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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1999 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 1-4928
DUKE ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
North Carolina 56-0205520
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
526 South Church Street, Charlotte, North 28202-1904
Carolina (Zip Code)
(Address of principal executive offices)
704-594-6200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, without par value New York Stock Exchange, Inc.
6.375% Preferred Stock A, 1993 Series, par value
$25 New York Stock Exchange, Inc.
First and Refunding Mortgage Bonds, 5 7/8% Due
2001 New York Stock Exchange, Inc.
First and Refunding Mortgage Bonds, 5 7/8%
Series C Due 2003 New York Stock Exchange, Inc.
First and Refunding Mortgage Bonds, 6 1/4%
Series B Due 2004 New York Stock Exchange, Inc.
First and Refunding Mortgage Bonds, 6 3/8% Due
2008 New York Stock Exchange, Inc.
First and Refunding Mortgage Bonds, 6 5/8%
Series B Due 2003 New York Stock Exchange, Inc.
First and Refunding Mortgage Bonds, 6 3/4% Due
2025 New York Stock Exchange, Inc.
First and Refunding Mortgage Bonds, 6 7/8%
Series B Due 2023 New York Stock Exchange, Inc.
First and Refunding Mortgage Bonds, 7% Due 2000 New York Stock Exchange, Inc.
First and Refunding Mortgage Bonds, 7% Series B
Due 2000 New York Stock Exchange, Inc.
First and Refunding Mortgage Bonds, 7% Due 2033 New York Stock Exchange, Inc.
First and Refunding Mortgage Bonds, 7 1/2%
Series B Due 2025 New York Stock Exchange, Inc.
First and Refunding Mortgage Bonds, 7 7/8% Due
2024 New York Stock Exchange, Inc.
7.20% Quarterly Income Preferred Securities
issued by Duke Energy
Capital Trust I and guaranteed by Duke Energy
Corporation New York Stock Exchange, Inc.
7.20% Trust Preferred Securities issued by Duke
Energy Capital
Trust II and guaranteed by Duke Energy
Corporation New York Stock Exchange, Inc.
Preference Stock Purchase Rights New York Stock Exchange, Inc.
Series C 6.60% Senior Notes Due 2038 New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
Title of class
Preferred Stock, par value $100
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. [_]
Estimated aggregate market value of the voting stock held by
nonaffiliates of the registrant at
February 29, 2000............................................ $ 17,313,000,000
Number of shares of Common Stock, without par value,
outstanding at February 29, 2000............................. 366,689,508
Documents incorporated by reference:
The registrant is incorporating herein by reference certain sections of the
proxy statement relating to the 2000 annual meeting of shareholders to provide
information required by Part III, Items 10, 11, 12 and 13 of this annual
report.
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DUKE ENERGY CORPORATION
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
Item Page
- ---- ----
PART I.
1.Business............................................................... 1
General............................................................... 1
Electric Operations................................................... 3
Natural Gas Transmission.............................................. 7
Field Services........................................................ 9
Trading and Marketing................................................. 11
Global Asset Development.............................................. 12
Other Energy Services................................................. 14
Real Estate Operations................................................ 15
Environmental Matters................................................. 15
Foreign Operations and Export Sales................................... 16
Employees............................................................. 16
Operating Statistics.................................................. 17
Executive Officers of Duke Energy..................................... 18
2.Properties............................................................. 18
3.Legal Proceedings...................................................... 20
4.Submission of Matters to a Vote of Security Holders.................... 20
PART II.
5.Market for Registrant's Common Equity and Related Stockholder Matters.. 20
6.Selected Financial Data................................................ 21
7.Management's Discussion and Analysis of Results of Operations and
Financial Condition..................................................... 21
7A.Quantitative and Qualitative Disclosures About Market Risk............ 39
8.Financial Statements and Supplementary Data............................ 40
9.Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................... 80
PART III.
10.Directors and Executive Officers of the Registrant.................... 80
11.Executive Compensation................................................ 80
12.Security Ownership of Certain Beneficial Owners and Management........ 80
13.Certain Relationships and Related Transactions........................ 80
PART IV.
14.Exhibits, Financial Statement Schedule, and Reports on Form 8-K....... 81
Signatures............................................................. 82
Exhibit Index.......................................................... 83
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 the 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 achievements and events 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."
PART I.
Item 1. Business.
GENERAL
Duke Energy Corporation (collectively with its subsidiaries, "Duke Energy")
is an integrated energy and energy services provider with the ability to offer
physical delivery and management of both electricity and natural gas throughout
the U.S. and abroad. Duke Energy provides these and other services through
seven business segments:
.Electric Operations
.Natural Gas Transmission
.Field Services
.Trading and Marketing
.Global Asset Development
.Other Energy Services
.Real Estate Operations
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
(NCUC) and the Public Service Commission of South Carolina (PSCSC).
Natural Gas Transmission 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 2 to the Consolidated Financial Statements, "Business Combinations,
Acquisitions and Dispositions." The interstate natural gas transmission and
storage operations are subject to the rules and regulations of the FERC.
Field Services gathers, processes, transports and markets natural gas and
produces, transports and markets natural gas liquids (NGLs). Field Services
operates gathering systems in western Canada and ten contiguous states that
serve major gas-producing regions in the Rocky Mountain, Permian Basin, Mid-
Continent and onshore and offshore Gulf Coast areas.
Trading and Marketing markets natural gas, electricity and other energy-
related products across North America. Duke Energy owns a 60% interest in
Trading and Marketing's energy trading operations, with Mobil Corporation
owning a 40% minority interest. This segment also includes certain other
trading activities and limited hydrocarbon exploration and production
activities that are wholly owned by Duke Energy.
Global Asset Development develops, owns and operates energy-related
facilities worldwide. Global Asset Development conducts its operations
primarily through Duke Energy North America, LLC (Duke Energy North America)
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. (DukeSolutions).
Real Estate Operations conducts its business through Crescent Resources,
Inc., which develops high quality commercial and residential real estate
projects and manages land holdings in the southeastern U.S.
The 1997 merger of Duke Power Company (Duke Power) and PanEnergy Corp
(PanEnergy) was accounted for as a pooling of interests; therefore, all
financial information included in this annual report for
1
periods prior to the merger include the combined historical financial results
of Duke Power and PanEnergy. See Note 2 to the Consolidated Financial
Statements, "Business Combinations, Acquisitions and Dispositions," for
additional information on the merger.
Certain terms used to describe Duke Energy's business are explained below.
British Thermal Unit (Btu). A standard unit for measuring thermal energy or
heat commonly used as a gauge for the energy content of natural gas and other
fuels.
Cubic Foot (cf). The most common unit of measurement of gas volume; the
amount of natural gas required to fill a volume of one cubic foot under stated
conditions of temperature, pressure and water vapor.
Distribution. The system of lines, transformers and switches that connect the
electric transmission system to customers.
Federal Energy Regulatory Commission (FERC). The agency that regulates the
transportation of electricity and natural gas in interstate commerce and
authorizes the buying and selling of energy commodities at market-based rates.
Gathering System. Pipeline, processing and related facilities that access
production and other sources of natural gas supplies for delivery to mainline
transmission systems.
Generation. The process of transforming other forms of energy, such as
nuclear or fossil fuels, into electricity. Also, the amount of electric energy
produced, expressed in megawatt-hours.
Greenfield Development. The development of a new power generating facility on
an undeveloped site.
Independent System Operator (ISO). Ensures non-discriminatory access to a
regional transmission system, providing all customers access to the power
exchange and clearing all bilateral contract requests for use of the electric
transmission system. Also responsible for maintaining bulk electric system
reliability.
Jurisdictional. Facilities and activities subject to the primary regulatory
oversight of FERC or state regulatory agencies.
Liquefied Natural Gas (LNG). Natural gas that has been converted to a liquid
by cooling it to -260 degrees Fahrenheit.
Local Distribution Company (LDC). A company that obtains the major portion of
its revenues from the operations of a retail distribution system for the
delivery of electricity or gas for ultimate consumption.
2
Natural Gas. A naturally occurring mixture of hydrocarbon and non-hydrocarbon
gases found in porous geological formations beneath the earth's surface, often
in association with petroleum. The principal constituent is methane.
Natural Gas Liquids (NGLs). Liquid hydrocarbons extracted during the
processing of natural gas. Principal commercial NGLs include butanes, propane,
natural gasoline and ethane.
Peak Load. The amount of electricity required during periods of highest
demand. Peak periods fluctuate by season, generally occurring in the morning
hours in winter and in late afternoon during the summer.
Throughput. The amount of natural gas or natural gas liquids transported
through a pipeline system.
Transmission System (Electric). An interconnected group of electric
transmission lines and related equipment for moving or transferring electric
energy in bulk between points of supply and points at which it is transformed
for delivery over a distribution system to customers, or for delivery to other
electric transmission systems.
Transmission System (Natural Gas). An interconnected group of natural gas
pipelines and associated facilities for transporting natural gas in bulk
between points of supply and delivery points to industrial customers, local
distribution companies, or for delivery to other natural gas transmission
systems.
Watt. A measure of real power production or usage equal to one joule per
second.
A discussion of the current business and operations of each of Duke Energy's
segments follows. For further discussion of the operating outlook of Duke
Energy and its segments, see "Management's Discussion and Analysis of Results
of Operations and Financial Condition, Introduction--Business Strategy." For
financial information concerning Duke Energy's business segments, see Note 3 to
the Consolidated Financial Statements, "Business Segments."
Duke Energy is a North Carolina corporation with its principal executive
offices located at 526 South Church Street, Charlotte, NC 28202-1904. The
telephone number is 704-594-6200.
ELECTRIC OPERATIONS
Service Area and Customers
Electric Operations' service area, approximately two-thirds of which lies in
North Carolina, covers about 22,000 square miles with an estimated population
of 5.3 million and includes a number of cities, of which the largest are
Charlotte, Greensboro, Winston-Salem and Durham in North Carolina, and
Greenville and Spartanburg in South Carolina. Electric Operations supplies
electric service directly to approximately two million residential, commercial
and industrial customers in more than 200 cities, towns and unincorporated
communities. Electricity is sold at wholesale to incorporated municipalities
and to several public and private utilities. In addition, sales are made
through contractual agreements to municipal or cooperative customers who
purchased portions of the Catawba Nuclear Station. For statistics related to
gigawatt-hour sales by customer type, see "Business, Operating Statistics." For
further discussion of the Catawba Nuclear Station joint ownership, see Note 5
to the Consolidated Financial Statements, "Joint Ownership of Generating
Facilities."
Electric Operations' service area is undergoing increasingly diversified
industrial and commercial development. The textile industry, machinery and
equipment manufacturing, and chemical and chemical-related industries are of
major significance to the economy of the area. Other industrial activities
include rubber and plastic products, paper and allied products, and various
other light and heavy manufacturing and service businesses. The largest
industry served is the textile industry, which accounted for approximately $428
million of Electric Operations' revenues for 1999, representing 10% of total
electric revenues and 36% of industrial revenues. Electric Operations normally
experiences seasonal peak loads in summer and winter.
3
(A map appears here depicting Electric Operation's 100 kV Electric Lines, 230kV
Electric Lines, 500 kV Electric Lines, Nuclear Facilities, Fossil Facilities,
Hydro Facilities, and Combustion Turbine Facilities.)
Capability and Resources of Energy
Electric energy required to supply the needs of Electric Operations'
customers is primarily generated by three nuclear generating stations with a
combined net capability of 5,020 megawatts (MW) (Oconee Nuclear Station--2,538
MW, McGuire Nuclear Station--2,200 MW and Catawba Nuclear Station--282 MW,
which represents Electric Operations' 12.5% ownership share in the Catawba
Nuclear Station), eight coal-fired stations with a combined capability of 7,699
MW, thirty-one hydroelectric stations with a combined capability of 2,803 MW
and six combustion turbine stations with a combined capability of 1,784 MW.
Energy and capacity are also supplied through contracts with other generators
of electricity and purchased on the open market. Electric Operations has
interconnections and arrangements with its neighboring utilities, which are
considered adequate for planning, emergency assistance, exchange of capacity
and energy and reliability of power supply. Future increased energy
requirements of Electric Operations' customers are expected to be supplied
through purchased power contracts and open market purchases. For statistics
regarding sources of electric energy, see "Business, Operating Statistics."
4
Fuel Supply
Electric Operations presently relies principally on coal and nuclear fuel for
the generation of electric energy. Electric Operations' reliance on oil and gas
is minimal. Information regarding the utilization of sources of power and cost
of fuels for each of the three years in the period ended December 31, 1999 is
set forth in the following table:
Cost of Fuel
per Net
Generation by Kilowatt-hour
Source Generated
(Percent)(d) (Cents)(d)
----------------- --------------
1999 1998 1997 1999 1998 1997
----- ----- ----- ---- ---- ----
Coal...................................... 50.4 50.7 59.0 1.33 1.32 1.30
Nuclear(a)................................ 48.0 46.2 38.5 0.43 0.44 0.48
Oil and gas(b)............................ 0.8 1.0 0.4 4.51 4.01 5.58
----- ----- ----- ---- ---- ----
All fuels (cost based on weighted
average)(a).............................. 99.2 97.9 97.9 0.92 0.93 0.99
Hydroelectric(c).......................... 0.8 2.1 2.1
----- ----- -----
100.0 100.0 100.0
===== ===== =====
--------
(a) Statistics related to nuclear generation and all fuels reflect
Electric Operations' 12.5% ownership interest in the Catawba
Nuclear Station.
(b) Cost statistics include amounts for light-off fuel at Electric
Operations' coal-fired stations.
(c) Generating figures are net of output required to replenish pumped
storage units during off-peak periods.
(d) Years prior to 1998 have been restated to include Nantahala Power
and Light.
Coal. Electric Operations meets its coal demand through purchase supply
contracts and spot agreements. Large amounts of its coal supply are obtained
under supply contracts with mining operators utilizing both underground and
surface mining. Electric Operations has an adequate supply of coal to fuel its
current operations. Its supply contracts, all of which have price adjustment
provisions, have expiration dates ranging from 2000 to 2003. Duke Energy
believes that it will be able to renew such contracts as they expire or to
enter into similar contractual arrangements with other coal suppliers for the
quantities and qualities of coal required. The coal purchased under these
supply contracts is produced from mines located in eastern Kentucky, southern
West Virginia and southwestern Virginia. Coal requirements not met by supply
contracts have been and are expected to be fulfilled with spot market
purchases.
The average sulfur content of coal being purchased by Electric Operations is
approximately 1%. Such coal satisfies the current emission limitation for
sulfur dioxide for existing facilities. See also "Management's Discussion and
Analysis of Results of Operations and Financial Condition, Current Issues--
Environmental, Air Quality Control" for additional information regarding
particulate matter.
Nuclear. Generally, the process for developing nuclear generating fuel supply
involves the mining and milling of uranium ore to produce uranium concentrates,
the conversion of uranium concentrates to uranium hexafluoride, enrichment of
that gas and fabrication of the enriched uranium hexafluoride into usable fuel
assemblies. Electric Operations has contracted for uranium materials and
services required to fuel the Oconee, McGuire and Catawba Nuclear Stations.
Based upon current projections, these contracts will meet Electric Operations'
requirements through the following years:
Uranium Conversion Enrichment Fabrication
Nuclear Station Material Service Service Service
--------------- -------- ---------- ---------- -----------
Oconee............................ 2000 2000 2002 2006
McGuire........................... 2000 2000 2002 2009
Catawba........................... 2000 2000 2002 2009
5
Uranium material requirements will be met through various supplier contracts,
with uranium material produced primarily in the U.S. and Canada. Duke Energy
believes that it will be able to renew contracts as they expire or to enter
into similar contractual arrangements with other suppliers of nuclear fuel
materials and services. Requirements not met by long-term supply contracts have
been and are expected to be fulfilled with unfabricated uranium spot market
purchases.
Duke Energy entered into a contract with the Department of Energy (DOE) to
use mixed oxide fuel at its McGuire and Catawba nuclear stations. The mixed
oxide fuel is fabricated from plutonium from the government's surplus and is
similar to conventional uranium fuel. Before using the fuel, Duke Energy must
apply for and receive amendments to the respective facility operating licenses
from the Nuclear Regulatory Commission (NRC). Mixed oxide fuel is scheduled to
be used at McGuire and Catawba nuclear stations in 2007.
After spent fuel is removed from a nuclear reactor, it is placed in temporary
storage for cooling in a spent fuel pool at the nuclear station site. Under
provisions of the Nuclear Waste Policy Act of 1982, Duke Energy has entered
into contracts with the DOE for the disposal of spent nuclear fuel. The DOE
failed to begin accepting the spent nuclear fuel on January 31, 1998, the date
provided by the Nuclear Waste Policy Act and by Duke Energy's contract with the
DOE. On June 8, 1998, Duke Energy filed with the U.S. Court of Federal Claims a
claim against the DOE for damages in excess of $1 billion arising out of the
DOE's failure to begin accepting commercial spent nuclear fuel by January 31,
1998. Damages claimed in the suit are intended to recover costs that Duke
Energy is incurring and will continue to incur as a result of the DOE's partial
material breach of its contract with Duke Energy, including costs associated
with securing additional spent fuel storage capacity. Duke Energy will continue
to safely manage its spent nuclear fuel until the DOE accepts it.
Competition
Electric industry restructuring is being addressed in all 50 states and in
the District of Columbia, which is resulting in changes in the industry. For
further discussion, see "Management's Discussion and Analysis of Results of
Operations and Financial Condition, Current Issues--Electric Competition."
Electric Operations is currently subject to competition in some areas from
government owned power systems, municipally owned electric systems, rural
electric cooperatives and, in certain instances, other private utilities.
Currently, statutes in North Carolina and South Carolina provide for the
assignment by the NCUC and the PSCSC, respectively, of all areas outside
municipalities in such States to regulated electric utilities and rural
electric cooperatives. Substantially all of the territory comprising the
Electric Operations' service area has been so assigned. The remaining areas
have been designated as unassigned and in such areas Electric Operations
remains subject to competition. A decision of the North Carolina Supreme Court
limits, in some instances, the right of North Carolina municipalities to serve
customers outside their corporate limits. In South Carolina there continues to
be competition between municipalities and other electric suppliers outside the
corporate limits of the municipalities, subject, however, to the regulation of
the PSCSC. In addition, Electric Operations is engaged in continuing
competition with various natural gas providers.
Regulation
The NCUC and the PSCSC approve rates for retail electric sales within their
respective states. The FERC approves Electric Operations' rates for certain
electric sales to wholesale customers. For further discussion of rate matters,
see Note 4 to the Consolidated Financial Statements, "Regulatory Matters--
Electric Operations." The FERC, the NCUC and the PSCSC also have authority over
the construction and operation of Electric Operations' facilities. Electric
Operations holds certificates of public convenience and necessity issued by the
FERC, the NCUC and the PSCSC, authorizing it to construct and operate the
electric facilities now in operation for which certificates are required, and
to sell electricity to retail and wholesale customers. Prior approval from the
NCUC and the PSCSC is required to issue securities.
The NCUC, PSCSC and FERC have implemented regulations governing access to
regulated electric customer data by non-regulated entities and services
provided between regulated and non-regulated affiliated
6
entities. These regulations affect the activities of Trading and Marketing,
Global Asset Development, and Other Energy Services with Electric Operations.
The Energy Policy Act of 1992 (EPACT) and the FERC's subsequent rulemaking
activities permit the FERC to order transmission access for third parties to
transmission facilities owned by another entity. EPACT does not, however,
permit the FERC to issue orders requiring transmission access to retail
customers. The FERC has issued orders for third-party transmission service and
a number of rules of general applicability, including Orders 888 and 889.
Pursuant to the FERC's final rules, Electric Operations obtained from the FERC
open-access rule the rights to sell capacity and energy at market-based rates
from its own assets. For further discussion, see "Management's Discussion and
Analysis of Results of Operations and Financial Condition, Current Issues--
Electric Competition."
The Electric Operations segment is subject to the jurisdiction of the NRC as
to the design, construction and operation of its nuclear stations. For
discussions of nuclear decommissioning costs and nuclear insurance regulatory
requirements and coverages, see Note 11 to the Consolidated Financial
Statements, "Nuclear Decommissioning Costs" and Note 14 to the Consolidated
Financial Statements, "Commitments and Contingencies--Nuclear Insurance,"
respectively.
The hydroelectric generating facilities of Electric Operations are licensed
by the FERC under Part I of the Federal Power Act, with license terms expiring
from 2001 to 2036. The nuclear generating facilities of Electric Operations are
licensed by the NRC with license terms expiring from 2013 to 2026. The FERC has
authority to grant extensions of hydroelectric generating licenses, and the NRC
has authority to grant extensions of nuclear generating licenses. Duke Energy
has filed an application for a 20-year renewal of its operating license for the
Oconee Nuclear Station. The application is expected to receive approval from
the NRC in 2000. Duke Energy is also initiating the license renewal process for
the McGuire and Catawba Nuclear Stations in 2000. Duke Energy has filed a
license application for one of its hydroelectric facilities for which it
expects to receive a new license by 2001. Duke Energy is also in various stages
of relicensing other facilities whose licenses expire between 2005 and 2008.
The Electric Operations 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."
NATURAL GAS TRANSMISSION
Natural Gas Transmission provides interstate transportation and storage of
natural gas through its Northeast Pipelines, which includes Texas Eastern
Transmission Corporation (TETCO) and Algonquin Gas Transmission Company
(Algonquin). The Midwest Pipelines, which included Panhandle Eastern Pipe Line
Company (PEPL) and Trunkline Gas Company (Trunkline), were also a part of
Natural Gas Transmission until their sale to CMS Energy Corporation (CMS) in
March 1999. See further discussion of the sale in Note 2 to the Consolidated
Financial Statements, "Business Combinations, Acquisitions and Dispositions."
Investments include a 37.5% ownership interest in Maritimes & Northeast
Pipeline, which has a design capacity of 530 million cubic feet per day
(MMcf/d) in Canada and 400 MMcf/d in the U.S. Maritimes & Northeast Pipeline
was placed in service and received the first delivery of natural gas from the
Sable Offshore Energy Project in December 1999.
In January 2000, Natural Gas Transmission announced that it had entered into
a definitive agreement to purchase the East Tennessee Natural Gas Company, a
1,100-mile pipeline that crosses the TETCO pipeline in Tennessee and serves the
rapidly growing southeastern region of the U.S. The transaction is expected to
close in late March 2000, subject to regulatory approval. For more information
on this purchase, see Note 19 to the Consolidated Financial Statements,
"Subsequent Events."
For 1999, consolidated natural gas deliveries by Natural Gas Transmission's
interstate pipelines totaled 1,893 trillion British thermal units (TBtu),
compared to 2,593 TBtu in 1998. For the Northeast Pipelines, 1999 natural gas
deliveries were 1,565 TBtu, a 7% increase from last year. The Midwest
Pipelines, as a consequence of the sale to CMS, reported natural gas deliveries
of 328 TBtu in 1999 compared to 1,141 TBtu in 1998.
7
A majority of the delivered volumes of Natural Gas Transmission'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 provide both firm and 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 Natural Gas Transmission's interstate pipeline systems is
seasonal, with the highest throughput occurring during the colder periods in
the first and fourth quarters.
Natural Gas Transmission's interstate pipeline systems consist of
approximately 11,000 miles of pipe, which include 650 miles related to the
partial ownership interest in Maritimes & Northeast Pipeline. The pipeline
systems receive natural gas from most major North American producing regions
for delivery to markets primarily in the Mid-Atlantic and New England states.
(A map appears here depicting Natural Gas Transmission's interstate pipeline
systems and storage.)
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.
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 75 billion cubic feet (Bcf), and the combined
working gas in storage was 59 Bcf on December 31, 1999. Algonquin owns no
storage fields.
8
Competition
Duke Energy'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.
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.
Natural gas competes with other forms of energy available to Duke Energy'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 Duke Energy.
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 "Management's Discussion and Analysis of Results of Operations and
Financial Condition, Liquidity and Capital Resources--Operating Cash Flows" and
Note 4 to the Consolidated Financial Statements, "Regulatory Matters--Natural
Gas Transmission." The FERC also has authority over the construction and
operation of pipeline and related facilities utilized in the transportation,
storage and sale of natural gas in interstate commerce, including the
extension, enlargement or abandonment of such facilities. TETCO and Algonquin
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.
As required by FERC Order 636, Natural Gas Transmission's pipelines operate
as open-access transporters of natural gas, providing unbundled firm and
interruptible transportation and storage services on an equal basis for all gas
supplies, whether purchased from the pipeline or from another gas supplier.
FERC 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 4 to the Consolidated Financial Statements, "Regulatory Matters--
Natural Gas Transmission."
The FERC has implemented regulations governing access to regulated natural
gas transmission customer data by non-regulated entities and services provided
between regulated and non-regulated affiliated entities. These regulations
affect the activities of Trading and Marketing, Global Asset Development and
Other Energy Services with Natural Gas Transmission.
Natural Gas Transmission is subject to the jurisdiction of the EPA and state
environmental agencies. For a discussion of environmental regulation, see
"Business, Environmental Matters." Natural Gas Transmission 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.
FIELD SERVICES
Field Services gathers, processes, transports and markets natural gas and
produces, transports and markets NGLs. Field Services owns and operates
approximately 28,000 miles of natural gas gathering systems, including
intrastate pipelines, and 52 natural gas processing plants in the U.S. and
Canada. Field Services also has ownership interests in 12 other natural gas
processing plants in the U.S.
Field Services gathers natural gas from production wellheads through
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. Field Services' operations also include
several intrastate pipeline systems and one high-deliverability natural gas
storage facility.
9
The map below includes Field Services' natural gas gathering systems,
intrastate pipelines, region offices and supply areas. The map also shows the
interstate systems of the Natural Gas Transmission segment.
(A map appears here depicting the items indicated in the above paragraph.)
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. 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. Most NGL sales
are based upon current market-related prices. Field Services also produces
helium at the National Helium Corporation facility in Liberal, Kansas and the
Ladder Creek facility in Colorado.
Field Services' operating results are significantly impacted by changes in
NGL prices, which increased approximately 30.8% in 1999 compared to 1998. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition, Quantitative and Qualitative Disclosures About Market Risk" for a
discussion of Field Services' exposure to changes in commodity prices.
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), as well as UPR's
10
natural gas and NGL marketing activities (collectively, "the UPR acquisition").
For further discussion of the UPR acquisition see Note 2 to the Consolidated
Financial Statements, "Business Combinations, Acquisitions and Dispositions."
In 1998, Field Services sold assets related to its crude oil gathering and
marketing business, including 1,800 miles of intrastate crude oil pipelines in
the Mid-Continent and South Texas areas and 450 miles of intrastate NGL
pipelines in the Texas Gulf Coast area, to TEPPCO Partners, L.P. (TEPPCO) in
exchange for an additional ownership interest in TEPPCO. As a result of the
sale, Duke Energy now has a 2% general partner interest and a 19.1% limited
partner interest in TEPPCO, a publicly owned master limited partnership that
transports refined products and liquefied petroleum products through a 4,300
mile pipeline system.
On December 16, 1999, Field Services announced that it had signed definitive
agreements to combine Field Services' gas gathering and processing businesses
with Phillips Petroleum Company's Gas Processing and Marketing unit to form a
new midstream company. The transaction is expected to close by late March 2000.
For additional information, see Note 19 to the Consolidated Financial
Statements, "Subsequent Events."
See certain operating statistics of Field Services under "Business, Operating
Statistics." Activities of Field Services can fluctuate in response to the
seasonality affecting natural gas.
Competition
Field Services competes with major integrated oil companies, major interstate
pipelines, national and local natural gas gatherers, brokers, marketers and
distributors for natural gas supplies, in gathering and processing natural gas
and in marketing and transporting natural gas and NGLs. Competition for natural
gas supplies is primarily based on the efficiency and reliability of
operations, the availability of transportation to high demand markets and the
ability to obtain a satisfactory price for the producer's natural gas.
Competition for sales customers is based primarily upon reliability and price
of delivered natural gas and NGLs.
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, are also subject to FERC regulation.
However, the majority of the natural gas gathering activities of the Field
Services group are not subject to regulation by the FERC.
Field Services is subject to the jurisdiction of the EPA and state
environmental agencies. For a discussion of environmental regulation, see
"Business, Environmental Matters." Certain operations of Field Services are
subject to the jurisdiction of the Department of Transportation and certain
similar state agencies whose regulations have incorporated certain provisions
of the Natural Gas Pipeline Safety Act of 1968, the Hazardous Liquid Pipeline
Safety Act of 1979, and subsequent amendments.
TRADING AND MARKETING
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 natural gas and electric power trading operations, with
Mobil Corporation (Mobil) owning a 40% minority interest. Trading and Marketing
also includes certain other trading activities and limited hydrocarbon
exploration and production activities that are wholly owned by Duke Energy.
11
Trading and Marketing markets natural gas primarily to LDCs, electric power
generators (including Global Asset Development's generation facilities),
municipalities, large industrial end-users and energy marketing companies.
Trading and Marketing markets electricity to investor owned utilities,
municipal power generators and other power marketers. 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. Operations are primarily in the U.S.
and, to a lesser extent, in Canada, and are serviced through three operating
centers. Additionally, during 1999, Duke Energy Hydrocarbons was formed to
invest capital in limited hydrocarbon exploration and production prospects
through non-operating working interests.
Natural gas marketing operations encompass both on-system and off-system
supplies. With respect to on-system supplies, Trading and Marketing generally
purchases natural gas from Field Services' facilities and delivers the gas to
an intrastate or interstate pipeline for redelivery to another customer.
Natural Gas Transmission's pipelines are utilized for deliveries when prudent.
With respect to off-system supplies, Trading and Marketing purchases natural
gas from producers, pipelines and other suppliers not connected with Duke
Energy's facilities for resale to customers. Substantially all of Mobil's U.S.
and Canadian natural gas production is committed to be marketed through Trading
and Marketing through 2006.
With respect to electricity marketing operations, Trading and Marketing
purchases electricity from third-party suppliers and from Global Asset
Development's domestic generation 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 supplies, also generally
include market-sensitive pricing provisions. Purchases and sales of off-system
gas and electricity supplies are normally made under short-term contracts.
Purchase and sales commitments involving significant price and location risk
are generally hedged with offsetting commitments and commodity futures, swaps
and options. For information concerning Trading and Marketing'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 7 to the Consolidated Financial
Statements, "Risk Management and Financial Instruments--Commodity Derivatives--
Trading."
See certain operating statistics of Trading and Marketing under "Business,
Operating Statistics." Activities of Trading and Marketing can fluctuate in
response to the seasonality affecting both electricity and natural gas.
Competition
Trading and Marketing competes with major integrated oil companies, major
interstate pipelines and their marketing affiliates, brokers, marketers and
distributors, and electric utilities and other electric power marketers for
natural gas supplies and in marketing natural gas, electricity and other energy
commodities. 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.
Regulation
The energy marketing activities of Trading and Marketing may, in certain
circumstances, be subject to the jurisdiction of the FERC. Current FERC
policies permit Trading and Marketing entities subject to FERC jurisdiction to
market natural gas and electricity at market-based rates.
GLOBAL ASSET DEVELOPMENT
Global Asset Development develops, owns and operates energy-related
facilities worldwide. Global Asset Development conducts its operations
primarily in the U.S. through Duke Energy North America and internationally,
currently in Australia and Latin America, through Duke Energy International.
12
Deregulation of energy markets in the U.S. and abroad is providing
substantial opportunities for Global Asset Development to grow through
acquisitions, construction of greenfield projects and expansion of existing
facilities. Global Asset Development is an active participant in both domestic
and international competitive energy-related markets, which include natural gas
pipelines, power generation, energy trading and marketing and other services.
Global Asset Development owns, operates or has substantial interests in
approximately 12,500 MW of generation and approximately 1,900 miles of pipeline
systems, including projects under construction.
Domestically, Duke Energy North America is investing in new merchant power
plants throughout the U.S. To capture the greatest value, Duke Energy North
America, through its portfolio management strategy, seeks opportunities to
invest in markets which have capacity needs and to divest, in whole or in part,
when significant value can be realized. During 1999, Duke Energy North America
began construction of multiple new power generation plants in the southwest and
midwest.
The following map includes Duke Energy North America's power generation
facilities.
(A map appears here depicting Duke Energy North America's power generation
facilities, including those under construction.)
Duke Energy International continues to focus on its regional target areas in
Australia and Latin America for further expansion opportunities and intends to
implement its strategies in Europe. In January 1999, Duke Energy International
completed the $315 million purchase of power generation and transmission assets
in western Australia and New Zealand, including an ownership interest in a
pipeline in western Australia. From August 1999 through January 2000, Duke
Energy International entered into a series of transactions to complete an
approximate $1.0 billion purchase of an approximate 95% economic interest in
Companhia de Geracao de Energia Eletrica Paranapanema, an electric generating
company in Brazil. Also during 1999, Duke Energy International reached a
definitive agreement with Dominion Resources, Inc. to acquire its portfolio of
hydroelectric, natural gas and diesel power generation businesses in Argentina,
Belize, Bolivia and Peru for approximately $405 million. For additional
information on business acquisitions see "Management's Discussion and Analysis
of Results of Operations and Financial Condition, Liquidity and Capital
Resources--Investing Cash Flows" and Notes 2 and 19 to the Consolidated
Financial Statements, "Business Combinations, Acquisitions and Dispositions"
and "Subsequent Events," respectively.
13
The following map illustrates the locations of Duke Energy International's
worldwide energy facilities, including projects under construction or under
contract.
(A map appears here depicting the items indicated in the above paragraph.)
Competition and Regulation
Global Asset Development experiences substantial competition from existing
utility companies as well as other merchant electric generation companies in
the U.S. Internationally, Global Asset Development focuses on regions where
free markets prevail or are developing. Competition in these markets is from
other multinational energy companies and local private and public utilities.
Most of Global Asset Development's operations are not subject to regulation.
However, to the extent that Global Asset Development's generating stations in
California sell electricity under "reliability must run" agreements to the
California Independent System Operator, such sales are made at FERC regulated
rates.
Global Asset Development is subject to international, federal, state and
local environmental regulations. For a discussion of environmental regulation,
see "Business, Environmental Matters."
OTHER ENERGY SERVICES
Other Energy Services provides engineering, consulting, construction and
integrated energy solutions worldwide, primarily through Duke Engineering &
Services, Duke/Fluor Daniel and DukeSolutions.
Duke Engineering & Services 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, transmission and
distribution projects worldwide.
Duke/Fluor 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
14
domestically and internationally. Subsidiaries of Duke Energy and Fluor
Corporation each own 50% of Duke/Fluor Daniel.
DukeSolutions provides energy consulting services to large end users of
energy by first identifying and then affecting points in a customer's
operations where energy related costs are incurred, including procurement,
production and disposal. The scope of services involves providing strategic
solutions to reduce costs when customers buy energy, convert it into a usable
form, use it to manufacture products and dispose of any waste.
Other Energy Services experiences substantial competition from utilities and
other independent companies in the U. S. or abroad.
Other Energy Services is subject to the jurisdiction of the EPA and
international, state and local environmental agencies. For a discussion of
environmental regulation, see "Business, Environmental Matters."
REAL ESTATE OPERATIONS
Real Estate Operations conducts its business through Crescent Resources Inc.,
which develops high quality commercial and residential real estate projects and
manages land holdings in the southeastern U.S. At December 31, 1999, Real
Estate Operations owned 4.2 million square feet of commercial and industrial
space, with an additional 1.4 million square feet under construction. At
December 31, 1999, the commercial portfolio included 2.6 million square feet of
office space, 1.5 million square feet of warehouse space and 0.1 million square
feet of retail space. In 1999, commercial buildings totaling 2.0 million of
square feet were sold for $155 million.
Real Estate Operations' residential developments are high-end, country club
and golf course communities with individual lots sold to custom builders. In
1999, Real Estate Operations added the development of moderately priced
residential communities in Jacksonville, Florida, with sales in tracts to
national builders. In 1999, Real Estate Operations sold 917 residential
developed lots for $138 million, and tract sales were $9 million.
In 1999, Real Estate Operations also announced plans to enter the multi-
family market and to significantly increase its retail development. At December
31, 1999, Real Estate Operations had approximately 200,000 acres of land under
its management.
ENVIRONMENTAL MATTERS
Duke Energy is subject to international, 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 Duke
Energy include:
. The Clean Air Act Amendments of 1990, which require a two-phase reduction
by electric utilities in aggregate annual emissions of sulfur dioxide and
nitrogen oxide by 2000;
. State Implementation Plans, which were issued by the EPA to 22 states
including North and South Carolina, and the District of Columbia related
to existing and new national ambient air quality standards for ozone;
. The Federal Water Pollution Control Act Amendments of 1987, which require
permits for facilities that discharge treated wastewater into the
environment; and
. The Comprehensive Environmental Response, Compensation and Liability Act,
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 Duke Energy,
including possible liability and capital costs, see "Legal Proceedings,"
"Management's Discussion and Analysis of Results of Operations and Financial
Condition, Current Issues--Environmental" and Note 14 to the Consolidated
Financial Statements,
15
"Commitments and Contingencies--Environmental." Compliance with international,
federal, state and local provisions' regulating the discharge of materials into
the environment, or otherwise protecting the environment, is not expected to
have a material adverse effect on the competitive position, consolidated
results of operations or financial position of Duke Energy.
FOREIGN OPERATIONS AND EXPORT SALES
Foreign operations consisted of 10% of consolidated revenues in 1999 and 15%
of consolidated long-lived assets as of December 31, 1999. For 1998 and 1997,
foreign operations and export sales were not material to Duke Energy as a
whole. For a discussion of Duke Energy's foreign operations and the risks
associated with them, see "Management's Discussion and Analysis of Results of
Operations and Financial Condition, Quantitative and Qualitative Disclosures
About Market Risk--Foreign Operations Risk" and Notes 3 and 7 to the
Consolidated Financial Statements, "Business Segments" and "Risk Management and
Financial Instruments," respectively.
EMPLOYEES
At December 31, 1999, Duke Energy had approximately 21,000 employees.
Approximately 1,600 operating and maintenance employees are represented by
unions. Of these approximately 1,400 are represented by the International
Brotherhood of Electrical Workers (IBEW). During 1999, new agreements were
reached with IBEW units for a portion of the employees. Additionally,
negotiations began with the IBEW for a new contract for other employees. The
new contract when completed, will be effective in 2000. An additional 74
employees are represented by the United Steelworkers and Rubberworkers of
America. Approximately 160 employees are represented by the Paper, Allied,
Chemical and Energy Workers Union (PACE, formerly the Oil, Chemical and Atomic
Workers International Union). Two new agreements were reached with PACE during
1999.
16
OPERATING STATISTICS
Years Ended December 31,
-----------------------------------------
1999 1998 1997 1996 1995
-------- ------- ------- ------ ------
Electric Operations(a)
Sources of Electric Energy, GWh(b)
Generated--net output:
Coal............................. 41,306 42,164 45,234 40,649 32,389
Nuclear.......................... 39,263 38,366 29,569 33,177 39,836
Hydro............................ 638 1,714 1,633 1,802 2,117
Oil and gas...................... 662 846 301 199 255
-------- ------- ------- ------ ------
Total generation............... 81,869 83,090 76,737 75,827 74,597
Purchased power and net
interchange..................... 3,617 2,659 3,781 3,885 1,239
-------- ------- ------- ------ ------
Total output................... 85,486 85,749 80,518 79,712 75,836
Plus: Purchases from other
Catawba joint owners............ 1,233 1,656 2,316 2,662 6,070
-------- ------- ------- ------ ------
Total sources of energy........ 86,719 87,405 82,834 82,374 81,906
Less: Line loss and company
usage........................... 5,171 5,394 4,899 4,827 4,780
-------- ------- ------- ------ ------
Total GWh sales................ 81,548 82,011 77,935 77,547 77,126
======== ======= ======= ====== ======
Electric Energy Sales, GWh
Residential...................... 21,897 22,002 20,483 21,484 20,124
General service.................. 21,807 21,093 19,687 19,593 18,461
Industrial
Textile......................... 11,201 11,981 11,955 11,603 12,155
Other........................... 18,704 18,668 18,376 18,131 17,738
Other energy and wholesale....... 7,715 8,933 7,029 6,781 7,852
-------- ------- ------- ------ ------
Total GWh sales billed......... 81,324 82,677 77,530 77,592 76,330
Unbilled GWh sales............... 224 (666) 405 (45) 796
-------- ------- ------- ------ ------
Total GWh sales................ 81,548 82,011 77,935 77,547 77,126
======== ======= ======= ====== ======
Natural Gas Transmission
Throughput Volumes, TBtu(c):
Northeast Pipelines
TETCO........................... 1,254 1,148 1,300 1,349 1,234
Algonquin....................... 311 311 341 327 331
-------- ------- ------- ------ ------
Total Northeast Pipelines...... 1,565 1,459 1,641 1,676 1,565
-------- ------- ------- ------ ------
Midwest Pipelines(d)
PEPL............................ 176 560 659 687 663
Trunkline....................... 152 581 620 632 519
-------- ------- ------- ------ ------
Total Midwest Pipelines........ 328 1,141 1,279 1,319 1,182
-------- ------- ------- ------ ------
Intercompany eliminations........ -- (7) (58) (56) (44)
-------- ------- ------- ------ ------
Total Natural Gas
Transmission.................. 1,893 2,593 2,862 2,939 2,703
======== ======= ======= ====== ======
Field Services
Natural Gas Gathered and
Processed/Transported, TBtu/d(e).. 5.1 3.6 3.4 2.9 1.9
NGL Production, MBbl/d(f).......... 192.4 110.2 108.2 78.5 54.8
Average Natural Gas Price per
MMBtu(g).......................... $2.27 $2.11 $2.59 $2.59 $1.64
Average NGL Price per Gallon....... $0.34 $0.26 $0.35 $0.39 $0.33
Natural Gas Marketed, TBtu/d....... 0.5 0.4 0.4 0.5 0.1
Trading and Marketing
Natural Gas Marketed, TBtu/d....... 10.5 8.0 6.9 5.5 3.6
Electricity Marketed, GWh.......... 109,634 98,991 64,650 4,229 513
- --------
(a) Years prior to 1998 have been restated to include Nantahala Power and
Light.
(b) Gigawatt-hour.
(c) Trillion British thermal units.
(d) Sold in March 1999.
(e) Trillion British thermal units per day.
(f) Thousand barrels per day.
(g) Million British thermal units.
17
EXECUTIVE OFFICERS OF DUKE ENERGY
Richard B. Priory, 53, Chairman of the Board, President and Chief Executive
Officer. Mr. Priory served as President and Chief Operating Officer from 1994
until he assumed his present position in 1997 following the merger with
PanEnergy.
William A. Coley, 56, Group President, Duke Power. Mr. Coley served as
President of Duke Energy's Associated Enterprises Group from 1994 to 1997 when
he assumed his present position following the merger.
Fred J. Fowler, 54, Group President, Energy Transmission. Mr. Fowler served
as Group Vice President of PanEnergy from 1996 until the merger, when he
assumed his present position. He was President of TETCO from 1994 to 1996.
Harvey J. Padewer, 52, Group President, Energy Services. Mr. Padewer assumed
his present position on January 1, 1999. From 1995 through 1998, he served as
Senior Vice President and General Manager of Utilicorp Energy Group, where he
was President, Aquila Energy; President, Utilico Group; and Vice Chairman of
the Board, Aquila Pipeline Corporation. From 1989 to 1995, he served in
executive positions at ABB Power Generation, Inc., first as Vice President,
Sales and Marketing and later as President, Turbine Power Division.
Richard W. Blackburn, 57, Executive Vice President, General Counsel and
Secretary. Mr. Blackburn was named to his present position in October 1997.
Prior to joining Duke Energy, he served as President and Group Executive of
NYNEX Corporation's Worldwide Communications and Media Group from 1995 to 1997.
Richard J. Osborne, 49, Executive Vice President and Chief Financial Officer.
Mr. Osborne served as Senior Vice President and Chief Financial Officer from
1994 until he assumed his present position in 1997 following the merger.
Ruth G. Shaw, 52, Executive Vice President and Chief Administrative Officer.
Ms. Shaw served as Senior Vice President, Corporate Resources, from 1994 until
she assumed her present position following the merger.
Sandra P. Meyer, 45, Vice President and Corporate Controller. Ms. Meyer
assumed her present position in September 1999. Prior to her present position,
Ms. Meyer served as Vice President, Duke Power Planning and Finance following
the merger in 1997. She became Vice President and Controller of PanEnergy in
1994 and was named to the additional position of Treasurer in October 1996.
Executive officers are elected annually by the Board of Directors and serve
until the first meeting of the Board of Directors following the annual meeting
of shareholders and until their successors are duly elected.
There are no family relationships between any of the executive officers nor
any arrangement or understanding between any executive officer and any other
person pursuant to which the officer was selected.
Item 2. Properties.
ELECTRIC OPERATIONS
At December 31, 1999, Electric Operations operated three nuclear generating
stations with a combined net capability of 5,020 MW (which includes 12.5%
ownership in the Catawba Nuclear Station), eight coal-fired stations with a
combined capability of 7,699 MW, thirty-one hydroelectric stations with a
combined capability of 2,803 MW and six combustion turbine stations with a
combined capability of 1,784 MW, all of which are located in North Carolina or
South Carolina.
18
In addition, Electric Operations owned, as of December 31, 1999,
approximately 13,000 conductor miles of electric transmission lines, including
600 conductor miles of 525 kilovolts, 2,600 conductor miles of 230 kilovolts,
6,500 conductor miles of 100 kilovolts, and 3,300 conductor miles of 13 to 66
kilovolts. Electric Operations also owned approximately 91,100 conductor miles
of electric distribution lines, including 61,800 conductor miles of rural
overhead lines, 15,500 conductor miles of urban overhead lines, 7,500 conductor
miles of rural underground lines and 6,300 conductor miles of urban underground
lines. At December 31, 1999, the electric transmission and distribution systems
comprised approximately 1,600 substations.
Substantially all electric plant is mortgaged under the Indenture relating to
First and Refunding Mortgage Bonds.
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
consists of 9,220 miles of pipeline and has 73 compressor stations.
TETCO also owns and operates two offshore Louisiana pipeline 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 approximately 250 miles through New Jersey, New York,
Connecticut, Rhode Island and Massachusetts. The system consists of 1,066 miles
of pipeline with six compressor stations.
For information concerning natural gas storage properties, see "Business,
Natural Gas Transmission."
FIELD SERVICES
For information regarding the properties of Field Services, see "Business,
Field Services."
GLOBAL ASSET DEVELOPMENT
Duke Energy North America owns several gas-fueled electric generating
stations throughout the U.S., including four wholly owned stations in
California with combined capacity of 3,351 MW. As of December 31, 1999, Duke
Energy North America had ownership interests ranging from 24.42% to 50% in
numerous other generating facilities with combined capacity of 1,217 MW.
Additionally, Duke Energy North America wholly owns or has ownership interests
ranging from 50% to 78.53% in several generating stations that are under
construction. The combined capacity of these facilities is 2,960 MW.
As of December 31, 1999, Duke Energy International's properties included a
combination of hydroelectric and thermal power generation assets. Duke Energy
International had ownership interests ranging from 50% to 98% in hydroelectric
facilities located in Brazil, Argentina, Bolivia, Peru and Belize, with
combined capacity of 3,443 MW. Wholly owned thermal facilities in Australia and
New Zealand had capacity of 392 MW. Thermal facilities in which Duke Energy
International had ownership interests ranging from 21.9% to 97% in Peru,
Ecuador, El Salvador, Indonesia and Argentina had capacity of 1,085 MW. These
statistics include projects under construction or under contract.
Additionally, Duke Energy International owned 889 miles of pipeline systems
in Australia, and had an ownership interest of 11.84% in 800 miles of pipeline
systems in Australia and a 21.9% ownership interest in 190 miles of pipeline
systems in Peru. These statistics include projects under construction. Also as
of December 31, 1999, Duke Energy International had a 25% indirect interest in
National Methanol Company, which owns and operates a methanol and MTBE (methyl
tertiary butyl ether) business in Jubail, Saudi Arabia.
For additional information and maps regarding the properties of Global Asset
Development, see "Business, Global Asset Development."
19
REAL ESTATE OPERATIONS
For information regarding the properties of Real Estate Operations, see
"Business, Real Estate Operations."
OTHER
None of the properties used in connection with Duke Energy's other business
activities are considered material to Duke Energy's operations as a whole.
Item 3. Legal Proceedings.
The Illinois Environmental Protection Agency has initiated an environmental
enforcement proceeding against a former subsidiary of Duke Energy relating to
alleged air quality permit violations at a natural gas compressor station. Duke
Energy has agreed to indemnify the purchaser of this former subsidiary against
liability for any penalty or fines resulting from these alleged violations.
This proceeding could result in a penalty in excess of $100,000.
See Note 14 to the Consolidated Financial Statements, "Commitments and
Contingencies--Injury and Damages Claims," for discussion of Duke Energy's
injury and damages claims.
Management believes that the resolution of the matters discussed and referred
to above will not have a material adverse effect on consolidated results of
operations or financial position.
For additional information concerning litigation and other contingencies, see
Note 14 to the Consolidated Financial Statements, "Commitments and
Contingencies," and "Management's Discussion and Analysis of Results of
Operations and Financial Condition, Current Issues--Environmental." With respect
to the State Implementation Plan EPA proceeding discussed under "Management's
Discussion and Analysis of Results of Operations and Financial Condition,
Current Issues--Environmental--Air Quality Control," in March 2000, the court
ruled in favor of the EPA with respect to several issues. Management's estimate
of the potential capital improvement costs in this matter remain appropriate.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of Duke Energy's security holders during
the last quarter of 1999.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The common stock of Duke Energy is listed for trading on the New York Stock
Exchange. At February 29, 2000, there were approximately 152,392 holders of
record of such common stock.
Common Stock Data by Quarter
1999 1998
----------------------------- ----------------------------
Stock Price Range Stock Price Range
Dividends ------------------- Dividends ------------------
Per Share High Low Per Share High Low
--------- --------- --------- --------- --------- --------
First Quarter.... $0.55 $64 11/16 $54 13/16 $0.55 $60 5/8 $53 7/16
Second Quarter... 1.10 61 3/16 52 1/8 1.10 62 9/16 55 1/8
Third Quarter.... -- 58 1/2 52 7/16 -- 66 3/16 57 1/16
Fourth Quarter... 0.55 56 7/8 47 1/16 0.55 70 11/16 60 1/16
On December 17, 1998, Duke Energy's Board of Directors adopted a shareholder
rights plan, which was subsequently approved by the North Carolina Utilities
Commission and the Public Service Commission of South Carolina. Under the terms
of the plan, holders of record of outstanding common stock on February 12, 1999
received one right for each share of common stock owned. The plan is intended
to assure fair and equal treatment for all shareholders in the event of a
hostile takeover attempt and to encourage a potential acquirer to negotiate
with the Board of Directors a fair price for all shareholders before attempting
a takeover. The adoption of the plan was not in response to any takeover offer
or threat.
20
Item 6. Selected Financial Data.
1999 1998 1997(b) 1996(b) 1995(b)
------- ------- ------- ------- -------
In millions, except per share amounts
Income Statement
Operating revenues.................. $21,742 $17,610 $16,309 $12,302 $ 9,694
Operating expenses(a)............... 19,947 15,177 14,339 10,143 7,626
------- ------- ------- ------- -------
Operating income.................... 1,795 2,433 1,970 2,159 2,068
Other income and expenses........... 248 214 138 135 122
------- ------- ------- ------- -------
Earnings before interest and taxes.. 2,043 2,647 2,108 2,294 2,190
Interest expense.................... 601 514 472 499 508
Minority interests.................. 142 96 23 6 --
------- ------- ------- ------- -------
Earnings before income taxes........ 1,300 2,037 1,613 1,789 1,682
Income taxes........................ 453 777 639 698 664
------- ------- ------- ------- -------
Income before extraordinary item.... 847 1,260 974 1,091 1,018
Extraordinary gain/(loss), net of
tax................................ 660 (8) -- (17) --
------- ------- ------- ------- -------
Net income.......................... 1,507 1,252 974 1,074 1,018
Dividends and premiums on
redemptions of preferred and
preference stock................... 20 21 72 44 49
------- ------- ------- ------- -------
Earnings available for common
stockholders....................... $ 1,487 $ 1,231 $ 902 $ 1,030 $ 969
======= ======= ======= ======= =======
Common Stock Data
Shares of common stock outstanding
Year-end........................... 366 363 360 359 362
Weighted average................... 365 361 360 361 361
Earnings per share (before
extraordinary item)(a)
Basic.............................. $ 2.26 $ 3.43 $ 2.51 $ 2.90 $ 2.68
Dilutive........................... $ 2.25 $ 3.42 $ 2.50 $ 2.88 $ 2.67
Earnings per share(a)
Basic.............................. $ 4.08 $ 3.41 $ 2.51 $ 2.85 $ 2.68
Dilutive........................... $ 4.07 $ 3.40 $ 2.50 $ 2.83 $ 2.67
Dividends per share................. $ 2.20 $ 2.20 $ 1.90 $ 1.57 $ 1.50
Balance Sheet
Total assets........................ $33,409 $26,806 $24,029 $22,366 $20,868
Long-term debt...................... $ 8,683 $ 6,272 $ 6,530 $ 5,485 $ 5,803
Preferred stock with sinking fund
requirements....................... $ 104 $ 124 $ 149 $ 234 $ 234
- --------
(a) Financial information reflects a pre-tax $800 million charge for estimated
injury and damages claims. The earnings per share effect of this charge was
$1.34 per share. See Note 14 to the Consolidated Financial Statements,
"Commitments and Contingencies--Injury and Damages Claims," for additional
information.
(b) Financial information reflects accounting for the 1997 merger with
PanEnergy Corp as a pooling of interests. As a result, the financial
information gives effect to the merger as if it had occurred January 1,
1995.
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
INTRODUCTION
Management's Discussion and Analysis should be read in conjunction with the
Consolidated Financial Statements.
21
Business Segments. Duke Energy Corporation (collectively with its
subsidiaries, "Duke Energy") is an integrated energy and energy services
provider with the ability to offer physical delivery and management of both
electricity and natural gas throughout the U.S. and abroad. Duke Energy
provides these and other services through seven business segments:
.Electric Operations
.Natural Gas Transmission
.Field Services
.Trading and Marketing
.Global Asset Development
.Other Energy Services
.Real Estate Operations
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
(NCUC) and the Public Service Commission of South Carolina (PSCSC).
Natural Gas Transmission 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 2 to the Consolidated Financial Statements. The interstate natural gas
transmission and storage operations are subject to the rules and regulations of
the FERC.
Field Services gathers, processes, transports and markets natural gas and
produces, transports and markets natural gas liquids (NGLs). Field Services
operates gathering systems in western Canada and ten contiguous states that
serve major gas-producing regions in the Rocky Mountain, Permian Basin, Mid-
Continent and onshore and offshore Gulf Coast areas.
Trading and Marketing markets natural gas, electricity and other energy-
related products across North America. Duke Energy owns a 60% interest in
Trading and Marketing's energy trading operations, with Mobil Corporation
owning a 40% minority interest. This segment also includes certain other
trading activities and limited hydrocarbon exploration and production
activities that are wholly owned by Duke Energy.
Global Asset Development develops, owns and operates energy-related
facilities worldwide. Global Asset Development conducts its operations
primarily through Duke Energy North America, LLC (Duke Energy North America)
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. (DukeSolutions).
Real Estate Operations conducts its business through Crescent Resources,
Inc., which develops high quality commercial and residential real estate
projects and manages land holdings in the southeastern U.S.
In 1997, Duke Power Company (Duke Power) merged with PanEnergy Corp
(PanEnergy). The merger was accounted for as a pooling of interests; therefore,
the Consolidated Financial Statements and other financial information included
in this Annual Report for periods prior to the merger include the combined
historical financial results of Duke Power and PanEnergy. See Note 2 to the
Consolidated Financial Statements for additional information on the
combination.
22
Business Strategy. Duke Energy's business strategy is to develop integrated
energy infrastructures in targeted regions where Duke Energy's extensive
capabilities in developing energy assets, operating electricity, gas and NGL
plants, optimizing commercial operations and managing risk can provide
comprehensive energy solutions for customers and create superior value for
shareholders. Domestically, Duke Energy is aggressively investing in new
merchant power plants throughout the U.S., expanding its natural gas pipeline
infrastructure in the eastern U.S., rapidly increasing its leading position in
gas processing and NGL marketing and broadening its trading and marketing
expertise across the energy spectrum. Internationally, Duke Energy is
currently focusing on integrated electric and gas opportunities in Australia
and Latin America and intends to implement its strategies in Europe.
Electric Operations continues to strive to maintain low costs and
competitive rates for its customers and to provide high quality customer
service. Electric Operations is expected to grow moderately, consistent with
historical trends. Expansion will primarily result from continued economic
growth in its service territory.
Natural Gas Transmission provides solid earnings growth and strengthens its
competitive position by adhering to a comprehensive strategy of selected
acquisitions and developing incremental projects that expand services to meet
specific customer needs. In January 2000, Natural Gas Transmission announced
that it had entered into a definitive agreement to purchase the East Tennessee
Natural Gas Company, a pipeline well positioned to serve the rapidly growing
southeastern region of the U.S. The transaction is expected to close in the
first quarter of 2000, subject to regulatory approval. For more information on
this purchase, see Note 19 to the Consolidated Financial Statements.
Duke Energy plans to significantly grow several of its business segments:
Field Services, Trading and Marketing, Global Asset Development and Other
Energy Services. Restructuring of energy markets in the U.S. and abroad is
providing substantial opportunities for these segments to capitalize on their
broad capabilities.
Expansion opportunities for Field Services include the planned combination
of Duke Energy's gas gathering and processing businesses with Phillips
Petroleum's Gas Processing and Marketing unit to form a new midstream company.
The transaction is expected to close by first quarter 2000, subject to
regulatory approval. See Note 19 to the Consolidated Financial Statements for
further discussion.
Trading and marketing activities at Duke Energy continue to expand as
Trading and Marketing provides energy supply, output marketing, risk
management and commercial optimization services to all of Duke Energy's
merchant structure developments. Trading and Marketing continues to increase
its customer base for wholesale energy management services to aggregators,
distribution companies, large industrials and other marketers.
Global Asset Development expects to continue strong earnings growth through
acquisitions, divestitures, construction of greenfield projects and expansion
of existing facilities as opportunities are extracted, evaluated and realized
through the marketplace. Duke Energy's combination of assets and capabilities
that span the energy value chain have contributed to Global Asset
Development's successful delivery of natural gas pipeline, power generation,
energy marketing and other services as demonstrated both domestically and
internationally. To capture the greatest value in North America, Duke Energy
North America, through its portfolio management strategy, seeks opportunities
to invest in markets which have capacity needs and to divest, in whole or in
part, when significant value can be realized.
Other Energy Services seeks to grow with various types of services including
comprehensive energy efficiencies in food, textile and government facilities.
The strong real estate market in the Southeast continues to present substan-
tial growth opportunities for both the commercial and residential development
of Real Estate Operations. In addition to initiating development of signifi-
cant office and industrial facilities in each of its established markets, Real
Estate Operations entered a new market niche in 1999 to develop moderately
priced residential communities in Jacksonville, Florida. Real Estate Opera-
tions also announced plans to enter the multi-family market and to signifi-
cantly increase its retail development.
23
RESULTS OF OPERATIONS
In 1999, earnings available for common stockholders were $1,487 million, or
$4.08 per basic share, net of an after-tax extraordinary gain of $660 million,
or $1.82 per basic share. In 1998, earnings available for common stockholders
were $1,231 million, or $3.41 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 was primarily due to the 1999
extraordinary gain resulting from the sale of the Midwest Pipelines. This gain,
along with the factors described below that affect segment profit and loss, was
partially offset by a pre-tax $800 million charge for estimated injury and
damages claims (see Note 14 to the Consolidated Financial Statements), higher
interest expense and minority interest expense
Earnings available for common stockholders increased $329 million in 1998
from 1997 earnings of $902 million, or $2.51 per basic share. The increase in
earnings available for common stockholders was due to the factors described
below that affect segment profit and loss. These factors were partially offset
by increased interest expense and minority interests.
Operating income for 1999 was $1,795 million compared to $2,433 million in
1998 and $1,970 million in 1997. Earnings before interest and taxes (EBIT) were
$2,043 million, $2,647 million and $2,108 million for 1999, 1998 and 1997,
respectively. Management evaluates each business segment based on an internal
measure of earnings before interest and taxes, after deducting minority
interests. Operating Income and EBIT are affected by the same fluctuations for
Duke Energy and each of its business segments. The only notable difference
between Operating Income and EBIT is the inclusion in EBIT of certain non-
operating activities. See Note 3 to the Consolidated Financial Statements for
additional information on business segments.
EBIT is summarized in the following table and is discussed by business
segment thereafter.
EBIT by Business Segment
Years Ended December 31,
---------------------------
1999 1998 1997
-------- -------- --------
In millions
Electric Operations............................. $ 856 $ 1,513 $ 1,282
Natural Gas Transmission........................ 627 702 624
Field Services.................................. 144 76 157
Trading and Marketing........................... 70 81 23
Global Asset Development........................ 181 64 4
Other Energy Services........................... (94) 10 18
Real Estate Operations.......................... 176 142 98
Other Operations................................ (9) 2 (120)
Minority Interests.............................. 92 57 22
-------- -------- --------
Consolidated EBIT............................... $ 2,043 $ 2,647 $ 2,108
======== ======== ========
Other Operations primarily include communication services, water services and
certain unallocated corporate costs. Included in the amounts discussed
hereafter are intercompany transactions that are eliminated in the Consolidated
Financial Statements.
24
Electric Operations
Years Ended December 31,
--------------------------------
1999 1998 1997
---------- ---------- ----------
In millions, except where noted
Operating Revenues......................... $ 4,700 $ 4,626 $ 4,401
Operating Expenses......................... 3,966 3,228 3,221
---------- ---------- ----------
Operating Income........................... 734 1,398 1,180
Other Income, Net of Expenses.............. 122 115 102
---------- ---------- ----------
EBIT....................................... $ 856 $ 1,513 $ 1,282
========== ========== ==========
Sales -- GWh (a)........................... 81,548 82,011 77,935
--------
(a) Gigawatt-hours.
In 1999, EBIT for Electric Operations decreased $657 million compared to
1998, primarily due to an $800 million charge for estimated injury and damages
claims. See Note 14 to the Consolidated Financial Statements for additional
information related to this charge. Partially offsetting this decrease was a
2.8% increase in the number of customers in the Electric Operations' service
territory during 1999, and the absence of 1998 severance and other costs
related to closing Electric Operations' merchandising business.
In 1998, EBIT for Electric Operations increased $231 million as compared to
1997, primarily due to a 5.2% increase in gigawatt-hour sales. Gigawatt-hour
sales increased as a result of warmer spring and summer weather conditions
during 1998 and a 2.5% growth in the number of customers in the Electric
Operations' service territory. EBIT also increased due to the absence of 1997
severance costs, however this was substantially offset by 1998 costs related to
the closing of Electric Operations' merchandising business.
Natural Gas Transmission
Years Ended December 31,
--------------------------------
1999 1998 1997
---------- ---------- ----------
In millions, except where noted
Operating Revenues......................... $ 1,206 $ 1,528 $ 1,572
Operating Expenses......................... 615 864 964
---------- ---------- ----------
Operating Income........................... 591 664 608
Other Income, Net of Expenses.............. 36 38 16
---------- ---------- ----------
EBIT....................................... $ 627 $ 702 $ 624
========== ========== ==========
Throughput -- TBtu (a)..................... 1,893 2,593 2,862
--------
(a) Trillion British thermal units.
EBIT for Natural Gas Transmission decreased $75 million in 1999 compared to
1998. As a result of the sale of the Midwest Pipelines to CMS Energy
Corporation (CMS) on March 29, 1999, EBIT for the Midwest Pipelines decreased
$156 million compared to 1998's full year of operation. For the Northeast
Pipelines, EBIT increased $81 million compared to 1998, primarily as a result
of increased earnings from market-expansion projects and joint ventures, higher
throughput and lower operating expenses. A gain of $24 million resulting from
the sale of Duke Energy's interest in the Alliance Pipeline project and
benefits totaling $38 million related to the completion of certain PCB
(polychlorinated biphenyl) and soil clean-up programs below estimates also
increased EBIT in 1999. Partially offsetting these contributions to EBIT were
the non-recurrence of the 1998 favorable resolution of regulatory issues
related to gas supply realignment cost issues ("GSR issues") and a 1998 refund
from a state property tax ruling.
In 1998, EBIT for Natural Gas Transmission increased $78 million compared to
1997. EBIT for the Northeast Pipelines increased $56 million in 1998 over 1997,
primarily as a result of the favorable resolution of
25
GSR issues, favorable state property tax rulings and increased market expansion
projects. These increases were partially offset by a decrease in throughput
primarily as a result of mild winter weather.
For the Midwest Pipelines, 1998 EBIT increased $22 million compared to 1997,
primarily due to a gain on the sale of the general partner interests in
Northern Border Partners, L.P. and non-recurring 1997 litigation expenses.
These increases were partially offset by the favorable resolution of certain
regulatory matters in 1997, which was reflected as additional revenue and other
income.
Field Services
Years Ended December 31,
---------------------------------
1999 1998 1997
---------- ---------- ----------
In millions, except where noted
Operating Revenues....................... $ 3,590 $ 2,639 $ 3,055
Operating Expenses....................... 3,444 2,598 2,898
---------- ---------- ----------
Operating Income......................... 146 41 157
Other Income, Net of Expenses............ (2) 35 --
---------- ---------- ----------
EBIT..................................... $ 144 $ 76 $ 157
========== ========== ==========
Natural Gas Gathered and
Processed/Transported, TBtu/d (a)....... 5.1 3.6 3.4
NGL Production, MBbl/d (b)............... 192.4 110.2 108.2
Natural Gas Marketed, TBtu/d............. 0.5 0.4 0.4
Average Natural Gas Price per MMBtu (c).. $ 2.27 $ 2.11 $ 2.59
Average NGL Price per Gallon (d)......... $ 0.34 $ 0.26 $ 0.35
--------
(a) Trillion British thermal units per day.
(b) Thousand barrels per day.
(c) Million British thermal units.
(d) Does not reflect results of commodity hedges.
In 1999, EBIT for Field Services increased $68 million compared to 1998. A
significant portion of the increase resulted from the March 31, 1999
acquisition of the natural gas gathering, processing, fractionation and NGL
pipeline business from Union Pacific Resources (UPR), (collectively, the "UPR
acquisition"). For more information on the UPR acquisition, see Note 2 to the
Consolidated Financial Statements. Improved average NGL prices, which were up
$0.08 per gallon, or 30.8% from the prior year, also contributed to the
increase in EBIT. Partially offsetting these increases were $34 million in 1998
of gains on sales of assets, which were included in other income.
EBIT for Field Services decreased $81 million in 1998 from 1997, primarily
due to a decrease in average NGL prices of approximately $0.09 per gallon, or
25.7%. The decrease in EBIT was partially offset by $34 million of gains on
sales of assets, which were included in other income.
On December 16, 1999, Duke Energy announced that it had signed definitive
agreements with Phillips Petroleum to form a new midstream gas gathering and
processing company. See Note 19 to the Consolidated Financial Statements for
further discussion.
26
Trading and Marketing
Years Ended December 31,
---------------------------------
1999 1998 1997
----------- ---------- ----------
In millions, except where noted
Operating Revenues........................ $ 11,793 $ 8,785 $ 7,489
Operating Expenses........................ 11,724 8,665 7,446
----------- ---------- ----------
Operating Income.......................... 69 120 43
Other Income, Net of Expenses............. 43 2 1
Minority Interest Expense................. 42 41 21
----------- ---------- ----------
EBIT...................................... $ 70 $ 81 $ 23
=========== ========== ==========
Natural Gas Marketed, TBtu/d.............. 10.5 8.0 6.9
Electricity Marketed, GWh................. 109,634 98,991 64,650
In 1999, EBIT for Trading and Marketing decreased $11 million from 1998. The
decrease resulted primarily from lower natural gas trading margins, partially
offset by higher electricity trading margins as well as margins associated with
other trading activities and sales of natural gas interests associated with
drilling activities.
EBIT for Trading and Marketing increased $58 million in 1998 compared to
1997. The increase resulted primarily from increased trading margins and
electricity margins, partially offset by increased expenses due to business
growth. Electricity volumes marketed increased primarily as a result of
acquiring the remaining 50% ownership interest in the Duke/Louis Dreyfus,
L.L.C. (D/LD) joint venture in June 1997.
Global Asset Development
Years Ended December 31,
--------------------------------
1999 1998 1997
---------- ---------- ----------
In millions, except where noted
Operating Revenues....................... $ 777 $ 319 $ 123
Operating Expenses....................... 571 261 129
---------- ---------- ----------
Operating Income......................... 206 58 (6)
Other Income, Net of Expenses............ 25 22 11
Minority Interest Expense................ 50 16 1
---------- ---------- ----------
EBIT..................................... $ 181 $ 64 $ 4
========== ========== ==========
Proportional Megawatt Capacity Owned
(a)..................................... 8,773 6,041 3,912
Proportional Maximum Pipeline Capacity
(a), MMcf/d (b)......................... 309 124 --
--------
(a) Includes under construction or under contract.
(b) Million cubic feet per day.
In 1999, EBIT for Global Asset Development increased $117 million compared to
1998. The increase includes $99 million in income from the sale of partial
interests in four generating stations in the U.S. as a result of executing its
domestic portfolio management strategy. Earnings from new projects in Latin
America and Australia also contributed $63 million to the increase. Partially
offsetting these increases were higher operating expenses and increased
development costs associated with business expansion.
EBIT for Global Asset Development increased $60 million in 1998 over 1997.
The increase resulted primarily from business expansion and acquisitions,
including the July 1998 acquisition of three electric generating stations in
California and the December 1997 acquisition of an indirect 32.5% ownership
interest in American Ref-Fuel Company. An expansion to the PT Puncakjaya power
generation facility in Indonesia also contributed to the increase in EBIT
during 1998. The increase in EBIT was partially offset by decreased earnings
resulting from lower prices at National Methanol Company, a methanol and MTBE
(methyl tertiary butyl ether) business in Saudi Arabia.
27
Other Energy Services
Years Ended December 31,
---------------------------
1999 1998 1997
--------- ------- --------
In millions
Operating Revenues............................... $ 989 $ 521 $ 376
Operating Expenses............................... 1,083 511 353
--------- ------- -------
Operating Income................................. (94) 10 23
Other Income, Net of Expenses.................... -- -- (5)
--------- ------- -------
EBIT............................................. $ (94) $ 10 $ 18
========= ======= =======
In 1999, EBIT for Other Energy Services decreased $104 million compared to
1998. The decrease was primarily due to charges of $38 million and $35 million
at Duke Engineering & Services and DukeSolutions, respectively. These charges,
which include costs associated with repositioning the companies to focus on
growth markets, included expenses related to severance, office closings and
write-offs of uncollectable accounts. Increased development activity at
DukeSolutions and decreased earnings from projects of Duke Engineering &
Services also contributed to lower EBIT. EBIT for Other Energy Services
decreased $8 million in 1998 compared to 1997, primarily due to reduced
earnings of Duke Engineering & Services.
Real Estate Operations
Years Ended December 31,
--------------------------
1999 1998 1997
-------- -------- --------
In millions
Operating Revenues................................ $ 233 $ 181 $ 124
Operating Expenses................................ 57 39 26
-------- -------- --------
EBIT.............................................. $ 176 $ 142 $ 98
======== ======== ========
In 1999, EBIT for Real Estate Operations increased $34 million compared to
1998. The increase was primarily due to increased residential developed lot
sales, land sales and commercial project sales, partially offset by decreased
lake lot sales. EBIT for Real Estate Operations increased $44 million in 1998
over 1997, primarily as a result of increased commercial project sales, lake
lot sales and land sales, including a gain on the sale of land in the Jocassee
Gorges region of South Carolina.
Other Operations
EBIT for Other Operations decreased $11 million in 1999 compared to 1998,
primarily as a result of the resolution of certain contingent items during
1998. EBIT for Other Operations increased $122 million in 1998 compared to
1997, primarily as a result of the absence of $71 million of non-recurring 1997
merger-related costs and the favorable resolution of certain contingent items
in 1998, partially offset by a 1997 gain on the sale of Duke Energy's ownership
interest in the Midland Cogeneration Venture.
Other Impacts on Earnings Available for Common Stockholders
Interest expense increased $87 million in 1999 compared to 1998, and $42
million in 1998 compared to 1997 due to higher average debt balances
outstanding, resulting from acquisitions and expansion.
Minority interests increased $46 million in 1999 compared to 1998, and $73
million in 1998 compared to 1997. The increases were due primarily to regular
distributions paid on new issuances of Duke Energy's trust preferred
securities. For more information on issuances of trust preferred securities,
see Note 12 to the Consolidated Financial Statements. Excluding these
dividends, minority interests related primarily to Global Asset Development's
1999 investments and Trading and Marketing's joint venture with Mobil
Corporation. For more information regarding acquisitions and new projects, see
Notes 2 and 8 to the Consolidated Financial Statements.
28
Duke Energy's effective income tax rate was approximately 35%, 38% and 40%
for 1999, 1998 and 1997, respectively. The decrease in 1999 from 1998 was
primarily due to the favorable resolution of several income tax issues and the
utilization of certain capital loss carryforwards due to the sale of the
Midwest Pipelines. Favorable resolution of income tax issues also resulted in a
decline in the effective tax rate in 1998 from 1997. Duke Energy expects its
ongoing effective tax rate to approximate 38%.
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. For further discussion on the sale, see Note 2 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.
In December 1997, Duke Energy redeemed four issues of preferred stock and
commenced a tender offer to purchase a portion of six additional issues of
preferred stock. Premiums related to these redemptions were included in the
Consolidated Statements of Income and Comprehensive Income in 1997 as Dividends
and Premiums on Redemptions of Preferred and Preference Stock.
LIQUIDITY AND CAPITAL RESOURCES
Operating Cash Flows
Net cash provided by operations was $2,684 million in 1999, $2,331 million in
1998 and $2,140 million in 1997. In each of these years, the increase in cash
was primarily due to net income resulting from business expansion.
On August 29, 1998, the FERC approved a settlement from Texas Eastern
Transmission Corporation (TETCO), a subsidiary of Duke Energy, which
accelerates recovery of natural gas transition costs. The order was effective
October 1, 1998 and includes a rate moratorium until 2004. Net cash flows from
operations are not expected to change for the first two years after
implementation; however, after the natural gas transition costs are fully
recovered, cash flows from operations are expected to decrease on an annual
basis. For more information concerning the settlement, see Note 4 to the
Consolidated Financial Statements.
In late 1999, Duke Energy established an accrual for estimated injury and
damages claims. Duke Energy expects to fund approximately $350 million, which
is comprised of an insurance policy premium and estimated claim activity over
the next year, primarily through new debt issuances. Management believes that
the long-term cash requirements of the projected liability will not have a
material effect on Duke Energy's liquidity or cash flows. See Note 14 to the
Consolidated Financial Statements for further discussion.
Investing Cash Flows
Capital and investment expenditures were approximately $5.9 billion in 1999
compared to approximately $2.5 billion in 1998. The increase primarily resulted
from business expansion for the Field Services and Global Asset Development
segments. Business expansion for Field Services included the $1.35 billion
acquisition of the natural gas gathering, processing, fractionation and NGL
pipeline business from UPR along with its natural gas and NGL marketing
activities. International business expansion for Global Asset Development
included $1.7 billion for multiple acquisitions in Latin America, western
Australia and New Zealand. In 1999, Global Asset Development also began
construction of multiple power generation plants in North America and continued
capital expenditures on projects initiated prior to 1999. Expenditures related
to these activities were partially funded by $1.9 billion in cash proceeds from
the sale of Panhandle Eastern Pipe Line Company (PEPL), Trunkline Gas Company
(Trunkline) and additional storage related to those systems, which
substantially comprised the Midwest Pipelines, along with Trunkline LNG
Company. For additional information concerning acquisitions and dispositions,
see Note 2 to the Consolidated Financial Statements.
29
Capital and investment expenditures in 1998 increased $472 million from $2.0
billion in 1997 primarily due to business expansion by Global Asset
Development. This included the $501 million purchase of three electric
generating stations in California and the completion of the first phase of
Bridgeport Energy, a power generation plant in Connecticut. Business expansion
for Natural Gas Transmission and Field Services also contributed to the
increase in capital and investment expenditures. The increase was partially
offset by decreased expenditures for Electric Operations, primarily as a result
of steam generator replacements at certain of its nuclear plants in 1997, and
by the acquisition of the remaining 50% ownership of the D/LD joint venture in
June 1997.
Projected 2000 capital and investment expenditures for Electric Operations,
including allowance for funds used during construction, are approximately $900
million. These projections include expenditures for existing plants, including
refurbishment and upgrades related to the Oconee Nuclear Station's application
for a 20-year renewal of its operating license, which is expected to receive
approval from the Nuclear Regulatory Commission in 2000.
Projected 2000 capital and investment expenditures for Natural Gas
Transmission, including allowance for funds used during construction, are
approximately $600 million. These projections include expansion of the
Maritimes & Northeast Pipeline, which delivers natural gas to markets in the
Canadian Maritimes provinces and the northeastern U.S. from a supply basin
offshore of Nova Scotia, and the planned $386 million purchase of the East
Tennessee Natural Gas Company, which is expected to close in the first quarter
of 2000 and is contingent upon regulatory approval. For further discussion on
this purchase, see Note 19 to the Consolidated Financial Statements.
Duke Energy plans to continue to significantly grow several of its business
segments: Field Services, Global Asset Development, Trading and Marketing and
Other Energy Services. Expansion plans for Field Services include the
combination of Duke Energy's gas gathering and processing businesses with
Phillips Petroleum's Gas Processing and Marketing unit to form a new midstream
company. The transaction is expected to close by first quarter 2000 and is
subject to regulatory approval. See Note 19 to the Consolidated Financial
Statements for additional information.
Projected 2000 capital and investment expenditures for Global Asset
Development are approximately $3.6 billion. Expansion opportunities for Global
Asset Development's domestic division, Duke Energy North America, include the
continuation of various greenfield projects across the U.S. Expansion plans for
Global Asset Development's international division, Duke Energy International,
include completing the purchase of Dominion Resources, Inc.'s portfolio of
hydroelectric, natural gas and diesel power generation businesses in Argentina
and Bolivia (see Note 2 to the Consolidated Financial Statements) and the
January 2000 completion of the tender offer for additional ownership interests
in Companhia de Geracao de Energia Eletrica Paranapanema (Paranapanema) (see
Note 19 to the Consolidated Financial Statements). Duke Energy International
will also continue to focus on its regional target areas in Australia and Latin
America for further expansion opportunities and intends to implement its
strategies in Europe.
Projected 2