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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 2000 Commission File Number 1-4928
DUKE ENERGY CORPORATION
(Exact name of Registrant as Specified in its Charter)
<TABLE>
<CAPTION>
<S> <C>
North Carolina 56-0205520
(State or Other Jurisdiction of Incorporation) (IRS Employer Identification No.)
</TABLE>
526 South Church Street
Charlotte, NC 28202-1904
(Address of Principal Executive Offices)
(Zip code)
704-594-6200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months 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,
2000......368,810,069
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<PAGE>
DUKE ENERGY CORPORATION
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2000
INDEX
<TABLE>
<CAPTION>
Item Page
---- ----
PART I. FINANCIAL INFORMATION
<S> <C>
1. Financial Statements....................................................................................1
Consolidated Statements of Income and Comprehensive Income for the Three and Nine Months
Ended September 30, 2000 and 1999 ..............................................................1
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2000 and 1999.........2
Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999..........................3
Notes to Consolidated Financial Statements..........................................................5
2. Management's Discussion and Analysis of Results of Operations and Financial Condition..................14
PART II. OTHER INFORMATION
1. Legal Proceedings......................................................................................25
4. Submission of Matters to a Vote of Security Holders....................................................25
6. Exhibits and Reports on Form 8-K.......................................................................25
Signatures.............................................................................................26
</TABLE>
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
From time to time, Duke Energy's reports, filings and other public announcements
may include assumptions, projections, expectations, intentions or beliefs about
future events. These statements are intended as "forward-looking statements"
under the Private Securities Litigation Reform Act of 1995. 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; and the effect of accounting policies issued
periodically by accounting standard-setting bodies.
i
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
DUKE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
(In millions, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2000 1999 2000 1999
----------- --------- --------- ---------
<S> <C> <C> <C> <C>
Operating Revenues
Sales, trading and marketing of natural gas
and petroleum products $ 7,441 $ 2,983 $ 18,277 $ 7,385
Generation, transmission and distribution of electricity 1,562 1,546 4,077 3,756
Trading and marketing of electricity 5,731 1,578 9,484 2,684
Transportation and storage of natural gas 253 253 779 885
Gain on sale of equity investment 407 - 407 -
Other 297 316 883 835
-------- -------- -------- --------
Total operating revenues 15,691 6,676 33,907 15,545
-------- -------- -------- --------
Operating Expenses
Natural gas and petroleum products purchased 7,195 2,924 17,504 7,171
Net interchange and purchased power 5,461 1,536 9,047 2,685
Fuel used in electric generation 215 227 583 587
Other operation and maintenance 908 772 2,487 2,065
Depreciation and amortization 300 246 864 704
Property and other taxes 111 105 315 291
-------- -------- -------- --------
Total operating expenses 14,190 5,810 30,800 13,503
-------- -------- -------- --------
Operating Income 1,501 866 3,107 2,042
-------- -------- -------- --------
Other Income and Expenses
Deferred returns and allowance for funds used during construction 15 22 54 62
Other, net 40 20 91 55
-------- -------- -------- --------
Total other income and expenses 55 42 145 117
-------- -------- -------- --------
Earnings Before Interest and Taxes 1,556 908 3,252 2,159
Interest Expense 257 153 670 405
Minority Interest Expense 31 31 151 99
-------- -------- -------- --------
Earnings Before Income Taxes 1,268 724 2,431 1,655
Income Taxes 498 283 939 619
-------- -------- -------- --------
Income Before Extraordinary Item 770 441 1,492 1,036
Extraordinary Gain, net of tax - - - 660
-------- -------- -------- --------
Net Income 770 441 1,492 1,696
Dividends and Premiums on Redemptions of
Preferred and Preference Stock 4 5 14 15
-------- -------- -------- --------
Earnings Available For Common Stockholders 766 436 1,478 1,681
Other Comprehensive Income, net of tax (12) - (60) -
-------- -------- -------- --------
Total Comprehensive Income $ 754 $ 436 $ 1,418 $ 1,681
======== ======== ======== ========
Common Stock Data
Weighted average shares outstanding 368 365 367 364
Earnings per share (before extraordinary item)
Basic $ 2.08 $ 1.20 $ 4.02 $ 2.80
Diluted $ 2.07 $ 1.19 $ 4.01 $ 2.80
Earnings per share
Basic $ 2.08 $ 1.20 $ 4.02 $ 4.62
Diluted $ 2.07 $ 1.19 $ 4.01 $ 4.61
Dividends per share $ - $ - $ 1.65 $ 1.65
</TABLE>
See Notes to Consolidated Financial Statements.
1
<PAGE>
DUKE ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------
2000 1999
------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 1,492 $ 1,696
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 997 836
Net gain on mark-to-market adjustment (486) (2)
Extraordinary gain, net of tax - (660)
Gain on sale of equity interest (407) -
Deferred income taxes 246 20
Purchased capacity levelization 98 77
Transition cost recoveries, net 65 64
(Increase) decrease in
Receivables (4,828) (1,106)
Inventory (164) (78)
Other current assets (665) (11)
Increase (decrease) in
Accounts payable 5,242 687
Taxes accrued (173) 356
Interest accrued 31 5
Other current liabilities 567 (101)
Other, net (128) 6
------- -------
Net cash provided by operating activities 1,887 1,789
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital and investment expenditures (4,697) (4,433)
Proceeds from sale of subsidiaries - 1,900
Proceeds from sale of equity interest 400 -
Decommissioning, retirements and other 310 238
------- -------
Net cash used in investing activities (3,987) (2,295)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issuance of
Long-term debt 2,755 2,382
Guaranteed preferred beneficial interests in subordinated notes of
Duke Energy Corporation or Subsidiaries - 484
Common stock and stock options 130 106
Payments for the redemption of
Long-term debt (844) (643)
Preferred and preference stock (20) (20)
Net change in notes payable and commercial paper 1,189 (114)
Distributions to minority interests (1,217) -
Contributions from minority interests 741 -
Dividends paid (621) (616)
Other 35 (100)
------- -------
Net cash provided by financing activities 2,148 1,479
------- -------
Net increase in cash and cash equivalents 48 973
Cash received from business acquisitions 100 7
Cash and cash equivalents at beginning of period 613 80
------- -------
Cash and cash equivalents at end of period $ 761 $ 1,060
======= =======
Supplemental Disclosures
Cash paid for interest, net of amount capitalized $ 611 $ 381
Cash paid for income taxes $ 758 $ 393
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
DUKE ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
(Unaudited)
----------- -------------
ASSETS
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 761 $ 613
Receivables 8,375 3,248
Inventory 803 599
Current portion of natural gas transition costs 16 81
Current portion of purchased capacity costs 145 146
Unrealized gains on mark-to-market transactions 4,803 1,131
Other 1,139 353
------ -----
Total current assets 16,042 6,171
------ -----
Investments and Other Assets
Investments in affiliates 1,370 1,299
Nuclear decommissioning trust funds 702 703
Pre-funded pension costs 304 315
Goodwill, net 1,195 844
Notes receivable 408 154
Unrealized gains on mark-to-market transactions 3,134 690
Other 1,186 705
----- -----
Total investments and other assets 8,299 4,710
----- -----
Property, Plant and Equipment
Cost 33,954 30,436
Less accumulated depreciation and amortization 9,908 9,441
------ ------
Net property, plant and equipment 24,046 20,995
------ ------
Regulatory Assets and Deferred Debits
Purchased capacity costs 400 497
Debt expense 211 223
Regulatory asset related to income taxes 500 500
Other 323 313
----- -----
Total regulatory assets and deferred debits 1,434 1,533
----- -----
Total Assets $49,821 $33,409
======= =======
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE>
DUKE ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
(Unaudited)
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
<S> <C> <C>
Accounts payable $ 7,926 $ 2,312
Notes payable and commercial paper 1,489 267
Taxes accrued 621 685
Interest accrued 175 139
Current maturities of long-term debt and preferred stock 633 515
Unrealized losses on mark-to-market transactions 4,768 1,241
Other 1,246 717
-------- --------
Total current liabilities 16,858 5,876
-------- --------
Long-term Debt 10,577 8,683
-------- --------
Deferred Credits and Other Liabilities
Deferred income taxes 3,822 3,402
Investment tax credit 215 225
Nuclear decommissioning costs externally funded 702 703
Environmental clean-up liabilities 124 101
Unrealized losses on mark-to-market transactions 2,541 438
Other 1,534 2,099
-------- --------
Total deferred credits and other liabilities 8,938 6,968
-------- --------
Guaranteed Preferred Beneficial Interests in Subordinated
Notes of Duke Energy Corporation or Subsidiaries 1,405 1,404
-------- --------
Minority Interests 1,844 1,200
-------- --------
Preferred and Preference Stock
Preferred and preference stock with sinking fund requirements 51 71
Preferred and preference stock without sinking fund requirements 209 209
-------- --------
Total preferred and preference stock 260 280
-------- --------
Common Stockholders' Equity
Common stock, no par, 1 billion shares authorized; 369 million and 366
million shares outstanding at September 30, 2000 and December 31, 1999,
respectively 4,718 4,603
Retained earnings 5,283 4,397
Accumulated other comprehensive income (62) (2)
-------- --------
Total common stockholders' equity 9,939 8,998
-------- --------
Total Liabilities and Stockholders' Equity $ 49,821 $ 33,409
======== ========
</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 U.S. and abroad. Duke Energy provides these and other services through seven
business segments:
o Franchised Electric
o Natural Gas Transmission
o Field Services
o North American Wholesale Energy (NAWE)
o International Energy
o Other Energy Services
o Duke Ventures
Franchised Electric generates, transmits, distributes and sells electric energy
in central and western North Carolina and the western portion of South Carolina,
primarily through Duke Power and 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 conducts its operations primarily through Duke Energy
Gas Transmission Corporation, and provides interstate transportation and storage
of natural gas for customers primarily in the Mid-Atlantic, New England and
Southeastern states. The interstate natural gas transmission and storage
operations are subject to the rules and regulations of the FERC.
Field Services gathers, processes, transports, markets and stores natural gas
and produces, transports and markets natural gas liquids. Field Services'
operations are conducted primarily through Duke Energy Field Services, LLC
(DEFS), a limited liability company that is 30.3% owned by Phillips Petroleum.
Field Services operates gathering systems in western Canada and eleven
contiguous states that serve major gas-producing regions in the Rocky Mountain,
Permian Basin, Mid-Continent, East Texas-Austin Chalk-North Louisiana and
onshore and offshore Gulf Coast areas.
NAWE's activities include asset development, operation and management, primarily
through Duke Energy North America, LLC (DENA), as well as commodity sales and
services related to natural gas and power, primarily through Duke Energy Trading
and Marketing (DETM), a joint venture with Exxon Mobil Corporation, a 40%
partner in DETM. NAWE also includes Duke Energy Merchants, which develops new
business lines in the evolving energy commodity markets. NAWE conducts its
business throughout the U.S. and western Canada. The operations of the
previously segregated Trading and Marketing segment were combined by management
into NAWE during the second quarter of 2000. Previous periods have been restated
to conform to current period presentation.
International Energy conducts its operations through Duke Energy International,
LLC (DEI). International Energy's activities include asset development,
operation and management of international energy-related facilities, primarily
in Latin America, Asia Pacific and Europe. International Energy also provides
worldwide energy trading and marketing of natural gas and electric power.
5
<PAGE>
Other Energy Services is a combination of certain other businesses that provide
engineering, consulting, construction and integrated energy solutions worldwide,
primarily through Duke Engineering & Services, Inc., Duke/Fluor Daniel and
DukeSolutions, Inc. Duke/Fluor Daniel is a 50/50 partnership between Duke Energy
and Fluor Enterprises, Inc.
Duke Ventures is comprised of other diverse businesses, primarily operating
through Crescent Resources, Inc. (Crescent), DukeNet Communications (DukeNet)
and Duke Capital Partners (DCP). Crescent develops high quality commercial and
residential real estate projects and manages land holdings primarily in the
Southeastern U.S. DukeNet provides fiber optic and wireless digital networks for
industrial, commercial and residential customers. DCP, a newly formed
wholly-owned merchant finance company, provides financing, investment banking
and asset management services to wholesale and commercial energy markets.
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 and Comprehensive Income are not necessarily indicative of
amounts expected for the respective annual periods due to the effects of
seasonal temperature variations on energy consumption and the timing of
maintenance of certain electric generating units.
Earnings Per Common Share. Basic earnings per share is based on a simple
weighted average of common shares outstanding. Diluted 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
diluted 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,
---------------------------------------------------
2000 1999 2000 1999
---------------------------------------------------
<S> <C> <C> <C> <C>
Denominator for basic earnings per share
(weighted average shares outstanding) 368.2 365.0 367.4 364.3
Assumed exercise of diluted stock options 2.3 0.5 1.4 0.6
---------------------------------------------------
Denominator for diluted earnings per share 370.5 365.5 368.8 364.9
-----------------------------------------------------------------------------------------------------
</TABLE>
Extraordinary Item. On March 29, 1999, wholly-owned subsidiaries of Duke Energy
sold Panhandle Eastern Pipe Line Company (PEPL), Trunkline Gas Company and
additional storage related to those systems, which substantially comprised the
Midwest Pipelines, along with Trunkline LNG Company to CMS Energy Corporation
(CMS). The sales price of $2.2 billion involved cash proceeds of $1.9 billion
and CMS' assumption of existing PEPL debt of approximately $300 million. The
sale resulted in an extraordinary gain of $660 million, net of income tax of
$404 million, and an increase in basic earnings per share of $1.82.
New Accounting Standards. In June 1998, Statement of Financial Accounting
Standard (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued. Duke Energy is required to adopt this standard by
January 1, 2001. SFAS No. 133 requires that all derivatives be recognized as
either assets or liabilities and measured at fair value, and changes in the fair
value of derivatives are reported in current earnings, unless the derivative is
designated and effective as a hedge. If the intended use of the derivative is to
hedge the exposure to changes in the fair value of an asset, a liability or a
firm commitment, then changes in the fair value of the derivative instrument
will generally be offset in the income statement
6
<PAGE>
by changes in the hedged item's fair value. However, if the intended use of the
derivative is to hedge the exposure to variability in expected future cash
flows, then changes in the fair value of the derivative instrument will
generally be reported in Other Comprehensive Income (OCI). The gains and losses
on the derivative instrument that are reported in OCI will be reclassified to
earnings in the periods in which earnings are impacted by the hedged item.
Duke Energy manages its exposure to risk from existing contractual commitments
and provides risk management services to its customers through forward
contracts, futures, over-the-counter swap agreements and options (collectively,
"commodity derivatives"). Energy commodity forward contracts involve physical
delivery of an energy commodity. Energy commodity futures involve the buying or
selling of natural gas, electricity or other energy-related commodities at a
fixed price. Over-the-counter swap agreements require Duke Energy to receive or
make payments based on the difference between a specified price and the actual
price of the underlying commodity. Energy commodity options held to mitigate
price risk provide the right, but not the requirement, to buy or sell
energy-related commodities at a fixed price. Duke Energy uses primarily
electric, natural gas and crude oil commodity derivatives.
Duke Energy has conducted a review of its contracts to identify derivative
instruments and document hedging activities, including the methods for assessing
hedge effectiveness. In conducting this review, it was determined that Duke
Energy's derivative instruments were generally highly effective in offsetting or
reducing the risks of the underlying hedged items. In accordance with the
transition provisions of SFAS No.133, management estimates a net-of-tax
cumulative-effect adjustment of $20 million as a reduction in earnings and a
net-of-tax cumulative-effect adjustment reducing OCI and Stockholders' Equity by
$194 million if SFAS No. 133 was implemented at September 30, 2000. Due to the
volatility of the commodities markets, management cannot determine the actual
transition valuation effect on the future consolidated results of operations or
financial position once SFAS No. 133 is implemented on January 1, 2001. The
table below depicts a sensitivity analysis of increases in commodity prices
relating to Duke Energy's contractual commitments extending out three years.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
Transition
Commodity Commodity Price Change Adjustment OCI
Increase (Decrease)
(In millions)
---------------------------------------------------------------------------------------
<S> <C> <C>
Natural Gas $0.10 increase per MMBtu (a) ($23.3)
Electricity $1.00 increase per MW (b) $22.8
Crude Oil $1.00 increase per Barrel $21.3
------------------------------------------------------------ --------------------------
(a) Million British thermal units.
(b) Megawatts.
</TABLE>
In December 1999, the Securities and Exchange Commission (SEC) released Staff
Accounting Bulletin No. 101 (SAB 101) which provides the SEC staff's views on
revenue recognition policies. Duke Energy has adopted early the provisions of
SAB 101 as of April 1, 2000. The impact of adopting SAB 101 was not material to
Duke Energy's consolidated results of operations or financial position.
Reclassifications. Certain prior period amounts have been reclassified in the
Consolidated Financial Statements to conform to the current presentation.
3. Business Acquisitions and Dispositions
For acquisitions accounted for using the purchase method, assets and liabilities
have been consolidated as of the purchase date and earnings from the
acquisitions have been included in consolidated earnings of Duke Energy
subsequent to the purchase date. Assets acquired and liabilities assumed are
recorded at their estimated fair values, and the excess of the purchase price
over the estimated fair value of the net identifiable assets and liabilities
acquired is recorded as goodwill. Purchase price allocations are subject to
7
<PAGE>
adjustment when information concerning asset and liability valuations are
finalized and the evaluation of certain pre-acquisition contingent liabilities
is completed.
Market Hub Partners (MHP). In September 2000, Duke Energy, through a
wholly-owned subsidiary, completed the approximately $400 million acquisition of
MHP from subsidiaries of NiSource Inc. for approximately $250 million in cash
and the assumption of $150 million in debt with interest rates of 8 1/4% ($115
million) and 10 3/4% ($35 million). MHP provides natural gas storage services in
Louisiana and Texas with a current capacity of 23 billion cubic feet with
significant expansion capabilities. Assets and liabilities acquired have been
recorded at preliminary estimated fair values. No material amount of goodwill
was recorded in the transaction.
Phillips Petroleum's Gas Gathering, Processing and Marketing Unit (Phillips). In
March 2000, Duke Energy, through a wholly-owned subsidiary, completed the
approximately $1.7 billion transaction that combined Field Services' gas
gathering, processing and marketing business with Phillips to form a new
midstream company, named DEFS. In connection with the combination, DEFS issued
approximately $2.75 billion of commercial paper in April 2000. The proceeds were
used to make one-time cash distributions of approximately $1.53 billion to Duke
Energy and $1.22 billion to Phillips Petroleum. Duke Energy owns approximately
70% of DEFS and Phillips Petroleum owns approximately 30%.
Assets and liabilities acquired have been recorded at preliminary estimated fair
values. Goodwill of approximately $175 million was recorded in connection with
the transaction and is being amortized on a straight-line basis over 20 years.
During the third quarter, DEFS filed a shelf registration statement with the SEC
to offer up to $2.0 billion of long-term debt securities and then issued
approximately $1.7 billion of long-term debt securities under this shelf
registration. The proceeds from these securities were used to reduce the balance
of the above-mentioned commercial paper. As a result, the $2.8 billion
commercial paper program was reduced to $1.0 billion.
The parent company of DEFS, Duke Energy Field Services Corporation (DEFS
Corporation), may offer a portion of its common stock to the public in 2001, in
an initial public offering. The proceeds of this offering will be used to reduce
its outstanding commercial paper. Such an offering is subject to favorable
market conditions. After an offering, the ownership share of Duke Energy and
Phillips Petroleum in DEFS Corporation would be reduced accordingly.
East Tennessee Natural Gas Company. In March 2000, Duke Energy, through a
wholly-owned subsidiary, completed the approximately $390 million acquisition of
East Tennessee Natural Gas Company from El Paso Energy. East Tennessee Natural
Gas Company owns a 1,100-mile interstate natural gas pipeline system that
crosses Duke Energy's Texas Eastern Transmission Corporation's pipeline and
serves the Southeastern region of the U.S. Assets and liabilities acquired have
been recorded at preliminary estimated fair values. No goodwill was recorded in
the transaction.
Dominion Resources' Hydroelectric, Natural Gas and Diesel Power Generation
Businesses. In August 1999, Duke Energy, through its wholly-owned subsidiary
DEI, reached a definitive agreement to acquire Dominion Resources Inc.'s
1,200-megawatt portfolio of hydroelectric, natural gas and diesel power
generation businesses in Argentina, Belize, Bolivia and Peru (collectively, the
"Dominion acquisitions") for approximately $405 million. The purchases of the
businesses in Belize and Peru were completed in 1999. In March and April 2000,
DEI completed the purchases of the businesses in Argentina and Bolivia,
respectively. Assets and liabilities of the Dominion acquisitions have been
recorded at preliminary estimated fair values. Total goodwill related to these
purchases was $111 million and is being amortized on a straight-line basis over
40 years.
Companhia de Geracao de Energia Eletrica Paranapanema (Paranapanema). In August
1999, Duke Energy, through its wholly-owned subsidiary DEI, entered a series of
transactions to complete the
8
<PAGE>
approximately $760 million purchase of a controlling voting interest and an
approximate 44% economic interest in Paranapanema, an electric generating
company in Brazil. In January 2000, Duke Energy completed a tender offer to the
minority shareholders of Paranapanema and successfully acquired an additional
51% economic interest in the company for approximately $280 million. This
increased Duke Energy's economic ownership from approximately 44% to
approximately 95%. The purchase accounting for the acquisition of this
additional interest included a reduction of the carrying value of the related
assets by approximately $626 million to reflect the difference in the purchase
price from the book value of minority interest acquired.
Catawba River Associates, LLC (Catawba). In September 2000, Duke Energy formed
Catawba for the purpose of raising funds for certain of Duke Energy's projects
and other assets and sold a non-controlling, preferred interest in Catawba to a
third party for approximately $650 million. Catawba is a limited liability
company with separate existence and identity from its members, and the assets of
Catawba are separate and legally distinct from Duke Energy. The preferred
interest receives a preferred return equal to an adjusted floating reference
rate (approximately 7.6% at September 30, 2000). The financial position, results
of operations and cash flows of Catawba are consolidated with Duke Energy. The
preferred interest and the expense attributable to this interest are included in
Minority Interests and Minority Interest Expense, respectively, on the
Consolidated Financial Statements. The third party investor in Catawba has
committed to invest an additional $375 million under similar terms subject to
the contribution of additional assets and satisfaction of certain conditions.
BellSouth Carolina PCS. In September 2000, Duke Energy, through its wholly-owned
subsidiary DukeNet, sold its 20% interest in BellSouth Carolina PCS for
approximately $400 million to BellSouth Corporation. The resulting pre-tax gain
was $407 million, or an after-tax gain of $0.67 per basic share, and is recorded
in Operating Revenues.
9
<PAGE>
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)
after deducting minority interests. EBIT presented in the accompanying table
includes intersegment sales accounted for at prices representative of
unaffiliated party transactions. Segment assets are provided as additional
information in the accompanying table and are net of intercompany advances,
intercompany notes receivable and investments in subsidiaries.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
Business Segment Data (In millions)
--------------------------------------------------------------------------------------------------------------------
Depreciation Capital and
Unaffiliated Intersegment Total and Investment
Revenues Revenues Revenues EBIT Amortization Expenditures
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Three Months Ended
September 30, 2000
Franchised Electric $ 1,435 $ - $ 1,435 $ 589 $141 $ 166
Natural Gas Transmission 247 32 279 125 33 447
Field Services 2,087 440 2,527 81 67 53
NAWE 11,143 43 11,186 231 20 558
International Energy 270 - 270 81 25 99
Other Energy Services 41 35 76 (69) 3 6
Duke Ventures 464 - 464 444 4 253
Other Operations (a) 4 4 8 29 7 206
Eliminations and
Minority Interests - (554) (554) 45 - -
---------------------------------------------------------------------------------
Total Consolidated $ 15,691 $ - $ 15,691 $ 1,556 $300 $ 1,788
--------------------------------------------------------------------------------------------------------------------
Three Months Ended
September 30, 1999
Franchised Electric $ 1,503 $ - $ 1,503 $ 617 $134 $ 194
Natural Gas Transmission 237 26 263 128 29 80
Field Services 989 219 1,208 49 34 58
NAWE 3,684 34 3,718 84 16 252
International Energy 98 14 112 20 20 898
Other Energy Services 125 26 151 (47) 4 77
Duke Ventures 65 - 65 28 3 84
Other Operations (a) (25) 9 (16) 11 6 -
Eliminations and
Minority Interests - (328) (328) 18 - -
---------------------------------------------------------------------------------
Total Consolidated $ 6,676 $ - $ 6,676 $ 908 $246 $ 1,643
--------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
Business Segment Data (In millions)
--------------------------------------------------------------------------------------------------------------------
Depreciation Capital and
Unaffiliated Intersegment Total and Investment
Revenues Revenues Revenues EBIT Amortization Expenditures
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Nine Months Ended
September 30, 2000
Franchised Electric $ 3,708 $ - $ 3,708 $1,395 $423 $ 457
Natural Gas Transmission 748 98 846 398 94 914
Field Services 5,231 917 6,148 218 176 268
NAWE 22,586 235 22,821 415 55 1,384
International Energy 725 2 727 267 74 929
Other Energy Services 386 103 489 (53) 9 22
Duke Ventures 531 - 531 474 12 417
Other Operations (a) (8) 30 22 10 21 306
Eliminations and
Minority Interests - (1,385) (1,385) 128 - -
----------------------------------------------------------------------------------
Total Consolidated $ 33,907 $ - $ 33,907 $3,252 $864 $ 4,697
--------------------------------------------------------------------------------------------------------------------
Nine Months Ended
September 30, 1999
Franchised Electric $ 3,659 $ - $ 3,659 $1,343 $407 $ 497
Natural Gas Transmission 852 73 925 482 98 187
Field Services 1,837 497 2,334 97 90 1,595
NAWE 8,523 76 8,599 156 41 605
International Energy 177 35 212 24 32 1,214
Other Energy Services 394 70 464 (58) 11 87
Duke Ventures 128 - 128 65 9 246
Other Operations (a) (25) 27 2 (5) 16 2
Eliminations and
Minority Interests - (778) (778) 55 - -
----------------------------------------------------------------------------------
Total Consolidated $ 15,545 $ - $ 15,545 $2,159 $704 $ 4,433
--------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
Segment Assets (In millions)
-------------------------------------------------------------------------------------
September 30, December 31,
2000 1999
-----------------------------------
Franchised Electric $12,908 $13,133
Natural Gas Transmission 4,333 3,897
Field Services 6,202 3,565
NAWE 18,915 6,268
International Energy 4,217 4,459
Other Energy Services 689 612
Duke Ventures 1,779 1,031
Other Operations (a) 2,654 1,250
Eliminations (1,876) (806)
-----------------------------------
Total Consolidated $49,821 $33,409
-------------------------------------------------------------------------------------
(a) Includes certain unallocated corporate items.
</TABLE>
11
<PAGE>
5. Risk Management and Financial Instruments
Interest Rate Derivatives. To take advantage of current interest rates, Duke
Energy entered into several fixed-to-floating interest rate swap agreements
during June 2000. The swaps have a total notional amount of $328 million and
will expire in August 2022. In July 2000, Duke Energy entered into a
fixed-to-floating interest rate swap agreement for a total notional amount of
$77 million that will expire in April 2014.
6. Debt and Credit Facilities
In September 2000, Duke Energy issued $250 million of 7 1/8% remarketable or
redeemable Senior Notes. At the option of the remarketing dealer, the notes will
either be redeemed in 2002 or remarketed and extended for an additional ten
years. In August 2000, DEFS issued $1.7 billion of notes comprised of $600
million of 7 1/2% notes due 2005, $800 million of 7 7/8% notes due 2010 and $300
million of 8 1/8% notes due 2030. The proceeds were used to repay a portion of
the $2.75 billion of commercial paper issued in connection with the Phillips
acquisition (see Note 3 to the Consolidated Financial Statements). In March
2000, Duke Energy issued $300 million of Series D 7 3/8% Senior Notes due 2010.
7. Commitments and Contingencies
Environmental Matters. Air Quality Control. In October 1998, the Environmental
Protection Agency (EPA) issued a final ruling on regional ozone control that
requires revised State Implementation Plans (SIPs) for 22 eastern states and the
District of Columbia. This EPA ruling was challenged in court by various states,
industry and other interests, including the states of North Carolina and South
Carolina and Duke Energy. In March 2000, the court upheld most aspects of the
EPA's rule. Most of the states subject to the rule submitted their SIP revisions
in October 2000. The District of Columbia Circuit Court has extended the
deadline for implementation of emission controls required by the SIP revisions
to May 1, 2004. Late in 1999, the EPA finalized another ozone-related rule
having virtually identical goals to its October 1998 action. The 1999 rule has
likewise been challenged in court by the same or similar parties.
The North Carolina Environmental Management Commission (EMC) also considered
several competing proposals to reduce utility emissions of nitrogen oxide.
During October 2000, the EMC adopted a temporary rule to comply with the EPA's
SIP Call. This temporary rule will be submitted to the EPA for approval during
the fourth quarter 2000. This rule caps nitrogen oxides emissions from
coal-fired power plants at 39,377 tons state-wide in 2004, declining to 28,100
tons by 2006. Duke Energy's portion of these caps is approximately 24,000 tons
and 17,000 tons, respectively. Additionally, the EMC adopted a permanent rule,
which caps nitrogen oxide emissions from coal-fired power plants to 39,377 tons
state-wide regardless of the ultimate resolution of the SIP Call legal
challenge. Duke Energy's portion of the state-wide emissions cap is
approximately 24,000 tons. Duke Energy has committed to cap its emissions of
nitrogen oxide from coal-fired power plants to the level imposed by the EMC's
permanent rule beginning in 2004.
Depending on the resolution of these and related matters, management anticipates
that costs to Duke Energy may range from $350 million to $600 million in capital
costs for additional emission controls over an estimated time period beginning
in 2000 and continuing through 2007.
In October 1999, the EPA sent Duke Energy a request seeking information on Duke
Power's repair and maintenance of its coal-fired power plants since 1978. This
is part of the EPA's New Source Reviews (NSR) enforcement initiative, in which
the EPA claims that utilities and others have committed widespread violations of
the Clean Air Act permitting requirements for the past quarter century. The EPA
has filed suit against several utilities and issued administrative orders
alleging numerous NSR permitting violations. In May 2000, Duke Energy received a
notice of violation from the EPA alleging various violations of the NSR
pre-construction permitting requirements of the Clean Air Act. The EPA's
allegations run counter to previous EPA guidance regarding the applicability of
the NSR permitting requirements. Duke Energy, along with several other
utilities, has routinely undertaken the type of repair, replacement, and
maintenance projects that the EPA now claims are illegal. Duke Energy believes
that all of its electric generation units are properly permitted and have been
properly maintained. Duke Energy has met with the EPA to explain
12
<PAGE>
that it has not violated the Clean Air Act. Duke Energy intends to defend itself
vigorously against these alleged violations; however, because these matters are
in a preliminary stage, management cannot estimate the effects of these matters
on future consolidated results of operations or financial position.
Litigation. Duke Energy and its subsidiaries are involved in legal, tax and
regulatory proceedings before various courts, regulatory commissions and
governmental agencies regarding performance, contracts and other matters arising
in the ordinary course of business, some of which involve substantial amounts.
Management believes that the final disposition of these proceedings will not
have a material adverse effect on consolidated results of operations or
financial position.
Other Commitments and Contingencies. Periodically, 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.
Management believes that these commitments and contingencies will not have a
material adverse effect on consolidated results of operations or financial
position.
13
<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 U.S. and abroad. Duke Energy provides these and other services through seven
business segments:
o Franchised Electric
o Natural Gas Transmission
o Field Services
o North American Wholesale Energy (NAWE)
o International Energy
o Other Energy Services
o Duke Ventures
See Note 1 to the Consolidated Financial Statements for further descriptions.
Management's Discussion and Analysis should be read in conjunction with the
Consolidated Financial Statements.
RESULTS OF OPERATIONS
For the quarter ended September 30, 2000, earnings available for common
stockholders were $766 million, or $2.08 per basic share. For the comparable
1999 period, earnings available for common stockholders were $436 million, or
$1.20 per basic share. The increase was primarily due to a pre-tax gain of $407
million, or an after-tax gain of $0.67 per basic share, on the sale of Duke
Energy's 20% interest in BellSouth Carolina PCS. Also contributing to the
increase was higher segment earnings due to business expansion, as described by
segment below, partially offset by increased interest expense.
For the nine months ended September 30, 2000, earnings available for common
stockholders were $1,478 million, or $4.02 per basic share, including the
above-mentioned after-tax gain of $0.67 per basic share. For the comparable 1999
period, 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. The decrease in earnings available for common
stockholders was primarily due to the 1999 extraordinary gain resulting from the
sale of the Midwest Pipelines. The absence of this gain and higher interest and
minority interest expense in the current year were partially offset by increased
segment earnings primarily due to business expansion, as described below by
segment.
Operating income and earnings before interest and taxes (EBIT) for the quarter
ended September 30, 2000 were $1,501 million and $1,556 million, respectively,
compared to $866 million and $908 million, respectively, for the same period in
1999. For the nine months ended September 30, 2000, operating income increased
$1,065 million to $3,107 million from the same period in 1999. EBIT for the nine
months ended September 30, 2000 was $3,252 million compared to $2,159 million
for 1999. Management evaluates each business segment based on an internal
measure of EBIT, after deducting minority interests. Operating income and EBIT
are affected by the same fluctuations for Duke Energy and each of its business
segments. The only notable difference between operating income and EBIT is the
inclusion in EBIT of certain non-operating activities. See Note 4 to the
Consolidated Financial Statements for additional information on business
segments.
14
<PAGE>
EBIT is summarized in the following table and is discussed by business segment
thereafter.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
EBIT by Business Segment (In millions)
----------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
-----------------------------------------------------------------
2000 1999 2000 1999
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Franchised Electric $ 589 $617 $1,395 $1,343
Natural Gas Transmission 125 128 398 482
Field Services 81 49 218 97
NAWE 231 84 415 156
International Energy 81 20 267 24
Other Energy Services (69) (47) (53) (58)
Duke Ventures 444 28 474 65
Other Operations 29 11 10 (5)
EBIT attributable to
Minority Interests 45 18 128 55
-----------------------------------------------------------------
Consolidated EBIT $1,556 $908 $3,252 $2,159
----------------------------------------------------------------------------------------------------
</TABLE>
Other Operations primarily include certain unallocated corporate costs. Included
in the amounts discussed hereafter are intercompany transactions that are
eliminated in the Consolidated Financial Statements.
Franchised Electric
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------------------------------
(In millions, except where noted) 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating Revenues $1,435 $1,503 $3,708 $3,659
Operating Expenses 865 908 2,371 2,379
------------------------------------------------------------
Operating Income 570 595 1,337 1,280
Other Income, Net of Expenses 19 22 58 63
------------------------------------------------------------
EBIT $ 589 $ 617 $1,395 $1,343
============================================================
Sales - GWh (a) 22,639 23,141 63,854 62,462
-------------------------------------------------------------------------------------------------------------
(a) Gigawatt-hours.
</TABLE>
Franchised Electric's EBIT decreased $28 million for the quarter ended September
30, 2000 compared to the same period in 1999. The decrease was primarily due to
milder summer weather decreasing total gigawatt-hour sales to customers by 2.2%
and increased purchased capacity expenses. Sales to residential and industrial
customers decreased 3.5% and 1.0%, respectively, while sales to general service
customers increased 1.0%. The average number of customers in Franchised
Electric's service territory increased 2.5% for this year's third quarter.
For the nine months ended September 30, 2000, Franchised Electric's EBIT
increased $52 million compared to the same period in 1999. The increase for the
nine months was primarily due to overall favorable weather and growth in
customers, partially offset by increased storm repair costs. Total gigawatt-hour
sales to customers increased by 2.2% for this year's nine months. Sales to
general service and residential customers increased 4.7% and 2.1%, respectively,
while total industrial sales increased 0.1%. The average number of customers in
Franchised Electric's service territory increased 2.5%.
15
<PAGE>
Natural Gas Transmission
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------------------------------
(In millions, except where noted) 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating Revenues $279 $263 $846 $925
Operating Expenses 151 139 459 457
------------------------------------------------------------
Operating Income 128 124 387 468
Other Income, Net of Expenses (3) 4 11 14
------------------------------------------------------------
EBIT $125 $128 $398 $482
============================================================
Throughput - TBtu (a) 346 338 1,223 1,489
-------------------------------------------------------------------------------------------------------------
(a) Trillion British thermal units.
</TABLE>
For the quarter and nine months ended September 30, 2000, EBIT for Natural Gas
Transmission decreased $3 million and $84 million, respectively, compared to the
same periods in 1999. Benefits in 1999, related to the completion of certain PCB
(polychlorinated biphenyl) and soil clean-up programs below estimates,
contributed $10 million and $38 million to the decrease in EBIT for the quarter
and nine-month periods, respectively. The decrease for the current nine-month
period also resulted from the absence of $70 million in 1999 EBIT related to the
Midwest Pipelines, which were sold to CMS Energy Corporation in March 1999. The
decreases in EBIT for both periods were partially offset by increased earnings
from market-expansion projects and joint ventures such as the Maritimes &
Northeast Pipeline, which was placed into service in December 1999, and earnings
from East Tennessee Natural Gas Company, which was acquired in March 2000 (see
Note 3 to the Consolidated Financial Statements).
Field Services
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------------------------------
(In millions, except where noted) 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating Revenues $2,527 $1,208 $6,148 $2,334
Operating Expenses 2,409 1,158 5,846 2,237
------------------------------------------------------------
Operating Income 118 50 302 97
Other Income, Net of Expenses 9 (1) 5 -
Minority Interest Expense 46 - 89 -
------------------------------------------------------------
EBIT $ 81 $ 49 $ 218 $ 97
============================================================
Natural Gas Gathered and
Processed/Transported, TBtu/d (a) 8.2 5.8 7.4 4.9
Natural Gas Liquids (NGL)
Production, MBbl/d (b) 417.0 224.7 349.9 182.5
Natural Gas Marketed, TBtu/d 0.5 0.5 0.5 0.5
Average Natural Gas Price per MMBtu (c) $4.27 $2.59 $3.42 $2.16
Average NGL Price per Gallon (d) $0.55 $0.40 $0.51 $0.31
-------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Trillion British thermal units per day.
(b) Thousand barrels per day.
(c) Million British thermal units.
(d) Does not reflect results of commodity hedges.
EBIT for Field Services increased $32 million and $121 million for the quarter
and nine months ended September 30, 2000, respectively, compared to the same
periods in 1999. The increases in EBIT and volume of activity for both periods
were primarily due to growth and acquisitions, including: the
16
<PAGE>
combination of Field Services' gas gathering, processing and marketing business
with Phillips Petroleum's Gas Gathering, Processing and Marketing unit
(Phillips) in March 2000 (see Note 3 to the Consolidated Financial Statements);
the acquisition of the natural gas gathering, processing, fractionation and NGL
pipeline business from Union Pacific Resources (UPR) in April 1999; and, other
recent acquisitions and plant expansions. Improved average NGL prices, which
increased 38% for the quarter and 65% for the nine months, when compared to the
prior year, also contributed significantly to the increase in EBIT.
NAWE
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------------------------------
(In millions, except where noted) 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating Revenues $11,186 $3,718 $22,821 $8,599
Operating Expenses 10,959 3,630 22,377 8,424
------------------------------------------------------------
Operating Income 227 88 444 175
Other Income, Net of Expenses (4) 3 (8) 21
Minority Interest (Benefit) Expense (8) 7 21 40
------------------------------------------------------------
EBIT $ 231 $ 84 $ 415 $ 156
============================================================
Natural Gas Marketed, TBtu/d .12.0 10.4 11.7 10.4
Electricity Marketed, GWh 89,967 34,131 198,518 78,147
Proportional Megawatt Capacity Owned (a) 7,925 5,909
-------------------------------------------------------------------------------------------------------------
(a) Includes under construction or under contract at period end.
</TABLE>
In the second quarter of 2000, Duke Energy's Trading and Marketing segment was
combined with NAWE. See Note 1 to the Consolidated Financial Statements for
additional information. For the quarter ended September 30, 2000, EBIT for NAWE
increased $147 million compared with the same period in 1999. The increase was
attributable to increased earnings from generation assets and favorable trading
margins due to price volatility in natural gas and power. In addition, NAWE
increased its volumes of natural gas and power marketed by 15% and 164%,
respectively. Partially offsetting the increase in EBIT were increased operating
and development costs and a net decrease of $26 million in income when compared
to 1999 from the sale of interests in generating facilities as a result of NAWE
executing its domestic portfolio management strategy.
NAWE's EBIT increased $259 million for the nine months ended September 30, 2000
compared to the same period in 1999. The increase was the result of increased
earnings from asset positions, increased trading margins due to price volatility
in gas and power and a net $49 million increase in income over the prior year
from the sale of interests in generating facilities. In addition, the volumes of
natural gas and power marketed increased 13% and 154%, respectively. These
increases were partially offset by increased operating and development costs
associated with business expansion.
17
<PAGE>
International Energy
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------------------------------
(In millions, except where noted) 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating Revenues $270 $112 $727 $212
Operating Expenses 189 87 477 186
------------------------------------------------------------
Operating Income 81 25 250 26
Other Income, Net of Expenses 7 6 35 13
Minority Interest Expense 7 11 18 15
------------------------------------------------------------
EBIT $ 81 $ 20 $267 $ 24
============================================================
Proportional Megawatt Capacity Owned (a) 4,394 2,019
Proportional Maximum Pipeline
Capacity (a), MMcf/d (b) 321 321
-------------------------------------------------------------------------------------------------------------
(a) Includes under construction or under contract at period end.
(b) Million cubic feet per day.
</TABLE>
International Energy's EBIT increased $61 million for the quarter and $243
million for the nine months ended September 30, 2000 compared to the same
periods in 1999. The increase for both periods was primarily attributable to
increased earnings in Latin America, mainly resulting from new projects (see
Note 3 to the Consolidated Financial Statements for a discussion of recent
acquisitions). The increase for the nine-month period also included $54 million
from the February 2000 sale of certain assets relating to the transportation of
NGLs.
Other Energy Services
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------------------------------
(In millions) 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating Revenues $ 76 $151 $489 $464
Operating Expenses 145 198 542 522
------------------------------------------------------------
EBIT $(69) $ (47) $(53) $ (58)
-------------------------------------------------------------------------------------------------------------
</TABLE>
For the quarter ended September 30, 2000, EBIT for Other Energy Services
decreased $22 million, compared to the same period in 1999. The results for the
quarter include a loss on a project recorded by Duke/Fluor Daniel (D/FD) of
approximately $42 million. Duke Engineering & Services, Inc. (DE&S) also
recorded an approximately $27 million charge during the quarter to reflect a
more conservative revenue recognition approach on its projects. This DE&S charge
was offset by a $38 million charge in 1999, comprised primarily of expenses for
severance and office closings associated with repositioning the company for
growth. The current year charges were also partially offset by increased
earnings at DukeSolutions, Inc. (DukeSolutions) from new business activity and
decreased operating expenses.
For the nine months ended September 30, 2000, EBIT for Other Energy Services
increased $5 million. This increase is the result of the effect of the third
quarter activity listed above, more than offset by earnings from new business
activity and decreased operating expenses at DukeSolutions, and earnings related
to new projects at D/FD.
18
<PAGE>
Duke Ventures
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------------------------------
(In millions) 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating Revenues $464 $65 $531 $128
Operating Expenses 20 37 57 63
------------------------------------------------------------
EBIT $444 $28 $474 $ 65
-------------------------------------------------------------------------------------------------------------
</TABLE>
EBIT for Duke Ventures increased $416 million and $409 million for the quarter
and nine months ended September 30, 2000, respectively, compared with the same
periods in 1999. This increase is primarily attributable to the sale by DukeNet
Communications of its 20% interest in BellSouth Carolina PCS to BellSouth
Corporation for a pre-tax gain of $407 million. Increased gains on commercial
project sales by Crescent Resources, Inc. also contributed to the increased
earnings for the quarter but had no impact on the nine-month period.
Other Impacts on Earnings Available for Common Stockholders
Interest expense increased $104 million for the quarter and $265 million for the
nine months ended September 30, 2000 compared to the same periods in 1999, due
to higher average debt balances outstanding, resulting from acquisitions and
expansion.
Minority interest expense did not change for the quarter but increased $52
million for the nine months ended September 30, 2000, compared to the same
periods in 1999. Included in minority interests is expense related to regular
distributions on issuances of Duke Energy's trust preferred securities. This
expense increased $3 million for the quarter and $21 million for the nine-month
period due to additional issuances of Duke Energy's trust preferred securities
during 1999.
Minority interest expense related to joint ventures decreased $3 million for the
quarter but increased $31 million for the nine-month period. The increase for
the current nine-month period includes minority interest expense related to
Field Services' joint venture with Phillips Petroleum (see Note 3 to the
Consolidated Financial Statements). Also contributing to the change for the
nine-month period was decreased minority interest expense at NAWE related to its
joint venture with Exxon Mobil Corporation and increased minority interest
expense at International Energy related to its 1999 and 2000 acquisitions.
As a result of favorable resolution of several income tax issues and the
utilization of certain capital loss carryforwards due to the sale of the Midwest
Pipelines, income tax provisions aggregating $30 million were reduced during the
second quarter of 1999.
The sale of the Midwest Pipelines closed in March 1999 and resulted in a $660
million extraordinary gain, net of income tax of $404 million. For further
discussion on the sale, see Note 2 to the Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Operating Cash Flows
Net cash provided by operations was $1,887 million for the nine months ended
September 30, 2000 compared to $1,789 million for the same period in 1999. The
increase in cash was primarily due to increased accounts payable due to
increased trading and marketing volumes, offset by increased tax payments made
in 2000 as a result of the earlier sale of the Midwest Pipelines.
In 1999, Duke Energy established an accrual for estimated injury and damages
claims. During the first quarter of 2000, Duke Energy paid approximately $253
million related to the insurance premium.
19
<PAGE>
Management believes that the long-term cash requirements of the projected
liability will not have a material effect on Duke Energy's liquidity or cash
flows.
Investing Cash Flows
Net cash used in investing activities was $3,987 million for the nine months
ended September 30, 2000 compared to $2,295 million for the same period in 1999.
The primary use of cash in investing activities for capital and investment
expenditures reflect development and expansion expenditures, refurbishment and
upgrades to existing assets and the acquisition of various businesses and
assets. Significant acquisitions in 2000 include approximately $390 million for
the acquisition of East Tennessee Natural Gas Company, approximately $280
million for the acquisition of additional minority interests in Companhia de
Geracao de Energia Eletrica Paranapanema and approximately $250 million for the
acquisition of Market Hub Partners. See Note 3 to the Consolidated Financial
Statements for further information on significant acquisitions. In 1999, the
primary acquisition was the $1.35 billion acquisition of the natural gas
gathering, processing, fractionation and NGL pipeline business from UPR, as well
as UPR's NGL marketing activities.
Offsetting the capital and investing expenditures were the cash proceeds from
the current period sale of Duke Energy's 20% interest in BellSouth Carolina PCS
to BellSouth Corporation for $400 million (see Note 3 to the Consolidated
Financial Statements) and the 1999 sale of the Midwest Pipelines business for
$1.9 billion.
Financing Cash Flows
Duke Energy's consolidated capital structure at September 30, 2000, including
short-term debt, was 48% debt, 46% common equity and minority interests, 5%
trust preferred securities and 1% preferred stock. Fixed charges coverage,
calculated using the Securities and Exchange Commission (SEC) method, was 4.3
times and 4.6 times for the nine months ended September 30, 2000 and 1999,
respectively.
Duke Energy plans to continue to significantly grow several of its business
segments: Field Services, NAWE, International Energy and Other Energy Services.
These growth opportunities, along with dividends, debt repayments and operating
requirements, are expected to be funded by cash from operations, external
financing, common stock issuances and the proceeds from certain asset sales.
Funding requirements met by external financing, common stock issuances and
proceeds from the sale of assets are dependent upon the opportunities presented
and favorable market conditions. Management believes Duke Energy has adequate
financial resources to meet its future needs.
In March 2000, Duke Energy issued $300 million of Series D 7 3/8% Senior Notes
due 2010. In April 2000, Duke Energy Field Services, LLC (DEFS) issued
approximately $2.75 billion of commercial paper associated with the Phillips
acquisition. In August 2000, DEFS issued $1.7 billion of notes comprised of $600
million of 7 1/2% notes due 2005, $800 million of 7 7/8% notes due 2010 and $300
million of 8 1/8% notes due 2030, reducing the DEFS commercial paper balance
(see Note 3 to the Consolidated Financial Statements). In September 2000, Duke
Energy issued $250 million of 7 1/8% remarketable or redeemable Senior Notes. At
the option of the remarketing dealer, the notes will either be redeemed in 2002
or remarketed and extended for an additional ten years.
In September 2000, Duke Energy formed Catawba River Associates, LLC (Catawba)
and sold a non-controlling, preferred interest in Catawba to a third party for
approximately $650 million. The preferred interest receives a preferred return
equal to an adjusted floating reference rate (approximately 7.6% at September
30, 2000). The third party investor
20
<PAGE>
in Catawba has committed to invest an additional $375 million under similar
terms subject to the contribution of additional assets and satisfaction of
certain conditions. See Note 3 to the Consolidated Financial Statements for
further discussion.
Under its commercial paper facilities and extendable commercial note programs
(ECNs), Duke Energy had the ability to borrow up to $5.7 billion and $3.3
billion at September 30, 2000 and December 31, 1999, respectively.
A summary of the available commercial paper and ECNs as of September 30, 2000 is
as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
Duke Capital Duke Energy
(In billions) Duke Energy Corporation DEFS International Total
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial Paper $1.25 $1.55 $1.00 (a) $0.41 (b) $4.21
ECNs 0.50 1.00 - - 1.50
------------------------------------------------------------------------------------
Total $1.75 $2.55 $1.00 $0.41 $5.71
------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Original availability of $2.8 billion was reduced upon DEFS' issuance of
$1.7 billion in notes.
(b) Includes ability to issue medium term notes.
The amount of Duke Energy's bank credit and construction facilities available at
September 30, 2000 and December 31, 1999, was approximately $5.1 billion and
$3.7 billion, respectively. Certain of the credit facilities support the
issuance of commercial paper; therefore, the issuance of commercial paper
reduces the amount available under these credit facilities. At September 30,
2000, approximately $2.9 billion was outstanding under the commercial paper
facilities and ECNs, and approximately $337 million of borrowings were
outstanding under the bank credit and construction facilities.
The parent company of DEFS, Duke Energy Field Services Corporation (DEFS
Corporation), may offer a portion of its common stock to the public in 2001, in
an initial public offering. The proceeds of this offering will be used to reduce
its outstanding commercial paper. Such an offering is subject to favorable
market conditions. After an offering, the ownership share of Duke Energy and
Phillips Petroleum in DEFS Corporation would be reduced accordingly. See Note 3
to the Consolidated Financial Statements for further discussion.
As of September 30, 2000, Duke Energy and its subsidiaries had the ability to
issue up to $3.5 billion aggregate principal amount of debt and other securities
under shelf registrations filed with the SEC. Such securities may be issued as
First and Refunding Mortgage Bonds, Senior Notes, Subordinated Notes or
Preferred Securities.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Risk Policies
Duke Energy is exposed to market risks associated with interest rates, commodity
prices, equity prices and foreign exchange rates. The established comprehensive
risk management policies are currently monitored and maintained by the Chief
Risk Officer (CRO) to monitor and manage these market risks. Duke Energy's
Policy Committee is responsible for the overall approval of market risk
management policies and the delegation of approval and authorization levels. The
Policy Committee is comprised of senior executives that receive periodic updates
from the CRO on market risk positions, corporate exposures and overall results
of Duke Energy's risk management activities. The CRO has responsibility for
oversight of interest rate risk, foreign currency risk, credit risk and energy
risk management, including monitoring of energy financial exposure limits. A
description of the changes in Duke Energy's market risk since December 31, 1999
follows.
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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 for additional information.
Duke Energy entered into several fixed-to-floating interest rate swap agreements
for a total notional amount of $328 million in June 2000 and entered into a
fixed-to-floating interest rate swap agreement for a total notional amount of
$77 million in July 2000. These swaps exchange fixed rate interest payment
obligations to variable rate obligations to take advantage of current interest
rates.
Commodity Price Risk
In March 2000, Duke Energy's exposure to market fluctuations in the prices of
NGLs increased as a result of Duke Energy combining its gas gathering,
processing and marketing business with Phillips to form a new midstream company.
See Note 3 to the Consolidated Financial Statements for additional information
on the combination. Duke Energy closely monitors the risks associated with NGL
price changes on its future operations, and where appropriate, uses crude oil
commodity instruments to hedge NGL prices. Based on a sensitivity analysis as of
September 30, 2000, it was estimated that if NGL prices average one cent per
gallon less in the next twelve months, earnings before income taxes would
decrease by approximately $5 million, after considering the effect of Duke
Energy's commodity hedge positions.
The risk in Duke Energy's commodity trading portfolio is measured on a daily
basis utilizing a Value-at-Risk model to determine the maximum potential one-day
favorable or unfavorable Daily Earnings at Risk (DER). The DER is monitored
daily in comparison to established thresholds. Other measures are also utilized
to monitor the risk in the commodity trading portfolio on a monthly and annual
basis. For additional information on the DER computations, see the Quantitative
and Qualitative Disclosures About Market Risk section in the 1999 Duke Energy
Form 10-K filing.
The estimated potential one-day favorable or unfavorable impact on earnings
before income taxes related to commodity derivatives held for trading purposes
was approximately $11 million and $10 million at September 30, 2000 and December
31, 1999, respectively. The average estimated potential one-day favorable or
unfavorable impact on earnings before income taxes related to commodity
derivatives held for trading purposes was approximately $12 million and $8
million for the nine months ended September 30, 2000 and 1999, respectively.
Foreign Operations Risk
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. 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
derivatives, 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.
At September 30, 2000, Duke Energy's primary foreign currency exchange rate
exposures were the Brazilian Real, the Peruvian Nuevo Sol, the Australian
dollar, the El Salvadorian Colon, the Argentine Peso, the European Euro, and the
Canadian dollar. Based on a sensitivity analysis at September 30, 2000, a 10%
devaluation in the currency exchange rates in Brazil would reduce Duke Energy's
financial position by approximately $100 million and would not significantly
affect Duke Energy's consolidated results of operations or cash flows over the
next twelve months. Based on a sensitivity analysis at September 30, 2000, a 10%
devaluation in other foreign currencies were insignificant to Duke Energy's
consolidated results of operations, financial position or cash flows.
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CURRENT ISSUES
Electric Competition. Wholesale Competition. On December 20, 1999, the Federal
Energy Regulatory Commission (FERC) issued its Order No. 2000 regarding Regional
Transmission Organizations (RTOs). In its order, the FERC stressed the voluntary
nature of RTO participation by utilities and set minimum characteristics and
functions that must be met by utilities that participate in an RTO. The order
provides for an open, flexible structure for RTOs to meet the needs of the
market and provides for the possibility of incentive ratemaking and other
benefits for utilities that participate in an RTO.
On February 25, 2000, the FERC issued an Order on Rehearing -- Order No. 2000-A.
In Order No. 2000-A, the FERC reaffirmed the core elements and basic framework
of Order No. 2000 and issued clarifying guidance in several areas. Among the
issues clarified was the requirement that the RTO must have exclusive and
independent authority to propose rates, terms and conditions of transmission
service provided over the facilities it operates.
On October 16, 2000, Duke Energy and two other investor-owned utilities,
Carolina Power & Light and South Carolina Electric & Gas, filed with the FERC to
establish GridSouth Transco, LLC, as an RTO. If approved, GridSouth will be a
for-profit, independent transmission company, responsible for operating and
planning the companies' combined transmission systems. It will be headquartered
in the greater Charlotte, North Carolina, area. Management believes that the
establishment of GridSouth will not have a material adverse effect on future
consolidated results of operations or financial position.
Retail Competition. 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 unanimously approved a
set of recommendations on electric restructuring in April 2000. The commission's
report to the legislature containing these recommendations was submitted in a
report to the general assembly in May. The report basically recommended retail
deregulation beginning partially in 2005 and in full in 2006. No legislative
action based upon the recommendations is expected until 2001.
Natural Gas Competition. Wholesale Competition. On February 9, 2000, the FERC
issued Order 637 which sets forth revisions to its regulations governing
short-term natural gas transportation services and policies governing the
regulation of interstate natural gas pipelines. "Short term" has been defined as
all transactions of less than one year. Among the significant actions taken are
the lifting of the price cap for short-term capacity release by pipeline
customers for an experimental 2 1/2-year period ending September 1, 2002 and
requiring that interstate pipelines file pro forma tariff sheets to (i) provide
for nomination equality between capacity release and primary pipeline capacity;
(ii) implement imbalance management services (for which interstate pipelines may
charge fees) while at the same time reducing the use of operational flow orders
and penalties and (iii) provide segmentation rights if operationally feasible.
Order 637 also narrows the right of first refusal to remove economic biases
perceived in the current rule. Order 637 imposes significant new reporting
requirements for interstate pipelines that were implemented by Duke Energy
during the third quarter. The stated FERC goal of these reporting requirements
is to increase transparency of transactions on a real-time basis and to provide
additional information on pipeline organizational structure. Additionally, Order
637 permits pipelines to propose peak/off-peak rates and term-differentiated
rates, and encourages pipelines to propose experimental capacity auctions. By
Order 637-A issued in February 2000, the FERC generally denied requests for
rehearing and several parties, including Duke Energy, have filed appeals in the
District of Columbia Court of Appeals seeking court review of various aspects of
the Order. During the third quarter, Duke Energy's interstate pipelines made the
required pro forma tariff sheet filings. These filings are currently subject to
review and approval by the FERC.
Because the ultimate resolution of the foregoing proceeding is unknown,
management cannot estimate the effects of these matters on future consolidated
results of operations or financial position.
Environmental Matters. Air Quality Control. In October 1998, the Environmental
Protection Agency (EPA) issued a final ruling on regional ozone control that
requires revised State Implementation Plans
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(SIPs) for 22 eastern states and the District of Columbia. This EPA ruling was
challenged in court by various states, industry and other interests, including
the states of North Carolina and South Carolina and Duke Energy. In March 2000,
the court upheld most aspects of the EPA's rule. Most of the states subject to
the rule submitted their SIP revisions in October 2000. The District of Columbia
Circuit Court has extended the deadline for implementation of emission controls
required by the SIP revisions to May 1, 2004. Late in 1999, the EPA finalized
another ozone-related rule having virtually identical goals to its October 1998
action. The 1999 rule has likewise been challenged in court by the same or
similar parties.
The North Carolina Environmental Management Commission (EMC) also considered
several competing proposals to reduce utility emissions of nitrogen oxide.
During October 2000, the EMC adopted a temporary rule to comply with the EPA's
SIP Call. This temporary rule will be submitted to the EPA for approval during
the fourth quarter 2000. This rule caps nitrogen oxides emissions from
coal-fired power plants at 39,377 tons state-wide in 2004, declining to 28,100
tons by 2006. Duke Energy's portion of these caps is approximately 24,000 tons
and 17,000 tons, respectively. Additionally, the EMC adopted a permanent rule,
which caps nitrogen oxide emissions from coal-fired power plants to 39,377 tons
state-wide regardless of the ultimate resolution of the SIP Call legal
challenge. Duke Energy's portion of the state-wide emissions cap is
approximately 24,000 tons. Duke Energy has committed to cap its emissions of
nitrogen oxide from coal-fired power plants to the level imposed by the EMC's
permanent rule beginning in 2004.
Depending on the resolution of these and related matters, management anticipates
that costs to Duke Energy may range from $350 million to $600 million in capital
costs for additional emission controls over an estimated time period beginning
in 2000 and continuing through 2007.
In October 1999, the EPA sent Duke Energy a request seeking information on Duke
Power's repair and maintenance of its coal-fired power plants since 1978. This
is part of the EPA's New Source Reviews (NSR) enforcement initiative, in which
the EPA claims that utilities and others have committed widespread violations of
the Clean Air Act permitting requirements for the past quarter century. The EPA
has filed suit against several utilities and issued administrative orders
alleging numerous NSR permitting violations. In May 2000, Duke Energy received a
notice of violation from the EPA alleging various violations of the NSR
pre-construction permitting requirements of the Clean Air Act. The EPA's
allegations run counter to previous EPA guidance regarding the applicability of
the NSR permitting requirements. Duke Energy, along with several other
utilities, has routinely undertaken the type of repair, replacement, and
maintenance projects that the EPA now claims are illegal. Duke Energy believes
that all of its electric generation units are properly permitted and have been
properly maintained. Duke Energy has met with the EPA to explain that it has not
violated the Clean Air Act. Duke Energy intends to defend itself vigorously
against these alleged violations; however, because these matters are in a
preliminary stage, management cannot estimate the effects of these matters on
future consolidated results of operations or financial position.
Nuclear Re-licensing. In May 2000, the Nuclear Regulatory Commission renewed the
operating license for Duke Energy's three Oconee nuclear stations through 2033
to 2034.
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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.
For additional information concerning litigation and other contingencies, see
Note 7 to the Consolidated Financial Statements, "Commitments and
Contingencies."
Management believes that the resolution of the matters discussed and referred to
above will not have a material adverse effect on consolidated results of
operations or financial position.
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 2000.
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
Duke Energy filed no reports on Form 8-K during the third quarter of
2000.
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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 13, 2000 /s/ Richard J. Osborne
---------------------------------------
Richard J. Osborne
Executive Vice President and
Chief Financial Officer
November 13, 2000 /s/ Sandra P. Meyer
---------------------------------------
Sandra P. Meyer
Vice President and Corporate Controller
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