thereafter.
13
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
EBIT BY BUSINESS SEGMENT (In millions)
- ---------------------------------- -----------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- --------------------------------
1999 1998 1999 1998
---------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Electric Operations $617 $591 $1,343 $1,331
Natural Gas Transmission 128 178 482 534
Field Services 49 7 97 68
Trading and Marketing (6) 31 50 59
Global Asset Development 128 33 185 57
Other Energy Services (47) 6 (58) 15
Real Estate Operations 32 33 78 97
Other Operations (a) 7 (8) (18) (30)
---------------- --------------- ---------------- ---------------
Consolidated EBIT $908 $871 $2,159 $2,131
- ----------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes communication services, water services and certain unallocated
corporate items.
Included in the amounts discussed hereafter are intercompany transactions that
are eliminated in the Consolidated Financial Statements.
ELECTRIC OPERATIONS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
-------------- -------------- --------------- --------------
(In millions, except where noted) 1999 1998 1999 1998
- ------------------------------------------------ -------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Operating Revenues $1,503 $1,438 $3,659 $3,608
Operating Expenses 908 876 2,379 2,353
-------------- -------------- --------------- --------------
Operating Income 595 562 1,280 1,255
Other Income, Net of Expenses 22 29 63 76
-------------- -------------- --------------- --------------
EBIT $ 617 $ 591 $1,343 $1,331
============== ============== =============== ==============
Sales - GWh (a) 23,141 23,365 62,462 63,458
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Gigawatt-hours
For the quarter ended September 30, 1999, EBIT for Electric Operations increased
$26 million compared to the same period in 1998. The increase is primarily due
to a 2.6% increase in the average number of total customers, partially offset by
a 1.0% decrease in gigawatt-hour sales. Sales to general service customers were
up 3.3%, while sales to industrial and residential customers were comparable to
the prior year quarter.
For the nine months ended September 30, 1999, EBIT for Electric Operations
increased $12 million compared to the same period in 1998. The increase is
primarily the result of a 2.7% increase in the average number of total
customers, partially offset by a decrease of 1.6% in gigawatt-hour sales. Sales
to general service customers were up 3.4%, offset by declines in sales to
industrial customers of 2.3%.
14
<PAGE>
NATURAL GAS TRANSMISSION
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
-------------- -------------- --------------- --------------
(In millions, except where noted) 1999 1998 1999 1998
- ------------------------------------------------ -------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Operating Revenues $263 $375 $925 $1,152
Operating Expenses 139 205 457 640
-------------- -------------- --------------- --------------
Operating Income 124 170 468 512
Other Income, Net of Expenses 4 8 14 22
-------------- -------------- --------------- --------------
EBIT $128 $178 $482 $ 534
============== ============== =============== ==============
Throughput - TBtu (a) 338 527 1,489 1,896
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Trillion British thermal units
For the quarter and nine months ended September 30, 1999, EBIT for the Natural
Gas Transmission segment decreased $50 million and $52 million, respectively,
compared to the same periods in 1998. Due to the sale of the Midwest Pipelines
to CMS Energy Corporation (CMS) on March 29, 1999, EBIT for the Midwest
Pipelines decreased $37 million and $91 million for the quarter and nine months
ended September 30, 1999, respectively, compared to the prior year.
EBIT for the Northeast Pipelines decreased $13 million for the quarter ended
September 30, 1999 compared to the same period in 1998. The decrease is
primarily due to last year's resolution of gas supply realignment cost issues
("GSR issues") which resulted in $39 million of EBIT in 1998. Partially
offsetting this decrease was increased earnings from market-expansion projects
and joint ventures, lower operating expenses and a $10 million benefit related
to the completion of certain PCB (polychlorinated biphenyl) and soil clean-up
programs ("PCB programs").
For the nine months ended September 30, 1999, Northeast Pipelines' EBIT
increased $39 million compared to the same period in 1998. The increase is
primarily the result of increased earnings from market-expansion projects and
joint ventures and lower operating expenses. Benefits totaling $38 million
related to the completion of PCB programs also increased EBIT in 1999. Partially
offsetting these contributions to EBIT were the non-recurrence of the 1998
resolution of the GSR issues and a 1998 refund from a state property tax ruling.
15
<PAGE>
FIELD SERVICES
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
-------------- -------------- --------------- --------------
(In millions, except where noted) 1999 1998 1999 1998
- ------------------------------------------------ -------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Operating Revenues $1,208 $725 $2,334 $2,123
Operating Expenses 1,158 716 2,237 2,085
-------------- -------------- --------------- --------------
Operating Income 50 9 97 38
Other Income, Net of Expenses (1) (2) - 30
-------------- -------------- --------------- --------------
EBIT $ 49 $ 7 $ 97 $ 68
============== ============== =============== ==============
Natural Gas Gathered and
Processed/Transported, TBtu/d (a) 5.8 3.7 4.9 3.7
Natural Gas Liquids (NGL)
Production, MBbl/d (b) 224.7 115.4 182.5 111.5
Natural Gas Marketed, TBtu/d 0.5 0.5 0.5 0.5
Average Natural Gas Price per MMBtu (c) $2.59 $1.99 $2.16 $2.13
Average NGL Price per Gallon $0.40 $0.24 $0.31 $0.27
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Trillion British thermal units per day
(b) Thousand barrels per day
(c) Million British thermal units
For the quarter ended September 30, 1999, EBIT for Field Services increased $42
million compared to the same period in 1998. A significant portion of the
increase resulted from the March 31, 1999 acquisition of the natural gas
gathering, processing, fractionation and NGL pipeline business from Union
Pacific Resources (UPR), (collectively, the "UPR acquisition"). Improved average
NGL prices, which were up $0.16 per gallon, or 66.7%, from the prior year
quarter also contributed to the increase.
For the nine months ended September 30, 1999, EBIT for Field Services increased
$29 million compared to the same period in 1998. The increase is primarily the
result of the UPR acquisition and increased average NGL prices. These
improvements were partially offset by a $31 million gain on the sale of two NGL
fractionation facilities in 1998, which is included in other income.
TRADING AND MARKETING
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
-------------- -------------- --------------- --------------
(In millions, except where noted) 1999 1998 1999 1998
- ------------------------------------------------ -------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Operating Revenues $3,720 $2,754 $8,552 $6,493
Operating Expenses 3,727 2,723 8,508 6,435
-------------- -------------- --------------- --------------
Operating Income (7) 31 44 58
Other Income, Net of Expenses 1 - 6 1
-------------- -------------- --------------- --------------
EBIT $ (6) $ 31 $ 50 $ 59
============== ============== =============== ==============
Natural Gas Marketed, TBtu/d 10.4 7.5 10.4 7.5
Electricity Marketed, GWh 34,131 37,000 78,147 80,426
- -------------------------------------------------------------------------------------------------------------
</TABLE>
EBIT for Trading and Marketing decreased $37 million for the three months ended
September 30, 1999 compared with the same period in 1998. The decrease is
largely due to lower natural gas and electricity trading margins, and decreased
volatility in these respective commodity markets when compared to 1998 when the
volatility was unusually high.
16
<PAGE>
For the nine months ended September 30, 1999, EBIT for Trading and Marketing
decreased $9 million compared to the same period in 1998. The decrease is
primarily the result of lower natural gas trading margins, offset slightly by
higher electricity trading margins.
GLOBAL ASSET DEVELOPMENT
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
-------------- -------------- --------------- --------------
(In millions, except where noted) 1999 1998 1999 1998
- ------------------------------------------------ -------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Operating Revenues $304 $111 $526 $208
Operating Expenses 166 86 369 167
-------------- -------------- --------------- --------------
Operating Income 138 25 157 41
Other Income, Net of Expenses (10) 8 28 16
============== ============== =============== ==============
EBIT $128 $ 33 $185 $ 57
============== ============== =============== ==============
As of September 30,
------------------------------
1999 1998
--------------- --------------
Proportional MW (a) Capacity Owned (b) 7,928 4,435
Proportional Maximum Pipeline (b)
Capacity, Tbtu 112 45
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Megawatts
(b) Includes under construction or under contract
For the quarter and nine months ended September 30, 1999, EBIT for Global Asset
Development increased $95 million and $128 million, respectively, compared with
the same periods in 1998. These increases are primarily due to $63 million in
income from the sale of partial interests in generating stations in Madison,
Ohio and Vermillion, Indiana. Contributions from new projects in South America,
Australia and California also contributed to the increases. Partially offsetting
these increases were higher operating expenses due to increased development
costs and business expansion. Additionally, included in EBIT for the nine months
ended 1999, is income related to the sale of the Mecklenburg Cogeneration
facility and option fee income related to the sale of a partial interest in the
Bridgeport facility.
OTHER ENERGY SERVICES
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
-------------- -------------- --------------- --------------
(In millions) 1999 1998 1999 1998
- ------------------------------------------------ -------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Operating Revenues $151 $127 $464 $378
Operating Expenses 198 122 522 364
-------------- -------------- --------------- --------------
Operating Income (47) 5 (58) 14
Other Income, Net of Expenses - 1 - 1
-------------- -------------- --------------- --------------
EBIT $ (47) $ 6 $ (58) $ 15
- -------------------------------------------------------------------------------------------------------------
</TABLE>
For the quarter and nine months ended September 30, 1999, EBIT for Other Energy
Services decreased $53 million and $73 million, respectively, compared to the
same periods in 1998. The decreases in EBIT are primarily the result of a $38
million charge, including expenses associated with severance and office
closings, at Duke Engineering & Services, Inc. associated with repositioning the
company for growth. Continued increased development activity at DukeSolutions,
Inc., and decreased earnings from projects of Duke Engineering & Services, Inc.
also contributed to the decreased EBIT.
17
<PAGE>
REAL ESTATE OPERATIONS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
-------------- -------------- --------------- --------------
(In millions) 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating Revenues $43 $41 $109 $120
Operating Expenses 11 8 31 23
-------------- -------------- --------------- --------------
EBIT $32 $33 $ 78 $ 97
- -------------------------------------------------------------------------------------------------------------
</TABLE>
For the quarter ended September 30, 1999, EBIT for Real Estate Operations
decreased $1 million when compared with the same period in 1998. This decrease
resulted primarily from a reduction in lake lot sales and project sales,
partially offset by increased developed lot sales.
For the nine months ended September 30, 1999, EBIT for Real Estate Operations
decreased $19 million when compared with the same period in 1998. This decrease
is due primarily to a lake lot sales program completed during 1998 and the 1998
gain on the sale of land in the Jocassee Gorges region to the state of South
Carolina, partially offset by the 1999 gain on the sale of land in the Jocassee
Gorges region to the state of North Carolina.
OTHER IMPACTS ON EARNINGS AVAILABLE FOR COMMON STOCKHOLDERS
For the quarter and nine months ended September 30, 1999, interest expense
increased $14 million and $20 million, respectively, over the comparable 1998
periods due to higher average debt balances outstanding.
Minority interest increased $1 million and $37 million for the quarter and nine
months ended September 30, 1999, respectively, over the comparable periods in
1998. The increases were due primarily to regular distributions paid on new
issuances of Duke Energy's trust preferred securities. Partially offsetting
these increases were the reduced minority interests in 1999 compared to 1998
related to the trading and marketing joint venture with Mobil Corporation.
As a result of favorable resolution of several income tax issues and the
utilization of certain capital loss carryforwards due to the sale of the Midwest
Pipelines, income tax provisions aggregating $30 million were reduced during the
second quarter of 1999.
The sale of the Midwest Pipelines to CMS closed on March 29, 1999 and resulted
in a $660 million extraordinary gain, net of income tax of $404 million. (See
further discussion in Liquidity and Capital Resources, Investing Cash Flows
section and in Note 3 to the Consolidated Financial Statements.) In January
1998, TEPPCO Partners L.P., in which Duke Energy has a 21.1% ownership interest,
redeemed certain First Mortgage Notes which resulted in Duke Energy recording a
non-cash extraordinary loss of $8 million, net of income tax of $5 million,
related to its share of costs of the early retirement of debt.
LIQUIDITY AND CAPITAL RESOURCES
INVESTING CASH FLOWS
Capital and investment expenditures were approximately $4,433 million for the
nine months ended September 30, 1999 compared to approximately $1,838 million
for the same period in 1998. Increased capital and investment expenditures
during the period primarily resulted from business expansion for the Field
Services and Global Asset Development segments discussed below.
18
<PAGE>
FIELD SERVICES
On March 31, 1999, Field Services completed the $1.35 billion acquisition of the
natural gas gathering, processing, fractionation and NGL pipeline business from
UPR along with its natural gas and NGL marketing activities (collectively "the
UPR acquisition"). Additionally, Duke Energy assumed responsibility for certain
environmental liabilities associated with the UPR acquisition. During due
diligence procedures prior to the acquisition, Duke Energy identified
environmental contamination at certain UPR facilities. In September 1999, Duke
Energy transferred liability and risk for soil and groundwater contamination to
a third party that will take responsibility for environmental remediation and
provide financial management and program oversight. Additional environmental
matters may also require corrective action. The cost to enter into the contract
and remediate the remaining conditions was approximately $58 million, of which
$34 million remains as a liability at September 30, 1999 in Environmental
Clean-up Liabilities on the Consolidated Balance Sheets.
GLOBAL ASSET DEVELOPMENT
In January 1999, Global Asset Development's international business unit, Duke
Energy International, LLC (Duke Energy International) completed the $315 million
purchase of power generation and transmission assets in western Australia and
New Zealand from Broken Hill Proprietary Company Limited (BHP), including an
ownership interest in a pipeline in western Australia. This acquisition also
includes a development proposal for a cogeneration plant and a portfolio of
international and Australian-based projects.
In August 1999, Duke Energy International completed the $692 million purchase,
excluding acquisition costs, of a controlling voting interest and an approximate
40% economic interest in Companhia de Geracao de Energia Eletrica Paranapanema
(Paranapanema). Paranapanema is Brazil's eleventh largest electric generating
company, owning and operating 2,307 megawatts of hydroelectric generation
facilities.
In September 1999, Duke Energy International completed the $125 million
purchase, excluding acquisition costs, of controlling interests in two El
Salvadorian generating companies, Generadora Acajutla S.A. de C.V. and
Generadora Salvadorena, S.A. de C.V. The El Salvadorian generating companies
currently own 275 megawatts of thermal power generation. Expansion and
modernization construction of approximately $75 million will begin prior to the
end of the year, with completion scheduled for late 2001.
In August 1999, Duke Energy International announced that it reached a definitive
agreement with Dominion Resources, Inc. to acquire its portfolio of
hydroelectric, natural gas and diesel power generation businesses in Argentina,
Belize, Bolivia and Peru for approximately $405 million. In October 1999, Duke
Energy International successfully completed the purchase of additional ownership
interests in the hydroelectric and thermal generation business in Peru from two
other parties for approximately $152 million in cash and certain other assets.
See Note 10 to the Consolidated Financial Statements for further discussion.
Global Asset Development's domestic business unit, Duke Energy North America,
LLC has begun construction of three new power generation plants: the Hidalgo
Energy project, a 510-megawatt, gas-fired merchant plant in south Texas; the
Madison Generating Station, a 640-megawatt, gas-fired merchant peaking plant in
Butler County, Ohio; and, the Vermillion Generating Station, a 640-megawatt,
gas-fired merchant peaking plant in Vermillion County, Indiana. Duke/Fluor
Daniel will serve as the construction and engineering contractor for the plants,
a Duke Energy Natural Gas Transmission pipeline will deliver the natural gas
supply, and Trading and Marketing will provide energy management services and
market the plants' output. Duke Energy's capital commitment to these three
projects totals approximately $465 million.
19
<PAGE>
TRADING AND MARKETING
During the second quarter of 1999, Trading and Marketing formed a new
subsidiary, Duke Energy Hydrocarbons, to invest capital in limited hydrocarbon
exploration and production prospects through non-operating working interests.
Duke Energy's intent is to produce natural gas to partially offset the short gas
position of Duke Energy's power generation assets and to increase production
volumes that will be beneficial to Field Services, Trading and Marketing, and
Natural Gas Transmission. Duke Energy Hydrocarbons has contracted to participate
in limited drilling programs comprising 27 prospects in the Gulf of Mexico.
Drilling began in the second quarter with additional drilling continuing for the
remainder of 1999.
ELECTRIC OPERATIONS
In April 1999, Duke Power contracted to purchase six steam generators from
Babcock & Wilcox to replace those currently at Duke Power's Oconee Nuclear
Station. The total estimated cost of the steam generator replacement project is
$420 million. It is projected that the steam generators on Unit 1 will be
installed in 2003, with Units 2 and 3 following in 2004.
NATURAL GAS TRANSMISSION
On March 29, 1999, Duke Energy, through its wholly owned subsidiaries, PanEnergy
Corp and Texas Eastern Corporation, sold Panhandle Eastern Pipe Line Company
(PEPL), Trunkline Gas Company and additional storage related to those systems,
which substantially comprised the Midwest Pipelines, along with Trunkline LNG
Company, to CMS. The sales price of $2.2 billion included cash proceeds of $1.9
billion and CMS' assumption of existing PEPL debt of approximately $300 million.
FINANCING CASH FLOWS
Duke Energy's consolidated capital structure at September 30, 1999, including
short-term debt, was 42% debt, 6% minority interest, 6% trust preferred
securities, 2% preferred stock and 44% common equity. Fixed charges coverage,
calculated using the Securities and Exchange Commission method, was 4.6 times
and 5.0 times for the nine months ended September 30, 1999 and 1998,
respectively.
Duke Energy plans to continue to significantly grow several of its business
segments: Field Services, Trading and Marketing, Global Asset Development and
Other Energy Services. These growth opportunities, along with dividends, debt
repayments and operating and investing requirements, are expected to be funded
by cash from operations, external financing and the proceeds from certain asset
sales, most notably the sale of the Midwest Pipelines.
In January 1999, Duke Energy issued $200 million of 5 3/8% Series B Senior Notes
due 2009. In March 1999, Duke Energy issued $200 million of 6.60% Series C
Senior Notes due 2038. Also included in financings for the first nine months of
1999 are bank borrowings of Global Asset Development related to the purchase and
development of assets in Australia and New Zealand. Approximately $300 million
of these borrowings occurred in the first quarter and related to the purchase of
BHP's portfolio of energy assets. This bridge financing expired in July 1999,
but has been extended through December 31, 1999. These notes have variable
interest rates that approximated 5.3% as of September 30, 1999. Global Asset
Development also assumed approximately $456 million of non-recourse debt,
denominated in Brazilian reals, due in 2013, in relation to the acquisition of
Paranapanema in the third quarter. The interest rate on the debt assumed is
10.0% and the principal is indexed annually to inflation.
In September 1999, Duke Energy, through its subsidiary, Duke Capital
Corporation, issued $500 million of 7 1/4% Senior Notes due 2004, $500 million
of 7 1/2% Senior Notes due 2009 and $500 million of 8%
20
<PAGE>
Senior Notes due 2019. The proceeds from the sale of these notes will be used
for general corporate purposes, including reducing commercial paper indebtedness
incurred in connection with recent acquisitions of electric power generating
assets in Brazil and elsewhere in South and Central America.
Also, during the year, Duke Energy's and Duke Capital Corporation's business
trusts, which are treated as wholly owned subsidiaries for financial reporting
purposes, issued a total of $500 million of trust preferred securities. (See
Note 7 to the Consolidated Financial Statements.)
Under its commercial paper facilities, Duke Energy had the ability to borrow up
to $2.8 billion at both September 30, 1999 and December 31, 1998. The commercial
paper facilities consisted of $1.25 billion for Duke Energy and $1.55 billion
for Duke Capital Corporation. Duke Energy's various bank credit facilities
totaled approximately $3.3 billion (including approximately $330 million related
to foreign facilities) at September 30, 1999 and $2.9 billion at December 31,
1998. At September 30, 1999, approximately $1.1 billion was outstanding under
the commercial paper facilities and approximately $97 million of borrowings were
outstanding under the bank credit facilities.
In September 1999, Duke Energy Australia Pty Ltd, an indirect subsidiary of Duke
Energy, established a combined commercial paper and medium-term note program in
the amount of approximately $500 million. The program is denominated in
Australian dollars and is guaranteed by Duke Capital. Issuances from this
program will be used to refund the $300 million bridge financing and fund
on-going construction expenditures for the Eastern Gas Pipeline.
In April 1999, Duke Energy's shareholders approved an amendment to the Articles
of Incorporation to increase the authorized common stock from 500 million to 1
billion shares. This increase in authorized stock will provide Duke Energy with
added flexibility in affecting financings, stock splits or stock dividends,
stock plans and other transactions and arrangements involving the use of stock.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
RISK POLICIES
Duke Energy is exposed to market risks associated with commodity prices,
interest rates, equity prices and foreign exchange rates. Comprehensive risk
management policies have been established by the Corporate Risk Management
Committee (CRMC) to monitor and control these market risks. The CRMC is chaired
by the Chief Financial Officer and primarily comprises senior executives. The
CRMC has responsibility for oversight of all corporate energy risk management
and approving energy financial exposure limits, as well as responsibility for
oversight of interest rate risk, foreign currency risk and credit risk. A
description of the changes in Duke Energy's market risk since December 31, 1998
follows.
INTEREST RATE RISK
From time to time Duke Energy 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 5 to the Consolidated
Financial Statements.)
To manage the interest rate risk associated with Duke Energy's variable rate
commercial paper, Duke Energy entered into several fixed rate swap transactions
for a total notional amount of $500 million in July 1999. The swaps effectively
convert the variable rate of commercial paper to a fixed rate, mitigating the
risk of future interest rate increases.
COMMODITY PRICE RISK
As a result of Field Services' acquisition from UPR on March 31, 1999, Duke
Energy's exposure to market fluctuations in the prices of NGLs increased. Duke
Energy has a program in place that analyzes and actively hedges a portion of its
commodity price risk exposure, primarily NGLs. As of September 30, 1999, if NGL
prices average one cent per gallon less in the next twelve months, earnings
before income taxes will decrease by approximately $6 million, after considering
the effect of Duke Energy's commodity hedge positions.
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<PAGE>
FOREIGN OPERATIONS RISK
On February 18, 1999, Duke Energy announced its intent to make a concurrent cash
tender offer in Chilean pesos in Chile and the United States for 51% of the
outstanding shares of Empresa Nacional de Electricidad S.A. (Endesa-Chile) for
an estimated total cash outlay of approximately $2.1 billion based on current
exchange rates. In anticipation of the purchase of Endesa-Chile, Duke Energy
entered into foreign currency forward and swap contracts to obtain Chilean pesos
for the purchase. Exposures to foreign currency risks associated with these
instruments were managed through established policies and procedures. (See Note
5 to the Consolidated Financial Statements.) On April 21, 1999, following a
competitive counter offer, Duke Energy reached the conclusion that Endesa-Chile
could not be acquired on terms favorable to Duke Energy's shareholders and
withdrew the tender offer. The forward and swap contracts were settled with a
net loss of $4 million recorded during the second quarter of 1999.
Duke Energy is exposed to foreign currency risk, sovereign risk and other
foreign operations risk that arise from investments in international affiliates
and businesses owned and operated in foreign countries. Since December 31, 1998,
Duke Energy has made additional investments in foreign countries. At September
30, 1999, Duke Energy's primary foreign currency exchange rate exposures are the
Brazilian real, the Australian dollar and the Canadian dollar. Investments in
other foreign countries are not material. To mitigate risks associated with
foreign currency fluctuations, when possible, contracts are denominated in or
indexed to the U.S. dollar or may be hedged through debt denominated in the
foreign currency. Duke Energy also uses foreign currency swaps, where possible,
to manage its risk related to foreign currency fluctuations. To monitor its
currency exchange rate risks, Duke Energy uses sensitivity analysis, which
measures the impact of a devaluation of the foreign currencies to which it has
exposure. Based on the sensitivity analysis at September 30, 1999, a 10%
devaluation in the currency exchange rates in Brazil would reduce Duke Energy's
financial position by $65 million and would not materially affect Duke Energy's
consolidated results of operations or cash flows over the next twelve months.
Based on the sensitivity analysis at September 30, 1999, a 10% devaluation in
other foreign currencies would not materially affect Duke Energy's consolidated
results of operations, financial position or cash flows.
CURRENT ISSUES
ELECTRIC COMPETITION
During 1999, three electric utility restructuring bills have been filed in South
Carolina's House of Representatives. All three bills introduce competition while
allowing utilities to recover stranded costs, and have transition and phase-in
periods ranging from five to six years. A task force formed by the South
Carolina Senate is also examining issues related to deregulation of the state's
electric utility business. This task force will prepare a report for review,
discussion and possible legislative action by the state's Senate Judiciary
Committee and General Assembly as a whole.
In May 1997, North Carolina passed a bill that established a study commission to
examine whether competition should be implemented in the state. Members of this
commission include legislators, customers, utilities and a member of an
environmental group. The study commission has met this fall to discuss electric
restructuring issues and expects to issue its report to the state General
Assembly in the year 2000.
More than a dozen bills on electric restructuring have been introduced in this
session of Congress. On October 27, 1999 the US House Commerce Subcommittee on
Energy and Power voted to move H.R. 2944, "The Electricity Competition and
Reliability Act," to the full Commerce Committee. The primary restructuring
issues addressed include repeal of major provisions of the Public Utility
Holding Company Act (PUCHA) and the Public Utility Regulatory Policies Act
(PURPA), reliability, transmission, nuclear decommissioning and State authority.
22
<PAGE>
Currently, the electric utility industry is predominantly regulated on a basis
designed to recover the cost of providing electric power to customers. If
cost-based regulation were to be discontinued in the industry for any reason,
including competitive pressure on the cost-based prices of electricity, profits
could be reduced and electric utilities might be required to reduce their asset
balances to reflect a market basis less than cost. Discontinuance of cost-based
regulation would also require affected utilities to write off their associated
regulatory assets. Duke Energy's regulatory assets are included in the
Consolidated Balance Sheets. The portion of these regulatory assets related to
Electric Operations is approximately $1.5 billion, including primarily purchased
capacity costs, debt expense and deferred taxes related to regulatory assets.
Currently, Duke Energy is recovering substantially all of these regulatory
assets through wholesale and retail electric rates and would attempt to continue
to recover these assets during a transition to competition. In addition, Duke
Energy would seek to recover the costs of its electric generating facilities in
excess of the market price of power at the time of transition.
Duke Energy supports a properly managed and orderly transition to competitive
generation and retail services in the electric industry. However, transforming
the current regulated industry into efficient, competitive generation and retail
electric markets is a complex undertaking, which will require a carefully
considered transition to a restructured electric industry. The key to effective
retail competition is fairness among customers, service providers and investors.
Duke Energy intends to work with customers, legislators and regulators to
address all the important issues. Management currently cannot predict the
impact, if any, of these competitive forces on future consolidated results of
operations or financial position.
FERC NOTICE OF PROPOSED RULEMAKING
On May 13, 1999, the FERC issued a Notice of Proposed Rulemaking (NOPR)
requesting comment on proposed rules concerning Regional Transmission
Organizations (RTOs). The stated purpose of the NOPR is to (1) specify certain
minimum required characteristics and functions of RTOs; (2) provide for an open,
flexible architecture of RTOs to meet market needs; (3) provide for flexible
ratemaking; and (4) require certain filings by October 15, 2000 of
transmission-owning utilities with regard to their efforts to join an RTO.
The characteristics for acceptable RTOs include independence from market
participants, operational control over a region of sufficient scope to support
efficient and nondiscriminatory markets, and exclusive authority to maintain
short-term reliability. The NOPR does not mandate RTO membership; however, FERC
expects public utilities to join RTOs, and the NOPR announced a willingness to
include rate incentives and non-pricing benefits to encourage participation.
Comments on the NOPR were due August 23, 1999. Because this NOPR is in the very
early stages, and ultimate resolution is unknown, management cannot estimate the
effects on future consolidated results of operations or financial position.
MIXED-OXIDE FUELS
Duke Power has entered into a contract to use mixed oxide fuel at its McGuire
and Catawba nuclear stations. Mixed-oxide fuel is very similar to conventional
uranium fuel, but it utilizes plutonium from the government's surplus. Before
using the fuel, Duke Power must apply for and receive amendments to the
respective facility operating licenses from the Nuclear Regulatory Commission
(NRC). Duke Power is currently in the process of researching and preparing for
the application process with actual license application to the NRC planned for
the end of 2003. Mixed-oxide fuel is expected to be available for Duke Power use
in 2007, subject to receiving appropriate governmental consents and approvals.
Under a contract with the DOE, Duke Power will be reimbursed for all operating,
maintenance and capital expenditures necessary to refurbish its plants for
mixed-oxide fuel use. By using mixed-oxide fuel, Duke Power expects to realize a
long-term supply of nuclear fuel at moderate savings over conventional uranium
fuel.
23
<PAGE>
Duke Engineering & Services will also participate in the design and construction
of the facility to fabricate mixed-oxide fuel.
YEAR 2000 READINESS PROGRAM
STATE OF READINESS
Duke Energy initiated its Year 2000 Readiness Program in 1996 and began a formal
review of computer-based systems and devices that are used in its business
operations both domestically and internationally. These systems and devices
include customer information, financial, materials management and personnel
systems, as well as components of natural gas production, gathering, processing
and transmission, and electric generation, distribution and transmission.
Duke Energy's goal is to provide energy services reliably and safely to its
customers - now, on January 1, 2000 and beyond. By "Year 2000 ready," Duke
Energy means that it has executed the Year 2000 approach described below and
management believes the business will not suffer a material adverse impact to
consolidated financial results caused by Year 2000 events. However, the Year
2000 issue is complex and the Year 2000 readiness of customers, suppliers and
others beyond our control can affect our business operations.
Duke Energy is using a three-phase approach to address Year 2000 issues: 1)
inventory and preliminary assessment of computer systems, equipment and devices;
2) detailed assessment and remediation planning; and 3) conversion, testing and
contingency planning. Duke Energy is employing a combination of systems repair,
planned systems replacement activities, systems retirement and workarounds to
achieve Year 2000 readiness for its business and process control systems,
equipment and devices. All business units, with the exception of Global Asset
Development's Duke Energy International, have achieved Year 2000 readiness of
their critical systems, equipment and devices as of September 30, 1999. Duke
Energy International has recently acquired assets that it is integrating into
its overall Year 2000 program and process. Duke Energy International has
extended its Year 2000 readiness date to November 1999.
Duke Energy is monitoring the Year 2000 readiness of key third parties. Third
parties include vendors, customers, U.S. governmental agencies, foreign
governments and agencies, and other business associates. While the Year 2000
readiness of third parties cannot be controlled, Duke Energy is attempting to
assess the readiness of key third parties and potential implications to its
operations. Alternate suppliers of critical products, goods and services are
being identified, where necessary.
Duke Energy conducts an analysis of Year 2000 issues for potential acquisitions.
COSTS
Management believes it is devoting the resources necessary to achieve Year 2000
readiness in a timely manner. Current estimates for total costs of the program,
including internal labor as well as incremental costs such as consulting and
contract costs, are approximately $60 million, of which approximately $54
million had been incurred as of September 30, 1999. These costs exclude
replacement systems that, in addition to being Year 2000 ready, provide
significantly enhanced capabilities which will benefit operations in future
periods.
RISKS
Management believes it has an effective program in place to manage the risks
associated with the Year 2000 issue in a timely manner. Nevertheless, since it
is not possible to anticipate all future outcomes, especially when third parties
are involved, there could be circumstances in which Duke Energy would
temporarily be unable to deliver energy or energy services to its customers.
Management believes that the most reasonably likely worst case scenario would be
small, localized interruptions of service, which likely
24
<PAGE>
would be rapidly restored. In addition, there could be a temporary reduction in
energy needs of customers caused by their own Year 2000 problems. If such a
scenario occurs, management does not expect it to have a material adverse impact
on consolidated results of operations or financial position.
CONTINGENCY PLANS
Year 2000 contingency planning addresses continuity of business operations for
all periods during which Year 2000 impacts may occur. Duke Energy is
participating in multiple industry efforts to facilitate effective Year 2000
contingency plans, and has completed its own Year 2000 contingency plans. As to
the recently acquired assets, contingency plans are being addressed in
conjunction with the readiness efforts for those assets. Contingency plans
address various Year 2000 risk scenarios that cross departmental, business unit
and industry lines as well as specific risks from various internal and external
sources, including supplier readiness.
Based on Year 2000 readiness efforts and contingency plans in place, management
believes that Year 2000 issues, including the cost of making critical systems,
equipment and devices ready, will not have a material adverse effect on Duke
Energy's business operation or consolidated results of operations or financial
position. Nevertheless, achieving Year 2000 readiness is subject to risks and
uncertainties, including those described above. While management believes the
possibility is remote, if Duke Energy's internal systems, or the internal
systems of external parties, fail to achieve Year 2000 readiness in a timely
manner, Duke Energy's business, consolidated results of operations or financial
condition could be adversely affected.
25
<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 Duke Energy relating to
alleged air quality permit violations at a natural gas compressor station. Duke
Energy has agreed to indemnify the purchaser of this former subsidiary against
liability for any penalty or fines resulting from these alleged violations. This
proceeding could result in a penalty in excess of $100,000. Management believes
that the resolution of this matter will not have a material adverse effect on
consolidated results of operations or financial position.
For additional information concerning litigation and other contingencies, see
Note 9 to the Consolidated Financial Statements, "Commitments and
Contingencies."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of the security holders of Duke Energy
during the third quarter of 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
(27) Financial Data Schedule (included in electronic filing only)
(b) Reports on Form 8-K
A Current Report on Form 8-K filed on August 5, 1999 contained
disclosures under Item 5, Other Events.
26
<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 ENERGY CORPORATION
November 10, 1999 /s/ Richard J. Osborne
---------------------------------------
Richard J. Osborne
Executive Vice President and
Chief Financial Officer
November 10, 1999 /s/ Sandra P. Meyer
---------------------------------------
Sandra P. Meyer
Vice President and Corporate Controller
27
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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