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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
<S> <C>
FOR QUARTER ENDED MARCH 31, 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 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 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 April 30,
1999..............................................................364,224,600
==============================================================================================
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DUKE ENERGY CORPORATION
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1999
INDEX
ITEM PAGE
- ---- ----
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PART I. FINANCIAL INFORMATION
1. Financial Statements.................................................................1
Consolidated Statements of Income for the Three Months Ended March 31, 1999
and 1998.......................................................................1
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 1999 and 1998........................................................2
Consolidated Balance Sheets as of March 31, 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..........................................................................11
PART II. OTHER INFORMATION
1. Legal Proceedings...................................................................21
4. Submission of Matters to a Vote of Security Holders.................................21
6. Exhibits and Reports on Form 8-K....................................................21
Signatures..........................................................................22
</TABLE>
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
From time to time, Duke Energy may make statements regarding its assumptions,
projections, expectations, intentions or beliefs about future events. These
statements are intended as "forward-looking statements" under the Private
Securities Litigation Reform Act of 1995. 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. Factors that could cause actual achievements and events to differ
materially from those expressed or implied in such forward-looking statements
include state and federal legislative and regulatory initiatives that affect
cost and investment recovery, 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 and interest
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; 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.
i
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
DUKE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended
March 31,
------------------------------
1999 1998
------------- --------------
<S> <C> <C>
OPERATING REVENUES
Sales, trading and marketing of natural gas
and petroleum products $ 2,014 $ 1,976
Transportation and storage of natural gas 379 387
Generation, transmission and distribution of electricity 1,097 1,020
Trading and marketing of electricity 439 537
Other 231 195
------------- --------------
Total operating revenues 4,160 4,115
------------- --------------
OPERATING EXPENSES
Natural gas and petroleum products purchased 1,940 1,869
Fuel used in electric generation 165 153
Net interchange and purchased power 484 612
Other operation and maintenance 620 569
Depreciation and amortization 225 222
Property and other taxes 99 82
------------- --------------
Total operating expenses 3,533 3,507
------------- --------------
OPERATING INCOME 627 608
------------- --------------
OTHER INCOME AND EXPENSES
Deferred returns and allowance for funds
used during construction 21 23
Other, net 35 47
------------- --------------
Total other income and expenses 56 70
------------- --------------
EARNINGS BEFORE INTEREST AND TAXES 683 678
INTEREST EXPENSE 132 124
MINORITY INTERESTS 35 15
------------- --------------
EARNINGS BEFORE INCOME TAXES 516 539
INCOME TAXES 209 211
------------- --------------
INCOME BEFORE EXTRAORDINARY ITEM 307 328
EXTRAORDINARY GAIN (LOSS), NET OF TAX 660 (8)
------------- --------------
NET INCOME 967 320
------------- --------------
DIVIDENDS AND PREMIUMS ON REDEMPTIONS OF
PREFERRED AND PREFERENCE STOCK 5 6
------------- --------------
EARNINGS AVAILABLE FOR COMMON STOCKHOLDERS $ 962 $ 314
============= ==============
COMMON STOCK DATA
Weighted average shares outstanding 363 360
Earnings per share (before extraordinary item)
Basic $ 0.83 $ 0.89
Dilutive $ 0.83 $ 0.89
Earnings per share
Basic $ 2.65 $ 0.87
Dilutive $ 2.64 $ 0.87
Dividends per share $ 0.55 $ 0.55
See Notes to Consolidated Financial Statements.
</TABLE>
1
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DUKE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN MILLIONS)
Three Months Ended
March 31,
----------------------------
1999 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 967 $ 320
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 270 263
Extraordinary (gain) loss (660) 8
Deferred income taxes (18) (14)
Purchased capacity levelization 28 27
Transition cost recoveries (payments), net 23 (1)
(Increase) decrease in
Receivables 69 298
Inventory (20) (11)
Other current assets (8) 23
Increase (decrease) in
Accounts payable (284) (520)
Taxes accrued 254 183
Interest accrued 1 (6)
Other current liabilities (90) (76)
Other, net 15 20
------------- -------------
Net cash provided by operating activities 547 514
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital and investment expenditures (2,086) (387)
Proceeds from sale of subsidiaries 1,900 -
Decommissioning, retirements and other - (1)
------------- -------------
Net cash used in investing activities (186) (388)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issuance of
Long-term debt 711 228
Common stock and stock options 57 -
Payments for the redemption of
Long-term debt (225) (80)
Preferred and preference stock - (180)
Net change in notes payable and commercial paper (137) 46
Dividends paid (205) (203)
Other (59) (24)
------------- -------------
Net cash provided by (used in) financing activities 142 (213)
------------- -------------
Net increase (decrease) in cash and cash equivalents 503 (87)
Cash received from business acquisitions - 35
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 80 109
============= =============
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 583 $ 57
============= =============
SUPPLEMENTAL DISCLOSURES
Cash paid for interest, net of amount capitalized $ 125 $ 121
Cash paid for income taxes $ 23 $ 67
</TABLE>
See Notes to Consolidated Financial Statements.
2
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<TABLE>
<CAPTION>
DUKE ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
March 31, December 31,
1999 1998
(Unaudited)
---------------- --------------
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ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 583 $ 80
Receivables 2,323 2,318
Inventory 516 543
Current portion of natural gas transition costs 100 100
Current portion of purchased capacity costs 111 99
Unrealized gains on mark-to-market transactions 1,241 1,457
Other 169 228
---------------- --------------
Total current assets 5,043 4,825
---------------- --------------
INVESTMENTS AND OTHER ASSETS
Investments in affiliates 938 902
Nuclear decommissioning trust funds 609 580
Pre-funded pension costs 327 332
Goodwill, net 641 495
Notes receivable 242 244
Unrealized gains on mark-to-market transactions 1,217 396
Other 373 283
---------------- --------------
Total investments and other assets 4,347 3,232
---------------- --------------
PROPERTY, PLANT AND EQUIPMENT
Cost 25,932 27,128
Less accumulated depreciation and amortization 8,390 10,253
---------------- --------------
Net property, plant and equipment 17,542 16,875
---------------- --------------
REGULATORY ASSETS AND DEFERRED DEBITS
Purchased capacity costs 608 648
Debt expense 238 253
Regulatory asset related to income taxes 506 506
Natural gas transition costs 57 80
Environmental clean-up costs 76 87
Other 294 300
---------------- --------------
Total regulatory assets and deferred debits 1,779 1,874
---------------- --------------
TOTAL ASSETS $ 28,711 $ 26,806
================ ==============
See Notes to Consolidated Financial Statements.
</TABLE>
3
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DUKE ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
March 31, December 31,
1999 1998
(Unaudited)
--------------- ---------------
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,541 $ 1,754
Notes payable and commercial paper 73 209
Taxes accrued 971 119
Interest accrued 108 109
Current maturities of long-term debt and preferred stock 1,013 707
Unrealized losses on mark-to-market transactions 1,271 1,387
Other 514 642
--------------- ---------------
Total current liabilities 5,491 4,927
--------------- ---------------
LONG-TERM DEBT 6,164 6,272
--------------- ---------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 3,525 3,733
Investment tax credit 236 242
Nuclear decommissioning costs externally funded 609 580
Environmental clean-up liabilities 279 148
Unrealized losses on mark-to-market transactions 1,120 362
Other 885 907
--------------- ---------------
Total deferred credits and other liabilities 6,654 5,972
--------------- ---------------
MINORITY INTERESTS 202 253
--------------- ---------------
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN SUBORDINATED
NOTES OF DUKE ENERGY CORPORATION OR SUBSIDIARIES 920 919
--------------- ---------------
PREFERRED AND PREFERENCE STOCK
Preferred and preference stock with sinking fund requirements 104 104
Preferred and preference stock without sinking fund requirements 209 209
--------------- ---------------
Total preferred and preference stock 313 313
--------------- ---------------
COMMON STOCKHOLDERS' EQUITY
Common stock, no par, 500 million shares authorized; 364 million and 363 million
shares outstanding at March 31, 1999 and December 31, 1998, respectively 4,504 4,449
Retained earnings 4,463 3,701
--------------- ---------------
Total common stockholders' equity 8,967 8,150
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 28,711 $ 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 and markets natural gas liquids (NGLs). Field Services operates
gathering systems in western Canada and ten contiguous states that serve major
gas-producing regions in the Rocky Mountain, Permian Basin, Mid-Continent and
onshore and offshore Gulf Coast areas.
Trading and Marketing markets natural gas, electricity and other energy-related
products across North America. Duke Energy owns a 60% interest in Trading and
Marketing's operations, with Mobil Corporation owning a 40% minority interest.
Global Asset Development develops, owns and operates energy-related facilities
worldwide. Global Asset Development conducts its operations primarily through
Duke Energy North America, LLC (formerly Duke Energy Power Services, LLC) and
Duke Energy International, LLC.
Other Energy Services provides engineering, consulting, construction and
integrated energy solutions worldwide, primarily through Duke Engineering &
Services, Inc., Duke/Fluor Daniel and DukeSolutions, Inc.
5
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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 years 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. In prior years, these contracts were accounted for under the
accrual method of accounting. Under this methodology, gains and losses were
recognized as the contract settled. While implementation of this accounting
standard affected certain components of financial position, the cumulative
effect of the change in accounting method on the Consolidated Statements of
Income for the period ended March 31, 1999 was immaterial.
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.
======================================================
DENOMINATOR FOR EARNINGS PER SHARE (In millions)
-----------------------------------------------------
March 31,
-------------
1999 1998
------ ------
Denominator for basic earnings per
share (weighted average shares
outstanding) 363 360
Assumed exercise of dilutive stock
options 1 1
------ ------
Denominator for dilutive earnings per
share 364 361
=====================================================
EXTRAORDINARY ITEM. 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.
For a description of the 1999 extraordinary item, see Note 3 to the Consolidated
Financial Statements.
RECLASSIFICATIONS. Certain amounts have been reclassified in the Consolidated
Financial Statements to conform to the current presentation.
6
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3. BUSINESS ACQUISITIONS/DISPOSITIONS
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 acquisition was accounted
for by the purchase method. The assets and liabilities of the UPR acquisition
have been consolidated in Duke Energy's financial statements as of March 31,
1999. The excess of the purchase price over the fair value of the net
identifiable assets and liabilities acquired of $158 million has been recorded
as goodwill and will be amortized on a straight-line basis over 15 to 20 years.
Duke Energy agreed to take 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. Soil and groundwater contamination at the identified UPR sites
will be addressed in conjunction with Duke Energy's remediation plans. Also,
other environmental matters, such as the status of air emission permits at some
facilities, may require corrective action. The estimated cost to remediate these
conditions at March 31, 1999 is $157 million, which is included in Environmental
Clean-up Liabilities on the Consolidated Balance Sheets. Under the terms of the
purchase agreement, all environmental liabilities in excess of $40 million will
be considered a reduction in the purchase price. The total amount of
environmental liabilities is currently being negotiated. Any adjustment to
estimated environmental clean-up costs or other estimated amounts will be
recorded as an adjustment to goodwill.
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's 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 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.
==========================================================================
COMBINED OPERATING RESULTS OF THE PEPL COMPANIES AND TRUNKLINE LNG FOR THE
PERIOD FROM JANUARY 1, 1999 THROUGH MARCH 28, 1999(A) (In millions)
- --------------------------------------------------------------------------
Operating Revenues $126
Operating Expenses 57
Other Income, Net 4
------------------
Earnings Before Interest and Taxes $ 73
==========================================================================
(A) Excludes intercompany building rental revenue, allocated corporate expenses,
building depreciation and certain other costs to be retained by Duke Energy.
7
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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 earnings before interest and taxes, presented in the
accompanying table, includes intersegment sales accounted for at prices
representative of unaffiliated party transactions. Segment assets are provided
as additional information in the accompanying table and are net of intercompany
advances, intercompany notes receivable and investments in subsidiaries.
<TABLE>
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=========================================================================================
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, 1999
Electric Operations $1,061 $ - $1,061 $407 $ 125
Natural Gas Transmission 378 24 402 208 42
Field Services 234 110 344 12 1,445
Trading and Marketing 2,242 44 2,286 33 5
Global Asset Development 88 20 108 32 382
Other Energy Services 134 20 154 (5) 8
Real Estate Operations 28 - 28 18 60
Other Operations (A) (5) 13 8 (22) 19
Eliminations - (231) (231) - -
-----------------------------------------------------------
Total Consolidated $4,160 $ - $4,160 $683 $2,086
- ----------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31, 1998
Electric Operations $1,036 $ - $1,036 $378 $101
Natural Gas Transmission 379 31 410 209 73
Field Services 530 140 670 48 70
Trading and Marketing 2,003 9 2,012 13 1
Global Asset Development 36 1 37 9 85
Other Energy Services 99 16 115 7 4
Real Estate Operations 30 - 30 22 42
Other Operations (A) 2 1 3 (8) 11
Eliminations - (198) (198) - -
----------------------------------------------------------
Total Consolidated $4,115 $ - $4,115 $678 $387
=======================================================================================
=======================================================
SEGMENT ASSETS (In millions)
- -------------------------------------------------------
March 31, December 31,
1999 1998
--------------------------
Electric Operations $12,940 $12,953
Natural Gas Transmission 3,925 4,996
Field Services 3,671 1,893
Trading and Marketing 3,652 3,233
Global Asset Development 2,266 2,061
Other Energy Services 390 376
Real Estate Operations 759 724
Other Operations (A) 1,547 968
Eliminations (439) (398)
--------------------------
Total Consolidated $28,711 $26,806
=======================================================
(A) Includes communication services, water services and certain unallocated
corporate items.
</TABLE>
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5. RISK MANAGEMENT AND FINANCIAL INSTRUMENTS
FOREIGN CURRENCY INSTRUMENTS. In anticipation of the purchase of Empresa
Nacional de Electricidad S.A. (Endesa-Chile) (see Note 9 to the Consolidated
Financial Statements), Duke Energy entered into foreign currency forwards and
swap contracts to obtain Chilean pesos for the purchase. These financial
instruments were accounted for using the mark-to-market method of accounting.
Under this methodology, the instruments are adjusted to market value, and the
resulting gains and losses are recognized in current period income and are
included in the Consolidated Statements of Income as Other, Net. Unrealized
gains and losses are recorded in the Consolidated Balance Sheets as Unrealized
Gains or Losses on Mark-to-Market Transactions. The forward contracts, with a
notional contract amount of 120.7 billion Chilean pesos (USD $245 million) at
March 31, 1999, mature in April 1999. The swaps, with a notional contract amount
of approximately 74 billion Chilean pesos (USD $150 million) at March 31, 1999,
mature April 20, 1999 to July 20, 1999. The weighted average fixed exchange
rates of the forward and swap contracts are 492.6 and 492.7 Chilean pesos to
U.S. dollars, respectively. The fair value of these contracts as of March 31,
1999 was approximately $2 million.
6. DEBT AND CREDIT FACILITIES
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.
Associated with the purchase of certain assets in Australia and New Zealand,
Duke Energy borrowed approximately $300 million in both Australian and New
Zealand dollars during the first quarter of 1999. The loans, with interest rates
ranging from 4.340% to 5.2209%, mature in July 1999.
7. 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.
8. 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 has engaged in unlawful and
anti-competitive conduct with regard to requests for interconnects with the PEPL
system for service to the Kansas City area. Asserting that PEPL has violated the
antitrust laws and tortiously interfered with the plaintiffs' business
expectancies, the plaintiffs 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.
9
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OTHER COMMITMENTS AND CONTINGENCIES. In January 1998, Duke Energy acquired a
9.8% ownership in Alliance Pipeline. This pipeline is designed to transport
natural gas from western Canada to the Chicago-area market center for
distribution throughout North America. The pipeline is scheduled to begin
commercial operation in late 2000. In addition to buying an ownership interest
in the pipeline project, Duke Energy has a contractual commitment for 67.25
million cubic feet per day of capacity on the line over 15 years for an
estimated total of $315 million.
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 which contain
certain schedule and performance requirements. Risk management techniques are
used to mitigate their 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.
Management believes that these commitments and contingencies will not have a
material adverse effect on consolidated results of operations or financial
position.
9. SUBSEQUENT EVENT
On February 18, 1999, Duke Energy announced its intent to make a concurrent cash
tender offer in Chilean pesos in Chile and the United States for 51% of the
outstanding shares of Endesa-Chile for an estimated total cash outlay of
approximately $2.1 billion based on current exchange rates. On April 21,
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.
10
<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.
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. For further discussion of the sale
of the Midwest Pipelines, see 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 and markets natural gas liquids (NGLs). Field Services operates
gathering systems in western Canada and ten contiguous states that serve major
gas-producing regions in the Rocky Mountain, Permian Basin, Mid-Continent and
onshore and offshore Gulf Coast areas.
Trading and Marketing markets natural gas, electricity and other energy-related
products across North America. Duke Energy owns a 60% interest in Trading and
Marketing's operations, with Mobil Corporation owning a 40% minority interest.
Global Asset Development develops, owns and operates energy-related facilities
worldwide. Global Asset Development conducts its operations primarily through
Duke Energy North America, LLC (Duke Energy North America) (formerly Duke Energy
Power Services, LLC) and Duke Energy International, LLC (Duke Energy
International).
Other Energy Services provides engineering, consulting, construction and
integrated energy solutions worldwide, primarily through Duke Engineering &
Services, Inc. (Duke Engineering & Services), Duke/Fluor Daniel and
DukeSolutions, Inc.
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.
11
<PAGE>
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, 1999, earnings available for common
stockholders was $962 million, or $2.65 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 to common stockholders was $314 million, or
$0.87 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 for the three months ended March 31, 1999 increased to $627
million compared to $608 million for the same period in 1998. Earnings before
interest and taxes (EBIT) were $683 million and $678 million for the three
months ended March 31, 1999 and 1998, respectively. Operating income and
earnings before interest and taxes are affected by the same fluctuations for
Duke Energy and each of its business segments. The only significant variable
between the two amounts is gains on the sale of assets which are included in
Other, Net on the Consolidated Income Statement. Gains on sales of assets
include a $14 million gain on an investment sale by Global Asset Development in
1999 and a $31 million gain on an asset sale by Field Services in 1998. Earnings
before interest and taxes by business segment are summarized below, and are
discussed by business segment thereafter.
============================================================================
EARNINGS BEFORE INTEREST AND TAXES BY BUSINESS SEGMENT (In millions)
- ----------------------------------------------------------------------------
Three Months Ended
March 31,
-----------------------
1999 1998
-----------------------
Electric Operations $407 $378
Natural Gas Transmission 208 209
Field Services 12 48
Trading and Marketing 33 13
Global Asset Development 32 9
Other Energy Services (5) 7
Real Estate Operations 18 22
Other Operations (A) (22) (8)
----------- -----------
Consolidated EBIT $683 $678
============================================================================
(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.
12
<PAGE>
ELECTRIC OPERATIONS
============================================================================
Three Months Ended
March 31,
-----------------------
(In millions, except where noted) 1999 1998
- ----------------------------------------------------------------------------
Operating Revenues $1,061 $1,036
Operating Expenses 675 681
-----------------------
Operating Income 386 355
Other Income, Net of Expenses 21 23
-----------------------
EBIT $ 407 $ 378
=======================
Sales - GWh (A) 19,537 19,257
============================================================================
(A) Gigawatt-hours
Earnings before interest and taxes for Electric Operations increased $29
million, or 7.7%, for the three months ended March 31, 1999 compared to the same
period in 1998. The increase is primarily due to a 1.5% increase in
gigawatt-hour sales and lower operating expenses. Sales to weather-sensitive
customers increased only slightly for the period when compared to the prior year
quarter as both periods were affected by milder than normal weather. Sales to
residential and general service customers were up 0.4% and 3.6%, respectively.
Sales to industrial customers decreased 3.5%, with sales to textile customers
down 8.0%. The decrease in operating expenses was partially due to lower nuclear
expenses resulting primarily from fewer outage days.
NATURAL GAS TRANSMISSION
============================================================================
Three Months Ended
March 31,
-----------------------
(In millions, except where noted) 1999 1998
- ----------------------------------------------------------------------------
Operating Revenues $402 $410
Operating Expenses 202 210
-----------------------
Operating Income 200 200
Other Income, Net of Expenses 8 9
-----------------------
EBIT $208 $209
=======================
Throughput - TBtu (A) 811 778
============================================================================
(A) Trillion British thermal units
Earnings before interest and taxes for the Natural Gas Transmission segment
decreased $1 million for the three months ended March 31, 1999 compared to the
same period in 1998. Earnings before interest and taxes for the Northeast
Pipelines increased $6 million for the three months ended March 31, 1999
compared to the prior year quarter, primarily as a result of increased income
from market expansion projects and lower operating expenses. Partially
offsetting these benefits was the non-recurrence of a 1998 refund from a state
property tax ruling.
Earnings before interest and taxes for the Midwest Pipelines decreased $7
million for the three months ended March 31, 1999 compared to the prior year
quarter, primarily due to decreased throughput. The sale of the Midwest
Pipelines to CMS Energy Corporation (CMS) closed on March 29, 1999.
13
<PAGE>
FIELD SERVICES
============================================================================
Three Months Ended
March 31,
-----------------------
(In millions, except where noted) 1999 1998
- ----------------------------------------------------------------------------
Operating Revenues $344 $670
Operating Expenses 332 653
-----------------------
Operating Income 12 17
Other Income, Net of Expenses - 31
-----------------------
EBIT $ 12 $ 48
=======================
Natural Gas Gathered and Processed/Transported,
TBtu/d (A) 3.4 3.7
NGL Production, MBbl/d (B) 107.6 106.4
Natural Gas Marketed, TBtu/d 0.4 0.3
Average Natural Gas Price per MMBtu (C) $1.75 $2.20
Average NGL Price per Gallon $0.23 $0.29
============================================================================
(A) Trillion British thermal units per day
(B) Thousand barrels per day
(C) Million British thermal units
Earnings before interest and taxes for Field Services decreased $36 million for
the three months ended March 31, 1999 compared to the same period in 1998. The
decrease resulted from a $31 million gain on the sale of two NGL fractionation
facilities in 1998, which is included in other income. Gross revenues and
expenses also decreased as a result of the November 1998 sale of Duke Energy
Transport and Trading Co., which gathers, stores, transports and markets crude
oil and operates two NGL pipelines, to TEPPCO Partners, L.P., a company in which
Duke Energy has a 21.1% ownership interest. Low average NGL prices, which
decreased $0.06 per gallon, or 20.7%, from March 31, 1998 to March 31, 1999,
continue to have a significant impact on earnings for Field Services; however,
decreased earnings resulting from lower NGL prices were partially offset by a
gain on hedging activities.
TRADING AND MARKETING
============================================================================
Three Months Ended
March 31,
-----------------------
(In millions, except where noted) 1999 1998
- ----------------------------------------------------------------------------
Operating Revenues $2,286 $2,012
Operating Expenses 2,257 2,000
-----------------------
Operating Income 29 12
Other Income, Net of Expenses 4 1
-----------------------
EBIT $ 33 $ 13
=======================
Natural Gas Marketed, TBtu/d 11.0 7.9
Electricity Marketed, GWh 21,837 23,892
============================================================================
Earnings before interest and taxes for Trading and Marketing increased $20
million for the three months ended March 31, 1999 compared with the same period
in 1998. The increase results primarily from higher natural gas and electricity
trading margins compared to the same period in 1998 when a significant decline
in energy price volatility resulted in decreased trading margins. Partially
offsetting the current year increase in income were higher operating expenses
resulting from business growth.
14
<PAGE>
GLOBAL ASSET DEVELOPMENT
============================================================================
Three Months Ended
March 31,
-----------------------
(In millions) 1999 1998
- ----------------------------------------------------------------------------
Operating Revenues $108 $37
Operating Expenses 101 32
-----------------------
Operating Income 7 5
Other Income, Net of Expenses 25 4
-----------------------
EBIT $ 32 $ 9
============================================================================
Earnings before interest and taxes for Global Asset Development increased $23
million for the three months ended March 31, 1999 compared with the same period
in 1998. The increase is primarily due to increased contributions from new
projects in California, Australia and Chile and a $14 million gain on the sale
of its investment in the Mecklenburg Cogeneration facility, which is included in
other income.
OTHER ENERGY SERVICES
============================================================================
Three Months Ended
March 31,
-----------------------
(In millions) 1999 1998
- ----------------------------------------------------------------------------
Operating Revenues $154 $115
Operating Expenses 159 108
-----------------------
EBIT $ (5) $ 7
============================================================================
Earnings before interest and taxes for Other Energy Services decreased $12
million for the three months ended March 31, 1999 compared with the same period
in 1998, primarily due to decreased earnings from projects of Duke Engineering &
Services.
REAL ESTATE OPERATIONS
============================================================================
Three Months Ended
March 31,
-----------------------
(In millions) 1999 1998
- ----------------------------------------------------------------------------
Operating Revenues $28 $30
Operating Expenses 10 8
-----------------------
EBIT $18 $22
============================================================================
Earnings before interest and taxes for Real Estate Operations decreased $4
million, or 18.2%, for the three months ended March 31, 1999 compared with the
same period in 1998. This resulted from decreased project and land sales, which
were partially offset by increased developed lot sales.
OTHER OPERATIONS
Earnings before interest and taxes for Other Operations decreased $14 million
for the three months ended March 31, 1999 compared with the same period in 1998.
This decrease primarily resulted from mark-to-market losses on corporately
managed long-dated energy risk positions used to hedge exposure to commodity
prices, primarily NGLs. As these positions are liquidated over the next 18
months, actual results will be allocated back to Field Services.
15
<PAGE>
OTHER IMPACTS ON EARNINGS AVAILABLE FOR COMMON STOCKHOLDERS
For the three months ended March 31, 1999, interest expense increased $8
million, or 6.5%, over the comparable period in 1998 due to higher average debt
balances outstanding.
Minority interest increased $20 million primarily as a result of dividends
incurred for Duke Energy's trust preferred securities, $600 million of which
were issued after the first quarter in 1998. Excluding these dividends, minority
interests relate primarily to the trading and marketing joint venture with Mobil
Corporation.
The sale of the Midwest Pipelines to CMS closed on March 29, 1999 and resulted
in a $660 million extraordinary gain, net of income tax of $404 million. (See
further discussion in Liquidity and Capital Resources, Investing Cash Flows
section below and in Note 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 $2,086 million for the
three months ended March 31, 1999 compared to approximately $387 million for the
same period in 1998. Increased capital and investment expenditures during the
period were primarily due to business expansion for the Field Services and
Global Asset Development segments discussed below.
On January 22, 1999, Global Asset Development's international division, Duke
Energy International, completed the $315 million purchase of power generation
and transmission assets in western Australia and New Zealand from Broken Hill
Proprietary Company Limited (BHP), including an ownership interest in a pipeline
in western Australia. This acquisition also includes a development proposal for
a cogeneration plant and a portfolio of international and Australian-based
projects.
Global Asset Development's domestic division, Duke Energy North America, began
construction of the Hidalgo Energy project located in South Texas, which is
targeted to begin producing power in mid-2000. For the 510 megawatt gas-fired
merchant plant, Duke/Fluor Daniel will serve as the construction contractor, a
Natural Gas Transmission pipeline will deliver the natural gas supply, and
Trading and Marketing will provide energy management services and market the
plant's output.
On March 31, 1999, Field Services completed the $1.35 billion acquisition of the
natural gas gathering, processing, fractionation and NGL pipeline business from
Union Pacific Resources (UPR) along with its natural gas and NGL marketing
activities (collectively "the UPR acquisition"). Additionally, Duke Energy
agreed to take 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. Soil and groundwater contamination at the identified UPR sites will
be addressed in conjunction with Duke Energy's remediation plans. Also, other
environmental matters, such as the status of air emission permits at some
facilities, may require corrective action. The estimated cost to remediate these
conditions at March 31, 1999 is $157 million. This amount is included in
Environmental Clean-up Liabilities on the Consolidated Balance Sheets.
On April 19, 1999, Duke Power entered into a contract 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.
16
<PAGE>
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's assumption of existing PEPL debt of approximately $300
million.
FINANCING CASH FLOWS
Duke Energy's consolidated capital structure at March 31, 1999, including
short-term debt, was 42% debt, 5% trust preferred securities, 2% preferred stock
and 51% common equity. Fixed charges coverage, calculated using the Securities
and Exchange Commission method, was 4.6 times and 5.0 times for the three months
ended March 31, 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 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 first quarter 1999 are
various bank borrowings of Global Asset Development related to the purchase of
BHP. These borrowings total approximately $300 million at interest rates of
4.340% to 5.2209% and mature in July 1999.
Under its commercial paper facilities, Duke Energy had the ability to borrow up
to $2.8 billion at both March 31, 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, a wholly owned subsidiary of Duke Energy that
serves as the parent for Duke Energy's business segments except for Electric
Operations and certain other operations. Duke Energy's various bank credit
facilities totaled approximately $2.9 billion at each of March 31, 1999 and
December 31, 1998. At March 31, 1999, approximately $1.6 billion was outstanding
under the commercial paper facilities and $76 million was outstanding under the
bank credit facilities.
On April 15, 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 effecting 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. Changes
in Duke Energy's market risk since December 31, 1998 follows.
17
<PAGE>
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. As of
March 31, 1999, if NGL prices average one cent per gallon less in 1999, earnings
before income taxes will decrease by approximately $18 million. Duke Energy
generally does not maintain a material inventory of NGLs or actively trade
commodity derivatives related to NGLs.
FOREIGN OPERATIONS RISK AND INTEREST RATE RISK
In anticipation of Duke Energy's purchase of Empresa Nacional de Electricidad
S.A. (Endesa-Chile) (see further discussion in Current Issues, Subsequent
Event), 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 Notes 2 and 5 to the Consolidated Financial Statements.) The
foreign currency risk is measured by periodically performing sensitivity
analysis to assess the impact of a hypothetical change in the Chilean peso to
U.S. dollar exchange rate. At March 31, 1999, if the Chilean peso to U.S. dollar
exchange rate increased (decreased) by 10%, earnings before interest and taxes
would decrease (increase) by approximately $25 million.
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 recoup their 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 April 1999, the Department of Energy (DOE) introduced an electric utility
restructuring bill in Congress: the 1999 Comprehensive Electricity Competition
Act. The primary restructuring issues addressed include repeal of major
provisions of the Public Utility Holding Company Act (PUHCA) and the Public
Utility Regulatory Policies Act (PURPA), grandfathering of deregulating states,
stranded costs, reliability, reciprocity and transmission. January 1, 2003 was
chosen as the deadline for retail choice to be implemented, with a grandfather
clause for states that are already deregulating.
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
18
<PAGE>
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.
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
mid-2000. Mixed oxide fuel is expected to be available for Duke Power use in
2007. By using mixed-oxide fuel, Duke Power will realize a long-term supply of
nuclear fuel at moderate savings over conventional uranium fuel.
Duke Power and Duke Engineering & Services will also participate in the design
and construction of the facility to fabricate mixed-oxide fuel. 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.
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. Most Duke Energy business units have substantially
completed the first two phases throughout their business operations, and are in
various stages of the third and final phase. Field Services, Global Asset
Development and Other Energy Services' goal is to have critical systems,
equipment and devices year 2000 ready by September 1999. All other business
units', including Electric Operations and Natural Gas Transmission, goal is to
have critical systems, equipment and devices year 2000 ready by mid-1999.
19
<PAGE>
Duke Energy conducts an analysis of Year 2000 issues for potential acquisitions.
In addition, 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 third parties and any potential implications to its
operations. Alternate suppliers of critical products, goods and services are
being identified, where necessary.
COSTS
Management believes it is devoting the resources necessary to achieve Year 2000
readiness in a timely manner. Current estimates for total costs of the program,
including internal labor as well as incremental costs such as consulting and
contract costs, are approximately $65 million, of which approximately $45
million had been incurred as of March 31, 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 would be rapidly
restored. In addition, there could be a temporary reduction in energy needs of
customers due to their own Year 2000 problems. In the event that such a scenario
occurs, it is not expected to have a material adverse impact on consolidated
results of operations or financial position.
CONTINGENCY PLANS
Year 2000 contingency planning is currently underway to address 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 intends to complete its own Year 2000
contingency plans by mid-1999. These plans address various Year 2000 risk
scenarios that cross departmental, business unit and industry lines as well as
specific risks from various internal and external sources, including supplier
readiness.
20
<PAGE>
Based on assessments completed to date and compliance plans in process,
management believes that Year 2000 issues, including the cost of making critical
systems, equipment and devices ready, will not have a material adverse effect on
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.
SUBSEQUENT EVENT
On February 18, 1999, Duke Energy announced its intent to make a concurrent cash
tender offer in Chilean pesos in Chile and the United States for 51% of the
outstanding shares of Endesa-Chile for an estimated total cash outlay of
approximately $2.1 billion based on current exchange rates. On April 21,
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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
For information concerning litigation and other contingencies, see Note 8 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 first 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 January 26, 1999 contained
disclosures under Item 5, Other Events.
A Current Report on Form 8-K filed on February 11, 1999 contained
disclosures under Item 5, Other Events, and Item 7, Financial Statements and
Exhibits.
A Current Report on Form 8-K filed on March 8, 1999 contained
disclosures under Item 7, Financial Statements and Exhibits.
A Current Report on Form 8-K filed on March 10, 1999 contained
disclosures under Item 5, Other Events, and Item 7, Financial Statements and
Exhibits.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DUKE ENERGY CORPORATION
May 14, 1999 /s/ Richard J. Osborne
--------------------------------
Richard J. Osborne
Executive Vice President and
Chief Financial Officer
May 14, 1999 /s/ Jeffrey L. Boyer
--------------------------------
Jeffrey L. Boyer
Vice President and Corporate Controller
22
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<NET-INCOME> 967,000
5,000
<EARNINGS-AVAILABLE-FOR-COMM> 962,000
<COMMON-STOCK-DIVIDENDS> 200,000
<TOTAL-INTEREST-ON-BONDS> 48,000
<CASH-FLOW-OPERATIONS> 547,000
<EPS-PRIMARY> 2.65<F1>
<EPS-DILUTED> 2.64
<FN>
<F1>REPRESENTS BASIC EARNINGS PER SHARE
</FN>
</TABLE>
