-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WovcjMeTzdvJRPaORtaXRZBOS1PHcHMwlRnZwioHzWUtAYo2tsFuSP++1Teq8Yar n97VOLgsU4jl+HjNImKtqA== 0000950168-99-001537.txt : 19990517 0000950168-99-001537.hdr.sgml : 19990517 ACCESSION NUMBER: 0000950168-99-001537 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DUKE ENERGY CORP CENTRAL INDEX KEY: 0000030371 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 560205520 STATE OF INCORPORATION: NC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-04928 FILM NUMBER: 99623520 BUSINESS ADDRESS: STREET 1: 526 SOUTH CHURCH STREET CITY: CHARLOTTE STATE: NC ZIP: 28201-1006 BUSINESS PHONE: 7045946200 MAIL ADDRESS: STREET 1: 422 S CHURCH ST CITY: CHARLOTTE STATE: NC ZIP: 28242 FORMER COMPANY: FORMER CONFORMED NAME: DUKE POWER CO /NC/ DATE OF NAME CHANGE: 19920703 10-Q 1 DUKE ENERGY CORPORATION FORM 10-Q
============================================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR QUARTER ENDED MARCH 31, 1999 COMMISSION FILE NUMBER 1-4928 DUKE ENERGY CORPORATION (Exact name of Registrant as Specified in its Charter) NORTH CAROLINA 56-0205520 (State or Other Jurisdiction of Incorporation) (IRS Employer Identification No.) 526 SOUTH CHURCH STREET CHARLOTTE, NC 28202-1904 (Address of Principal Executive Offices) (Zip code) 704-594-6200 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes x No -- -- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Number of shares of Common Stock, without par value, outstanding at April 30, 1999..............................................................364,224,600 ==============================================================================================
DUKE ENERGY CORPORATION FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1999 INDEX ITEM PAGE - ---- ---- PART I. FINANCIAL INFORMATION 1. Financial Statements.................................................................1 Consolidated Statements of Income for the Three Months Ended March 31, 1999 and 1998.......................................................................1 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1999 and 1998........................................................2 Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998...........3 Notes to Consolidated Financial Statements.......................................5 2. Management's Discussion and Analysis of Results of Operations and Financial Condition..........................................................................11 PART II. OTHER INFORMATION 1. Legal Proceedings...................................................................21 4. Submission of Matters to a Vote of Security Holders.................................21 6. Exhibits and Reports on Form 8-K....................................................21 Signatures..........................................................................22
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 From time to time, Duke Energy may make statements regarding its assumptions, projections, expectations, intentions or beliefs about future events. These statements are intended as "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. Duke Energy cautions that assumptions, projections, expectations, intentions or beliefs about future events may and often do vary from actual results and the differences between assumptions, projections, expectations, intentions or beliefs and actual results can be material. Accordingly, there can be no assurance that actual results will not differ materially from those expressed or implied by the forward-looking statements. Factors that could cause actual achievements and events to differ materially from those expressed or implied in such forward-looking statements include state and federal legislative and regulatory initiatives that affect cost and investment recovery, have an impact on rate structures and affect the speed and degree to which competition enters the electric and natural gas industries; industrial, commercial and residential growth in the service territories of Duke Energy and its subsidiaries; the weather and other natural phenomena; the timing and extent of changes in commodity prices and interest rates; changes in environmental and other laws and regulations to which Duke Energy and its subsidiaries are subject or other external factors over which Duke Energy has no control; the results of financing efforts; growth in opportunities for Duke Energy's business units; achievement of year 2000 readiness; and the effect of accounting policies issued periodically by accounting standard-setting bodies. i
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. DUKE ENERGY CORPORATION CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) Three Months Ended March 31, ------------------------------ 1999 1998 ------------- -------------- OPERATING REVENUES Sales, trading and marketing of natural gas and petroleum products $ 2,014 $ 1,976 Transportation and storage of natural gas 379 387 Generation, transmission and distribution of electricity 1,097 1,020 Trading and marketing of electricity 439 537 Other 231 195 ------------- -------------- Total operating revenues 4,160 4,115 ------------- -------------- OPERATING EXPENSES Natural gas and petroleum products purchased 1,940 1,869 Fuel used in electric generation 165 153 Net interchange and purchased power 484 612 Other operation and maintenance 620 569 Depreciation and amortization 225 222 Property and other taxes 99 82 ------------- -------------- Total operating expenses 3,533 3,507 ------------- -------------- OPERATING INCOME 627 608 ------------- -------------- OTHER INCOME AND EXPENSES Deferred returns and allowance for funds used during construction 21 23 Other, net 35 47 ------------- -------------- Total other income and expenses 56 70 ------------- -------------- EARNINGS BEFORE INTEREST AND TAXES 683 678 INTEREST EXPENSE 132 124 MINORITY INTERESTS 35 15 ------------- -------------- EARNINGS BEFORE INCOME TAXES 516 539 INCOME TAXES 209 211 ------------- -------------- INCOME BEFORE EXTRAORDINARY ITEM 307 328 EXTRAORDINARY GAIN (LOSS), NET OF TAX 660 (8) ------------- -------------- NET INCOME 967 320 ------------- -------------- DIVIDENDS AND PREMIUMS ON REDEMPTIONS OF PREFERRED AND PREFERENCE STOCK 5 6 ------------- -------------- EARNINGS AVAILABLE FOR COMMON STOCKHOLDERS $ 962 $ 314 ============= ============== COMMON STOCK DATA Weighted average shares outstanding 363 360 Earnings per share (before extraordinary item) Basic $ 0.83 $ 0.89 Dilutive $ 0.83 $ 0.89 Earnings per share Basic $ 2.65 $ 0.87 Dilutive $ 2.64 $ 0.87 Dividends per share $ 0.55 $ 0.55 See Notes to Consolidated Financial Statements.
1
DUKE ENERGY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN MILLIONS) Three Months Ended March 31, ---------------------------- 1999 1998 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 967 $ 320 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 270 263 Extraordinary (gain) loss (660) 8 Deferred income taxes (18) (14) Purchased capacity levelization 28 27 Transition cost recoveries (payments), net 23 (1) (Increase) decrease in Receivables 69 298 Inventory (20) (11) Other current assets (8) 23 Increase (decrease) in Accounts payable (284) (520) Taxes accrued 254 183 Interest accrued 1 (6) Other current liabilities (90) (76) Other, net 15 20 ------------- ------------- Net cash provided by operating activities 547 514 ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES Capital and investment expenditures (2,086) (387) Proceeds from sale of subsidiaries 1,900 - Decommissioning, retirements and other - (1) ------------- ------------- Net cash used in investing activities (186) (388) ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from the issuance of Long-term debt 711 228 Common stock and stock options 57 - Payments for the redemption of Long-term debt (225) (80) Preferred and preference stock - (180) Net change in notes payable and commercial paper (137) 46 Dividends paid (205) (203) Other (59) (24) ------------- ------------- Net cash provided by (used in) financing activities 142 (213) ------------- ------------- Net increase (decrease) in cash and cash equivalents 503 (87) Cash received from business acquisitions - 35 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 80 109 ============= ============= CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 583 $ 57 ============= ============= SUPPLEMENTAL DISCLOSURES Cash paid for interest, net of amount capitalized $ 125 $ 121 Cash paid for income taxes $ 23 $ 67
See Notes to Consolidated Financial Statements. 2
DUKE ENERGY CORPORATION CONSOLIDATED BALANCE SHEETS (IN MILLIONS) March 31, December 31, 1999 1998 (Unaudited) ---------------- -------------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 583 $ 80 Receivables 2,323 2,318 Inventory 516 543 Current portion of natural gas transition costs 100 100 Current portion of purchased capacity costs 111 99 Unrealized gains on mark-to-market transactions 1,241 1,457 Other 169 228 ---------------- -------------- Total current assets 5,043 4,825 ---------------- -------------- INVESTMENTS AND OTHER ASSETS Investments in affiliates 938 902 Nuclear decommissioning trust funds 609 580 Pre-funded pension costs 327 332 Goodwill, net 641 495 Notes receivable 242 244 Unrealized gains on mark-to-market transactions 1,217 396 Other 373 283 ---------------- -------------- Total investments and other assets 4,347 3,232 ---------------- -------------- PROPERTY, PLANT AND EQUIPMENT Cost 25,932 27,128 Less accumulated depreciation and amortization 8,390 10,253 ---------------- -------------- Net property, plant and equipment 17,542 16,875 ---------------- -------------- REGULATORY ASSETS AND DEFERRED DEBITS Purchased capacity costs 608 648 Debt expense 238 253 Regulatory asset related to income taxes 506 506 Natural gas transition costs 57 80 Environmental clean-up costs 76 87 Other 294 300 ---------------- -------------- Total regulatory assets and deferred debits 1,779 1,874 ---------------- -------------- TOTAL ASSETS $ 28,711 $ 26,806 ================ ============== See Notes to Consolidated Financial Statements.
3
DUKE ENERGY CORPORATION CONSOLIDATED BALANCE SHEETS (IN MILLIONS) March 31, December 31, 1999 1998 (Unaudited) --------------- --------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 1,541 $ 1,754 Notes payable and commercial paper 73 209 Taxes accrued 971 119 Interest accrued 108 109 Current maturities of long-term debt and preferred stock 1,013 707 Unrealized losses on mark-to-market transactions 1,271 1,387 Other 514 642 --------------- --------------- Total current liabilities 5,491 4,927 --------------- --------------- LONG-TERM DEBT 6,164 6,272 --------------- --------------- DEFERRED CREDITS AND OTHER LIABILITIES Deferred income taxes 3,525 3,733 Investment tax credit 236 242 Nuclear decommissioning costs externally funded 609 580 Environmental clean-up liabilities 279 148 Unrealized losses on mark-to-market transactions 1,120 362 Other 885 907 --------------- --------------- Total deferred credits and other liabilities 6,654 5,972 --------------- --------------- MINORITY INTERESTS 202 253 --------------- --------------- GUARANTEED PREFERRED BENEFICIAL INTERESTS IN SUBORDINATED NOTES OF DUKE ENERGY CORPORATION OR SUBSIDIARIES 920 919 --------------- --------------- PREFERRED AND PREFERENCE STOCK Preferred and preference stock with sinking fund requirements 104 104 Preferred and preference stock without sinking fund requirements 209 209 --------------- --------------- Total preferred and preference stock 313 313 --------------- --------------- COMMON STOCKHOLDERS' EQUITY Common stock, no par, 500 million shares authorized; 364 million and 363 million shares outstanding at March 31, 1999 and December 31, 1998, respectively 4,504 4,449 Retained earnings 4,463 3,701 --------------- --------------- Total common stockholders' equity 8,967 8,150 --------------- --------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 28,711 $ 26,806 =============== ===============
See Notes to Consolidated Financial Statements. 4 DUKE ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. GENERAL Duke Energy Corporation (collectively with its subsidiaries, "Duke Energy") is an integrated energy and energy services provider with the ability to offer physical delivery and management of both electricity and natural gas throughout the United States and abroad. Duke Energy provides these and other services through seven business segments: o Electric Operations o Natural Gas Transmission o Field Services o Trading and Marketing o Global Asset Development o Other Energy Services o Real Estate Operations These segments were defined as a result of Duke Energy adopting Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information," in December 1998. Electric Operations generates, transmits, distributes and sells electric energy in central and western North Carolina and the western portion of South Carolina (doing business as Duke Power or Nantahala Power and Light). These electric operations are subject to the rules and regulations of the Federal Energy Regulatory Commission (FERC), the North Carolina Utilities Commission and the Public Service Commission of South Carolina. Natural Gas Transmission, through its Northeast Pipelines, provides interstate transportation and storage of natural gas for customers primarily in the Mid-Atlantic and New England states. Until the sale of the Midwest Pipelines on March 29, 1999, Natural Gas Transmission also provided interstate transportation and storage services in the midwest states. See further discussion of the sale of the Midwest Pipelines in Note 3 to the Consolidated Financial Statements. The interstate natural gas transmission and storage operations are also subject to the rules and regulations of the FERC. Field Services gathers, processes, transports and markets natural gas and produces and markets natural gas liquids (NGLs). Field Services operates gathering systems in western Canada and ten contiguous states that serve major gas-producing regions in the Rocky Mountain, Permian Basin, Mid-Continent and onshore and offshore Gulf Coast areas. Trading and Marketing markets natural gas, electricity and other energy-related products across North America. Duke Energy owns a 60% interest in Trading and Marketing's operations, with Mobil Corporation owning a 40% minority interest. Global Asset Development develops, owns and operates energy-related facilities worldwide. Global Asset Development conducts its operations primarily through Duke Energy North America, LLC (formerly Duke Energy Power Services, LLC) and Duke Energy International, LLC. Other Energy Services provides engineering, consulting, construction and integrated energy solutions worldwide, primarily through Duke Engineering & Services, Inc., Duke/Fluor Daniel and DukeSolutions, Inc. 5 Real Estate Operations conducts its business through Crescent Resources, Inc., which develops high quality commercial and residential real estate projects and manages forest holdings in the southeastern United States. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION. The consolidated financial statements include the accounts of Duke Energy and all majority-owned subsidiaries. These consolidated financial statements reflect all normal recurring adjustments that are, in the opinion of management, necessary to present fairly the financial position and results of operations for the respective periods. Amounts reported in the Consolidated Statements of Income are not necessarily indicative of amounts expected for the respective years due to the effects of seasonal temperature variations on energy consumption and the timing of maintenance of certain electric generating units. COMMODITY INSTRUMENTS. Effective January 1, 1999, Duke Energy adopted Emerging Issues Task Force Consensus No. 98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management Activities" for certain energy forward contracts. This accounting standard requires entities involved in energy trading activities to record energy trading contracts using the mark-to-market method of accounting. Under this methodology, the contracts are adjusted to market value, and the gains and losses are recognized in current period income and are included in the Consolidated Statements of Income as Natural Gas and Petroleum Products Purchased. In prior years, these contracts were accounted for under the accrual method of accounting. Under this methodology, gains and losses were recognized as the contract settled. While implementation of this accounting standard affected certain components of financial position, the cumulative effect of the change in accounting method on the Consolidated Statements of Income for the period ended March 31, 1999 was immaterial. EARNINGS PER COMMON SHARE. Basic earnings per share is based on a simple weighted average of common shares outstanding. Dilutive earnings per share reflects the potential dilution that could occur if securities or other agreements to issue common stock, such as stock options, were exercised or converted into common stock. The numerator for the calculation of basic and dilutive earnings per share is earnings available for common stockholders. ====================================================== DENOMINATOR FOR EARNINGS PER SHARE (In millions) ----------------------------------------------------- March 31, ------------- 1999 1998 ------ ------ Denominator for basic earnings per share (weighted average shares outstanding) 363 360 Assumed exercise of dilutive stock options 1 1 ------ ------ Denominator for dilutive earnings per share 364 361 ===================================================== EXTRAORDINARY ITEM. In January 1998, TEPPCO Partners, L.P., in which a subsidiary of Duke Energy has a 2% general partner interest and a 19.1% limited partner interest, redeemed certain First Mortgage Notes. A non-cash extraordinary loss of $8 million, net of income tax of $5 million, was recorded related to costs of the early retirement of debt. Earnings per common share for 1998 were reduced by $0.02 as a result of this charge. For a description of the 1999 extraordinary item, see Note 3 to the Consolidated Financial Statements. RECLASSIFICATIONS. Certain amounts have been reclassified in the Consolidated Financial Statements to conform to the current presentation. 6 3. BUSINESS ACQUISITIONS/DISPOSITIONS UNION PACIFIC RESOURCES' GATHERING, PROCESSING AND MARKETING OPERATIONS. On March 31, 1999, Duke Energy, through its wholly owned subsidiary, Duke Energy Field Services, Inc., completed the $1.35 billion acquisition of the natural gas gathering, processing, fractionation and NGL pipeline business from Union Pacific Resources (UPR), as well as UPR's natural gas and NGL marketing activities (collectively, "the UPR acquisition"). The acquisition was accounted for by the purchase method. The assets and liabilities of the UPR acquisition have been consolidated in Duke Energy's financial statements as of March 31, 1999. The excess of the purchase price over the fair value of the net identifiable assets and liabilities acquired of $158 million has been recorded as goodwill and will be amortized on a straight-line basis over 15 to 20 years. Duke Energy agreed to take responsibility for certain environmental liabilities associated with the UPR acquisition. During due diligence procedures prior to the acquisition, Duke Energy identified environmental contamination at certain UPR facilities. Soil and groundwater contamination at the identified UPR sites will be addressed in conjunction with Duke Energy's remediation plans. Also, other environmental matters, such as the status of air emission permits at some facilities, may require corrective action. The estimated cost to remediate these conditions at March 31, 1999 is $157 million, which is included in Environmental Clean-up Liabilities on the Consolidated Balance Sheets. Under the terms of the purchase agreement, all environmental liabilities in excess of $40 million will be considered a reduction in the purchase price. The total amount of environmental liabilities is currently being negotiated. Any adjustment to estimated environmental clean-up costs or other estimated amounts will be recorded as an adjustment to goodwill. PEPL COMPANIES AND TRUNKLINE LNG. On March 29, 1999, Duke Energy, through its wholly owned subsidiaries, PanEnergy Corp and Texas Eastern Corporation, sold Panhandle Eastern Pipe Line Company (PEPL), Trunkline Gas Company and additional storage related to those systems (collectively, the PEPL Companies), which substantially comprised the Midwest Pipelines, along with Trunkline LNG Company (Trunkline LNG), to CMS Energy Corporation (CMS). The sales price of $2.2 billion involved cash proceeds of $1.9 billion and CMS's assumption of existing PEPL debt of approximately $300 million. The sale resulted in an extraordinary gain of $660 million, net of income tax of $404 million, and an increase in earnings per basic share of $1.82. Under the terms of the agreement with CMS, Duke Energy is retaining certain assets and liabilities, such as the Houston office building, certain environmental, legal and tax liabilities, and substantially all intercompany balances. Management believes that the retention of these items will not have a material adverse effect on consolidated results of operations or financial position. ========================================================================== COMBINED OPERATING RESULTS OF THE PEPL COMPANIES AND TRUNKLINE LNG FOR THE PERIOD FROM JANUARY 1, 1999 THROUGH MARCH 28, 1999(A) (In millions) - -------------------------------------------------------------------------- Operating Revenues $126 Operating Expenses 57 Other Income, Net 4 ------------------ Earnings Before Interest and Taxes $ 73 ========================================================================== (A) Excludes intercompany building rental revenue, allocated corporate expenses, building depreciation and certain other costs to be retained by Duke Energy. 7 4. BUSINESS SEGMENTS Duke Energy's reportable segments are strategic business units that offer different products and services and are each managed separately. Management evaluates segment performance based on earnings before interest and taxes (EBIT). Segment earnings before interest and taxes, presented in the accompanying table, includes intersegment sales accounted for at prices representative of unaffiliated party transactions. Segment assets are provided as additional information in the accompanying table and are net of intercompany advances, intercompany notes receivable and investments in subsidiaries.
========================================================================================= BUSINESS SEGMENT DATA (In millions) - ----------------------------------------------------------------------------------------- Capital and Unaffiliated Intersegment Total Investment Revenues Revenues Revenues EBIT Expenditures ------------------------------------------------------------ THREE MONTHS ENDED MARCH 31, 1999 Electric Operations $1,061 $ - $1,061 $407 $ 125 Natural Gas Transmission 378 24 402 208 42 Field Services 234 110 344 12 1,445 Trading and Marketing 2,242 44 2,286 33 5 Global Asset Development 88 20 108 32 382 Other Energy Services 134 20 154 (5) 8 Real Estate Operations 28 - 28 18 60 Other Operations (A) (5) 13 8 (22) 19 Eliminations - (231) (231) - - ----------------------------------------------------------- Total Consolidated $4,160 $ - $4,160 $683 $2,086 - ---------------------------------------------------------------------------------------- THREE MONTHS ENDED MARCH 31, 1998 Electric Operations $1,036 $ - $1,036 $378 $101 Natural Gas Transmission 379 31 410 209 73 Field Services 530 140 670 48 70 Trading and Marketing 2,003 9 2,012 13 1 Global Asset Development 36 1 37 9 85 Other Energy Services 99 16 115 7 4 Real Estate Operations 30 - 30 22 42 Other Operations (A) 2 1 3 (8) 11 Eliminations - (198) (198) - - ---------------------------------------------------------- Total Consolidated $4,115 $ - $4,115 $678 $387 ======================================================================================= ======================================================= SEGMENT ASSETS (In millions) - ------------------------------------------------------- March 31, December 31, 1999 1998 -------------------------- Electric Operations $12,940 $12,953 Natural Gas Transmission 3,925 4,996 Field Services 3,671 1,893 Trading and Marketing 3,652 3,233 Global Asset Development 2,266 2,061 Other Energy Services 390 376 Real Estate Operations 759 724 Other Operations (A) 1,547 968 Eliminations (439) (398) -------------------------- Total Consolidated $28,711 $26,806 ======================================================= (A) Includes communication services, water services and certain unallocated corporate items.
8 5. RISK MANAGEMENT AND FINANCIAL INSTRUMENTS FOREIGN CURRENCY INSTRUMENTS. In anticipation of the purchase of Empresa Nacional de Electricidad S.A. (Endesa-Chile) (see Note 9 to the Consolidated Financial Statements), Duke Energy entered into foreign currency forwards and swap contracts to obtain Chilean pesos for the purchase. These financial instruments were accounted for using the mark-to-market method of accounting. Under this methodology, the instruments are adjusted to market value, and the resulting gains and losses are recognized in current period income and are included in the Consolidated Statements of Income as Other, Net. Unrealized gains and losses are recorded in the Consolidated Balance Sheets as Unrealized Gains or Losses on Mark-to-Market Transactions. The forward contracts, with a notional contract amount of 120.7 billion Chilean pesos (USD $245 million) at March 31, 1999, mature in April 1999. The swaps, with a notional contract amount of approximately 74 billion Chilean pesos (USD $150 million) at March 31, 1999, mature April 20, 1999 to July 20, 1999. The weighted average fixed exchange rates of the forward and swap contracts are 492.6 and 492.7 Chilean pesos to U.S. dollars, respectively. The fair value of these contracts as of March 31, 1999 was approximately $2 million. 6. DEBT AND CREDIT FACILITIES Duke Energy issued $200 million Series B 5 3/8% Senior Notes due 2009 and $200 million Series C 6.60% Senior Notes due 2038 in January 1999 and March 1999, respectively. Associated with the purchase of certain assets in Australia and New Zealand, Duke Energy borrowed approximately $300 million in both Australian and New Zealand dollars during the first quarter of 1999. The loans, with interest rates ranging from 4.340% to 5.2209%, mature in July 1999. 7. COMMON STOCK At Duke Energy's annual meeting of shareholders held on April 15, 1999, shareholders approved an amendment to the articles of incorporation to increase the authorized common stock from 500 million to 1 billion shares. 8. COMMITMENTS AND CONTINGENCIES LITIGATION. Under the terms of the agreement with CMS discussed in Note 3 to the Consolidated Financial Statements, Duke Energy is retaining certain legal and tax liabilities including the following matter. On April 25, 1997, a group of affiliated plaintiffs that own and/or operate various pipeline and marketing companies and partnerships primarily in Kansas filed suit against PEPL, a former subsidiary of Duke Energy, in the U.S. District Court for the Western District of Missouri. The plaintiffs alleged that PEPL has engaged in unlawful and anti-competitive conduct with regard to requests for interconnects with the PEPL system for service to the Kansas City area. Asserting that PEPL has violated the antitrust laws and tortiously interfered with the plaintiffs' business expectancies, the plaintiffs pursued compensatory and punitive damages. In February 1999, this case was settled. The court entered an order dismissing the case on March 3, 1999. The settlement did not have a material adverse effect on consolidated results of operations or financial position. Duke Energy and its subsidiaries are also involved in other legal, tax and regulatory proceedings before various courts, regulatory commissions and governmental agencies regarding matters arising in the ordinary course of business, some of which involve substantial amounts. Where appropriate, Duke Energy has made accruals in accordance with SFAS No. 5, "Accounting for Contingencies," to provide for such matters. Management believes that the final disposition of these proceedings will not have a material adverse effect on consolidated results of operations or financial position. 9 OTHER COMMITMENTS AND CONTINGENCIES. In January 1998, Duke Energy acquired a 9.8% ownership in Alliance Pipeline. This pipeline is designed to transport natural gas from western Canada to the Chicago-area market center for distribution throughout North America. The pipeline is scheduled to begin commercial operation in late 2000. In addition to buying an ownership interest in the pipeline project, Duke Energy has a contractual commitment for 67.25 million cubic feet per day of capacity on the line over 15 years for an estimated total of $315 million. Periodically, Duke Energy may become involved in contractual disputes with natural gas transmission customers involving potential or threatened abrogation of contracts by the customers. If the customers are successful, Duke Energy may not receive the full value of anticipated benefits under the contracts. In the normal course of business, certain of Duke Energy's subsidiaries and affiliates enter into various contracts for energy services which contain certain schedule and performance requirements. Risk management techniques are used to mitigate their exposure associated with such contracts. Certain subsidiaries of Duke Energy have guaranteed performance under some of these contracts. In addition, certain subsidiaries of Duke Energy have guaranteed debt agreements of affiliates and have provided surety bonds and letters of credit. Management believes that these commitments and contingencies will not have a material adverse effect on consolidated results of operations or financial position. 9. SUBSEQUENT EVENT On February 18, 1999, Duke Energy announced its intent to make a concurrent cash tender offer in Chilean pesos in Chile and the United States for 51% of the outstanding shares of Endesa-Chile for an estimated total cash outlay of approximately $2.1 billion based on current exchange rates. On April 21, following a competitive counter offer, Duke Energy reached the conclusion that Endesa-Chile could not be acquired on terms favorable to Duke Energy's shareholders and withdrew the tender offer. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION. INTRODUCTION Duke Energy Corporation (collectively with its subsidiaries, "Duke Energy") is an integrated energy and energy services provider with the ability to offer physical delivery and management of both electricity and natural gas throughout the United States and abroad. Duke Energy provides these and other services through seven business segments: o Electric Operations o Natural Gas Transmission o Field Services o Trading and Marketing o Global Asset Development o Other Energy Services o Real Estate Operations These segments were defined as a result of Duke Energy adopting Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," in December 1998. Electric Operations generates, transmits, distributes and sells electric energy in central and western North Carolina and the western portion of South Carolina (doing business as Duke Power or Nantahala Power and Light). These electric operations are subject to the rules and regulations of the Federal Energy Regulatory Commission (FERC), the North Carolina Utilities Commission and the Public Service Commission of South Carolina. Natural Gas Transmission, through its Northeast Pipelines, provides interstate transportation and storage of natural gas for customers primarily in the Mid-Atlantic and New England states. Until the sale of the Midwest Pipelines on March 29, 1999, Natural Gas Transmission also provided interstate transportation and storage services in the midwest states. For further discussion of the sale of the Midwest Pipelines, see Note 3 to the Consolidated Financial Statements. The interstate natural gas transmission and storage operations are also subject to the rules and regulations of the FERC. Field Services gathers, processes, transports and markets natural gas and produces and markets natural gas liquids (NGLs). Field Services operates gathering systems in western Canada and ten contiguous states that serve major gas-producing regions in the Rocky Mountain, Permian Basin, Mid-Continent and onshore and offshore Gulf Coast areas. Trading and Marketing markets natural gas, electricity and other energy-related products across North America. Duke Energy owns a 60% interest in Trading and Marketing's operations, with Mobil Corporation owning a 40% minority interest. Global Asset Development develops, owns and operates energy-related facilities worldwide. Global Asset Development conducts its operations primarily through Duke Energy North America, LLC (Duke Energy North America) (formerly Duke Energy Power Services, LLC) and Duke Energy International, LLC (Duke Energy International). Other Energy Services provides engineering, consulting, construction and integrated energy solutions worldwide, primarily through Duke Engineering & Services, Inc. (Duke Engineering & Services), Duke/Fluor Daniel and DukeSolutions, Inc. Real Estate Operations conducts its business through Crescent Resources, Inc., which develops high quality commercial and residential real estate projects and manages forest holdings in the southeastern United States. 11 Management's Discussion and Analysis should be read in conjunction with the Consolidated Financial Statements. RESULTS OF OPERATIONS For the three months ended March 31, 1999, earnings available for common stockholders was $962 million, or $2.65 per basic share, including an after-tax extraordinary gain of $660 million, or $1.82 per basic share. For the comparable 1998 period, earnings available to common stockholders was $314 million, or $0.87 per basic share, net of an after-tax extraordinary loss of $8 million, or $0.02 per basic share. The increase in earnings available for common stockholders is primarily due to the 1999 extraordinary gain resulting from the sale of the Midwest Pipelines. Operating income for the three months ended March 31, 1999 increased to $627 million compared to $608 million for the same period in 1998. Earnings before interest and taxes (EBIT) were $683 million and $678 million for the three months ended March 31, 1999 and 1998, respectively. Operating income and earnings before interest and taxes are affected by the same fluctuations for Duke Energy and each of its business segments. The only significant variable between the two amounts is gains on the sale of assets which are included in Other, Net on the Consolidated Income Statement. Gains on sales of assets include a $14 million gain on an investment sale by Global Asset Development in 1999 and a $31 million gain on an asset sale by Field Services in 1998. Earnings before interest and taxes by business segment are summarized below, and are discussed by business segment thereafter. ============================================================================ EARNINGS BEFORE INTEREST AND TAXES BY BUSINESS SEGMENT (In millions) - ---------------------------------------------------------------------------- Three Months Ended March 31, ----------------------- 1999 1998 ----------------------- Electric Operations $407 $378 Natural Gas Transmission 208 209 Field Services 12 48 Trading and Marketing 33 13 Global Asset Development 32 9 Other Energy Services (5) 7 Real Estate Operations 18 22 Other Operations (A) (22) (8) ----------- ----------- Consolidated EBIT $683 $678 ============================================================================ (A) Includes communication services, water services and certain unallocated corporate items. Included in the amounts discussed hereafter are intercompany transactions that are eliminated in the Consolidated Financial Statements. 12 ELECTRIC OPERATIONS ============================================================================ Three Months Ended March 31, ----------------------- (In millions, except where noted) 1999 1998 - ---------------------------------------------------------------------------- Operating Revenues $1,061 $1,036 Operating Expenses 675 681 ----------------------- Operating Income 386 355 Other Income, Net of Expenses 21 23 ----------------------- EBIT $ 407 $ 378 ======================= Sales - GWh (A) 19,537 19,257 ============================================================================ (A) Gigawatt-hours Earnings before interest and taxes for Electric Operations increased $29 million, or 7.7%, for the three months ended March 31, 1999 compared to the same period in 1998. The increase is primarily due to a 1.5% increase in gigawatt-hour sales and lower operating expenses. Sales to weather-sensitive customers increased only slightly for the period when compared to the prior year quarter as both periods were affected by milder than normal weather. Sales to residential and general service customers were up 0.4% and 3.6%, respectively. Sales to industrial customers decreased 3.5%, with sales to textile customers down 8.0%. The decrease in operating expenses was partially due to lower nuclear expenses resulting primarily from fewer outage days. NATURAL GAS TRANSMISSION ============================================================================ Three Months Ended March 31, ----------------------- (In millions, except where noted) 1999 1998 - ---------------------------------------------------------------------------- Operating Revenues $402 $410 Operating Expenses 202 210 ----------------------- Operating Income 200 200 Other Income, Net of Expenses 8 9 ----------------------- EBIT $208 $209 ======================= Throughput - TBtu (A) 811 778 ============================================================================ (A) Trillion British thermal units Earnings before interest and taxes for the Natural Gas Transmission segment decreased $1 million for the three months ended March 31, 1999 compared to the same period in 1998. Earnings before interest and taxes for the Northeast Pipelines increased $6 million for the three months ended March 31, 1999 compared to the prior year quarter, primarily as a result of increased income from market expansion projects and lower operating expenses. Partially offsetting these benefits was the non-recurrence of a 1998 refund from a state property tax ruling. Earnings before interest and taxes for the Midwest Pipelines decreased $7 million for the three months ended March 31, 1999 compared to the prior year quarter, primarily due to decreased throughput. The sale of the Midwest Pipelines to CMS Energy Corporation (CMS) closed on March 29, 1999. 13 FIELD SERVICES ============================================================================ Three Months Ended March 31, ----------------------- (In millions, except where noted) 1999 1998 - ---------------------------------------------------------------------------- Operating Revenues $344 $670 Operating Expenses 332 653 ----------------------- Operating Income 12 17 Other Income, Net of Expenses - 31 ----------------------- EBIT $ 12 $ 48 ======================= Natural Gas Gathered and Processed/Transported, TBtu/d (A) 3.4 3.7 NGL Production, MBbl/d (B) 107.6 106.4 Natural Gas Marketed, TBtu/d 0.4 0.3 Average Natural Gas Price per MMBtu (C) $1.75 $2.20 Average NGL Price per Gallon $0.23 $0.29 ============================================================================ (A) Trillion British thermal units per day (B) Thousand barrels per day (C) Million British thermal units Earnings before interest and taxes for Field Services decreased $36 million for the three months ended March 31, 1999 compared to the same period in 1998. The decrease resulted from a $31 million gain on the sale of two NGL fractionation facilities in 1998, which is included in other income. Gross revenues and expenses also decreased as a result of the November 1998 sale of Duke Energy Transport and Trading Co., which gathers, stores, transports and markets crude oil and operates two NGL pipelines, to TEPPCO Partners, L.P., a company in which Duke Energy has a 21.1% ownership interest. Low average NGL prices, which decreased $0.06 per gallon, or 20.7%, from March 31, 1998 to March 31, 1999, continue to have a significant impact on earnings for Field Services; however, decreased earnings resulting from lower NGL prices were partially offset by a gain on hedging activities. TRADING AND MARKETING ============================================================================ Three Months Ended March 31, ----------------------- (In millions, except where noted) 1999 1998 - ---------------------------------------------------------------------------- Operating Revenues $2,286 $2,012 Operating Expenses 2,257 2,000 ----------------------- Operating Income 29 12 Other Income, Net of Expenses 4 1 ----------------------- EBIT $ 33 $ 13 ======================= Natural Gas Marketed, TBtu/d 11.0 7.9 Electricity Marketed, GWh 21,837 23,892 ============================================================================ Earnings before interest and taxes for Trading and Marketing increased $20 million for the three months ended March 31, 1999 compared with the same period in 1998. The increase results primarily from higher natural gas and electricity trading margins compared to the same period in 1998 when a significant decline in energy price volatility resulted in decreased trading margins. Partially offsetting the current year increase in income were higher operating expenses resulting from business growth. 14 GLOBAL ASSET DEVELOPMENT ============================================================================ Three Months Ended March 31, ----------------------- (In millions) 1999 1998 - ---------------------------------------------------------------------------- Operating Revenues $108 $37 Operating Expenses 101 32 ----------------------- Operating Income 7 5 Other Income, Net of Expenses 25 4 ----------------------- EBIT $ 32 $ 9 ============================================================================ Earnings before interest and taxes for Global Asset Development increased $23 million for the three months ended March 31, 1999 compared with the same period in 1998. The increase is primarily due to increased contributions from new projects in California, Australia and Chile and a $14 million gain on the sale of its investment in the Mecklenburg Cogeneration facility, which is included in other income. OTHER ENERGY SERVICES ============================================================================ Three Months Ended March 31, ----------------------- (In millions) 1999 1998 - ---------------------------------------------------------------------------- Operating Revenues $154 $115 Operating Expenses 159 108 ----------------------- EBIT $ (5) $ 7 ============================================================================ Earnings before interest and taxes for Other Energy Services decreased $12 million for the three months ended March 31, 1999 compared with the same period in 1998, primarily due to decreased earnings from projects of Duke Engineering & Services. REAL ESTATE OPERATIONS ============================================================================ Three Months Ended March 31, ----------------------- (In millions) 1999 1998 - ---------------------------------------------------------------------------- Operating Revenues $28 $30 Operating Expenses 10 8 ----------------------- EBIT $18 $22 ============================================================================ Earnings before interest and taxes for Real Estate Operations decreased $4 million, or 18.2%, for the three months ended March 31, 1999 compared with the same period in 1998. This resulted from decreased project and land sales, which were partially offset by increased developed lot sales. OTHER OPERATIONS Earnings before interest and taxes for Other Operations decreased $14 million for the three months ended March 31, 1999 compared with the same period in 1998. This decrease primarily resulted from mark-to-market losses on corporately managed long-dated energy risk positions used to hedge exposure to commodity prices, primarily NGLs. As these positions are liquidated over the next 18 months, actual results will be allocated back to Field Services. 15 OTHER IMPACTS ON EARNINGS AVAILABLE FOR COMMON STOCKHOLDERS For the three months ended March 31, 1999, interest expense increased $8 million, or 6.5%, over the comparable period in 1998 due to higher average debt balances outstanding. Minority interest increased $20 million primarily as a result of dividends incurred for Duke Energy's trust preferred securities, $600 million of which were issued after the first quarter in 1998. Excluding these dividends, minority interests relate primarily to the trading and marketing joint venture with Mobil Corporation. The sale of the Midwest Pipelines to CMS closed on March 29, 1999 and resulted in a $660 million extraordinary gain, net of income tax of $404 million. (See further discussion in Liquidity and Capital Resources, Investing Cash Flows section below and in Note 3 to the Consolidated Financial Statements.) In January 1998, TEPPCO Partners L.P., in which Duke Energy has a 21.1% ownership interest, redeemed certain First Mortgage Notes which resulted in Duke Energy recording a non-cash extraordinary loss of $8 million, net of income tax of $5 million, related to its share of costs of the early retirement of debt. LIQUIDITY AND CAPITAL RESOURCES INVESTING CASH FLOWS Capital and investment expenditures were approximately $2,086 million for the three months ended March 31, 1999 compared to approximately $387 million for the same period in 1998. Increased capital and investment expenditures during the period were primarily due to business expansion for the Field Services and Global Asset Development segments discussed below. On January 22, 1999, Global Asset Development's international division, Duke Energy International, completed the $315 million purchase of power generation and transmission assets in western Australia and New Zealand from Broken Hill Proprietary Company Limited (BHP), including an ownership interest in a pipeline in western Australia. This acquisition also includes a development proposal for a cogeneration plant and a portfolio of international and Australian-based projects. Global Asset Development's domestic division, Duke Energy North America, began construction of the Hidalgo Energy project located in South Texas, which is targeted to begin producing power in mid-2000. For the 510 megawatt gas-fired merchant plant, Duke/Fluor Daniel will serve as the construction contractor, a Natural Gas Transmission pipeline will deliver the natural gas supply, and Trading and Marketing will provide energy management services and market the plant's output. On March 31, 1999, Field Services completed the $1.35 billion acquisition of the natural gas gathering, processing, fractionation and NGL pipeline business from Union Pacific Resources (UPR) along with its natural gas and NGL marketing activities (collectively "the UPR acquisition"). Additionally, Duke Energy agreed to take responsibility for certain environmental liabilities associated with the UPR acquisition. During due diligence procedures prior to the acquisition, Duke Energy identified environmental contamination at certain UPR facilities. Soil and groundwater contamination at the identified UPR sites will be addressed in conjunction with Duke Energy's remediation plans. Also, other environmental matters, such as the status of air emission permits at some facilities, may require corrective action. The estimated cost to remediate these conditions at March 31, 1999 is $157 million. This amount is included in Environmental Clean-up Liabilities on the Consolidated Balance Sheets. On April 19, 1999, Duke Power entered into a contract to purchase six steam generators from Babcock & Wilcox to replace those currently at Duke Power's Oconee Nuclear Station. The total estimated cost of the steam generator replacement project is $420 million. It is projected that the steam generators on unit 1 will be installed in 2003, with units 2 and 3 following in 2004. 16 On March 29, 1999, Duke Energy, through its wholly owned subsidiaries, PanEnergy Corp and Texas Eastern Corporation, sold Panhandle Eastern Pipe Line Company (PEPL), Trunkline Gas Company and additional storage related to those systems, which substantially comprised the Midwest Pipelines, along with Trunkline LNG Company, to CMS. The sales price of $2.2 billion included cash proceeds of $1.9 billion and CMS's assumption of existing PEPL debt of approximately $300 million. FINANCING CASH FLOWS Duke Energy's consolidated capital structure at March 31, 1999, including short-term debt, was 42% debt, 5% trust preferred securities, 2% preferred stock and 51% common equity. Fixed charges coverage, calculated using the Securities and Exchange Commission method, was 4.6 times and 5.0 times for the three months ended March 31, 1999 and 1998, respectively. Duke Energy plans to continue to significantly grow several of its business segments: Field Services, Trading and Marketing, Global Asset Development and Other Energy Services. These growth opportunities, along with dividends, debt repayments and operating and investing requirements, are expected to be funded by cash from operations, external financing and the proceeds from the sale of the Midwest Pipelines. In January 1999, Duke Energy issued $200 million of 5 3/8% Series B Senior Notes due 2009. In March 1999, Duke Energy issued $200 million of 6.60% Series C Senior Notes due 2038. Also included in financings for first quarter 1999 are various bank borrowings of Global Asset Development related to the purchase of BHP. These borrowings total approximately $300 million at interest rates of 4.340% to 5.2209% and mature in July 1999. Under its commercial paper facilities, Duke Energy had the ability to borrow up to $2.8 billion at both March 31, 1999 and December 31, 1998. The commercial paper facilities consisted of $1.25 billion for Duke Energy and $1.55 billion for Duke Capital Corporation, a wholly owned subsidiary of Duke Energy that serves as the parent for Duke Energy's business segments except for Electric Operations and certain other operations. Duke Energy's various bank credit facilities totaled approximately $2.9 billion at each of March 31, 1999 and December 31, 1998. At March 31, 1999, approximately $1.6 billion was outstanding under the commercial paper facilities and $76 million was outstanding under the bank credit facilities. On April 15, 1999, Duke Energy's shareholders approved an amendment to the articles of incorporation to increase the authorized common stock from 500 million to 1 billion shares. This increase in authorized stock will provide Duke Energy with added flexibility in effecting financings, stock splits or stock dividends, stock plans and other transactions and arrangements involving the use of stock. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK RISK POLICIES Duke Energy is exposed to market risks associated with commodity prices, interest rates, equity prices and foreign exchange rates. Comprehensive risk management policies have been established by the Corporate Risk Management Committee (CRMC) to monitor and control these market risks. The CRMC is chaired by the Chief Financial Officer and primarily comprises senior executives. The CRMC has responsibility for oversight of all corporate energy risk management and approving energy financial exposure limits, as well as responsibility for oversight of interest rate risk, foreign currency risk and credit risk. Changes in Duke Energy's market risk since December 31, 1998 follows. 17 COMMODITY PRICE RISK As a result of Field Services' acquisition from UPR on March 31, 1999, Duke Energy's exposure to market fluctuations in the prices of NGLs increased. As of March 31, 1999, if NGL prices average one cent per gallon less in 1999, earnings before income taxes will decrease by approximately $18 million. Duke Energy generally does not maintain a material inventory of NGLs or actively trade commodity derivatives related to NGLs. FOREIGN OPERATIONS RISK AND INTEREST RATE RISK In anticipation of Duke Energy's purchase of Empresa Nacional de Electricidad S.A. (Endesa-Chile) (see further discussion in Current Issues, Subsequent Event), Duke Energy entered into foreign currency forward and swap contracts to obtain Chilean pesos for the purchase. Exposures to foreign currency risks associated with these instruments were managed through established policies and procedures. (See Notes 2 and 5 to the Consolidated Financial Statements.) The foreign currency risk is measured by periodically performing sensitivity analysis to assess the impact of a hypothetical change in the Chilean peso to U.S. dollar exchange rate. At March 31, 1999, if the Chilean peso to U.S. dollar exchange rate increased (decreased) by 10%, earnings before interest and taxes would decrease (increase) by approximately $25 million. CURRENT ISSUES ELECTRIC COMPETITION During 1999, three electric utility restructuring bills have been filed in South Carolina's House of Representatives. All three bills introduce competition while allowing utilities to recoup their stranded costs, and have transition and phase-in periods ranging from five to six years. A task force formed by the South Carolina Senate is also examining issues related to deregulation of the state's electric utility business. This task force will prepare a report for review, discussion and possible legislative action by the state's Senate Judiciary Committee and General Assembly as a whole. In April 1999, the Department of Energy (DOE) introduced an electric utility restructuring bill in Congress: the 1999 Comprehensive Electricity Competition Act. The primary restructuring issues addressed include repeal of major provisions of the Public Utility Holding Company Act (PUHCA) and the Public Utility Regulatory Policies Act (PURPA), grandfathering of deregulating states, stranded costs, reliability, reciprocity and transmission. January 1, 2003 was chosen as the deadline for retail choice to be implemented, with a grandfather clause for states that are already deregulating. Currently, the electric utility industry is predominantly regulated on a basis designed to recover the cost of providing electric power to customers. If cost-based regulation were to be discontinued in the industry for any reason, including competitive pressure on the cost-based prices of electricity, profits could be reduced and electric utilities might be required to reduce their asset balances to reflect a market basis less than cost. Discontinuance of cost-based regulation would also require affected utilities to write off their associated regulatory assets. Duke Energy's regulatory assets are included in the Consolidated Balance Sheets. The portion of these regulatory assets related to Electric Operations is approximately $1.5 billion, including primarily purchased capacity costs, debt expense and deferred taxes related to regulatory assets. Currently, Duke Energy is recovering substantially all of these regulatory assets through wholesale and retail electric rates and would attempt to continue to recover these assets during a transition to competition. In addition, Duke Energy would seek to recover the costs of its electric generating facilities in excess of the market price of power at the time of transition. Duke Energy supports a properly managed and orderly transition to competitive generation and retail services in the electric industry. However, transforming the current regulated industry into efficient, competitive generation and retail electric markets is a complex undertaking, which will require a carefully 18 considered transition to a restructured electric industry. The key to effective retail competition is fairness among customers, service providers and investors. Duke Energy intends to work with customers, legislators and regulators to address all the important issues. Management currently cannot predict the impact, if any, of these competitive forces on future consolidated results of operations or financial position. MIXED-OXIDE FUELS Duke Power has entered into a contract to use mixed oxide fuel at its McGuire and Catawba nuclear stations. Mixed-oxide fuel is very similar to conventional uranium fuel, but it utilizes plutonium from the government's surplus. Before using the fuel, Duke Power must apply for and receive amendments to the respective facility operating licenses from the Nuclear Regulatory Commission (NRC). Duke Power is currently in the process of researching and preparing for the application process with actual license application to the NRC planned for mid-2000. Mixed oxide fuel is expected to be available for Duke Power use in 2007. By using mixed-oxide fuel, Duke Power will realize a long-term supply of nuclear fuel at moderate savings over conventional uranium fuel. Duke Power and Duke Engineering & Services will also participate in the design and construction of the facility to fabricate mixed-oxide fuel. Under a contract with the DOE, Duke Power will be reimbursed for all operating, maintenance and capital expenditures necessary to refurbish its plants for mixed oxide fuel use. YEAR 2000 READINESS PROGRAM STATE OF READINESS Duke Energy initiated its Year 2000 Readiness Program in 1996 and began a formal review of computer-based systems and devices that are used in its business operations both domestically and internationally. These systems and devices include customer information, financial, materials management and personnel systems, as well as components of natural gas production, gathering, processing and transmission, and electric generation, distribution and transmission. Duke Energy's goal is to provide energy services reliably and safely to its customers - now, on January 1, 2000 and beyond. By "Year 2000 ready," Duke Energy means that it has executed the Year 2000 approach described below and management believes the business will not suffer a material adverse impact to consolidated financial results caused by Year 2000 events. However, the Year 2000 issue is complex and the Year 2000 readiness of customers, suppliers and others beyond our control can affect our business operations. Duke Energy is using a three-phase approach to address Year 2000 issues: 1) inventory and preliminary assessment of computer systems, equipment and devices; 2) detailed assessment and remediation planning; and 3) conversion, testing and contingency planning. Duke Energy is employing a combination of systems repair, planned systems replacement activities, systems retirement and workarounds to achieve Year 2000 readiness for its business and process control systems, equipment and devices. Most Duke Energy business units have substantially completed the first two phases throughout their business operations, and are in various stages of the third and final phase. Field Services, Global Asset Development and Other Energy Services' goal is to have critical systems, equipment and devices year 2000 ready by September 1999. All other business units', including Electric Operations and Natural Gas Transmission, goal is to have critical systems, equipment and devices year 2000 ready by mid-1999. 19 Duke Energy conducts an analysis of Year 2000 issues for potential acquisitions. In addition, Duke Energy is monitoring the Year 2000 readiness of key third parties. Third parties include vendors, customers, U.S. governmental agencies, foreign governments and agencies, and other business associates. While the Year 2000 readiness of third parties cannot be controlled, Duke Energy is attempting to assess the readiness of third parties and any potential implications to its operations. Alternate suppliers of critical products, goods and services are being identified, where necessary. COSTS Management believes it is devoting the resources necessary to achieve Year 2000 readiness in a timely manner. Current estimates for total costs of the program, including internal labor as well as incremental costs such as consulting and contract costs, are approximately $65 million, of which approximately $45 million had been incurred as of March 31, 1999. These costs exclude replacement systems that, in addition to being Year 2000 ready, provide significantly enhanced capabilities which will benefit operations in future periods. RISKS Management believes it has an effective program in place to manage the risks associated with the Year 2000 issue in a timely manner. Nevertheless, since it is not possible to anticipate all future outcomes, especially when third parties are involved, there could be circumstances in which Duke Energy would temporarily be unable to deliver energy or energy services to its customers. Management believes that the most reasonably likely worst case scenario would be small, localized interruptions of service, which likely would be rapidly restored. In addition, there could be a temporary reduction in energy needs of customers due to their own Year 2000 problems. In the event that such a scenario occurs, it is not expected to have a material adverse impact on consolidated results of operations or financial position. CONTINGENCY PLANS Year 2000 contingency planning is currently underway to address continuity of business operations for all periods during which Year 2000 impacts may occur. Duke Energy is participating in multiple industry efforts to facilitate effective Year 2000 contingency plans, and intends to complete its own Year 2000 contingency plans by mid-1999. These plans address various Year 2000 risk scenarios that cross departmental, business unit and industry lines as well as specific risks from various internal and external sources, including supplier readiness. 20 Based on assessments completed to date and compliance plans in process, management believes that Year 2000 issues, including the cost of making critical systems, equipment and devices ready, will not have a material adverse effect on Duke Energy's business operation or consolidated results of operations or financial position. Nevertheless, achieving Year 2000 readiness is subject to risks and uncertainties, including those described above. While management believes the possibility is remote, if Duke Energy's internal systems, or the internal systems of external parties, fail to achieve Year 2000 readiness in a timely manner, Duke Energy's business, consolidated results of operations or financial condition could be adversely affected. SUBSEQUENT EVENT On February 18, 1999, Duke Energy announced its intent to make a concurrent cash tender offer in Chilean pesos in Chile and the United States for 51% of the outstanding shares of Endesa-Chile for an estimated total cash outlay of approximately $2.1 billion based on current exchange rates. On April 21, following a competitive counter offer, Duke Energy reached the conclusion that Endesa-Chile could not be acquired on terms favorable to Duke Energy's shareholders and withdrew the tender offer. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. For information concerning litigation and other contingencies, see Note 8 to the Consolidated Financial Statements, "Commitments and Contingencies." ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There were no matters submitted to a vote of the security holders of Duke Energy during the first quarter of 1999. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits (27) Financial Data Schedule (included in electronic filing only) (b) Reports on Form 8-K A Current Report on Form 8-K filed on January 26, 1999 contained disclosures under Item 5, Other Events. A Current Report on Form 8-K filed on February 11, 1999 contained disclosures under Item 5, Other Events, and Item 7, Financial Statements and Exhibits. A Current Report on Form 8-K filed on March 8, 1999 contained disclosures under Item 7, Financial Statements and Exhibits. A Current Report on Form 8-K filed on March 10, 1999 contained disclosures under Item 5, Other Events, and Item 7, Financial Statements and Exhibits. 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DUKE ENERGY CORPORATION May 14, 1999 /s/ Richard J. Osborne -------------------------------- Richard J. Osborne Executive Vice President and Chief Financial Officer May 14, 1999 /s/ Jeffrey L. Boyer -------------------------------- Jeffrey L. Boyer Vice President and Corporate Controller 22 EX-27 2 FDS -- DUKE ENERGY CORPORATION
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED STATEMENTS OF INCOME, CONSOLIDATED STATEMENTS OF CASH FLOWS, AND CONSOLIDATED BALANCE SHEETS AS OF AND FOR YEAR TO DATE 3/31/99 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 0000030371 DUKE ENERGY CORPORATION 1000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 PER-BOOK 9,603,000 12,286,000 5,043,000 1,779,000 0 28,711,000 4,504,000 0 4,463,000 8,967,000 104,000 209,000 6,164,000 9,000 0 1,563,000 993,000 20,000 6,000 2,000 12,181,000 28,711,000 4,160,000 209,000 3,533,000 3,742,000 627,000 56,000 1,099,000 132,000 967,000 5,000 962,000 200,000 48,000 547,000 2.65 2.64 REPRESENTS BASIC EARNINGS PER SHARE
-----END PRIVACY-ENHANCED MESSAGE-----