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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[x] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended December 31, 1997
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ______________ to ________________
Commission file number 1-8157
PanEnergy Corp
(Exact name of registrant as specified in its charter)
Delaware 74-2150460
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5400 Westheimer Court P.O. Box 1642, Houston, Texas 77251-1642
(Address of principal executive offices) (Zip Code)
713-627-5400
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (x)
The Registrant meets the conditions set forth in General Instructions (I)(1)(a)
and (b) of Form 10-K and is therefore filing this Form 10-K with the reduced
disclosure format. Items 4, 10, 11, 12 and 13 have been omitted and Item 7 has
been reduced in accordance with such Instruction I.
All of the Registrant's common shares are indirectly owned by Duke Energy
Corporation (File No. 1-4928), which files reports and proxy materials pursuant
to the Securities Exchange Act of 1934.
State the aggregate market value of the voting and non-voting stock held by
nonaffiliates of the Registrant.......................................None
Number of shares of Registrant's Common Stock, $1.00 par value, outstanding at
March 31, 1998........................................................1,000
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PANENERGY CORP
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
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PART I.
1. Business....................................................................................................1
General...................................................................................................1
Natural Gas Transmission..................................................................................1
Energy Services...........................................................................................3
Environmental Matters.....................................................................................6
Other Matters.............................................................................................6
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995.........................6
Operating Statistics......................................................................................7
2. Properties..................................................................................................7
3. Legal Proceedings...........................................................................................8
PART II.
5. Market for Registrant's Common Equity and Related Stockholder Matters.......................................9
6. Selected Financial Data.....................................................................................9
7. Management's Discussion and Analysis of Results of Operations and Financial Condition......................10
7A. Quantitative and Qualitative Disclosures About Market Risk.................................................16
8. Financial Statements and Supplementary Data................................................................17
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......................40
PART IV.
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...........................................40
Signatures.................................................................................................41
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PART I.
Item 1. Business.
GENERAL
PanEnergy Corp (PanEnergy) is an indirect wholly owned subsidiary of Duke
Energy Corporation (Duke Energy). On June 18, 1997, Duke Power Company changed
its name to Duke Energy Corporation in accordance with the terms of the merger
agreement with PanEnergy, pursuant to which Duke Energy issued 158.3 million
shares of its common stock in exchange for all the outstanding stock of
PanEnergy (the merger). PanEnergy was merged with a wholly owned subsidiary of
Duke Energy, with PanEnergy as the surviving corporation. Pursuant to the
merger, each share of PanEnergy's outstanding common stock was converted into
the right to receive 1.0444 shares of Duke Energy common stock. In addition,
each outstanding option to purchase PanEnergy common stock became an option to
purchase common stock of Duke Energy, adjusted accordingly. The merger was
accounted for as a pooling of interests.
Subsequently, the common stock of PanEnergy was contributed by Duke Energy
to Duke Capital Corporation (Duke Capital), a wholly owned subsidiary which
serves as the parent company of Duke Energy's non-utility operations.
In October 1997, Duke Capital contributed the common stock of several
wholly owned subsidiaries to PanEnergy. These subsidiaries included Duke
Engineering & Services, Inc., DukeSolutions, Inc., and Duke Energy Global Asset
Development, Inc. The consolidated financial statements for periods prior to
the combination of Pan Energy and these entities were restated to include the
operations of these subsidiaries.
PanEnergy and its subsidiaries (the Company) conducts its operating
activities primarily through two business segments:
The Natural Gas Transmission segment is involved in interstate
transportation and storage of natural gas for customers in the Mid-Atlantic, New
England and Midwest states. The interstate natural gas transmission and storage
operations of the Company's wholly owned subsidiaries are subject to the rules
and regulations of the Federal Energy Regulatory Commission (FERC).
The Energy Services segment is comprised of several separate business
units: Field Services - gathers and processes natural gas, produces and markets
natural gas liquids and transports and trades crude oil; Trading and Marketing -
markets natural gas, electricity and other energy-related products; Global Asset
Development - develops, owns and operates energy-related facilities worldwide;
and Other Energy Services - provides engineering consulting, construction and
integrated energy solutions.
The Other Operations of the Company includes accounting for corporate costs
and intersegment eliminations.
A discussion of the current business and operations of each of the
Company's segments follows. The Company expects relatively slow growth in the
Natural Gas Transmission segment, due to increased competition. The Company is
seeking to significantly grow its Energy Services segment through acquisition,
construction and expansion opportunities. For further discussion of the
operating outlook of the Company and its segments, see "Management's Discussion
and Analysis of Results of Operations and Financial Condition, Current Issues -
Operations Outlook." For financial information concerning the Company's business
segments, see Note 4 to the Consolidated Financial Statements, "Business
Segments."
The Company is a Delaware corporation organized in 1981 in connection with
the corporate restructuring of Panhandle Eastern Pipe Line Company (PEPL) which
was incorporated in 1929. The Company's principal executive offices are located
at 5400 Westheimer Court, Houston, Texas 77056-5310 and the telephone number is
713-627-5400.
NATURAL GAS TRANSMISSION
During 1997, the Natural Gas Transmission segment completed the
organization of its operations into the Northeast Pipelines, which includes
Texas Eastern Transmission Corporation (TETCO) and Algonquin Gas Transmission
Company (Algonquin), and the Midwest Pipelines, which includes Panhandle Eastern
Pipe Line Company (PEPL) and Trunkline Gas Company (Trunkline).
1
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In 1997, consolidated natural gas deliveries by the Natural Gas
Transmission segment's interstate pipelines totaled 2,862 TBtu (Trillion British
thermal units), compared to 2,939 TBtu in 1996, which represented approximately
12% of the natural gas consumed in the United States. A substantial majority of
the delivered volumes of the Natural Gas Transmission segment's interstate
pipelines represents gas transported under long-term firm service agreements
with local distribution company (LDC) customers in the pipelines' market areas.
Firm transportation services are also provided under contract to gas marketers,
producers, other pipelines, electric power generators and a variety of
end-users. In addition, the pipelines offer interruptible transportation to
customers on a short-term or seasonal basis. See natural gas deliveries
statistics under "Business, Operating Statistics." Demand for gas transmission
of the Natural Gas Transmission segment's interstate pipeline systems is
seasonal, with the highest throughput occurring during the colder periods in the
first and fourth quarters.
The Natural Gas Transmission segment's 37,500 mile interstate pipeline
system is fully interconnected and can receive natural gas from most major North
American producing regions for delivery to market's throughout the Northeast and
Midwest states.
Northeast Pipelines
TETCO's major customers are located in Pennsylvania, New Jersey and New
York, and include LDCs serving the Pittsburgh, Philadelphia, Newark and New York
City metropolitan areas. Algonquin's major customers include LDCs and electric
power generators located in the Boston, Hartford, New Haven, Providence and Cape
Cod areas.
TETCO also provides firm and interruptible open-access storage services.
Since the implementation of the FERC Order 636 restructuring, storage is offered
as a stand-alone unbundled service or as part of a no-notice bundled service.
TETCO's storage services utilize two joint venture storage facilities in
Pennsylvania and one wholly owned and operated storage field in Maryland. TETCO
also leases storage capacity. TETCO's certificated working capacity in these
three fields is 70 Billion cubic feet (Bcf), and the combined working gas in
storage was 55 Bcf on December 31, 1997. Algonquin owns no storage fields. For
further discussion of Order 636, see "Business, Natural Gas Transmission -
Regulation."
Midwest Pipelines
PEPL's market volumes are concentrated among approximately 20 utilities
located in the Midwest market area that encompasses large portions of Michigan,
Ohio, Indiana, Illinois and Missouri. Trunkline's major customers include eight
utilities located in portions of Tennessee, Missouri, Illinois, Indiana and
Michigan.
PEPL also owns and operates three underground storage fields located in
Illinois, Michigan and Oklahoma. Trunkline owns and operates one storage field
in Louisiana. The combined maximum working gas capacity of the four fields is 44
Bcf. Additionally, PEPL, through a subsidiary, Pan Gas Storage Company (Pan
Gas), is the owner of a storage field in Kansas with an estimated maximum
capacity of 26 Bcf. PEPL is the operator of the field. Since the implementation
of Order 636, each of PEPL, Trunkline and Pan Gas offer firm and interruptible
storage on an open-access basis. In addition to owning and operating storage
fields, PEPL also leases storage capacity. PEPL and Trunkline have retained the
right to use up to 15 Bcf and 10 Bcf, respectively, of their storage capacity
for system needs. See further discussion of Order 636 in "Business, Natural Gas
Transmission - Regulation."
Competition
The Company's interstate pipeline subsidiaries compete with other
interstate and intrastate pipeline companies in the transportation and storage
of natural gas. The principal elements of competition among pipelines are rates,
terms of service and flexibility and reliability of service. Competitive forces
may cause the Company's interstate pipeline subsidiaries to modify rates to
remain competitive. The Company's pipelines continue to offer selective
discounting to maximize revenues from existing capacity and to advance projects
that provide expanded services to meet the specific needs of customers.
In the Mid-Atlantic and New England markets, TETCO competes directly with
Transcontinental Gas Pipe Line Corporation, Tennessee Gas Pipeline Company
(TGPC), Iroquois Gas Transmission System (Iroquois), CNG Transmission
Corporation and Columbia Gas Transmission Corporation. Algonquin competes
directly in certain market areas with TGPC and Iroquois. PEPL and Trunkline
compete directly with ANR Pipeline Company, Natural Gas Pipeline Company of
America and Texas Gas Transmission Corporation in the Midwest market area.
Natural gas competes with other forms of energy available to the Company's
customers and end-users, including electricity, coal and fuel oils. The primary
competitive factor is price. Changes in the availability or price of natural gas
and other forms of energy, the level of business activity, conservation,
legislation and governmental regulations, the capability to convert to
alternative fuels, and other factors, including weather, affect the demand for
natural gas in the areas served by the Company.
2
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Regulation
The FERC has authority to regulate rates and charges for natural gas
transported in or stored for interstate commerce or sold by a natural gas
company in interstate commerce for resale. For further discussion of rate
matters, see Note 5 to the Consolidated Financial Statements, "Regulatory
Matters." The FERC also has authority over the construction and operation of
pipeline and related facilities utilized in the transportation and sale of
natural gas in interstate commerce, including the extension, enlargement or
abandonment of such facilities. TETCO, Algonquin, PEPL, Trunkline and Pan Gas
hold certificates of public convenience and necessity issued by the FERC,
authorizing them to construct and operate the pipelines, facilities and
properties now in operation for which such certificates are required, and to
transport and store natural gas in interstate commerce.
The Natural Gas Transmission segment's pipelines operate as open-access
transporters of natural gas. In 1992, the FERC issued Order 636, which requires
open-access pipelines to provide firm and interruptible transportation services
on an equal basis for all gas supplies, whether purchased from the pipeline or
from another gas supplier. To implement this requirement, Order 636 provided,
among other things, for mandatory unbundling of services that have historically
been provided by pipelines into separate open-access transportation, sales and
storage services. Order 636 allows pipelines to recover eligible costs, known as
"transition costs," resulting from the implementation of Order 636. For further
discussion of Order 636, see Note 5 to the Consolidated Financial Statements,
"Regulatory Matters."
The Natural Gas Transmission segment is subject to the jurisdiction of the
Environmental Protection Agency (EPA) and state environmental agencies. For a
discussion of environmental regulation, see "Business, Environmental Matters."
The Natural Gas Transmission segment is also subject to the Natural Gas Pipeline
Safety Act of 1968, which regulates gas pipeline safety requirements, and to the
Hazardous Liquid Pipeline Safety Act of 1979, which regulates oil and petroleum
pipelines.
ENERGY SERVICES
The Energy Services segment is comprised of several separate business
units: Field Services, Trading and Marketing, Global Asset Development and Other
Energy Services. See certain operating statistics of the Energy Services segment
under "Operating Statistics." Activities of the Energy Services segment can
fluctuate in response to the seasonality affecting both electricity and natural
gas.
Field Services
Field Services owns and operates approximately 17,000 miles of natural gas
gathering systems, including intrastate pipelines, and 27 natural gas processing
plants in the United States. Field Services also has ownership interests in 11
other natural gas processing plants in the United States.
Field Services' gathering systems are located in 10 states, which serve
major gas-producing regions in the Rocky Mountains, Permian Basin, Mid-Continent
and Gulf Coast (offshore and onshore) areas. Field Services' gathering
operations also include several intrastate pipeline systems and two natural gas
storage facilities.
Field Services' NGL processing operations involve the extraction of NGLs
from natural gas and, at certain facilities, the fractionation of the NGLs into
their individual components (ethane, propane, butane and natural gasoline). The
natural gas used in Field Services' processing operations is generally gathered
on its own gathering system or from the natural gas stream on the Company's
transmission system. Field Services also operates approximately 450 miles of NGL
pipelines in the Texas Gulf Coast area which transport NGLs received from 12
processing plants in South Texas. NGLs are sold by Field Services to a variety
of customers ranging from large multi-national petrochemical and refining
companies to small family-owned retail propane distributors. NGL sales are based
upon current market-related prices. Field Services also provides, on a more
limited basis, processing services to producers and others for a stipulated fee
and produces helium at the National Helium facility.
Field Services also operates approximately 1,500 miles of intrastate crude
oil pipelines in the Mid-Continent and South Texas areas. The crude oil pipeline
system provides gathering and mainline transportation service, for a volumetric
fee, based on published tariffs. Crude oil is also purchased from producers and
sold to end-users.
Trading and Marketing
3
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The Company's energy marketing operations are conducted through Duke Energy
Trading and Marketing L.L.C. in the United States and Duke Energy Marketing
Limited Partnership in Canada (collectively, DETM) and through Duke/Louis
Dreyfus L.L.C. (D/LD).
DETM was formed in August 1996 as a natural gas and power marketing joint
venture with Mobil Corporation (Mobil). All of Mobil's United States and
Canadian natural gas production is committed to be marketed through DETM for at
least a 10-year period. The Company, through its affiliates, operates the joint
venture and owns a 60% interest, with Mobil owning a 40% minority interest.
In June 1997, Duke Capital acquired the remaining 50% ownership interest
in D/LD not already owned from affiliates of Louis Dreyfus Corp, and
subsequently contributed this ownership interest to subsidiaries of the Company.
A substantial portion of the Company's trading and marketing of electricity is
conducted through D/LD.
Trading and Marketing markets natural gas primarily to LDCs, electric power
generators, municipalities, industrial end-users and energy marketing companies
and markets electricity to investor owned utilities, municipal power generators
and other power marketers. Operations are primarily in the United States and, to
a lesser extent, in Canada, and are serviced through 13 offices or operating
centers.
Natural gas marketing operations encompass both on-system and off-system
sales. With respect to on-system sales, Trading and Marketing generally
purchases natural gas from the Company's Field Services' facilities and delivers
the gas to an intrastate or interstate pipeline for redelivery to another
customer. The Company's Natural Gas Transmission pipelines are utilized for
deliveries when prudent. With respect to off-system sales, Trading and Marketing
purchases natural gas from producers, pipelines and other suppliers not
connected with the Company's facilities for resale to customers.
Trading and Marketing has a portfolio of short-term and long-term sales
agreements with customers, the vast majority of which incorporate
market-sensitive pricing terms. Long-term gas purchase agreements with
producers, principally entered into in connection with on-system sales,
generally also include market-sensitive pricing provisions. Purchases and sales
of off-system gas and electricity supply are normally made under short-term
contracts. Purchase and sales commitments involving significant price and
location risk are generally hedged with commodity futures, swaps and options.
For information concerning the Company's risk-management activities, see
"Management's Discussion and Analysis of Results of Operations and Financial
Condition, Quantitative and Qualitative Disclosures About Market Risk -
Commodity Price Risk" and Note 8 to the Consolidated Financial Statements,
"Financial Instruments and Risk Management - Commodity Derivative Instruments."
Trading and Marketing also provides energy management services, such as
supply and market aggregation, peaking services, dispatching, balancing,
transportation, storage, tolling, contract negotiation and administration, as
well as energy commodity risk management products and services.
Global Asset Development
Global Asset Development is an active participant in competitive power
markets worldwide and has ownership interests in more than 6,500 megawatts of
generation worldwide, including projects under construction and under contract.
Global Asset Development is comprised of three units: Duke Energy Power Services
(DEPS), Duke Energy Industrial Asset Development, and Duke Energy International.
DEPS develops, owns and operates electric generation projects for customers
in the United States and Canada. DEPS focuses on acquisitions of existing energy
production facilities, greenfield opportunities and operating energy assets.
Domestic investments include a 32.5% indirect ownership interest in American
Ref-Fuel Company, which owns five waste-to-energy facilities in New York, New
Jersey, Massachusetts and Connecticut. Such facilities process about 4 million
tons of municipal solid waste per year and have an aggregate generating capacity
of 286 megawatts. DEPS's projects under construction include an ownership
interest in the Bridgeport Energy Project, a 520 megawatt combined cycle natural
gas-fired merchant generation plant, which will be Connecticut's largest
non-nuclear power plant.
On November 18, 1997, DEPS entered into an agreement with Pacific Gas &
Electric Company (PG&E) for the purchase of three electric generating plants in
California for approximately $500 million. The plants have a combined net
operating capacity of 2,645 megawatts. The sale is expected to close during
1998. Pursuant to California's electric restructuring law, DEPS must contract
with PG&E to operate and maintain the facilities for two years following the
sale. Energy and capacity from the plants will be sold into the California power
exchange and under separate contracts.
4
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Duke Energy Industrial Asset Development was formed in July 1997 to
develop, own, manage and operate on-site, inside-the-fence electric generation
and energy conversion facilities for industrial customers. Its market focus is
the United States and Canada. This unit is currently working with prospective
customers from the textile, pulp and paper, petrochemical, agricultural, food
and automotive industries and the federal privatization sector.
Duke Energy International develops, owns and operates energy projects
worldwide. This unit focuses on projects involving natural gas exploration,
production, processing, transportation and supply. Additionally, projects
include generation, delivery and marketing of electric power and thermal energy.
Its ownership interests include investments in National Methanol Company, a
methanol plant and methyl tertiary butyl ether plant in Saudi Arabia; one
storage facility and two liquid natural gas (LNG) vessels utilized in
international LNG trade; Piedra del Aguilla, a 1,400 megawatt hydroelectric
generating facility in Argentina; and Puncakjaya Power, a 194 megawatt diesel
fired plant in Indonesia. Certain projects under construction include
investments in:
o Nueva Renca, a 370 megawatt gas fired plant in Chile
o Aguaytia, Peru's first integrated energy development project
encompassing natural gas development and production, gathering, processing
and transmission facilities; gas-fired electric generation and electric
transmission.
Other Energy Services
Other Energy Services provides engineering consulting, construction and
integrated energy solutions, primarily through Duke Engineering & Services, Inc.
(DE&S), Duke/Flour Daniel and DukeSolutions, Inc. (DukeSolutions).
DE&S specializes in energy and environmental projects and provides
comprehensive engineering, quality assurance, project and construction
management and operating and maintenance services for all phases of
hydroelectric, nuclear and renewable power generation projects worldwide.
Duke/Flour Daniel, operating through several entities, provides full
service siting, permitting, licensing, engineering, procurement, construction,
start-up, operating and maintenance services for fossil-fired plants, both
domestically and internationally.
DukeSolutions provides integrated energy solutions to industrial,
commercial, institutional, governmental and wholesale customers and focuses on
increasing customers' efficiency, productivity and profitability through energy
cost savings.
Competition
Field Services and Trading and Marketing compete with major integrated oil
companies, major interstate pipelines and their marketing affiliates, national
and local natural gas gatherers, brokers, marketers and distributors and
electric utilities and other electric power marketers for natural gas supplies,
in gathering and processing natural gas and in marketing and transporting
natural gas, electricity, NGLs and crude oil. Competition for natural gas
supplies is primarily based on efficiency, reliability, availability of
transportation and the ability to obtain a satisfactory price for the producer's
natural gas. Competition for customers is based primarily upon reliability and
price of delivered natural gas, NGLs and crude oil. Competition in the energy
marketing business is driven by the price of commodities and services delivered,
along with the quality and reliability of services provided.
The Global Asset Development and Other Energy Services business units
experience substantial competition in their fields from utility companies in the
United States or abroad and from independent companies.
Regulation
The intrastate pipelines owned by the Field Services group are subject to
state regulation and, to the extent they provide services under Section 311 of
the Natural Gas Policy Act of 1978 (NGPA), are also subject to the FERC
regulation. The natural gas gathering activities of the Field Services group are
generally not subject to regulation by the FERC, but are subject to state
regulation.
The energy marketing activities of the Trading and Marketing group may, in
certain circumstances, be subject to the jurisdiction of the FERC. Current FERC
policies permit the Trading and Marketing entities subject to the FERC
jurisdiction to market natural gas and electricity at market-based rates.
The North Carolina Utilities Commission, Public Service Commission of South
Carolina and the FERC have implemented regulations governing access to regulated
electric customer data by non-regulated entities and services provided between
regulated and non-regulated affiliated entities. These regulations affect Energy
Services' activities with Duke Energy's Electric Operations segment.
5
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The Energy Services segment is subject to the jurisdiction of the EPA and
state environmental agencies. For a discussion of environmental regulation, see
"Business, Environmental Matters." The Energy Services segment is also subject
to the Natural Gas Pipeline Safety Act of 1968, which regulates gas pipeline and
LNG plant safety requirements, and to the Hazardous Liquid Pipeline Safety Act
of 1979, which regulates oil and petroleum pipelines.
ENVIRONMENTAL MATTERS
The Company is subject to federal, state and local regulations with regard
to air and water quality, hazardous and solid waste disposal and other
environmental matters. Certain environmental regulations affecting the Company
include, but are not limited to:
o The Clean Air Act Amendments of 1990;
o State Implementation Plans (SIP), which were issued by the EPA to 22 states
related to existing and new national ambient air quality standards for
ozone;
o The Federal Water Pollution Control Act Amendments of 1987, which require
permits for facilities that discharge treated wastewater into the
environment; and
o The Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA), which can require any individual or entity which may have owned
or operated a disposal site, as well as transporters or generators of
hazardous wastes which were sent to such site, to share in remediation
costs for the site.
For further discussion of environmental matters involving the Company,
including possible liability and capital costs, see "Management's Discussion and
Analysis of Results of Operations and Financial Condition, Current Issues -
Environmental" and Note 12 to the Consolidated Financial Statements,
"Commitments and Contingencies - Environmental." Except as set forth therein,
compliance with federal, state and local provisions which have been enacted or
adopted regulating the discharge of materials into the environment, or otherwise
protecting the environment, is not expected to have a material adverse effect on
the consolidated results of operations or financial position of the Company.
OTHER MATTERS
Foreign operations and export sales are not material to the Company's
business as a whole. For a discussion of risks associated with the Company's
foreign operations, see "Management's Discussion and Analysis of Results of
Operations and Financial Condition, Quantitative and Qualitative Disclosures
About Market Risk - Foreign Operations Risk."
At December 31, 1997, the Company had approximately 8,300 employees.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
From time to time, the Company 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. The Company cautions that
assumptions, projections, expectations, intentions or beliefs about future
events may and often do vary from actual results and the differences between
assumptions, projections, expectations, intentions or beliefs and actual results
can be material. Accordingly, there can be no assurance that actual results will
not differ materially from those expressed or implied by the forward-looking
statements. For a discussion of some factors that could cause actual results to
differ materially from those expressed or implied in such forward-looking
statements, see "Management's Discussion and Analysis of Results of Operations
and Financial Condition, Current Issues -Forward-Looking Statements."
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OPERATING STATISTICS
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Natural Gas Transmission Years Ended December 31
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1997 1996 1995 1994 1993
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Throughput Volumes, TBtu(a):
Northeast Pipelines
TETCO 1,300 1,349 1,234 1,194 1,115
Algonquin 341 327 331 288 245
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Total Northeast Pipelines 1,641 1,676 1,565 1,482 1,360
Midwest Pipelines
PEPL 659 687 663 626 607
Trunkline 620 632 519 560 633
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Total Midwest Pipelines 1,279 1,319 1,182 1,186 1,240
Intercompany eliminations (58) (56) (44) (91) (125)
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Total Natural Gas Transmission 2,862 2,939 2,703 2,577 2,475
- ----------------------------------------------------------- ------------- ------------- ------------- ------------- -------------
- ----------------------------------------------------------- ---------------------------------------------------------------------
Energy Services Years Ended December 31
---------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ------------- ------------- ------------- -------------
Field Services Natural Gas Gathered/Processed, TBtu/d(b) 3.4 2.9 1.9 1.6 1.4
Field Services NGL Production, MBbl/d(c) 103.9 76.5 54.8 49.4 42.0
Trading and Marketing Natural Gas Marketed, TBtu/d 6.9 5.5 3.6 2.7 2.1
Trading and Marketing Electricity Marketed, GWh(d) 64,650 4,229 513 - -
- ----------------------------------------------------------- ------------- ------------- ------------- ------------- -------------
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(a) Trillion British thermal units
(b) Trillion British thermal units per day
(c) Thousand barrels per day
(d) Gigawatt-hours
Item 2. Properties.
NATURAL GAS TRANSMISSION
TETCO's gas transmission system extends approximately 1,700 miles from
producing fields in the Gulf Coast region of Texas and Louisiana to Ohio,
Pennsylvania, New Jersey and New York. It consists of two parallel systems, one
consisting of three large-diameter parallel pipelines and the other consisting
of from one to three large-diameter pipelines over its length. TETCO's system,
including its gathering systems, has 73 compressor stations. The TETCO system
connects with the PEPL and Trunkline systems in Lebanon, Ohio.
TETCO also owns and operates two offshore Louisiana gas supply systems,
which extend over 100 miles into the Gulf of Mexico and consist of 490 miles of
pipeline.
Algonquin's transmission system connects with TETCO's facilities in New
Jersey, and extends through New Jersey, New York, Connecticut, Rhode Island and
Massachusetts. The system consists of approximately 250 miles of pipeline with 6
compressor stations.
PEPL's transmission system, which consists of four large-diameter parallel
pipelines and 13 mainline compressor stations, extends a distance of
approximately 1,300 miles from producing areas in the Anadarko Basin of Texas,
Oklahoma and Kansas through the states of Missouri, Illinois, Indiana and Ohio
into Michigan.
Trunkline's transmission system extends approximately 1,400 miles from the
Gulf Coast areas of Texas and Louisiana through the states of Arkansas,
Mississippi, Tennessee, Kentucky, Illinois and Indiana to a point on the
Indiana-Michigan border. The system consists principally of three large-diameter
parallel pipelines and 18 mainline compressor stations.
Trunkline also owns and operates two offshore Louisiana gas supply systems
consisting of 337 miles of pipeline extending approximately 81 miles into the
Gulf of Mexico.
For information concerning natural gas storage properties, see "Business,
Natural Gas Transmission."
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ENERGY SERVICES
For information regarding the properties of Field Services, see "Business,
Energy Services - Field Services."
Global Asset Development owns two LNG ships, each with a transportation
capacity of 125,000 cubic meters of LNG. Both vessels have been chartered to
Nigeria LNG Limited (Nigeria LNG) for 22 years starting in 1999. Under the terms
of the charter, Nigeria LNG will have the right to purchase the vessels.
Global Asset Development also owns a marine terminal, storage and
regasification facility for LNG located in Louisiana. The LNG facility has a
design output capacity of approximately 700 million cubic feet per day (MMcf/d)
and a storage capacity of approximately 1.8 million barrels, which approximates
6 Bcf.
Other generation, transmission and distribution properties of Global Asset
Development are owned primarily through joint ventures in which the Company's
ownership interest is 50% or less.
Properties of Trading and Marketing and Other Energy Services are not
considered material to the Company's operations as a whole.
OTHER OPERATIONS
None of the properties used in connection with the Company's other business
activities are considered material to the Company's operations as a whole.
Item 3. Legal Proceedings.
See Note 12 to the Consolidated Financial Statements, "Commitments and
Contingencies - Litigation" and "Management's Discussion and Analysis of Results
of Operations and Financial Condition, Current Issues - Environmental" for a
discussion of material legal proceedings.
8
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
All of the outstanding Common Stock of the Company is, as of the date
hereof, owned by Duke Capital. There is no market for the Common Stock.
Dividends on the Common Stock will be paid when declared by the Board of
Directors. Dividends declared on Common Stock were $217.2 million and $142.5
million in 1997 and 1996, respectively. At present, the Company plans to pay a
quarterly dividend on the Common Stock.
Item 6. Selected Financial Data.
<TABLE>
<CAPTION>
- ---------------------------------------------------- -------------- -------------- -------------- -------------- --------------
In Millions 1997(a) 1996(a) 1995(a) 1994(a) 1993(a)
- ---------------------------------------------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Income Operating Revenues $ 11,805.1 $ 7,715.5 $ 5,098.3 $ 4,677.6 $ 4,368.5
Statement Operating Expenses 11,046.5 6,917.1 4,368.1 4,048.3 3,861.1
-------------- -------------- -------------- -------------- --------------
Operating Income 758.6 798.4 730.2 629.3 507.4
Other Income and Expenses 37.0 19.8 18.0 (1.8) 46.6
-------------- -------------- -------------- -------------- --------------
Earnings Before Interest and Taxes 795.6 818.2 748.2 627.5 554.0
Interest Expense 199.8 224.8 233.7 228.6 262.9
Minority Interest 21.4 6.2 - - -
-------------- -------------- -------------- -------------- --------------
Earnings Before Income Taxes 574.4 587.2 514.5 398.9 291.1
Income Taxes 230.1 225.3 203.0 165.7 119.8
-------------- -------------- -------------- -------------- --------------
Income Before Extraordinary Item 344.3 361.9 311.5 233.2 171.3
Extraordinary Item - 16.7 - - -
-------------- -------------- -------------- -------------- --------------
Net Income $ 344.3 $ 345.2 $ 311.5 $ 233.2 $ 171.3
- -------------- ------------------------------------- -------------- -------------- -------------- -------------- --------------
Balance Total Assets $ 10,385.3 $ 9,202.7 $ 7,705.5 $ 7,513.2 $ 7,585.5
Sheet Long-term Debt $ 1,936.5 $ 1,947.0 $ 2,091.7 $ 2,363.7 $ 2,085.5
- -------------- ------------------------------------- -------------- -------------- -------------- -------------- --------------
</TABLE>
(a) Financial information reflects the accounting for the combination of the
Company with Duke Engineering & Services, Inc., DukeSolutions, Inc. and Duke
Energy Global Asset Development, Inc. as a pooling of interests. As a
result, the financial information gives effect to the combination as if it
had occurred on January 1, 1993.
9
<PAGE>
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
INTRODUCTION
PanEnergy Corp (PanEnergy) is an indirect wholly owned subsidiary of Duke
Energy Corporation (Duke Energy). On June 18, 1997, Duke Power Company changed
its name to Duke Energy Corporation in accordance with the terms of the merger
agreement with PanEnergy, pursuant to which Duke Energy issued 158.3 million
shares of its common stock in exchange for all the outstanding stock of
PanEnergy (the merger). PanEnergy was merged with a wholly owned subsidiary of
Duke Energy, with PanEnergy as the surviving corporation. Pursuant to the
merger, each share of PanEnergy's outstanding common stock was converted into
the right to receive 1.0444 shares of Duke Energy common stock. In addition,
each outstanding option to purchase PanEnergy common stock became an option to
purchase common stock of Duke Energy, adjusted accordingly. The merger was
accounted for as a pooling of interests.
Subsequently, the common stock of PanEnergy was contributed by Duke Energy
to Duke Capital Corporation (Duke Capital), a wholly owned subsidiary which
serves as the parent company of Duke Energy's non-utility operations.
In October 1997, Duke Capital contributed the common stock of several
wholly owned subsidiaries to PanEnergy. These subsidiaries included Duke
Engineering & Services, Inc., DukeSolutions, Inc., and Duke Energy Global Asset
Development, Inc. The consolidated financial statements for periods prior to
the combination were restated to include the operations of these subsidiaries.
PanEnergy and its subsidiaries (the Company) conducts its operating
activities primarily through two business segments:
The Natural Gas Transmission segment is involved in interstate
transportation and storage of natural gas for customers in the Mid-Atlantic, New
England and Midwest states. The interstate natural gas transmission and storage
operations of the Company's wholly owned subsidiaries are subject to the rules
and regulations of the Federal Energy Regulatory Commission (FERC).
The Energy Services segment is comprised of several separate business
units: Field Services - gathers and processes natural gas, produces and markets
natural gas liquids and transport and trades crude oil; Trading and Marketing -
markets natural gas, electricity and other energy-related products; Global Asset
Development - develops, owns and operates energy-related facilities worldwide;
and Other Energy Services - provides engineering consulting, construction and
integrated energy solutions.
The Other Operations of the Company include corporate costs and
intersegment eliminations.
Management's Discussion and Analysis should be read in conjunction with the
Consolidated Financial Statements of the Company.
RESULTS OF OPERATIONS
Net income in 1997 decreased slightly as compared to 1996, from $345.2
million in 1996 to $344.3 million in 1997. The decrease was due primarily to
increases in non-recurring merger related costs, Trading and Marketing's
operations due primarily to growth and amortization of goodwill associated with
the purchase of the remaining 50% ownership interest of the Duke/Louis Dreyfus
joint venture (see Note 3 to the Consolidated Financial Statements, "Business
Combinations and Acquisitions - Duke/Louis Dreyfus, L.L.C."). These increases
were offset by Natural Gas Transmission's market-expansion projects placed in
service and an extraordinary item related to the early retirement of debt in
1996.
Operating income of the Company for 1997 was $758.6 million as compared to
$798.4 million in 1996. Earnings before interest and taxes (EBIT) were $795.6
million and $818.2 million for 1997 and 1996, respectively. Operating income and
earnings before interest and taxes are not materially different, and are
affected by the same fluctuations for the Company and each of its business
segments. Earnings before interest and taxes by business segment are summarized
below, and the explanation of these results by business segment is provided
thereafter.
Earnings Before Interest and Taxes by Business Segment is as follows:
10
<PAGE>
- ----------------------------------------------------- ------------ ------------
In Millions 1997 1996
- ----------------------------------------------------- ------------ ------------
Natural Gas Transmission
Northeast Pipelines $ 420.5 $ 399.4
Midwest Pipelines 203.9 196.1
------------ ------------
Total Natural Gas Transmission 624.4 595.5
------------ ------------
Energy Services
Field Services 157.0 151.6
Trading and Marketing 44.4 57.9
Global Asset Development 4.5 -
Other Energy Services 8.8 18.2
------------ ------------
Total Energy Services 214.7 227.7
------------ ------------
Other Operations (43.5) (5.0)
------------ ------------
Consolidated EBIT $ 795.6 $ 818.2
- ----------------------------------------------------- ------------ ------------
Net income for 1997 is net of a full year of the minority interest
associated with the joint venture with Mobil Corporation (Mobil) in the Trading
and Marketing operation of the Energy Services segment (see Note 3 to the
Consolidated Financial Statements, "Business Combinations and Acquisitions -
Duke Energy Trading and Marketing, L.L.C.).
Included in the amounts discussed below are intercompany transactions that
do not impact consolidated earnings before interest and taxes.
Natural Gas Transmission
- ----------------------------------------------------- ------------ ------------
Dollars in Millions 1997 1996
- ----------------------------------------------------- ------------ ------------
Revenue $ 1,572.1 $ 1,556.3
Operating Expenses 964.4 972.5
------------ ------------
Operating Income 607.7 583.8
Other Income, Net of Expenses 16.7 11.7
------------ ------------
EBIT $ 624.4 $ 595.5
- ----------------------------------------------------- ------------ ------------
Volumes, Tbtu(a) 2,862 2,939
- ----------------------------------------------------- ------------ ------------
(a) Trillion British thermal units
During 1997, the Natural Gas Transmission segment completed the
organization of its operations into the Northeast Pipelines, which includes
Texas Eastern Transmission Corporation (TETCO) and Algonquin Gas Transmission
Company (Algonquin), and the Midwest Pipelines, which includes Panhandle Eastern
Pipe Line Company (PEPL) and Trunkline Gas Company (Trunkline). Earnings before
interest and taxes for the Natural Gas Transmission segment increased 5% in 1997
over the prior year, with increases in earnings at Northeast Pipelines and
Midwest Pipelines of 5% and 4%, respectively. Earnings before interest and taxes
increased primarily due to market-expansion projects placed in service and the
favorable resolution of regulatory matters in 1997 in amounts in excess of those
resolved in 1996. The resolution of regulatory matters was reflected as
additional revenue and other income. The increases were partially offset by
certain litigation expenses recorded in 1997.
Energy Services
As noted previously in the table of Earnings Before Interest and Taxes by
Business Segment, earnings before interest and taxes for the Energy Services
segment in 1997 decreased slightly as compared to 1996. During 1997 and 1996,
these fluctuations were driven primarily by the results of operations of Field
Services and Trading and Marketing, which are described below. Additionally,
earnings before interest and taxes for Other Energy Services decreased
primarily due to reduced income from an affiliate's domestic construction
activities.
11
<PAGE>
Field Services
- ----------------------------------------------------- ------------ ------------
Dollars in Millions 1997 1996
- ----------------------------------------------------- ------------ ------------
Revenue $ 3,054.6 $ 2,636.5
Operating Expenses 2,897.9 2,487.1
------------ ------------
Operating Income 156.7 149.4
Other Income, Net of Expenses 0.3 2.2
------------ ------------
EBIT $ 157.0 $ 151.6
- ----------------------------------------------------- ------------ ------------
Volumes
Natural Gas Gathered/Processed, TBtu/d(a) 3.4 2.9
NGL Production, MBbl/d(b) 103.9 76.5
- ----------------------------------------------------- ------------ ------------
(a) Trillion British thermal units per day
(b) Thousand barrels per day
Field Services' earnings before interest and taxes increased 4% for 1997
over 1996 primarily due to higher volumes as a result of acquisitions in 1996.
Natural gas gathered and processed volumes increased 17% and natural gas liquids
(NGLs) production increased 36%. Partially offsetting these increases were
higher natural gas prices, which increased operating expenses, and a decrease in
NGL prices of 8%, which decreased revenues.
Trading and Marketing
- ----------------------------------------------------- ------------ ------------
Dollars in Millions 1997 1996
- ----------------------------------------------------- ------------ ------------
Revenue $ 7,488.7 $ 3,814.0
Operating Expenses 7,446.0 3,757.7
------------ ------------
Operating Income 42.7 56.3
Other Income, Net of Expenses 1.7 1.6
------------ ------------
EBIT $ 44.4 $ 57.9
- ----------------------------------------------------- ------------ ------------
Volumes
Natural Gas Marketed, TBtu/d 6.9 5.5
Electricity Marketed, GWh(a) 64,650 4,229
- ----------------------------------------------------- ------------ ------------
(a) Gigawatt-hours
Duke Capital acquired the remaining 50% ownership interest in the
Duke/Louis Dreyfus, L.L.C. (D/LD) joint venture in June 1997, and then
contributed this ownership to subsidiaries of the Company. This acquisition,
coupled with a full year of operations of the joint venture with Mobil formed in
August 1996, accounted for the significant increases in Trading and Marketing
revenues, related operating expenses and volumes in 1997 over 1996. Natural gas
marketed volumes increased 25%, in addition to increases in natural gas margins
from trading activities, which were largely offset by the emerging electric
power trading and marketing activities. Higher operating expenses, driven mainly
by increased personnel levels and system development costs to provide the
necessary infrastructure for growth in the trading and marketing business,
resulted in a decrease in earnings before interest and taxes in 1997 as compared
to 1996.
Other Operations
As noted previously in the table of Earnings Before Interest and Taxes by
Business Segment, earnings before interest and taxes for Other Operations
declined $38.5 million in 1997 as compared to 1996. The decrease was primarily
the result of non-recurring merger related costs and the 1997 amortization of
goodwill associated with the purchase of the remaining 50% ownership interest in
the D/LD joint venture. These decreases were partially offset by a gain on the
sale of the Company's ownership interest in the Midland Cogeneration Venture
in 1997.
Other Impacts on Net Income
In 1997, interest expense decreased $25 million, or 11%, as compared to
1996 as a result of lower interest rates.
Minority interests in 1997 and 1996 relate primarily to the joint venture
with Mobil.
12
<PAGE>
On October 1, 1996, a subsidiary of the Company redeemed its $150 million,
10% debentures and its $100 million, 10 1/8% debentures, both due 2011. The
Company recorded a non-cash extraordinary item of $16.7 million (net of income
tax of $10.3 million) related to the unamortized discount on this early
retirement of debt.
LIQUIDITY AND CAPITAL RESOURCES
Operating Cash Flow. Operating cash flows decreased $145 million from 1996
to 1997. This decrease reflects the cash impacts of natural gas transition cost
recoveries and receivables sold in 1996 and repaid in 1997, which were
classified as current liabilities. Additionally, payments associated with rate
case settlements during 1997 caused cash flows from operations to decrease.
Assets and liabilities recorded in the Consolidated Balance Sheets related
to the natural gas transition cost recoveries and the related cash flow impacts
are effected by state and federal regulatory initiatives and specific
agreements. For more information on the natural gas transition cost recoveries,
see Note 5 to the Consolidated Financial Statements, "Regulatory Matters."
Investing Cash Flow. Capital and investment expenditures were approximately
$824.2 million in 1997 compared with approximately $811.2 million in 1996.
Increased capital and investment expenditures were partially due to the
acquisition of an ownership interest in American Ref-Fuel Company.
Additionally, increased business expansion for the Natural Gas Transmission
segment caused expenditures to increase. These increases were partially offset
by the 1996 acquisition of certain assets from Mobil for approximately $300
million by Field Services.
Also in June 1997, the Company signed a letter of intent to build a $265
million, 520-megawatt combined cycle natural gas fired merchant generation plant
in Bridgeport, Connecticut. The Company will be majority owner, with the first
phase of the project scheduled to provide power in mid-1998. The project is
currently under construction.
During December 1997, a wholly owned subsidiary of the Company formed a
joint venture with UAE Ref-Fuel L.L.C. (UAE), a wholly owned subsidiary of
United American Energy Corp. The Company owns a 65% interest in the joint
venture, with UAE owning a 35% minority interest. The joint venture acquired a
50% ownership interest in American Ref-Fuel Company, a waste-to-energy firm,
with operations primarily in New York and New Jersey. Thus, the Company has an
indirect 32.5% ownership interest in American Ref-Fuel Company and provided $237
million of investment and financing to the venture.
During 1997, the Company sold its equity interest in certain affiliates and
its ownership in trading and marketing operations in the United Kingdom.
Proceeds from these sales were $87 million.
The Company plans to maintain its regulated facilities and pursue business
expansion of its regulated operations as opportunities arise. Projected 1998
capital and investment expenditures for the Natural Gas Transmission segment,
including allowance for funds used during construction, are approximately $300
million. This projection is subject to periodic review and revisions. Actual
expenditures incurred may vary from such estimates due to various factors,
including business expansion opportunities, environmental matters and cost and
availability of capital.
The Energy Services segment plans to spend approximately $100 million in
1998 for required capital expenditures at its existing facilities. In addition,
the Company is seeking to significantly grow its Energy Services businesses,
primarily through the Global Asset Development business unit. One expansion
opportunity includes the 520-megawatt combined cycle natural gas fired merchant
generation plant in Bridgeport, Connecticut already under construction. Another
growth opportunity includes the recently announced agreement to purchase from
Pacific Gas & Electric Company three power plants in California. The power
plants have a combined capacity of 2,645 megawatts. The purchase price is
estimated at approximately $500 million and the transaction is expected to close
during 1998. Global Asset Development is actively pursuing other similar
initiatives which will likely require significant capital and investment
expenditures in 1998. Potential investments will be subject to periodic review
and revision and may vary significantly depending on the value-added
opportunities presented.
13
<PAGE>
Financing Cash Flow. Subsequent to the merger, several rating agencies
reviewed and in some cases revised their debt ratings for the Company and its
subsidiaries PEPL and TETCO. As of December 31, 1997, the Company has been
assigned a senior debt rating of A- by Standard & Poor's Group. The Company's
intent is to maintain this credit rating.
At December 31, 1996, the Company had two variable-rate bank credit
agreements that permitted the Company to borrow up to $400 million under a
364-day facility and $400 million under a five-year facility. During August
1997, these credit facilities were terminated. As a result, Duke Capital began
providing credit support for the Company in August 1997.
Since December 31, 1996, $114.5 million of the Company's medium term notes
matured. These retirements were funded primarily through the Company's
commercial paper facilities, before they were terminated in August 1997.
The Company has authority to issue up to $250 million aggregate principal
amount of unsecured debt securities under shelf registration statements filed
with the Securities and Exchange Commission.
Dividends and debt repayments, along with operating and investing
requirements, are expected to be funded by cash from operations, debt and
Duke Capital's credit facilities. As noted previously, the Company is seeking to
significantly grow its Energy Services businesses, which will likely require
significant additional financing.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk. The Company is exposed to changes in interest rates as
a result of its issuance of fixed-rate debt. The Company manages its interest
rate exposure by monitoring the effects of market changes in interest rates. The
Company had no variable-rate debt outstanding at December 31, 1997; therefore, a
change in interest rates would not have an effect on the earnings of the
Company. (See Note 8, "Financial Instruments and Risk Management" and Note 11,
"Debt and Credit Facilities" to the Consolidated Financial Statements).
Commodity Price Risk. The Company, substantially through its subsidiaries,
is exposed to the impact of market fluctuations in the price and transportation
costs of natural gas, electricity and petroleum products marketed and employs
established policies and procedures to manage its risks associated with these
market fluctuations using various commodity derivatives, including futures,
swaps and options. (See Note 8 to the Consolidated Financial Statements,
"Financial Instruments and Risk Management.") The Company measures the risk in
its commodity derivative portfolio on a daily basis utilizing a Value-at-Risk
(VAR) model to determine the maximum potential one-day favorable or unfavorable
impact on its earnings and monitors its risk in comparison to established
thresholds. The Company also utilizes other measures to monitor the risk in its
commodity derivative portfolio on a monthly, quarterly and annual basis. The VAR
computations are based on an historical simulation, which utilizes price
movements over a specified period to simulate forward price curves in the energy
markets to estimate the favorable or unfavorable impact of one-day's price
movement on the existing portfolio. The VAR computations utilize several key
assumptions, including the confidence level for the resultant price movement and
the holding period chosen for the calculation. The Company's calculation
includes commodity derivative instruments held for trading purposes and excludes
the effects of written and embedded physical options in the trading portfolio.
At December 31, 1997, the Company's estimated potential one-day favorable or
unfavorable impact on income before taxes, as measured by VAR, related to its
commodity derivatives held for trading purposes, was approximately $2 million.
Changes in markets inconsistent with historical trends could cause actual
results to exceed predicted limits. Market risks associated with commodity
derivatives held for purposes other than trading were not material at December
31, 1997.
Subsidiaries of the Company are also exposed to market fluctuations in the
price of NGLs related to their ongoing gathering and processing operating
activities. Because the Company generally does not maintain an inventory of
NGLs or actively trade commodity derivatives related to NGLs, the Company was
not exposed to this risk at December 31, 1997. However, the Company closely
monitors the risks associated with NGL price changes on its future operations.
Foreign Operations Risk. The Company has investments in several
international operations, many of which are joint ventures. At December 31,
1997, the Company had investments in international affiliates of $220.4 million.
These investments represent primarily investments in affiliates which own
energy-related production, generation and transmission facilities.
The Company is exposed to foreign currency risk, sovereign risk and other
foreign operations risks, primarily through investments in affiliates of $33.9
million in Asia and $100.7 million in South America. In order to mitigate risks
associated with foreign currency fluctuations, the majority of contracts entered
into by the Company or its affiliates are denominated in or
14
<PAGE>
indexed to the U.S. dollar. Other exposures to foreign currency risk, sovereign
risk or other foreign operations risk are periodically reviewed by management
and were not material to the Company's consolidated results of operations or
financial position during the period.
CURRENT ISSUES
Operations Outlook. Due to increased competition, especially for the
Midwest Pipelines, relatively slow growth is expected for future operations of
the Company's Natural Gas Transmission segment. The Natural Gas Transmission
segment continues to offer selective discounting to maximize revenues from
existing capacity and to advance projects that provide expanded services to meet
the specific needs of customers. Several projects have been announced that
position the Natural Gas Transmission segment to meet increasing demand for gas
in northeast markets by providing continuous paths from new supplies in both
eastern and western Canada in addition to traditional domestic supply basins.
The Company is seeking to significantly grow its Energy Services segment.
Deregulation of energy markets in the U.S. and abroad is providing substantial
opportunities for the Energy Services business units to capitalize on their
broad capabilities. Growth is expected to be achieved through acquisitions,
construction of greenfield projects and expansion of existing facilities as
value-added opportunities present themselves.
Environmental. The Company is subject to federal, state and local
regulations regarding air and water quality, hazardous and solid waste disposal
and other environmental matters.
Superfund Sites. Subsidiaries of the Company are considered by regulators
to be a potentially responsible party and may be subject to future liability at
six federal Superfund sites. While the cost of remediation of the remaining
sites may be substantial, the Company's subsidiaries will share in any liability
associated with remediation of contamination at such sites with other
potentially responsible parties. Management is of the opinion that resolution of
these matters will not have a material adverse effect on the consolidated
results of operation or financial position of the Company.
PCB (Polychlorinated Biphenyl) Assessment and Clean-up Programs. TETCO, a
wholly owned subsidiary of the Company, is currently conducting PCB assessment
and clean-up programs at certain of its compressor station sites under
conditions stipulated by a U.S. Consent Decree. The programs include on- and
off-site assessment, installation of on-site source control equipment and
groundwater monitoring wells, and on- and off-site clean-up work. TETCO expects
to complete these clean-up programs during 1998. Groundwater monitoring
activities will continue at several sites beyond 1998.
The Company has also identified environmental contamination at certain
sites on the PEPL and Trunkline systems and is undertaking clean-up programs at
these sites. The contamination resulted from the past use of lubricants
containing PCBs and the prior use of wastewater collection facilities and other
on-site disposal areas. Soil and sediment testing, to date, has detected no
significant off-site contamination. The Company has communicated with the
Environmental Protection Agency (EPA) and appropriate state regulatory agencies
on these matters. Environmental clean-up programs are expected to continue until
2002.
At December 31, 1997 and 1996, the Company had accrued liabilities for
remaining estimated clean-up costs on the TETCO, PEPL and Trunkline systems,
which were included in Environmental Clean-up Liabilities in the Consolidated
Balance Sheets. These cost estimates represent gross clean-up costs expected to
be incurred, have not been discounted or reduced by customer recoveries and do
not include fines, penalties or third-party claims. Costs expected to be
recovered from customers are included in the Consolidated Balance Sheets as of
December 31, 1997 and 1996, as Regulatory Assets and Deferred Debits.
In 1987, the Commonwealth of Kentucky instituted a suit in state court
against TETCO, alleging improper disposal of PCBs at TETCO's three compressor
station sites in Kentucky. This suit is still pending. In 1996, TETCO completed
clean-up of these sites under the U.S. Consent Decree.
The federal and state clean-up programs are not expected to interrupt or
diminish the Company's ability to deliver natural gas to customers. Based on the
Company's experience to date and costs incurred for clean-up operations,
management believes the resolution of matters relating to the environmental
issues discussed above will not have a material adverse effect on the
consolidated results of operations or financial position of the Company.
15
<PAGE>
Air Quality Control. In 1994, the State of Missouri issued a Notice of
Violation to PEPL alleging violations of Missouri air pollution regulations at
the Company's Houstonia compressor station. The Company is in negotiations with
the State to resolve this matter. The State is seeking a penalty and correction
of the alleged violations.
In December 1997, the United Nations held negotiations in Kyoto, Japan to
determine how to achieve worldwide stabilization of greenhouse gas emissions,
including carbon dioxide emissions from fossil-fired generating facilities.
Because this matter is in the early stages of discussion, the Company cannot
estimate the effects on future consolidated results of operations or financial
position of the Company.
Litigation and Contingencies. For information concerning litigation and
other commitments and contingencies, see Note 12 to the Consolidated Financial
Statements, "Commitments and Contingencies."
Computer Systems Changes for the Year 2000. The Company is incurring
incremental costs to modify existing computer systems to accommodate the year
2000 and beyond. The Company is currently making modifications to its programs
and is of the opinion that remaining modifications will be completed before
significant problems related to the year 2000 arise. Management is of the
opinion that the costs associated with these modifications will not have a
material adverse effect on the consolidated results of operations or financial
position of the Company.
Forward-Looking Statements. From time to time, the Company 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. The
Company cautions that assumptions, projections, expectations, intentions or
beliefs about future events may and often do vary from actual results and the
differences between assumptions, projections, expectations, intentions or
beliefs and actual results can be material. Accordingly, there can be no
assurance that actual results will not differ materially from those expressed or
implied by the forward-looking statements. The following are some of the factors
that could cause actual achievements and events to differ materially from those
expressed or implied in such forward-looking statements: 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 the Company 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 the Company and its subsidiaries are subject
or other external factors over which the Company has no control; the results of
financing efforts; growth in opportunities for the Company's subsidiaries; and
the effect of the Company's accounting policies, in each case during the periods
covered by the forward-looking statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
See "Management's Discussion and Analysis of Results of Operations and
Financial Condition, Quantitative and Qualitative Disclosures About Market
Risk."
16
<PAGE>
Item 8. Financial Statements and Supplementary Data.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
PANENERGY CORPORATION Years Ended December 31
- -----------------------------------------------------------------------------------------------------------------------------------
(In millions) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Revenues
Natural gas and petroleum products
Sales, trading and marketing of natural gas
and petroleum products $ 8,150.7 $ 5,848.0 $ 3,397.2
Transportation and storage of natural gas 1,503.5 1,522.9 1,500.6
Trading and marketing of electricity 1,664.9 77.8 9.8
Other 486.0 266.8 190.7
---------------- ---------------- ----------------
Total operating revenues 11,805.1 7,715.5 5,098.3
---------------- ---------------- ----------------
Operating Expenses
Natural gas and petroleum products purchased 7,705.2 5,414.3 3,119.3
Purchased power 1,658.1 78.1 11.9
Other operation and maintenance 1,256.3 1,042.4 872.2
Depreciation and amortization 336.2 301.5 280.7
Property and other taxes 90.7 80.8 84.0
---------------- ---------------- ----------------
Total operating expenses 11,046.5 6,917.1 4,368.1
---------------- ---------------- ----------------
Operating Income 758.6 798.4 730.2
---------------- ---------------- ----------------
Other Income and Expenses
Allowance for funds used during construction 3.0 1.9 3.7
Other, net 34.0 17.9 14.3
---------------- ---------------- ----------------
Total other income and expenses 37.0 19.8 18.0
---------------- ---------------- ----------------
Earnings Before Interest and Taxes 795.6 818.2 748.2
Interest Expense 199.8 224.8 233.7
Minority Interests 21.4 6.2 -
---------------- ---------------- ----------------
Earnings Before Income Taxes 574.4 587.2 514.5
Income Taxes 230.1 225.3 203.0
---------------- ---------------- ----------------
Income Before Extraordinary Item 344.3 361.9 311.5
Extraordinary Item (net of tax) - 16.7 -
---------------- ---------------- ----------------
Net Income $ 344.3 $ 345.2 $ 311.5
================ ================ ================
</TABLE>
See Notes to Consolidated Financial Statements.
17
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PANENERGY CORPORATION Years Ended December 31
- --------------------------------------------------------------------------------------------------------------------------------
(In millions) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 344.3 $ 345.2 $ 311.5
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 342.3 301.1 281.1
Deferred income taxes 118.2 102.3 109.2
Extraordinary charge - 16.7 -
Transition cost recoveries (35.6) 90.9 (85.2)
Rate settlements (70.5) 6.6 14.1
(Increase) Decrease in
Receivables (238.1) (647.7) (150.0)
Inventory (13.5) 4.6 (11.7)
Other current assets (9.8) 7.3 96.9
Increase (Decrease) in
Accounts payable 303.2 576.7 43.0
Taxes accrued 28.3 7.5 12.7
Interest accrued (9.4) (9.4) 4.1
Other current liabilities (8.5) (12.0) (21.7)
Other, net (60.7) 45.4 (72.7)
-------------- ---------------- ----------------
Net cash provided by operating activities 690.2 835.2 531.3
-------------- ---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (419.3) (666.3) (434.4)
Investment expenditures (404.9) (144.9) (53.1)
Proceeds from sales and other 104.1 62.2 32.2
-------------- ---------------- ----------------
Net cash used in investing activities (720.1) (749.0) (455.3)
-------------- ---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issuance of
Long-term debt 2.6 248.8 200.0
Common stock and stock options 6.0 11.8 16.5
Payments for the redemption of long-term debt (128.2) (432.8) (314.3)
Net change in notes payable and commercial paper (354.1) 214.1 145.0
Net change in advances - parent 306.1 - -
Capital infusions from parent 318.8 107.3 37.8
Dividends and return of capital (169.0) (166.9) (136.0)
Other, net (23.3) (14.3) (2.4)
-------------- ---------------- ----------------
Net cash used in financing activities (41.1) (32.0) (53.4)
-------------- ---------------- ----------------
Net increase (decrease) in cash and cash equivalents (71.0) 54.2 22.6
Cash and cash equivalents at beginning of year 118.1 63.9 41.3
-------------- ---------------- ----------------
Cash and cash equivalents at end of year $ 47.1 $ 118.1 $ 63.9
============== ================ ================
Supplemental Disclosures
Cash paid for interest (net of amount capitalized) $ 208.0 $ 224.0 $ 223.0
Cash paid for income taxes $ 99.7 $ 63.3 $ 80.8
</TABLE>
See Notes to Consolidated Financial Statements.
18
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PANENERGY CORPORATION December 31
- --------------------------------------------------------------------------------------------------------------------------------
(In millions) 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 47.1 $ 118.1
Receivables 1,598.7 1,234.3
Inventory 145.6 132.1
Current portion of natural gas transition costs 66.9 67.9
Unrealized gains on mark to market transactions 551.3 397.2
Other 140.0 130.2
---------------- ----------------
Total current assets 2,549.6 2,079.8
---------------- ----------------
Investments and Other Assets
Investments in affiliates 636.8 443.9
Pre-funded pension costs 302.6 280.6
Goodwill, net 503.6 222.1
Notes receivable 173.4 8.5
Other 145.5 87.5
---------------- ----------------
Total investments and other assets 1,761.9 1,042.6
---------------- ----------------
Property, Plant and Equipment
Cost 9,194.4 8,833.5
Less accumulated depreciation and amortization 3,609.2 3,369.0
---------------- ----------------
Net property, plant and equipment 5,585.2 5,464.5
---------------- ----------------
Regulatory Assets and Deferred Debits
Debt expense 65.6 74.2
Regulatory asset related to income taxes 16.9 4.5
Natural gas transition costs 193.7 250.0
Environmental clean-up costs 103.6 153.2
Other 108.8 133.9
---------------- ----------------
Total regulatory assets and deferred debits 488.6 615.8
---------------- ----------------
Total Assets $ 10,385.3 $ 9,202.7
================ ================
</TABLE>
See Notes to Consolidated Financial Statements.
19
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PANENERGY CORPORATION December 31
- -----------------------------------------------------------------------------------------------------------------------------------
(In millions) 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Accounts payable $ 1,428.0 $ 980.5
Advances - Parent 450.5 --
Notes payable and commercial paper -- 359.1
Taxes accrued 107.2 78.9
Interest accrued 50.3 59.7
Current portion of natural gas transition liabilities 35.0 84.4
Current portion of environmental clean-up liabilities 26.4 32.4
Current maturities of long-term debt 13.8 138.3
Unrealized losses on mark to market transactions 537.8 388.5
Other 324.3 370.6
--------- --------
Total current liabilities 2,973.3 2,492.4
--------- --------
Long-term Debt 1,936.5 1,947.0
---------- --------
Deferred Credits and Other Liabilities
Deferred income taxes 1,312.9 1,189.1
Natural gas transition liabilities 78.4 121.9
Environmental clean-up liabilities 157.6 188.9
Other 428.4 465.4
--------- --------
Total deferred credits and other liabilities 1,977.3 1,965.3
--------- --------
Minority Interests 167.2 82.3
--------- --------
Commitments and Contingencies
Common Stockholder's Equity
Common stock, 1,000 shares issued and outstanding at
December 31, 1997 and 1996, respectively, $1 par value per share 151.8 151.1
Paid-in capital 3,006.2 2,491.8
Retained earnings 173.0 72.8
--------- --------
Total common stockholder's equity 3,331.0 2,715.7
--------- --------
Total Liabilities and Stockholder's Equity $ 10,385.3 $ 9,202.7
========= ========
</TABLE>
See Notes to Consolidated Financial Statements.
20
<PAGE>
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
PANENERGY CORPORATION Years Ended December 31
- -------------------------------------------------------------------------------------------------------------------------------
(In millions) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
Common Stock
<S> <C> <C> <C>
Balance at beginning of year $ 151.1 $ 150.2 $ 149.1
Stock issued for purchase of assets - - 0.1
Dividend reinvestment and employee benefits 0.7 0.9 1.0
---------------- ---------------- ----------------
Balance at end of year 151.8 151.1 150.2
---------------- ---------------- ----------------
Paid-in Capital
Balance at beginning of year 2,491.8 2,388.8 2,318.5
Stock issued for purchase of assets - - 2.4
Dividend reinvestment and employee benefits 8.4 22.4 17.5
Capital contributions 573.8 107.4 54.0
Return of capital (96.2) (27.0) (3.6)
Other capital stock transactions, net 28.4 .2 --
---------------- ---------------- ----------------
Balance at end of year 3,006.2 2,491.8 2,388.8
---------------- ---------------- ----------------
Retained Earnings (Deficit)
Balance at beginning of year 72.8 (130.8) (309.8)
Net income 344.3 345.2 311.5
Common stock dividends (217.7) (142.5) (132.5)
Other capital stock transactions, net (26.9) 0.9 -
---------------- ---------------- ----------------
Balance at end of year 173.0 72.8 (130.8)
---------------- ---------------- ----------------
Total Common Stockholder's Equity $ 3,331.0 $ 2,715.7 $ 2,408.2
================ ================ ================
</TABLE>
See Notes to Consolidated Financial Statements.
21
<PAGE>
PanEnergy Corp
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1997, 1996 and 1995
Note 1. Nature of Operations
PanEnergy Corp (PanEnergy) is an indirect wholly owned subsidiary of Duke
Energy Corporation (Duke Energy). On June 18, 1997, Duke Power Company changed
its name to Duke Energy Corporation in accordance with the terms of the merger
agreement with PanEnergy, pursuant to which Duke Energy issued 158.3 million
shares of its common stock in exchange for all the outstanding stock of
PanEnergy (the merger). PanEnergy was merged with a wholly owned subsidiary of
Duke Energy, with PanEnergy as the surviving corporation. Pursuant to the
merger, each share of PanEnergy's outstanding common stock was converted into
the right to receive 1.0444 shares of Duke Energy common stock. In addition,
each outstanding option to purchase PanEnergy common stock became an option to
purchase common stock of Duke Energy, adjusted accordingly. The merger was
accounted for as a pooling of interests.
Subsequently, the common stock of PanEnergy was contributed by Duke Energy
to Duke Capital Corporation (Duke Capital), a wholly owned subsidiary which
serves as the parent company of Duke Energy's non-utility operations.
In October 1997, Duke Capital contributed the common stock of several
wholly owned subsidiaries to PanEnergy. These subsidiaries included Duke
Engineering & Services, Inc., DukeSolutions, Inc., and Duke Energy Global Asset
Development, Inc. The consolidated financial statements for periods prior to the
combination were restated to include the operations of these subsidiaries.
PanEnergy and its subsidiaries (the Company) conducts its operating
activities primarily through two business segments:
Natural Gas Transmission - Interstate transportation and storage of natural
gas for customers in the Mid-Atlantic, New England and Midwest states. The
interstate natural gas transmission and storage operations of the Company's
wholly owned subsidiaries Texas Eastern Transmission Corporation (TETCO),
Algonquin Gas Transmission Company (Algonquin), Panhandle Eastern Pipe Line
Company (PEPL), and Trunkline Gas Company (Trunkline) are subject to the rules
and regulations of the Federal Energy Regulatory Commission (FERC).
Energy Services - Comprised of several separate business units: Field
Services - gathers and processes natural gas, produces and markets natural gas
liquids and transports and trades crude oil; Trading and Marketing - markets
natural gas, electricity and other energy-related products; Global Asset
Development - develops, owns and operates energy-related facilities worldwide;
and Other Energy Services - provides engineering consulting, construction and
integrated energy solutions.
The Other Operations of the Company include corporate costs and
intersegment eliminations.
Note 2. Summary of Significant Accounting Policies
Consolidation. The consolidated financial statements reflect consolidation
of all of the Company's majority owned subsidiaries after the elimination of
intercompany transactions. Investments in other entities that are not majority
owned and where the Company has significant influence over operations are
accounted for using the equity method.
The consolidated financial statements are prepared in conformity with
generally accepted accounting principles appropriate in the circumstances to
reflect in all material respects the substance of events and transactions which
should be included. In preparing these statements, management makes informed
judgments and estimates of the expected effects of events and transactions that
are currently being reported. However, actual results could differ from these
estimates.
Cash and Cash Equivalents. All liquid investments with maturities at date
of purchase of three months or less are considered cash equivalents.
22
<PAGE>
Inventory. Inventory consists primarily of materials and supplies, and gas
held for transmission, processing and sales commitments. Inventory is recorded
at the lower of cost or market, primarily using the average cost method.
Commodity Derivative Instruments. The Company, primarily through its
subsidiaries, holds and issues instruments that reduce exposure to market
fluctuations in the price and transportation costs of natural gas, petroleum
products and electric power marketed. The Company uses futures, swaps and
options to manage and hedge price and location risk related to market exposures.
In order to qualify as a hedge, the price movements in the commodity derivatives
must be highly correlated with the underlying hedged commodity. Gains and losses
related to commodity derivatives which qualify as hedges of commodity
commitments are recognized in income when the underlying hedged physical
transaction closes (the deferral method) and are included in Natural Gas and
Petroleum Products Purchased or Purchased Power in the Consolidated Statements
of Income. Gains and losses related to such instruments, to the extent not yet
settled in cash, are reported as Current Assets or Liabilities, as appropriate,
in the Consolidated Balance Sheets until recognized in income. If the derivative
instrument is no longer sufficiently correlated to the underlying commodity, or
if the underlying commodity transaction closes earlier than anticipated, the
deferred gains or losses are recognized in income.
In addition to non-trading activities, the Company also engages in the
trading of commodity derivatives and therefore experiences net open positions.
Gains and losses on derivatives utilized for trading are recognized in income on
a current basis (the mark to market method) and are also included in Natural Gas
and Petroleum Products Purchased or Purchased Power in the Consolidated
Statements of Income.
Goodwill Amortization. The Company amortizes goodwill related to the
purchases of Duke/Louis Dreyfus, L.L.C. (D/LD) and Texas Eastern Corporation
(TEC), and certain other natural gas gathering, transmission and processing
facilities and engineering consulting businesses on a straight-line basis over
10 years, 40 years, and 15 years, respectively. Accumulated amortization of
goodwill at December 31, 1997 and 1996 was $123.6 million and $99.7 million,
respectively.
Property, Plant and Equipment. Property, plant and equipment is stated at
original cost. The Company capitalizes all construction-related direct labor and
materials. The cost of renewals and betterments that extend the useful life of
property is also capitalized. The cost of repairs and replacements is charged
to expense. Depreciation is generally computed using the straight-line method.
The Company's composite weighted-average depreciation rates, were 3.48, 3.36
and 3.33 percent for 1997, 1996 and 1995, respectively.
At the time property, plant and equipment maintained by the Company's
regulated operations are retired, the original cost plus the cost of retirement,
less salvage, is charged to accumulated depreciation and amortization. When
entire regulated operating units are sold or non-regulated properties are
retired or sold, the property and related accumulated depreciation and
amortization accounts are reduced and any gain or loss is recorded in income,
unless otherwise required by the FERC.
Unamortized Debt Premium, Discount and Expense. Expenses incurred in
connection with the issuance of presently outstanding long-term debt, and
premiums and discounts relating to such debt, are amortized over the terms of
the respective issues. Also, any call premiums or unamortized expenses
associated with refinancing higher-cost debt obligations used to finance
regulated assets and operations are amortized consistent with regulatory
treatment of these items.
Environmental Expenditures. Expenditures that relate to an existing
condition caused by past operations, and do not contribute to current or future
revenue generation, are expensed. Environmental expenditures relating to current
or future revenues are expensed or capitalized as appropriate. Liabilities are
recorded when environmental assessments and/or clean-ups are probable and the
costs can be reasonably estimated. Certain of these environmental assessments
and clean-up costs have been deferred and are included in Regulatory Assets and
Deferred Debits as they are expected to be recovered from Natural Gas
Transmission customers.
Cost-Based Regulation. The regulated operations of the Company are subject
to the provisions of Statement of Financial Accounting Standards (SFAS) No. 71,
"Accounting for the Effects of Certain Types of Regulation." Accordingly, the
Company records certain assets and liabilities that result from the effects of
the ratemaking process that would not be recorded under generally accepted
accounting principles for non-regulated entities. The regulatory assets and
regulatory liabilities of the Company are classified as Regulatory Assets and
Deferred Debits and Deferred Credits and Other Liabilities, respectively, in the
Consolidated Balance Sheets. The Company regularly evaluates the continued
applicability of SFAS No. 71, considering such factors as the impact of
competition and necessity to discount cost based rates charged to customers.
Increased competition might require entities to reduce their asset balances to
reflect a market basis less than cost and would also require entities to write
off their associated regulatory assets. Management cannot predict the potential
impact, if any, of
23
<PAGE>
increased competition on the Company's future financial position and results
of operations. However, the Company continues to position itself to effectively
meet these challenges by maintaining prices that are competitive.
Revenues. The Company recognizes revenues on transportation and storage of
natural gas as service is provided and on sales of natural gas and petroleum
products in the period of delivery. When rate cases associated with the
transportation of natural gas are pending final FERC approval, a portion of the
revenues collected by the interstate natural gas pipelines is subject to
possible refund. The Company has established reserves where required for such
cases.
The Company recognizes revenues from engineering and consulting services
provided through costs plus fee contracts based on the costs incurred during the
period plus a pro rata portion of the total fee earned. Revenues from services
provided through fixed price contracts are recognized using the
percentage-of-completion method, primarily based on contract costs to date
compared with the total estimated contract costs.
Allowance for Funds Used During Construction (AFUDC). AFUDC represents the
estimated debt and equity costs of capital funds necessary to finance the
construction of new regulated facilities. AFUDC is a non-cash item and is
recognized as a cost of Property, Plant and Equipment, with offsetting credits
to Other Income and Expenses and to Interest Expense. After construction is
completed, the Company is permitted to recover these costs, including a fair
return, through their inclusion in rate base and in the provision for
depreciation.
Rates used for capitalization of AFUDC by the Company's regulated
operations are calculated in compliance with FERC rules.
Income Taxes. Prior to the merger, PanEnergy and its subsidiaries filed
consolidated federal income tax returns. Subsequent to the merger, Duke Energy
and its subsidiaries file a consolidated federal income tax return. Federal
income taxes have been provided by the Company on the basis of its separate
company income and deductions in accordance with established practices of the
consolidated group.
Deferred income taxes have been provided for temporary differences.
Temporary differences occur when events and transactions recognized for
financial reporting result in taxable or tax-deductible amounts in different
periods.
Reclassifications. Certain amounts have been reclassified in the
consolidated financial statements to conform to the current presentation.
Note 3. Business Combinations and Acquisitions
Duke/Louis Dreyfus, L.L.C. (D/LD). On June 17, 1997, Duke Capital acquired
the remaining 50% ownership interest in D/LD from affiliates of Louis Dreyfus
Corp. for $247 million. Subsequently, Duke Capital contributed this investment
to Duke Energy Global Asset Development, Inc. D/LD markets electric power,
natural gas and energy-related services to utilities, municipalities and other
large energy users in North America. The acquisition was accounted for by the
purchase method, and the assets and liabilities and results of operations of
D/LD have been consolidated in the Company's financial statements since the date
of purchase. The purchase price substantially represents goodwill.
Duke/UAE L.L.C. During December 1997, a wholly owned subsidiary of the
Company formed a joint venture with UAE Ref-Fuel L.L.C. (UAE), a wholly owned
subsidiary of United American Energy Corp. The Company owns a 65% interest in
the joint venture, with UAE owning a 35% minority interest. The joint venture
acquired a 50% ownership interest in American Ref-Fuel Company, a
waste-to-energy firm with operations primarily in New York and New Jersey. Thus,
the Company has an indirect 32.5% ownership interest in American Ref-Fuel
Company and provided $237 million of investment and financing to the venture.
Duke Energy Trading and Marketing, L.L.C. On August 1, 1996, a wholly owned
subsidiary of the Company formed a natural gas and power marketing joint venture
with Mobil Corporation (Mobil) affiliates. The marketing company (DETM) conducts
business as Duke Energy Trading and Marketing, L.L.C. (formerly PanEnergy
Trading and Market Services, L.L.C.) in the United States and as Duke Energy
Marketing L.P. (formerly PanEnergy Marketing L.P.) in Canada. The Company
operates the joint venture and owns a 60% interest, with Mobil owning a 40%
minority interest.
24
<PAGE>
Note 4. Business Segments
Business segment financial information follows for each of the three years
in the period ended December 31, 1997. Other Operations include intersegment
eliminations.
<TABLE>
<CAPTION>
---------------------------------- ------------- ------------- ------------- -------------- ------------- -------------
Unaffiliated Intersegment Total Operating Earnings Depreciation
In Millions Revenues Revenues Revenues Income Before &
Interest & Amortization
Taxes
---------------------------------- ------------- ------------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
1997
Natural Gas Transmission $ 1,467.8 $ 104.3 $1,572.1 $ 607.7 $ 624.4 $ 229.6
Energy Services
Trading and Marketing 7,411.0 77.7 7,488.7 42.7 44.4 7.0
Field Services 2,480.5 574.1 3,054.6 156.7 157.0 71.4
Global Asset Development 109.2 14.2 123.4 (6.4) 4.5 8.7
Other Energy Services 333.4 32.8 366.2 13.8 8.8 5.8
Energy Services' Eliminations - (655.1) (655.1) - - -
------------- ------------- ------------- ------------- -------------- -------------
Total Energy Services 10,334.1 43.7 10,377.8 206.8 214.7 92.9
Other Operations 3.2 (148.0) (144.8) (55.9) (43.5) 13.7
------------- ------------- ------------- ------------- -------------- -------------
Total Consolidated $ 11,805.1 $ - $ 11,805.1 $ 758.6 $ 795.6 $ 336.2
---------------------------------- ------------- ------------- ------------- ------------- -------------- -------------
1996
Natural Gas Transmission $ 1,470.2 $ 86.1 $ 1,556.3 $ 583.8 $ 595.5 $ 228.2
Energy Services
Trading and Marketing 3,773.5 40.5 3,814.0 56.3 57.9 3.8
Field Services 2,215.6 420.9 2,636.5 149.4 151.6 58.7
Global Asset Development 65.0 6.6 71.6 (1.2) - 6.9
Other Energy Services 181.0 21.4 202.4 18.1 18.2 3.5
Energy Services' Eliminations - (456.5) (456.5) - - -
------------- ------------- -------------- ------------- ------------- -------------
Total Energy Services 6,235.1 32.9 6,268.0 222.6 227.7 72.9
Other Operations 10.2 (119.0) (108.8) (8.0) (5.0) 0.4
------------- ------------- -------------- ------------- ------------- -------------
Total Consolidated $ 7,715.5 $ - $ 7,715.5 $ 798.4 $ 818.2 $ 301.5
- ------------------------------------- ------------- ------------- -------------- ------------- ------------- -------------
1995
Natural Gas Transmission $ 1,480.3 $ 53.1 $ 1,533.4 $ 562.3 $ 567.6 $ 228.5
Energy Services
Trading and Marketing 1,838.3 28.4 1,866.7 20.0 17.1 2.3
Field Services 1,607.1 184.3 1,791.4 96.8 106.1 40.3
Global Asset Development 75.3 4.0 79.3 24.9 26.8 6.8
Other Energy Services 94.4 0.8 95.2 23.5 23.6 0.8
Energy Services' Eliminations - (216.9) (216.9) - - -
------------- ------------- -------------- ------------- ------------- -------------
Total Energy Services 3,615.1 0.6 3,615.7 165.2 173.6 50.2
Other Operations 2.9 (53.7) (50.8) 2.7 7.0 2.0
------------- ------------- -------------- ------------- ------------- -------------
Total Consolidated $ 5,098.3 $ - $ 5,098.3 $ 730.2 $ 748.2 $ 280.7
- ------------------------------------- ------------- ------------- -------------- ------------- ------------- -------------
- ------------------------------------- ----------------------------------------- ----------------------------
Capital and Investment Expenditures Identifiable Assets
----------------------------------------- ----------------------------
In Millions 1997 1996 1995 1997 1996
- ------------------------------------- ------------- ------------- ------------- ------------- --------------
Natural Gas Transmission $ 247.3 $ 194.0 $ 230.5 $ 5,088.9 $ 5,216.4
Energy Services
Trading and Marketing 17.9 6.6 15.3 1,857.3 1,403.5
Field Services 156.5 530.8 187.2 1,979.8 1,769.4
Global Asset Development 348.3 34.8 53.5 987.6 522.3
Other Energy Services 47.2 39.1 1.0 212.1 128.4
Energy Services' Eliminations - - - (169.1) (247.0)
------------- ------------- ------------- ------------- --------------
Total Energy Services 569.9 611.3 257.0 4,867.7 3,576.6
Other Operations 7.0 5.9 - 428.7 409.7
------------- ------------- ------------- ------------- --------------
Total Consolidated $ 824.2 $ 811.2 $ 487.5 $ 10,385.3 $ 9,202.7
- ------------------------------------- ------------- ------------- ------------- ------------- --------------
</TABLE>
25
<PAGE>
Note 5. Regulatory Matters
FERC Order 636 and Natural Gas Transition Costs. The Company's interstate
natural gas pipelines primarily provide transportation and storage services
pursuant to FERC Order 636. Order 636 allows pipelines to recover eligible costs
resulting from implementation of the order (transition costs). In 1994, the FERC
approved TETCO's settlement resolving regulatory issues related primarily to
Order 636 transition costs and a number of other issues related to services
prior to Order 636. TETCO's liability for transition costs is estimated based on
the amount of producers' natural gas reserves and other factors. TETCO's final
and nonappealable settlement provides for the recovery of certain of these
transition costs from customers through volumetric and reservation charges
through 2002 and beyond, if necessary. Pursuant to the settlement, TETCO will
absorb a certain portion of the transition costs, the amount of which continues
to be subject to change dependent upon natural gas prices and deliverability
levels. In 1995, based upon producers' discoveries of additional natural gas
reserves, TETCO increased the estimated liabilities for transition costs by
$125.8 million. Under the terms of the existing settlement, regulatory assets
were increased $85.8 million for amounts expected to be collected from customers
and TETCO recognized a $40 million charge to operating expenses ($26 million
after tax).
On July 16, 1996, the U.S. Court of Appeals for the District of Columbia
upheld, in general, all aspects of Order 636 and remanded certain issues for
further explanation. One of the issues remanded for further explanation is
whether pipelines should be entitled to recover 100% of gas supply realignment
(GSR) costs. On February 27, 1997, FERC issued an order reaffirming the right of
interstate pipelines to recover 100% of GSR costs. This matter is substantially
mitigated by TETCO's transition cost settlements.
The Company believes the exposure associated with gas purchase contract
commitments is substantially mitigated by transition cost recoveries pursuant to
customer settlements, Order 636 and other mechanisms, and that this issue will
not have a material adverse effect on consolidated results of operations or
financial position of the Company.
Jurisdictional Transportation and Sales Rates. On April 1, 1992 and
November 1, 1992, PEPL placed into effect, subject to refund, general rate
increases. On February 26, 1997, the FERC approved PEPL's settlement agreement
which provided final resolution of refund matters and established prospective
rates. The agreement terminated other actions relating to these proceedings as
well as PEPL's restructuring of rates and transition cost recoveries related to
FERC Order 636. The settlement will not have a material impact on future
operating revenues or financial position of the Company.
As a result of the resolution of these and certain other proceedings, PEPL
refunded $37.8 million to customers in 1997 and recorded earnings before
interest and taxes of $32.7 million, $8 million, and $20.6 million in 1997, 1996
and 1995, respectively.
Note 6. Related Party Transactions
Certain balances due to or due from related parties included in the
Consolidated Balance Sheets at December 31, 1997 and 1996 is as follows:
- --------------------------------------------- -------------- -------------
In Millions 1997 1996
- --------------------------------------------- -------------- -------------
Receivables $ 14.9 $ 1.9
Accounts payable 132.6 13.4
Taxes accrued 27.9 -
- --------------------------------------------- -------------- -------------
Operating revenues of $17.7 million, $23.3 million and $10.7 million
related to intercompany sales to Duke Energy are included in the Consolidated
Statements of Income for the years ended December 31, 1997, 1996 and 1995,
respectively.
Advances-Parent are carried as open accounts and are not segregated between
current and non-current amounts. Increases and decreases in advances result
from the movement of funds to provide for operations, capital expenditures
and debt payments of the Company.
26
<PAGE>
Note 7. Income Taxes
Income tax expense as presented in the Consolidated Statements of Income is
summarized as follows:
<TABLE>
<CAPTION>
--------------------------------------------------- ------------- ------------ ------------
In Millions 1997 1996 1995
--------------------------------------------------- ------------- ------------ ------------
<S> <C> <C> <C>
Current income taxes
Federal $ 89.2 $ 107.6 $ 78.6
State 22.7 20.7 14.8
------------- ------------ ------------
Total current income taxes 111.9 128.3 93.4
------------- ------------ ------------
Deferred income taxes, net
Federal 110.5 84.5 92.2
State 7.7 12.5 17.4
------------- ------------ ------------
Total deferred income taxes, net 118.2 97.0 109.6
------------- ------------ ------------
Total income tax expense $ 230.1 $ 225.3 $ 203.0
--------------------------------------------------- ------------- ------------ ------------
</TABLE>
Total income tax differs from the amount computed by applying the federal
income tax rate of 35% to income before income taxes. The reasons for this
difference are as follows:
<TABLE>
<CAPTION>
--------------------------------------------------- ------------- ------------ ------------
In Millions 1997 1996 1995
--------------------------------------------------- ------------- ------------ ------------
<S> <C> <C> <C>
Income tax, computed at the statutory rate $ 201.0 $ 205.6 $ 180.1
Adjustments resulting from:
State income tax, net of federal income tax effect 20.0 21.5 20.8
Other items, net 9.1 (1.8) 2.1
-------------- ------------ ------------
Total income tax expense $ 230.1 $ 225.3 $ 203.0
--------------------------------------------------- ------------- ------------ ------------
Effective tax rate 40.1% 38.3% 39.5%
--------------------------------------------------- ------------- ------------ ------------
</TABLE>
The tax effects of temporary differences that resulted in deferred income
tax assets and liabilities, and a description of the significant items that
created these differences as of December 31, 1997 and 1996, are as follows:
<TABLE>
<CAPTION>
---------------------------------------------------- ------------- -------------
In Millions 1997 1996
---------------------------------------------------- ------------- -------------
<S> <C> <C>
Deferred credits and other liabilities $ 290.4 $ 322.5
Alternative minimum tax credit carryforward 30.3 72.6
Other 11.4 -
------------- -------------
Total deferred income tax assets 332.1 395.1
Valuation Allowance (146.1) (141.1)
------------- -------------
Net deferred income tax assets 186.0 254.0
------------- -------------
Investments and other assets (130.6) (92.7)
Pre-funded pension costs (105.9) (98.2)
Property, plant and equipment (964.8) (931.6)
Regulatory assets and deferred debits (135.4) (119.5)
Natural gas transition costs (67.8) (87.5)
Other - (25.6)
------------- -------------
Total deferred income tax liabilities (1,404.5) (1,355.1)
------------- -------------
State deferred income tax, net of federal tax effect (94.4) (88.0)
------------- -------------
Net deferred income tax liability $(1,312.9) $(1,189.1)
---------------------------------------------------- ------------- -------------
</TABLE>
The alternative minimum tax credit carryforward can be carried forward
indefinitely.
In 1990, the Company established a provision for certain tax issues related
to the purchase of TEC, which resulted in an increase in goodwill and deferred
income tax liability. Following discussions with the Internal Revenue Service,
the Company revised its estimates in 1995 and 1996 with respect to these issues.
As a result, the Company reduced the related goodwill and deferred income tax
liability by approximately $40 million and $100 million in 1996 and 1995,
respectively. If tax benefits relating to the valuation allowance for deferred
income tax assets and other tax reserves are recognized subsequent to December
31, 1997, approximately $29.4 million will be allocated to goodwill.
27
<PAGE>
Note 8. Financial Instruments and Risk Management
Financial Instruments. In 1996, TETCO received $98.6 million from the
financing of the right to collect certain Order 636 natural gas transition
costs, with limited recourse. At December 31, 1997 and 1996, $52.8 million and
$87.3 million, respectively, remained outstanding related to the transition cost
recovery rights and were included in Other Current Liabilities in the
Consolidated Balance Sheets. In the opinion of management, the probability that
the Company will be required to perform under the recourse provisions is remote.
During 1997, the Company terminated its agreement to sell accounts
receivable, which was entered into in 1996. Also in 1997, the LNG settlement
receivables sale agreement, which was entered into in 1993, expired, as all the
receivables were collected. Amounts outstanding at December 31, 1996 under these
agreements were $100 million and $29.9 million, respectively.
Fair Value of Financial Instruments. The Company's financial instruments
include $1,950.3 million and $2,085.3 million of long-term debt with an
approximate fair value of $2,087.6 million and $2,226.0 million as of December
31, 1997 and 1996, respectively. The majority of these estimated fair value
amounts of long-term debt were obtained from independent parties. Judgment is
required in interpreting market data to develop the estimates of fair value.
Accordingly, the estimates determined as of December 31, 1997 and 1996 are not
necessarily indicative of the amounts the Company could have realized in current
market exchanges.
The fair value of cash and cash equivalents, notes receivable, and notes
payable and commercial paper are not materially different from their carrying
amounts because of the short-term nature of these instruments or the stated
rates approximating market rates.
The following financial instruments have no book value associated with them
and there are no fair values readily determinable since quoted market prices are
not available: guarantees made to affiliates or recourse provisions from
affiliates and sales agreements for trade accounts receivables, LNG project
settlement and Order 636 natural gas transition cost recovery. The fair value of
advances-parent are not readily determinable since amounts are carried as open
accounts.
Commodity Derivative Instruments. At December 31, 1997 and 1996, the
Company held or issued several instruments that reduce exposure to market
fluctuations relative to price and transportation costs of natural gas,
electricity and petroleum products. The Company's market exposure, primarily
within DETM and D/LD, arises from natural gas storage inventory balances and
fixed-price purchase and sale commitments that extend for periods of up to 9
years. The Company uses futures, swaps and options to manage and hedge price and
location risk related to these market exposures.
DETM and D/LD also provide risk management services to their customers
through a variety of energy commodity instruments, including forward contracts
involving physical delivery of an energy commodity, energy commodity futures,
over-the-counter swap agreements and options. In addition to hedging activities,
the Company also engages in the trading of such instruments, and therefore
experiences net open positions. The Company manages open positions with strict
policies which limit its exposure to market risk and require daily reporting to
management of potential financial exposure. These policies include statistical
risk tolerance limits using historical price movements to calculate a daily
earnings at risk as well as a total Value-at-Risk (VAR) measurement. The
weighted-average life of the Company's commodity risk portfolio was
approximately 7 months at December 31, 1997.
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 the Company to receive or make payments
based on the difference between a specified price and the actual price of the
underlying commodity. The Company uses futures and swaps to manage margins on
underlying fixed-price purchase or sale commitments for physical quantities of
natural gas, electricity and other energy-related commodities. 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. The Company utilizes
options to manage margins and to limit overall price risk exposure. DETM and
D/LD account for these activities using the mark to market method of accounting.
At December 31, 1997 and 1996, the Company had outstanding futures, swaps
and options for an absolute notional contract quantity of 4,810 billion cubic
feet (Bcf) and 3,425 Bcf of natural gas, respectively, some of which were in
place to offset the risk of price fluctuations under fixed-price commitments for
purchasing and delivering natural gas. At December 31, 1997 and 1996,
28
<PAGE>
outstanding futures, swaps and options related to electric contracts and other
energy-related commodities were not material. The gains, losses and costs
related to those commodity instruments that qualify as a hedge are not
recognized until the underlying physical transaction occurs. At December 31,
1997 and 1996, the Company had current unrecognized net gains of $13.5 million
and $8.7 million, respectively, related to commodity instruments. The fair value
of energy commodity swaps held at December 31, 1997 was a liability of $158.6
million.
During 1997, 1996 and 1995, the Company recognized net gains of $33.6
million, $25.4 million, and $10.5 million, respectively, from trading
activities. The values of energy commodity futures, swaps and options held for
trading purposes were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------ ---------------------------------- ----------------------------------
1997 1996
---------------------------------- ----------------------------------
In Millions Assets Liabilities Assets Liabilities
- ------------------------------------------ ----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Fair value at year end $ 1,626 $ 1,470 $ 833 $ 941
Notional amount at year end 2,009 1,825 407 530
Average fair value for the year 595 700 588 653
- ------------------------------------------ ----------------- ---------------- ----------------- ----------------
</TABLE>
Market and Credit Risk. New York Mercantile Exchange (Exchange) traded
futures and option contracts are guaranteed by the Exchange and have nominal
credit risk. On all other transactions described above, the Company is exposed
to credit risk in the event of nonperformance by the counterparties. For each
counterparty, the Company analyzes the financial condition prior to entering
into an agreement, establishes credit limits and monitors the appropriateness of
these limits on an ongoing basis. The change in market value of Exchange-traded
futures and options contracts requires daily cash settlement in margin accounts
with brokers. Swap contracts and most other over-the-counter instruments are
generally settled at the expiration of the contract term and may be subject to
margin requirements with the counterparty.
Note 9. Investment in Affiliates
Certain investments, where the Company's ownership in domestic and
international affiliates is 50 percent or less, are accounted for by the equity
method. These investments include undistributed earnings of $62.3 million in
1997 and $73.9 million in 1996. The Company's proportionate share of net income
from these affiliates for the years ended December 31, 1997, 1996 and 1995 was
$59.1 million, $49.9 million, and $63.4 million, respectively. These amounts are
reflected in Other Operating Revenues in the Consolidated Statements of Income.
Investment in affiliates as of December 31, 1997 and 1996 includes the
following:
- -------------------------------------------------- ------------- -------------
In Millions 1997 1996
- -------------------------------------------------- ------------- -------------
Natural Gas Transmission - domestic $ 67.5 $ 46.5
------------- -------------
Energy Services
Field Services - domestic 159.8 129.6
Global Asset Development
Domestic 174.5 14.5
International 207.8 183.5
Other Energy Services - domestic 14.6 49.2
------------- -------------
Total Energy Services 556.7 376.8
------------- -------------
Other Operations
Domestic - 8.0
International 12.6 12.6
------------- -------------
Total Other Operations 12.6 20.6
------------- -------------
Total Investments in Affiliates $ 636.8 $ 443.9
- -------------------------------------------------- ------------- -------------
Natural Gas Transmission. Investments primarily include ownership interests
in natural gas pipeline joint ventures which transport gas from Canada to the
United States.
Field Services. Among other investments, Field Services holds an interest
in a partnership which owns natural gas gathering systems in the Gulf of Mexico,
a master limited partnership that owns and operates a petroleum pipeline, and a
joint venture that provides gathering, processing and marketing services for
natural gas producers in Oklahoma.
29
<PAGE>
Global Asset Development. Global Asset Development has investments in
various natural gas and electric generation and transmission facilities world
wide, and in a joint venture that owns and operates a methanol plant and a MTBE
(methyl tertiary butyl ether) plant in Jubail, Saudi Arabia.
Other Energy Services. Investments include the participation in various
construction and support activities for fossil-fueled generating plants.
Other Operations. This segment primarily holds investments in an insurance
company and a partnership that develops and markets natural gas information
services and systems.
Summarized combined balance sheet and income statement information of the
entities that are accounted for using the equity method are as follows:
<TABLE>
<CAPTION>
- ----------------------------------- --------------- -------------- ---------------
In Millions 1997 1996 1995
- ----------------------------------- --------------- -------------- ---------------
<S> <C> <C> <C>
Assets
Current Assets $ 574.5 $ 989.1 $ 552.0
Noncurrent Assets 5,345.6 5,278.9 4,925.6
--------------- -------------- ---------------
Total Assets $ 5,920.1 $ 6,268.0 $ 5,477.6
--------------- -------------- ---------------
Liabilities and Equity
Current Liabilities $ 393.8 $ 752.1 $ 450.3
Noncurrent Liabilities 3,242.6 3,449.7 3,368.9
Equity 2,283.7 2,066.2 1,658.4
--------------- -------------- ---------------
Total Liabilities and Equity $ 5,920.1 $ 6,268.0 $ 5,477.6
--------------- -------------- ---------------
Income
Operating Revenues $ 788.7 $ 2,924.3 $ 1,324.5
Operating Expenses 450.0 2,199.4 596.1
Net Income 218.5 250.4 255.6
- ----------------------------------- --------------- -------------- ---------------
</TABLE>
The Company had outstanding loans to certain affiliates of $87.1 million
and $2.9 million at December 31, 1997 and 1996, respectively.
Note 10. Property, Plant and Equipment
A summary of property, plant and equipment by classification as of December
31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------- --------------- --------------
In Millions 1997 1996
- ----------------------------------------------------- --------------- --------------
<S> <C> <C>
Natural Gas Plant In Service
Transmission $ 6,094.4 $ 5,994.1
Gathering 812.5 643.0
Processing 502.4 508.4
Underground storage 488.8 450.6
LNG facilities and vessels 751.7 751.0
General plant 310.7 348.7
Construction work in progress 159.9 126.7
-------------- ---------------
Total natural gas plant in service 9,120.4 8,822.5
-------------- ---------------
Other Property and Equipment 74.0 11.0
-------------- ---------------
Total Property, Plant and Equipment 9,194.4 8,833.5
Less accumulated depreciation and amortization 3,609.2 3,369.0
-------------- ---------------
Net property, plant and equipment $ 5,585.2 $ 5,464.5
- ----------------------------------------------------- -------------- ---------------
</TABLE>
30
<PAGE>
Note 11. Debt and Credit Facilities
At December 31, 1996, the Company had two variable-rate bank credit
agreements that permitted the Company to borrow up to $400 million under a
364-day facility and $400 million under a five-year facility. During August
1997, these credit facilities were terminated. As a result, Duke Capital began
providing credit support to the Company in August 1997. At December 31, 1996,
notes payable and commercial paper included $102.2 million of commercial paper
outstanding, $251.9 million of short-term borrowings from banks, and a $5
million note payable to an affiliate. No amounts were outstanding under the
credit agreements at December 31, 1996.
A summary of short-term debt is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------- ----------- ------------ -----------
Dollars in Millions 1997 1996 1995
- --------------------------------------------------------------- ----------- ------------ -----------
<S> <C> <C>
Amount outstanding at end of year - $ 359.1 $ 150.0
Weighted-average rate at end of year - 6.10% 6.07%
Maximum amount outstanding during the year $ 382.7 $ 359.1 $ 150.0
Average amount outstanding during the year $ 336.5 $ 131.1 $ 69.3
Weighted-average interest rate for the year - computed on a
daily basis 6.03% 5.95% 5.83%
- --------------------------------------------------------------- ----------- ------------ -----------
</TABLE>
Long-term debt outstanding as of December 31, 1997 and 1996 consisted of
the following:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------- -------------- -------------- ---------------
Dollars in Millions Year Due 1997 1996
- ------------------------------------------------------------------- -------------- -------------- ---------------
<S> <C> <C> <C>
PanEnergy
Bonds:
7 3/4% 2022 $ 328.0 $ 328.0
8 5/8% Debentures 2025 100.0 100.0
Notes:
9.55%, maturing serially 1996 - 1999 27.5 41.3
9.9%, maturing serially 2000 - 2003 45.0 45.0
7% - 8 5/8% 1999 - 2006 450.0 450.0
Notes converted or matured during 1997 - 124.5
TETCO
Notes:
8% - 10 3/8% 2000 - 2004 500.0 500.0
Medium term, Series A, 7.64% - 9.07% 1999 - 2012 100.0 100.0
Algonquin
9.13% Notes 2001 - 2003 100.0 100.0
PEPL
7 7/8% Notes 2004 100.0 100.0
7.2% - 7.95% Debentures 2023 - 2024 200.0 200.0
Other 2.6 -
Unamortized debt discount and premium, net (2.8) (3.5)
-------------- ---------------
Total long-term debt 1,950.3 2,085.3
Current maturities of long-term debt (13.8) (138.3)
-------------- ---------------
Total long-term portion $1,936.5 $1,947.0
- ------------------------------------------------------------------- -------------- -------------- ---------------
</TABLE>
The annual maturities of consolidated long-term debt at December 31, 1997
were $13.8 million, $162.7 million, $211.2 million, $160.5 million and $144.5
million for 1998 through 2002, respectively.
On October 1, 1996, TETCO redeemed its $150 million, 10% debentures and its
$100 million, 10 1/8% debentures due 2011. TETCO recorded a non-cash
extraordinary item of $16.7 million (net of income tax of $10.3 million) related
to the unamortized discount on this early retirement of debt.
31
<PAGE>
Note 12. Commitments and Contingencies
Future Construction Costs. The Company plans to maintain its regulated
facilities, and pursue business expansion of its regulated operations as
opportunities arise. Projected 1998 capital and investment expenditures for the
Natural Gas Transmission segment, including AFUDC, are approximately $300
million. These projections are subject to periodic review and revisions. Actual
expenditures incurred may vary from such estimates due to various factors,
including business expansion opportunities, environmental matters and cost and
availability of capital.
The Energy Services segment plans to spend approximately $100 million in
1998 for required capital expenditures at its existing facilities. In addition,
the Company is seeking to significantly grow its Energy Services businesses,
primarily through the Global Asset Development business unit. One opportunity
includes the 520-megawatt combined cycle natural gas fired merchant generation
plant in Bridgeport, Connecticut already under construction.
Another growth opportunity includes the recently announced agreement to
purchase from Pacific Gas & Electric Company three power plants in California.
The power plants have a combined capacity of 2,645 megawatts. The purchase price
is estimated at approximately $500 million and this transaction is expected to
close during 1998. Other similar initiatives in 1998 will likely require
significant capital and investment expenditures which will be subject to
periodic review and revision and may vary significantly depending on the
value-added opportunities presented.
Environmental. The Company is subject to federal, state and local
regulations regarding air and water quality, hazardous and solid waste disposal,
and other environmental matters.
TETCO is currently conducting PCB (polychlorinated biphenyl) assessment and
clean-up programs at certain of its compressor station sites under conditions
stipulated by a U.S. Consent Decree. The programs include on- and off-site
assessment, installation of on-site source control equipment and groundwater
monitoring wells, and on- and off-site clean-up work. TETCO expects to complete
these clean-up programs during 1998. Groundwater monitoring activities will
continue at several sites beyond 1998.
The Company has also identified environmental contamination at certain
sites on the PEPL and Trunkline systems and is undertaking clean-up programs at
these sites. The contamination resulted from the past use of lubricants
containing PCBs and the prior use of wastewater collection facilities and other
on-site disposal areas. Soil and sediment testing, to date, has detected no
significant off-site contamination. The Company has communicated with the
Environmental Protection Agency and appropriate state regulatory agencies on
these matters. Environmental clean-up programs are expected to continue until
2002.
At December 31, 1997 and 1996, the Company had accrued liabilities for
remaining estimated clean-up costs on the TETCO, PEPL and Trunkline systems
which are included in Environmental Clean-up Liabilities in the Consolidated
Balance Sheets. These cost estimates represent gross clean-up costs expected to
be incurred, have not been discounted or reduced by customer recoveries and do
not include fines, penalties or third-party claims. Costs to be recovered from
customers are included in the Consolidated Balance Sheets as of December 31,
1997 and 1996, as Regulatory Assets and Deferred Debits.
In 1987, the Commonwealth of Kentucky instituted a suit in state court
against TETCO, alleging improper disposal of PCBs at TETCO's three compressor
station sites in Kentucky. This suit is still pending. In 1996, TETCO completed
clean-up of these sites under the U.S. Consent Decree.
The federal and state clean-up programs are not expected to interrupt or
diminish the Company's ability to deliver natural gas to customers. Based on the
Company's experience to date and costs incurred for clean-up operations,
management believes the resolution of matters relating to the environmental
issues discussed above will not have a material adverse effect on the
consolidated results of operations or financial position of the Company.
Litigation. In December 1996, TETCO received notification that Marathon Oil
Company (Marathon) intended to commence substitution of other gas reserves,
deliverability and leases for those dedicated to a certain natural gas purchase
contract (the Marathon Contract) with TETCO. In TETCO's view, the tendered
substitute gas reserves, deliverability and leases are not subject to the
Marathon Contract; therefore TETCO filed a declaratory judgment action on
December 17, 1996 in the U.S. District Court for the Eastern District of
Louisiana seeking a ruling that Marathon's interpretation of the Marathon
Contract is incorrect. Marathon filed a counterclaim seeking a declaratory
judgment enforcing its interpretation of the Marathon Contract. On January 7,
1997, Marathon filed an answer and a counterclaim to TETCO's complaint seeking
declaratory judgment enforcing its interpretation of the Marathon Contract.
32
<PAGE>
On February 18, 1997, Amerada Hess Corporation (Amerada Hess) notified
TETCO that it intended to commence substitution of other gas reserves,
deliverability and leases for those dedicated to its natural gas purchase
contract (the Amerada Hess Contract) with TETCO. On the same date, Amerada Hess
also filed a petition in the District Court of Harris County, Texas, 157th
Judicial District, seeking a declaratory judgment that its interpretation of the
Amerada Hess Contract, which covers the same leases and reserves as the Marathon
Contract, is correct. TETCO filed a declaratory judgment action with respect to
Amerada Hess' contentions in the U.S. District Court for the Eastern District of
Louisiana on February 21, 1997. The two actions have been transferred to the
judge presiding over the Marathon Contract matter.
On September 26, 1997, the judge presiding over the Marathon and Amerada
Hess contract matters issued summary judgments in both actions in favor of
TETCO. Marathon and Amerada Hess subsequently filed notices of appeal of the
summary judgments. On January 5, 1998, TETCO entered into an agreement with
Marathon settling all issues associated with the Marathon Contract. The
potential liability of the Company associated with the Amerada Hess Contract
should TETCO be contractually obligated to purchase natural gas based upon the
substitute gas reserves, deliverability and leases, and the effect of transition
cost recoveries pursuant to TETCO's Order 636 settlement involves numerous
complex legal and factual matters which will take a substantial period of time
to resolve. However, the Company does not believe that Amerada Hess will prevail
on its appeal of the lower court's summary judgment. Management is of the
opinion that the final disposition of this matter will not have a material
adverse effect on the consolidated results of operations or financial position
of the Company.
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 in the U.S. District Court for the Western District of
Missouri. The plaintiffs allege 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' contracts with
third parties, the plaintiffs seek compensatory and punitive damages in
unspecified amounts. Periodically, similar disputes arise with other natural gas
marketers and pipeline companies concerning interconnections and other issues
involving access to the Company's natural gas transmission systems. Management
is of the opinion that the final disposition of these proceedings will not have
a material adverse effect on the consolidated results of operations or financial
position of the Company.
On May 1, 1997, Citrus Trading Corporation (Citrus) and Enron
Capital and Trade Resources Corporation, as successor to Enron Gas
Marketing Corporation, filed suit in the District Court of Harris
County, Texas, against PanEnergy LNG Sales, Inc. (formerly Pan National
Gas Sales, Inc.), a subsidiary of the Company, alleging breach of a gas
purchase contract (the Contract) for regasified LNG entered into between
Citrus and Pan National Gas Sales, Inc. Plaintiffs allege that PanEnergy
LNG Sales, Inc. failed to deliver LNG pursuant to the terms of the
Contract. The plaintiffs seek compensatory damages in unspecified
amounts for losses allegedly incurred as a result of the contract breach
as well as a declaratory judgment that PanEnergy LNG Sales Inc.'s
assertions of force majeure due to the interruption in the supply of LNG
to PanEnergy LNG Sales, Inc. do not constitute force majeure under the
Contract. While this matter is in the early stages of litigation, based
on infomation currently available to the Company, the Company believes
the resolution of this matter will not have a material adverse effect on
the consolidated results of operations or financial position of the
Company.
On May 13, 1997, Anadarko Petroleum Corporation (Anadarko) filed suits
against PEPL and other affiliates, as defendants, both in the United States
District Court for the Southern District of Texas and State District Court of
Harris County, Texas. Anadarko claims that it was effectively indemnified by the
defendants against any responsibility for refunds of Kansas ad valorem taxes
which are due purchasers of gas from Anadarko, retroactive to 1983. While this
matter is in the early stages of litigation, based on information currently
available to the Company, the Company believes the resolution of this matter
will not have a material adverse effect on the consolidated results of
operations or financial position of the Company.
The Company and its subsidiaries are also involved in 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, the
Company has made accruals in accordance with SFAS No. 5, "Accounting for
Contingencies," in order to provide for such matters. Management is of the
opinion that the final disposition of these matters will not have a material
adverse effect on the consolidated results of operations or financial position
of the Company.
Other Commitments and Contingencies. In 1993, the U.S. Department of the
Interior announced its intention to seek additional royalties from gas producers
as a result of payments received by such producers in connection with past
take-or-pay settlements, and buyouts and buydowns of gas sales contracts with
natural gas pipelines. The Company's pipelines, with respect to certain producer
contract settlements, may be contractually required to reimburse or, in some
instances, to indemnify producers against such royalty claims. The potential
liability of the producers to the government and of the pipelines to the
producers involves complex issues of law and fact which are likely to take
substantial time to resolve. On August 27, 1996, the U.S. Court of Appeals for
the District of Columbia overturned a lower court ruling in favor of the
government in litigation brought on behalf of producers. The Department's
petition for rehearing was denied in November 1996. The Department may continue
to seek further appelate review. If the Company's pipelines ultimately have to
reimburse or indemnify the producer, the Company's pipelines will file with the
FERC to recover a portion of these costs from pipeline customers.
33
<PAGE>
The Company has a 10% ownership interest in TEPPCO Partners, L.P., a master
limited partnership (MLP) that owns and operates a petroleum products pipeline.
A subsidiary partnership of the MLP had $326.5 million in First Mortgage Notes
outstanding at December 31, 1997 with recourse to the general partner, a
subsidiary of the Company.
PEPL owns an effective 5.4% ownership interest in Northern Border Pipeline
Company (Northern Border). Under the terms of a settlement related to a
transportation agreement between PEPL and Northern Border, PEPL
guarantees payment to Northern Border under a transportation agreement
by an affiliate of Pan-Alberta Gas Limited. The transportation agreement
requires estimated total payments of $78.3 million for 1998 through 2001.
In connection with the sale of Petrolane in 1989, TEC agreed to indemnify
Petrolane against certain obligations for guaranteed leases and environmental
matters. Certain of the lease obligations relate to Petrolane's divestiture of
supermarket operations prior to its acquisition by TEC and as of December 31,
1997 total approximately $50.9 million over the remaining terms of the leases,
which expire in 2006.
In January 1998, the Company 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 1999, provided the
necessary U.S. and Canadian regulatory approvals are secured. In addition to
buying an ownership interest in the pipeline project, the Company 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.
As of December 31, 1997, the Company had letters of credit and surety bonds
of $46.5 million issued on its behalf related to natural gas transmission
operations, engineering services contracts, insurance contracts and various
other items.
Periodically, the Company may become involved in contractual disputes with
natural gas transmission customers involving potential or threatened abrogation
of contracts by the customers, including, for example, attempted transfers of
contractual obligations to less creditworthy subsidiaries of the customers. If
the customers are successful, the Company may not receive the full value of
anticipated benefits under the contracts.
In the normal course of business, certain of the Company's affiliates enter
into various contracts, including agreements for debt, natural gas transmission
service and construction contracts, which contain certain schedule and
performance requirements. Such affiliates use risk management techniques to
mitigate their exposure associated with such contracts. Duke Capital or the
Company have guaranteed performance by such affiliates under some of these
contracts.
Management is of the opinion that these commitments and contingencies will
not have a material adverse effect on the consolidated results of operations or
the financial position of the Company.
Leases. The Company utilizes assets under operating leases in several areas
of operations. Consolidated rental expense amounted to $41.7 million, $49.7
million, and $34.7 million in 1997, 1996, and 1995, respectively. Future minimum
rental payments under the Company's various operating leases for the years 1998
through 2002 are $38.5 million, $32.9 million, $26.2 million, $21 million and
$15.1 million, respectively.
Note 13. Stock Based Compensation
Stock Options and Awards. Effective with the merger, each share of the
Company's common stock outstanding immediately prior to the merger was converted
into the right to receive 1.0444 shares of Duke Energy common stock. Each option
to purchase the Company's common stock that was outstanding prior to the merger
was assumed by Duke Energy and became exercisable upon the same terms as under
the applicable Company's stock option plan and option agreement, except that
such options became an option to purchase shares of Duke Energy common stock,
appropriately adjusted. Each award of restricted shares of the Company's common
stock outstanding and not vested prior to the merger was assumed by Duke Energy
and such restricted shares of the Company's common stock were exchanged for
restricted shares of Duke Energy common stock.
34
<PAGE>
Under Duke Energy's 1996 Stock Incentive Plan, stock options and awards for
up to two million shares of Duke Energy common stock may be granted to key
employees of Duke Energy and its subsidiaries. Under the plan, the exercise
price of each option granted equals the market price of Duke Energy common stock
on the date of grant. Vesting periods range from one to five years with a
maximum exercise term of 10 years.
In 1997, the Company granted 115,615 shares of performance-based stock
awards with an average grant date fair value of $44 per share. The Company
recognized compensation expense of $4.4 million in 1997, $8.3 million in 1996
and none in 1995 for such stock awards. The Company follows the intrinsic value
method of accounting for common stock awards issued to employees.
Note 14. Benefit Plans
Retirement Plans. Duke Energy and its subsidiaries have multiple
non-contributory defined benefit retirement plans covering most employees with
minimum service requirements. Certain employees of the Company participate in
either the PanEnergy Plan or the Duke Energy Plan.
PanEnergy's plan provides retirement benefits (i) for eligible employees
of certain subsidiaries that are generally based on an employee's years of
benefit accrual service and highest average eligible earnings, and (ii) for
eligible employees of certain other subsidiaries under a cash balance formula.
A cash balance plan participant accumulates a benefit based upon a percentage
of current salary, which varies with age and years of service, and interest
credits.
Other Company employees participate in Duke Energy's non-contributory
defined benefit retirement plan. Effective January 1, 1997, this plan was
amended to a plan under which benefits are based upon a cash balance formula.
Prior to January 1, 1997, retirement plan benefits were based on an age-related
formula, which took into account years of benefit accrual service and the
employee's highest average eligible earnings.
Both the Company's and Duke Energy's policy is to fund amounts, as
necessary, on an actuarial basis to provide assets sufficient to meet benefits
to be paid to plan members. On December 30, 1997, assets and related liabilities
of $235.6 million and $204 million, respectively, for certain Company
participants were transferred to the Duke Energy plan. As a result of this
transfer, no contributions to the Duke Energy plan were necessary in 1997.
The fair market value of Duke Energy's plan assets were $2,724.7 million
and $2,445.3 million for December 31, 1997 and 1996, respectively. The
accumulated benefit obligation was $2,030.2 million and $1,841.6 million for
December 31, 1997 and 1996, respectively. The amount of pre-funded pension cost
allocated to the Company as of December 31, 1997 and 1996 was $302.6 million and
$280.6 million, respectively.
Assumptions used in Duke Energy's pension and other postretirement benefits
accounting (reflecting weighted-averages across plans) include:
<TABLE>
<CAPTION>
- --------------------------------------------------- ----------- ----------- ------------
Percent (%) 1997 1996 1995
- --------------------------------------------------- ----------- ----------- ------------
<S> <C> <C> <C>
Discount rate 7.25 7.50 7.50
Salary increase 4.15 4.80 4.81
Expected long-term rate of return on plan assets 9.25 9.18 9.18
- --------------------------------------------------- ----------- ----------- ------------
</TABLE>
The Company's net periodic pension benefit, including amounts allocated by
Duke Energy, for the years ended December 31, 1997, 1996 and 1995, was $19.4
million, $19.1 million and $18.2 million, respectively.
Duke Energy and PanEnergy also sponsor employee savings plans, which
cover substantially all employees. The Company expensed plan contributions,
including amounts allocated by Duke Energy, of $18.6 million, $14.2 million and
$14 million in 1997, 1996 and 1995, respectively.
Postretirement Benefits. Duke Energy and most of its subsidiaries provide
certain health care and life insurance benefits for retired employees on a
contributory and non-contributory basis. Employees become eligible for these
benefits when they have met certain age and service requirements at retirement,
as defined in the plans.
Benefit costs are accrued over the active service period of employees to
the date of full eligibility for the benefits. The net unrecognized transition
obligation, resulting from the implementation of accrual accounting, is being
amortized over approximately 20 years. With respect to the entire plan, the fair
value of the plan assets was $266.2 million and $225.3 million at December 31,
1997 and 1996, respectively. The accumulated postretirement benefit obligation
was $667.0 million and $641.7 million at December 31, 1997 and 1996,
respectively.
35
<PAGE>
It is the Company's and Duke Energy's general policy to fund accrued
postretirement health care costs. Duke Energy funds postretirement benefits
through various mechanisms, including retired lives reserves, voluntary
employee's beneficiary association trusts and 401(h) funding.
The Company's net periodic postretirement benefit cost, including amounts
allocated by Duke Energy, for the years ended December 31, 1997, 1996 and 1995,
was $17 million, $16.2 million and $15.1 million, respectively.
The weighted-average health care cost trend rate used to estimate
postretirement benefits was 7.75% in 1997. This rate is expected to decrease,
with a 4.75% weighted-average ultimate trend rate expected to be achieved by
2005. The effect of a 1% increase in the assumed health care cost trend rate for
each future year would result in a $2.4 million increase in the annual aggregate
postretirement benefit cost and an $29.5 million increase in Duke Energy's
accumulated postretirement benefit obligation at December 31, 1997.
Note 15. Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------- -------------- ------------- --------------- -------------- ---------------
First Second Third Fourth
In Millions Quarter Quarter Quarter Quarter Total
- --------------------------------------- -------------- ------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
1997
Operating revenues(a) $ 2,725.2 $ 2,098.9 $ 3,504.6 $ 3,476.4 $11,805.1
Operating income(a) 282.3 136.2 159.4 180.7 758.6
Net income 138.2 61.9 68.0 76.2 344.3
1996
Operating revenues(a) $ 1,725.1 $ 1,468.7 $ 1,874.7 $ 2,647.0 $ 7,715.5
Operating income(a) 220.8 181.9 183.4 212.3 798.4
Income before extraordinary item 104.0 82.3 86.1 89.5 361.9
Net income 104.0 82.3 86.1 72.8 345.2
- --------------------------------------- -------------- ------------- --------------- -------------- ---------------
</TABLE>
(a) These amounts reflect a reclassification of equity in earnings of
unconsolidated affiliates from other income to operating revenues to be
consistent with the Company's presentation.
Amounts reported on a quarterly basis are not necessarily indicative of
amounts expected for the respective years due to the effects of seasonal
temperature variations on energy consumption.
36
<PAGE>
Independent Auditors' Report
----------------------------
PanEnergy Corp:
We have audited the accompanying consolidated balance sheet of PanEnergy
Corp and subsidiaries (the Company) as of December 31, 1997 and the
related consolidated statements of income, common stockholder's equity,
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31,
1997, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
We previously audited and reported on the consolidated balance sheets of Duke
Engineering & Services, Inc., and Duke Energy Global Asset Development (formerly
Mint Street Capital Corp.) (the "Contributed Companies") as of December 31, 1996
and the related Contributed Companies consolidated statements of income and
retained earnings, and of cash flows for each of the two years in the period
then ended. As described in Note 1 to the consoldiated financial statements, the
1996 and 1995 consolidated financial statements are restated to reflect the 1997
contribution of the Contributed Companies to the Company by its parent, Duke
Capital Corporation, in connection with the merger of Duke Power Company and
PanEnergy Corp which has been accounted for as as a pooling of interests. The
Contributed Companies revenues and net income represented 2% and 0% for 1996 and
2% and 1% for 1995 of the respective restated totals. Separate financial
statements of PanEnergy Corp and subsidiaries included in the restated
consolidated balance sheet as of December 31, 1996 and the related restated
consolidated statements of income, common stockholder's equity, and cash flows
for each of the two years in the period then ended, were audited and reported on
separately by other auditors. We also audited the combination of the
accompanying consolidated balance sheet as of December 31, 1996 and related
consolidated statements of income, common stockholder's equity, and cash flows
for each of the two years in the period then ended, after restatement for the
1997 contribution in connection with the pooling of interests descibed above; in
our opinion, such consolidated statements have been properly combined on the
basis described in Note 1 to the consolidated financial statements.
/s/ Deloitte & Touche LLP
Charlotte, North Carolina
February 13, 1998
37
<PAGE>
Independent Auditors' Report
----------------------------
The Board of Directors
PanEnergy Corp:
We have audited the consolidated balance sheet of PanEnergy Corp
and Subsidiaries as of December 31, 1996, and the related consolidated
statements of income, common stockholder's equity, and cash flows for
the years ended December 31, 1996 and 1995. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of PanEnergy
Corp and Subsidiaries as of December 31, 1996, and the results of their
operations and their cash flows for the years ended December 31, 1996 and 1995
in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Houston, Texas
January 16, 1997
38
<PAGE>
Responsibility for Financial Statements
---------------------------------------
The financial statements of PanEnergy Corp are prepared by management, which is
responsible for their integrity and objectivity. The statements are prepared in
conformity with generally accepted accounting principles appropriate in the
circumstances to reflect in all material respects the substance of events and
transactions which should be included. The other information in the annual
report is consistent with the financial statements. In preparing these
statements, management makes informed judgments and estimates of the expected
effects of events and transactions that are currently being reported.
The Company's system of internal accounting control is designed to provide
reasonable assurance that assets are safeguarded and transactions are executed
according to management's authorization. Internal accounting controls also
provide reasonable assurance that transactions are recorded properly, so that
financial statements can be prepared according to generally accepted accounting
principles. In addition, the Company's accounting controls provide reasonable
assurance that errors or irregularities which could be material to the financial
statements are prevented or are detected by employees within a timely period as
they perform their assigned functions. The Company's accounting controls are
continually reviewed for effectiveness. In addition, written policies, standards
and procedures, and a strong internal audit program augment the Company's
accounting controls.
/s/ Jeffrey L. Boyer
Jeffrey L. Boyer
Vice President and Controller
39
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
No disclosure required.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Consolidated Financial Statements and Supplemental Financial Data included
in Part II of this annual report are as follows:
Consolidated Statements of Income for the Years Ended December 31,
1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1997, 1996 and 1995
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Common Stockholder's Equity for the Years
Ended December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
Independent Auditors' Reports
Quarterly Financial Data (unaudited) (included in Note 15 to
the Consolidated Financial Statements)
All other schedules are omitted because of the absence of the
conditions under which they are required or because the required
information is included in the financial statements or notes thereto.
(b) Exhibits
Exhibits filed herewith are designated by an asterisk(*); all exhibits not
so designated are incorporated herein by reference to a prior filing, as
indicated. Items constituting management contracts or compensatory plans
or arrangements are designated by a double asterisk(**).
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
2.1 Amended and Restated Agreement and Plan of Merger dated March
10, 1997, among Duke Power Company, Duke Transaction Corp and
PanEnergy Corp (filed with Form 8-K PanEnegy Corp
dated March 20, 1997, as Exhibit 2(a)).
* 3.1 Restated Certificate of Incorporation of registrant
3.2 By-Laws of regisrant (filed with Form 10-Q of Panhandle
Eastern Corporation for the quarter ended September 30, 1986,
File No. 1-8157, as Exhibit 19(a)).
10.1 Formation Agreement between PanEnergy Trading and Market
Services, Inc. and Mobil Natural Gas Inc. dated May 29, 1996
(filed with Form 10-K of PanEnergy Corp for the year ended
December 31, 1996, File No 1-8157, as Exhibit 2.02).
10.2** 1997 Non-Qualified Stock Option Plan of Panhandle Eastern
Corporation, as amended through December 3, 1986 (and related
Agreement) (filed with Form 10-K of Panhandle Eastern
Corporation for the year ended December 31, 1986, File No.
1-8157, as Exhibit 10(f)).
10.3** 1982 Key Employee Stock Option Plan of Panhandle Eastern
Corporation, as amended through December 3, 1986 (and related
Agreement) (filed with Form 10-K of Panhandle Eastern
Corporation for the year ended December 31, 1986, File No.
1-8157, as Exhibit 10(g)).
10.4** Employee Savings Plan of Panhandle Eastern Corporation and
Participating Affiliates (filed with Form 10-K of Panhandle
Eastern Corporation for the year ended December 31, 1990,
File No. 1-8157, as Exhibit 10.12).
10.5** Panhandle Eastern Corporation 1994 Long Term Incentive Plan
(filed with Form 10-K of Panhandle Eastern Corporation for
the year ended December 31, 1993, File No. 1-8157, as Exhibit
10.18).
10.6** Amendment to Panhandle Eastern Corporation 1994 Long Term Incentive Plan
(filed with Form 10-Q of PanEnergy Corp for quarter ended
June 30, 1996, File No. 1-8157, as Exhibit 10.40).
* 12 Computation of Ratio of Earnings to Fixed Charges
* 21 Subsidiaries of the registrant
* 23.1 Consent of Deloitte & Touche LLP
* 23.2 Consent of KPMG Peat Marwick LLP
* 24.1 Power of Attorney authorizing Richard J. Osborne and others to
sign the annual report on behalf of the registrant and certain
of its directors and officers.
* 24.2 Certified copy of resolutions of the Board of Directors of the registrant authorizing power of attorney.
* 27 Financial Data Schedule
</TABLE>
Undertaking
The registrant, hereby undertakes pursuant to Regulation S-K, Item
601(b), paragraph (4)(iii), to furnish to the Securities and Exchange
Commission upon request all constituent instruments defining the rights
of holders of long-term debt of the registrant and its consolidated
subsidiaries not filed herewith for the reason that the total amount of
securities authorized under any of such instruments does not exceed 10%
of the total consolidated assets of registrant and its consolidated
subsidiaries.
40
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
Date: March 31, 1998 PANENERGY CORP
(Registrant)
By Richard J. Osborne
__________________________
Richard J. Osborne
Senior Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
(i) Principal executive officer:
Paul M. Anderson
Chairman, President and Chief Executive Officer and Director
(ii) Principal accounting officer:
Jeffrey L. Boyer
Vice President and Controller
(iii) A majority of the Directors:
Fred J. Fowler
James T. Hackett
Richard B. Priory
Date: March 31, 1998
Richard J. Osborne, by signing his name hereto, does hereby sign this
document on behalf of the registrant and on behalf of each of the above-named
persons pursuant to a power of attorney duly executed by the registrant and such
persons, filed with the Securities and Exchange Commission as an exhibit hereto.
By /s/ Richard J. Osborne
________________________________
Richard J. Osborne
Attorney-in-fact
41
Restated Certificate of Incorporation
of
PanEnergy Corp
FIRST: The name of the corporation is PanEnergy Corp.
SECOND: The address of the corporation's registered office in the State
of Delaware is Corporation Trust Center, 1209 Orange Street in the City of
Wilmington, County of New Castle. The name of its registered agent at such
address is The Corporation Trust Company.
THIRD: The purpose of the corporation is to engage in any lawful act or
activity for which corporations may be organized under the DGCL.
FOURTH: The total number of shares which the corporation shall have
authority to issue is one thousand (1,000) shares of common stock, par value
$1.00 per share.
FIFTH: The Board of Directors of the corporation is expressly authorized to
adopt, amend or repeal By-Laws of the corporation.
SIXTH: Elections of directors need not be by written ballot except and to
the extent provided in the By-Laws of the corporation.
SEVENTH: To the full extent permitted by the DGCL or any other applicable
laws presently or hereafter in effect, no director of the corporation shall be
personally liable to the corporation or its stockholders for or with respect
to any acts or omissions in the performance of his or her duties as a director
of the corporaiton. Any repeal or modification of this Article SEVENTH shall
not adversely affect any right or protection of a director of the corporation
existing immediately prior to such repeal or modificaiton.
EIGHTH: Each person who is or was or had agreed to become a
director or officer of the corporation, or each such person who is or
was serving or who had agreed to serve at the request of the Board of
Directors or an officer of the corporation as an employee or agent of
the corporation or as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other entity
(including the heirs, executors, administrators or estate of such
person), shall be indemnified by the corporation to the full extent
permitted by the DGCL or any other applicable laws as presently or
hereafter in effect. Without limiting the generality of the effect of
the foregoing, the corporation may adopt by-laws or enter into one or
more agreements with any person which provide for indemnification
greater or different than that provided
<PAGE>
in this Article EIGHTH or the DGCL. Any repeal or modification of this Article
EIGHTH shall not adversely affect any right or protection existing hereunder
immediately prior to such repeal or modification.
<PAGE>
<PAGE>
EXHIBIT 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
- ------------------------------------------------------- ---------------------------------------------------------------------
Dollars in Millions Year Ended December 31
- ------------------------------------------------------- ---------------------------------------------------------------------
1997(a) 1996(a) 1995(a) 1994(a) 1993(a)
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Earnings before income taxes $ 574.4 $ 587.2 $ 514.5 $ 398.9 $ 291.1
Fixed charges 215.1 244.1 256.6 259.6 295.2
------------- ------------- ------------- ------------- -------------
Total $ 789.5 $ 831.3 $ 771.1 $ 658.5 $ 586.3
============= ============= ============= ============= =============
Fixed charges:
Interest on debt $ 204.7 $ 228.0 $ 245.3 $ 249.6 $ 285.9
Interest component of rentals 10.4 16.1 11.3 10.0 9.3
------------- ------------- ------------- ------------- -------------
Fixed charges $ 215.1 $ 244.1 $ 256.6 $ 259.6 $ 295.2
============= ============= ============= ============= =============
Ratio of earnings to fixed charges 3.7 3.4 3.0 2.5 2.0
- ------------------------------------------------------- ------------- ------------- ------------- ------------- -------------
</TABLE>
(a) Financial information reflects the accounting for the combination of the
Company with Duke Engineering & Services, Inc., DukeSolutions, Inc. and
Duke Energy Global Asset Development, Inc. as a pooling of interests. As a
result, the financial information gives effect to the combination as if it
had occurred on January 1, 1993.
42
<PAGE>
LIST OF SUBSIDIARIES
The following is a list of certain subsidiaries of the registrant and
their respective states of incorporation (100% owned unless otherwise
indicated):
Algonquin Gas Transmission Company (Delaware)
Duke Energy Field Services, Inc. (Colorado)
Duke Energy Natural Gas Corporation (Delaware)
Duke Energy Trading and Marketing, L.L.C. (Delaware)(60% owned)
Duke Engineering and Services, Inc. (North Carolina)
Panhandle Eastern Pipe Line Company (Delaware)
Texas Eastern Transmission Corporation (Delaware)
Trunkline Gas Company (Delaware)
<PAGE>
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in Registration Statement Nos.
33-28914 and 333-10219 of PanEnergy Corp on Form S-3 and Registration Statement
Nos. 33-28912, 2-61225, 2-79180, 33-35253, 33-35251, 33-36698, 33-41079,
33-55119 and 333-02877 of PanEnergy Corp on Form S-8 of our report dated
February 13, 1998, appearing in this Form 10-K of PanEnergy Corp for the year
ended December 31, 1997.
/s/ Deloitte & Touche LLP
Charlotte, North Carolina
March 31, 1998
43
<PAGE>
EXHIBIT 23.2
Consent of Independent Auditors
We consent to the incorporation by reference in Registration Statement Nos.
33-28914 and 333-10219 of PanEnergy Corp on Form S-3 and Registration Statement
Nos. 33-28912, 2-61225, 2-79180, 33-35253, 33-35251, 33-36698, 33-41079,
33-55119 and 333-02877 of PanEnergy Corp on Form S-8 of our report on the
consolidated financial statements of PanEnergy Corp as of and for the years
ended December 31, 1996 and 1995, dated January 16, 1997, appearing in this Form
10-K of PanEnergy Corp for the year ended December 31, 1997.
/s/ KPMG Peat Marwick LLP
Houston, Texas
March 31, 1998
44
<PAGE>
Exhibit 24.1
PANENERGY CORP
Power of Attorney
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997
(Annual Report)
The undersigned PanEnergy Corp, a Delaware corporation and certain of its
officers and/or directors, do each hereby constitute and appoint Richard J.
Osborne, W. Edward Poe, Jr. and Jeffrey L. Boyer, and each of them, to act as
attorneys-in-fact for and in the respective names, places, and stead of the
undersigned, to execute, seal, sign, and file with the Securities and Exchange
Commission the Annual Report of said PanEnergy Corp on Form 10-K and any and
all amendments thereto, hereby granting to said attorneys-in-fact, and
each of them, full power and authority to do and perform all and every act
and thing whatsoever requisite, necessary, or proper to be done in and about
the premises, as fully to all intents and purposes as the undersigned, or any
of them, might or could do if personally present, hereby ratifying and
approving the acts of said attorneys-in-fact.
Executed the 18th day of March, 1998.
PANENERGY CORP
By : /s/ Paul M. Anderson
----------------------------
Paul M. Anderson
Chairman, President and
Chief Executive Officer
/s/ Paul M Anderson Chairman, President and Chief Executive Officer
- ------------------------- (Principal Executive Officer and Director)
Paul M. Anderson
/s/ Richard J. Osborne Senior Vice President and Chief Financial
- ------------------------- Officer (Principal Financial Officer)
Richard J. Osborne
/s/ Jeffrey L. Boyer Controller
- ------------------------- (Principal Accounting Officer)
Jeffrey L. Boyer
/s/ Fred J. Fowler (Director)
- -------------------------
Fred J. Fowler
/s/ James T. Hackett (Director)
- -------------------------
James T. Hackett
/s/ R.B. Priory (Director)
- -------------------------
R. B. Priory
45
<PAGE>
Exhibit 24.2
Certified Copy of Resolutions Adapted by
Unanimous Written to Action Without a Meeting
of the Board of Directors of
PanEnergy Corp
Effective March 16, 1998
RESOLVED, that the Power of Attorney as presented to and executed by the
Directors in connection with the execution of this written consent be, and
hereby is, approved in form and content for purposes of filing the Form 10-K
Annual Report for the year ended December 31, 1997 with the Securities and
Exchange Commission.
I do hereby certify that the above is a full, true and complete extract
from a unanimous written consent to action without a meeting of the Board of
Directors of PanEnergy Corp, effective March 16, 1998.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed the Corporate
Seal of said PanEnergy Corp this 31st day of March, 1998.
/s/ Robert T. Lucas III
--------------------------------
Robert T. Lucas III
Assistant Secretary
46
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
PanEnergy Corp Annual Report on Form 10-K for year ended
December 31, 1997 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK> 0000351696
<NAME> PANENERGY CORP
<MULTIPLIER> 1,000
<CAPTION>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 47100
<SECURITIES> 0
<RECEIVABLES> 1598700
<ALLOWANCES> 0
<INVENTORY> 145600
<CURRENT-ASSETS> 2549600
<PP&E> 9194400
<DEPRECIATION> 3609200
<TOTAL-ASSETS> 10385300
<CURRENT-LIABILITIES> 2973300
<BONDS> 1936500
0
0
<COMMON> 151800
<OTHER-SE> 3179200
<TOTAL-LIABILITY-AND-EQUITY> 10385300
<SALES> 9815600
<TOTAL-REVENUES> 11805100
<CGS> 9363300
<TOTAL-COSTS> 10619600
<OTHER-EXPENSES> 426900
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 199800
<INCOME-PRETAX> 795600
<INCOME-TAX> 230100
<INCOME-CONTINUING> 344300
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 344300
<EPS-PRIMARY> 0 <F1>
<EPS-DILUTED> 0 <F1>
<FN>
<F1>Not meaningful since PanEnergy Corp is a wholly-owned subsidiary.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
PanEnergy Corp Annual Report on Form 10-K for year ended December 31, 1996 and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<RESTATED>
<CIK> 0000351696
<NAME> PANENERGY CORP
<MULTIPLIER> 1,000
<CAPTION>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 118100
<SECURITIES> 0
<RECEIVABLES> 1234300
<ALLOWANCES> 0
<INVENTORY> 132100
<CURRENT-ASSETS> 2079800
<PP&E> 8833500
<DEPRECIATION> 3369000
<TOTAL-ASSETS> 9202700
<CURRENT-LIABILITIES> 2492400
<BONDS> 1947000
0
0
<COMMON> 151100
<OTHER-SE> 2564600
<TOTAL-LIABILITY-AND-EQUITY> 9202700
<SALES> 5925800
<TOTAL-REVENUES> 7715500
<CGS> 5492400
<TOTAL-COSTS> 6534800
<OTHER-EXPENSES> 382300
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 224800
<INCOME-PRETAX> 818200
<INCOME-TAX> 225300
<INCOME-CONTINUING> 361900
<DISCONTINUED> 0
<EXTRAORDINARY> 16700
<CHANGES> 0
<NET-INCOME> 345200
<EPS-PRIMARY> 0 <F1>
<EPS-DILUTED> 0 <F1>
<FN>
<F1>Not meaningful since PanEnergy Corp is a wholly-owned subsidiary.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
PanEnergy Corp Annual Report on Form 10-K for year ended
December 31, 1995 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<RESTATED>
<CIK> 0000351696
<NAME> PANENERGY CORP
<MULTIPLIER> 1,000
<CAPTION>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 3407000
<TOTAL-REVENUES> 5098300
<CGS> 3131200
<TOTAL-COSTS> 4003400
<OTHER-EXPENSES> 364700
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 233700
<INCOME-PRETAX> 748200
<INCOME-TAX> 203000
<INCOME-CONTINUING> 311500
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 311500
<EPS-PRIMARY> 0 <F1>
<EPS-DILUTED> 0 <F1>
<FN>
<F1>Not meaningful since PanEnergy Corp is a wholly-owned subsidiary.
</FN>
</TABLE>
