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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, 1998 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 incorporation or organization) (I.R.S. Employer Identification No.)
526 South Church Street, Charlotte, North Carolina 28202-1904
(Address of principal executive offices) (Zip Code)
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.
First and Refunding Mortgage Bonds, 8% Series B Due 1999 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.
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
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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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Estimated aggregate market value of the voting stock held by nonaffiliates of
the registrant at February 26, 1999..............................$20,121,000,000
Number of shares of Common Stock, without par value, outstanding at
February 26, 1999....................................................363,472,398
Documents incorporated by reference:
The registrant is incorporating herein by reference certain sections of
the proxy statement relating to the 1999 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, 1998
TABLE OF CONTENTS
Item Page
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PART I.
1. Business ...................................................................... 1
General ....................................................................... 1
Electric Operations ........................................................... 3
Natural Gas Transmission ...................................................... 6
Field Services ................................................................ 9
Trading and Marketing ......................................................... 10
Global Asset Development ...................................................... 11
Other Energy Services ......................................................... 13
Real Estate Operations ........................................................ 13
Environmental Matters ......................................................... 13
Foreign Operations and Export Sales ........................................... 14
Employees ..................................................................... 14
Operating Statistics .......................................................... 15
Executive Officers of Duke Energy ............................................. 16
2. Properties .................................................................... 16
3. Legal Proceedings ............................................................. 18
4. Submission of Matters to a Vote of Security Holders ........................... 18
PART II.
5. Market for Registrant's Common Equity and Related Stockholder Matters ......... 18
6. Selected Financial Data ....................................................... 19
7. Management's Discussion and Analysis of Results of Operations and Financial
Condition .................................................................. 19
7A. Quantitative and Qualitative Disclosures About Market Risk .................... 33
8. Financial Statements and Supplementary Data ................................... 34
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure ................................................................. 71
PART III.
10. Directors and Executive Officers of the Registrant ............................ 71
11. Executive Compensation ........................................................ 71
12. Security Ownership of Certain Beneficial Owners and Management ................ 71
13. Certain Relationships and Related Transactions ................................ 71
PART IV.
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .............. 72
Signatures ....................................................................... 73
Exhibit Index .................................................................... 74
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 United States and abroad. Duke Energy provides these and other
services through seven business segments:
o Electric Operations
o Natural Gas Transmission
o Field Services
o Trading and Marketing
o Global Asset Development
o Other Energy Services
o Real Estate Operations
These segments were defined as a result of Duke Energy adopting Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information."
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, through its Northeast Pipelines, provides
interstate transportation and storage of natural gas for customers primarily in
the Mid-Atlantic and New England states. Until the expected sale of the Midwest
Pipelines in early 1999, Natural Gas Transmission also provides interstate
transportation and storage services in the Midwest states. See further
discussion of the proposed sale of the Midwest Pipelines in Note 14 to the
Consolidated Financial Statements. The interstate natural gas transmission and
storage operations are also subject to the rules and regulations of the FERC.
Field Services gathers, processes, transports and markets natural gas and
produces and markets natural gas liquids (NGL). Field Services operates
gathering systems in ten states that serve major gas-producing regions in the
Rocky Mountain, Permian Basin, Mid-Continent and Gulf Coast areas.
Trading and Marketing markets natural gas, electricity and other
energy-related products across North America. Duke Energy owns a 60% interest
in Trading and Marketing's operations, with Mobil Corporation owning a 40%
minority interest.
Global Asset Development develops, owns and operates energy-related
facilities worldwide. Global Asset Development conducts its operations
primarily through Duke Energy Power Services, LLC (Duke Energy Power Services)
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 forest holdings in the southeastern United States.
The 1997 merger of Duke Power Company (Duke Power) and PanEnergy Corp (Pan
Energy) was accounted for as a pooling of interests; therefore all 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.)
Certain terms used to describe Duke Energy's business are explained below.
Base Load. The minimum amount of electric power or natural gas delivered or
required over a given period of time at a steady rate. The minimum continuous
load or demand in a power system over a given period of time usually not
temperature sensitive.
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.
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Brownfield Development. The development of a new power generating facility on a
site with existing industrial assets, typically power generating assets.
Cogeneration Facility. A facility that produces electric energy and useful
thermal energy for industrial, commercial, heating or cooling purposes.
Combined Cycle. The combination of one or more gas turbines and steam turbines
in an electric generation plant. An electric generating technology in which
electricity is produced from otherwise lost waste heat exiting from one or more
gas turbines.
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.
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.
Merchant Plant. A power plant that sells directly to wholesale customers
without its output necessarily being committed to long-term power sales
agreements.
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.
Natural Gas/Power Marketer. An entity which buys and sells a commodity or
commodities at either fixed or index prices. More sophisticated
trader/marketing entities also provide comprehensive energy management
services, such as capacity, supply, storage and price risk management.
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 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.
A discussion of the current business and operations of each of Duke
Energy's segments follows. Duke Energy expects moderate growth in its Electric
Operations segment, consistent with historical trends. The Northeast Pipelines
are an essential part of Natural Gas Transmission's strategy to advance
projects that provide expanded services to meet the specific needs of
customers. The proposed sale of the Midwest Pipelines allows Natural Gas
Transmission to focus on regions, such as the northeastern U.S., with
increasing demand for gas. Duke Energy plans to significantly grow several of
its other business
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segments: Field Services, Trading and Marketing, Global Asset Development and
Other Energy Services. 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, Current Issues -- Operations Outlook."
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 5.2 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 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 $456 million of
Electric Operations' revenues for 1998, representing 10% of total electric
revenues and 37% of industrial revenues. Electric Operations normally
experiences seasonal peak loads in summer and winter.
(A map appears here depicting Duke Energy's 100kV Electric Lines, 230kV Electric
Lines, 500kV Electric Lines, Nuclear Facilities, Fossil Facilities, Hydro
Facilities, and Combustion Turbine Facilities)
3
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 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 2,797 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."
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, 1998
is set forth in the following table:
Cost of Fuel per Net
Generation by Source Kilowatt-hour Generated
(Percent) (d) (Cents)
----------------------------- -----------------------------
1998 1997 1996 1998 1997 1996
--------- --------- --------- --------- --------- ---------
Coal .......................................... 50.7 59.0 53.6 1.32 1.30 1.40
Nuclear (a) ................................... 46.2 38.5 43.7 0.44 0.48 0.53
Oil and gas (b) ............................... 1.0 .4 .3 4.01 5.58 6.74
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All fuels (cost based on weighted average) (a) 97.9 97.9 97.6 0.93 0.99 1.02
Hydroelectric (c) ............................. 2.1 2.1 2.4
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100.0 100.0 100.0
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(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 obtains a large amount of its coal under supply
contracts with mining operators utilizing both underground and surface mining.
Electric Operations currently has an adequate supply of coal. Its supply
contracts, all of which have price adjustment provisions, have expiration dates
ranging from 1999 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 supply of fuel for nuclear generating units
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. After a region (approximately one-third of the nuclear fuel
assemblies in the reactor at any time) of 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. 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:
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Uranium Conversion Enrichment Fabrication
Nuclear Station Material Service Service Service
- ----------------------- ---------- ------------ ------------ -------------
Oconee .............. 1999 1999 2001 2006
McGuire ............. 1999 1999 2001 2009
Catawba ............. 1999 1999 2001 2009
Uranium material requirements will be met through various supplier
contracts, with uranium material produced primarily in the United States 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 uranium spot
market purchases. Duke Energy, in cooperation with other companies, submitted a
proposal to the Department of Energy (DOE) to use mixed oxide fuel at its
McGuire and Catawba nuclear stations. The mixed oxide fuel is very similar to
conventional uranium fuel, but it utilizes plutonium from the government's
surplus. Before using the mixed oxide fuel, a contract must be executed with
the DOE and Duke Energy must apply for and receive amendments to their
respective facility operating licenses from the Nuclear Regulatory Commission
(NRC). Mixed oxide is currently not expected to be available prior to 2007.
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 United States 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 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
electric sales to wholesale customers. For further discussion of rate matters
and fuel and purchased power cost adjustment procedures, 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 entities. These
regulations affect the activities of Trading and Marketing, Global Asset
Development, and Other Energy Services with the Electric Operations segment.
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
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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 applied for a 20-year renewal of its operating
license for the Oconee Nuclear Station. The license renewal process could take
three to five years to complete.
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 consists of the Northeast Pipelines, which
includes Texas Eastern Transmission Corporation (TETCO) and Algonquin Gas
Transmission Company (Algonquin), and the Midwest Pipelines, which includes
Panhandle Eastern Pipe Line Company (PEPL) and Trunkline Gas Company
(Trunkline). PEPL and Trunkline, along with additional storage related to those
systems, are expected to be sold to CMS Energy Corporation in early 1999. See
further discussion of the sale in "Management's Discussion and Analysis of
Results of Operations and Financial Condition, Liquidity and Capital
Resources."
For 1998, consolidated natural gas deliveries by Natural Gas
Transmission's interstate pipelines totaled 2,593 TBtu (Trillion British
thermal units), compared to 2,862 TBtu in 1997, which represented approximately
12% of the natural gas consumed in the United States. The Northeast Pipelines
and the Midwest Pipelines natural gas deliveries were 1,459 TBtu and 1,141
TBtu, respectively, in 1998, with 7 TBtu of intercompany transportation. A
substantial 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.
In 1998, Natural Gas Transmission's fully interconnected interstate
pipeline system consisted of approximately 20,700 miles and received natural
gas from most major North American producing regions for delivery to markets
throughout the Northeast and Midwest states. The proposed sale of the Midwest
Pipelines would result in a reduction of approximately 10,400 miles in Duke
Energy's interstate pipeline systems.
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(A map appears here depicting Duke Energy's storage.)
Northeast Pipelines
TETCO's major customers are located in Pennsylvania, New Jersey and New
York, and include LDCs serving the Pittsburgh, Philadelphia, Newark and New
York City metropolitan areas. Algonquin's major customers include LDCs and
electric power generators located in the Boston, Hartford, New Haven,
Providence and Cape Cod areas.
TETCO also provides firm and interruptible open-access storage services.
Storage is offered as a stand-alone unbundled service or as part of a no-notice
bundled service. TETCO's storage services utilize two joint venture storage
facilities in Pennsylvania and one wholly owned and operated storage field in
Maryland. TETCO also leases storage capacity. TETCO's certificated working
capacity in these three fields is 70 Billion cubic feet (Bcf), and the combined
working gas in storage was 61 Bcf on December 31, 1998. Algonquin owns no
storage fields.
Investments include a 37.5% ownership interest in Maritimes & Northeast
Pipeline and a 9.8 % ownership interest in Alliance Pipeline. Maritimes &
Northeast pipelines is expected to be completed in late 1999 and will deliver
natural gas to markets in the Canadian Maritimes provinces and the northeastern
United States from a supply basin offshore Nova Scotia. The 1,900 mile Alliance
Pipeline project will deliver Canadian gas from Fort St. John, British Columbia
into the Chicago area by mid- to late 2000.
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Midwest Pipelines
PEPL's major customers include 20 utilities located in the Midwest market
area that encompasses large portions of Michigan, Ohio, Indiana, Illinois and
Missouri. Trunkline's major customers include eight utilities located in
portions of Tennessee, Missouri, Illinois, Indiana and Michigan.
PEPL also owns and operates three underground storage fields located in
Illinois, Michigan and Oklahoma with working gas capacity of 31 Bcf. PEPL has
received FERC approval to transfer these storage fields to its subsidiary, Pan
Gas Storage Company (Pan Gas) and has filed for an effective date of April 1,
1999. Pan Gas is also the owner and operator of a 26 Bcf. storage field in
Kansas. Trunkline owns and operates one 13 Bcf. storage field in Louisiana.
Since the implementation of Order 636, each of PEPL, Trunkline and Pan Gas
provide firm and interruptible storage on an open-access basis. In addition to
owning and operating storage fields, PEPL also leases storage capacity. PEPL
and Trunkline have retained the right to use up to 15 Bcf and 10 Bcf,
respectively, of their storage capacity for system needs. See further
discussion of Order 636 in "Business, Natural Gas Transmission -- Regulation."
Competition
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. PEPL and Trunkline
compete directly with ANR Pipeline Company, Natural Gas Pipeline Company of
America and Texas Gas Transmission Corporation in the Midwest market area.
Natural gas competes with other forms of energy available to 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
and sale of natural gas in interstate commerce, including the extension,
enlargement or abandonment of such facilities. TETCO, Algonquin, PEPL,
Trunkline and Pan Gas hold certificates of public convenience and necessity
issued by the FERC, authorizing them to construct and operate the pipelines,
facilities and properties now in operation for which such certificates are
required, and to transport and store natural gas in interstate commerce.
Natural Gas Transmission's pipelines operate as open-access transporters
of natural gas. In 1992, the FERC issued Order 636, which requires open-access
pipelines to provide firm and interruptible transportation services on an equal
basis for all gas supplies, whether purchased from the pipeline or from another
gas supplier. To implement this requirement, Order 636 provided, among other
things, for mandatory unbundling of services that historically had been
provided by pipelines into separate open-access transportation, sales and
storage services. Order 636 allows pipelines to recover eligible costs, known
as "transition costs," resulting from the implementation of Order 636. For
further discussion of Order 636, see Note 4 to the Consolidated Financial
Statements, "Regulatory Matters -- 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.
8
FIELD SERVICES
Field Services gathers, processes, transports and markets natural gas and
produces and markets NGLs. Field Services owns and operates approximately
20,000 miles of natural gas gathering systems, including intrastate pipelines,
and 32 natural gas processing plants in the United States. Field Services also
has ownership interests in 12 other natural gas processing plants in the United
States.
Field Services gathers natural gas from production wellheads through
gathering systems located in ten states that serve major gas-producing regions
in the Rocky Mountain, Permian Basin, Mid-Continent and Gulf Coast (offshore
and onshore) areas. Field Services' gathering operations also include several
intrastate pipeline systems and two natural gas storage facilities.
(A map appears here depicting Field Services' gathering and processing
facilities, offices and supply areas.)
9
Field Services' NGL processing operations involve the extraction of NGLs
from natural gas and, at certain facilities, the fractionation of the NGLs into
their individual components (ethane, propane, butane and natural gasoline). The
natural gas used in Field Services' processing operations is generally gathered
on its own gathering system or from the natural gas stream on Duke Energy's
transmission 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. NGL sales are based upon
current market-related prices. Field Services also produces helium at the
National Helium Corporation facility in Liberal, Kansas.
Field Services' operating results are significantly impacted by changes in
NGL prices, which declined approximately 25.7% in 1998 compared to 1997. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition -- Qualitative and Quantitative Disclosures About Market Risk" for a
discussion of Field Services' exposure to changes in commodity prices.
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 gases through a 4,300 mile
pipeline system.
Field Services expects to complete the $1.35 billion acquisition of the
natural gas gathering, processing, fractionation and NGL pipeline business of
Union Pacific Resources including its natural gas and NGL marketing activities
on or about March 31, 1999.
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 efficiency,
reliability, availability of transportation and the ability to obtain a
satisfactory price for the producer's natural gas. Competition for customers is
based primarily upon reliability and price of delivered natural gas 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 (NGPA), are also subject to FERC regulation.
The natural gas gathering activities of the Field Services group are generally
not subject to regulation by the FERC, but are subject to state regulation.
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 operations, with Mobil Corporation (Mobil) owning a
40% minority interest.
Trading and Marketing was formed in August 1996 as a natural gas and power
marketing joint venture with Mobil. Operations were expanded in June 1997 when
a wholly owned subsidiary of Duke Energy acquired from affiliates of Louis
Dreyfus Corp. the remaining 50% ownership interest in Duke/Louis Dreyfus,
L.L.C. (D/LD), which Duke Energy did not already own.
10
Trading and Marketing markets natural gas primarily to local distribution
companies, electric power generators, including Global Asset Development's
generation facilities, municipalities, industrial end-users and energy
marketing companies. Trading and Marketing markets electricity to investor
owned utilities, municipal power generators and other power marketers.
Operations are primarily in the United States and, to a lesser extent, in
Canada, and are serviced through 16 offices or operating centers.
Natural gas marketing operations encompass both on-system and off-system
sales. With respect to on-system sales, Trading and Marketing generally
purchases natural gas from 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 sales, 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 United States
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 generation facilities in California and Connecticut for resale to
customers.
Trading and Marketing has a portfolio of short-term and long-term sales
agreements with customers, the vast majority of which incorporate
market-sensitive pricing terms. Long-term gas purchase agreements with
producers, principally entered into in connection with on-system sales, also
generally include market-sensitive pricing provisions. Purchases and sales of
off-system gas and electricity supply are normally made under short-term
contracts. Purchase and sales commitments involving significant price and
location risk are generally hedged with commodity futures, swaps and options.
For information concerning Trading and Marketing's risk-management activities,
see "Management's Discussion and Analysis of Results of Operations and
Financial Condition, Qualitative and Quantitative Disclosures About Market Risk
- -- Commodity Price Risk" and Note 7 to the Consolidated Financial Statements,
"Risk Management and Financial Instruments -- Commodity Instruments --
Trading."
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.
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 through Duke Energy Power Services and Duke Energy International.
Deregulation of energy markets in the United States and abroad is
providing substantial opportunities for Global Asset Development to capitalize
on its broad capabilities. Global Asset Development is an active participant in
competitive power markets worldwide. Global Asset Development owns and operates
approximately 4,100 megawatts of generation, including projects under
construction, and has ownership interests in approximately 3,800 megawatts of
generation, including projects under construction. Global Asset Development
also owns and operates approximately 900 miles of pipeline systems in
Australia, including projects planned for construction, and has ownership
interests in approximately 1,000 miles of pipeline systems, including projects
under construction.
11
Duke Energy Power Services
Duke Energy Power Services develops, owns and operates largely unregulated
electric generation projects across the United States. Duke Energy Power
Services focuses on acquisitions of existing energy production facilities,
greenfield and brownfield development opportunities and operating energy assets
throughout North America.
In 1998, Duke Energy Power Services completed the purchase of three
electric generating plants in California from Pacific Gas & Electric Company
(PG&E). Two of these electric generating plants sell electricity under the
terms of Reliability Must Run Agreements with the California Independent System
Operator, which purchases electricity at FERC regulated rates. The plants have
a combined net operating capacity of 2,645 megawatts. Pursuant to California's
electric restructuring law, Duke Energy Power Services entered into a contract
with PG&E to operate and maintain the facilities for two years following the
sale. Energy and capacity from the plants is being sold into the California
power exchange and under separate contracts.
Other investments include a 32.5% indirect ownership interest in American
Ref-Fuel Company, which owns five waste-to-energy facilities in New York, New
Jersey, Massachusetts and Connecticut. Such facilities process about 4 million
tons of municipal solid waste per year and have an aggregate generating
capacity of 286 megawatts.
Projects under construction include: the second phase of the Bridgeport
Energy Project, a 520-megawatt combined cycle natural gas-fired merchant
generation plant in Connecticut; the Maine Independence Station, a 520-megawatt
combined cycle natural gas-fired merchant generation plant in Maine which is
scheduled to begin producing power in the summer of 2000; and the Hidalgo
project, a 510-megawatt power plant to be built in south Texas, which is
targeted to begin producing power in mid-2000.
In January 1999, Duke Energy Power Services agreed to a ten-year lease
with the Port of San Diego to operate and eventually replace the 706-megawatt
South Bay Power plant. The Port of San Diego will acquire this facility from
San Diego Gas & Electric Company. Duke Energy Power Services expects to close
on the lease valued at over $110 million by mid-1999. This plant's capacity is
excluded from the generation amounts previously discussed above.
Duke Energy International
Duke Energy International develops, owns and operates energy projects
worldwide. Projects involve natural gas exploration, production, processing,
transportation and supply. Additionally, projects include generation, delivery
and marketing of electric power and thermal energy. Duke Energy International's
regional target areas are Asia Pacific, South America and Europe.
In 1998, Duke Energy International completed the purchase of the
Queensland Pipeline, a 389-mile pipeline in southeast Queensland, Australia.
Additional opportunities in Australia include the purchase of the rights to
develop and operate the 500-mile Eastern Gas Pipeline project in eastern
Australia. Construction of this pipeline project is scheduled to begin in July
1999 and completion is expected by mid-2000. Also, Duke Energy International
purchased power generation and transmission assets in western Australia and New
Zealand, including an ownership interest in a pipeline in western Australia.
This acquisition also includes a development proposal for a cogeneration plant
and a portfolio of international and Australian-based projects. This
transaction closed on January 22, 1999.
Duke Energy International's investments include a 25% indirect ownership
interest in National Methanol Company, which owns and operates a methanol and
MTBE (methyl tertiary butyl ether) plant in Saudi Arabia, and a 42.86% indirect
ownership interest in PT Puncakjaya, a 389-megawatt power generation facility
in Indonesia. Investments in South America include, among others: a 9.76%
indirect ownership interest in Hidroelectrica Piedra del Aguila S.A., a
1,400-megawatt hydroelectric generating facility in Argentina; a 51.5% indirect
ownership interest in Electroquil, S.A., a 168-megawatt diesel-fired generating
facility in Ecuador; a 24% indirect ownership interest in Sociedad Electrica de
Santiago S.A., a 370-megawatt gas-fired generating facility in Chile; a 21.9%
indirect ownership interest in Aguaytia Energy LLC, an integrated natural
gas and power project in Peru; and a 99% indirect ownership interest in
PanEnergy Exploration and Production (Peru) Ltd. Duke Energy International also
operates two liquified natural gas (LNG) ships which have been chartered to
Nigeria LNG Limited for 22.5 years starting in 1999.
In February 1999, Duke Energy, through its wholly owned subsidiary Duke
Energy International, commenced a concurrent cash tender offer in Chilean pesos
in Chile and the United States for 51% of the outstanding shares of Empresa
Nacional de Electricidad S.A. (Endesa-Chile). The estimated total cash outlay
is approximately $2.1 billion based on current exchange rates. The tender
offers are contingent upon, among other things, certain Endesa-Chile
shareholder approvals. If all approvals are obtained and the other conditions
to the tender offers are satisfied or waived, the transactions are expected
12
to be completed during the second quarter of 1999. Endesa-Chile controls 10,247
megawatts of generating capacity in Argentina, Brazil, Chile, Colombia and
Peru.
Competition and Regulation
Global Asset Development experiences substantial competition from utility
companies in the United States and abroad and from independent companies.
Global Asset Development is subject to the Natural Gas Pipeline Safety Act
of 1968, which regulates LNG plant safety requirements.
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 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
domestically and internationally. Subsidiaries of Duke Energy and Fluor Daniel,
Inc. each own 50% of Duke/Fluor Daniel.
DukeSolutions provides integrated energy solutions to industrial,
commercial, institutional, governmental and wholesale customers and focuses on
increasing customers' efficiency, productivity and profitability through energy
cost savings.
Other Energy Services experiences substantial competition from utility
companies in the United States and abroad and from independent companies.
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 commercial and residential real estate projects and
manages forest holdings in the southeastern United States. At December 31,
1998, Real Estate Operations owned 4.2 million square feet of commercial space,
of which 76% was leased, with an additional 1.7 million square feet under
construction. At December 31, 1998, the commercial portfolio included 2.3
million square feet of warehouse space, 1.8 million square feet of office space
and 0.1 million square feet of retail space. In 1998, commercial buildings
totaling 1.3 million of square feet and 850 residential developed lots were
sold. At December 31, 1998, 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:
o 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;
o State Implementation Plans, which were issued by the EPA to 22 states and
the District of Columbia related to existing and new national ambient air
quality standards for ozone;
o The Federal Water Pollution Control Act Amendments of 1987, which require
permits for facilities that discharge treated wastewater into the
environment; and
o The Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA), which can require any individual or entity which may have owned
or operated a disposal site, as well as transporters or generators of
hazardous wastes which were sent to such site, to share in remediation
costs for the site.
13
For further discussion of environmental matters involving Duke Energy,
including possible liability and capital costs, see "Management's Discussion
and Analysis of Results of Operations and Financial Condition, Current Issues
- -- Environmental" and Note 14 to the Consolidated Financial Statements,
"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 and export sales are currently not material to Duke
Energy's business as a whole. For a discussion of risks associated with Duke
Energy's foreign operations, see "Management's Discussion and Analysis of
Results of Operations and Financial Condition, Qualitative and Quantitative
Disclosures About Market Risk -- Foreign Operations Risk" and Note 19 to the
Consolidated Financial Statements.
EMPLOYEES
At December 31, 1998, Duke Energy had approximately 22,000 employees.
Approximately 1,600 operating and maintenance employees are represented by the
International Brotherhood of Electrical Workers in two collective bargaining
agreements. An additional 77 employees are represented by the United
Steelworkers and Rubberworkers of America. New agreements for each of these
units were negotiated during 1998. Approximately 500 employees are represented
by the Oil, Chemical and Atomic Workers International Union, AFL-CIO.
Approximately 300 of these employees and their bargaining unit will transfer to
CMS Energy upon the sale of the Midwest Pipelines in early 1999. The remaining
employees represented by the Oil, Chemical and Atomic Workers International
Union, AFL-CIO are in a separate bargaining unit. Terms of their contract are
still being negotiated.
14
OPERATING STATISTICS
Years Ended December 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
------------ ----------- ---------- ---------- ---------
Electric Operations (a)
Sources of Electric Energy, GWh (b)
Generated -- net output:
Coal .......................................................... 42,164 45,234 40,649 32,389 32,714
Nuclear ....................................................... 38,366 29,569 33,177 39,836 35,587
Hydro ......................................................... 1,714 1,633 1,802 2,117 2,025
Oil and gas ................................................... 846 301 199 255 35
------- ------ ------ ------ ------
Total generation ........................................... 83,090 76,737 75,827 74,597 70,361
Purchased power and net interchange ........................... 2,659 3,781 3,885 1,239 1,299
------- ------ ------ ------ ------
Total output ............................................... 85,749 80,518 79,712 75,836 71,660
Plus: Purchases from other Catawba joint owners ............... 1,656 2,316 2,662 6,070 9,046
------- ------ ------ ------ ------
Total sources of energy .................................... 87,405 82,834 82,374 81,906 80,706
Less: Line loss and company usage ............................. 5,394 4,899 4,827 4,780 4,652
------- ------ ------ ------ ------
Total GWh sales ............................................ 82,011 77,935 77,547 77,126 76,054
======= ====== ====== ====== ======
Electric Energy Sales, GWh
Residential ................................................... 22,002 20,483 21,484 20,124 19,306
General service ............................................... 21,093 19,687 19,593 18,461 17,577
Industrial
Textile ..................................................... 11,981 11,955 11,603 12,155 12,289
Other ....................................................... 18,668 18,376 18,131 17,738 17,108
Other energy and wholesale .................................... 8,933 7,029 6,781 7,852 9,934
------- ------ ------ ------ ------
Total GWh sales billed ..................................... 82,677 77,530 77,592 76,330 76,214
Unbilled GWh sales ........................................ (666) 405 (45) 796 (160)
------- ------ ------ ------ ------
Total GWh sales ......................................... 82,011 77,935 77,547 77,126 76,054
======= ====== ====== ====== ======
Natural Gas Transmission
Throughput Volumes, TBtu (c):
Northeast Pipelines
TETCO ....................................................... 1,148 1,300 1,349 1,234 1,194
Algonquin ................................................... 311 341 327 331 288
------- ------ ------ ------ ------
Total Northeast Pipelines .................................. 1,459 1,641 1,676 1,565 1,482
Midwest Pipelines
PEPL ........................................................ 560 659 687 663 626
Trunkline ................................................... 581 620 632 519 560
------- ------ ------ ------ ------
Total Midwest Pipelines .................................... 1,141 1,279 1,319 1,182 1,186
Intercompany eliminations ..................................... (7) (58) (56) (44) (91)
--------- ------ ------ ------ ------
Total Natural Gas Transmission ................................. 2,593 2,862 2,939 2,703 2,577
======== ====== ====== ====== ======
Other Operating Statistics
Natural Gas Gathered and Processed/Transported, TBtu/d (d) ..... 3.6 3.4 2.9 1.9 1.6
NGL Production, MBbl/d (e) ..................................... 110.2 108.2 78.5 54.8 49.4
Average Natural Gas Price per MMBtu (f)......................... $ 2.11 $ 2.59 $ 2.59 $ 1.64 $ 1.90
Average NGL Price per Gallon ................................... $ 0.26 $ 0.35 $ 0.39 $ 0.33 $ 0.31
Natural Gas Marketed (g), TBtu/d ............................... 8.4 7.3 6.0 3.7 2.7
Electricity Marketed, GWh ...................................... 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) Trillion British thermal units per day
(e) Thousand barrels per day
(f) Million British thermal units
(g) Includes volumes of Trading and Marketing and Field Services
15
EXECUTIVE OFFICERS OF DUKE ENERGY
RICHARD B. PRIORY, 52, 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.
He was Executive Vice President, Power Generation Group, from 1991 to 1994.
WILLIAM A. COLEY, 55, Group President, Duke Power. Mr. Coley served as
President, Associated Enterprises Group, from 1994 to 1997 when he assumed his
present position following the merger. Mr. Coley served as Executive Vice
President, Customer Group, from 1991 to 1994.
FRED J. FOWLER, 53, 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, and
President of 1Source Corporation from 1993 to 1994.
HARVEY J. PADEWER, 51, 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 through 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, 56, 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.
He was Chief Operating Officer, Worldwide Communications and Media Group, of
NYNEX from 1993 to 1995.
RICHARD J. OSBORNE, 48, 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. Mr. Osborne served as Vice President and Chief Financial Officer from
1991 to 1994.
RUTH G. SHAW, 51, 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. Ms. Shaw was
Vice President, Corporate Communications, from 1992 to 1994.
JEFFREY L. BOYER, 42, Vice President and Corporate Controller. Mr. Boyer
served as Controller from 1994 to 1997, when he assumed his present position
following the merger. He was Director of Corporate Accounting from 1992 to
1994.
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, 1998, 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 2,797 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.
In addition, Electric Operations owned, as of December 31, 1998,
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 90,100 conductor miles
of electric distribution lines, including 61,400 conductor miles of rural
overhead lines, 15,500 conductor miles of urban overhead lines, 7,200 conductor
miles of rural underground lines and 6,000 conductor miles of urban underground
lines. At December 31, 1998, the electric transmission and distribution systems
comprised approximately 1,600 substations with an installed transformer
capacity of approximately 83,900,000 kVA (kilovolt-ampere).
Substantially all electric plant is mortgaged under the Indenture relating
to First and Refunding Mortgage Bonds.
16
NATURAL GAS TRANSMISSION
TETCO's gas transmission system extends approximately 1,700 miles from
producing fields in the Gulf Coast region of Texas and Louisiana to Ohio,
Pennsylvania, New Jersey and New York. It consists of two parallel systems, one
consisting of three large-diameter parallel pipelines and the other consisting
of from one to three large-diameter pipelines over its length. TETCO's system,
including its gathering systems, has 73 compressor stations.
TETCO also owns and operates two offshore Louisiana gas supply systems,
which extend over 100 miles into the Gulf of Mexico and consist of 490 miles of
pipeline.
Algonquin's transmission system connects with TETCO's facilities in New
Jersey, and extends through New Jersey, New York, Connecticut, Rhode Island and
Massachusetts. The system consists of approximately 250 miles of pipeline with
six compressor stations.
PEPL's transmission system, which consists of four large-diameter parallel
pipelines and 13 mainline compressor stations, extends a distance of
approximately 1,300 miles from producing areas in the Anadarko Basin of Texas,
Oklahoma and Kansas through the states of Missouri, Illinois, Indiana and Ohio
into Michigan.
Trunkline's transmission system extends approximately 1,400 miles from the
Gulf Coast areas of Texas and Louisiana through the states of Arkansas,
Mississippi, Tennessee, Kentucky, Illinois and Indiana to a point on the
Indiana-Michigan border. The system consists principally of three
large-diameter parallel pipelines, 18 mainline compressor stations and one
offshore compressor platform.
Trunkline also owns and operates two offshore Louisiana gas supply systems
consisting of 337 miles of pipeline extending approximately 81 miles into the
Gulf of Mexico.
The PEPL and Trunkline properties are included in the proposed sale of the
Midwest Pipelines, which is expected to close in early 1999.
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 Power Services owns several electric generating stations,
including three in California and one in Connecticut (95.9% ownership)
currently under expansion. These power plants have a combined capacity of 3,165
MW. For more information regarding electric generating stations, see "Business,
Global Asset Development -- Duke Energy Power Services."
A subsidiary of Duke Energy owns a marine terminal, storage and
regasification facility for LNG located in Louisiana. This LNG facility is
operated by Duke Energy International and is included in the proposed sale of
the Midwest Pipelines as previously discussed. The design output capacity of
the facility is approximately 700 million cubic feet per day and its storage
capacity is approximately 1.8 million barrels, which approximates 6 Bcf. See
further information regarding the properties of Duke Energy International at
"Business, Global Asset Development -- Duke Energy International."
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.
17
Item 3. Legal Proceedings.
On January 8, 1999, a subsidiary of Duke Energy agreed to a Compliance
Order on Consent (Consent Order) with the Colorado Department of Public Health
and Environment concerning alleged air quality permit reporting and
record-keeping violations at the Greeley Natural Gas Processing Plant and
several other Colorado facilities. This Consent Order superseded an earlier
Compliance Order and Assessment of Civil Penalty for the Greeley Natural Gas
Processing Plant. This Consent Order assesses a civil and noncompliance penalty
of $54,000 and requires supplemental environmental projects of $525,000 that
involve implementing additional air emission controls to reduce air emissions
below standards.
The Illinois Environmental Protection Agency has indicated to a subsidiary
of Duke Energy that it intends to initiate an environmental enforcement
proceeding relating to alleged air quality permit violations at a natural gas
compressor station. This proceeding could result in a penalty in excess of
$100,000.
Management believes that the resolution of these matters will not have a
material adverse effect on consolidated results of operations or financial
position.
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" for
further discussion of legal proceedings.
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 1998.
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 26, 1999, there were approximately 153,633 holders
of record of such common stock.
COMMON STOCK DATA BY QUARTER
Dividends
1998 Per Share Stock Price Range
- ------------------- ----------- ------------------------
High Low
----------- ------------
First Quarter ... $ .55 $ 60 5/8 $ 53 7/16
Second Quarter .. 1.10 62 9/16 55 1/8
Third Quarter ... -- 66 3/16 57 1/16
Fourth Quarter .. .55 70 11/16 60 1/16
Dividends
1997 Per Share Stock Price Range
- ------------------- ----------- ----------------------
High Low
---------- -----------
First Quarter ... $ .40 $ 48 $ 43 3/8
Second Quarter .. .40 48 42 1/8
Third Quarter ... .55 51 1/8 47 11/16
Fourth Quarter .. .55 56 3/16 45 3/4
- ---------
(a) 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 on January 1,
1997.
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.
18
Item 6. Selected Financial Data.
1998 1997(a) 1996(a) 1995(a) 1994(a)
------------- ------------ ----------- ----------- -----------
In millions, except per share amounts
Income Statement
Operating revenues ....................................... $17,610 $ 16,309 $12,302 $ 9,694 $ 9,115
Operating expenses ....................................... 15,177 14,339 10,143 7,626 7,309
------- -------- ------- ------- -------
Operating income ......................................... 2,433 1,970 2,159 2,068 1,806
Other income and expenses ................................ 214 138 135 122 101
------- -------- ------- ------- -------
Earnings before interest and taxes ....................... 2,647 2,108 2,294 2,190 1,907
Interest expense ......................................... 514 472 499 508 485
Minority interests ....................................... 96 23 6 -- --
------- -------- ------- ------- -------
Earnings before income taxes ............................. 2,037 1,613 1,789 1,682 1,422
Income taxes ............................................. 777 639 698 664 558
------- -------- ------- ------- -------
Income before extraordinary item ......................... 1,260 974 1,091 1,018 864
Extraordinary loss, net of tax ........................... (8) -- (17) -- --
--------- -------- ------- ------- -------
Net income ............................................... 1,252 974 1,074 1,018 864
Dividends and premiums on redemptions of preferred and
preference stock ........................................ 21 72 44 49 50
-------- -------- ------- ------- -------
Earnings available for common stockholders ............... $1,231 $ 902 $ 1,030 $ 969 $ 814
======== ======== ======= ======= =======
Common Stock Data
Shares of common stock outstanding
Year-end ................................................ 363 360 359 362 361
Weighted average ........................................ 361 360 361 361 360
Earnings per share (before extraordinary item)
Basic ................................................... $ 3.43 $ 2.51 $ 2.90 $ 2.68 $ 2.26
Dilutive ................................................ $ 3.42 $ 2.50 $ 2.88 $ 2.67 $ 2.25
Earnings per share
Basic ................................................... $ 3.41 $ 2.51 $ 2.85 $ 2.68 $ 2.26
Dilutive ................................................ $ 3.40 $ 2.50 $ 2.83 $ 2.67 $ 2.25
Dividends per share ...................................... $ 2.20 $ 1.90 $ 1.57 $ 1.50 $ 1.44
Balance Sheet
Total assets ............................................. $26,806 $ 24,029 $22,366 $20,868 $20,254
Long-term debt ........................................... $6,272 $ 6,530 $ 5,485 $ 5,803 $ 5,931
Preferred stock with sinking fund requirements ........... $ 124 $ 149 $ 234 $ 234 $ 280
- ---------
(a) 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 on January 1,
1994.
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
INTRODUCTION
Duke Energy Corporation (collectively with its subsidiaries, "Duke
Energy") is an integrated energy and energy services provider with the ability
to offer physical delivery and management of both electricity and natural gas
throughout the United States and abroad. Duke Energy provides these and other
services through seven business segments:
o Electric Operations
o Natural Gas Transmission
o Field Services
o Trading and Marketing
o Global Asset Development
o Other Energy Services
o Real Estate Operations
19
These segments were defined as a result of Duke Energy adopting Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information."
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, through its Northeast Pipelines, provides
interstate transportation and storage of natural gas for customers primarily in
the Mid-Atlantic and New England states. Until the expected sale of the Midwest
Pipelines in early 1999, Natural Gas Transmission also provides interstate
transportation and storage services in the midwest states. See further
discussion of the proposed sale of the Midwest Pipelines in the Liquidity and
Capital Resources section of Management's Discussion and Analysis. The
interstate natural gas transmission and storage operations are also subject to
the rules and regulations of the FERC.
Field Services gathers, processes, transports and markets natural gas and
produces and markets natural gas liquids (NGL). Field Services operates
gathering systems in ten states that serve major gas-producing regions in the
Rocky Mountain, Permian Basin, Mid-Continent and Gulf Coast areas.
Trading and Marketing markets natural gas, electricity and other
energy-related products across North America. Duke Energy owns a 60% interest
in Trading and Marketing's operations, with Mobil Corporation owning a 40%
minority interest.
Global Asset Development develops, owns and operates energy-related
facilities worldwide. Global Asset Development conducts its operations
primarily through Duke Energy Power Services, LLC (Duke Energy Power Services)
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 forest holdings in the southeastern United States.
The 1997 merger of Duke Power Company (Duke Power) and PanEnergy Corp
(PanEnergy) 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.)
Management's Discussion and Analysis should be read in conjunction with
the Consolidated Financial Statements.
RESULTS OF OPERATIONS
In 1998, earnings available for common stockholders increased 36.5% over
1997, to $1,231 million, or $3.41 per basic share, net of an extraordinary loss
of $8 million, or $0.02 per basic share. The increase in earnings available for
common stockholders was primarily due to increased electric sales and energy
marketing activities, expansions and acquisitions, gains on sales of assets and
the absence of 1997 non-recurring merger costs. These increases were partially
offset by decreased NGL prices and increased interest expense and minority
interests.
Earnings available for common stockholders decreased 12.4% in 1997
compared to 1996, to $902 million or $2.51 per basic share in 1997 from $1,030
million or $2.85 per basic share in 1996. The decrease was due primarily to
non-recurring 1997 merger costs, 1997 severance costs, premiums associated with
the redemption and tender offer for ten issues of preferred stock and increased
nuclear expenses. Partially offsetting the decrease were lower expenses in 1997
as compared to 1996, when major storms affected Electric Operations'
distribution costs, and an extraordinary loss related to the early retirement
of debt in 1996.
Operating income for 1998 was $2,433 million compared to $1,970 million in
1997 and $2,159 million in 1996. Earnings before interest and taxes (EBIT) were
$2,647 million, $2,108 million and $2,294 million for 1998, 1997 and 1996,
respectively. Operating income and earnings before interest and taxes,
excluding the effect of gains on asset sales of $34 million by Field Services
in 1998, are affected by the same fluctuations for Duke Energy and each of its
business segments. Earnings before interest and taxes by business segment are
summarized below and are discussed by business segment thereafter.
20
Earnings Before Interest and Taxes by Business Segment
Years Ended December 31,
-----------------------------
1998 1997 1996
--------- --------- ---------
In millions
Electric Operations .............. $1,513 $1,282 $1,419
Natural Gas Transmission ......... 702 624 595
Field Services ................... 76 157 152
Trading and Marketing ............ 122 44 58
Global Asset Development ......... 80 5 --
Other Energy Services ............ 10 18 20
Real Estate Operations ........... 142 98 88
Other Operations ................. 2 (120) (38)
------ ------ ------
Consolidated EBIT ................ $2,647 $2,108 $2,294
====== ====== ======
Other Operations primarily includes communication services, water services
and certain unallocated corporate costs. Included in the amounts discussed
below are intercompany transactions that are eliminated in the Consolidated
Financial Statements.
Electric Operations
Years Ended December 31,
-----------------------------
1998 1997 1996
--------- --------- ---------
Dollars in millions
Operating Revenues .................... $4,626 $4,401 $4,498
Operating Expenses .................... 3,228 3,221 3,195
------ ------ ------
Operating Income ...................... 1,398 1,180 1,303
Other Income, Net of Expenses ......... 115 102 116
------ ------ ------
EBIT .................................. $1,513 $1,282 $1,419
====== ====== ======
Volumes, Sales -- GWh (a) ............. 82,011 77,935 77,547
- ---------
(a) Gigawatt-hour
In 1998, earnings before interest and taxes for Electric Operations
increased 18.0% to $1,513 million from $1,282 million in 1997, primarily due to
a 5.2% increase in gigawatt-hour sales. The increase in earnings before
interest and taxes due to the absence of 1997 severance costs was substantially
offset by 1998 severance and other costs related to the shut-down of Electric
Operations' merchandising business.
Sales to weather-sensitive customers increased significantly in 1998
compared to 1997, which was a mild weather year, with sales to residential and
general service customers up 7.5% and 7.1%, respectively, primarily due to
warmer spring and summer weather conditions. On July 21, 1998, Electric
Operations customers set the third record demand of the summer, reaching a peak
of 15,812 megawatts. Sales to industrial customers increased slightly in 1998
over 1997, with sales to textile customers relatively flat. The number of
customers in the Electric Operations service territory increased 2.5% in 1998
over 1997 due to economic growth in the region.
In 1997, earnings before interest and taxes for Electric Operations
declined 9.7% as compared to 1996, primarily as a result of severance costs and
increased nuclear outage expenses. Also contributing to the decrease were lower
electric revenues, which were due primarily to mild weather and to the South
Carolina rate reduction, which was effective June 1, 1996. Partially offsetting
the decrease in earnings were lower expenses in 1997 as compared to 1996, when
major storms affected distribution costs.
21
Natural Gas Transmission
Years Ended December 31,
-----------------------------
1998 1997 1996
--------- --------- ---------
Dollars in millions
Operating Revenues ...................... $1,528 $1,572 $1,556
Operating Expenses ...................... 864 964 973
------ ------ ------
Operating Income ........................ 664 608 583
Other Income, Net of Expenses ........... 38 16 12
------ ------ ------
EBIT .................................... $ 702 $ 624 $ 595
====== ====== ======
Volumes, Throughput -- TBtu (a) ......... 2,593 2,862 2,939
- ---------
(a) Trillion British thermal units
Earnings before interest and taxes for Natural Gas Transmission increased
$78 million in 1998 over 1997. Earnings before interest and taxes for Northeast
Pipelines increased $56 million to $476 million in 1998 compared to 1997,
primarily as a result of the favorable resolution of regulatory issues related
to gas supply realignment costs, 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.
In 1998, earnings before interest and taxes for Midwest Pipelines
increased 10.8% 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. See the Liquidity and Capital Resources
- -- Investing Cash Flows section of Management's Discussion and Analysis for a
discussion of the expected sale of the Midwest Pipelines in early 1999. (See
also Note 14 to the Consolidated Financial Statements.)
Earnings before interest and taxes for Natural Gas Transmission increased
4.9% in 1997 over 1996, with increases in earnings at Northeast Pipelines and
Midwest Pipelines of 5.3% and 4.0%, respectively. Earnings before interest and
taxes for the Northeast Pipelines increased primarily due to market-expansion
projects placed in service.
For the Midwest Pipelines, earnings before interest and taxes increased
primarily due to the favorable resolution of certain regulatory matters in 1997
in amounts in excess of those resolved in 1996, which was reflected as
additional revenue and other income. This increase was partially offset by 1997
litigation expenses.
Field Services
Years Ended December 31,
--------------------------------------
1998 1997 1996
------------ ------------ ------------
Dollars in millions
Operating Revenues ........................................ $ 2,639 $ 3,055 $ 2,637
Operating Expenses ........................................ 2,598 2,898 2,487
-------- -------- --------
Operating Income .......................................... 41 157 150
Other Income, Net of Expenses ............................. 35 -- 2
-------- -------- --------
EBIT ...................................................... $ 76 $ 157 $ 152
======== ======== ========
Volumes
Natural Gas Gathered and Processed/Transported, TBtu/d (a) 3.6 3.4 2.9
Natural Gas Marketed, TBtu/d .............................. 0.4 0.4 0.5
NGL Production, MBbl/d (b) ................................ 110.2 108.2 78.5
- ---------
(a) Trillion British thermal units per day
(b) Thousand barrels per day
In 1998, earnings before interest and taxes for Field Services decreased
$81 million compared to 1997, primarily due to a decrease in average NGL prices
of approximately $0.09 per gallon, or 25.7%. The decrease in earnings before
interest and taxes was partially offset by $34 million of gains on sales of
assets which are included in other income.
22
Earnings before interest and taxes for Field Services increased 3.3% in
1997 over 1996, primarily due to higher volumes as a result of acquisitions in
1996. Natural gas gathered and processed volumes increased 17.2%, and NGL
production increased 37.8% in 1997 compared to 1996. Partially offsetting these
increases were lower NGL prices of approximately $0.04 per gallon, or 8%, and
higher natural gas prices.
Trading and Marketing
Years Ended December 31,
-----------------------------------
1998 1997 1996
----------- ----------- -----------
Dollars in millions
Operating Revenues .................... $8,785 $7,489 $3,814
Operating Expenses .................... 8,665 7,446 3,758
------ ------ ------
Operating Income ...................... 120 43 56
Other Income, Net of Expenses ......... 2 1 2
------ ------ ------
EBIT .................................. $ 122 $ 44 $ 58
====== ====== ======
Volumes
Natural Gas Marketed, TBtu/d .......... 8.0 6.9 5.5
Electricity Marketed, GWh ............. 98,991 64,650 4,229
In 1998, earnings before interest and taxes for Trading and Marketing
increased $78 million over 1997. The increase resulted primarily from increased
financial 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.
Earnings before interest and taxes for Trading and Marketing decreased $14
million in 1997 compared to 1996. The acquisition of the remaining 50%
ownership interest in the D/LD joint venture in 1997, coupled with a full year
of operations of the joint venture with Mobil Corporation formed in August
1996, accounted for the significant increases in Trading and Marketing
revenues, related operating expenses (including increased purchased power
expense) and volumes in 1997 over 1996. Increased natural gas volumes marketed
of 25.5% in 1997, in addition to increased natural gas margins from trading
activities, were largely offset by the emerging electric power trading and
marketing activities. Higher operating expenses, due primarily to increased
personnel levels and system development costs to provide the necessary
infrastructure for growth in the trading and marketing business, resulted in a
decrease in earnings before interest and taxes in 1997 as compared to 1996.
Global Asset Development
Years Ended December 31,
-------------------------------
1998 1997 1996
-------- ----------- ----------
In millions
Operating Revenues .................... $ 319 $ 123 $ 72
Operating Expenses .................... 261 129 73
----- ----- ----
Operating Income ...................... 58 (6) (1)
Other Income, Net of Expenses ......... 22 11 1
----- ------ -----
EBIT .................................. $ 80 $ 5 $ --
===== ====== =====
In 1998, earnings before interest and taxes for Global Asset Development
increased $75 million over 1997. The increase results primarily from business
expansion and acquisitions, including Duke Energy Power Services' July 1, 1998
acquisition of three electric generating stations in California from Pacific
Gas & Electric Company (PG&E) and December 1997 acquisition of an indirect
32.5% ownership interest in American Ref-Fuel Company. Duke Energy
International also contributed to the increase in earnings before interest and
taxes in 1998 compared to 1997 through an expansion to the PT Puncakjaya power
generation facility in Indonesia. This increase was partially offset by
decreased earnings resulting from lower prices at National Methanol, a methanol
and MTBE (methyl tertiary butyl ether) plant in Saudi Arabia.
In 1997, earnings before interest and taxes increased slightly compared to
1996, due primarily to business expansion and acquisitions, including the
December 1997 acquisition of an ownership interest in American Ref-Fuel
Company, and a gain on the sale of an investment. These increases were
partially offset by increased expenses due to business growth.
23
Other Energy Services
Years Ended December 31,
-----------------------------
1998 1997 1996
-------- ----------- --------
In millions
Operating Revenues .................... $ 521 $ 376 $ 204
Operating Expenses .................... 511 353 184
----- ----- -----
Operating Income ...................... 10 23 20
Other Income, Net of Expenses ......... -- (5) --
----- ------- -----
EBIT .................................. $ 10 $ 18 $ 20
===== ====== =====
In 1998, earnings before interest and taxes for Other Energy Services
decreased $8 million compared to 1997, primarily due to decreased earnings of
Duke Engineering & Services. Earnings before interest and taxes for Other
Energy Services decreased $2 million in 1997 compared to 1996, primarily as a
result of start-up expenses of DukeSolutions partially offset by increased
earnings of Duke Engineering & Services due to growth.
Real Estate Operations
Years Ended December 31,
--------------------------
1998 1997 1996
-------- -------- --------
In millions
Operating Revenues .................... $ 181 $ 124 $ 114
Operating Expenses .................... 39 26 26
----- ----- -----
Operating Income ...................... 142 98 88
Other Income, Net of Expenses ......... -- -- --
----- ----- -----
EBIT .................................. $ 142 $ 98 $ 88
===== ===== =====
In 1998, earnings before interest and taxes for Real Estate Operations
increased 44.9% compared to 1997, primarily as a result of increased project
and lake lot sales and a gain on land sales in the Jocassee Gorges region of
South Carolina. Earnings before interest and taxes for Real Estate Operations
increased 11.4% in 1997 over 1996, primarily due to gains associated with bulk
land sales in 1997.
Other Operations
Earnings before interest and taxes for Other Operations increased 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. The increase in earnings before interest and taxes
was partially offset by a 1997 gain on the sale of the ownership interest in
the Midland Cogeneration Venture.
Earnings before interest and taxes for Other Operations declined $82
million in 1997 compared to 1996. Contributing to the decrease were increased
merger-related expenses of $57 million in 1997 compared to 1996 and the 1997
amortization of goodwill associated with the purchase of the remaining 50%
ownership interest in the D/LD joint venture. This decline was partially offset
by the sale of the ownership interest in the Midland Cogeneration Venture in
1997.
Other Impacts on Earnings Available for Common Stockholders
Interest expense increased 8.9% in 1998 over 1997 due to higher average
debt balances outstanding. In 1997, interest expense decreased $27 million, or
5.4%, as compared to 1996 as a result of lower interest rates.
In 1998, minority interests increased $73 million compared to 1997. This
increase includes 1998 dividends for trust preferred securities, of which $350
million were issued in December 1997 and $600 million were issued in 1998. See
further discussion of the 1998 issuances of trust preferred securities in the
Liquidity and Capital Resources section of Management's Discussion and
Analysis. Excluding these dividends, minority interests relate primarily to the
trading and marketing joint venture with Mobil Corporation formed in August
1996.
In January 1998, TEPPCO Partners, L.P., in which a subsidiary of Duke
Energy has a 2% general partner interest and a 19.1% limited partner interest,
redeemed certain First Mortgage Notes. A non-cash extraordinary loss of $8
million, net of income tax of $5 million, was recorded related to costs of the
early retirement of that debt.
24
On October 1, 1996, a subsidiary of Duke Energy redeemed its $150 million,
10% debentures and its $100 million, 10 1/8% debentures, both due 2011. A
non-cash extraordinary loss of $17 million, net of income tax of $10 million,
was recorded related to the unamortized discount on this 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 an additional six issues of
preferred stock. Premiums related to these redemptions were included in the
Consolidated Statements of Income in 1997 as Dividends and Premiums on
Redemptions of Preferred and Preference Stock.
LIQUIDITY AND CAPITAL RESOURCES
Operating Cash Flows. Assets and liabilities recorded in the Consolidated
Balance Sheets related to purchased capacity levelization and natural gas
transition cost recoveries and the related cash flow impacts are affected by
state and federal regulatory initiatives and specific agreements. For more
information on the purchased capacity levelization and the natural gas
transition cost recoveries, see Notes 5 and 4, respectively, to the
Consolidated Financial Statements.
On August 29, 1998, the FERC approved a settlement from Texas Eastern
Transmission Corporation (TETCO), a subsidiary of Duke Energy, which will
accelerate recovery of natural gas transition costs and reduce depreciation
expense to more appropriately reflect the estimated useful lives of its
facilities, principally interstate natural gas pipelines. The order was
effective October 1, 1998 and includes a rate moratorium until 2004. Cash flows
from operations are not expected to change for the first two years after
implementation due to the offsetting effect on customer rates of the reduced
depreciation expense and increased recovery of natural gas transition costs.
When the natural gas transition costs are fully recovered, cash flows from
operations are expected to decrease during 2001 through 2003 by an estimated
total of $270 million. For more information concerning the settlement, see Note
4 to the Consolidated Financial Statements.
Investing Cash Flows. Capital and investment expenditures were
approximately $2.5 billion in 1998 compared to approximately $2.0 billion in
1997. This increase was primarily due to business expansion by Global Asset
Development, which included Duke Energy Power Services' $501 million purchase
of three electric generating stations in California from PG&E and the
completion of the first phase of Bridgeport Energy, a $265 million,
520-megawatt combined cycle natural gas-fired merchant generation plant.
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.
Capital and investment expenditures in 1997 included the acquisition of
the remaining 50% ownership interest in the D/LD joint venture for $247
million, which substantially represented goodwill, and Global Asset
Development's acquisition of an ownership interest in American Ref-Fuel Company
for $237 million. The increase in capital and investment expenditures in 1997
over 1996 also included increased Electric Operations construction costs,
primarily due to steam generator replacements at certain of its nuclear plants
and increased distribution line construction, and business expansion for the
Natural Gas Transmission segment. These increases were partially offset by the
1996 acquisition of certain assets from Mobil Corporation.
Duke Energy plans to maintain its regulated electric operations facilities
in the Carolinas and pursue business expansion as opportunities arise.
Projected 1999 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. The license renewal process
could take three to five years to complete. All projections are subject to
periodic review and revisions. Actual expenditures incurred may vary from such
estimates due to various factors, including industry restructuring, weather,
economic growth, regulatory constraints and environmental regulation.
Projected 1999 capital and investment expenditures for Natural Gas
Transmission, including allowance for funds used during construction, are
approximately $400 million which do not include projections related to the
Midwest Pipelines which are expected to be sold in early 1999. These
projections include the completion of the Maritimes & Northeast Pipeline
project, which will deliver natural gas to markets in the Canadian Maritimes
provinces and the northeastern United States from a supply basin offshore Nova
Scotia. These projections also include other market expansion projects and
costs relating to existing assets.
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 opportunities for Field Services
inc