-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TE/keFm8NdnmIlJBQIpIHuLQDy/XXoT802r+VlxsLIFCAThyFOClqvkES1x3xrT+ 7kF3PpxHXreQ9agIgKe/sQ== 0000950109-00-001035.txt : 20000322 0000950109-00-001035.hdr.sgml : 20000322 ACCESSION NUMBER: 0000950109-00-001035 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000321 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DUKE ENERGY CORP CENTRAL INDEX KEY: 0000030371 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 560205520 STATE OF INCORPORATION: NC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-04928 FILM NUMBER: 574121 BUSINESS ADDRESS: STREET 1: 526 SOUTH CHURCH STREET CITY: CHARLOTTE STATE: NC ZIP: 28201-1006 BUSINESS PHONE: 7045946200 MAIL ADDRESS: STREET 1: 422 S CHURCH ST CITY: CHARLOTTE STATE: NC ZIP: 28242 FORMER COMPANY: FORMER CONFORMED NAME: DUKE POWER CO /NC/ DATE OF NAME CHANGE: 19920703 10-K 1 FORM 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------- FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 or [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ____________ Commission file number 1-4928 DUKE ENERGY CORPORATION (Exact name of registrant as specified in its charter) North Carolina 56-0205520 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 526 South Church Street, Charlotte, North 28202-1904 Carolina (Zip Code) (Address of principal executive offices) 704-594-6200 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange Title of each class on which registered - ------------------- --------------------- Common Stock, without par value New York Stock Exchange, Inc. 6.375% Preferred Stock A, 1993 Series, par value $25 New York Stock Exchange, Inc. First and Refunding Mortgage Bonds, 5 7/8% Due 2001 New York Stock Exchange, Inc. First and Refunding Mortgage Bonds, 5 7/8% Series C Due 2003 New York Stock Exchange, Inc. First and Refunding Mortgage Bonds, 6 1/4% Series B Due 2004 New York Stock Exchange, Inc. First and Refunding Mortgage Bonds, 6 3/8% Due 2008 New York Stock Exchange, Inc. First and Refunding Mortgage Bonds, 6 5/8% Series B Due 2003 New York Stock Exchange, Inc. First and Refunding Mortgage Bonds, 6 3/4% Due 2025 New York Stock Exchange, Inc. First and Refunding Mortgage Bonds, 6 7/8% Series B Due 2023 New York Stock Exchange, Inc. First and Refunding Mortgage Bonds, 7% Due 2000 New York Stock Exchange, Inc. First and Refunding Mortgage Bonds, 7% Series B Due 2000 New York Stock Exchange, Inc. First and Refunding Mortgage Bonds, 7% Due 2033 New York Stock Exchange, Inc. First and Refunding Mortgage Bonds, 7 1/2% Series B Due 2025 New York Stock Exchange, Inc. First and Refunding Mortgage Bonds, 7 7/8% Due 2024 New York Stock Exchange, Inc. 7.20% Quarterly Income Preferred Securities issued by Duke Energy Capital Trust I and guaranteed by Duke Energy Corporation New York Stock Exchange, Inc. 7.20% Trust Preferred Securities issued by Duke Energy Capital Trust II and guaranteed by Duke Energy Corporation New York Stock Exchange, Inc. Preference Stock Purchase Rights New York Stock Exchange, Inc. Series C 6.60% Senior Notes Due 2038 New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: Title of class Preferred Stock, par value $100 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] Estimated aggregate market value of the voting stock held by nonaffiliates of the registrant at February 29, 2000............................................ $ 17,313,000,000 Number of shares of Common Stock, without par value, outstanding at February 29, 2000............................. 366,689,508
Documents incorporated by reference: The registrant is incorporating herein by reference certain sections of the proxy statement relating to the 2000 annual meeting of shareholders to provide information required by Part III, Items 10, 11, 12 and 13 of this annual report. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- DUKE ENERGY CORPORATION FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999 TABLE OF CONTENTS
Item Page - ---- ---- PART I. 1.Business............................................................... 1 General............................................................... 1 Electric Operations................................................... 3 Natural Gas Transmission.............................................. 7 Field Services........................................................ 9 Trading and Marketing................................................. 11 Global Asset Development.............................................. 12 Other Energy Services................................................. 14 Real Estate Operations................................................ 15 Environmental Matters................................................. 15 Foreign Operations and Export Sales................................... 16 Employees............................................................. 16 Operating Statistics.................................................. 17 Executive Officers of Duke Energy..................................... 18 2.Properties............................................................. 18 3.Legal Proceedings...................................................... 20 4.Submission of Matters to a Vote of Security Holders.................... 20 PART II. 5.Market for Registrant's Common Equity and Related Stockholder Matters.. 20 6.Selected Financial Data................................................ 21 7.Management's Discussion and Analysis of Results of Operations and Financial Condition..................................................... 21 7A.Quantitative and Qualitative Disclosures About Market Risk............ 39 8.Financial Statements and Supplementary Data............................ 40 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................................... 80 PART III. 10.Directors and Executive Officers of the Registrant.................... 80 11.Executive Compensation................................................ 80 12.Security Ownership of Certain Beneficial Owners and Management........ 80 13.Certain Relationships and Related Transactions........................ 80 PART IV. 14.Exhibits, Financial Statement Schedule, and Reports on Form 8-K....... 81 Signatures............................................................. 82 Exhibit Index.......................................................... 83
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 From time to time, Duke Energy may make statements regarding its assumptions, projections, expectations, intentions or beliefs about future events. These statements are intended as "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. Duke Energy cautions that assumptions, projections, expectations, intentions or beliefs about future events may and often do vary from actual results, and the differences between assumptions, projections, expectations, intentions or beliefs and actual results can be material. Accordingly, there can be no assurance that the actual results will not differ materially from those expressed or implied by the forward-looking statements. For a discussion of some factors that could cause actual achievements and events to differ materially from those expressed or implied in such forward-looking statements, see "Management's Discussion and Analysis of Results of Operations and Financial Condition, Current Issues-- Forward-Looking Statements." PART I. Item 1. Business. GENERAL Duke Energy Corporation (collectively with its subsidiaries, "Duke Energy") is an integrated energy and energy services provider with the ability to offer physical delivery and management of both electricity and natural gas throughout the U.S. and abroad. Duke Energy provides these and other services through seven business segments: .Electric Operations .Natural Gas Transmission .Field Services .Trading and Marketing .Global Asset Development .Other Energy Services .Real Estate Operations Electric Operations generates, transmits, distributes and sells electric energy in central and western North Carolina and the western portion of South Carolina (doing business as Duke Power or Nantahala Power and Light). These electric operations are subject to the rules and regulations of the Federal Energy Regulatory Commission (FERC), the North Carolina Utilities Commission (NCUC) and the Public Service Commission of South Carolina (PSCSC). Natural Gas Transmission provides interstate transportation and storage of natural gas for customers primarily in the Mid-Atlantic and New England states. Until the sale of the Midwest Pipelines on March 29, 1999, Natural Gas Transmission also provided interstate transportation and storage services in the midwest states. See further discussion of the sale of the Midwest Pipelines in Note 2 to the Consolidated Financial Statements, "Business Combinations, Acquisitions and Dispositions." The interstate natural gas transmission and storage operations are subject to the rules and regulations of the FERC. Field Services gathers, processes, transports and markets natural gas and produces, transports and markets natural gas liquids (NGLs). Field Services operates gathering systems in western Canada and ten contiguous states that serve major gas-producing regions in the Rocky Mountain, Permian Basin, Mid- Continent and onshore and offshore Gulf Coast areas. Trading and Marketing markets natural gas, electricity and other energy- related products across North America. Duke Energy owns a 60% interest in Trading and Marketing's energy trading operations, with Mobil Corporation owning a 40% minority interest. This segment also includes certain other trading activities and limited hydrocarbon exploration and production activities that are wholly owned by Duke Energy. Global Asset Development develops, owns and operates energy-related facilities worldwide. Global Asset Development conducts its operations primarily through Duke Energy North America, LLC (Duke Energy North America) and Duke Energy International, LLC (Duke Energy International). Other Energy Services provides engineering, consulting, construction and integrated energy solutions worldwide, primarily through Duke Engineering & Services, Inc. (Duke Engineering & Services), Duke/Fluor Daniel and DukeSolutions, Inc. (DukeSolutions). Real Estate Operations conducts its business through Crescent Resources, Inc., which develops high quality commercial and residential real estate projects and manages land holdings in the southeastern U.S. The 1997 merger of Duke Power Company (Duke Power) and PanEnergy Corp (PanEnergy) was accounted for as a pooling of interests; therefore, all financial information included in this annual report for 1 periods prior to the merger include the combined historical financial results of Duke Power and PanEnergy. See Note 2 to the Consolidated Financial Statements, "Business Combinations, Acquisitions and Dispositions," for additional information on the merger. Certain terms used to describe Duke Energy's business are explained below. British Thermal Unit (Btu). A standard unit for measuring thermal energy or heat commonly used as a gauge for the energy content of natural gas and other fuels. Cubic Foot (cf). The most common unit of measurement of gas volume; the amount of natural gas required to fill a volume of one cubic foot under stated conditions of temperature, pressure and water vapor. Distribution. The system of lines, transformers and switches that connect the electric transmission system to customers. Federal Energy Regulatory Commission (FERC). The agency that regulates the transportation of electricity and natural gas in interstate commerce and authorizes the buying and selling of energy commodities at market-based rates. Gathering System. Pipeline, processing and related facilities that access production and other sources of natural gas supplies for delivery to mainline transmission systems. Generation. The process of transforming other forms of energy, such as nuclear or fossil fuels, into electricity. Also, the amount of electric energy produced, expressed in megawatt-hours. Greenfield Development. The development of a new power generating facility on an undeveloped site. Independent System Operator (ISO). Ensures non-discriminatory access to a regional transmission system, providing all customers access to the power exchange and clearing all bilateral contract requests for use of the electric transmission system. Also responsible for maintaining bulk electric system reliability. Jurisdictional. Facilities and activities subject to the primary regulatory oversight of FERC or state regulatory agencies. Liquefied Natural Gas (LNG). Natural gas that has been converted to a liquid by cooling it to -260 degrees Fahrenheit. Local Distribution Company (LDC). A company that obtains the major portion of its revenues from the operations of a retail distribution system for the delivery of electricity or gas for ultimate consumption. 2 Natural Gas. A naturally occurring mixture of hydrocarbon and non-hydrocarbon gases found in porous geological formations beneath the earth's surface, often in association with petroleum. The principal constituent is methane. Natural Gas Liquids (NGLs). Liquid hydrocarbons extracted during the processing of natural gas. Principal commercial NGLs include butanes, propane, natural gasoline and ethane. Peak Load. The amount of electricity required during periods of highest demand. Peak periods fluctuate by season, generally occurring in the morning hours in winter and in late afternoon during the summer. Throughput. The amount of natural gas or natural gas liquids transported through a pipeline system. Transmission System (Electric). An interconnected group of electric transmission lines and related equipment for moving or transferring electric energy in bulk between points of supply and points at which it is transformed for delivery over a distribution system to customers, or for delivery to other electric transmission systems. Transmission System (Natural Gas). An interconnected group of natural gas pipelines and associated facilities for transporting natural gas in bulk between points of supply and delivery points to industrial customers, local distribution companies, or for delivery to other natural gas transmission systems. Watt. A measure of real power production or usage equal to one joule per second. A discussion of the current business and operations of each of Duke Energy's segments follows. For further discussion of the operating outlook of Duke Energy and its segments, see "Management's Discussion and Analysis of Results of Operations and Financial Condition, Introduction--Business Strategy." For financial information concerning Duke Energy's business segments, see Note 3 to the Consolidated Financial Statements, "Business Segments." Duke Energy is a North Carolina corporation with its principal executive offices located at 526 South Church Street, Charlotte, NC 28202-1904. The telephone number is 704-594-6200. ELECTRIC OPERATIONS Service Area and Customers Electric Operations' service area, approximately two-thirds of which lies in North Carolina, covers about 22,000 square miles with an estimated population of 5.3 million and includes a number of cities, of which the largest are Charlotte, Greensboro, Winston-Salem and Durham in North Carolina, and Greenville and Spartanburg in South Carolina. Electric Operations supplies electric service directly to approximately two million residential, commercial and industrial customers in more than 200 cities, towns and unincorporated communities. Electricity is sold at wholesale to incorporated municipalities and to several public and private utilities. In addition, sales are made through contractual agreements to municipal or cooperative customers who purchased portions of the Catawba Nuclear Station. For statistics related to gigawatt-hour sales by customer type, see "Business, Operating Statistics." For further discussion of the Catawba Nuclear Station joint ownership, see Note 5 to the Consolidated Financial Statements, "Joint Ownership of Generating Facilities." Electric Operations' service area is undergoing increasingly diversified industrial and commercial development. The textile industry, machinery and equipment manufacturing, and chemical and chemical-related industries are of major significance to the economy of the area. Other industrial activities include rubber and plastic products, paper and allied products, and various other light and heavy manufacturing and service businesses. The largest industry served is the textile industry, which accounted for approximately $428 million of Electric Operations' revenues for 1999, representing 10% of total electric revenues and 36% of industrial revenues. Electric Operations normally experiences seasonal peak loads in summer and winter. 3 (A map appears here depicting Electric Operation's 100 kV Electric Lines, 230kV Electric Lines, 500 kV Electric Lines, Nuclear Facilities, Fossil Facilities, Hydro Facilities, and Combustion Turbine Facilities.) Capability and Resources of Energy Electric energy required to supply the needs of Electric Operations' customers is primarily generated by three nuclear generating stations with a combined net capability of 5,020 megawatts (MW) (Oconee Nuclear Station--2,538 MW, McGuire Nuclear Station--2,200 MW and Catawba Nuclear Station--282 MW, which represents Electric Operations' 12.5% ownership share in the Catawba Nuclear Station), eight coal-fired stations with a combined capability of 7,699 MW, thirty-one hydroelectric stations with a combined capability of 2,803 MW and six combustion turbine stations with a combined capability of 1,784 MW. Energy and capacity are also supplied through contracts with other generators of electricity and purchased on the open market. Electric Operations has interconnections and arrangements with its neighboring utilities, which are considered adequate for planning, emergency assistance, exchange of capacity and energy and reliability of power supply. Future increased energy requirements of Electric Operations' customers are expected to be supplied through purchased power contracts and open market purchases. For statistics regarding sources of electric energy, see "Business, Operating Statistics." 4 Fuel Supply Electric Operations presently relies principally on coal and nuclear fuel for the generation of electric energy. Electric Operations' reliance on oil and gas is minimal. Information regarding the utilization of sources of power and cost of fuels for each of the three years in the period ended December 31, 1999 is set forth in the following table:
Cost of Fuel per Net Generation by Kilowatt-hour Source Generated (Percent)(d) (Cents)(d) ----------------- -------------- 1999 1998 1997 1999 1998 1997 ----- ----- ----- ---- ---- ---- Coal...................................... 50.4 50.7 59.0 1.33 1.32 1.30 Nuclear(a)................................ 48.0 46.2 38.5 0.43 0.44 0.48 Oil and gas(b)............................ 0.8 1.0 0.4 4.51 4.01 5.58 ----- ----- ----- ---- ---- ---- All fuels (cost based on weighted average)(a).............................. 99.2 97.9 97.9 0.92 0.93 0.99 Hydroelectric(c).......................... 0.8 2.1 2.1 ----- ----- ----- 100.0 100.0 100.0 ===== ===== =====
-------- (a) Statistics related to nuclear generation and all fuels reflect Electric Operations' 12.5% ownership interest in the Catawba Nuclear Station. (b) Cost statistics include amounts for light-off fuel at Electric Operations' coal-fired stations. (c) Generating figures are net of output required to replenish pumped storage units during off-peak periods. (d) Years prior to 1998 have been restated to include Nantahala Power and Light. Coal. Electric Operations meets its coal demand through purchase supply contracts and spot agreements. Large amounts of its coal supply are obtained under supply contracts with mining operators utilizing both underground and surface mining. Electric Operations has an adequate supply of coal to fuel its current operations. Its supply contracts, all of which have price adjustment provisions, have expiration dates ranging from 2000 to 2003. Duke Energy believes that it will be able to renew such contracts as they expire or to enter into similar contractual arrangements with other coal suppliers for the quantities and qualities of coal required. The coal purchased under these supply contracts is produced from mines located in eastern Kentucky, southern West Virginia and southwestern Virginia. Coal requirements not met by supply contracts have been and are expected to be fulfilled with spot market purchases. The average sulfur content of coal being purchased by Electric Operations is approximately 1%. Such coal satisfies the current emission limitation for sulfur dioxide for existing facilities. See also "Management's Discussion and Analysis of Results of Operations and Financial Condition, Current Issues-- Environmental, Air Quality Control" for additional information regarding particulate matter. Nuclear. Generally, the process for developing nuclear generating fuel supply involves the mining and milling of uranium ore to produce uranium concentrates, the conversion of uranium concentrates to uranium hexafluoride, enrichment of that gas and fabrication of the enriched uranium hexafluoride into usable fuel assemblies. Electric Operations has contracted for uranium materials and services required to fuel the Oconee, McGuire and Catawba Nuclear Stations. Based upon current projections, these contracts will meet Electric Operations' requirements through the following years:
Uranium Conversion Enrichment Fabrication Nuclear Station Material Service Service Service --------------- -------- ---------- ---------- ----------- Oconee............................ 2000 2000 2002 2006 McGuire........................... 2000 2000 2002 2009 Catawba........................... 2000 2000 2002 2009
5 Uranium material requirements will be met through various supplier contracts, with uranium material produced primarily in the U.S. and Canada. Duke Energy believes that it will be able to renew contracts as they expire or to enter into similar contractual arrangements with other suppliers of nuclear fuel materials and services. Requirements not met by long-term supply contracts have been and are expected to be fulfilled with unfabricated uranium spot market purchases. Duke Energy entered into a contract with the Department of Energy (DOE) to use mixed oxide fuel at its McGuire and Catawba nuclear stations. The mixed oxide fuel is fabricated from plutonium from the government's surplus and is similar to conventional uranium fuel. Before using the fuel, Duke Energy must apply for and receive amendments to the respective facility operating licenses from the Nuclear Regulatory Commission (NRC). Mixed oxide fuel is scheduled to be used at McGuire and Catawba nuclear stations in 2007. After spent fuel is removed from a nuclear reactor, it is placed in temporary storage for cooling in a spent fuel pool at the nuclear station site. Under provisions of the Nuclear Waste Policy Act of 1982, Duke Energy has entered into contracts with the DOE for the disposal of spent nuclear fuel. The DOE failed to begin accepting the spent nuclear fuel on January 31, 1998, the date provided by the Nuclear Waste Policy Act and by Duke Energy's contract with the DOE. On June 8, 1998, Duke Energy filed with the U.S. Court of Federal Claims a claim against the DOE for damages in excess of $1 billion arising out of the DOE's failure to begin accepting commercial spent nuclear fuel by January 31, 1998. Damages claimed in the suit are intended to recover costs that Duke Energy is incurring and will continue to incur as a result of the DOE's partial material breach of its contract with Duke Energy, including costs associated with securing additional spent fuel storage capacity. Duke Energy will continue to safely manage its spent nuclear fuel until the DOE accepts it. Competition Electric industry restructuring is being addressed in all 50 states and in the District of Columbia, which is resulting in changes in the industry. For further discussion, see "Management's Discussion and Analysis of Results of Operations and Financial Condition, Current Issues--Electric Competition." Electric Operations is currently subject to competition in some areas from government owned power systems, municipally owned electric systems, rural electric cooperatives and, in certain instances, other private utilities. Currently, statutes in North Carolina and South Carolina provide for the assignment by the NCUC and the PSCSC, respectively, of all areas outside municipalities in such States to regulated electric utilities and rural electric cooperatives. Substantially all of the territory comprising the Electric Operations' service area has been so assigned. The remaining areas have been designated as unassigned and in such areas Electric Operations remains subject to competition. A decision of the North Carolina Supreme Court limits, in some instances, the right of North Carolina municipalities to serve customers outside their corporate limits. In South Carolina there continues to be competition between municipalities and other electric suppliers outside the corporate limits of the municipalities, subject, however, to the regulation of the PSCSC. In addition, Electric Operations is engaged in continuing competition with various natural gas providers. Regulation The NCUC and the PSCSC approve rates for retail electric sales within their respective states. The FERC approves Electric Operations' rates for certain electric sales to wholesale customers. For further discussion of rate matters, see Note 4 to the Consolidated Financial Statements, "Regulatory Matters-- Electric Operations." The FERC, the NCUC and the PSCSC also have authority over the construction and operation of Electric Operations' facilities. Electric Operations holds certificates of public convenience and necessity issued by the FERC, the NCUC and the PSCSC, authorizing it to construct and operate the electric facilities now in operation for which certificates are required, and to sell electricity to retail and wholesale customers. Prior approval from the NCUC and the PSCSC is required to issue securities. The NCUC, PSCSC and FERC have implemented regulations governing access to regulated electric customer data by non-regulated entities and services provided between regulated and non-regulated affiliated 6 entities. These regulations affect the activities of Trading and Marketing, Global Asset Development, and Other Energy Services with Electric Operations. The Energy Policy Act of 1992 (EPACT) and the FERC's subsequent rulemaking activities permit the FERC to order transmission access for third parties to transmission facilities owned by another entity. EPACT does not, however, permit the FERC to issue orders requiring transmission access to retail customers. The FERC has issued orders for third-party transmission service and a number of rules of general applicability, including Orders 888 and 889. Pursuant to the FERC's final rules, Electric Operations obtained from the FERC open-access rule the rights to sell capacity and energy at market-based rates from its own assets. For further discussion, see "Management's Discussion and Analysis of Results of Operations and Financial Condition, Current Issues-- Electric Competition." The Electric Operations segment is subject to the jurisdiction of the NRC as to the design, construction and operation of its nuclear stations. For discussions of nuclear decommissioning costs and nuclear insurance regulatory requirements and coverages, see Note 11 to the Consolidated Financial Statements, "Nuclear Decommissioning Costs" and Note 14 to the Consolidated Financial Statements, "Commitments and Contingencies--Nuclear Insurance," respectively. The hydroelectric generating facilities of Electric Operations are licensed by the FERC under Part I of the Federal Power Act, with license terms expiring from 2001 to 2036. The nuclear generating facilities of Electric Operations are licensed by the NRC with license terms expiring from 2013 to 2026. The FERC has authority to grant extensions of hydroelectric generating licenses, and the NRC has authority to grant extensions of nuclear generating licenses. Duke Energy has filed an application for a 20-year renewal of its operating license for the Oconee Nuclear Station. The application is expected to receive approval from the NRC in 2000. Duke Energy is also initiating the license renewal process for the McGuire and Catawba Nuclear Stations in 2000. Duke Energy has filed a license application for one of its hydroelectric facilities for which it expects to receive a new license by 2001. Duke Energy is also in various stages of relicensing other facilities whose licenses expire between 2005 and 2008. The Electric Operations segment is subject to the jurisdiction of the Environmental Protection Agency (EPA) and state environmental agencies. For a discussion of environmental regulation, see "Business, Environmental Matters." NATURAL GAS TRANSMISSION Natural Gas Transmission provides interstate transportation and storage of natural gas through its Northeast Pipelines, which includes Texas Eastern Transmission Corporation (TETCO) and Algonquin Gas Transmission Company (Algonquin). The Midwest Pipelines, which included Panhandle Eastern Pipe Line Company (PEPL) and Trunkline Gas Company (Trunkline), were also a part of Natural Gas Transmission until their sale to CMS Energy Corporation (CMS) in March 1999. See further discussion of the sale in Note 2 to the Consolidated Financial Statements, "Business Combinations, Acquisitions and Dispositions." Investments include a 37.5% ownership interest in Maritimes & Northeast Pipeline, which has a design capacity of 530 million cubic feet per day (MMcf/d) in Canada and 400 MMcf/d in the U.S. Maritimes & Northeast Pipeline was placed in service and received the first delivery of natural gas from the Sable Offshore Energy Project in December 1999. In January 2000, Natural Gas Transmission announced that it had entered into a definitive agreement to purchase the East Tennessee Natural Gas Company, a 1,100-mile pipeline that crosses the TETCO pipeline in Tennessee and serves the rapidly growing southeastern region of the U.S. The transaction is expected to close in late March 2000, subject to regulatory approval. For more information on this purchase, see Note 19 to the Consolidated Financial Statements, "Subsequent Events." For 1999, consolidated natural gas deliveries by Natural Gas Transmission's interstate pipelines totaled 1,893 trillion British thermal units (TBtu), compared to 2,593 TBtu in 1998. For the Northeast Pipelines, 1999 natural gas deliveries were 1,565 TBtu, a 7% increase from last year. The Midwest Pipelines, as a consequence of the sale to CMS, reported natural gas deliveries of 328 TBtu in 1999 compared to 1,141 TBtu in 1998. 7 A majority of the delivered volumes of Natural Gas Transmission's interstate pipelines represents gas transported under long-term firm service agreements with local distribution company (LDC) customers in the pipelines' market areas. Firm transportation services are also provided under contract to gas marketers, producers, other pipelines, electric power generators and a variety of end- users. In addition, the pipelines provide both firm and interruptible transportation to customers on a short-term or seasonal basis. See natural gas deliveries statistics under "Business, Operating Statistics." Demand for gas transmission of Natural Gas Transmission's interstate pipeline systems is seasonal, with the highest throughput occurring during the colder periods in the first and fourth quarters. Natural Gas Transmission's interstate pipeline systems consist of approximately 11,000 miles of pipe, which include 650 miles related to the partial ownership interest in Maritimes & Northeast Pipeline. The pipeline systems receive natural gas from most major North American producing regions for delivery to markets primarily in the Mid-Atlantic and New England states. (A map appears here depicting Natural Gas Transmission's interstate pipeline systems and storage.) TETCO's major customers are located in Pennsylvania, New Jersey and New York, and include LDCs serving the Pittsburgh, Philadelphia, Newark and New York City metropolitan areas. Algonquin's major customers include LDCs and electric power generators located in the Boston, Hartford, New Haven, Providence and Cape Cod areas. TETCO also provides firm and interruptible open-access storage services. Storage is offered as a stand-alone unbundled service or as part of a no-notice bundled service. TETCO's storage services utilize two joint venture storage facilities in Pennsylvania and one wholly owned and operated storage field in Maryland. TETCO also leases storage capacity. TETCO's certificated working capacity in these three fields is 75 billion cubic feet (Bcf), and the combined working gas in storage was 59 Bcf on December 31, 1999. Algonquin owns no storage fields. 8 Competition Duke Energy's interstate pipeline subsidiaries compete with other interstate and intrastate pipeline companies in the transportation and storage of natural gas. The principal elements of competition among pipelines are rates, terms of service, and flexibility and reliability of service. In the Mid-Atlantic and New England markets, TETCO competes directly with Transcontinental Gas Pipe Line Corporation, Tennessee Gas Pipeline Company (TGPC), Iroquois Gas Transmission System (Iroquois), CNG Transmission Corporation and Columbia Gas Transmission Corporation. Algonquin competes directly in certain market areas with TGPC and Iroquois. Natural gas competes with other forms of energy available to Duke Energy's customers and end-users, including electricity, coal and fuel oils. The primary competitive factor is price. Changes in the availability or price of natural gas and other forms of energy, the level of business activity, conservation, legislation and governmental regulations, the capability to convert to alternative fuels, and other factors, including weather, affect the demand for natural gas in the areas served by Duke Energy. Regulation The FERC has authority to regulate rates and charges for natural gas transported in or stored for interstate commerce or sold by a natural gas company in interstate commerce for resale. For further discussion of rate matters, see "Management's Discussion and Analysis of Results of Operations and Financial Condition, Liquidity and Capital Resources--Operating Cash Flows" and Note 4 to the Consolidated Financial Statements, "Regulatory Matters--Natural Gas Transmission." The FERC also has authority over the construction and operation of pipeline and related facilities utilized in the transportation, storage and sale of natural gas in interstate commerce, including the extension, enlargement or abandonment of such facilities. TETCO and Algonquin hold certificates of public convenience and necessity issued by the FERC, authorizing them to construct and operate the pipelines, facilities and properties now in operation for which such certificates are required, and to transport and store natural gas in interstate commerce. As required by FERC Order 636, Natural Gas Transmission's pipelines operate as open-access transporters of natural gas, providing unbundled firm and interruptible transportation and storage services on an equal basis for all gas supplies, whether purchased from the pipeline or from another gas supplier. FERC allows pipelines to recover eligible costs, known as "transition costs," resulting from the implementation of Order 636. For further discussion of Order 636, see Note 4 to the Consolidated Financial Statements, "Regulatory Matters-- Natural Gas Transmission." The FERC has implemented regulations governing access to regulated natural gas transmission customer data by non-regulated entities and services provided between regulated and non-regulated affiliated entities. These regulations affect the activities of Trading and Marketing, Global Asset Development and Other Energy Services with Natural Gas Transmission. Natural Gas Transmission is subject to the jurisdiction of the EPA and state environmental agencies. For a discussion of environmental regulation, see "Business, Environmental Matters." Natural Gas Transmission is also subject to the Natural Gas Pipeline Safety Act of 1968, which regulates gas pipeline and LNG plant safety requirements, and to the Hazardous Liquid Pipeline Safety Act of 1979, which regulates oil and petroleum pipelines. FIELD SERVICES Field Services gathers, processes, transports and markets natural gas and produces, transports and markets NGLs. Field Services owns and operates approximately 28,000 miles of natural gas gathering systems, including intrastate pipelines, and 52 natural gas processing plants in the U.S. and Canada. Field Services also has ownership interests in 12 other natural gas processing plants in the U.S. Field Services gathers natural gas from production wellheads through gathering systems in western Canada and ten contiguous states that serve major gas-producing regions in the Rocky Mountain, Permian Basin, Mid-Continent and onshore and offshore Gulf Coast areas. Field Services' operations also include several intrastate pipeline systems and one high-deliverability natural gas storage facility. 9 The map below includes Field Services' natural gas gathering systems, intrastate pipelines, region offices and supply areas. The map also shows the interstate systems of the Natural Gas Transmission segment. (A map appears here depicting the items indicated in the above paragraph.) Field Services' NGL processing operations involve the extraction of NGLs from natural gas and, at certain facilities, the fractionation of the NGLs into their individual components (ethane, propane, butane and natural gasoline). The natural gas used in Field Services' processing operations is generally gathered on its own gathering system. NGLs are sold by Field Services to a variety of customers ranging from large, multi-national petrochemical and refining companies to small, family-owned retail propane distributors. Most NGL sales are based upon current market-related prices. Field Services also produces helium at the National Helium Corporation facility in Liberal, Kansas and the Ladder Creek facility in Colorado. Field Services' operating results are significantly impacted by changes in NGL prices, which increased approximately 30.8% in 1999 compared to 1998. See "Management's Discussion and Analysis of Results of Operations and Financial Condition, Quantitative and Qualitative Disclosures About Market Risk" for a discussion of Field Services' exposure to changes in commodity prices. On March 31, 1999, Field Services completed the $1.35 billion acquisition of the natural gas gathering, processing, fractionation and NGL pipeline business from Union Pacific Resources (UPR), as well as UPR's 10 natural gas and NGL marketing activities (collectively, "the UPR acquisition"). For further discussion of the UPR acquisition see Note 2 to the Consolidated Financial Statements, "Business Combinations, Acquisitions and Dispositions." In 1998, Field Services sold assets related to its crude oil gathering and marketing business, including 1,800 miles of intrastate crude oil pipelines in the Mid-Continent and South Texas areas and 450 miles of intrastate NGL pipelines in the Texas Gulf Coast area, to TEPPCO Partners, L.P. (TEPPCO) in exchange for an additional ownership interest in TEPPCO. As a result of the sale, Duke Energy now has a 2% general partner interest and a 19.1% limited partner interest in TEPPCO, a publicly owned master limited partnership that transports refined products and liquefied petroleum products through a 4,300 mile pipeline system. On December 16, 1999, Field Services announced that it had signed definitive agreements to combine Field Services' gas gathering and processing businesses with Phillips Petroleum Company's Gas Processing and Marketing unit to form a new midstream company. The transaction is expected to close by late March 2000. For additional information, see Note 19 to the Consolidated Financial Statements, "Subsequent Events." See certain operating statistics of Field Services under "Business, Operating Statistics." Activities of Field Services can fluctuate in response to the seasonality affecting natural gas. Competition Field Services competes with major integrated oil companies, major interstate pipelines, national and local natural gas gatherers, brokers, marketers and distributors for natural gas supplies, in gathering and processing natural gas and in marketing and transporting natural gas and NGLs. Competition for natural gas supplies is primarily based on the efficiency and reliability of operations, the availability of transportation to high demand markets and the ability to obtain a satisfactory price for the producer's natural gas. Competition for sales customers is based primarily upon reliability and price of delivered natural gas and NGLs. Regulation The intrastate pipelines owned by the Field Services group are subject to state regulation and, to the extent they provide services under Section 311 of the Natural Gas Policy Act of 1978, are also subject to FERC regulation. However, the majority of the natural gas gathering activities of the Field Services group are not subject to regulation by the FERC. Field Services is subject to the jurisdiction of the EPA and state environmental agencies. For a discussion of environmental regulation, see "Business, Environmental Matters." Certain operations of Field Services are subject to the jurisdiction of the Department of Transportation and certain similar state agencies whose regulations have incorporated certain provisions of the Natural Gas Pipeline Safety Act of 1968, the Hazardous Liquid Pipeline Safety Act of 1979, and subsequent amendments. TRADING AND MARKETING Trading and Marketing markets natural gas, electricity and other energy- related products across North America. Duke Energy owns a 60% interest in Trading and Marketing's natural gas and electric power trading operations, with Mobil Corporation (Mobil) owning a 40% minority interest. Trading and Marketing also includes certain other trading activities and limited hydrocarbon exploration and production activities that are wholly owned by Duke Energy. 11 Trading and Marketing markets natural gas primarily to LDCs, electric power generators (including Global Asset Development's generation facilities), municipalities, large industrial end-users and energy marketing companies. Trading and Marketing markets electricity to investor owned utilities, municipal power generators and other power marketers. Trading and Marketing also provides energy management services, such as supply and market aggregation, peaking services, dispatching, balancing, transportation, storage, tolling, contract negotiation and administration, as well as energy commodity risk management products and services. Operations are primarily in the U.S. and, to a lesser extent, in Canada, and are serviced through three operating centers. Additionally, during 1999, Duke Energy Hydrocarbons was formed to invest capital in limited hydrocarbon exploration and production prospects through non-operating working interests. Natural gas marketing operations encompass both on-system and off-system supplies. With respect to on-system supplies, Trading and Marketing generally purchases natural gas from Field Services' facilities and delivers the gas to an intrastate or interstate pipeline for redelivery to another customer. Natural Gas Transmission's pipelines are utilized for deliveries when prudent. With respect to off-system supplies, Trading and Marketing purchases natural gas from producers, pipelines and other suppliers not connected with Duke Energy's facilities for resale to customers. Substantially all of Mobil's U.S. and Canadian natural gas production is committed to be marketed through Trading and Marketing through 2006. With respect to electricity marketing operations, Trading and Marketing purchases electricity from third-party suppliers and from Global Asset Development's domestic generation facilities for resale to customers. Trading and Marketing has a portfolio of short-term and long-term sales agreements with customers, the vast majority of which incorporate market- sensitive pricing terms. Long-term gas purchase agreements with producers, principally entered into in connection with on-system supplies, also generally include market-sensitive pricing provisions. Purchases and sales of off-system gas and electricity supplies are normally made under short-term contracts. Purchase and sales commitments involving significant price and location risk are generally hedged with offsetting commitments and commodity futures, swaps and options. For information concerning Trading and Marketing's risk-management activities, see "Management's Discussion and Analysis of Results of Operations and Financial Condition, Quantitative and Qualitative Disclosures About Market Risk--Commodity Price Risk" and Note 7 to the Consolidated Financial Statements, "Risk Management and Financial Instruments--Commodity Derivatives-- Trading." See certain operating statistics of Trading and Marketing under "Business, Operating Statistics." Activities of Trading and Marketing can fluctuate in response to the seasonality affecting both electricity and natural gas. Competition Trading and Marketing competes with major integrated oil companies, major interstate pipelines and their marketing affiliates, brokers, marketers and distributors, and electric utilities and other electric power marketers for natural gas supplies and in marketing natural gas, electricity and other energy commodities. Competition in the energy marketing business is driven by the price of commodities and services delivered, along with the quality and reliability of services provided. Regulation The energy marketing activities of Trading and Marketing may, in certain circumstances, be subject to the jurisdiction of the FERC. Current FERC policies permit Trading and Marketing entities subject to FERC jurisdiction to market natural gas and electricity at market-based rates. GLOBAL ASSET DEVELOPMENT Global Asset Development develops, owns and operates energy-related facilities worldwide. Global Asset Development conducts its operations primarily in the U.S. through Duke Energy North America and internationally, currently in Australia and Latin America, through Duke Energy International. 12 Deregulation of energy markets in the U.S. and abroad is providing substantial opportunities for Global Asset Development to grow through acquisitions, construction of greenfield projects and expansion of existing facilities. Global Asset Development is an active participant in both domestic and international competitive energy-related markets, which include natural gas pipelines, power generation, energy trading and marketing and other services. Global Asset Development owns, operates or has substantial interests in approximately 12,500 MW of generation and approximately 1,900 miles of pipeline systems, including projects under construction. Domestically, Duke Energy North America is investing in new merchant power plants throughout the U.S. To capture the greatest value, Duke Energy North America, through its portfolio management strategy, seeks opportunities to invest in markets which have capacity needs and to divest, in whole or in part, when significant value can be realized. During 1999, Duke Energy North America began construction of multiple new power generation plants in the southwest and midwest. The following map includes Duke Energy North America's power generation facilities. (A map appears here depicting Duke Energy North America's power generation facilities, including those under construction.) Duke Energy International continues to focus on its regional target areas in Australia and Latin America for further expansion opportunities and intends to implement its strategies in Europe. In January 1999, Duke Energy International completed the $315 million purchase of power generation and transmission assets in western Australia and New Zealand, including an ownership interest in a pipeline in western Australia. From August 1999 through January 2000, Duke Energy International entered into a series of transactions to complete an approximate $1.0 billion purchase of an approximate 95% economic interest in Companhia de Geracao de Energia Eletrica Paranapanema, an electric generating company in Brazil. Also during 1999, Duke Energy International reached a definitive agreement with Dominion Resources, Inc. to acquire its portfolio of hydroelectric, natural gas and diesel power generation businesses in Argentina, Belize, Bolivia and Peru for approximately $405 million. For additional information on business acquisitions see "Management's Discussion and Analysis of Results of Operations and Financial Condition, Liquidity and Capital Resources--Investing Cash Flows" and Notes 2 and 19 to the Consolidated Financial Statements, "Business Combinations, Acquisitions and Dispositions" and "Subsequent Events," respectively. 13 The following map illustrates the locations of Duke Energy International's worldwide energy facilities, including projects under construction or under contract. (A map appears here depicting the items indicated in the above paragraph.) Competition and Regulation Global Asset Development experiences substantial competition from existing utility companies as well as other merchant electric generation companies in the U.S. Internationally, Global Asset Development focuses on regions where free markets prevail or are developing. Competition in these markets is from other multinational energy companies and local private and public utilities. Most of Global Asset Development's operations are not subject to regulation. However, to the extent that Global Asset Development's generating stations in California sell electricity under "reliability must run" agreements to the California Independent System Operator, such sales are made at FERC regulated rates. Global Asset Development is subject to international, federal, state and local environmental regulations. For a discussion of environmental regulation, see "Business, Environmental Matters." OTHER ENERGY SERVICES Other Energy Services provides engineering, consulting, construction and integrated energy solutions worldwide, primarily through Duke Engineering & Services, Duke/Fluor Daniel and DukeSolutions. Duke Engineering & Services specializes in energy and environmental projects and provides comprehensive engineering, quality assurance, project and construction management and operating and maintenance services for all phases of hydroelectric, nuclear and renewable power generation, transmission and distribution projects worldwide. Duke/Fluor Daniel, operating through several entities, provides full service siting, permitting, licensing, engineering, procurement, construction, start- up, operating and maintenance services for fossil-fired plants, both 14 domestically and internationally. Subsidiaries of Duke Energy and Fluor Corporation each own 50% of Duke/Fluor Daniel. DukeSolutions provides energy consulting services to large end users of energy by first identifying and then affecting points in a customer's operations where energy related costs are incurred, including procurement, production and disposal. The scope of services involves providing strategic solutions to reduce costs when customers buy energy, convert it into a usable form, use it to manufacture products and dispose of any waste. Other Energy Services experiences substantial competition from utilities and other independent companies in the U. S. or abroad. Other Energy Services is subject to the jurisdiction of the EPA and international, state and local environmental agencies. For a discussion of environmental regulation, see "Business, Environmental Matters." REAL ESTATE OPERATIONS Real Estate Operations conducts its business through Crescent Resources Inc., which develops high quality commercial and residential real estate projects and manages land holdings in the southeastern U.S. At December 31, 1999, Real Estate Operations owned 4.2 million square feet of commercial and industrial space, with an additional 1.4 million square feet under construction. At December 31, 1999, the commercial portfolio included 2.6 million square feet of office space, 1.5 million square feet of warehouse space and 0.1 million square feet of retail space. In 1999, commercial buildings totaling 2.0 million of square feet were sold for $155 million. Real Estate Operations' residential developments are high-end, country club and golf course communities with individual lots sold to custom builders. In 1999, Real Estate Operations added the development of moderately priced residential communities in Jacksonville, Florida, with sales in tracts to national builders. In 1999, Real Estate Operations sold 917 residential developed lots for $138 million, and tract sales were $9 million. In 1999, Real Estate Operations also announced plans to enter the multi- family market and to significantly increase its retail development. At December 31, 1999, Real Estate Operations had approximately 200,000 acres of land under its management. ENVIRONMENTAL MATTERS Duke Energy is subject to international, federal, state and local regulations with regard to air and water quality, hazardous and solid waste disposal and other environmental matters. Certain environmental regulations affecting Duke Energy include: . The Clean Air Act Amendments of 1990, which require a two-phase reduction by electric utilities in aggregate annual emissions of sulfur dioxide and nitrogen oxide by 2000; . State Implementation Plans, which were issued by the EPA to 22 states including North and South Carolina, and the District of Columbia related to existing and new national ambient air quality standards for ozone; . The Federal Water Pollution Control Act Amendments of 1987, which require permits for facilities that discharge treated wastewater into the environment; and . The Comprehensive Environmental Response, Compensation and Liability Act, which can require any individual or entity which may have owned or operated a disposal site, as well as transporters or generators of hazardous wastes which were sent to such site, to share in remediation costs for the site. For further discussion of environmental matters involving Duke Energy, including possible liability and capital costs, see "Legal Proceedings," "Management's Discussion and Analysis of Results of Operations and Financial Condition, Current Issues--Environmental" and Note 14 to the Consolidated Financial Statements, 15 "Commitments and Contingencies--Environmental." Compliance with international, federal, state and local provisions' regulating the discharge of materials into the environment, or otherwise protecting the environment, is not expected to have a material adverse effect on the competitive position, consolidated results of operations or financial position of Duke Energy. FOREIGN OPERATIONS AND EXPORT SALES Foreign operations consisted of 10% of consolidated revenues in 1999 and 15% of consolidated long-lived assets as of December 31, 1999. For 1998 and 1997, foreign operations and export sales were not material to Duke Energy as a whole. For a discussion of Duke Energy's foreign operations and the risks associated with them, see "Management's Discussion and Analysis of Results of Operations and Financial Condition, Quantitative and Qualitative Disclosures About Market Risk--Foreign Operations Risk" and Notes 3 and 7 to the Consolidated Financial Statements, "Business Segments" and "Risk Management and Financial Instruments," respectively. EMPLOYEES At December 31, 1999, Duke Energy had approximately 21,000 employees. Approximately 1,600 operating and maintenance employees are represented by unions. Of these approximately 1,400 are represented by the International Brotherhood of Electrical Workers (IBEW). During 1999, new agreements were reached with IBEW units for a portion of the employees. Additionally, negotiations began with the IBEW for a new contract for other employees. The new contract when completed, will be effective in 2000. An additional 74 employees are represented by the United Steelworkers and Rubberworkers of America. Approximately 160 employees are represented by the Paper, Allied, Chemical and Energy Workers Union (PACE, formerly the Oil, Chemical and Atomic Workers International Union). Two new agreements were reached with PACE during 1999. 16 OPERATING STATISTICS
Years Ended December 31, ----------------------------------------- 1999 1998 1997 1996 1995 -------- ------- ------- ------ ------ Electric Operations(a) Sources of Electric Energy, GWh(b) Generated--net output: Coal............................. 41,306 42,164 45,234 40,649 32,389 Nuclear.......................... 39,263 38,366 29,569 33,177 39,836 Hydro............................ 638 1,714 1,633 1,802 2,117 Oil and gas...................... 662 846 301 199 255 -------- ------- ------- ------ ------ Total generation............... 81,869 83,090 76,737 75,827 74,597 Purchased power and net interchange..................... 3,617 2,659 3,781 3,885 1,239 -------- ------- ------- ------ ------ Total output................... 85,486 85,749 80,518 79,712 75,836 Plus: Purchases from other Catawba joint owners............ 1,233 1,656 2,316 2,662 6,070 -------- ------- ------- ------ ------ Total sources of energy........ 86,719 87,405 82,834 82,374 81,906 Less: Line loss and company usage........................... 5,171 5,394 4,899 4,827 4,780 -------- ------- ------- ------ ------ Total GWh sales................ 81,548 82,011 77,935 77,547 77,126 ======== ======= ======= ====== ====== Electric Energy Sales, GWh Residential...................... 21,897 22,002 20,483 21,484 20,124 General service.................. 21,807 21,093 19,687 19,593 18,461 Industrial Textile......................... 11,201 11,981 11,955 11,603 12,155 Other........................... 18,704 18,668 18,376 18,131 17,738 Other energy and wholesale....... 7,715 8,933 7,029 6,781 7,852 -------- ------- ------- ------ ------ Total GWh sales billed......... 81,324 82,677 77,530 77,592 76,330 Unbilled GWh sales............... 224 (666) 405 (45) 796 -------- ------- ------- ------ ------ Total GWh sales................ 81,548 82,011 77,935 77,547 77,126 ======== ======= ======= ====== ====== Natural Gas Transmission Throughput Volumes, TBtu(c): Northeast Pipelines TETCO........................... 1,254 1,148 1,300 1,349 1,234 Algonquin....................... 311 311 341 327 331 -------- ------- ------- ------ ------ Total Northeast Pipelines...... 1,565 1,459 1,641 1,676 1,565 -------- ------- ------- ------ ------ Midwest Pipelines(d) PEPL............................ 176 560 659 687 663 Trunkline....................... 152 581 620 632 519 -------- ------- ------- ------ ------ Total Midwest Pipelines........ 328 1,141 1,279 1,319 1,182 -------- ------- ------- ------ ------ Intercompany eliminations........ -- (7) (58) (56) (44) -------- ------- ------- ------ ------ Total Natural Gas Transmission.................. 1,893 2,593 2,862 2,939 2,703 ======== ======= ======= ====== ====== Field Services Natural Gas Gathered and Processed/Transported, TBtu/d(e).. 5.1 3.6 3.4 2.9 1.9 NGL Production, MBbl/d(f).......... 192.4 110.2 108.2 78.5 54.8 Average Natural Gas Price per MMBtu(g).......................... $2.27 $2.11 $2.59 $2.59 $1.64 Average NGL Price per Gallon....... $0.34 $0.26 $0.35 $0.39 $0.33 Natural Gas Marketed, TBtu/d....... 0.5 0.4 0.4 0.5 0.1 Trading and Marketing Natural Gas Marketed, TBtu/d....... 10.5 8.0 6.9 5.5 3.6 Electricity Marketed, GWh.......... 109,634 98,991 64,650 4,229 513
- -------- (a) Years prior to 1998 have been restated to include Nantahala Power and Light. (b) Gigawatt-hour. (c) Trillion British thermal units. (d) Sold in March 1999. (e) Trillion British thermal units per day. (f) Thousand barrels per day. (g) Million British thermal units. 17 EXECUTIVE OFFICERS OF DUKE ENERGY Richard B. Priory, 53, Chairman of the Board, President and Chief Executive Officer. Mr. Priory served as President and Chief Operating Officer from 1994 until he assumed his present position in 1997 following the merger with PanEnergy. William A. Coley, 56, Group President, Duke Power. Mr. Coley served as President of Duke Energy's Associated Enterprises Group from 1994 to 1997 when he assumed his present position following the merger. Fred J. Fowler, 54, Group President, Energy Transmission. Mr. Fowler served as Group Vice President of PanEnergy from 1996 until the merger, when he assumed his present position. He was President of TETCO from 1994 to 1996. Harvey J. Padewer, 52, Group President, Energy Services. Mr. Padewer assumed his present position on January 1, 1999. From 1995 through 1998, he served as Senior Vice President and General Manager of Utilicorp Energy Group, where he was President, Aquila Energy; President, Utilico Group; and Vice Chairman of the Board, Aquila Pipeline Corporation. From 1989 to 1995, he served in executive positions at ABB Power Generation, Inc., first as Vice President, Sales and Marketing and later as President, Turbine Power Division. Richard W. Blackburn, 57, Executive Vice President, General Counsel and Secretary. Mr. Blackburn was named to his present position in October 1997. Prior to joining Duke Energy, he served as President and Group Executive of NYNEX Corporation's Worldwide Communications and Media Group from 1995 to 1997. Richard J. Osborne, 49, Executive Vice President and Chief Financial Officer. Mr. Osborne served as Senior Vice President and Chief Financial Officer from 1994 until he assumed his present position in 1997 following the merger. Ruth G. Shaw, 52, Executive Vice President and Chief Administrative Officer. Ms. Shaw served as Senior Vice President, Corporate Resources, from 1994 until she assumed her present position following the merger. Sandra P. Meyer, 45, Vice President and Corporate Controller. Ms. Meyer assumed her present position in September 1999. Prior to her present position, Ms. Meyer served as Vice President, Duke Power Planning and Finance following the merger in 1997. She became Vice President and Controller of PanEnergy in 1994 and was named to the additional position of Treasurer in October 1996. Executive officers are elected annually by the Board of Directors and serve until the first meeting of the Board of Directors following the annual meeting of shareholders and until their successors are duly elected. There are no family relationships between any of the executive officers nor any arrangement or understanding between any executive officer and any other person pursuant to which the officer was selected. Item 2. Properties. ELECTRIC OPERATIONS At December 31, 1999, Electric Operations operated three nuclear generating stations with a combined net capability of 5,020 MW (which includes 12.5% ownership in the Catawba Nuclear Station), eight coal-fired stations with a combined capability of 7,699 MW, thirty-one hydroelectric stations with a combined capability of 2,803 MW and six combustion turbine stations with a combined capability of 1,784 MW, all of which are located in North Carolina or South Carolina. 18 In addition, Electric Operations owned, as of December 31, 1999, approximately 13,000 conductor miles of electric transmission lines, including 600 conductor miles of 525 kilovolts, 2,600 conductor miles of 230 kilovolts, 6,500 conductor miles of 100 kilovolts, and 3,300 conductor miles of 13 to 66 kilovolts. Electric Operations also owned approximately 91,100 conductor miles of electric distribution lines, including 61,800 conductor miles of rural overhead lines, 15,500 conductor miles of urban overhead lines, 7,500 conductor miles of rural underground lines and 6,300 conductor miles of urban underground lines. At December 31, 1999, the electric transmission and distribution systems comprised approximately 1,600 substations. Substantially all electric plant is mortgaged under the Indenture relating to First and Refunding Mortgage Bonds. NATURAL GAS TRANSMISSION TETCO's gas transmission system extends approximately 1,700 miles from producing fields in the Gulf Coast region of Texas and Louisiana to Ohio, Pennsylvania, New Jersey and New York. It consists of two parallel systems, one consisting of three large-diameter parallel pipelines and the other consisting of from one to three large-diameter pipelines over its length. TETCO's system consists of 9,220 miles of pipeline and has 73 compressor stations. TETCO also owns and operates two offshore Louisiana pipeline systems, which extend over 100 miles into the Gulf of Mexico and consist of 490 miles of pipeline. Algonquin's transmission system connects with TETCO's facilities in New Jersey, and extends approximately 250 miles through New Jersey, New York, Connecticut, Rhode Island and Massachusetts. The system consists of 1,066 miles of pipeline with six compressor stations. For information concerning natural gas storage properties, see "Business, Natural Gas Transmission." FIELD SERVICES For information regarding the properties of Field Services, see "Business, Field Services." GLOBAL ASSET DEVELOPMENT Duke Energy North America owns several gas-fueled electric generating stations throughout the U.S., including four wholly owned stations in California with combined capacity of 3,351 MW. As of December 31, 1999, Duke Energy North America had ownership interests ranging from 24.42% to 50% in numerous other generating facilities with combined capacity of 1,217 MW. Additionally, Duke Energy North America wholly owns or has ownership interests ranging from 50% to 78.53% in several generating stations that are under construction. The combined capacity of these facilities is 2,960 MW. As of December 31, 1999, Duke Energy International's properties included a combination of hydroelectric and thermal power generation assets. Duke Energy International had ownership interests ranging from 50% to 98% in hydroelectric facilities located in Brazil, Argentina, Bolivia, Peru and Belize, with combined capacity of 3,443 MW. Wholly owned thermal facilities in Australia and New Zealand had capacity of 392 MW. Thermal facilities in which Duke Energy International had ownership interests ranging from 21.9% to 97% in Peru, Ecuador, El Salvador, Indonesia and Argentina had capacity of 1,085 MW. These statistics include projects under construction or under contract. Additionally, Duke Energy International owned 889 miles of pipeline systems in Australia, and had an ownership interest of 11.84% in 800 miles of pipeline systems in Australia and a 21.9% ownership interest in 190 miles of pipeline systems in Peru. These statistics include projects under construction. Also as of December 31, 1999, Duke Energy International had a 25% indirect interest in National Methanol Company, which owns and operates a methanol and MTBE (methyl tertiary butyl ether) business in Jubail, Saudi Arabia. For additional information and maps regarding the properties of Global Asset Development, see "Business, Global Asset Development." 19 REAL ESTATE OPERATIONS For information regarding the properties of Real Estate Operations, see "Business, Real Estate Operations." OTHER None of the properties used in connection with Duke Energy's other business activities are considered material to Duke Energy's operations as a whole. Item 3. Legal Proceedings. The Illinois Environmental Protection Agency has initiated an environmental enforcement proceeding against a former subsidiary of Duke Energy relating to alleged air quality permit violations at a natural gas compressor station. Duke Energy has agreed to indemnify the purchaser of this former subsidiary against liability for any penalty or fines resulting from these alleged violations. This proceeding could result in a penalty in excess of $100,000. See Note 14 to the Consolidated Financial Statements, "Commitments and Contingencies--Injury and Damages Claims," for discussion of Duke Energy's injury and damages claims. Management believes that the resolution of the matters discussed and referred to above will not have a material adverse effect on consolidated results of operations or financial position. For additional information concerning litigation and other contingencies, see Note 14 to the Consolidated Financial Statements, "Commitments and Contingencies," and "Management's Discussion and Analysis of Results of Operations and Financial Condition, Current Issues--Environmental." With respect to the State Implementation Plan EPA proceeding discussed under "Management's Discussion and Analysis of Results of Operations and Financial Condition, Current Issues--Environmental--Air Quality Control," in March 2000, the court ruled in favor of the EPA with respect to several issues. Management's estimate of the potential capital improvement costs in this matter remain appropriate. Item 4. Submission of Matters to a Vote of Security Holders. No matters were submitted to a vote of Duke Energy's security holders during the last quarter of 1999. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. The common stock of Duke Energy is listed for trading on the New York Stock Exchange. At February 29, 2000, there were approximately 152,392 holders of record of such common stock. Common Stock Data by Quarter
1999 1998 ----------------------------- ---------------------------- Stock Price Range Stock Price Range Dividends ------------------- Dividends ------------------ Per Share High Low Per Share High Low --------- --------- --------- --------- --------- -------- First Quarter.... $0.55 $64 11/16 $54 13/16 $0.55 $60 5/8 $53 7/16 Second Quarter... 1.10 61 3/16 52 1/8 1.10 62 9/16 55 1/8 Third Quarter.... -- 58 1/2 52 7/16 -- 66 3/16 57 1/16 Fourth Quarter... 0.55 56 7/8 47 1/16 0.55 70 11/16 60 1/16
On December 17, 1998, Duke Energy's Board of Directors adopted a shareholder rights plan, which was subsequently approved by the North Carolina Utilities Commission and the Public Service Commission of South Carolina. Under the terms of the plan, holders of record of outstanding common stock on February 12, 1999 received one right for each share of common stock owned. The plan is intended to assure fair and equal treatment for all shareholders in the event of a hostile takeover attempt and to encourage a potential acquirer to negotiate with the Board of Directors a fair price for all shareholders before attempting a takeover. The adoption of the plan was not in response to any takeover offer or threat. 20 Item 6. Selected Financial Data.
1999 1998 1997(b) 1996(b) 1995(b) ------- ------- ------- ------- ------- In millions, except per share amounts Income Statement Operating revenues.................. $21,742 $17,610 $16,309 $12,302 $ 9,694 Operating expenses(a)............... 19,947 15,177 14,339 10,143 7,626 ------- ------- ------- ------- ------- Operating income.................... 1,795 2,433 1,970 2,159 2,068 Other income and expenses........... 248 214 138 135 122 ------- ------- ------- ------- ------- Earnings before interest and taxes.. 2,043 2,647 2,108 2,294 2,190 Interest expense.................... 601 514 472 499 508 Minority interests.................. 142 96 23 6 -- ------- ------- ------- ------- ------- Earnings before income taxes........ 1,300 2,037 1,613 1,789 1,682 Income taxes........................ 453 777 639 698 664 ------- ------- ------- ------- ------- Income before extraordinary item.... 847 1,260 974 1,091 1,018 Extraordinary gain/(loss), net of tax................................ 660 (8) -- (17) -- ------- ------- ------- ------- ------- Net income.......................... 1,507 1,252 974 1,074 1,018 Dividends and premiums on redemptions of preferred and preference stock................... 20 21 72 44 49 ------- ------- ------- ------- ------- Earnings available for common stockholders....................... $ 1,487 $ 1,231 $ 902 $ 1,030 $ 969 ======= ======= ======= ======= ======= Common Stock Data Shares of common stock outstanding Year-end........................... 366 363 360 359 362 Weighted average................... 365 361 360 361 361 Earnings per share (before extraordinary item)(a) Basic.............................. $ 2.26 $ 3.43 $ 2.51 $ 2.90 $ 2.68 Dilutive........................... $ 2.25 $ 3.42 $ 2.50 $ 2.88 $ 2.67 Earnings per share(a) Basic.............................. $ 4.08 $ 3.41 $ 2.51 $ 2.85 $ 2.68 Dilutive........................... $ 4.07 $ 3.40 $ 2.50 $ 2.83 $ 2.67 Dividends per share................. $ 2.20 $ 2.20 $ 1.90 $ 1.57 $ 1.50 Balance Sheet Total assets........................ $33,409 $26,806 $24,029 $22,366 $20,868 Long-term debt...................... $ 8,683 $ 6,272 $ 6,530 $ 5,485 $ 5,803 Preferred stock with sinking fund requirements....................... $ 104 $ 124 $ 149 $ 234 $ 234
- -------- (a) Financial information reflects a pre-tax $800 million charge for estimated injury and damages claims. The earnings per share effect of this charge was $1.34 per share. See Note 14 to the Consolidated Financial Statements, "Commitments and Contingencies--Injury and Damages Claims," for additional information. (b) Financial information reflects accounting for the 1997 merger with PanEnergy Corp as a pooling of interests. As a result, the financial information gives effect to the merger as if it had occurred January 1, 1995. Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition. INTRODUCTION Management's Discussion and Analysis should be read in conjunction with the Consolidated Financial Statements. 21 Business Segments. Duke Energy Corporation (collectively with its subsidiaries, "Duke Energy") is an integrated energy and energy services provider with the ability to offer physical delivery and management of both electricity and natural gas throughout the U.S. and abroad. Duke Energy provides these and other services through seven business segments: .Electric Operations .Natural Gas Transmission .Field Services .Trading and Marketing .Global Asset Development .Other Energy Services .Real Estate Operations Electric Operations generates, transmits, distributes and sells electric energy in central and western North Carolina and the western portion of South Carolina (doing business as Duke Power or Nantahala Power and Light). These electric operations are subject to the rules and regulations of the Federal Energy Regulatory Commission (FERC), the North Carolina Utilities Commission (NCUC) and the Public Service Commission of South Carolina (PSCSC). Natural Gas Transmission provides interstate transportation and storage of natural gas for customers primarily in the Mid-Atlantic and New England states. Until the sale of the Midwest Pipelines on March 29, 1999, Natural Gas Transmission also provided interstate transportation and storage services in the midwest states. See further discussion of the sale of the Midwest Pipelines in Note 2 to the Consolidated Financial Statements. The interstate natural gas transmission and storage operations are subject to the rules and regulations of the FERC. Field Services gathers, processes, transports and markets natural gas and produces, transports and markets natural gas liquids (NGLs). Field Services operates gathering systems in western Canada and ten contiguous states that serve major gas-producing regions in the Rocky Mountain, Permian Basin, Mid- Continent and onshore and offshore Gulf Coast areas. Trading and Marketing markets natural gas, electricity and other energy- related products across North America. Duke Energy owns a 60% interest in Trading and Marketing's energy trading operations, with Mobil Corporation owning a 40% minority interest. This segment also includes certain other trading activities and limited hydrocarbon exploration and production activities that are wholly owned by Duke Energy. Global Asset Development develops, owns and operates energy-related facilities worldwide. Global Asset Development conducts its operations primarily through Duke Energy North America, LLC (Duke Energy North America) and Duke Energy International, LLC (Duke Energy International). Other Energy Services provides engineering, consulting, construction and integrated energy solutions worldwide, primarily through Duke Engineering & Services, Inc. (Duke Engineering & Services), Duke/Fluor Daniel and DukeSolutions, Inc. (DukeSolutions). Real Estate Operations conducts its business through Crescent Resources, Inc., which develops high quality commercial and residential real estate projects and manages land holdings in the southeastern U.S. In 1997, Duke Power Company (Duke Power) merged with PanEnergy Corp (PanEnergy). The merger was accounted for as a pooling of interests; therefore, the Consolidated Financial Statements and other financial information included in this Annual Report for periods prior to the merger include the combined historical financial results of Duke Power and PanEnergy. See Note 2 to the Consolidated Financial Statements for additional information on the combination. 22 Business Strategy. Duke Energy's business strategy is to develop integrated energy infrastructures in targeted regions where Duke Energy's extensive capabilities in developing energy assets, operating electricity, gas and NGL plants, optimizing commercial operations and managing risk can provide comprehensive energy solutions for customers and create superior value for shareholders. Domestically, Duke Energy is aggressively investing in new merchant power plants throughout the U.S., expanding its natural gas pipeline infrastructure in the eastern U.S., rapidly increasing its leading position in gas processing and NGL marketing and broadening its trading and marketing expertise across the energy spectrum. Internationally, Duke Energy is currently focusing on integrated electric and gas opportunities in Australia and Latin America and intends to implement its strategies in Europe. Electric Operations continues to strive to maintain low costs and competitive rates for its customers and to provide high quality customer service. Electric Operations is expected to grow moderately, consistent with historical trends. Expansion will primarily result from continued economic growth in its service territory. Natural Gas Transmission provides solid earnings growth and strengthens its competitive position by adhering to a comprehensive strategy of selected acquisitions and developing incremental projects that expand services to meet specific customer needs. In January 2000, Natural Gas Transmission announced that it had entered into a definitive agreement to purchase the East Tennessee Natural Gas Company, a pipeline well positioned to serve the rapidly growing southeastern region of the U.S. The transaction is expected to close in the first quarter of 2000, subject to regulatory approval. For more information on this purchase, see Note 19 to the Consolidated Financial Statements. Duke Energy plans to significantly grow several of its business segments: Field Services, Trading and Marketing, Global Asset Development and Other Energy Services. Restructuring of energy markets in the U.S. and abroad is providing substantial opportunities for these segments to capitalize on their broad capabilities. Expansion opportunities for Field Services include the planned combination of Duke Energy's gas gathering and processing businesses with Phillips Petroleum's Gas Processing and Marketing unit to form a new midstream company. The transaction is expected to close by first quarter 2000, subject to regulatory approval. See Note 19 to the Consolidated Financial Statements for further discussion. Trading and marketing activities at Duke Energy continue to expand as Trading and Marketing provides energy supply, output marketing, risk management and commercial optimization services to all of Duke Energy's merchant structure developments. Trading and Marketing continues to increase its customer base for wholesale energy management services to aggregators, distribution companies, large industrials and other marketers. Global Asset Development expects to continue strong earnings growth through acquisitions, divestitures, construction of greenfield projects and expansion of existing facilities as opportunities are extracted, evaluated and realized through the marketplace. Duke Energy's combination of assets and capabilities that span the energy value chain have contributed to Global Asset Development's successful delivery of natural gas pipeline, power generation, energy marketing and other services as demonstrated both domestically and internationally. To capture the greatest value in North America, Duke Energy North America, through its portfolio management strategy, seeks opportunities to invest in markets which have capacity needs and to divest, in whole or in part, when significant value can be realized. Other Energy Services seeks to grow with various types of services including comprehensive energy efficiencies in food, textile and government facilities. The strong real estate market in the Southeast continues to present substan- tial growth opportunities for both the commercial and residential development of Real Estate Operations. In addition to initiating development of signifi- cant office and industrial facilities in each of its established markets, Real Estate Operations entered a new market niche in 1999 to develop moderately priced residential communities in Jacksonville, Florida. Real Estate Opera- tions also announced plans to enter the multi-family market and to signifi- cantly increase its retail development. 23 RESULTS OF OPERATIONS In 1999, earnings available for common stockholders were $1,487 million, or $4.08 per basic share, net of an after-tax extraordinary gain of $660 million, or $1.82 per basic share. In 1998, earnings available for common stockholders were $1,231 million, or $3.41 per basic share, net of an after-tax extraordinary loss of $8 million, or $0.02 per basic share. The increase in earnings available for common stockholders was primarily due to the 1999 extraordinary gain resulting from the sale of the Midwest Pipelines. This gain, along with the factors described below that affect segment profit and loss, was partially offset by a pre-tax $800 million charge for estimated injury and damages claims (see Note 14 to the Consolidated Financial Statements), higher interest expense and minority interest expense Earnings available for common stockholders increased $329 million in 1998 from 1997 earnings of $902 million, or $2.51 per basic share. The increase in earnings available for common stockholders was due to the factors described below that affect segment profit and loss. These factors were partially offset by increased interest expense and minority interests. Operating income for 1999 was $1,795 million compared to $2,433 million in 1998 and $1,970 million in 1997. Earnings before interest and taxes (EBIT) were $2,043 million, $2,647 million and $2,108 million for 1999, 1998 and 1997, respectively. Management evaluates each business segment based on an internal measure of earnings before interest and taxes, after deducting minority interests. Operating Income and EBIT are affected by the same fluctuations for Duke Energy and each of its business segments. The only notable difference between Operating Income and EBIT is the inclusion in EBIT of certain non- operating activities. See Note 3 to the Consolidated Financial Statements for additional information on business segments. EBIT is summarized in the following table and is discussed by business segment thereafter. EBIT by Business Segment
Years Ended December 31, --------------------------- 1999 1998 1997 -------- -------- -------- In millions Electric Operations............................. $ 856 $ 1,513 $ 1,282 Natural Gas Transmission........................ 627 702 624 Field Services.................................. 144 76 157 Trading and Marketing........................... 70 81 23 Global Asset Development........................ 181 64 4 Other Energy Services........................... (94) 10 18 Real Estate Operations.......................... 176 142 98 Other Operations................................ (9) 2 (120) Minority Interests.............................. 92 57 22 -------- -------- -------- Consolidated EBIT............................... $ 2,043 $ 2,647 $ 2,108 ======== ======== ========
Other Operations primarily include communication services, water services and certain unallocated corporate costs. Included in the amounts discussed hereafter are intercompany transactions that are eliminated in the Consolidated Financial Statements. 24 Electric Operations
Years Ended December 31, -------------------------------- 1999 1998 1997 ---------- ---------- ---------- In millions, except where noted Operating Revenues......................... $ 4,700 $ 4,626 $ 4,401 Operating Expenses......................... 3,966 3,228 3,221 ---------- ---------- ---------- Operating Income........................... 734 1,398 1,180 Other Income, Net of Expenses.............. 122 115 102 ---------- ---------- ---------- EBIT....................................... $ 856 $ 1,513 $ 1,282 ========== ========== ========== Sales -- GWh (a)........................... 81,548 82,011 77,935
-------- (a) Gigawatt-hours. In 1999, EBIT for Electric Operations decreased $657 million compared to 1998, primarily due to an $800 million charge for estimated injury and damages claims. See Note 14 to the Consolidated Financial Statements for additional information related to this charge. Partially offsetting this decrease was a 2.8% increase in the number of customers in the Electric Operations' service territory during 1999, and the absence of 1998 severance and other costs related to closing Electric Operations' merchandising business. In 1998, EBIT for Electric Operations increased $231 million as compared to 1997, primarily due to a 5.2% increase in gigawatt-hour sales. Gigawatt-hour sales increased as a result of warmer spring and summer weather conditions during 1998 and a 2.5% growth in the number of customers in the Electric Operations' service territory. EBIT also increased due to the absence of 1997 severance costs, however this was substantially offset by 1998 costs related to the closing of Electric Operations' merchandising business. Natural Gas Transmission
Years Ended December 31, -------------------------------- 1999 1998 1997 ---------- ---------- ---------- In millions, except where noted Operating Revenues......................... $ 1,206 $ 1,528 $ 1,572 Operating Expenses......................... 615 864 964 ---------- ---------- ---------- Operating Income........................... 591 664 608 Other Income, Net of Expenses.............. 36 38 16 ---------- ---------- ---------- EBIT....................................... $ 627 $ 702 $ 624 ========== ========== ========== Throughput -- TBtu (a)..................... 1,893 2,593 2,862
-------- (a) Trillion British thermal units. EBIT for Natural Gas Transmission decreased $75 million in 1999 compared to 1998. As a result of the sale of the Midwest Pipelines to CMS Energy Corporation (CMS) on March 29, 1999, EBIT for the Midwest Pipelines decreased $156 million compared to 1998's full year of operation. For the Northeast Pipelines, EBIT increased $81 million compared to 1998, primarily as a result of increased earnings from market-expansion projects and joint ventures, higher throughput and lower operating expenses. A gain of $24 million resulting from the sale of Duke Energy's interest in the Alliance Pipeline project and benefits totaling $38 million related to the completion of certain PCB (polychlorinated biphenyl) and soil clean-up programs below estimates also increased EBIT in 1999. Partially offsetting these contributions to EBIT were the non-recurrence of the 1998 favorable resolution of regulatory issues related to gas supply realignment cost issues ("GSR issues") and a 1998 refund from a state property tax ruling. In 1998, EBIT for Natural Gas Transmission increased $78 million compared to 1997. EBIT for the Northeast Pipelines increased $56 million in 1998 over 1997, primarily as a result of the favorable resolution of 25 GSR issues, favorable state property tax rulings and increased market expansion projects. These increases were partially offset by a decrease in throughput primarily as a result of mild winter weather. For the Midwest Pipelines, 1998 EBIT increased $22 million compared to 1997, primarily due to a gain on the sale of the general partner interests in Northern Border Partners, L.P. and non-recurring 1997 litigation expenses. These increases were partially offset by the favorable resolution of certain regulatory matters in 1997, which was reflected as additional revenue and other income. Field Services
Years Ended December 31, --------------------------------- 1999 1998 1997 ---------- ---------- ---------- In millions, except where noted Operating Revenues....................... $ 3,590 $ 2,639 $ 3,055 Operating Expenses....................... 3,444 2,598 2,898 ---------- ---------- ---------- Operating Income......................... 146 41 157 Other Income, Net of Expenses............ (2) 35 -- ---------- ---------- ---------- EBIT..................................... $ 144 $ 76 $ 157 ========== ========== ========== Natural Gas Gathered and Processed/Transported, TBtu/d (a)....... 5.1 3.6 3.4 NGL Production, MBbl/d (b)............... 192.4 110.2 108.2 Natural Gas Marketed, TBtu/d............. 0.5 0.4 0.4 Average Natural Gas Price per MMBtu (c).. $ 2.27 $ 2.11 $ 2.59 Average NGL Price per Gallon (d)......... $ 0.34 $ 0.26 $ 0.35
-------- (a) Trillion British thermal units per day. (b) Thousand barrels per day. (c) Million British thermal units. (d) Does not reflect results of commodity hedges. In 1999, EBIT for Field Services increased $68 million compared to 1998. A significant portion of the increase resulted from the March 31, 1999 acquisition of the natural gas gathering, processing, fractionation and NGL pipeline business from Union Pacific Resources (UPR), (collectively, the "UPR acquisition"). For more information on the UPR acquisition, see Note 2 to the Consolidated Financial Statements. Improved average NGL prices, which were up $0.08 per gallon, or 30.8% from the prior year, also contributed to the increase in EBIT. Partially offsetting these increases were $34 million in 1998 of gains on sales of assets, which were included in other income. EBIT for Field Services decreased $81 million in 1998 from 1997, primarily due to a decrease in average NGL prices of approximately $0.09 per gallon, or 25.7%. The decrease in EBIT was partially offset by $34 million of gains on sales of assets, which were included in other income. On December 16, 1999, Duke Energy announced that it had signed definitive agreements with Phillips Petroleum to form a new midstream gas gathering and processing company. See Note 19 to the Consolidated Financial Statements for further discussion. 26 Trading and Marketing
Years Ended December 31, --------------------------------- 1999 1998 1997 ----------- ---------- ---------- In millions, except where noted Operating Revenues........................ $ 11,793 $ 8,785 $ 7,489 Operating Expenses........................ 11,724 8,665 7,446 ----------- ---------- ---------- Operating Income.......................... 69 120 43 Other Income, Net of Expenses............. 43 2 1 Minority Interest Expense................. 42 41 21 ----------- ---------- ---------- EBIT...................................... $ 70 $ 81 $ 23 =========== ========== ========== Natural Gas Marketed, TBtu/d.............. 10.5 8.0 6.9 Electricity Marketed, GWh................. 109,634 98,991 64,650
In 1999, EBIT for Trading and Marketing decreased $11 million from 1998. The decrease resulted primarily from lower natural gas trading margins, partially offset by higher electricity trading margins as well as margins associated with other trading activities and sales of natural gas interests associated with drilling activities. EBIT for Trading and Marketing increased $58 million in 1998 compared to 1997. The increase resulted primarily from increased trading margins and electricity margins, partially offset by increased expenses due to business growth. Electricity volumes marketed increased primarily as a result of acquiring the remaining 50% ownership interest in the Duke/Louis Dreyfus, L.L.C. (D/LD) joint venture in June 1997. Global Asset Development
Years Ended December 31, -------------------------------- 1999 1998 1997 ---------- ---------- ---------- In millions, except where noted Operating Revenues....................... $ 777 $ 319 $ 123 Operating Expenses....................... 571 261 129 ---------- ---------- ---------- Operating Income......................... 206 58 (6) Other Income, Net of Expenses............ 25 22 11 Minority Interest Expense................ 50 16 1 ---------- ---------- ---------- EBIT..................................... $ 181 $ 64 $ 4 ========== ========== ========== Proportional Megawatt Capacity Owned (a)..................................... 8,773 6,041 3,912 Proportional Maximum Pipeline Capacity (a), MMcf/d (b)......................... 309 124 --
-------- (a) Includes under construction or under contract. (b) Million cubic feet per day. In 1999, EBIT for Global Asset Development increased $117 million compared to 1998. The increase includes $99 million in income from the sale of partial interests in four generating stations in the U.S. as a result of executing its domestic portfolio management strategy. Earnings from new projects in Latin America and Australia also contributed $63 million to the increase. Partially offsetting these increases were higher operating expenses and increased development costs associated with business expansion. EBIT for Global Asset Development increased $60 million in 1998 over 1997. The increase resulted primarily from business expansion and acquisitions, including the July 1998 acquisition of three electric generating stations in California and the December 1997 acquisition of an indirect 32.5% ownership interest in American Ref-Fuel Company. An expansion to the PT Puncakjaya power generation facility in Indonesia also contributed to the increase in EBIT during 1998. The increase in EBIT was partially offset by decreased earnings resulting from lower prices at National Methanol Company, a methanol and MTBE (methyl tertiary butyl ether) business in Saudi Arabia. 27 Other Energy Services
Years Ended December 31, --------------------------- 1999 1998 1997 --------- ------- -------- In millions Operating Revenues............................... $ 989 $ 521 $ 376 Operating Expenses............................... 1,083 511 353 --------- ------- ------- Operating Income................................. (94) 10 23 Other Income, Net of Expenses.................... -- -- (5) --------- ------- ------- EBIT............................................. $ (94) $ 10 $ 18 ========= ======= =======
In 1999, EBIT for Other Energy Services decreased $104 million compared to 1998. The decrease was primarily due to charges of $38 million and $35 million at Duke Engineering & Services and DukeSolutions, respectively. These charges, which include costs associated with repositioning the companies to focus on growth markets, included expenses related to severance, office closings and write-offs of uncollectable accounts. Increased development activity at DukeSolutions and decreased earnings from projects of Duke Engineering & Services also contributed to lower EBIT. EBIT for Other Energy Services decreased $8 million in 1998 compared to 1997, primarily due to reduced earnings of Duke Engineering & Services. Real Estate Operations
Years Ended December 31, -------------------------- 1999 1998 1997 -------- -------- -------- In millions Operating Revenues................................ $ 233 $ 181 $ 124 Operating Expenses................................ 57 39 26 -------- -------- -------- EBIT.............................................. $ 176 $ 142 $ 98 ======== ======== ========
In 1999, EBIT for Real Estate Operations increased $34 million compared to 1998. The increase was primarily due to increased residential developed lot sales, land sales and commercial project sales, partially offset by decreased lake lot sales. EBIT for Real Estate Operations increased $44 million in 1998 over 1997, primarily as a result of increased commercial project sales, lake lot sales and land sales, including a gain on the sale of land in the Jocassee Gorges region of South Carolina. Other Operations EBIT for Other Operations decreased $11 million in 1999 compared to 1998, primarily as a result of the resolution of certain contingent items during 1998. EBIT for Other Operations increased $122 million in 1998 compared to 1997, primarily as a result of the absence of $71 million of non-recurring 1997 merger-related costs and the favorable resolution of certain contingent items in 1998, partially offset by a 1997 gain on the sale of Duke Energy's ownership interest in the Midland Cogeneration Venture. Other Impacts on Earnings Available for Common Stockholders Interest expense increased $87 million in 1999 compared to 1998, and $42 million in 1998 compared to 1997 due to higher average debt balances outstanding, resulting from acquisitions and expansion. Minority interests increased $46 million in 1999 compared to 1998, and $73 million in 1998 compared to 1997. The increases were due primarily to regular distributions paid on new issuances of Duke Energy's trust preferred securities. For more information on issuances of trust preferred securities, see Note 12 to the Consolidated Financial Statements. Excluding these dividends, minority interests related primarily to Global Asset Development's 1999 investments and Trading and Marketing's joint venture with Mobil Corporation. For more information regarding acquisitions and new projects, see Notes 2 and 8 to the Consolidated Financial Statements. 28 Duke Energy's effective income tax rate was approximately 35%, 38% and 40% for 1999, 1998 and 1997, respectively. The decrease in 1999 from 1998 was primarily due to the favorable resolution of several income tax issues and the utilization of certain capital loss carryforwards due to the sale of the Midwest Pipelines. Favorable resolution of income tax issues also resulted in a decline in the effective tax rate in 1998 from 1997. Duke Energy expects its ongoing effective tax rate to approximate 38%. The sale of the Midwest Pipelines to CMS closed on March 29, 1999 and resulted in a $660 million extraordinary gain, net of income tax of $404 million. For further discussion on the sale, see Note 2 to the Consolidated Financial Statements. In January 1998, TEPPCO Partners, L.P., in which Duke Energy has a 21.1% ownership interest, redeemed certain First Mortgage Notes which resulted in Duke Energy recording a non-cash extraordinary loss of $8 million, net of income tax of $5 million, related to its share of costs of the early retirement of debt. In December 1997, Duke Energy redeemed four issues of preferred stock and commenced a tender offer to purchase a portion of six additional issues of preferred stock. Premiums related to these redemptions were included in the Consolidated Statements of Income and Comprehensive Income in 1997 as Dividends and Premiums on Redemptions of Preferred and Preference Stock. LIQUIDITY AND CAPITAL RESOURCES Operating Cash Flows Net cash provided by operations was $2,684 million in 1999, $2,331 million in 1998 and $2,140 million in 1997. In each of these years, the increase in cash was primarily due to net income resulting from business expansion. On August 29, 1998, the FERC approved a settlement from Texas Eastern Transmission Corporation (TETCO), a subsidiary of Duke Energy, which accelerates recovery of natural gas transition costs. The order was effective October 1, 1998 and includes a rate moratorium until 2004. Net cash flows from operations are not expected to change for the first two years after implementation; however, after the natural gas transition costs are fully recovered, cash flows from operations are expected to decrease on an annual basis. For more information concerning the settlement, see Note 4 to the Consolidated Financial Statements. In late 1999, Duke Energy established an accrual for estimated injury and damages claims. Duke Energy expects to fund approximately $350 million, which is comprised of an insurance policy premium and estimated claim activity over the next year, primarily through new debt issuances. Management believes that the long-term cash requirements of the projected liability will not have a material effect on Duke Energy's liquidity or cash flows. See Note 14 to the Consolidated Financial Statements for further discussion. Investing Cash Flows Capital and investment expenditures were approximately $5.9 billion in 1999 compared to approximately $2.5 billion in 1998. The increase primarily resulted from business expansion for the Field Services and Global Asset Development segments. Business expansion for Field Services included the $1.35 billion acquisition of the natural gas gathering, processing, fractionation and NGL pipeline business from UPR along with its natural gas and NGL marketing activities. International business expansion for Global Asset Development included $1.7 billion for multiple acquisitions in Latin America, western Australia and New Zealand. In 1999, Global Asset Development also began construction of multiple power generation plants in North America and continued capital expenditures on projects initiated prior to 1999. Expenditures related to these activities were partially funded by $1.9 billion in cash proceeds from the sale of Panhandle Eastern Pipe Line Company (PEPL), Trunkline Gas Company (Trunkline) and additional storage related to those systems, which substantially comprised the Midwest Pipelines, along with Trunkline LNG Company. For additional information concerning acquisitions and dispositions, see Note 2 to the Consolidated Financial Statements. 29 Capital and investment expenditures in 1998 increased $472 million from $2.0 billion in 1997 primarily due to business expansion by Global Asset Development. This included the $501 million purchase of three electric generating stations in California and the completion of the first phase of Bridgeport Energy, a power generation plant in Connecticut. Business expansion for Natural Gas Transmission and Field Services also contributed to the increase in capital and investment expenditures. The increase was partially offset by decreased expenditures for Electric Operations, primarily as a result of steam generator replacements at certain of its nuclear plants in 1997, and by the acquisition of the remaining 50% ownership of the D/LD joint venture in June 1997. Projected 2000 capital and investment expenditures for Electric Operations, including allowance for funds used during construction, are approximately $900 million. These projections include expenditures for existing plants, including refurbishment and upgrades related to the Oconee Nuclear Station's application for a 20-year renewal of its operating license, which is expected to receive approval from the Nuclear Regulatory Commission in 2000. Projected 2000 capital and investment expenditures for Natural Gas Transmission, including allowance for funds used during construction, are approximately $600 million. These projections include expansion of the Maritimes & Northeast Pipeline, which delivers natural gas to markets in the Canadian Maritimes provinces and the northeastern U.S. from a supply basin offshore of Nova Scotia, and the planned $386 million purchase of the East Tennessee Natural Gas Company, which is expected to close in the first quarter of 2000 and is contingent upon regulatory approval. For further discussion on this purchase, see Note 19 to the Consolidated Financial Statements. Duke Energy plans to continue to significantly grow several of its business segments: Field Services, Global Asset Development, Trading and Marketing and Other Energy Services. Expansion plans for Field Services include the combination of Duke Energy's gas gathering and processing businesses with Phillips Petroleum's Gas Processing and Marketing unit to form a new midstream company. The transaction is expected to close by first quarter 2000 and is subject to regulatory approval. See Note 19 to the Consolidated Financial Statements for additional information. Projected 2000 capital and investment expenditures for Global Asset Development are approximately $3.6 billion. Expansion opportunities for Global Asset Development's domestic division, Duke Energy North America, include the continuation of various greenfield projects across the U.S. Expansion plans for Global Asset Development's international division, Duke Energy International, include completing the purchase of Dominion Resources, Inc.'s portfolio of hydroelectric, natural gas and diesel power generation businesses in Argentina and Bolivia (see Note 2 to the Consolidated Financial Statements) and the January 2000 completion of the tender offer for additional ownership interests in Companhia de Geracao de Energia Eletrica Paranapanema (Paranapanema) (see Note 19 to the Consolidated Financial Statements). Duke Energy International will also continue to focus on its regional target areas in Australia and Latin America for further expansion opportunities and intends to implement its strategies in Europe. Projected 2000 capital and investment expenditures for Trading and Marketing are approximately $200 million. This includes expenditures related to Trading and Marketing's new subsidiary, Duke Energy Hydrocarbons, which was formed in the second quarter of 1999 to invest capital in limited hydrocarbon exploration and production prospects through non-operating working interests. Duke Energy's intent is to produce natural gas to partially offset the short gas position of Duke Energy's power generation assets and to increase production volumes that will be beneficial to Field Services, Trading and Marketing, and Natural Gas Transmission. Projected 2000 capital and investment expenditures for Other Energy Services, Real Estate Operations and Other Operations are approximately $200 million, $400 million and $250 million, respectively. All projected capital and investment expenditures for the above segments are subject to periodic review and revision and may vary significantly depending on a number of factors including, but not limited to, industry restructuring, regulatory constraints, acquisition opportunities, market volatility and economic trends. 30 Financing Cash Flows Duke Energy's consolidated capital structure at December 31, 1999, including short-term debt, was 44% debt, 6% minority interests, 7% trust preferred securities, 1% preferred stock and 42% common equity. Fixed charges coverage, calculated using the Securities and Exchange Commission method, was 2.9 times, 4.7 times and 4.1 times for 1999, 1998 and 1997, respectively. Duke Energy's business expansion opportunities, along with dividends, debt repayments and operating and investing requirements, are expected to be funded by cash from operations, external financing, common stock issuances and the proceeds from certain asset sales. During 1999, Duke Energy and its subsidiary, Duke Capital Corporation (Duke Capital), issued a total of $1.9 billion of Senior Notes. The proceeds were used for general corporate purposes, including reducing commercial paper indebtedness incurred in connection with acquisitions of electric power generating assets in Latin America. Global Asset Development, through its Australian subsidiary, borrowed approximately $450 million under new financing arrangements, including a combined commercial paper and medium-term note program, bank facilities and non-recourse financing for certain western Australian assets. These new Global Asset Development financings are denominated in either Australian or New Zealand dollars. Issuances from the combined commercial paper and medium-term note program and the bank facilities were used to refund bridge financing of assets obtained during 1998 and 1999 and to fund on-going construction expenditures for the Eastern Gas Pipeline and future projects in Australia. Global Asset Development also assumed approximately $430 million of non-recourse debt, denominated in Brazilian reais, in relation to the acquisition of Paranapanema (see Note 2 to the Consolidated Financial Statements) and borrowed $380 million under a new bank facility to refinance the California generating assets. For additional information regarding debt, see Note 10 to the Consolidated Financial Statements. Also during the year, Duke Energy's and Duke Capital's business trusts, which are treated as wholly owned subsidiaries for financial reporting purposes, issued a total of $500 million of trust preferred securities. See Note 12 to the Consolidated Financial Statements for additional information on trust preferred securities. Under its commercial paper facilities, Duke Energy had the ability to borrow up to $2.8 billion at both December 31, 1999 and 1998. The commercial paper facilities consisted of $1.25 billion for Duke Energy and $1.55 billion for Duke Capital. At December 31, 1999, Global Asset Development also had available an approximately $500 million combined commercial paper and medium-term note program. Duke Energy's various bank credit facilities totaled approximately $3.7 billion (including approximately $320 million related to foreign facilities) at December 31, 1999 and $2.9 billion at December 31, 1998. At December 31, 1999, approximately $1.8 billion was outstanding under the commercial paper facilities and approximately $460 million of borrowings were outstanding under the bank credit facilities. Certain of the credit facilities support the issuance of commercial paper, therefore, the issuance of commercial paper reduces the amount available under these credit facilities (see Note 10 to the Consolidated Financial Statements). As of December 31, 1999, Duke Energy and its subsidiaries had the ability to issue up to $2.15 billion aggregate principal amount of debt and other securities under shelf registrations filed with the Securities and Exchange Commission. Effective January 7, 2000, the amount available was increased by $1.5 billion. Such securities may be issued as First and Refunding Mortgage Bonds, Senior Notes, Subordinated Notes or Preferred Securities. On December 16, 1999, Duke Energy announced that it had signed definitive agreements to combine Duke Energy's gas gathering and processing businesses with Phillips Petroleum's Gas Processing and Marketing unit to form a new midstream company. The new company will seek to arrange approximately $2.6 billion of debt financing and, upon closing of the transaction, will make a one-time cash distribution of $1.2 billion to both Duke Energy and Phillips Petroleum. The new company would then offer approximately 20% of its equity to the public in 2000 to reduce the debt resulting from the transaction. Such an offering is conditional upon completion of the transaction and favorable market conditions. For additional information, see Note 19 to the Consolidated Financial Statements. 31 To maintain financial flexibility and reduce the amount of financing needed for growth opportunities, Duke Energy's Board of Directors adopted a dividend policy in June 1998 that targets 50% of earnings paid out in dividends on common stock. The Board of Directors intends to maintain dividends at the current quarterly rate of $0.55 per share until the target payout ratio is reached at which time it intends to re-evaluate its dividend policy. In April 1999, Duke Energy's shareholders approved an amendment to the Articles of Incorporation to increase the authorized common stock from 500 million to 1 billion shares. This increase in authorized stock will provide Duke Energy with added flexibility in effecting financings, stock splits or stock dividends, stock plans and other transactions and arrangements involving the use of common stock. Duke Energy InvestorChoice Plan, a stock dividend reinvestment plan, allows investors to reinvest dividends in new issuances of common stock and to purchase common stock directly from Duke Energy. Issuances under this plan were not material in 1999, 1998 or 1997. Duke Energy used authorized but unissued shares of its common stock to meet 1999 and 1998 employee benefit plan contribution requirements. This practice is expected to continue in 2000. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Risk Policies Duke Energy is exposed to market risks associated with interest rates, commodity prices, equity prices and foreign exchange rates. Comprehensive risk management policies have been established by the Corporate Risk Management Committee (CRMC) to monitor and control these market risks. The CRMC is chaired by the Chief Financial Officer and is comprised of senior executives. The CRMC has responsibility for oversight of interest rate risk, foreign currency risk, credit risk and energy risk management, including approval of energy financial exposure limits. Interest Rate Risk Duke Energy is exposed to risk resulting from changes in interest rates as a result of its issuance of variable-rate debt, fixed-rate debt and trust preferred securities, commercial paper and auction market preferred stock, as well as interest rate swaps and interest rate lock agreements. Duke Energy manages its interest rate exposure by limiting its variable-rate and fixed-rate exposures to certain percentages of total capitalization, as set by policy, and by monitoring the effects of market changes in interest rates. Duke Energy may also enter into financial derivative instruments including, but not limited to, swaps, options and treasury rate agreements to manage and mitigate interest rate risk exposure. See Notes 1, 7, 10, 12 and 13 to the Consolidated Financial Statements for additional information. Based on a sensitivity analysis as of December 31, 1999, it was estimated that if market interest rates average 1% higher (lower) in 2000 than in 1999, earnings before income taxes would decrease (increase) by approximately $24 million. Comparatively, based on a sensitivity analysis as of December 31, 1998, had interest rates averaged 1% higher (lower) in 1999 than in 1998, it was estimated that earnings before income taxes would have decreased (increased) by approximately $23 million. These amounts were determined by considering the impact of the hypothetical interest rates on the variable-rate securities outstanding as of December 31, 1999 and 1998. In the event of a significant change in interest rates, management would likely take actions to manage its exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no changes in Duke Energy's financial structure. Commodity Price Risk Duke Energy, substantially through its subsidiaries, is exposed to the impact of market fluctuations in the price of natural gas, electricity and natural gas liquid products marketed and purchased. Duke Energy employs 32 established policies and procedures to manage its risks associated with these market fluctuations using various commodity derivatives, including forward contracts, futures, swaps and options. Market risks associated with commodity derivatives held for purposes other than trading were not material at December 31, 1999 and 1998. See Notes 1 and 7 to the Consolidated Financial Statements for additional information. The risk in the commodity trading portfolio is measured on a daily basis utilizing a Value-at-Risk model to determine the maximum potential one-day favorable or unfavorable Daily Earnings at Risk (DER). The DER is monitored daily in comparison to established thresholds. Other measures are also utilized to monitor the risk in the commodity trading portfolio on a monthly and annual basis. The DER computations are based on a historical simulation, which utilizes price movements over a specified period to simulate forward price curves in the energy markets to estimate the favorable or unfavorable impact of one-day's price movement on the existing portfolio. The historical simulation emphasizes the most recent market activity, which is considered the most relevant predictor of immediate future market movements for natural gas, electricity and petroleum products. The DER computations utilize several key assumptions, including a 95% confidence level for the resultant price movement and the holding period specified for the calculation. Duke Energy's DER calculation includes commodity derivative instruments held for trading purposes. The estimated potential one-day favorable or unfavorable impact on earnings before income taxes related to commodity derivatives held for trading purposes at December 31, 1999 and 1998 was approximately $10 million. The average estimated potential one-day favorable or unfavorable impact on earnings before income taxes related to commodity derivatives held for trading purposes was approximately $11 million and $5 million during 1999 and 1998, respectively. The increase in average 1999 amounts compared to 1998 is a result of an increase in the authorized energy financial exposure limit in 1998, which was approved by the CRMC. Changes in markets inconsistent with historical trends could cause actual results to exceed predicted limits. Subsidiaries of Duke Energy are also exposed to market fluctuations in the prices of NGLs related to their ongoing gathering and processing operating activities. Duke Energy closely monitors the risks associated with NGL price changes on its future operations, and where appropriate, uses crude oil and natural gas commodity instruments to hedge NGL prices. Based on a sensitivity analysis as of December 31, 1999, it was estimated that if NGL prices average one cent per gallon less in 2000, earnings before income taxes would decrease by approximately $6 million, after considering the effect of Duke Energy's commodity hedge positions. Comparatively, based on sensitivity analysis as of December 31, 1998, if NGL prices would have averaged one cent per gallon less in 1999, it was estimated that earnings before income taxes would have decreased by approximately $8 million. Equity Price Risk Duke Energy maintains trust funds, as required by the Nuclear Regulatory Commission, to fund certain costs of nuclear decommissioning. (See Note 11 to the Consolidated Financial Statements.) As of December 31, 1999 and 1998, these funds were invested primarily in domestic and international equity securities, fixed-rate, fixed-income securities and cash and cash equivalents. Management believes that its exposure to fluctuations in equity prices or interest rates will not materially affect consolidated results of operations. See further discussion in the Current Issues, Nuclear Decommissioning Costs section of Management's Discussion and Analysis. Foreign Operations Risk Duke Energy is exposed to foreign currency risk, sovereign risk and other foreign operations risk that arise from investments in international affiliates and businesses owned and operated in foreign countries. To mitigate risks associated with foreign currency fluctuations, when possible, contracts are denominated in or indexed to the U.S. dollar or may be hedged through debt denominated in the foreign currency. Duke Energy also uses foreign currency derivatives, where possible, to manage its risk related to foreign currency fluctuations. To monitor its currency exchange rate risks, Duke Energy uses sensitivity analysis, which measures the impact of a devaluation of the foreign currencies to which it has exposure. 33 At December 31, 1999, Duke Energy's primary foreign currency exchange rate exposures were the Brazilian real, the Australian dollar and the Canadian dollar. Exposures to other foreign currencies were not material. Based on the sensitivity analysis at December 31, 1999, a 10% devaluation in the currency exchange rates in Brazil would reduce Duke Energy's financial position by approximately $65 million and would not significantly affect Duke Energy's consolidated results of operations or cash flows over the next twelve months. Based on the sensitivity analysis at December 31, 1999, a 10% devaluation in other foreign currencies were insignificant to Duke Energy's consolidated results of operations, financial position or cash flows. Exposures to foreign currency risks were not material to consolidated results of operations, financial position or cash flows during 1998. CURRENT ISSUES Electric Competition. Wholesale Competition. The Energy Policy Act of 1992 (EPACT) and the FERC's subsequent rulemaking activities have established the regulatory framework to open the wholesale energy market to competition. EPACT amended provisions of the Public Utility Holding Company Act of 1935 and the Federal Power Act to remove certain barriers to a competitive wholesale market. EPACT permits utilities to participate in the development of independent electric generating plants for sales to wholesale customers, and also permits the FERC to order transmission access for third parties to transmission facilities owned by another entity. It does not, however, permit the FERC to issue an order requiring transmission access to retail customers. The FERC, responsible in large measure for implementation of EPACT, has moved vigorously to implement its mandate, interpreting the statute broadly and issuing orders for third-party transmission service and a number of rules of general applicability, including Orders 888 and 889. Open-access transmission for wholesale customers as defined by the FERC's final rules provides energy suppliers, including Duke Energy, with opportunities to sell and deliver capacity and energy at market-based prices. Duke Energy and several of its non-regulated subsidiaries have been granted authority by the FERC to act as power marketers. Electric Operations obtained from the FERC open-access rule the rights to sell capacity and energy at market-based rates from its own assets. Open access provides another supply option through which Electric Operations can purchase at attractive rates a portion of capacity and energy requirements resulting in lower overall costs to customers. Open access also provides Electric Operations' existing wholesale customers with competitive opportunities to seek other suppliers for their capacity and energy requirements. On December 20, 1999, the FERC issued its Order No. 2000 regarding Regional Transmission Organizations (RTOs). In its order, the FERC stressed the voluntary nature of RTO participation by utilities and sets minimum characteristics and functions that must be met by utilities that participate in an RTO. The order provides for an open, flexible structure for RTOs to meet the needs of the market, and provides for the possibility of incentive ratemaking and other benefits for utilities that participate in an RTO. The characteristics for acceptable RTOs include independence from market participants, operational control over a region of sufficient scope to support efficient and nondiscriminatory markets, and exclusive authority to maintain short-term reliability. The order requires each utility subject to the jurisdiction of the FERC and not already in a FERC-approved RTO to make a filing by October 15, 2000, that either proposes participation in an RTO that will be in operation no later than December 15, 2001, or provides a status report on the utility's progress towards participation in an RTO. Because Order No. 2000 has just been issued, and may be revised in certain respects, management cannot estimate its effect on future consolidated results of operations or financial position. Retail Competition. Currently, Electric Operations operates as a vertically integrated, investor-owned utility with exclusive rights to supply electricity in a franchised service territory--a 20,000-square-mile service territory in the Carolinas. In its retail business, the NCUC and the PSCSC regulate Electric Operations' service and rates. 34 Electric industry restructuring is being addressed in all 50 states and in the District of Columbia. These restructurings will likely impact all entities owning electric generating assets. The NCUC and the PSCSC are studying the merits of restructuring the electric utility industry in the Carolinas. During 1999, three electric utility restructuring bills were filed in South Carolina's House of Representatives. All three bills would introduce competition while allowing utilities to recover stranded costs, and have transition and phase-in periods ranging from five to six years. A task force formed by the South Carolina Senate is also examining issues related to deregulation of the state's electric utility business. This task force will prepare a report for review, discussion and possible legislative action by the state's Senate Judiciary Committee and General Assembly as a whole. In May 1997, North Carolina passed a bill that established a study commission to examine whether competition should be implemented in the state. Members of this commission include legislators, customers, utilities and a member of an environmental group. The study commission expects to issue its report to the General Assembly in 2000. One of the significant issues the study commission must address is the approximately $6 billion of debt issued by the two North Carolina municipal agencies (North Carolina Municipal Power Agency Number 1 and the North Carolina Eastern Municipal Agency). This debt is related to their joint ownership of generation assets with Duke Energy and Carolina Power & Light (CP&L). The municipal power agencies' member municipalities currently have electric rates higher than either Duke Energy or CP&L and are facing significant rate increases in the future to service the debt. As a result, the power agencies' debt and electric rates are economic development issues for the 51 power agency municipalities and, by extension, for the state as a whole. On October 26 and 27, 1999, at the request of the study commission, four proposals were submitted to resolve the municipal debt issue, one of which was a joint Duke Energy-CP&L proposal. The study commission expects to include a recommendation to resolve the municipal debt issue in its report to the General Assembly in 2000. More than a dozen bills on electric restructuring have been introduced in the last session of Congress. On October 27, 1999 the U.S. House Commerce Subcommittee on Energy and Power voted to move H.R. 2944, "The Electricity Competition and Reliability Act," to the full Commerce Committee. The primary restructuring issues addressed include repeal of major provisions of the Public Utility Holding Company Act and the Public Utility Regulatory Policies Act, reliability, transmission, nuclear decommissioning and state authority. Currently, the electric utility industry is predominantly regulated on a basis designed to recover the cost of providing electric power to customers. If cost-based regulation were to be discontinued in the industry for any reason, including competitive pressure on the cost-based prices of electricity, profits could be reduced and electric utilities might be required to reduce their asset balances to reflect a market basis less than cost. Discontinuance of cost-based regulation would also require affected utilities to write off their associated regulatory assets. Duke Energy's regulatory assets are included in the Consolidated Balance Sheets. The portion of these regulatory assets related to Electric Operations is approximately $1.4 billion, including primarily purchased capacity costs, debt expense and deferred taxes related to regulatory assets. Duke Energy is recovering substantially all of these regulatory assets through its current wholesale and retail electric rates and would attempt to continue to recover these assets during a transition to competition. In addition, Duke Energy would seek to recover the costs of its electric generating facilities in excess of the market price of power at the time of transition. Duke Energy supports a properly managed and orderly transition to competitive generation and retail services in the electric industry. However, transforming the current regulated industry into efficient, competitive generation and retail electric markets is a complex undertaking, which will require a carefully considered transition to a restructured electric industry. The key to effective retail competition is fairness among customers, service providers and investors. Duke Energy intends to continue to work with customers, legislators and 35 regulators to address all the important issues. Management currently cannot predict the impact, if any, of these competitive forces on future consolidated results of operations or financial position. Natural Gas Competition. Wholesale Competition. On July 29, 1998, the FERC issued a Notice of Proposed Rulemaking (NOPR) on short-term natural gas transportation services, which proposed an integrated package of revisions to its regulations governing interstate natural gas pipelines. "Short term" has been defined in the NOPR as all transactions of less than one year. Under the proposed approach, cost-based regulation would be eliminated for short-term transportation and replaced by regulatory policies intended to maximize competition in the short-term transportation market, mitigate the ability of companies to exercise residual monopoly power and provide opportunities for greater flexibility in providing pipeline services. The proposed changes include initiatives to revise pipeline scheduling procedures, receipt and delivery point policies and penalty policies, and require pipelines to auction short-term capacity. Other proposed changes would improve the FERC's reporting requirements, permit pipelines to negotiate rates and terms of services, and revise certain rate and certificate policies that affect competition. In conjunction with the NOPR, the FERC also issued a Notice of Inquiry (NOI) on its pricing policies in the existing long-term market and pricing policies for new capacity. The FERC seeks comments on whether its policies are biased toward either short-term or long-term service, provide accurate price signals and the right incentives for pipelines to provide optimal transportation services and construct facilities that meet future demand and do not result in over building and excess capacity. Comments on the NOPR and NOI were due in April 1999. On September 15, 1999, the FERC issued a new policy statement on certifying new interstate capacity in response to comments filed on the certificate issues raised in the NOPR. Because the ultimate resolution of these issues is unknown, management cannot estimate the effects of these matters on future consolidated results of operations or financial position. Retail Competition. Changes in regulation to allow retail competition could affect Duke Energy's natural gas transportation contracts with local gas distribution companies. Natural gas retail deregulation is in the very early stages of development and management cannot estimate the effects of this matter on future consolidated results of operations or financial position. Nuclear Decommissioning Costs. Duke Energy's estimated site-specific nuclear decommissioning costs total approximately $1.9 billion stated in 1999 dollars based on decommissioning studies completed in 1999. This estimate includes the cost of decommissioning plant components not subject to radioactive contamination. Duke Energy contributes to an external decommissioning trust fund and maintains an internal reserve to fund these costs. The balance of the external funds as of December 31, 1999 and 1998 was $703 million and $580 million, respectively. The balance of the internal reserve as of December 31, 1999 and 1998 was $223 million and $217 million, respectively, and is reflected in the Consolidated Balance Sheets as Accumulated Depreciation and Amortization. Both the NCUC and the PSCSC have granted Duke Energy recovery of estimated decommissioning costs through retail rates over the expected remaining service periods of its nuclear plants. Management believes that funding of the decommissioning costs will not have a material adverse effect on consolidated results of operations or financial position. See Note 11 to the Consolidated Financial Statements for additional information. As of December 31, 1999 and 1998, the external decommissioning trust fund was invested primarily in domestic and international equity securities, fixed-rate, fixed-income securities and cash and cash equivalents. Maintaining a portfolio that includes long-term equity investments maximizes the returns to be utilized to fund nuclear decommissioning, which in the long-term will better correlate to inflationary increases in decommissioning costs. However, the equity securities included in Duke Energy's portfolio are exposed to price 36 fluctuations in equity markets, and the fixed-rate, fixed-income securities are exposed to changes in interest rates. Duke Energy actively monitors its portfolio by benchmarking the performance of its investments against certain indexes and by maintaining, and periodically reviewing, established target allocation percentages of the assets in its trusts. Because the accounting for nuclear decommissioning recognizes that costs are recovered through the Electric Operations segment's rates, fluctuations in equity prices or interest rates do not affect consolidated results of operations. Environmental. Duke Energy is subject to international, federal, state and local regulations regarding air and water quality, hazardous and solid waste disposal and other environmental matters. Manufactured Gas Plants and Superfund Sites. Duke Energy was an operator of manufactured gas plants until the early 1950s and has entered into a cooperative effort with the State of North Carolina and other owners of certain former manufactured gas plant sites to investigate and, where necessary, remediate these contaminated sites. The State of South Carolina has expressed interest in entering into a similar arrangement. Duke Energy is considered by regulators to be a potentially responsible party and may be subject to future liability at seven federal Superfund sites and two state Superfund sites. While the cost of remediation of the remaining sites may be substantial, Duke Energy will share in any liability associated with remediation of contamination at such sites with other potentially responsible parties. Management believes that resolution of these matters will not have a material adverse effect on consolidated results of operations or financial position. PCB (Polychlorinated Biphenyl) Assessment and Clean-up Programs. In June 1999, the Environmental Protection Agency (EPA) certified that TETCO, a wholly owned subsidiary of Duke Energy, had completed clean up of PCB contaminated sites under conditions stipulated by a U.S. Consent Decree in 1989. TETCO is required to continue groundwater monitoring on a number of sites for at least the next two years. The estimated cost of such monitoring is not material. Under terms of the agreement with CMS discussed in Note 2 to the Consolidated Financial Statements, Duke Energy is obligated to complete clean-up of previously identified contamination at certain agreed-upon sites on the PEPL and Trunkline systems. These clean-up programs are expected to continue until 2001. The contamination resulted from the past use of lubricants containing PCBs and the prior use of wastewater collection facilities and other on-site disposal areas. Soil and sediment testing, to date, has detected no significant off-site contamination. Duke Energy has communicated with the EPA and appropriate state regulatory agencies on these matters. At December 31, 1999 and 1998, remaining estimated clean-up costs on the TETCO, PEPL and Trunkline systems were accrued and included in the Consolidated Balance Sheets as Other Current Liabilities and Environmental Clean-up Liabilities. These cost estimates represent gross clean-up costs expected to be incurred, have not been discounted or reduced by customer recoveries and generally do not include fines, penalties or third-party claims. Costs expected to be recovered from customers have been deferred and are included in the Consolidated Balance Sheets as Environmental Clean-up Costs. The federal and state clean-up programs are not expected to interrupt or diminish Duke Energy's ability to deliver natural gas to customers. Based on Duke Energy's experience to date and costs incurred for clean-up operations, management believes the resolution of matters relating to the environmental issues discussed above will not have a material adverse effect on consolidated results of operations or financial position. Air Quality Control. The Clean Air Act Amendments of 1990 require a two-phase reduction by electric utilities in aggregate annual emissions of sulfur dioxide and nitrogen oxide by 2000. Duke Energy currently meets all requirements of Phase I. Duke Energy supports the national objective of protecting air quality in the most cost-effective manner, and has already reduced emissions by operating plants efficiently, using nuclear and hydroelectric generation and implementing various compliance strategies. To meet Phase II requirements by 37 2000, Duke Energy's current strategy includes using low-sulfur coal, purchasing sulfur dioxide emission allowances and installing low-nitrogen oxide burners and emission monitoring equipment. Construction activities needed to comply with Phase II requirements will be completed in the spring of 2000, allowing compliance with year 2000 Phase II requirements. Additional annual operating expenses of approximately $25 million for low-sulfur coal premiums, emission allowance purchases and other compliance activities will occur after 2000. This strategy is contingent upon developments in future markets for emission allowances, low-sulfur coal, future regulatory and legislative actions and advances in clean air technologies. In October 1998, the EPA issued a final ruling on regional ozone control which requires revised State Implementation Plans for 22 eastern states and the District of Columbia. This EPA ruling is being challenged in court by var- ious states, industry and other interests, including the states of North Caro- lina and South Carolina and Duke Energy. In May 1999, the court ordered that no state need submit a plan "pending further order of the court." The EPA has undertaken other ozone-related actions having virtually identical goals. These actions have likewise been challenged by the same or similar parties. The res- olution of the October 1998 action is expected to resolve these other ozone- related actions as well. The North Carolina Environmental Management Commis- sion is considering several competing proposals to reduce utility emissions of nitrogen oxide. A proposed rule is anticipated in March 2000 with a final rule in September 2000. Depending on the resolution of these matters, costs to Duke Energy may range from approximately $100 million to $600 million for addi- tional capital improvements. In October 1999, the EPA sent Duke Energy a request seeking information on Duke Power's repair and maintenance of its coal-fired plants since 1978. This is part of the EPA's New Source Reviews (NSR) enforcement initiative, in which the EPA claims that utilities and others have committed widespread violations of the Clean Air Act permitting requirements for the past quarter century. In November 1999, the EPA filed suit against seven utilities and issued an administrative order to Tennessee Valley Authority alleging numerous NSR permitting violations. The EPA's allegations run counter to previous EPA guidance regarding the applicability of the NSR permitting requirements. Duke Power, along with several other utilities, has routinely undertaken the type of repair, replacement, and maintenance projects that the EPA now claims are illegal. A suit has not been instituted against Duke Energy, and while it is too early to predict any consequences, Duke Energy believes that all of its electric generation units are properly permitted and have been properly maintained. Because this matter is in its most preliminary stage with respect to Duke Energy, management cannot estimate the effects of these matters on future consolidated results of operations or financial position. In December 1997, the United Nations held negotiations in Kyoto, Japan to determine how to minimize global warming caused by, among other things, carbon dioxide emissions from fossil-fired generating facilities and methane from natural gas operations. Further negotiations in November 1998 resulted in a work plan to complete the operational details of the Kyoto agreement by late 2000. If this initiative is adopted in its current form, it could have far reaching implications to Duke Energy and the entire energy industry. Because this matter is in the early stages of discussion, management cannot estimate the effects on future consolidated results of operations or financial position. Litigation and Contingencies. For information concerning litigation and other commitments and contingencies, see Note 14 to the Consolidated Financial Statements. Year 2000 Readiness Program. Duke Energy did not experience any disruption to its operations resulting from the transition to the year 2000. Duke Energy completed its year 2000 readiness program at all of its business units in November 1999. Systems will continue to be monitored throughout the year, with special attention given to the leap year transition. The total cost of the program, including internal labor as well as incremental costs such as consulting and contract costs, was approximately $58 million. These costs exclude replacement systems that, in addition to being Year 2000 ready, provided significantly enhanced capabilities which benefit operations in future periods. New Accounting Standard. In September 1998, Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," was issued. Duke Energy is required to 38 adopt this standard by January 1, 2001. SFAS No. 133 requires that all derivatives be recognized as either assets or liabilities and measured at fair value, and it defines the accounting for changes in the fair value of the derivatives depending on the intended use of the derivative. Duke Energy is currently reviewing the expected impact of SFAS No. 133 on consolidated results of operations and financial position. Subsequent Events. On December 16, 1999, Duke Energy announced that it had signed definitive agreements to combine Duke Energy's gas gathering and processing businesses with Phillips Petroleum's Gas Processing and Marketing unit to form a new midstream company. Under the terms of the agreements, the new company will seek to arrange approximately $2.6 billion of debt financing and, upon closing of the transaction, will make a one-time cash distribution of $1.2 billion to both Duke Energy and Phillips Petroleum. At closing, Duke Energy will own about 70% of the new company and Phillips Petroleum will own about 30%. The new company would then offer approximately 20% of its equity to the public in 2000 to reduce the debt resulting from the transaction. Such an offering is conditional upon completion of the transaction and favorable market conditions. On January 4, 2000, Duke Energy announced that it had entered into a definitive agreement to purchase, for $386 million, 100% of the stock of El Paso Energy Corporation's wholly owned subsidiary, East Tennessee Natural Gas Company, a 1,100-mile pipeline that crosses Duke Energy's TETCO pipeline and serves the southeastern region of the U.S. Both transactions are subject to regulatory approval and are expected to close in the first quarter of 2000. In January 2000, Duke Energy completed a tender offer to the minority shareholders of Paranapanema and successfully acquired an additional 51% economic interest in the company for approximately $280 million. This increased Duke Energy's economic ownership from approximately 44% to approximately 95%. Forward-Looking Statements. From time to time, Duke Energy's reports, filings and other public announcements may include assumptions, projections, expectations, intentions or beliefs about future events. These statements are intended as "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. Duke Energy cautions that assumptions, projections, expectations, intentions or beliefs about future events may and often do vary from actual results and the differences between assumptions, projections, expectations, intentions or beliefs and actual results can be material. Accordingly, there can be no assurance that actual results will not differ materially from those expressed or implied by the forward-looking statements. Some of the factors that could cause actual achievements and events to differ materially from those expressed or implied in such forward-looking statements include state, federal and foreign legislative and regulatory initiatives that affect cost and investment recovery, have an impact on rate structures and affect the speed and degree to which competition enters the electric and natural gas industries; industrial, commercial and residential growth in the service territories of Duke Energy and its subsidiaries; the weather and other natural phenomena; the timing and extent of changes in commodity prices, interest rates and foreign currency exchange rates; changes in environmental and other laws and regulations to which Duke Energy and its subsidiaries are subject or other external factors over which Duke Energy has no control; the results of financing efforts, including Duke Energy's ability to obtain financing on favorable terms, which can be affected by Duke Energy's credit rating and general economic conditions; growth in opportunities for Duke Energy's business units; and the effect of accounting policies issued periodically by accounting standard-setting bodies. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. See "Management's Discussion and Analysis of Results of Operations" and "Financial Condition, Quantitative and Qualitative Disclosures About Market Risk." 39 Item 8. Financial Statements and Supplementary Data. DUKE ENERGY CORPORATION Consolidated Statements Of Income And Comprehensive Income
Years Ended December 31, ---------------------------- 1999 1998 1997 -------- -------- -------- In millions, except per share amounts Operating Revenues Sales, trading and marketing of natural gas and petroleum products (Notes 1 and 7)........... $ 10,922 $ 7,854 $ 8,151 Generation, transmission and distribution of electricity (Notes 1 and 4)........................ 4,934 4,586 4,334 Trading and marketing of electricity (Notes 1 and 7)........................ 3,610 2,788 1,665 Transportation and storage of natural gas (Notes 1 and 4).................... 1,139 1,450 1,504 Other (Note 8)................ 1,137 932 655 -------- -------- -------- Total operating revenues... 21,742 17,610 16,309 -------- -------- -------- Operating Expenses Natural gas and petroleum products purchased (Note 1)........................ 10,636 7,497 7,705 Net interchange and purchased power (Notes 1, 4 and 5).................. 3,507 2,916 1,960 Fuel used in electric generation (Notes 1 and 11)....................... 764 767 743 Other operation and maintenance (Notes 4, 11 and 14)................... 3,701 2,738 2,721 Depreciation and amortization (Notes 1 and 5)........................ 968 909 841 Property and other taxes... 371 350 369 -------- -------- -------- Total operating expenses... 19,947 15,177 14,339 -------- -------- -------- Operating Income............ 1,795 2,433 1,970 -------- -------- -------- Other Income and Expenses Deferred returns and allowance for funds used during construction (Note 1)........................ 82 88 109 Other, net................. 166 126 29 -------- -------- -------- Total other income and expenses.................. 248 214 138 -------- -------- -------- Earnings Before Interest and Taxes...................... 2,043 2,647 2,108 Interest Expense (Notes 7 and 10).................... 601 514 472 Minority Interests (Note 12)........................ 142 96 23 -------- -------- -------- Earnings Before Income Taxes...................... 1,300 2,037 1,613 Income Taxes (Notes 1 and 6)......................... 453 777 639 -------- -------- -------- Income Before Extraordinary Item....................... 847 1,260 974 Extraordinary Gain (Loss), net of tax................. 660 (8) -- -------- -------- -------- Net Income.................. 1,507 1,252 974 -------- -------- -------- Dividends and Premiums on Redemptions of Preferred and Preference Stock (Note 13)........................ 20 21 72 -------- -------- -------- Earnings Available For Common Stockholders........ 1,487 1,231 902 -------- -------- -------- Other Comprehensive Income, net of tax Foreign currency translation adjustments (Note 1).................. (2) -- -- -------- -------- -------- Total Comprehensive Income.................... $ 1,485 $ 1,231 $ 902 ======== ======== ======== Common Stock Data (Note 1) Weighted average shares outstanding............... 365 361 360 Earnings per share (before extraordinary item) Basic.................... $ 2.26 $ 3.43 $ 2.51 Dilutive................. $ 2.25 $ 3.42 $ 2.50 Earnings per share Basic.................... $ 4.08 $ 3.41 $ 2.51 Dilutive................. $ 4.07 $ 3.40 $ 2.50 Dividends per share........ $ 2.20 $ 2.20 $ 1.90
See Notes to Consolidated Financial Statements. 40 DUKE ENERGY CORPORATION Consolidated Statements Of Cash Flows
Years Ended December 31, ---------------------------- 1999 1998 1997 -------- -------- -------- In millions Cash Flows From Operating Activities Net income...................................... $ 1,507 $ 1,252 $ 974 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization................. 1,151 1,055 983 Extraordinary (gain) loss, net of tax......... (660) 8 -- Injuries and damages accrual.................. 800 -- -- Deferred income taxes......................... (210) (35) 99 Purchased capacity levelization............... 104 88 56 Transition cost recoveries (payments), net.... 95 (28) (36) (Increase) decrease in Receivables.................................. (659) (18) (266) Inventory.................................... (89) (104) (7) Other current assets......................... (138) (39) (18) Increase (decrease) in Accounts payable............................. 477 72 239 Taxes accrued................................ (57) (6) 50 Interest accrued............................. 32 (2) (13) Other current liabilities.................... 73 84 15 Other, net.................................... 258 4 64 -------- -------- -------- Net cash provided by operating activities..... 2,684 2,331 2,140 -------- -------- -------- Cash Flows From Investing Activities Capital and investment expenditures............. (5,936) (2,500) (2,028) Proceeds from sale of subsidiaries.............. 1,900 -- -- Decommissioning, retirements and other.......... 236 24 34 -------- -------- -------- Net cash used in investing activities......... (3,800) (2,476) (1,994) -------- -------- -------- Cash Flows From Financing Activities Proceeds from the issuance of Long-term debt................................ 3,221 1,357 1,618 Guaranteed preferred beneficial interests in subordinated notes of Duke Energy Corporation or Subsidiaries.............................. 484 581 339 Common stock and stock options................ 162 176 15 Payments for the redemption of Long-term debt................................ (1,505) (698) (869) Common stock.................................. -- -- (25) Preferred and preference stock................ (20) (180) (224) Net change in notes payable and commercial paper.......................................... 58 (350) (290) Dividends paid.................................. (822) (814) (726) Other........................................... 22 6 (41) -------- -------- -------- Net cash provided by (used in) financing activities................................... 1,600 78 (203) -------- -------- -------- Net increase (decrease) in cash and cash equivalents.................................... 484 (67) (57) Cash received from business acquisitions........ 49 38 -- Cash and cash equivalents at beginning of year.. 80 109 166 -------- -------- -------- Cash and cash equivalents at end of year........ $ 613 $ 80 $ 109 ======== ======== ======== Supplemental Disclosures Cash paid for interest, net of amount capitalized.................................... $ 541 $ 490 $ 476 Cash paid for income taxes...................... $ 732 $ 733 $ 470
See Notes to Consolidated Financial Statements. 41 DUKE ENERGY CORPORATION Consolidated Balance Sheets
December 31, --------------- 1999 1998 ------- ------- In millions ASSETS Current Assets (Note 1) Cash and cash equivalents (Note 7)............................ $ 613 $ 80 Receivables (Note 7).......................................... 3,248 2,318 Inventory..................................................... 599 543 Current portion of natural gas transition costs (Note 4)...... 81 100 Current portion of purchased capacity costs (Note 5).......... 146 99 Unrealized gains on mark-to-market transactions (Note 7)...... 1,131 1,457 Other (Note 7)................................................ 353 246 ------- ------- Total current assets........................................ 6,171 4,843 ------- ------- Investments and Other Assets Investments in affiliates (Notes 8 and 14).................... 1,299 902 Nuclear decommissioning trust funds (Note 11)................. 703 580 Pre-funded pension costs (Note 17)............................ 315 332 Goodwill, net (Notes 1 and 2)................................. 844 495 Notes receivable.............................................. 154 244 Unrealized gains on mark-to-market transactions (Notes 1 and 7)........................................................... 690 396 Other......................................................... 705 283 ------- ------- Total investments and other assets.......................... 4,710 3,232 ------- ------- Property, Plant and Equipment (Notes 1, 5, 9, 10 and 11) Cost.......................................................... 30,436 27,128 Less accumulated depreciation and amortization................ 9,441 10,253 ------- ------- Net property, plant and equipment........................... 20,995 16,875 ------- ------- Regulatory Assets and Deferred Debits (Note 1) Purchased capacity costs (Note 5)............................. 497 648 Debt expense.................................................. 223 253 Regulatory asset related to income taxes...................... 500 506 Natural gas transition costs (Note 4)......................... 4 80 Environmental clean-up costs (Note 14)........................ 27 69 Other......................................................... 282 300 ------- ------- Total regulatory assets and deferred debits................. 1,533 1,856 ------- ------- Total Assets................................................... $33,409 $26,806 ======= =======
See Notes to Consolidated Financial Statements. 42 DUKE ENERGY CORPORATION Consolidated Balance Sheets, Continued
December 31, ---------------- 1999 1998 ------- ------- In millions LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable............................................. $ 2,312 $ 1,754 Notes payable and commercial paper (Notes 7 and 10).......... 267 209 Taxes accrued (Note 1)....................................... 685 119 Interest accrued............................................. 139 109 Current maturities of long-term debt and preferred stock (Notes 10 and 13)........................................... 515 707 Unrealized losses on mark-to-market transactions (Notes 1 and 7).......................................................... 1,241 1,387 Other (Notes 1 and 14)....................................... 717 670 ------- ------- Total current liabilities.................................. 5,876 4,955 ------- ------- Long-term Debt (Notes 7 and 10)............................... 8,683 6,272 ------- ------- Deferred Credits and Other Liabilities (Note 1) Deferred income taxes (Note 6)............................... 3,402 3,705 Investment tax credit (Note 6)............................... 225 242 Nuclear decommissioning costs externally funded (Note 11).... 703 580 Environmental clean-up liabilities (Note 14)................. 101 148 Unrealized losses on mark-to-market transactions (Note 7).... 438 362 Other (Note 14).............................................. 2,099 907 ------- ------- Total deferred credits and other liabilities............... 6,968 5,944 ------- ------- Minority Interests (Note 2)................................... 1,200 253 ------- ------- Guaranteed Preferred Beneficial Interests in Subordinated Notes of Duke Energy Corporation or Subsidiaries (Notes 7 and 12)......................................................... 1,404 919 ------- ------- Preferred and Preference Stock (Notes 7 and 13) Preferred and preference stock with sinking fund requirements................................................ 71 104 Preferred and preference stock without sinking fund requirements................................................ 209 209 ------- ------- Total preferred and preference stock....................... 280 313 ------- ------- Commitments and Contingencies (Notes 5, 11 and 14) Common Stockholders' Equity (Notes 15 and 16) Common stock, no par, 1 billion shares authorized; 366 million and 363 million shares outstanding at December 31, 1999 and 1998, respectively................................. 4,603 4,449 Retained earnings............................................ 4,397 3,701 Accumulated other comprehensive income....................... (2) -- ------- ------- Total common stockholders' equity.......................... 8,998 8,150 ------- ------- Total Liabilities and Stockholders' Equity.................... $33,409 $26,806 ======= =======
See Notes to Consolidated Financial Statements. 43 DUKE ENERGY CORPORATION Consolidated Statements Of Common Stockholders' Equity
Years Ended December 31, ---------------------------- 1999 1998 1997 -------- -------- -------- In millions Common Stock Balance at beginning of year................... $ 4,449 $ 4,284 $ 4,289 Dividend reinvestment and employee benefits.... 154 165 (9) Other capital stock transactions, net.......... -- -- 4 -------- -------- -------- Balance at end of year....................... 4,603 4,449 4,284 -------- -------- -------- Retained Earnings Balance at beginning of year................... 3,701 3,256 3,052 Net income..................................... 1,507 1,252 974 Common stock dividends......................... (802) (794) (682) Preferred and preference stock dividends and premiums on redemptions (Note 13)............. (20) (21) (72) Other capital stock transactions, net.......... 11 8 (16) -------- -------- -------- Balance at end of year....................... 4,397 3,701 3,256 -------- -------- -------- Accumulated Other Comprehensive Income Balance at beginning of year................... -- -- -- Foreign currency translation adjustments (Note 1)............................................ (2) -- -- -------- -------- -------- Balance at end of year....................... (2) -- -- -------- -------- -------- Total Common Stockholders' Equity................ $ 8,998 $ 8,150 $ 7,540 ======== ======== ========
See Notes to Consolidated Financial Statements 44 DUKE ENERGY CORPORATION Notes to Consolidated Financial Statements For the Years Ended December 31, 1999, 1998 and 1997 1. Summary of Significant Accounting Policies Consolidation. The consolidated financial statements include the accounts of all of Duke Energy Corporation's majority-owned subsidiaries after the elimination of significant intercompany transactions and balances. Investments in other entities that are not controlled by Duke Energy Corporation, but where it has significant influence over operations, are accounted for using the equity method. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates are based on management's knowledge of current and expected future events, actual results could differ from those estimates. "Duke Energy" is used in these Notes as a collective reference to Duke Energy Corporation and its subsidiaries. Cash and Cash Equivalents. All liquid investments with maturities at date of purchase of three months or less are considered cash equivalents. Inventory. Inventory consists primarily of materials and supplies, gas held for transmission, processing and sales commitments, and coal held for electric generation. Inventory is recorded at the lower of cost or market, primarily using the average cost method. Accounting for Risk Management and Commodity Trading Activities. Duke Energy, primarily through its subsidiaries, manages its exposure to risk from existing contractual commitments and provides risk management services to its customers and suppliers through commodity derivatives, including forward contracts, futures, over-the-counter swap agreements and options. Commodity derivatives utilized for trading purposes are accounted for using the mark-to-market method. Under this methodology, these instruments are adjusted to market value, and the unrealized gains and losses are recognized in current period income and are included in the Consolidated Statements of Income and Comprehensive Income as Natural Gas and Petroleum Products Purchased or Net Interchange and Purchased Power, and in the Consolidated Balance Sheets as Unrealized Gains or Losses on Mark-to-Market Transactions. Commodity derivatives such as futures, forwards, over-the-counter swap agreements and options are also utilized for non-trading purposes to hedge the impact of market fluctuations in the price of natural gas, electricity and other energy-related products. To qualify as a hedge, the price movements in the commodity derivatives must be highly correlated with the underlying hedged commodity. Under the deferral method of accounting, gains and losses related to commodity derivatives which qualify as hedges are recognized in income when the underlying hedged physical transaction closes and are included in the Consolidated Statements of Income and Comprehensive Income as Natural Gas and Petroleum Products Purchased, or Net Interchange and Purchased Power. If the commodity derivative is no longer sufficiently correlated to the underlying commodity, or if the underlying commodity transaction closes earlier than anticipated, the deferred gains or losses are recognized in income. Duke Energy periodically uses interest rate swaps, accounted for under the accrual method, to manage the interest rate characteristics associated with outstanding debt. Interest rate differentials to be paid or received as interest rates change are accrued and recognized as an adjustment to interest expense. The amount accrued as either a payable to or receivable from counterparties is included in the Consolidated Balance Sheets as Regulatory Assets and Deferred Debits. 45 DUKE ENERGY CORPORATION Notes to Consolidated Financial Statements -- Continued 1. Summary of Significant Accounting Policies -- Continued Duke Energy also periodically utilizes interest rate lock agreements to hedge interest rate risk associated with new debt issuances. Under the deferral method of accounting, gains or losses on such agreements, when settled, are deferred in the Consolidated Balance Sheets as Long-term Debt and are amortized in the Consolidated Statements of Income and Comprehensive Income as an adjustment to interest expense. Duke Energy is exposed to foreign currency risk from investments in international affiliates and businesses owned and operated in foreign countries. To mitigate risks associated with foreign currency fluctuations, when possible, contracts are denominated in or indexed to the U.S. dollar or may be hedged through debt denominated in the foreign currency. Duke Energy also uses foreign currency derivatives, where possible, to hedge its risk related to foreign currency fluctuations. To qualify as a hedge, there must be a high degree of correlation between price movements in the derivative and the item designated as being hedged. These derivatives are accounted for under the deferral method previously described under commodity derivatives used for non- trading purposes. Duke Energy also enters into foreign currency swap agreements to manage foreign currency risks associated with energy contracts denominated in foreign currencies. These agreements are accounted for under the mark-to-market method previously described. Goodwill. Goodwill represents the excess of acquisition costs over the fair value of the net assets of an acquired business. The goodwill created by Duke Energy's acquisitions is amortized on a straight-line basis over the useful lives of the assets, ranging from 10 to 40 years. The amount of goodwill reported on the Consolidated Balance Sheets as of December 31, 1999 and 1998, respectively, was $844 million and $495 million, net of accumulated amortization of $218 million and $166 million. See Note 2 to the Consolidated Financial Statements for information on significant goodwill additions. Property, Plant and Equipment. Property, plant and equipment are stated at original cost. Duke Energy capitalizes all construction-related direct labor and material costs, as well as indirect construction costs. Indirect costs include general engineering, taxes and the cost of money. The cost of renewals and betterments that extend the useful life of property, plant and equipment is also capitalized. The cost of repairs and replacements is charged to expense as incurred. Depreciation is generally computed using the straight-line method. The composite weighted-average depreciation rates, excluding nuclear fuel, were 3.73%, 3.82% and 3.67% for 1999, 1998 and 1997, respectively. When property, plant and equipment maintained by Duke Energy's regulated operations are retired, the original cost plus the cost of retirement, less salvage, is charged to accumulated depreciation and amortization. When entire regulated operating units are sold or non-regulated properties are retired or sold, the property and related accumulated depreciation and amortization accounts are reduced, and any gain or loss is recorded in income, unless otherwise required by the Federal Energy Regulatory Commission (FERC). Impairment of Long-Lived Assets. The recoverability of long-lived assets and intangible assets are reviewed whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Such evaluation is based on various analyses, including undiscounted cash flow projections. Unamortized Debt Premium, Discount and Expense. Premiums, discounts and expenses incurred in connection with the issuance of presently outstanding long-term debt are amortized over the terms of the respective issues. Any call premiums or unamortized expenses associated with refinancing higher-cost debt obligations used to finance regulated assets and operations are amortized consistent with regulatory treatment of those items. Environmental Expenditures. Environmental expenditures that relate to an existing condition caused by past operations and do not contribute to current or future revenue generation are expensed. Environmental 46 DUKE ENERGY CORPORATION Notes to Consolidated Financial Statements -- Continued 1. Summary of Significant Accounting Policies -- Continued expenditures relating to current or future revenues are expensed or capitalized as appropriate. Liabilities are recorded when environmental assessments and/or clean-ups are probable and the costs can be reasonably estimated. Certain of these environmental assessments and clean-up costs are expected to be recovered from Natural Gas Transmission customers and have, therefore, been deferred and are included in the Consolidated Balance Sheets as Environmental Clean-up Costs. Cost-Based Regulation. Duke Energy's regulated operations are subject to the provisions of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation." Accordingly, certain assets and liabilities that result from the regulated ratemaking process are recorded that would not be recorded under generally accepted accounting principles for non-regulated entities. These regulatory assets and liabilities are classified in the Consolidated Balance Sheets as Regulatory Assets and Deferred Debits, and Deferred Credits and Other Liabilities, respectively. The applicability of SFAS No. 71 is routinely evaluated, and factors such as regulatory changes and the impact of competition are considered. Discontinuing cost-based regulation or increasing competition might require companies to reduce their asset balances to reflect a market basis less than cost and to write off their associated regulatory assets. Management cannot predict the potential impact, if any, of discontinuing cost-based regulation or increasing competition on future financial position or consolidated results of operations. However, Duke Energy continues to position itself to effectively meet these challenges by maintaining competitive prices. Common Stock Options. Duke Energy accounts for stock-based compensation using the intrinsic method of accounting. Under this method, compensation cost, if any, is measured as the excess of the quoted market price of Duke Energy's stock at the date of the grant over the amount an employee must pay to acquire the stock. Restricted stock is recorded as compensation cost over the requisite vesting period based on the market value on the date of the grant. Pro forma disclosures utilizing the fair value accounting method are included in Note 16 to the Consolidated Financial Statements. Revenues. Revenues on sales of electricity and transportation and storage of natural gas are recognized as service is provided. Revenues on sales of natural gas and petroleum products, as well as electricity, gas and other energy products marketed, are recognized in the period of delivery. Receivables on the Consolidated Balance Sheets included $207 million and $193 million as of December 31, 1999 and 1998, respectively, for electric service that has been provided but not yet billed to customers. When rate cases are pending final approval, a portion of the revenues is subject to possible refund. Reserves are established where required for such cases. Nuclear Fuel. Amortization of nuclear fuel is included in the Consolidated Statements of Income and Comprehensive Income as Fuel Used in Electric Generation. The amortization is recorded using the units-of-production method. Deferred Returns and Allowance for Funds Used During Construction (AFUDC). Deferred returns represent the estimated financing costs associated with funding certain regulatory assets. These regulatory assets primarily arose from the funding of purchased capacity costs above levels collected in rates. Deferred returns are non-cash items and are primarily recognized as an addition to Purchased Capacity Costs with an offsetting credit to Other Income and Expenses. AFUDC represents the estimated debt and equity costs of capital funds necessary to finance the construction of new regulated facilities. AFUDC is a non-cash item and is recognized as a cost of Property, Plant and Equipment, with offsetting credits to Other Income and Expenses and to Interest Expense. After construction is completed, Duke Energy is permitted to recover these costs, including a fair return, through their inclusion in rate base and in the provision for depreciation. 47 DUKE ENERGY CORPORATION Notes to Consolidated Financial Statements -- Continued 1. Summary of Significant Accounting Policies -- Continued Rates used for capitalization of deferred returns and AFUDC by Duke Energy's regulated operations are calculated in compliance with FERC rules. Foreign Currency Translation. Assets and liabilities of Duke Energy's international operations, where the local currency is the functional currency, have been translated at year-end exchange rates, and revenues and expenses have been translated using average exchange rates prevailing during the year. Adjustments resulting from translation are included in the Consolidated Statements of Income and Comprehensive Income as Foreign Currency Translation Adjustments. The financial statements of international operations, where the U.S. dollar is the functional currency, reflect certain transactions denominated in the local currency that have been remeasured in U.S. dollars. The remeasurement of local currencies into U.S. dollars creates gains and losses from foreign currency transactions that are included in consolidated net income. Income Taxes. Duke Energy and its subsidiaries file a consolidated federal income tax return. Deferred income taxes have been provided for temporary differences. Temporary differences occur when events and transactions recognized for financial reporting result in taxable or tax-deductible amounts in different periods. Investment tax credits have been deferred and are being amortized over the estimated useful lives of the related properties. Earnings Per Common Share. Basic earnings per share is based on a simple weighted average of common shares outstanding. Dilutive earnings per share reflects the potential dilution that could occur if securities or other agreements to issue common stock, such as stock options, were exercised or converted into common stock. The numerator for the calculation of basic and dilutive earnings per share is earnings available for common stockholders.
1999 1998 1997 ---- ---- ---- In millions Denominator for Earnings per Share Denominator for basic earnings per share (weighted average shares outstanding)....................................... 365 361 360 Assumed exercise of dilutive stock options................. (a) 1 2 --- --- --- Denominator for dilutive earnings per share................ 365 362 362 === === ===
-------- (a) While Duke Energy had dilutive stock options as of December 31, 1999, the amount did not round to one million. Extraordinary Items. In 1999, Duke Energy realized an extraordinary gain of $660 million, or $1.82 per share, relating to the sale of certain pipeline companies. See Note 2 to the Consolidated Financial Statements for additional information on the extraordinary item. In January 1998, TEPPCO Partners, L.P. (TEPPCO), in which a subsidiary of Duke Energy has a 2% general partner interest and a 19.1% limited partner interest, redeemed certain First Mortgage Notes. A non-cash extraordinary loss of $8 million, net of income tax of $5 million, was recorded related to costs of the early retirement of debt. Earnings per common share for 1998 were reduced by $0.02 as a result of this charge. New Accounting Standard. In September 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," was issued. Duke Energy is required to adopt this standard by January 1, 2001. SFAS No. 133 requires that all derivatives be recognized as either assets or liabilities and measured at fair value, and it defines the accounting for changes in the fair value of the derivatives depending on the intended use of the 48 DUKE ENERGY CORPORATION Notes to Consolidated Financial Statements -- Continued 1. Summary of Significant Accounting Policies -- Continued derivative. Duke Energy is currently reviewing the expected impact of SFAS No. 133 on consolidated results of operations and financial position. Reclassifications. Certain amounts have been reclassified in the Consolidated Financial Statements to conform to the current presentation. 2. Business Combinations, Acquisitions and Dispositions Business Combinations: PanEnergy Corp (PanEnergy). On June 18, 1997, Duke Power Company (Duke Power) changed its name to Duke Energy Corporation and completed a stock-for-stock merger with PanEnergy (the merger). PanEnergy was involved in the gathering, processing, transportation and storage of natural gas; the production of natural gas liquids (NGLs); and the marketing of natural gas, electricity and other energy-related products. Pursuant to the merger agreement, Duke Energy issued 158.3 million shares of its common stock in exchange for all of the outstanding common stock of PanEnergy. Accordingly, each share of PanEnergy common stock outstanding was converted into the right to receive 1.0444 shares of Duke Energy's common stock. In addition, each outstanding option to purchase PanEnergy common stock became an option to purchase common stock of Duke Energy, adjusted accordingly. The merger was accounted for as a pooling of interests; 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. Business Acquisitions: For acquisitions accounted for using the purchase method, assets and liabilities have been consolidated as of the purchase date and earnings from the acquisitions have been included in consolidated earnings of Duke Energy subsequent to the purchase date. Assets acquired and liabilities assumed are recorded at their estimated fair values, and the excess of the purchase price over the estimated fair value of the net identifiable assets and liabilities acquired are recorded as goodwill. Dominion Resources' Hydroelectric, Natural Gas and Diesel Power Generation Businesses. In August 1999, Duke Energy, through its wholly owned subsidiary, Duke Energy International, LLC (Duke Energy International) reached a definitive agreement with Dominion Resources, Inc. (Dominion Resources) to acquire its portfolio of hydroelectric, natural gas and diesel power generation businesses in Argentina, Belize, Bolivia and Peru for approximately $405 million. In October 1999, Duke Energy International completed the purchase of the businesses in Belize and Peru from Dominion Resources, as well as acquired additional ownership interests in the Peru business (Egenor) from two other parties for $152 million in cash and certain other ownership interests in South America. The purchase increased Duke Energy International's ownership in Egenor from approximately 30% to 90%. The completion of the purchases in Argentina and Bolivia are subject to receiving appropriate governmental consents and approvals and are expected to close by mid-2000. Assets and liabilities of the Belize and Peru businesses have been recorded at preliminary fair values along with goodwill of $74 million which is being amortized on a straight-line basis over 35 to 40 years. The final purchase price allocation and estimated life of goodwill are subject to adjustment when additional information concerning asset and liability valuations is finalized and the evaluation of certain pre-acquisition contingent liabilities has been completed. Companhia de Geracao de Energia Eletrica Paranapanema (Paranapanema). In August 1999, Duke Energy International entered a series of transactions to complete a $761 million purchase of a controlling voting interest and an approximate 44% economic interest in Paranapanema, an electric generating company in 49 DUKE ENERGY CORPORATION Notes to Consolidated Financial Statements -- Continued 2. Business Combinations, Acquisitions and Dispositions -- Continued Brazil. Assets and liabilities have been recorded at preliminary fair values along with goodwill of $134 million which is being amortized on a straight-line basis over 40 years. The final purchase price allocation and estimated life of goodwill are subject to adjustment when additional information concerning asset and liability valuations is finalized and the evaluation of certain pre- acquisition contingent liabilities has been completed. In January 2000, Duke Energy completed a tender offer to the minority shareholders of Paranapanema and successfully acquired an additional 51% economic interest in the company for approximately $280 million. This increased Duke Energy's economic ownership from approximately 44% to approximately 95%. See Note 19 to the Consolidated Financial Statements. Union Pacific Resources' Gathering, Processing and Marketing Operations. On March 31, 1999, Duke Energy through its wholly owned subsidiary, Duke Energy Field Services, Inc., completed the $1.35 billion acquisition of the natural gas gathering, processing, fractionation and NGL pipeline business from Union Pacific Resources (UPR), as well as UPR's NGL marketing activities (collectively, "the UPR acquisition"). Goodwill of $135 million has been recorded and is being amortized on a straight-line basis over 15 to 20 years. The final purchase price allocation and estimated life of goodwill are subject to adjustment pending additional information concerning asset and liability valuations and the evaluation of certain pre-acquisition contingent liabilities. Dispositions: PEPL Companies and Trunkline LNG. On March 29, 1999, wholly owned subsidiaries of Duke Energy sold Panhandle Eastern Pipe Line Company (PEPL), Trunkline Gas Company and additional storage related to those systems (collectively, the PEPL Companies), which substantially comprised the Midwest Pipelines, along with Trunkline LNG Company (Trunkline LNG) to CMS Energy Corporation (CMS). The sales price of $2.2 billion involved cash proceeds of $1.9 billion and CMS' assumption of existing PEPL debt of approximately $300 million. The sale resulted in an extraordinary gain of $660 million, net of income tax of $404 million, and an increase in earnings per basic share of $1.82. Under the terms of the agreement with CMS, Duke Energy retained certain assets and liabilities, such as the Houston office building, certain environmental, legal and tax liabilities, and substantially all intercompany balances. Management believes that the retention of these items will not have a material adverse effect on consolidated results of operations or financial position. Combined Operating Results of the PEPL Companies and Trunkline LNG for the Period from January 1, 1999 through March 28, 1999 (a)
In millions Operating Revenues............................................... $126 Operating Expenses............................................... 57 Other Income, Net................................................ 4 ---- Earnings Before Interest and Taxes.............................. $ 73 ====
-------- (a) Excludes intercompany building rental revenue, allocated corporate expenses, building depreciation and certain other costs retained by Duke Energy. The pro forma results of operations for acquisitions and dispositions do not materially differ from reported results. 50 DUKE ENERGY CORPORATION Notes to Consolidated Financial Statements -- Continued 3. Business Segments Duke Energy is an integrated energy and energy services provider with the ability to offer physical delivery and management of both electricity and natural gas throughout the U.S. and abroad. Duke Energy provides these and other services through seven business segments: . Electric Operations . Natural Gas Transmission . Field Services . Trading and Marketing . Global Asset Development . Other Energy Services . Real Estate Operations Electric Operations generates, transmits, distributes and sells electric energy in central and western North Carolina and the western portion of South Carolina (doing business as Duke Power or Nantahala Power and Light). These electric operations are subject to the rules and regulations of the FERC, the North Carolina Utilities Commission (NCUC) and the Public Service Commission of South Carolina (PSCSC). Natural Gas Transmission provides interstate transportation and storage of natural gas for customers primarily in the Mid-Atlantic and New England states. Until the sale of the Midwest Pipelines on March 29, 1999, Natural Gas Transmission also provided interstate transportation and storage services in the midwest states. See further discussion of the sale of the Midwest Pipelines in Note 2 to the Consolidated Financial Statements. The interstate natural gas transmission and storage operations are subject to the rules and regulations of the FERC. Field Services gathers, processes, transports and markets natural gas and produces, transports and markets NGLs. Field Services operates gathering systems in western Canada and ten contiguous states that serve major gas- producing regions in the Rocky Mountain, Permian Basin, Mid-Continent and onshore and offshore Gulf Coast areas. Trading and Marketing markets natural gas, electricity and other energy- related products across North America. Duke Energy owns a 60% interest in Trading and Marketing's energy trading operations, with Mobil Corporation owning a 40% minority interest. This segment also includes certain other trading activities and limited hydrocarbon exploration and production activities that are wholly owned by Duke Energy. Global Asset Development develops, owns and operates energy-related facilities worldwide. Global Asset Development conducts its operations primarily through Duke Energy North America, LLC (Duke Energy North America) and Duke Energy International. Other Energy Services provides engineering, consulting, construction and integrated energy solutions worldwide, primarily through Duke Engineering & Services, Inc., Duke/Fluor Daniel and DukeSolutions, Inc. Real Estate Operations conducts its business through Crescent Resources, Inc., which develops high quality commercial and residential real estate projects and manages land holdings in the southeastern U.S. Duke Energy's reportable segments are strategic business units that offer different products and services and are each managed separately. The accounting policies for the segments are the same as those described in Note 1 to the Consolidated Financial Statements. Management evaluates segment performance based on earnings before interest and taxes (EBIT) after deducting minority interests. EBIT presented in the accompanying table includes intersegment sales accounted for at prices representative of unaffiliated party 51 DUKE ENERGY CORPORATION Notes to Consolidated Financial Statements -- Continued 3. Business Segments -- Continued transactions. Segment assets are provided as additional information in the accompanying table and are net of intercompany advances, intercompany notes receivable and investments in subsidiaries. Other Operations primarily includes communication services, water services and certain unallocated corporate items. Business Segment Data
Depreciation Capital and Unaffiliated Intersegment Total and Investment Segment Revenues Revenues Revenues EBIT Amortization Expenditures Assets ------------ ------------ -------- ------- ------------ ------------ ------- In millions Year Ended December 31, 1999 Electric Operations..... $ 4,700 $ -- $ 4,700 $ 856 $542 $ 759 $13,133 Natural Gas Transmission........... 1,100 106 1,206 627 126 261 3,897 Field Services.......... 2,883 707 3,590 144 131 1,630 3,565 Trading and Marketing... 11,334 459 11,793 70 12 104 4,060 Global Asset Development............ 612 165 777 181 104 2,703 6,673 Other Energy Services... 886 103 989 (94) 14 94 612 Real Estate Operations.. 233 -- 233 176 9 368 983 Other Operations........ (6) 44 38 (9) 30 17 1,298 Eliminations and Minority Interests..... -- (1,584) (1,584) 92 -- -- (812) ------- ------- ------- ------- ---- ------ ------- Total Consolidated.... $21,742 $ -- $21,742 $ 2,043 $968 $5,936 $33,409 ======= ======= ======= ======= ==== ====== ======= Year Ended December 31, 1998 Electric Operations..... $ 4,626 $ -- $ 4,626 $ 1,513 $522 $ 586 $12,953 Natural Gas Transmission........... 1,426 102 1,528 702 215 290 4,996 Field Services.......... 2,094 545 2,639 76 80 304 1,893 Trading and Marketing... 8,614 171 8,785 81 11 8 3,233 Global Asset Development............ 237 82 319 64 31 1,027 2,061 Other Energy Services... 436 85 521 10 12 41 376 Real Estate Operations.. 181 -- 181 142 6 217 724 Other Operations........ (4) 26 22 2 32 27 968 Eliminations and Minority Interests..... -- (1,011) (1,011) 57 -- -- (398) ------- ------- ------- ------- ---- ------ ------- Total Consolidated.... $17,610 $ -- $17,610 $ 2,647 $909 $2,500 $26,806 ======= ======= ======= ======= ==== ====== ======= Year Ended December 31, 1997 Electric Operations..... $ 4,401 $ -- $ 4,401 $ 1,282 $498 $ 743 $12,958 Natural Gas Transmission........... 1,468 104 1,572 624 229 247 5,059 Field Services.......... 2,481 574 3,055 157 71 157 1,855 Trading and Marketing... 7,411 78 7,489 23 7 18 1,857 Global Asset Development............ 109 14 123 4 9 348 988 Other Energy Services... 343 33 376 18 6 47 223 Real Estate Operations.. 124 -- 124 98 4 223 594 Other Operations........ (28) -- (28) (120) 17 245 941 Eliminations and Minority Interests..... -- (803) (803) 22 -- -- (446) ------- ------- ------- ------- ---- ------ ------- Total Consolidated.... $16,309 $ -- $16,309 $ 2,108 $841 $2,028 $24,029 ======= ======= ======= ======= ==== ====== =======
52 DUKE ENERGY CORPORATION Notes to Consolidated Financial Statements -- Continued 3. Business Segments -- Continued In 1999, foreign operations consisted of 10% of consolidated revenues and 15% of consolidated long-lived assets, primarily in Canada and Latin America. Foreign operations were not material for 1998 and 1997. 4. Regulatory Matters Electric Operations. 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. Electric sales to the other joint owners of the Catawba Nuclear Station, which represent a majority of Electric Operations' electric wholesale revenues, are set through contractual agreements. In 1997, in conjunction with its merger with PanEnergy, Duke Energy agreed to cap the base electric rates for retail customers at existing levels through 2000, with very limited exceptions. Duke Energy also agreed to freeze rates, except for the market-based rates, for transmission and wholesale electric sales. In addition, Duke Energy agreed to a cap on the rates charged to the other joint owners of Catawba Nuclear Station under the interconnection agreements and on the reimbursement of certain costs related to administration and general expenses and general plant costs under operation and fuel agreements. Management believes that these agreements will not have a material adverse effect on consolidated results of operations or financial position. Fuel costs are reviewed semiannually in the wholesale jurisdiction and annually in the South Carolina retail jurisdiction, with provisions for reviewing such costs in base rates. In the North Carolina retail jurisdiction, a review of fuel costs in rates is required annually and during general rate case proceedings. All jurisdictions allow Duke Energy to adjust electric rates for past over- or under-recovery of fuel costs. Therefore, the difference between actual fuel costs incurred for electric operations and fuel costs recovered through rates is reflected in revenues. The stipulation agreements related to the merger do not apply to the fuel cost adjustments. Certain of Electric Operations' electric wholesale customers, excluding the other Catawba Nuclear Station joint owners, initiated proceedings in 1995 before the FERC concerning rate-related matters. Duke Energy and nine of its eleven wholesale customers entered into a settlement in July 1996 which reduced the customers' electric rates by approximately 9%. These contracts will be in effect through 2001, subject to annual renewals thereafter. Both of the customers that did not enter into the settlement signed agreements and began purchasing electricity from other suppliers in 1997. Management believes that these agreements will not have a material adverse impact on consolidated results of operations or financial position. In December 1997, Duke Energy filed applications with the FERC, NCUC and PSCSC for authority to combine Nantahala Power and Light (a wholly owned subsidiary) and Duke Power. Duke Energy received the necessary approvals in June, April and February 1998, respectively. Nantahala Power and Light began operations as a division of Duke Power effective August 3, 1998. On December 20, 1999, the FERC issued Order 2000, which encourages transmission owners to voluntarily join Regional Transmission Organizations (RTOs) to increase access to the nation's power grid. All public utilities that own, operate, or control interstate electric transmission are required to file with the FERC by October 15, 2000. This filing must describe the company's proposal to join an RTO, including a description of efforts to participate, reasons for not participating, plans for further work towards participation and/or any obstacles in participation. All RTOs are to be operational by December 15, 2001. Natural Gas Transmission. Duke Energy's interstate natural gas pipelines primarily provide transportation and storage services pursuant to FERC Order 636. Order 636 allows pipelines to recover eligible 53 DUKE ENERGY CORPORATION Notes to Consolidated Financial Statements -- Continued 4. Regulatory Matters -- Continued costs resulting from implementation of the order (transition costs). In 1994, the FERC approved Texas Eastern Transmission Corporation's (TETCO) settlement resolving regulatory issues related primarily to Order 636 transition costs and a number of other issues related to services prior to Order 636. Under the 1994 settlement, TETCO's liability for transition costs was estimated based on the amount of producers' natural gas reserves and other factors. In 1998, TETCO favorably resolved all remaining gas purchase contracts, recognizing $39 million of income ($24 million after tax). In addition, the FERC approved a settlement filed by TETCO, which accelerates recovery of natural gas transition costs. The 1998 settlement is not expected to have a material adverse effect on the consolidated results of operations or financial position. Global Asset Development. Three California electric generating plants, Moss Landing, South Bay and Oakland, sell electricity under the terms of Reliability Must Run Agreements with the California Independent System Operator, which purchases electricity at FERC regulated rates. Moss Landing and Oakland have entered into settlement agreements with respect to the rates to be paid to them by the Independent System Operator. Those settlements were approved by the FERC in January 2000. South Bay has not reached a final agreement with respect to its electric rates and, therefore, its rates are subject to partial refund or surcharge. Management believes that the final resolution of this matter will not have a material adverse effect on consolidated results of operations or financial position. 5. Joint Ownership of Generating Facilities Joint Ownership of Catawba Nuclear Station
Ownership Owner Interest ----- --------- North Carolina Municipal Power Agency Number 1 (NCMPA)............. 37.5% North Carolina Electric Membership Corporation (NCEMC)............. 28.125% Duke Energy Corporation............................................ 12.5% Piedmont Municipal Power Agency (PMPA)............................. 12.5% Saluda River Electric Cooperative, Inc. (Saluda River)............. 9.375% -------- 100% ========
As of December 31, 1999, $523 million of Property, Plant and Equipment and $243 million of accumulated depreciation and amortization represented Duke Energy's investment in Catawba Nuclear Station Units 1 and 2. Duke Energy's share of operating costs is included in the Consolidated Statements of Income and Comprehensive Income. Duke Energy entered into contractual interconnection agreements with the other joint owners of Catawba Nuclear Station to purchase declining percentages of the generating capacity and energy from the station. These purchased power agreements became effective in 1985 and 1986. The purchased power agreements were established for fifteen years for NCMPA and PMPA and ten years for NCEMC and Saluda River. The portion of purchased capacity subject to levelization not recovered in rates was deferred. Duke Energy is recovering the accumulated balance, including returns on the deferred balance, over a period expected to end in 2004. Jurisdictional levelizations are intended to recover total costs, including deferred returns, and are subject to adjustments, including final true-ups. The current levelized approved revenues are approximately $186 million. 54 DUKE ENERGY CORPORATION Notes to Consolidated Financial Statements -- Continued 5. Joint Ownership of Generating Facilities -- Continued For the years ended December 31, 1999, 1998 and 1997, purchased capacity and energy costs from the other joint owners was approximately $62 million, $88 million and $120 million, respectively. These amounts, after adjustments for the costs of capacity purchased not reflected in current rates, are included in the Consolidated Statements of Income and Comprehensive Income as Net Interchange and Purchased Power. As of December 31, 1999 and 1998, $643 million and $747 million, respectively, associated with the cost of capacity purchased but not reflected in current rates have been accumulated in the Consolidated Balance Sheets as Purchased Capacity Costs and Current Portion of Purchased Capacity Costs. The interconnection agreements also provide for supplemental power sales by Duke Energy to the other joint owners of Catawba Nuclear Station to satisfy their capacity and energy needs beyond the capacity and energy which they retain from the station or potentially acquire in the form of other resources. The agreements further provide the other joint owners the ability to secure such supplemental requirements outside of these contractual agreements following an appropriate notice period. NCEMC, Saluda River and NCMPA have given such appropriate notice effective January 1, 2001. PMPA will continue to receive supplemental power sales from Duke Energy through December 31, 2005. As the other joint owners retain more capacity and energy from the station, or obtain additional capacity and energy from a third party, supplemental power sales are expected to decline. Management believes this will not have a material adverse effect on consolidated results of operations or financial position. 6. Income Taxes Income Tax Expense
For the Years Ended December 31, ---------------------- 1999 1998 1997 ------ ------ ------ In millions Current income taxes Federal............................................ $ 526 $ 673 $ 433 State.............................................. 138 138 100 ------ ------ ------ Total current income taxes....................... 664 811 533 ------ ------ ------ Deferred income taxes, net Federal............................................ (127) (15) 112 State.............................................. (65) (4) 9 ------ ------ ------ Total deferred income taxes, net................. (192) (19) 121 ------ ------ ------ Investment tax credit amortization................... (19) (15) (15) ------ ------ ------ Total income tax expense............................. $ 453 $ 777 $ 639 ====== ====== ======
55 DUKE ENERGY CORPORATION Notes to Consolidated Financial Statements -- Continued 6. Income Taxes -- Continued Income Tax Expense Reconciliation to Statutory Rate
For the Years Ended December 31, ---------------------- 1999 1998 1997 ------ ------ ------ In millions Income tax, computed at the statutory rate of 35%.. $ 455 $ 713 $ 565 Adjustments resulting from: State income tax, net of federal income tax effect.......................................... 47 90 71 Favorable resolution of tax issues............... (30) -- -- Other items, net................................. (19) (26) 3 ------ ------ ------ Total income tax expense....................... $ 453 $ 777 $ 639 ------ ------ ------ Effective tax rate................................. 34.9% 38.1% 39.6% ====== ====== ======
Net Deferred Income Tax Liability Components
December 31, ---------------- 1999 1998 ------- ------- In millions Deferred credits and other liabilities.................... $ 556 $ 268 Alternative minimum tax credit carryforward............... -- 30 Other..................................................... 8 36 ------- ------- Total deferred income tax assets........................ 564 334 Valuation allowance....................................... (62) (52) ------- ------- Net deferred income tax assets.......................... 502 282 ------- ------- Investments and other assets.............................. (245) (207) Property, plant and equipment............................. (2,483) (2,405) Regulatory assets and deferred debits..................... (427) (542) Regulatory asset related to restating to pre-tax basis.... (432) (435) Other..................................................... -- (69) ------- ------- Total deferred income tax liabilities................... (3,587) (3,658) ------- ------- State deferred income tax, net of federal tax effect...... (340) (357) ------- ------- Net deferred income tax liability......................... $(3,425) $(3,733) ======= =======
The change in the net deferred income tax liability from 1998 to 1999 differs from the 1999 deferred income tax expense as a result of the removal of net deferred income tax liabilities due to the sale of the PEPL Companies and Trunkline LNG. 7. Risk Management and Financial Instruments Commodity Derivatives. Duke Energy, primarily through Trading and Marketing, manages its exposure to risk from existing contractual commitments and provides risk management services to its customers through forward contracts, futures, over-the-counter swap agreements and options (collectively, "commodity derivatives"). Energy commodity forward contracts involve physical delivery of an energy commodity. Energy commodity futures involve the buying or selling of natural gas, electricity or other energy-related commodities at a fixed price. Over-the-counter swap agreements require Duke Energy to receive or make payments based on 56 DUKE ENERGY CORPORATION Notes to Consolidated Financial Statements -- Continued 7. Risk Management and Financial Instruments -- Continued the difference between a specified price and the actual price of the underlying commodity. Energy commodity options held to mitigate price risk provide the right, but not the requirement, to buy or sell energy-related commodities at a fixed price. Commodity Derivatives -- Trading. Duke Energy engages in the trading of commodity derivatives, and therefore experiences net open positions. Duke Energy manages open positions with strict policies which limit its exposure to market risk and require daily reporting to management of potential financial exposure. These policies include statistical risk tolerance limits using historical price movements to calculate a daily earnings at risk measurement. The weighted-average life of Duke Energy's commodity risk portfolio was approximately 20 months at December 31, 1999. Net Gains Recognized from Trading Commodity Derivatives
1999 1998 1997 ---- ---- ---- In millions Natural gas.................................................. $83 $114 $34 Electricity.................................................. 41 14 (a)
-------- (a) Not material. Absolute Notional Contract Quantity of Commodity Derivatives Held for Trading Purposes
December 31, --------------- 1999 1998 ------- ------- Natural gas, in billion cubic feet........................... 36,285 11,149 Electricity, in gigawatt hours............................... 469,371 112,867
Fair Values of Commodity Derivatives -- Trading
1999 1998 ------------------ ------------------ Assets Liabilities Assets Liabilities ------ ----------- ------ ----------- In millions Fair value at December 31 Natural gas......................... $2,966 $2,855 $1,275 $1,179 Electricity......................... 1,302 1,271 578 570 Average fair values for the year Natural gas......................... 2,401 2,269 805 757 Electricity......................... 962 900 420 416
Commodity Derivatives -- Non-Trading. At December 31, 1999 and 1998, Duke Energy held or issued several commodity derivatives, primarily in the form of swaps, that reduce exposure to market price fluctuations for certain power and NGL production facilities. At December 31, 1999, these commodity derivatives extended for periods up to ten years. The gains, losses and costs related to non-trading commodity derivatives that qualify as a hedge are not recognized until the underlying physical transaction closes. At December 31, 1999 and 1998, Duke Energy had unrealized net gains (losses) of $(120) million and $10 million, respectively, related to non-trading commodity derivatives. The determination of unrealized net gains (losses) requires judgement in interpreting market data and developing estimates of fair value. Accordingly, the unrealized net gains (losses) as of December 31, 1999 and 1998 are not necessarily indicative of the amounts Duke Energy could have realized in the current market. 57 DUKE ENERGY CORPORATION Notes to Consolidated Financial Statements -- Continued 7. Risk Management and Financial Instruments -- Continued Absolute Notional Contract Quantity of Commodity Derivatives Held for Non- Trading Purposes
1999 1998 ------ ------ Natural gas, in billion cubic feet............................. 592 218 Electricity, in gigawatt hours................................. 45,877 10,618 Power capacity, in megawatt months............................. 25,950 -- Oil, in thousands of barrels................................... 32,764 4,875
Interest Rate Derivatives. Duke Energy periodically enters into financial derivative instruments including, but not limited to, swaps, options and treasury rate agreements to manage and mitigate interest rate risk exposure related to borrowings. The notional amounts shown in the following table serve solely as a basis for the calculation of payment streams to be exchanged. These notional amounts are not a measure of the company's exposure through its use of derivatives. Fair values shown in the following table represent estimated amounts that Duke Energy would have received if the swaps had been settled at current market rates on the respective dates. Interest Rate Derivatives
December 31, ------------------------------------------------- 1999 1998 ------------------------ ------------------------ Notional Fair Contracts Notional Fair Contracts Amounts Value Expire Amounts Value Expire -------- ----- --------- -------- ----- --------- Dollars in millions Interest rate swaps........ $600 $ 2 2000 $300 $ 8 1999-2000
Deferred gains on settled interest rate derivatives were not material in 1999 or 1998. Unrealized gains and losses and exposure to changes in market condition were not material at December 31, 1999 and 1998. As a result of the interest rate swap contracts which swap fixed rate obligations to effective floating rates, interest expense for the relative notional amount on the Consolidated Statements of Income and Comprehensive Income is recognized at the weighted average London interbank offered rate (LIBOR) for the year plus the applicable margins. Weighted Average Rates for Interest Rate Swaps
For the Years Ended December 31, ---------------- 1999 1998 1997 ---- ---- ---- 8% Series B Swap........................................... 5.36% 5.69% 5.78% 7.5% Series B Swap......................................... 6.42% 6.74% 6.83% Commercial paper fixed rate swaps.......................... 4.95% -- --
Foreign Currency Derivatives. Trading and Marketing enters into foreign currency swap agreements to manage foreign currency risks associated with energy contracts denominated in foreign currencies. As of December 31, 1999, the agreements had a notional contract amount of approximately $762 million, beginning in the year 2000 and extending to the year 2005, and had a weighted average fixed exchange rate of 1.470 Canadian dollars to U.S. dollars. As of December 31, 1998, the agreements had a notional contract amount of approximately $120 million, beginning in the year 2000 and extending to the year 2005, and had a weighted average fixed exchange rate of 1.472 Canadian dollars to U.S. dollars. The fair value of foreign currency swap agreements was not material at December 31, 1999 or 1998. 58 DUKE ENERGY CORPORATION Notes to Consolidated Financial Statements -- Continued 7. Risk Management and Financial Instruments -- Continued In anticipation of the tender offer for Paranapanema (see Note 19 to the Consolidated Financial Statements), Duke Energy entered into foreign currency forward contracts to obtain Brazilian reais. As of December 31, 1999, the forward contracts had a notional amount of $280 million at an average exchange rate of 1.8496 Brazilian reais to U.S. dollars which approximated fair value. Market and Credit Risk. New York Mercantile Exchange (Exchange) traded futures and option contracts are guaranteed by the Exchange and have nominal credit risk. On all other transactions previously described, Duke Energy is exposed to credit risk in the event of nonperformance by the counterparties. For each counterparty, Duke Energy analyzes its financial condition prior to entering into an agreement, establishes credit limits and monitors the appropriateness of these limits on an ongoing basis. The change in market value of exchange-traded futures and options contracts requires daily cash settlement in margin accounts with brokers. Swap contracts and most other over-the-counter instruments are generally settled at the expiration of the contract term and may be subject to margin requirements with the counterparty. Financial Instruments. The fair value of financial instruments is summarized in the following table. Judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates determined as of December 31, 1999 and 1998 are not necessarily indicative of the amounts Duke Energy could have realized in current market exchanges. The majority of the estimated fair value amounts were obtained from independent parties. Financial Instruments
1999 1998 ---------------------- ---------------------- Approximate Approximate Book Value Fair Value Book Value Fair Value ---------- ----------- ---------- ----------- In millions Long-term debt (a)............ $9,165 $8,891 $6,959 $7,240 Guaranteed preferred beneficial interests in subordinated notes of Duke Energy or subsidiaries....... 1,404 1,207 919 937 Preferred stock (a)........... 313 303 333 346
-------- (a) Includes current maturities. The fair value of cash and cash equivalents, notes receivable, notes payable and commercial paper are not materially different from their carrying amounts because of the short-term nature of these instruments or because the stated rates approximate market rates. Guarantees made on behalf of affiliates or recourse provisions from affiliates have no book value associated with them, and there are no fair values readily determinable since quoted market prices are not available. 8. Investment in Affiliates Investments in domestic and international affiliates which are not controlled by Duke Energy but where Duke Energy has significant influence over operations are accounted for by the equity method. These investments include undistributed earnings of $6 million and $5 million in 1999 and 1998, respectively. Duke Energy's share of net income from these affiliates is reflected in the Consolidated Statements of Income and Comprehensive Income as Other Operating Revenues. 59 DUKE ENERGY CORPORATION Notes to Consolidated Financial Statements -- Continued 8. Investment in Affiliates -- Continued Natural Gas Transmission. Investments primarily include ownership interests in natural gas pipeline joint ventures which transport gas from Canada to the U.S. Investments include a 37.5% ownership interest in Maritimes & Northeast Pipeline, L.L.C. Field Services. Investments primarily include a 37% interest in a partnership which owns natural gas gathering systems in the Gulf of Mexico (Dauphin Island Gathering Partners) and a 21.1% interest in TEPPCO. Global Asset Development. Global Asset Development has investments in various natural gas and electric generation and transmission facilities in its targeted geographic areas. Significant investments include a 50% indirect interest in VMC Generating Company, a merchant electric generating company, a 36.8% indirect interest in American Ref-Fuel Company and a 25% indirect interest in National Methanol Company, which owns and operates a methanol and MTBE (methyl tertiary butyl ether) business in Jubail, Saudi Arabia. Other Energy Services. Investments include the participation in various construction and support activities for fossil-fueled generating plants. Real Estate Operations. Investments include various real estate development projects. Other Operations. Investments include a 20% interest in the BellSouth PCS L.P. joint venture, which provides wireless personal communication services. Investment in Affiliates
December 31, 1999 December 31, 1998 December 31, 1997 ----------------------------- ---------------------------- ---------------------------- Domestic International Total Domestic International Total Domestic International Total -------- ------------- ------ -------- ------------- ----- -------- ------------- ----- In millions Natural Gas Transmission........... $ 67 $ 83 $ 150 $104 $ 37 $141 $ 67 $ -- $ 67 Field Services.......... 439 -- 439 303 -- 303 160 -- 160 Global Asset Development............ 425 224 649 171 223 394 174 208 382 Other Energy Services... 51 6 57 19 23 42 16 10 26 Real Estate Operations.. 11 -- 11 5 -- 5 2 -- 2 Other Operations........ (7) -- (7) 17 -- 17 36 13 49 ----- ---- ------ ---- ---- ---- ---- ---- ---- Total.................. $ 986 $313 $1,299 $619 $283 $902 $455 $231 $686 ===== ==== ====== ==== ==== ==== ==== ==== ==== Equity in Earnings of Investment For the years ended: ----------------------------------------------------------------------------------------- December 31, 1999 December 31, 1998 December 31, 1997 ----------------------------- ---------------------------- ---------------------------- Domestic International Total Domestic International Total Domestic International Total -------- ------------- ------ -------- ------------- ----- -------- ------------- ----- In millions Natural Gas Transmission........... $ 16 $ 9 $ 25 $ 14 $ 3 $ 17 $ 8 $ -- $ 8 Field Services.......... 44 -- 44 9 -- 9 19 -- 19 Global Asset Development............ 47 10 57 50 18 68 8 21 29 Other Energy Services... 10 3 13 1 13 14 4 8 12 Real Estate Operations.. 3 -- 3 -- -- -- -- -- -- Other Operations........ (30) -- (30) (29) -- (29) (30) -- (30) ----- ---- ------ ---- ---- ---- ---- ---- ---- Total.................. $ 90 $ 22 $ 112 $ 45 $ 34 $ 79 $ 9 $ 29 $ 38 ===== ==== ====== ==== ==== ==== ==== ==== ====
60 DUKE ENERGY CORPORATION Notes to Consolidated Financial Statements -- Continued 8. Investment in Affiliates -- Continued Summarized Combined Financial Information of Unconsolidated Subsidiaries
December 31, -------------------- 1999 1998 1997 ------ ------ ------ In millions Balance Sheet Current Assets........................................ $1,544 $ 848 $ 642 Noncurrent Assets..................................... 7,826 7,340 5,868 Current Liabilities................................... 1,155 1,084 758 Noncurrent Liabilities................................ 4,727 3,884 3,257 ------ ------ ------ Net Assets.......................................... $3,488 $3,220 $2,495 ====== ====== ====== Income Statement Operating Revenues.................................... $3,510 $1,667 $ 905 Operating Expenses.................................... 3,104 1,166 703 Net Income.......................................... 193 263 72
Duke Energy had outstanding notes receivable from certain affiliates of $72 million and $80 million at December 31, 1999 and 1998, respectively. 9. Property, Plant and Equipment
December 31, --------------- 1999 1998 ------- ------- In millions Electric utility Generation................................................. $ 7,876 $ 7,670 Transmission and distribution.............................. 6,577 6,324 General plant.............................................. 1,166 1,127 Nuclear fuel............................................... 741 554 Construction work in progress.............................. 343 328 ------- ------- Total electric utility................................... 16,703 16,003 ------- ------- Natural gas transmission.................................... 4,473 6,194 Non-regulated generation.................................... 4,457 837 Gathering and processing.................................... 2,428 1,409 Construction work in progress............................... 881 469 Other property and equipment................................ 1,494 2,216 ------- ------- Total Property, Plant and Equipment...................... $30,436 $27,128 ======= ======= Accumulated Depreciation December 31, --------------- 1999 1998 ------- ------- In millions Electric utility(a)......................................... $ 6,950 $ 6,371 Natural gas transmission.................................... 1,217 2,585 Non-regulated generation.................................... 493 26 Other....................................................... 781 1,271 ------- ------- Total Accumulated Depreciation........................... $ 9,441 $10,253 ======= =======
-------- (a) Includes amortization of nuclear fuel: 1999--$444 million; 1998--$325 million. 61 DUKE ENERGY CORPORATION Notes to Consolidated Financial Statements -- Continued 10. Debt and Credit Facilities Long-term Debt
December 31, -------------- Year Due 1999 1998 ---------- ------ ------ In millions Duke Energy First and refunding mortgage bonds:(a) 7%................................................. 2000 $ 200 $ 200 5 7/8%--6 5/8%..................................... 2001--2008 625 625 6 3/4%--8.30%...................................... 2023--2025 661 678 7%--8.95%.......................................... 2027--2033 165 165 Mortgage bonds matured during 1999................. -- 425 Pollution control debt, 3.85%--7.75%................ 2012--2017 172 172 Notes: 5.38%--9.21%....................................... 2009--2016 264 65 6%--6.6%........................................... 2028--2038 500 300 Commercial paper, 5.84% and 5.28% weighted-average rate at December 31, 1999 and 1998, respectively... 1,000 1,200 Other debt.......................................... 21 23 Duke Capital Corporation Senior Notes: 6 1/4%--7 1/2%..................................... 2004--2009 1,250 250 6 3/4%--8%......................................... 2018--2019 650 150 Commercial paper, 5.91% and 5.73% weighted-average rate at December 31, 1999 and 1998, respectively... 500 500 Note payable to affiliate 5.03% and 4.68% weighted- average rate at December 31, 1999 and 1998, respectively....................................... 83 24 PanEnergy Bonds: 7 3/4%............................................. 2022 328 328 8 5/8% Debentures.................................. 2025 100 100 Notes: 7%--9.9%, maturing serially........................ 2003--2006 395 395 Notes matured during 1999.......................... -- 114 TETCO Notes: 8%--10 3/8%........................................ 2000--2004 500 500 Medium-term, Series A, 7.64% -- 9.07%.............. 2001--2012 51 100 Algonquin Gas Transmission Company 9.13% Notes........................................ 2003 100 100 Crescent Resources, Inc(b) Construction and mortgage loans, 5.86%--7.26%....... 2000--2011 46 69 Revolving credit facilities, 5.98% weighted-average rate at December 31, 1998.......................... 2001 -- 100 Global Asset Development Medium-term note, 7.25%............................. 2004 162 -- Credit facilities, 6.01% weighted-average rate at December 31, 1999.................................. 2002 460 -- Notes: 7.69%--18%......................................... 2000--2005 107 33 7.8%............................................... 2004--2013 161 -- 6%--10%(c)......................................... 2013--2017 485 -- Capital leases...................................... 2009--2028 207 -- Notes matured during 1999........................... -- 78 Other debt of subsidiaries.......................... 34 313 Unamortized debt discount and premium, net.......... (62) (48) ------ ------ Total long-term debt................................ 9,165 6,959 Current maturities of long-term debt................ (482) (687) ------ ------ Total long-term portion............................. $8,683 $6,272 ====== ======
- -------- (a) Substantially all of Electric Operations' electric plant was mortgaged. (b) Substantial amounts of Crescent Resources' real estate development projects, land and buildings were pledged as collateral. (c) Paranapanema (Brazil) debt, principal is indexed annually to inflation. 62 DUKE ENERGY CORPORATION Notes to Consolidated Financial Statements -- Continued 10. Debt and Credit Facilities -- Continued Annual Maturities
In millions 2000............................................................. $482 2001............................................................. 306 2002............................................................. 225 2003............................................................. 601 2004............................................................. 958
Annual maturities exclude $1,736 million of long-term debt that matures after 2004 which have call options whereby Duke Energy has the option to repay the debt early. Based on the years in which Duke Energy may first exercise their redemption options, $881 million could potentially be repaid in 2000, $328 million in 2002, $227 million in 2003, $200 million in 2004 and $100 million thereafter. Credit Facilities
December 31, 1999 December 31, 1998 ---------------------- ---------------------- Credit Credit Facilities Outstanding Facilities Outstanding ---------- ----------- ---------- ----------- In millions 364-day facilities (a)....... $ 823 $ 10 $ 600 $ -- Three-year revolving facilities.................. 565 450 -- -- Four-year revolving facilities.................. 125 -- 125 100 Five-year revolving facilities (a).............. 2,200 -- 2,200 -- ------ ---- ------ ---- Total Consolidated......... $3,713 $460 $2,925 $100 ====== ==== ====== ====
-------- (a) Supported commercial paper facilities. Notes Payable and Commercial Paper
December 31, ---------------- 1999 1998 ------- ------- In millions Credit facilities outstanding.............................. $ 460 $ 100 Note payable............................................... 86 4 Commercial paper outstanding............................... 1,764 1,905 ------- ------- 2,310 2,009 Less portion classified as long-term Credit facilities........................................ (460) (100) Note payable............................................. (83) -- Commercial paper......................................... (1,500) (1,700) ------- ------- Portion classified as short-term........................... $ 267 $ 209 ======= =======
The weighted average interest rate on outstanding short-term notes payable and commercial paper at December 31, 1999 and 1998 was 5.72% and 5.23%, respectively. 63 DUKE ENERGY CORPORATION Notes to Consolidated Financial Statements -- Continued 11. Nuclear Decommissioning Costs Nuclear Decommissioning Costs. Estimated site-specific nuclear decommissioning costs, including the cost of decommissioning plant components not subject to radioactive contamination, total approximately $1.9 billion stated in 1999 dollars based on decommissioning studies completed in 1999. This amount includes Duke Energy's 12.5% ownership in the Catawba Nuclear Station. The other joint owners of Catawba Nuclear Station are responsible for decommissioning costs related to their ownership interests in the station. Both the NCUC and the PSCSC have granted Duke Energy recovery of estimated decommissioning costs through retail rates over the expected remaining service periods of Duke Energy's nuclear stations. Such estimates presume each unit will be decommissioned as soon as possible following the end of its license life. Although subject to extension, the current operating licenses for Duke Energy's nuclear units expire as follows: Oconee 1 and 2 --2013, Oconee 3 -- 2014; McGuire 1 -- 2021, McGuire 2 -- 2023; and Catawba 1 -- 2024, Catawba 2 -- 2026. During 1999 and 1998, Duke Energy expensed approximately $57 million which was contributed to the external funds for decommissioning costs and accrued an additional $6 million to the internal reserve. Nuclear units are depreciated at an annual rate of 4.7%, of which 1.61% is for decommissioning. The balance of the external funds as of December 31, 1999 and 1998 was $703 million and $580 million, respectively. The balance of the internal reserve as of December 31, 1999 and 1998 was $223 million and $217 million, respectively, and is reflected in the Consolidated Balance Sheets as Accumulated Depreciation and Amortization. Management believes that the decommissioning costs being recovered through rates, when coupled with assumed after-tax fund earnings of 5.5% to 5.9%, are currently sufficient to provide for the cost of decommissioning. A provision in the Energy Policy Act of 1992 established a fund for the decontamination and decommissioning of the Department of Energy's (DOE) uranium enrichment plants. Licensees are subject to an annual assessment for 15 years based on their pro rata share of past enrichment services. The annual assessment is recorded in the Consolidated Statements of Income and Comprehensive Income as Fuel Used in Electric Generation. Duke Energy paid $10 million during 1999 and has paid $75 million cumulatively related to its ownership interests in nuclear plants. The remaining liability and regulatory assets of $70 million and $79 million at December 31, 1999 and 1998, respectively, are reflected in the Consolidated Balance Sheets as Deferred Credits and Other Liabilities, and Regulatory Assets and Deferred Debits, respectively. Spent Nuclear Fuel. 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. Payments made to the DOE for disposal costs are based on nuclear output and are included in the Consolidated Statements of Income and Comprehensive Income as Fuel Used in Electric Generation. 12. Guaranteed Preferred Beneficial Interests in Subordinated Notes of Duke Energy or Subsidiaries Duke Energy and Duke Capital Corporation (Duke Capital) have each formed business trusts for which they own all the respective common securities. The trusts issue and sell preferred securities and invest the gross proceeds in assets of the trusts. Substantially all the assets of each trust are junior subordinated notes issued by the respective company. 64 DUKE ENERGY CORPORATION Notes to Consolidated Financial Statements -- Continued 12. Guaranteed Preferred Beneficial Interests in Subordinated Notes of Duke Energy or Subsidiaries -- Continued Trust Preferred Securities
December 31, --------------- Issued Rate 1999 1998 Junior Subordinated Notes ------ ----- ------- ------ ------------------------- In millions Duke Energy 1997.................... 7.2% $ 350 $ 350 7.2% Series A due 2037 1999.................... 7.2% 250 -- 7.2% Series B due 2039 Duke Capital 1998.................... 7 3/8% 250 250 7 3/8% Series A due 2038 1998.................... 7 3/8% 350 350 7 3/8% Series B due 2038 1999.................... 8 3/8% 250 -- 8 3/8% Series C due 2029 Unamortized debt discount................. (46) (31) ------- ----- $ 1,404 $ 919 ======= =====
These trust preferred securities represent preferred undivided beneficial interests in the assets of the respective trusts. Payment of distributions on these preferred securities is guaranteed by the respective company, but only to the extent the trusts have funds legally and immediately available to make such distributions. Dividends of $87 million, $44 million and $15 million related to the trust preferred securities have been included in the Consolidated Statements of Income and Comprehensive Income as Minority Interests for the years ended December 31, 1999, 1998 and 1997, respectively. 13. Preferred and Preference Stock Authorized Shares of Stock as of December 31, 1999 and 1998
Par Value Shares --------- ----------- In millions Preferred Stock........................................ $100 12.5 Preferred Stock A...................................... $ 25 10.0 Preference Stock....................................... $100 1.5
As of December 31, 1999 and 1998, there were no shares of preference stock outstanding. Preferred Stock with Sinking Fund Requirements
December 31, Shares Outstanding ------------------- Rate/Series Year Issued at December 31, 1999 1999 1998 ----------- ----------- -------------------- --------- --------- Dollars in millions 6.10% C (Preferred Stock A)....... 1992 800,000 $ 20 $ 20 6.20% D (Preferred Stock A)....... 1992 800,000 20 20 6.20% T........................... 1992 130,000 13 13 6.30% U........................... 1992 130,000 13 13 6.40% V........................... 1992 130,000 13 13 6.75% X........................... 1993 250,000 25 25 5.95% B (Preferred Stock A) (a)... 1992 -- -- 20 --------- --------- Total....................... $ 104 $ 124 ========= =========
-------- (a) Preferred stock series redeemed in September 1999. 65 DUKE ENERGY CORPORATION Notes to Consolidated Financial Statements -- Continued 13. Preferred and Preference Stock -- Continued The annual sinking fund requirements for 2000 through 2004 are $33 million, $33 million, $13 million, $2 million and $2 million, respectively. Some additional redemptions are permitted at Duke Energy's option. Preferred Stock without Sinking Fund Requirements
December 31, ------------------- Year Shares Outstanding Rate/Series Issued at December 31, 1999 1999 1998 ----------- ------ -------------------- --------- --------- Dollars in millions 4.50% C..................... 1964 175,000 $ 18 $ 18 7.85% S..................... 1992 300,000 30 30 7.00% W..................... 1993 249,989 25 25 7.04% Y..................... 1993 299,995 30 30 6.375% (Preferred Stock A).. 1993 1,257,185 31 31 Auction Series A............ 1990 750,000 75 75 --------- --------- Total..................... $ 209 $ 209 ========= =========
The call provisions for the outstanding preferred stock specify various redemption prices not exceeding 104% of par value, plus accumulated dividends to the redemption date. During February 1998, Duke Energy purchased approximately two million shares of its preferred stock for $180 million. During December 1997, Duke Energy redeemed approximately three million shares of preferred stock for $203 million. The premiums related to these redemptions were included in the Consolidated Statements of Income and Comprehensive Income as Dividends and Premiums on Redemptions of Preferred and Preference Stock for 1997. 14. Commitments and Contingencies Nuclear Insurance. Duke Energy owns and operates the McGuire and Oconee Nuclear Stations with two and three nuclear reactors, respectively, and operates and has a partial ownership interest in the Catawba Nuclear Station with two nuclear reactors. Nuclear insurance coverage is maintained in three program areas: liability coverage; property, decontamination and decommissioning coverage; and business interruption and/or extra expense coverage. Certain expenses associated with nuclear insurance premiums paid by Duke Energy are reimbursed by the other joint owners of the Catawba Nuclear Station. Pursuant to the Price-Anderson Act, Duke Energy is required to insure against public liability claims resulting from nuclear incidents to the full limit of liability of approximately $9.8 billion. Primary Liability Insurance. The maximum required private primary liability insurance of $200 million has been purchased along with a like amount to cover certain worker tort claims. Excess Liability Insurance. This policy currently provides approximately $9.6 billion of coverage through the Price-Anderson Act's mandatory industry-wide excess secondary insurance program of risk pooling. The $9.6 billion of coverage is the sum of the current potential cumulative retrospective premium assessments of $88 million per licensed commercial nuclear reactor. This $9.6 billion will be increased by $88 million as each additional commercial nuclear reactor is licensed, or reduced by $88 million for certain nuclear reactors that are no longer operational and may be exempted from the risk pooling insurance program. Under this program, licensees could be assessed retrospective premiums to compensate for damages in the event of a nuclear incident at any licensed facility in the nation. If such an incident occurs and public liability damages exceed primary insurances, licensees may be assessed up to $88 million for each of their licensed reactors, payable at a rate not 66 DUKE ENERGY CORPORATION Notes to Consolidated Financial Statements -- Continued 14. Commitments and Contingencies -- Continued to exceed $10 million a year per licensed reactor for each incident. The $88 million amount is subject to indexing for inflation and may be subject to state premium taxes. Duke Energy is a member of Nuclear Electric Insurance Limited (NEIL), which provides property and business interruption insurance coverage for Duke Energy's nuclear facilities under the following three policy programs: Primary Property Insurance. This policy provides $500 million in primary property damage coverage for each of Duke Energy's nuclear facilities. Excess Property Insurance. This policy provides excess property, decontamination and decommissioning liability insurance in the following amounts: $2.25 billion for the Catawba Nuclear Station and $1.5 billion each for the Oconee and McGuire Nuclear Stations. Business Interruption Insurance. This policy provides business interruption and/or extra expense coverage resulting from an accidental outage of a nuclear unit. Each unit of the McGuire and Catawba Nuclear Stations is insured for up to approximately $4 million per week and the Oconee Nuclear Station units are insured for up to approximately $3 million per week. Coverage amounts per unit decline if more than one unit is involved in an accidental outage. Initial coverage begins after a 12-week deductible period and continues at 100% for 52 weeks and 80% for the next 110 weeks. If NEIL's losses ever exceed its reserves for any of the above three programs, Duke Energy will be liable for assessments of up to five times its annual premiums. The current potential maximum assessments are as follows: Primary Property Insurance -- $22 million; Excess Property Insurance -- $22 million; Business Interruption Insurance -- $20 million. The other joint owners of the Catawba Nuclear Station are obligated to assume their pro rata share of any liabilities for retrospective premiums and other premium assessments resulting from the Price-Anderson Act's excess secondary insurance program of risk pooling or the NEIL policies. Environmental. Duke Energy is subject to international, federal, state and local regulations regarding air and water quality, hazardous and solid waste disposal and other environmental matters. Manufactured Gas Plants and Superfund Sites. Duke Energy was an operator of manufactured gas plants until the early 1950s and has entered into a cooperative effort with the State of North Carolina and other owners of certain former manufactured gas plant sites to investigate and, where necessary, remediate these contaminated sites. The State of South Carolina has expressed interest in entering into a similar arrangement. Duke Energy is considered by regulators to be a potentially responsible party and may be subject to future liability at seven federal Superfund sites and two state Superfund sites. While the cost of remediation of the remaining sites may be substantial, Duke Energy will share in any liability associated with remediation of contamination at such sites with other potentially responsible parties. Management believes that resolution of these matters will not have a material adverse effect on consolidated results of operations or financial position. PCB (Polychlorinated Biphenyl) Assessment and Clean-up Programs. In June 1999, the Environmental Protection Agency (EPA) certified that TETCO, a wholly owned subsidiary of Duke Energy, had completed clean up of PCB contaminated sites under conditions stipulated by a U.S. Consent Decree in 1989. TETCO is required to continue groundwater monitoring on a number of sites for at least the next two years. The estimated cost of such monitoring is not material. 67 DUKE ENERGY CORPORATION Notes to Consolidated Financial Statements -- Continued 14. Commitments and Contingencies -- Continued Under terms of the agreement with CMS discussed in Note 2 to the Consolidated Financial Statements, Duke Energy is obligated to complete clean-up of previously identified contamination at certain agreed-upon sites on the PEPL and Trunkline systems. These clean-up programs are expected to continue until 2001. The contamination resulted from the past use of lubricants containing PCBs and the prior use of wastewater collection facilities and other on-site disposal areas. Soil and sediment testing, to date, has detected no significant off-site contamination. Duke Energy has communicated with the EPA and appropriate state regulatory agencies on these matters. At December 31, 1999 and 1998, remaining estimated clean-up costs on the TETCO, PEPL and Trunkline systems have been accrued and are included in the Consolidated Balance Sheets as Other Current Liabilities and Environmental Clean-up Liabilities. These cost estimates represent gross clean-up costs expected to be incurred, have not been discounted or reduced by customer recoveries and generally do not include fines, penalties or third-party claims. Costs expected to be recovered from customers have been deferred and are included in the Consolidated Balance Sheets as of December 31, 1999 and 1998, as Environmental Clean-up Costs. The federal and state clean-up programs are not expected to interrupt or diminish Duke Energy's ability to deliver natural gas to customers. Based on Duke Energy's experience to date and costs incurred for clean-up operations, management believes the resolution of matters relating to the environmental issues discussed above will not have a material adverse effect on consolidated results of operations or financial position. Injury and Damages Claims. Duke Energy has experienced numerous claims relating to damages for personal injury alleged to have arisen from the exposure to or use of asbestos in connection with construction and maintenance activities performed by Duke Energy on its electric generation plants during the 1960s and 1970s. During 1999, Duke Energy experienced a significant increase in the number of these claims. This increase, coupled with its cumulative experience in claims received, prompted Duke Energy to conduct a comprehensive review which was completed in late 1999 and to record an $800 million accrual, which is included in Other Deferred Credits and Other Liabilities in the Consolidated Financial Statements, to reflect the purchase of a third party insurance policy as well as estimated amounts for future claims not recoverable under such policy. The insurance policy, combined with amounts covered by self-insurance reserves, provides for claims paid up to an aggregate of $1.6 billion. Duke Energy currently believes the estimated claims relating to this exposure will not exceed such amount. While Duke Energy is uncertain as to the timing of when claims will be received, portions of the estimated claims may not be received and paid for 30 or more years. Amounts reserved for injury and damages claims were not material in 1998 and 1997. While Duke Energy has recorded an accrual related to this estimated liability, such estimates cannot be made with certainty. Factors, such as the frequency and magnitude of claims, could result in changes in the estimates of the injury and damages liability and insurance recoveries. Such changes could result in, over time, a difference from the amount currently reflected in the financial statements. However, due to Duke Energy's insurance program related to this liability, management believes that any changes in the estimates would not have a material adverse affect on consolidated results of operations or financial position. Litigation. Duke Energy and its subsidiaries are involved in legal, tax and regulatory proceedings before various courts, regulatory commissions and governmental agencies regarding performance, contracts and other matters arising in the ordinary course of business, some of which involve substantial amounts. Where appropriate, Duke Energy has made accruals in accordance with SFAS No. 5, "Accounting for Contingencies," to provide for such matters. Management believes that the final disposition of these proceedings will not have a material adverse effect on consolidated results of operations or financial position. 68 DUKE ENERGY CORPORATION Notes to Consolidated Financial Statements -- Continued 14. Commitments and Contingencies -- Continued Other Commitments and Contingencies. Periodically, Duke Energy may become involved in contractual disputes with natural gas transmission customers involving potential or threatened abrogation of contracts by the customers. If the customers are successful, Duke Energy may not receive the full value of anticipated benefits under the contracts. In the normal course of business, certain of Duke Energy's subsidiaries and affiliates enter into various contracts for energy services that contain certain schedule and performance requirements. Certain subsidiaries of Duke Energy had guaranteed performance under some of these contracts in the amount of approximately $2.5 billion and $1.2 billion as of December 31, 1999 and 1998, respectively. In addition, certain subsidiaries of Duke Energy have guaranteed debt agreements of affiliates and have provided surety bonds and letters of credit, all of which totaled approximately $853 million and $492 million as of December 31, 1999 and 1998, respectively. The increase in the amount of these obligations is due to the increased construction activities at Duke Energy North America and Duke/Fluor Daniel. Management monitors and approves these obligations and believes it is unlikely that Duke Energy would be required to perform or otherwise incur any material losses associated with the above obligations. Management believes that these commitments and contingencies will not have a material adverse effect on consolidated results of operations or financial position. Leases. Duke Energy utilizes assets under operating leases in several areas of operations. Consolidated rental expense amounted to $87 million, $80 million and $92 million in 1999, 1998 and 1997, respectively. Future minimum rental payments under Duke Energy's various operating leases for the years 2000 through 2004 are $79 million, $68 million, $58 million, $50 million and $45 million, respectively. 15. Common Stock At Duke Energy's annual meeting of shareholders held on April 15, 1999, shareholders approved an amendment to the Articles of Incorporation to increase the authorized common stock from 500 million to 1 billion shares. In 1996, the Board of Directors authorized Duke Energy to repurchase up to $1 billion of its common stock during the period beginning February 1996 and ending February 2001. No repurchases of common stock were made in 1999, 1998 or 1997, and none are anticipated in the future. 16. Stock-Based Compensation Under Duke Energy's 1998 Stock Incentive Plan, stock options for up to fifteen million shares of common stock may be granted to key employees. Under the plan, the exercise price of each option granted equals the market price of Duke Energy's common stock on the date of grant. Vesting periods range from one to five years with a maximum exercise term of ten years. Effective with Duke Energy's merger with PanEnergy Corp, each share of PanEnergy common stock, outstanding immediately prior to the merger, was converted into the right to receive 1.0444 shares of Duke Energy common stock. Each option to purchase PanEnergy common stock, outstanding prior to the merger, was assumed by Duke Energy and became exercisable upon the same terms as under the applicable PanEnergy stock option plan and option agreement, except that these options became options to purchase shares of Duke Energy common stock, appropriately adjusted. 69 DUKE ENERGY CORPORATION Notes to Consolidated Financial Statements -- Continued 16. Stock-Based Compensation -- Continued Stock Option Activity
Weighted Options Average (In thousands) Exercise Price -------------- -------------- Outstanding at December 31, 1996............... 3,274 $20 Granted...................................... 388 44 Exercised.................................... (873) 19 Forfeited.................................... (60) 27 ----- Outstanding at December 31, 1997............... 2,729 24 Granted...................................... 3,548 57 Exercised.................................... (948) 21 Forfeited.................................... (868) 57 ----- Outstanding at December 31, 1998............... 4,461 45 Granted...................................... 5,154 54 Exercised.................................... (428) 23 Forfeited.................................... (375) 57 ----- Outstanding at December 31, 1999............... 8,812 51 =====
Stock Options at December 31, 1999
Outstanding Exercisable ------------------------------------ ----------------------- Weighted Weighted Weighted Range of Average Average Average Exercise Number Remaining Exercise Number Exercise Prices (In thousands) Life (Years) Price (In thousands) Price -------- -------------- ------------ -------- -------------- -------- $10 to $14 36 1.4 $12 36 $12 $15 to $20 728 4.0 19 728 19 $21 to $25 153 4.2 23 153 23 $26 to $31 157 6.1 27 157 27 $42 to $50 2,992 9.8 49 124 44 $51 to $59 4,443 8.6 58 582 57 $60 to $67 303 9.0 65 13 67 ----- ----- Total 8,812 1,793 34 ===== =====
Duke Energy had 1.5 million and 2.4 million options exercisable at December 31, 1998 and 1997, with weighted average exercise prices of $22 and $21 per option, respectively. The weighted-average fair value of options granted was $10, $9 and $10 per option during 1999, 1998 and 1997, respectively. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model. Weighted-Average Assumptions for Option-Pricing
1999 1998 1997 ------- ------- ------- Stock dividend yield................................. 4.1% 4.2% 3.5% Expected stock price volatility...................... 18.8% 15.1% 20.7% Risk-free interest rates............................. 5.9% 5.6% 6.5% Expected option lives................................ 7 years 7 years 7 years
70 DUKE ENERGY CORPORATION Notes to Consolidated Financial Statements -- Continued 16. Stock-Based Compensation -- Continued Had compensation expense for stock-based compensation been determined based on the fair value at the grant dates, 1999 net income would have been $1,498 million, or $4.06 per basic share; 1998 net income would have been $1,250 million, or $3.40 per basic share; and 1997 net income would have been $971 million, or $2.50 per basic share. Duke Energy has the 1996 Stock Incentive Plan (the 1996 Plan) under which two million shares of common stock were reserved for awards to employees. Restricted stock grants made under the 1996 Plan vest over a period ranging between one and five years. Duke Energy awarded 65,850 restricted shares (fair value at grant dates of approximately $4 million) in 1999 and 3,000 restricted shares in 1998. Compensation expense for the grants is charged to earnings over the restriction period and was not material in 1999, 1998 or 1997. In addition, Duke Energy granted Performance Awards under the 1998 Long-Term Incentive Plan (the 1998 Plan), under which fifteen million shares of common stock have been reserved for employee awards. Grants under the 1998 Plan vest over periods ranging between one and seven years. Duke Energy awarded 493,200 shares (fair value at grant dates of $26 million) in 1999. Compensation expense for the stock grants is charged to earnings over the vesting period, and amounted to $3 million in 1999. 17. Employee Benefit Plans Retirement Plans. Duke Energy and its subsidiaries maintain a non- contributory defined benefit retirement plan covering most employees with minimum service requirements using a cash balance formula. Under a cash balance formula, a plan participant accumulates a retirement benefit based upon a percentage, which may vary with age and years of service, of current eligible earnings and current interest credits. On December 31, 1998, all defined benefit retirement plans maintained by Duke Energy and its subsidiaries, except for the PanEnergy retirement plan, were merged to form the Duke Energy Retirement Cash Balance Plan (Duke Energy Plan). The plan merger changed the benefit for certain participants, from a formula based primarily on benefit accrual service and highest average earnings, to a cash balance formula. Through December 31, 1998, the PanEnergy retirement plan provided retirement benefits (i) for eligible employees of certain subsidiaries that are generally based on an employee's years of benefit accrual service and highest average eligible earnings, and (ii) for eligible employees of certain other subsidiaries under a cash balance formula. In 1998, a significant amount of lump sum payouts was made from the PanEnergy plan resulting in a settlement gain of $10 million. Effective January 1, 1999, the benefit formula under the PanEnergy plan, for all eligible employees, was changed to a cash balance formula. In connection with the 1999 sale of the Midwest Pipelines to CMS, benefit accruals under the PanEnergy plan were frozen on December 31, 1998 for all participants who, as a result of the sale, became employees of CMS and its subsidiaries. Once the transfer of the benefit obligation and related assets of the affected participants to CMS was completed, the PanEnergy plan was merged into the Duke Energy Plan. Duke Energy's policy is to fund amounts, as necessary, on an actuarial basis to provide assets sufficient to meet benefits to be paid to plan participants. On December 30, 1997, assets and related liabilities of $236 million and $204 million, respectively, for certain PanEnergy plan participants were transferred to the Duke Power plan. As a result of this transfer, no contributions to the Duke Energy plan were necessary in 1999 or 1998. 71 DUKE ENERGY CORPORATION Notes to Consolidated Financial Statements -- Continued 17. Employee Benefit Plans -- Continued Components of Net Periodic Pension Costs
For the Years Ended December 31, ---------------------- 1999 1998 1997 ------ ------ ------ In millions Service cost benefit earned during the year.......... $ 72 $ 63 $ 62 Interest cost on projected benefit obligation........ 165 169 164 Expected return on plan assets....................... (224) (218) (209) Amortization of prior service cost................... (3) (4) (5) Amortization of net transition asset................. (4) (4) (4) Recognized net actuarial loss........................ 12 10 17 Settlement gain...................................... -- (10) -- ------ ------ ------ Net periodic pension costs........................... $ 18 $ 6 $ 25 ====== ====== ======
Reconciliation of Funded Status to Pre-funded Pension Costs
December 31, -------------- 1999 1998 ------ ------ In millions Change in Benefit Obligation Benefit obligation at beginning of year...................... $2,540 $2,372 Service cost................................................. 72 63 Interest cost................................................ 165 169 Plan amendment............................................... -- 5 Actuarial (gain) loss........................................ (41) 141 Transfer to CMS.............................................. (85) -- Benefits paid................................................ (205) (210) ------ ------ Benefit obligation at end of year............................ $2,446 $2,540 ====== ====== Change in Plan Assets Fair value of plan assets at beginning of year (a)........... $2,922 $2,725 Actual return on plan assets................................. 491 406 Employer contributions....................................... (2) 1 Transfer to CMS.............................................. (85) -- Benefits paid................................................ (205) (210) ------ ------ Fair value of plan assets at end of year (a)................. $3,121 $2,922 ====== ====== Funded status................................................ $ 675 $ 382 Unrecognized net experience (gain) loss...................... (315) 2 Unrecognized prior service cost reduction.................... (24) (27) Unrecognized net transition asset............................ (21) (25) ------ ------ Pre-funded pension costs..................................... $ 315 $ 332 ====== ======
-------- (a) Principally equity and fixed income securities. 72 DUKE ENERGY CORPORATION Notes to Consolidated Financial Statements -- Continued 17. Employee Benefit Plans -- Continued Assumptions Used for Pension Benefits Accounting (a)
1999 1998 1997 ---- ---- ---- Percent Discount rate................................................. 7.50 6.75 7.25 Salary increase............................................... 4.50 4.67 4.15 Expected long-term rate of return on plan assets.............. 9.25 9.25 9.25
-------- (a) Reflects weighted averages across all plans. Duke Energy also sponsors employee savings plans which cover substantially all employees. Employer matching contributions of $68 million, $53 million and $53 million were expensed in 1999, 1998 and 1997, respectively. Other Postretirement Benefits. Duke Energy and most of its subsidiaries provide certain health care and life insurance benefits for retired employees on a contributory and non-contributory basis. Employees become eligible for these benefits if they have met certain age and service requirements at retirement, as defined in the plans. Under plan amendments effective late 1998 and early 1999, health care benefits for future retirees were changed to limit employer contributions and medical coverage. Such benefit costs are accrued over the active service period of employees to the date of full eligibility for the benefits. The net unrecognized transition obligation, resulting from the implementation of accrual accounting, is being amortized over approximately 20 years. Components of Net Periodic Postretirement Benefit Costs
For the Years Ended December 31, ---------------------- 1999 1998 1997 ------ ------ ------ In millions Service cost benefit earned during the year........ $ 7 $ 10 $ 10 Interest cost on accumulated postretirement benefit obligation........................................ 40 43 46 Expected return on plan assets..................... (21) (18) (19) Amortization of prior service cost................. 1 7 6 Amortization of net transition obligation.......... 18 16 16 Recognized net actuarial (gain) loss............... (1) 1 (1) ------ ------ ------ Net periodic postretirement benefit costs.......... $ 44 $ 59 $ 58 ====== ====== ======
73 DUKE ENERGY CORPORATION Notes to Consolidated Financial Statements -- Continued 17. Employee Benefit Plans -- Continued Reconciliation of Funded Status to Accrued Postretirement Benefit Costs
December 31, -------------- 1999 1998 ------ ------ In millions Change in Benefit Obligation Accumulated postretirement benefit obligation at beginning of year................................................... $ 625 $ 667 Service cost............................................... 7 10 Interest cost.............................................. 40 43 Plan participants' contributions........................... 7 6 Amendments................................................. -- (49) Actuarial gain............................................. (68) (6) Benefits paid.............................................. (49) (46) ------ ------ Accumulated postretirement benefit obligation at end of year...................................................... $ 562 $ 625 ------ ------ Change in Plan Assets Fair value of plan assets at beginning of year (a)......... $ 305 $ 266 Actual return on plan assets............................... 41 34 Employer contributions..................................... 23 45 Plan participants' contributions........................... 7 6 Benefits paid.............................................. (49) (46) ------ ------ Fair market value of plan assets at end of year (a)........ $ 327 $ 305 ------ ------ Funded status.............................................. $ (235) $ (320) Unrecognized prior service cost............................ 8 9 Unrecognized net experience gain........................... (110) (23) Unrecognized transition obligation......................... 229 239 ------ ------ Accrued postretirement benefit costs....................... $ (108) $ (95) ====== ======
-------- (a) Principally equity and fixed income securities. Assumptions Used for Postretirement Benefits Accounting (a)
1999 1998 1997 ----- ----- ----- Percent Discount rate.............................................. 7.50 6.75 7.25 Salary increase............................................ 4.50 4.67 4.33 Expected long-term rate of return on 401(h) assets......... 9.25 9.25 9.25 Expected long-term rate of return on RLR assets............ 6.75 6.75 6.75 Expected long-term rate of return on VEBA assets........... 9.25 9.25 9.25 Assumed tax rate (b)....................................... 39.60 39.60 39.60
-------- (a) Reflects weighted averages across all plans. (b) Health care portion of postretirement benefits in VEBA trusts. For measurement purposes, a 5.0% weighted average rate of increase in the per capita cost of covered health care benefits was assumed for 1999. The rate was assumed to decrease gradually to 4.75% for 2005 and remain at that level thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. 74 DUKE ENERGY CORPORATION Notes to Consolidated Financial Statements -- Continued 17. Employee Benefit Plans -- Continued Sensitivity to Changes in Assumed Health Care Cost Trend Rates
1-Percentage- 1-Percentage- Point Increase Point Decrease -------------- -------------- In millions Effect on total of service and interest cost components................................. $ 3 $ (2) Effect on postretirement benefit obligation................................. 34 (24)
18. Quarterly Financial Data (Unaudited)
First Second Third Fourth Quarter Quarter Quarter Quarter Total ------- ------- ------- ------- ------- In millions, except per share data 1999 Operating revenues................ $4,160 $4,691 $6,694 $6,197 $21,742 Operating income.................. 627 531 884 (247) 1,795 EBIT.............................. 683 568 908 (116) 2,043 Income before extraordinary item.. 307 288 441 (189) 847 Net income........................ 967 288 441 (189) 1,507 Earnings per share (before extraordinary item) Basic........................... $ 0.83 $ 0.77 $ 1.20 $(0.53) $ 2.26 Dilutive........................ $ 0.83 $ 0.77 $ 1.19 $(0.53) $ 2.25 Earnings per share Basic........................... $ 2.65 $ 0.77 $ 1.20 $(0.53) $ 4.08 Dilutive........................ $ 2.64 $ 0.77 $ 1.19 $(0.53) $ 4.07 1998 Operating revenues................ $4,115 $4,014 $5,298 $4,183 $17,610 Operating income.................. 608 549 826 450 2,433 EBIT.............................. 678 582 871 516 2,647 Income before Extraordinary item.. 328 279 429 224 1,260 Net income........................ 320 279 429 224 1,252 Earnings per share before Extraordinary item) Basic........................... $ 0.89 $ 0.76 $ 1.18 $ 0.60 $ 3.43 Dilutive........................ $ 0.89 $ 0.76 $ 1.17 $ 0.60 $ 3.42 Earnings per share Basic........................... $ 0.87 $ 0.76 $ 1.18 $ 0.60 $ 3.41 Dilutive........................ $ 0.87 $ 0.76 $ 1.17 $ 0.60 $ 3.40
19. Subsequent Events On December 16, 1999, Duke Energy announced that it had signed definitive agreements to combine Duke Energy's gas gathering and processing businesses with Phillips Petroleum's Gas Processing and Marketing unit to form a new midstream company. Under the terms of the agreements, the new company will seek to arrange approximately $2.6 billion of debt financing and, upon closing of the transaction, will make a one-time cash distribution of $1.2 billion to both Duke Energy and Phillips Petroleum. At closing, Duke Energy will own about 70% of the new company and Phillips Petroleum will own about 30%. The new company would then offer approximately 20% of its equity to the public in 2000 to reduce the debt resulting from the transaction. Such an offering is conditional upon completion of the transaction and favorable market conditions. On January 4, 2000, Duke Energy announced that it had entered into a definitive agreement to purchase, for $386 million, 100% of the stock of El Paso Energy Corporation's wholly owned subsidiary, East Tennessee 75 DUKE ENERGY CORPORATION Notes to Consolidated Financial Statements -- Continued 19. Subsequent Events -- Continued Natural Gas Company, a 1,100-mile pipeline that crosses Duke Energy's TETCO pipeline and serves the southeastern region of the U.S. Both transactions are subject to regulatory approval and are expected to close in the first quarter of 2000. In January 2000, Duke Energy completed a tender offer to the minority shareholders of Paranapanema and successfully acquired an additional 51% economic interest in the company for approximately $280 million. This increases Duke Energy's economic ownership from approximately 44% to approximately 95%. 76 DUKE ENERGY CORPORATION SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Additions ------------------------- Balance at Charged to Charged to Balance at Beginning of Period Expense Other Accounts Deductions End of Period ------------------- ---------- -------------- ---------- ------------- In millions December 31, 1999: Injuries and Damages... $113 $ 900 $-- $111 $ 902 Other (a).............. 254 150 60(c) 104 360 ---- ------ --- ---- ------ $367 $1,050 $60 $215 $1,262 December 31, 1998 (b)... 367 December 31, 1997 (b)... 329
- -------- (a) Principally consists of property insurance reserves and litigation and other contingency reserves which are included in "Other Current Liabilities" or "Deferred Credits and Other Liabilities" in the Consolidated Balance Sheets. (b) Principally consists of injury and damages reserves, property insurance reserves and litigation and other contingency reserves which are included in "Other Current Liabilities" or "Deferred Credits and Other Liabilities" in the Consolidated Balance Sheets. (c) Principally litigation and other contingency reserves assumed in business combinations. 77 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Duke Energy Corporation We have audited the accompanying consolidated balance sheets of Duke Energy Corporation and subsidiaries (Duke Energy) as of December 31, 1999 and 1998, and the related consolidated statements of income and comprehensive income, common stockholders' equity and cash flows for each of the three years in the period ended December 31, 1999. Our audits also included the consolidated financial statement schedule listed in the accompanying index at Item 14. These financial statements and financial statement schedule are the responsibility of Duke Energy's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Duke Energy as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles. Also, in our opinion such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP Deloitte & Touche LLP Charlotte, North Carolina February 11, 2000 78 RESPONSIBILITY FOR FINANCIAL STATEMENTS The financial statements of Duke Energy Corporation (Duke Energy) are prepared by management, who are responsible for their integrity and objectivity. The statements are prepared in conformity with generally accepted accounting principles in all material respects and necessarily include judgments and estimates of the expected effects of events and transactions that are currently being reported. Duke Energy's system of internal accounting control is designed to provide reasonable assurance that assets are safeguarded and transactions are executed according to management's authorization. Internal accounting controls also provide reasonable assurance that transactions are recorded properly, so that financial statements can be prepared according to generally accepted accounting principles. In addition, accounting controls provide reasonable assurance that errors or irregularities which could be material to the financial statements are prevented or are detected by employees within a timely period as they perform their assigned functions. Duke Energy's accounting controls are continually reviewed for effectiveness. In addition, written policies, standards and procedures, and a strong internal audit program augment Duke Energy's accounting controls. The Board of Directors pursues its oversight role for the financial statements through the audit committee, which is composed entirely of directors who are not employees of Duke Energy. The audit committee meets with management and internal auditors periodically to review accounting control issues and to monitor each group's discharge of its responsibilities. The audit committee also meets periodically with Duke Energy's independent auditors, Deloitte & Touche LLP. The independent auditors have free access to the audit committee and the Board of Directors to discuss internal accounting control, auditing and financial reporting matters without the presence of management. /s/ Sandra P. Meyer Sandra P. Meyer Vice President and Corporate Controller 79 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. PART III. Item 10. Directors and Executive Officers of the Registrant. Reference is made to "Executive Officers of Duke Energy" included in "Item 1. Business" of this report. See "The Board of Directors," "Information on the Board of Directors" and "Other Information" in the proxy statement relating to Duke Energy's 2000 annual meeting of shareholders (the Proxy Statement), incorporated herein by reference. Item 11. Executive Compensation. See "Compensation" and "Information on the Board of Directors - Compensation of Directors" in the Proxy Statement, incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. See "Beneficial Ownership" in the Proxy Statement, incorporated herein by reference. Item 13. Certain Relationships and Related Transactions. See "Information on the Board of Directors -- Certain Relationships" in the Proxy Statement, incorporated herein by reference. 80 PART IV. Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K. (a) Consolidated Financial Statements, Supplemental Financial Data and Supplemental Schedule included in Part II of this annual report are as follows: Consolidated Financial Statements Consolidated Statements of Income and Comprehensive Income for the Years Ended December 31, 1999, 1998 and 1997 Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997 Consolidated Balance Sheets as of December 31, 1999 and 1998 Consolidated Statements of Common Stockholders' Equity for the Years Ended December 31, 1999, 1998 and 1997 Notes to Consolidated Financial Statements Quarterly Financial Data (unaudited) (included in Note 18 to the Consolidated Financial Statements) Consolidated Financial Statement Schedule II--Valuation and Qualifying Accounts and Reserves for the Years Ended December 31, 1999, 1998 and 1997 All other schedules are omitted because of the absence of the conditions under which they are required or because the required information is included in the financial statements or notes thereto. (b) Reports on Form 8-K A Current Report on Form 8-K filed on December 30, 1999 contained disclosures under Item 5, Other Events, and Item 7, Financial Statements and Exhibits. (c) Exhibits--See Exhibit Index immediately following the signature page. 81 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 20, 2000 Duke Energy Corporation (Registrant) By: Richard B. Priory Richard B. Priory Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. (i) Principal executive officer: Richard B. Priory Chairman of the Board, President and Chief Executive Officer (ii) Principal financial officer: Richard J. Osborne Executive Vice President and Chief Financial Officer (iii) Principal accounting officer: Sandra P. Meyer Vice President and Corporate Controller (iv) All of the Directors: Richard B. Priory G. Alex Bernhardt, Sr. Robert J. Brown William A. Coley William T. Esre Ann Maynard Gray Dennis R. Hendrix Harold S. Hook George Dean Johnson, Jr. Max Lennon Leo E. Linbeck, Jr. James G. Martin Russell M. Robinson, II Date: March 20, 2000 Richard J. Osborne, by signing his name hereto, does hereby sign this document on behalf of the registrant and on behalf of each of the above-named persons pursuant to a power of attorney duly executed by the registrant and such persons, filed with the Securities and Exchange Commission as an exhibit hereto. /s/ Richard J. Osborne By: __________________________________ Attorney-In-Fact 82 EXHIBIT INDEX Exhibits filed herewith are designated by an asterisk (*). All exhibits not so designated are incorporated by reference to a prior filing, as indicated. Items constituting management contracts or compensatory plans or arrangements are designated by a double asterisk (**).
Exhibit Number ------- 2 Agreement and Plan of Merger, dated as of November 24, 1996, as amended and restated as of March 10, 1997, among registrant, Duke Transaction Corporation and PanEnergy Corp (filed with Form 8-K dated March 20, 1997, File No. 1-4928, as Exhibit 2(a)). 3-A Restated Articles of Incorporation of registrant, dated June 18, 1997 (filed with Form S-8, No. 333-29563, effective June 19, 1997, as Exhibit 4(G)). *3-B Articles of Amendment to Restated Articles of Incorporation of registrant. *3-C By-Laws of registrant, as amended. 4 Rights Agreement, dated as of December 17, 1998, between the registrant and The Bank of New York, as Rights Agent (filed with Form 8-K dated February 11, 1999). 10-A Agreement, dated March 6, 1978, between the registrant and the North Carolina Municipal Power Agency No. 1 (filed with Form 8-K for the month of March 1978, File No. 1-4928). 10-B Agreement, dated August 1, 1980, between the registrant and Piedmont Municipal Power Agency (filed with Form 8-K for the month of August 1980, File No. 1-4928). 10-C Agreement, dated October 14, 1980, between the registrant and North Carolina Electric Membership Corporation (filed with Form 10-Q for the quarter ended September 30, 1980, File No. 1-4928). 10-D Agreement, dated October 14, 1980, between the registrant and Saluda River Electric Cooperative, Inc. (filed with Form 10-Q for the quarter ended September 30, 1980, File No. 1-4928). 10-E** Directors' Charitable Giving Program (filed with Form 10-K for the year ended December 31, 1992, File No. 1-4928, as Exhibit 10-P). 10-F** Estate Conservation Plan (filed with Form 10-K for the year ended December 31, 1992, File No. 1-4928, as Exhibit 10-R). 10-G** Directors' Savings Plan (filed with Form 10-K for the year ended December 31, 1996, File No. 1-4928, as Exhibit 10-BB). 10-H** Duke Power Company Stock Incentive Plan (filed as Appendix A to Schedule 14A of registrant, March 18, 1996, File No. 1- 4928).
83
Exhibit Number ------- 10-I** 1989 Non-employee Directors Stock Option Plan of Panhandle Eastern Corporation, adopted February 1, 1989 (filed with Form S-8 Registration Statement of Panhandle Eastern Corporation, File No. 33-28912, as Exhibit 28(a)). 10-J** 1982 Key Employee Stock Option Plan of Panhandle Eastern Corporation, as amended through December 3, 1986 (and related Agreement) (filed with Form 10-K of Panhandle Eastern Corporation for the year ended December 31, 1986, File No. 1- 8157, as Exhibit 10(g)). 10-K** Panhandle Eastern Corporation 1994 Long Term Incentive Plan (filed with Form 10-K of Panhandle Eastern Corporation for the year ended December 31, 1993, File No. 1-8157, as Exhibit 10.18). 10-L $1,250,000,000 Five-Year Credit Agreement dated as of August 25, 1997, among registrant, the banks listed therein and Morgan Guaranty Trust Company of New York, as Administrative Agent (filed with Form 10-K for the year ended December 31, 1997, as Exhibit 10-R). 10-M $950,000,000 Five-Year Credit Agreement dated as of August 25, 1997, among Duke Capital Corporation, the banks listed therein and The Chase Manhattan Bank, as Administrative Agent (filed with Form 10-K for the year ended December 31, 1997, as Exhibit 10-S). *10-N $600,000,000 364-Day Credit Agreement dated as of August 23, 1999, among Duke Capital Corporation, the banks listed therein and The Chase Manhattan Bank, as Administrative Agent. 10-O** Employment Agreement by and between the registrant and Richard B. Priory dated November 24, 1996 (incorporated by reference to Exhibit C-1 of Exhibit 2 to this Form 10-K), and the First Amendment thereto dated October 22, 1997 (filed with Form 10-K for the year ended December 31, 1997, as part of Exhibit 10- U). 10-P** Employment Agreement by and among PanEnergy Corp, the registrant and Fred J. Fowler dated November 24, 1996 (incorporated by reference to Exhibit B-3 of Exhibit 2 to this Form 10-K), and the First Amendment thereto dated October 24, 1997, filed herewith. 10-Q** Employment Agreement by and between the registrant and William A. Coley dated November 24, 1996 (incorporated by reference to Exhibit C-2 of Exhibit 2 to this Form 10-K), and the First Amendment thereto dated October 24, 1997 (filed with Form 10-K for the year ended December 31, 1997, as part of Exhibit 10- X). 10-R** Employment Agreement by and between the registrant and Richard J. Osborne dated November 24, 1996 (incorporated by reference to Exhibit C-3 of Exhibit 2 to this Form 10-K), and the First Amendment thereto dated October 27, 1997 (filed with Form 10-K for the year ended December 31, 1997, as part of Exhibit 10- Y).
84
Exhibit Number ------- 10-S** 1990 Long-Term Incentive Plan of Panhandle Eastern Corporation (filed with Form 10-K of Panhandle Eastern Corporation for the year ended December 31, 1990, File No. 1-8157, as Exhibit 10.14). 10-T Formation Agreement between PanEnergy Trading and Market Services, Inc. and Mobil Natural Gas, Inc. dated May 29, 1996 (filed with Form 10-Q of PanEnergy Corp for the quarter ended June 30, 1996, File No. 1-8157, as Exhibit 2). 10-U Duke Energy Corporation Long-Term Incentive Plan (filed as Appendix A to Schedule 14A of the registrant, March 16, 1998). 10-V** Duke Energy Corporation Policy Committee Short-Term Incentive Plan (filed as Appendix B to Schedule 14A of the registrant, March 16, 1998). 10-W Stock Purchase Agreement between PanEnergy Corp, Texas Eastern Corporation and CMS Energy Corporation, dated as of October 31, 1998 (filed as Exhibit 10 to Form 8-K of the registrant, File No. 1-4928, filed November 5, 1998). 10-X Merger and Purchase Agreement among Union Pacific Resources Company, Union Pacific Fuels, Inc., Duke Energy Field Services, Inc. and DEFS Merger Sub Corp., dated as of November 20, 1998 (filed as Exhibit 10 to Form 8-K of the registrant, File No. 1-4928, filed December 1, 1998). 10-Y** Duke Energy Corporation Executive Savings Plan (filed with Form 10-K Report of TEPPCO Partners, LP, File No. 1-10403, for the year ended December 31, 1999, as Exhibit 10.7). 10-Z** Duke Energy Corporation Executive Cash Balance Plan (filed with Form 10-K Report of TEPPCO Partners, LP, File No. 1- 10403, for the year ended December 31, 1999, as Exhibit 10.8). 10-AA** Duke Energy Corporation Retirement Benefit Equalization Plan (filed with Form 10-K Report of TEPPCO Partners, LP, File No. 1-10403, for the year ended December 31, 1999, as Exhibit 10.9). *10-BB** Form of Key Employee Severance Agreement and Release between the registrant and certain key executives. *10-CC** Form of Change in Control Agreement between the registrant and certain key executives. 10-DD Contribution Agreement by and among Phillips Petroleum Company, Duke Energy Corporation and Duke Energy Field Services L.L.C., dated as of December 16, 1999 (filed as Exhibit 2.1 to Form 8-K of the registrant, filed December 30, 1999). 10-EE Governance Agreement by and among Phillips Petroleum Company, Duke Energy Corporation and Duke Energy Field Services L.L.C., dated as of December 16, 1999 (filed as Exhibit 2.2 to Form 8- K of the registrant, filed December 30, 1999). *12 Computation of Ratio of Earnings to Fixed Charges. *21 List of Subsidiaries. *23(a) Independent Auditors' Consent. *24(a) Power of attorney authorizing Richard J. Osborne and others to sign the annual report on behalf of the registrant and certain of its directors and officers.
85 *24(b) Certified copy of resolution of the Management Committee of the Board of Directors of the registrant authorizing power of attorney. *27 Financial Data Schedule for the Year Ended December 31, 1999.
The total amount of securities of the registrant or its subsidiaries authorized under any instrument with respect to long-term debt not filed as an exhibit does not exceed 10% of the total assets of the registrant and its subsidiaries on a consolidated basis. The registrant agrees, upon request of the Securities and Exchange Commission, to furnish copies of any or all of such instruments. 86 EX-3.B 2 ARTICLES OF AMENDMENT OF DUKE ENERGY CORPORATION Exhibit 3-B ARTICLES OF AMENDMENT OF DUKE ENERGY CORPORATION The undersigned corporation hereby submits these Articles of Amendment for the purpose of amending its Articles of Incorporation: 1. The name of the corporation is Duke Energy Corporation. 2. The following amendment to the Articles of Incorporation of the corporation was adopted by the holders of its Common Stock on the 15th day of April, 1999, in the manner prescribed by law: The first unnumbered paragraph of Article IV of the Articles of Incorporation was amended to read as follows: The total number of authorized shares of this Corporation is 1,024,000,000 shares, divided unto 12,500,000 shares of Preferred Stock of the par value of $100 each (hereafter called Preferred Stock), 10,000,000 shares of Preferred Stock A of the par value of $25 each (hereafter called Preferred Stock A), 1,500,000 shares of Preference Stock of the par value of $100 each (hereafter called Preference Stock), and 1,000,000,000 shares of Common Stock without nominal or par value (hereafter called Common Stock). 3. Only shares of Common Stock of the corporation were entitled to vote with respect to the amendment. The number of such shares of the corporation outstanding at the time of such adoption was 364,145,736; the number of votes entitled to be cast thereon was 363,464,761; and the number of votes indisputably represented at the meeting of shareholders was 301,118,240. 4. The number of votes cast for such amendment was 255,717,157, and the number of votes cast against such amendment was 43,442,086. The total number of undisputed votes cast for the amendment was sufficient for approval of the amendment. This 28th day of April, 1999. DUKE ENERGY CORPORATION By: ______________________________ Richard B. Priory Chairman of the Board, President and Chief Executive Officer EX-3.C 3 BY-LAWS OF DUKE ENERGY CORPORATION Exhibit 3-C BY-LAWS OF DUKE ENERGY CORPORATION Date of Adoption: July 28, 1997 Amended February 17, 1999, April 15, 1999 and December 16, 1999 Exhibit 3-C TABLE OF CONTENTS -----------------
Page ---- ARTICLE I Offices........................................................................................ 1 Section 1.1. Principal Office.............................................................. 1 Section 1.2. Other Offices................................................................. 1 ARTICLE II Meetings of Shareholders....................................................................... 1 Section 2.1. Place of Meetings............................................................. 1 Section 2.2. Annual Meetings............................................................... 1 Section 2.3. Special Meetings.............................................................. 1 Section 2.4. Notice of Meetings............................................................ 1 Section 2.5. Voting Group.................................................................. 2 Section 2.6. Quorum........................................................................ 2 Section 2.7. Voting of Shares.............................................................. 2 Section 2.8. Proxies....................................................................... 3 Section 2.9. Notice of Shareholder Business and Nominations................................ 3 Section 2.10. Conduct of Meetings.......................................................... 5 Section 2.11. Inspectors of Elections...................................................... 6 Section 2.12. Shareholders' List........................................................... 6 ARTICLE III Board of Directors............................................................................ 6 Section 3.1. General Powers................................................................ 6 Section 3.2. Number and Qualifications..................................................... 6 Section 3.3. Election of Directors; Classes................................................ 7 Section 3.4. Removal....................................................................... 7 Section 3.5. Newly Created Directorships; Vacancies........................................ 7 Section 3.6. Compensation of Directors..................................................... 8 ARTICLE IV Meetings of Directors.......................................................................... 8 Section 4.1. Regular Meetings.............................................................. 8 Section 4.2. Special Meetings.............................................................. 8 Section 4.3. Notice........................................................................ 8 Section 4.4. Quorum and Manner of Acting................................................... 8 Section 4.5. Action by Consent of Board of Directors....................................... 8 Section 4.6. Conference Telephone Meetings................................................. 9 ARTICLE V Committees of the Board......................................................................... 9 Section 5.1. Management and Other Committees............................................... 9 Section 5.2................................................................................ 9 Section 5.3................................................................................ 10 ARTICLE VI Officers....................................................................................... 10 Section 6.1. Elected Officers.............................................................. 10 Section 6.2. Election and Term of Office................................................... 10 Section 6.3. Chairman of the Board and Chief Executive Officer............................. 11
i Section 6.4. President........................................................................... 11 Section 6.5. Vice Presidents..................................................................... 11 Section 6.6. Secretary........................................................................... 11 Section 6.7. Treasurer........................................................................... 11 Section 6.8. Controller.......................................................................... 12 Section 6.9. Assistant Secretaries, Assistant Treasurers and Assistant Controllers............... 12 Section 6.10. Removal............................................................................ 12 Section 6.11. Vacancies.......................................................................... 12 ARTICLE VII Stock Certificates and Transfers.................................................................... 13 Section 7.1. Certificates for Shares............................................................. 13 Section 7.2. Share Transfer Records.............................................................. 13 Section 7.3. Lost, Stolen or Destroyed Certificates.............................................. 13 Section 7.4. Fixing Record Date.................................................................. 14 Section 7.5. Holder of Record.................................................................... 14 ARTICLE VIII Contracts, Checks and Drafts, Deposits and Proxies................................................. 14 Section 8.1. Contracts........................................................................... 14 Section 8.2. Checks and Drafts................................................................... 14 Section 8.3. Deposits............................................................................ 14 Section 8.4. Proxies............................................................................. 14 ARTICLE IX Indemnification...................................................................................... 15 Section 9.1. Indemnification..................................................................... 15 ARTICLE X Miscellaneous......................................................................................... 16 Section 10.1. Fiscal Year........................................................................ 16 Section 10.2. Distributions...................................................................... 16 Section 10.3. Seal............................................................................... 16 Section 10.4. Waiver of Notice................................................................... 16 Section 10.5. Time Periods....................................................................... 16 Section 10.6. Resignations....................................................................... 16 Section 10.7. Definitions........................................................................ 16 ARTICLE XI Emergency Provisions................................................................................. 17 Section 11.1. General............................................................................ 17 Section 11.2. Unavailable Directors.............................................................. 17 Section 11.3. Authorized Number of Directors..................................................... 17 Section 11.4. Quorum............................................................................. 17 Section 11.5. Creation of Emergency Committee.................................................... 17 Section 11.6. Constitution of Emergency Committee................................................ 18 Section 11.7. Powers of Emergency Committee...................................................... 18 Section 11.8. Directors Becoming Available....................................................... 18 Section 11.9. Election of Board of Directors..................................................... 18 Section 11.10. Termination of Emergency Committee................................................ 18 Section 11.11. Nonexclusive Powers.............................................................. 18 ARTICLE XII Amendments.......................................................................................... 19 Section 12.1. Amendments......................................................................... 19
ii Exhibit 3-C BY-LAWS OF DUKE ENERGY CORPORATION (Adopted July 28, 1997 and Amended February 17, 1999, April 15, 1999 and December 16, 1999) ARTICLE I Offices Section 1.1. Principal Office. The principal office of the Corporation shall be located in Charlotte, North Carolina. Section 1.2. Other Offices. The Corporation may have such other offices either within or without the State of North Carolina as the Board of Directors may designate or as the business of the Corporation may from time to time require. ARTICLE II Meetings of Shareholders Section 2.1. Place of Meetings. All meetings of shareholders shall be held at such place either within or without the State of North Carolina as shall be fixed by the Board of Directors and designated in the notice of the meeting. Section 2.2. Annual Meetings. The annual meeting of shareholders for the election of directors and for the transaction of such other business as may properly come before the meeting shall be held on such date and at such time as may be fixed by the Board of Directors. Section 2.3. Special Meetings. Except as otherwise required by law and subject to the rights of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, special meetings of shareholders for any purpose or purposes may be called only by (i) the Board of Directors pursuant to a resolution stating the purpose or purposes thereof or (ii) by the Chairman of the Board of Directors. No business other than that stated in the notice shall be transacted at any special meeting. Section 2.4. Notice of Meetings. Written, printed or electronically transmitted notice, stating the place, day and hour of the meeting of shareholders and the purpose or purposes for which the meeting is called, shall be delivered by the Corporation not less 1 than 10 calendar days nor more than 60 calendar days before the date of the meeting, either personally, by mail, or by such other means as may be permitted by law to each shareholder of record entitled to vote at such meeting; provided that such notice must be given to all shareholders with respect to any meeting at which a merger or share exchange is to be submitted to shareholders for approval and in such other instances as required by law. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail with postage thereon prepaid, correctly addressed to the shareholder at such shareholder's address as it appears on the stock transfer books of the Corporation. If electronically transmitted, such notice shall be deemed to be delivered when transmitted to the shareholder at the electronic mail address most recently provided to the Corporation by the shareholder, unless the Corporation has reason to believe that such transmission is undeliverable at such address. Such further notice shall be given as may be required by law. When a meeting is adjourned to a different date, time or place, notice need not be given of the new date, time or place if the new date, time or place is announced at the meeting before adjournment and if a new record date is not or must not be fixed for the adjourned meeting; but if a new record date is fixed for the adjourned meeting (which must be done if the new date is more than 120 days after the date of the original meeting), notice of the adjourned meeting must be given as provided in this Section 2.4 to persons who are shareholders as of the new record date. Section 2.5. Voting Group. All shares of one or more classes or series that under the Articles of Incorporation or the North Carolina Business Corporation Act are entitled to vote and be counted together collectively on a matter at a meeting of shareholders constitute a voting group. All shares entitled by the Articles of Incorporation or the North Carolina Business Corporation Act to vote generally on a matter are for that purpose a single voting group. Classes or series of shares shall not be entitled to vote separately by voting group unless expressly authorized by the Articles of Incorporation or specifically required by law. Section 2.6. Quorum. Shares entitled to vote as a separate voting group may take action on a matter at a meeting of shareholders only if a quorum of that voting group exists. Unless otherwise required by law, the Articles of Incorporation or a By-Law adopted by the shareholders, a majority of the votes entitled to be cast on the matter by the voting group constitutes a quorum of that voting group for action on that matter. Once a share is represented for any purpose at a meeting, it is deemed present for quorum purposes for the remainder of the meeting and for any adjournment of that meeting unless a new record date is or must be set for that adjourned meeting. In the absence of a quorum at the opening of any meeting of shareholders, such meeting may be adjourned from time to time by the vote of a majority of the votes cast on the motion to adjourn; and, subject to the provisions of Section 2.4, at any adjourned meeting any business may be transacted that might have been transacted at the original meeting if a quorum exists with respect to the matter proposed. Section 2.7. Voting of Shares. Each outstanding share entitled to vote shall be entitled to one vote on each matter submitted to a vote at a meeting of shareholders. Except in the election of directors, the vote of a majority of shares voted on any matter at a meeting 2 of shareholders at which a quorum is present shall be the act of the shareholders on that matter, unless the vote of a greater number is required by law or by the Articles of Incorporation. Election of directors at all meetings of the shareholders at which directors are to be elected shall be by ballot, and, subject to the rights of the holders of any class of stock having a preference over the Common Stock as to dividends or upon liquidation to elect directors under specified circumstances, those nominees for election as directors who receive the highest number of votes at a meeting at which a quorum is present up to the maximum number of directors to be elected at such meeting shall be deemed to have been elected. Section 2.8. Proxies. Shares may be voted either in person or by one or more proxies authorized by an appointment of proxy given by the shareholder or by the shareholder's duly authorized attorney-in-fact, in any manner provided by law, including electronic or telephonic transmission. An appointment of proxy is valid for 11 months from the date of its execution, unless a different period is expressly provided in the appointment form. Section 2.9. Notice of Shareholder Business and Nominations. (A) Annual Meetings of Shareholders. (1) Nominations of persons for election to the Board of Directors and the proposal of business to be considered by the shareholders may be made at an annual meeting of shareholders (a) pursuant to the Corporation's notice of meeting pursuant to Section 2.4 of these By-Laws, (b) by or at the direction of the Board of Directors, or (c) by any shareholder of the Corporation who was a shareholder of record at the time of giving of notice provided for in this By-Law, who is entitled to vote at the meeting and who complies with the notice procedures set forth in this By-Law. (2) For nominations or other business to be properly brought before an annual meeting by a shareholder pursuant to clause (c) of paragraph (A)(1) of this By-Law, the shareholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a shareholder's notice shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the 90th calendar day nor earlier than the close of business on the 120th calendar day prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is more than 30 calendar days before or more than 60 calendar days after such anniversary date, notice by the shareholder to be timely must be so delivered not earlier than the close of business on the 120th calendar day prior to such annual meeting and not later than the close of business on the later of the 90th calendar day prior to such annual meeting or the 10th calendar day following the calendar day on which public announcement of the date of such meeting is first made by the Corporation. In no event shall the public announcement of an adjournment of an annual meeting of shareholders commence a new time period for the giving of a shareholder's notice as described above. Such shareholder's notice shall set forth (a) as to each person whom the shareholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is 3 otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Rule 14a-11 thereunder (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (b) as to any other business that the shareholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such shareholder and the beneficial owner, if any, on whose behalf the proposal is made; and as to the shareholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such shareholder, as they appear on the Corporation's books, and of such beneficial owner and (ii) the class and number of shares of the Corporation which are owned beneficially and of record by such shareholder and such beneficial owner. (3) Notwithstanding anything in the second sentence of paragraph (A)(2) of this By-Law to the contrary, in the event that the number of directors to be elected to the Board of Directors of the Corporation is increased and there is no public announcement by the Corporation naming all of the nominees for director or specifying the size of the increased Board of Directors at least 100 calendar days prior to the first anniversary of the preceding year's annual meeting of shareholders, a shareholder's notice required by this By-Law shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the 10th calendar day following the day on which such public announcement is first made by the Corporation. (B) Special Meetings of Shareholders. Only such business shall be conducted at a special meeting of shareholders as shall have been brought before the meeting pursuant to the Corporation's notice of meeting under Section 2.4 of these By-Laws. Nominations of persons for election to the Board of Directors may be made at a special meeting of shareholders at which directors are to be elected pursuant to the Corporation's notice of meeting (a) by or at the direction of the Board of Directors, or (b) provided that the Board of Directors has determined that directors shall be elected at such meeting, by any shareholder of the Corporation who is a shareholder of record at the time of giving of notice provided for in this By-Law, who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in this By-Law. In the event the Corporation calls a special meeting of shareholders for the purpose of electing one or more directors to the Board of Directors, any shareholder may nominate a person or persons (as the case may be) for election to such position(s) as specified in the Corporation's notice of meeting pursuant to such clause (b), if the shareholder's notice required by paragraph (A)(2) of this By- Law shall be delivered to the Secretary at the principal executive offices of the Corporation not earlier than the close of business on the 120th calendar day prior to such special meeting and not later than the close of business on the later of the 90th calendar day prior to such special meeting or the 10th calendar day following the day on which public announcement is first made of the date of such special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. In no event 4 shall the public announcement of an adjournment of a special meeting of shareholders commence a new time period for the giving of a shareholder's notice as described above. (C) General. (1) Only such persons who are nominated in accordance with the procedures set forth in this By-Law shall be eligible to serve as directors and only such business shall be conducted at a meeting of shareholders as shall have been brought before the meeting in accordance with the procedures set forth in this By-Law. Except as otherwise provided by law, the Articles of Incorporation or these By-Laws, the chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this By-Law and, if any proposed nomination or business is not in compliance with this By-Law, to declare that such defective proposal or nomination shall be disregarded. (2) For purposes of this By-Law, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. (3) Notwithstanding the foregoing provisions of this By-Law, a shareholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this By-Law. Nothing in this By-Law shall be deemed to affect any rights (i) of shareholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act or (ii) of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation to elect directors under specified circumstances. Section 2.10. Conduct of Meetings. The Board of Directors may to the extent not prohibited by law adopt such rules and regulations for the conduct of the meeting of shareholders as it shall deem appropriate. Except to the extent inconsistent with such rules and regulations as adopted by the Board of Directors, the chairman of any meeting of shareholders shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such chairman, are appropriate for the proper conduct of the meeting. Such rules, regulations or procedures, whether adopted by the Board of Directors or prescribed by the chairman of the meeting, may to the extent not prohibited by law include, without limitation, the following: (i) the establishment of an agenda or order of business for the meeting; (ii) rules and procedures for maintaining order at the meeting and the safety of those present; (iii) limitations on attendance at or participation in the meeting to shareholders of record of the Corporation, their duly authorized and constituted proxies or such other persons as the chairman of the meeting shall determine; (iv) restrictions on entry to the meeting after the time fixed for the commencement thereof; and (v) limitations on the time allotted to questions or comments by participants. The date and time of the opening and the closing of the polls for each matter upon which the shareholders will vote at a meeting shall be announced at the 5 meeting by the person presiding over the meeting. Unless, and to the extent, determined by the Board of Directors or the chairman of the meeting, meetings of shareholders shall not be required to be held in accordance with the rules of parliamentary procedure. Section 2.11. Inspectors of Elections. The Board of Directors may appoint, or may authorize the Chairman of the Board to appoint, one or more inspectors, which inspector or inspectors may include individuals who serve the Corporation in other capacities, including, without limitation, as officers, employees, agents or representatives, to act at the meetings of shareholders and make a written report thereof. If no inspector has been appointed to act or is able to act at a meeting of shareholders, the chairman of the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before discharging such person's duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of such person's ability. The inspectors shall, by majority vote, resolve all questions regarding voting of shares, including the shares represented at the meeting, the qualification of voters, the validity of proxies, the existence of a quorum as to any voting group, and the acceptance, rejection and tabulation of votes. Section 2.12. Shareholders' List. Before each meeting of shareholders, the Secretary of the Corporation shall prepare an alphabetical list of the shareholders entitled to notice of such meeting. The list shall be arranged by voting group (and within each voting group by class or series of shares) and show the address of and number of shares held by each shareholder. The list shall be kept on file at the principal office of the Corporation, or at a place identified in the meeting notice in the city where the meeting will be held, for the period beginning two business days after notice of the meeting is given and continuing through the meeting, and shall be available for inspection on written demand by any shareholder, personally or by or with such shareholder's representative, at any time during regular business hours. The list shall also be available at the meeting and shall be subject to inspection on written demand by any shareholder, personally or by or with such shareholder's representative, at any time during the meeting or any adjournment thereof. ARTICLE III Board of Directors Section 3.1. General Powers. The business and affairs of the Corporation shall be managed under the direction of the Board of Directors. In addition to the powers and authorities by these By-Laws expressly conferred upon them, the Board of Directors may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the Articles of Incorporation or by these By-Laws required to be exercised or done by the shareholders. Section 3.2. Number and Qualifications. The number of directors constituting the Board of Directors shall be not less than twelve nor more than twenty-four, as may be fixed from time to time by the Board of Directors. A director must be a shareholder of the 6 Corporation. Section 3.3. Election of Directors; Classes. The directors, other than those who may be elected by the holders of any class of stock having a preference over the Common Stock as to dividends or upon liquidation to elect directors under specified circumstances, shall be classified, with respect to the time for which they severally hold office into three classes, as nearly equal in number as possible. Such classes shall originally consist of one class (Class I) of seven directors who shall be elected at the annual meeting of shareholders held in 1991 for a term expiring at the annual meeting of shareholders held in 1992; a second class (Class II) of six directors who shall be elected at the annual meeting of shareholders held in 1991 for a term expiring at the annual meeting of shareholders to be held in 1993; and a third class (Class III) of six directors who shall be elected at the annual meeting of shareholders held in 1991 for a term expiring at the annual meeting of shareholders to be held in 1994; with each class to hold office until its successor is elected and qualified. The Board of Directors shall increase or decrease the number of directors in one or more classes as may be appropriate whenever it increases or decreases the number of directors pursuant to the Articles of Incorporation and Section 3.2 of these By-Laws, in order to ensure that the three classes shall be as nearly equal in number as possible. At each annual meeting of shareholders, the successors of the class of directors whose term expires at that meeting shall be elected to hold office for a term expiring at the annual meeting of shareholders held in the third year following the year of their election. Section 3.4. Removal. Subject to the rights of any class of stock having a preference over the Common Stock as to dividends or upon liquidation to elect directors under specified circumstances, a director may be removed from office only with cause. "Cause" for removal of a director under this Section 3.4 means fraudulent or dishonest acts, or gross abuse of authority in the discharge of duties to the Corporation, and must be established after written notice of specific charges and an opportunity to meet and refute such charges. Section 3.5. Newly Created Directorships; Vacancies. Except as may be otherwise provided for or fixed by or pursuant to any provisions of the Articles of Incorporation relating to the rights of the holders of any class of stock having a preference over the Common Stock as to dividends or upon liquidation to elect directors under specified circumstances, newly created directorships resulting from any increase in the number of directors and any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other cause shall be filled only by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the Board of Directors. Any director elected in accordance with the preceding sentence shall hold office until the expiration of the full term of the class for which such director is elected and until such director's successor shall have been elected and qualified. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. 7 Section 3.6. Compensation of Directors. Directors, as such, may receive, pursuant to resolution of the Board of Directors, fixed fees and other compensation for their services as directors, including, without limitation, their services as members of committees of the Board of Directors. ARTICLE IV Meetings of Directors Section 4.1. Regular Meetings. A regular meeting of the Board of Directors shall be held without other notice than this By-Law as soon as practicable after the annual meeting of shareholders. The Board of Directors may, by resolution, provide the time and place for the holding of additional regular meetings without other notice than such resolution. Section 4.2. Special Meetings. Special meetings of the Board of Directors shall be called at the request of the Chairman of the Board or a majority of the Board of Directors then in office. The person or persons authorized to call special meetings of the Board of Directors may fix the place and time of the meetings. Section 4.3. Notice. Notice of any special meeting of directors shall be given to each director at such director's business or residence in writing by hand delivery, first-class or overnight mail or courier service, facsimile transmission or orally by telephone. If mailed by first-class mail, such notice shall be deemed adequately delivered when deposited in the United States mails so addressed, with postage thereon prepaid, at least 5 calendar days before such meeting. If by overnight mail or courier service, such notice shall be deemed adequately delivered when the notice is delivered to the overnight mail or courier service company at least 24 hours before such meeting. If by facsimile transmission, such notice shall be deemed adequately delivered when the notice is transmitted at least 12 hours before such meeting. If by telephone or by hand delivery, the notice shall be given at least 12 hours prior to the time set for the meeting. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in the notice of such meeting. Section 4.4. Quorum and Manner of Acting. Unless the Articles of Incorporation or these By-Laws provide otherwise, a majority of the number of directors fixed pursuant to these By-Laws shall constitute a quorum for the transaction of business at any meeting of the Board of Directors. Unless required by law or the Articles of Incorporation or these By-Laws provide otherwise, the affirmative vote of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. Section 4.5. Action by Consent of Board of Directors. Any action required or permitted to be taken at any meeting of the Board of Directors may be taken without a meeting if all members of the Board of Directors consent thereto in writing, whether before or after such action, and the writing or writings are included with the minutes or 8 filed with the corporate records. Section 4.6. Conference Telephone Meetings. Members of the Board of Directors may participate in a meeting of the Board of Directors by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at such meeting. ARTICLE V Committees of the Board Section 5.1. Management and Other Committees. The Board of Directors may designate a Management Committee consisting of two or more directors of the Corporation which shall include the Chairman of the Board who shall act as chairman. Subject to delegations of authority or any other restrictions adopted by the Board of Directors, the Management Committee may exercise all of the authority of the Board of Directors when it is not in session, except that the Management Committee may not (i) authorize distributions; (ii) approve, or propose to shareholders, action that is required by law to be approved by shareholders; (iii) fill vacancies on the Board of Directors or on any of its Committees; (iv) amend the Articles of Incorporation; (v) adopt, amend or repeal By-Laws; (vi) approve a plan of merger not requiring shareholder approval; (vii) authorize or approve reacquisition of shares, except according to a formula or method prescribed by the Board of Directors; or (viii) authorize or approve the issuance or sale or contract for the sale of shares, or determine the designation and relative rights, preferences and limitations of a class or series of shares, except within limits specifically prescribed by the Board of Directors. Any resolutions adopted or other action taken by the Management Committee within the scope of its authority shall be deemed for all purposes to be adopted or taken by the Board of Directors. The Board of Directors may also designate one or more other Committees of the Board of Directors which shall consist of two or more directors of the Corporation. Any such Committee, other than the Management Committee (the powers of which are expressly provided for herein), may to the extent permitted by law exercise such powers and shall have such responsibilities as shall be specified in the designating resolution. The Board of Directors shall have power at any time to fill vacancies in, to change the membership of, or to dissolve any such Committee. Nothing herein shall be deemed to prevent the Board of Directors from appointing one or more Committees consisting in whole or in part of persons who are not directors of the Corporation; provided, however, that no such Committee shall have or may exercise any authority of the Board of Directors. Section 5.2. Each Committee shall keep written minutes of its proceedings and shall report such proceedings to the Board when required. A majority of the members of a 9 Committee of the Board of Directors shall be necessary to constitute a quorum and the affirmative vote of the majority of the members present at a meeting at which a quorum is present shall be necessary to constitute action by the Committee. A Committee may also act by the written consent of all members thereof although not convened in a meeting provided that such written consent is filed with the Minute Books of the Committee. Section 5.3. Each Committee shall fix the time and place of its meetings, unless the Board of Directors shall otherwise provide. Notice of meetings of any Committee shall be given to each member of the Committee in the manner provided for in Section 4.3 of these By-Laws. ARTICLE VI Officers Section 6.1. Elected Officers. The elected officers of the Corporation shall be a Chairman of the Board, a President, a Secretary, a Treasurer, a Controller and such other officers (including, without limitation, Executive Vice Presidents and Senior Vice Presidents and Vice Presidents) as the Board of Directors or the Management Committee from time to time may deem proper. The Chairman of the Board and the President shall be chosen from among the directors. Elected officers shall have such powers and duties as generally pertain to their respective offices, subject to the specific provisions of this Article VI. Such officers shall also have such powers and duties as from time to time may be conferred by the Board of Directors or by any committee thereof. The Board of Directors or the Management Committee may from time to time appoint such other officers (including one or more Vice Presidents, Assistant Secretaries and Assistant Treasurers), as may be necessary or desirable for the conduct of the business of the Corporation. Such other officers and agents shall have such duties and shall hold their offices for such terms as shall be provided in these By-Laws or, to the extent consistent with these By-Laws, as may be prescribed by the Board of Directors or the Management Committee. The Executive Officers of the Corporation shall consist of the members of the Policy Committee of the Corporation, the Controller, the Chief Financial Officer, the Secretary, the Treasurer, and such other officers as the Board of Directors may designate as Executive Officers from time to time. Section 6.2. Election and Term of Office. Executive Officers of the Corporation shall be elected by the Board of Directors at the regular meeting of the Board of Directors held after the annual meeting of shareholders. Officers who are not Executive Officers may be elected by either the Board of Directors or the Management Committee at the first regular meeting of the Board of Directors (or the Management Committee) held after the annual meeting of shareholders. If the election of officers shall not be held at such meeting, such election shall be held as soon thereafter as practicable. Each officer shall hold office until such person's successor shall have been duly elected and shall have qualified or until 10 such person's death or until he or she shall resign or shall be removed pursuant to Section 6.10. Section 6.3. Chairman of the Board and Chief Executive Officer. The Chairman of the Board shall be the Chief Executive Officer of the Corporation and shall be responsible for the general management of the affairs of the Corporation and shall perform all duties incidental to such person's office which may be required by law and all such other duties as are properly required of the Chairman of the Board by the Board of Directors. The Chairman of the Board shall preside at all meetings of shareholders and of the Board of Directors and shall make reports to the Board of Directors and the shareholders, and shall see that all orders and resolutions of the Board of Directors and of any committee thereof are carried into effect. The Chairman of the Board may also serve as President, if so elected by the Board. Section 6.4. President. The President shall act in a general executive capacity and shall assist the Chairman of the Board in the administration and operation of the Corporation's business and general supervision of its policies and affairs. The President shall in the absence of or because of the inability to act of the Chairman of the Board, perform all duties of the Chairman of the Board and preside at all meetings of shareholders and of the Board of Directors. Section 6.5. Vice Presidents. The Executive Vice Presidents, the Senior Vice Presidents and the Vice Presidents shall have such powers and duties as may be prescribed for them, respectively, by the Board of Directors, the Management Committee or the Chairman of the Board. Each of such officers shall report to the Chairman of the Board or such other officer as the Chairman of the Board shall direct. Section 6.6. Secretary. The Secretary shall attend all meetings of the shareholders and of the Board of Directors, shall keep a true and faithful record thereof in proper books and shall have the custody and care of the corporate seal, records, minute books and stock books of the Corporation and of such other books and papers as in the practical business operations of the Corporation shall naturally belong in the office or custody of the Secretary or as shall be placed in the Secretary's custody by order of the Board of Directors or the Management Committee. The Secretary shall keep a suitable record of the addresses of shareholders and shall, except as may be otherwise required by statute or these By-Laws, sign and issue all notices required for meetings of shareholders or of the Board of Directors. The Secretary shall sign all papers to which the Secretary's signature may be necessary or appropriate, shall affix and attest the seal of the Corporation to all instruments requiring the seal, shall have the authority to certify the By-Laws, resolutions of the shareholders and Board of Directors and other documents of the Corporation as true and correct copies thereof and shall have such other powers and duties as are commonly incidental to the office of Secretary and as may be prescribed by the Board of Directors, the Management Committee or the Chairman of the Board. Section 6.7. Treasurer. The Treasurer shall have charge of and supervision over and be responsible for the funds, securities, receipts and disbursements of the Corporation; 11 cause the moneys and other valuable effects of the Corporation to be deposited in the name and to the credit of the Corporation in such banks or trust companies or with such bankers or other depositories as shall be selected in accordance with resolutions adopted by the Board of Directors; cause the funds of the Corporation to be disbursed by checks or drafts upon the authorized depositories of the Corporation, and cause to be taken and preserved proper vouchers for all moneys disbursed; render to the proper officers and to the Board of Directors, the Management Committee and the Finance Committee, whenever requested, a statement of the financial condition of the Corporation and of all his or her transactions as Treasurer; cause to be kept at the principal executive offices of the Corporation correct books of account of all its business and transactions; and, in general, perform all duties incident to the office of Treasurer and such other duties as are given to him or her by the By-Laws or as may be assigned to him or her by the Chairman of the Board or the Board of Directors. Section 6.8. Controller. The Controller shall be the chief accounting officer of the Corporation; shall keep full and accurate accounts of all assets, liabilities, commitments, revenues, costs and expenses, and other financial transactions of the Corporation in books belonging to the Corporation, and conform them to sound accounting principles with adequate internal control; shall cause regular audits of these books and records to be made; shall see that all expenditures are made in accordance with procedures duly established, from time to time, by the Corporation; shall render financial statements upon the request of the Board of Directors; and, in general, shall perform all the duties ordinarily connected with the office of Controller and such other duties as may be assigned to him or her by the Chairman of the Board or the Board of Directors. Section 6.9. Assistant Secretaries, Assistant Treasurers and Assistant Controllers . Assistant Secretaries, Assistant Treasurers and Assistant Controllers, when elected or appointed, shall respectively assist the Secretary, the Treasurer and the Controller in the performance of the respective duties assigned to such principal officers, and in assisting such principal officer, each of such assistant officers shall for such purpose have the powers of such principal officer; and, in case of the absence, disability, death, resignation or removal from office of any principal officer, such principal officer's duties shall, except as otherwise ordered by the Board of Directors or the Management Committee, temporarily devolve upon such assistant officer as shall be designated by the Chairman of the Board. Section 6.10. Removal. Any officer or agent may be removed by the affirmative vote of a majority of the directors then in office whenever, in their judgment, the best interests of the Corporation would be served thereby. In addition, any officer or agent appointed by the Management Committee may be removed by the Management Committee whenever, in its judgment, the best interests of the Corporation would be served thereby. Any removal shall be without prejudice to the contract rights, if any, of the person so removed. Section 6.11. Vacancies. A newly created elected office and a vacancy in any elected office because of death, resignation or removal may be filled by the Board of Directors for the unexpired portion of the term at any meeting of the Board of Directors. Any vacancy 12 in an office appointed by the Management Committee because of death, resignation or removal may be filled by the Management Committee. ARTICLE VII Stock Certificates and Transfers Section 7.1. Certificates for Shares. The Board of Directors may authorize the issuance of some or all of the shares of the Corporation's classes or series without issuing certificates to represent such shares. If shares are represented by certificates, the certificates shall be in such form as required by law and as determined by the Board of Directors. Certificates shall be signed, either manually or in facsimile, by the Chairman of the Board, the President or a Vice President and by the Secretary or Treasurer or an Assistant Secretary or an Assistant Treasurer. In case any officer or officers who shall have signed, or whose facsimile signature or signatures shall have been used on, any such certificate or certificates shall cease to be such officer or officers of the Corporation, whether because of death, resignation or otherwise, before such certificate or certificates shall have been delivered by the Corporation, such certificate or certificates may nevertheless be adopted by the Corporation and be issued and delivered as though the person or persons who signed such certificate or certificates or whose facsimile signature or signatures shall have been used thereon had not ceased to be such officer or officers of the Corporation and the issuance and delivery of any such certificate or certificates shall be conclusive evidence of such adoption. All certificates for shares shall be consecutively numbered or otherwise identified and entered into the stock transfer books of the Corporation. When shares are represented by certificates, the Corporation shall issue and deliver to each shareholder to whom such shares have been issued or transferred certificates representing the shares owned by such shareholder. When shares are not represented by certificates, then within a reasonable time after the issuance or transfer of such shares, the Corporation shall send the shareholder to whom such shares have been issued or transferred a written statement of the information required by law to be on certificates. Section 7.2. Share Transfer Records. The Corporation shall maintain share transfer records, containing the name and address of each shareholder of record and the number and class or series of shares held by such shareholder. Transfers of shares of the Corporation shall be made only on the share transfer records of the Corporation by the holder of record thereof or by a duly authorized agent, transferee or legal representative and only upon surrender for cancellation of the certificate for such shares (if the shares are represented by certificates). Section 7.3. Lost, Stolen or Destroyed Certificates. No certificate for shares of stock in the Corporation shall be issued in place of any certificate alleged to have been lost, destroyed or stolen, except on production of such evidence of such loss, destruction or theft and on delivery to the Corporation of a bond of indemnity in such amount, upon such terms and secured by such surety, as the Board of Directors or any financial officer may 13 in its or such person's discretion require. A new certificate may be issued without requiring any bond if the Board of Directors or such financial officer so determines. Section 7.4. Fixing Record Date. The Board of Directors may fix a future date as the record date for one or more voting groups in order to determine the shareholders entitled to notice of a meeting of shareholders, to vote or to take any other action. Such record date may not be more than 70 days before the meeting or action requiring a determination of shareholders. A determination of shareholders entitled to notice of or to vote at a meeting of shareholders is effective for any adjournment of the meeting unless the Board of Directors fixes a new record date for the adjourned meeting, which it must do if the meeting is adjourned to a date more than 120 days after the date fixed for the original meeting. If no record date is fixed by the Board of Directors for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders, the close of business on the day before the first notice of the meeting is delivered to shareholders shall be the record date for such determination of shareholders. The Board of Directors may fix a date as the record date for determining shareholders entitled to a distribution or share dividend. If no record date is fixed by the Board of Directors for such determination, it is the date the Board of Directors authorizes the distribution or share dividend. Section 7.5. Holder of Record. Except as otherwise required by law, the Corporation may treat the person in whose name the shares stand of record on its books as the absolute owner of the shares and the person exclusively entitled to receive notification and distributions, to vote and to otherwise exercise the rights, powers and privileges of ownership of such shares. ARTICLE VIII Contracts, Checks and Drafts, Deposits and Proxies Section 8.1. Contracts. The Board of Directors may authorize any officer or officers, agent or agents, to enter into any contract or execute and deliver any instrument in the name of and on behalf of the Corporation, and such authority may be general or confined to specific instances. Section 8.2. Checks and Drafts. All checks, drafts or other orders for the payment of money, issued in the name of the Corporation, shall be signed by such officer or officers, agent or agents of the Corporation and in such manner as shall from time to time be determined by the Board of Directors. Section 8.3. Deposits. All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation in such depositories as may be selected by or under the authority of the Board of Directors. Section 8.4. Proxies. Unless otherwise provided by the Board of Directors, the Chairman of the Board, the President or any Executive Vice President, Senior Vice 14 President or Vice President may from time to time appoint an attorney or attorneys or agent or agents of the Corporation, in the name and on behalf of the Corporation, to cast the votes which the Corporation may be entitled to cast as the holder of stock or other securities in any other corporation, any of whose stock or other securities may be held by the Corporation, at meetings of the holders of the stock or other securities of such other corporation, or to consent in writing, in the name of the Corporation as such holder, to any action by such other corporation, and may instruct the person or persons so appointed as to the manner of casting such votes or giving such consent, and may execute or cause to be executed in the name and on behalf of the Corporation and under its corporate seal or otherwise, all such written proxies or other instruments as he or she may deem necessary or proper in the premises. ARTICLE IX Indemnification Section 9.1. Indemnification. Any person who is or was serving as a director, officer, employee or agent of the Corporation or who, at the request of the Corporation, is or was serving as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise or as a trustee or administrator under an employee benefit plan, shall be indemnified by the Corporation, to the fullest extent permitted by law, against (a) litigation expenses, including costs, expenses and reasonable attorneys' fees incurred by any such person in connection with any threatened, pending or completed action, suit or proceedings, whether civil, criminal, administrative or investigative, whether formal or informal, and whether or not brought by or on behalf of the Corporation, arising out of such person's status as such or such person's activities in any of the foregoing capacities, (b) liability, including payments made by such person in satisfaction of any judgment, money decree, fine (including an excise tax assessed with respect to an employee benefit plan), penalty or settlement for which such person may have become liable in any such action, suit or proceeding, and (c) reasonable costs, expenses and attorneys' fees incurred by such person in connection with the enforcement of the indemnification rights provided herein. Any person who is or was serving in any of the foregoing capacities for or on behalf of the Corporation shall be conclusively deemed to be doing or to have done so in reliance upon, and as consideration for, the indemnification rights provided herein. Any such litigation expenses shall be paid by the Corporation in advance of the final disposition of any action, suit or proceeding upon receipt of an unsecured written promise by or on behalf of any such person to repay such amount unless it shall ultimately be determined that such person is entitled to be indemnified by the Corporation against such expenses. The rights of indemnification provided herein (which shall be deemed to be a contract between any such person and the Corporation enforceable on the part of such person notwithstanding any subsequent amendment or repeal of this By-Law) shall inure to the 15 benefit of the estates or legal representatives of any such person and shall not be exclusive of any other rights to which such person may be entitled apart from this By-Law, by contract, resolution or otherwise. ARTICLE X Miscellaneous Section 10.1. Fiscal Year. The fiscal year of the Corporation shall begin on the first day of January in each year and shall end on the thirty-first day of December of such year. Section 10.2. Distributions. The Board of Directors may from time to time authorize, and the Corporation may grant, distributions and share dividends to its shareholders pursuant to law and subject to the provisions of the Articles of Incorporation. Section 10.3. Seal. The corporate seal of the Corporation shall be circular in form and shall consist of two concentric circles between which is the name of the Corporation and the location of its principal office and in the center of which is inscribed the word "SEAL". The corporate seal may be used by causing it or a facsimile thereof to be impressed or reproduced or otherwise. Section 10.4. Waiver of Notice. Whenever any notice is required to be given to any shareholder or director of the Corporation under the provisions of the North Carolina Business Corporation Law or these By-Laws, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. Neither the business to be transacted at, nor the purpose of, any annual or special meeting of the shareholders or the Board of Directors or committee thereof need be specified in any waiver of notice of such meeting. Section 10.5. Time Periods. In applying any provision of these By-Laws which requires that an act be done or not be done a specified number of days prior to an event or that an act be done during a period of a specified number of days prior to an event, calendar days shall be used, the day of the doing of the act shall be excluded, and the day of the event shall be included. Section 10.6. Resignations. Any director or any officer, whether elected or appointed, may resign at any time by giving written notice of such resignation to the Chairman of the Board or the Secretary, and such resignation shall be deemed to be effective when communicated unless the notice specifies a later effective date. No formal action shall be required on behalf of the Corporation to make any such resignation effective. Section 10.7. Definitions. Unless the context otherwise requires, terms used in these By-Laws shall have the meanings assigned to them in the North Carolina Business Corporation Act to the extent defined therein. 16 ARTICLE XI Emergency Provisions Section 11.1. General. The provisions of this Article shall be operative only during a national emergency declared by the President of the United States or the person performing the President's functions, or in the event of a nuclear, atomic or other attack on the United States or on a locality in which the Corporation conducts its principal business or customarily holds meetings of its Board of Directors or its shareholders, or during the existence of any other catastrophic event or similar emergency, as a result of which a quorum of the Board of Directors cannot readily be assembled for action. Said provisions in such event shall override all other By-Laws of the Corporation in conflict with any provisions of this Article, and shall remain operative during such emergency, but thereafter shall be inoperative; provided that all actions taken in good faith pursuant to such provisions shall thereafter remain in full force and effect unless and until revoked by action taken pursuant to the provisions of the By-Laws other than those contained in this Article. Section 11.2. Unavailable Directors. All directors of the Corporation who are not available to perform their duties as directors by reason of physical or mental incapacity or for any other reason or who are unwilling to perform their duties or whose whereabouts are unknown shall automatically cease to be directors, with like effect as if such persons had resigned as directors, so long as such unavailability continues. Section 11.3. Authorized Number of Directors. The authorized number of directors shall be the number of directors remaining after eliminating those who have ceased to be directors pursuant to Section 11.2, or the minimum number required by law, whichever number is greater. Section 11.4. Quorum. The number of directors necessary to constitute a quorum shall be one-third of the authorized number of directors as specified in Section 11.3, or such other minimum number as, pursuant to the law or lawful decree then in force, it is possible for the by-laws of a corporation to specify. Section 11.5. Creation of Emergency Committee. In the event the number of directors remaining after eliminating those who have ceased to be directors pursuant to Section 11.2 is less than the minimum number of authorized directors required by law, then until the appointment of additional directors to make up such required minimum, all the powers and authorities which the Board of Directors could by law delegate, including all powers and authorities which the Board of Directors could delegate to a committee, shall be automatically vested in an emergency committee, and the emergency committee shall thereafter manage the affairs of the Corporation pursuant to such powers and authorities and shall have all other powers and authorities as may by law or lawful decree be conferred on any person or body of persons during a period of emergency. 17 Section 11.6. Constitution of Emergency Committee. The emergency committee shall consist of all the directors remaining after eliminating those who have ceased to be directors pursuant to Section 11.2, provided that such remaining directors are not less than three in number. In the event such remaining directors are less than three in number, the emergency committee shall consist of three persons, who shall be the remaining director or directors and either one or two officers or employees of the Corporation, as the remaining director or directors may in writing designate. If there is no remaining director, the emergency committee shall consist of the three most senior officers of the Corporation who are available to serve, and if and to the extent that officers are not available, the most senior employees of the Corporation. Seniority shall be determined in accordance with any designation of seniority in the minutes of the proceedings of the Board of Directors, and in the absence of such designation, shall be determined by rate of remuneration. Section 11.7. Powers of Emergency Committee. The emergency committee, once appointed, shall govern its own procedures and shall have power to increase the number of members thereof beyond the original number, and in the event of a vacancy or vacancies therein, arising at any time, the remaining member or members of the emergency committee shall have the power to fill such vacancy or vacancies. In the event at any time after its appointment all members of the emergency committee shall die or resign or become unavailable to act for any reason whatsoever, a new emergency committee shall be appointed in accordance with the foregoing provisions of this Article 11. Section 11.8. Directors Becoming Available. Any person who has ceased to be a director pursuant to the provisions of Section 11.2 and who thereafter becomes available to serve as a director shall automatically become a member of the emergency committee. Section 11.9. Election of Board of Directors. The emergency committee shall, as soon after its appointment as is practicable, take all requisite action to secure the election of a board of directors, and upon such election all the powers and authorities of the emergency committee shall cease. Section 11.10. Termination of Emergency Committee. In the event, after the appointment of an emergency committee, a sufficient number of persons who ceased to be directors pursuant to Section 11.2 become available to serve as directors, so that if they had not ceased to be directors as aforesaid, there would be sufficient directors to constitute the minimum number of directors required by law, then all such persons shall automatically be deemed to be reappointed as directors and the powers and authorities of the emergency committee shall terminate. Section 11.11. Nonexclusive Powers. The emergency powers provided in this Article 11 shall be in addition to any powers provided by law. 18 ARTICLE XII Amendments Section 12.1. Amendments. Except as required by law or as otherwise provided in the Articles of Incorporation or in a By-Law adopted by the shareholders, these By-Laws may be amended or repealed and new By-Laws may be adopted by the Board of Directors. No By-Law adopted, amended or repealed by the shareholders shall be readopted, amended or repealed by the Board of Directors, unless the Articles of Incorporation or a By-Law adopted by the shareholders authorizes the Board of Directors to adopt, amend or repeal that particular By-Law or the By-Laws generally. 19 EX-10.N 4 BY-LAWS OF DUKE ENERGY CORPORATION Exhibit 10N BY-LAWS OF DUKE ENERGY CORPORATION Date of Adoption: July 28, 1997 Amended February 17, 1999, April 15, 1999 and December 16, 1999 EXHIBIT 10-N [CONFORMED COPY] $600,000,000 364-DAY CREDIT AGREEMENT dated as of August 23, 1999 among Duke Capital Corporation, The Banks Listed Herein and The Chase Manhattan Bank, as Administrative Agent ------------------------------------------ Morgan Guaranty Trust Company of New York, Syndication Agent Chase Securities Inc. J.P. Morgan Securities Inc., Co-Lead Arrangers and Co-Book Managers TABLE OF CONTENTS
Page ---- ARTICLE 1 Definitions Section 1.01. Definitions................................................. 1 Section 1.02. Accounting Terms and Determinations......................... 10 Section 1.03. Types and Classes of Borrowings............................. 11 ARTICLE 2 The Credits Section 2.01. Commitments to Lend......................................... 11 Section 2.02. Notice of Committed Borrowings.............................. 12 Section 2.03. Bid Rate Borrowings......................................... 13 Section 2.04. Notice to Banks; Funding of Loans........................... 17 Section 2.05. Registry; Notes............................................. 18 Section 2.06. Maturity of Loans........................................... 18 Section 2.07. Interest Rates.............................................. 19 Section 2.08. Fees........................................................ 20 Section 2.09. Optional Termination or Reduction of Commitments............ 21 Section 2.10. Method of Electing Interest Rates........................... 21 Section 2.11. Mandatory Termination of Commitments........................ 22 Section 2.12. Optional Prepayments........................................ 22 Section 2.13. General Provisions as to Payments........................... 23 Section 2.14. Funding Losses.............................................. 24 Section 2.15. Computation of Interest and Fees............................ 24 Section 2.16. Regulation D Compensation................................... 24 Section 2.17. Increased Commitments; Additional Banks..................... 25 ARTICLE 3 Conditions Section 3.01. Effectiveness............................................... 26 Section 3.02. Borrowings.................................................. 27 ARTICLE 4 Representations and Warranties Section 4.01. Corporate Existence and Power............................... 28 Section 4.02. Corporate and Governmental Authorization; No Contravention.. 28 Section 4.03. Binding Effect.............................................. 28
i Section 4.04. Financial Information....................................... 29 Section 4.05. Litigation.................................................. 29 Section 4.06. Compliance with Laws........................................ 29 Section 4.07. Taxes....................................................... 30 Section 4.08. Public Utility Holding Company Act.......................... 30 Section 4.09. Year 2000................................................... 30 ARTICLE 5 Covenants Section 5.01. Information................................................ 30 Section 5.02. Payment of Taxes........................................... 32 Section 5.03. Maintenance of Property; Insurance......................... 32 Section 5.04. Maintenance of Existence................................... 33 Section 5.05. Compliance with Laws....................................... 33 Section 5.06. Books and Records.......................................... 33 Section 5.07. Maintenance of Ownership of Principal Subsidiaries......... 34 Section 5.08. Negative Pledge............................................ 34 Section 5.09. Consolidations, Mergers and Sales of Assets................ 35 Section 5.10. Use of Proceeds............................................ 35 Section 5.11. Transactions with Affiliates............................... 36 Section 5.12. Indebtedness/Capitalization Ratio.......................... 36 ARTICLE 6 Defaults Section 6.01. Events of Default........................................... 36 Section 6.02. Notice of Default........................................... 38 ARTICLE 7 The Administrative Agent Section 7.01. Appointment and Authorization............................... 38 Section 7.02. Administrative Agent and Affiliates......................... 38 Section 7.03. Action by Administrative Agent.............................. 39 Section 7.04. Consultation with Experts................................... 39 Section 7.05. Liability of Administrative Agent........................... 39 Section 7.06. Indemnification............................................. 40 Section 7.07. Credit Decision............................................. 40 Section 7.08. Successor Administrative Agent.............................. 40 Section 7.09. Administrative Agent's Fee.................................. 40
ii ARTICLE 8 Change in Circumstances Section 8.01. Basis for Determining Interest Rate Inadequate or Unfair.... 41 Section 8.02. Illegality.................................................. 41 Section 8.03. Increased Cost and Reduced Return........................... 42 Section 8.04. Taxes....................................................... 43 Section 8.05. Base Rate Loans Substituted for Affected Fixed Rate Loans... 46 Section 8.06. Substitution of Bank Termination Option..................... 46 ARTICLE 9 Miscellaneous Section 9.01. Notices..................................................... 47 Section 9.02. No Waivers.................................................. 48 Section 9.03. Expenses; Indemnification................................... 48 Section 9.04. Sharing of Set-offs......................................... 48 Section 9.05. Amendments and Waivers...................................... 49 Section 9.06. Successors and Assigns...................................... 49 Section 9.07. Collateral.................................................. 51 Section 9.08. Confidentiality............................................. 51 Section 9.09. Governing Law; Submission to Jurisdiction................... 51 Section 9.10. Counterparts; Integration................................... 51 Section 9.11. WAIVER OF JURY TRIAL........................................ 52
iii PAGE ---- PRICING SCHEDULE EXHIBIT A - Note EXHIBIT B - Form of Bid Rate Quote Request EXHIBIT C - Form of Invitation for Bid Rate Quotes EXHIBIT D - Form of Bid Rate Quote EXHIBIT E - Opinion of General Counsel for the Borrower EXHIBIT F - Opinion of Davis Polk & Wardwell, Special Counsel for the Administrative Agent EXHIBIT G - Assignment and Assumption Agreement EXHIBIT H - Extension Agreement
iv 364-DAY CREDIT AGREEMENT 364-DAY CREDIT AGREEMENT dated as of August 23, 1999 among DUKE CAPITAL CORPORATION, the BANKS listed on the signature pages hereof and THE CHASE MANHATTAN BANK, as Administrative Agent. The parties hereto agree as follows: ARTICLE 1 Definitions Section 1.01. Definitions. The following terms, as used herein, have the following meanings: "Additional Bank" means any financial institution that becomes a Bank for purposes hereof in connection with (i) an increase in the aggregate amount of the Commitments pursuant to Section 2.17 or (ii) the replacement of a Bank pursuant to Section 8.06. "Administrative Agent" means The Chase Manhattan Bank in its capacity as administrative agent for the Banks hereunder, and its successors in such capacity. "Administrative Questionnaire" means, with respect to each Bank, the administrative questionnaire in the form submitted to such Bank by the Administrative Agent and submitted to the Administrative Agent (with a copy to the Borrower) duly completed by such Bank. "Affiliate" means (i) any Person that directly, or indirectly through one or more intermediaries, controls the Borrower (a "Controlling Person") or (ii) any Person (other than the Borrower or a Subsidiary) which is controlled by or is under common control with a Controlling Person. As used herein, the term "control" means possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ownership of voting securities, by contract or otherwise. "Applicable Lending Office" means, with respect to any Bank, (i) in the case of its Domestic Loans, its Domestic Lending Office, (ii) in the case of its Euro-Dollar Loans, its Euro-Dollar Lending Office and (iii) in the case of its Bid Rate Loans, its Bid Rate Lending Office. "Approved Officer" means the president, a vice president or the treasurer or assistant treasurer of the Borrower or such other representative of the Borrower as may be designated by any one of the foregoing with the consent of the Administrative Agent. "Assignee" has the meaning set forth in Section 9.06(c). "Bank" means each bank or other financial institution listed on the signature pages hereof, each Additional Bank, each Assignee which becomes a Bank pursuant to Section 9.06(c), and their respective successors. "Base Rate" means, for any day, a rate per annum equal to the higher of (i) the Prime Rate for such day and (ii) the sum of 1/2 of 1% plus the Federal Funds Rate for such day. "Base Rate Loan" means (i) a Committed Loan which bears interest at the Base Rate pursuant to the applicable Notice of Committed Borrowing or Notice of Interest Rate Election or the provisions of Article 8 or (ii) an overdue amount which was a Base Rate Loan immediately before it became overdue. "Bid Rate (General)" has the meaning set forth in Section 2.03(d). "Bid Rate (General) Auction" means a solicitation of Bid Rate Quotes setting forth Bid Rates (General) pursuant to Section 2.03. "Bid Rate (General) Loan" means a loan made or to be made by a Bank pursuant to a Bid Rate (General) Auction. "Bid Rate (Indexed) Auction" means a solicitation of Bid Rate Quotes setting forth Bid Rate (Indexed) Margins based on the London Interbank Offered Rate pursuant to Section 2.03. "Bid Rate Lending Office" means, as to each Bank, its Domestic Lending Office or such other office, branch or affiliate of such Bank as it may hereafter designate as its Bid Rate Lending Office by notice to the Borrower and the Administrative Agent; provided that any Bank may from time to time by notice to the Borrower and the Administrative Agent designate separate Bid Rate Lending Offices for its Bid Rate (Indexed) Loans, on the one hand, and its Bid Rate (General) Loans, on the other hand, in which case all references herein to the Bid Rate Lending Office of such Bank shall be deemed to refer to either or both of such offices, as the context may require. "Bid Rate (Indexed) Loan" means a loan made or to be made by a Bank pursuant to a Bid Rate (Indexed) Auction (including such a loan bearing interest at the Base Rate pursuant to Section 8.01(a)). 2 "Bid Rate Loan" means a Bid Rate (Indexed) Loan or a Bid Rate (General) Loan. "Bid Rate (Indexed) Margin" has the meaning set forth in Section 2.03(d). "Bid Rate Quote" means an offer by a Bank to make a Bid Rate Loan in accordance with Section 2.03. "Borrower" means Duke Capital Corporation, a Delaware corporation, and its successors. "Borrowing" has the meaning set forth in Section 1.03. "Class" refers to the determination whether a Loan is a Committed Loan (and, if a Committed Loan, whether a Revolving Credit Loan or a Term Loan) or a Bid Rate Loan. "Commitment" means (i) with respect to each Bank listed on the signature pages hereof, the amount set forth opposite the name of such Bank on the signature pages hereof, and (ii) with respect to each Additional Bank or Assignee which becomes a bank pursuant to Sections 2.17(a), 2.01(c) and 9.06(c), the amount of the Commitment thereby assumed by it, in each case as such amount may from time to time be reduced pursuant to Section 2.09, 2.11 or 9.06(c) or increased pursuant to Section 2.17(a), 8.06 or 9.06(c). "Commitment Termination Date" means, for each Bank, August 21, 2000, as such date may be extended from time to time with respect to such Bank pursuant to Section 2.01(c) or, if any such day is not a Euro-Dollar Business Day, the next preceding Euro-Dollar Business Day. "Committed Loan" means a Revolving Credit Loan or a Term Loan made by a Bank pursuant to Section 2.01. "Consolidated Capitalization" means the sum of (i) Consolidated Indebtedness, (ii) consolidated common stockholders' equity as would appear on a consolidated balance sheet of the Borrower and its Consolidated Subsidiaries prepared in accordance with generally accepted accounting principles, and (iii) the aggregate liquidation preference of preferred stocks (other than preferred stocks subject to mandatory redemption or repurchase) of the Borrower and its Consolidated Subsidiaries upon involuntary liquidation. "Consolidated Indebtedness" means, at any date, all Indebtedness of Borrower and its Consolidated Subsidiaries determined on a consolidated basis in accordance with generally accepted accounting principles. 3 "Consolidated Subsidiary" means, for any Person, at any date any Subsidiary or other entity the accounts of which would be consolidated with those of such Person in its consolidated financial statements if such statements were prepared as of such date; unless otherwise specified "Consolidated Subsidiary" means a Consolidated Subsidiary of the Borrower. "Default" means any condition or event which constitutes an Event of Default or which with the giving of notice or lapse of time or both would, unless cured or waived, become an Event of Default. "Domestic Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in New York City are authorized by law to close. "Domestic Lending Office" means, as to each Bank, its office located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Domestic Lending Office) or such other office as such Bank may hereafter designate as its Domestic Lending Office by notice to the Borrower and the Administrative Agent. "Effective Date" means the date this Agreement becomes effective in accordance with Section 3.01. "Environmental Laws" means any and all federal, state, local and foreign statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements or other governmental restrictions relating to the environment or to emissions, discharges, releases of pollutants, contaminants, chemicals, or industrial, toxic or hazardous substances or wastes into the environment including, without limitation, ambient air, surface water, ground water, or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, or handling of pollutants, contaminants, chemicals, or industrial, toxic or hazardous substances or wastes. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "ERISA Group" means all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Borrower, are treated as a single employer under Section 414 of the Internal Revenue Code. "Euro-Dollar Business Day" means any Domestic Business Day on which commercial banks are open for international business (including dealings in dollar deposits) in London. 4 "Euro-Dollar Lending Office" means, as to each Bank, its office, branch or affiliate located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Euro-Dollar Lending Office) or such other office, branch or affiliate of such Bank as it may hereafter designate as its Euro-Dollar Lending Office by notice to the Borrower and the Administrative Agent. "Euro-Dollar Loan" means (i) a Committed Loan which bears interest at a Euro-Dollar Rate pursuant to the applicable Notice of Committed Borrowing or Notice of Interest Rate Election or (ii) an overdue amount which was a Euro- Dollar Loan immediately before it became overdue. "Euro-Dollar Margin" means a rate per annum determined in accordance with the Pricing Schedule. "Euro-Dollar Rate" means a rate of interest determined pursuant to Section 2.07(b) on the basis of a London Interbank Offered Rate. "Euro-Dollar Reference Banks" means the principal London offices of The Chase Manhattan Bank and Morgan Guaranty Trust Company of New York. "Euro-Dollar Reserve Percentage" has the meaning set forth in Section 2.16. "Event of Default" has the meaning set forth in Section 6.01. "Existing Credit Agreement" means the $600,000,000 364-Day Credit Agreement dated as of August 24, 1998 among the Borrower, the lenders party thereto and The Chase Manhattan Bank, as administrative agent. "Federal Funds Rate" means, for any day, the rate per annum (rounded upwards, if necessary, to the nearest 1/100th of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Domestic Business Day next succeeding such day, provided that (i) if such day is not a Domestic Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Domestic Business Day as so published on the next succeeding Domestic Business Day, and (ii) if no such rate is so published on such next succeeding Domestic Business Day, the Federal Funds Rate for such day shall be the average rate quoted to The Chase Manhattan Bank (or its successor as Administrative Agent) on such day on such transactions as determined by the Administrative Agent. 5 "Final Maturity Date" means, for each Bank, the first anniversary of its Commitment Termination Date or, if such day is not a Euro-Dollar Business Day, the next preceding Euro-Dollar Business Day; provided that the Final Maturity Date for all Banks shall be no later than August 16, 2004. "Fixed Rate Loans" means Euro-Dollar Loans or Bid Rate Loans (excluding Bid Rate (Indexed) Loans bearing interest at the Base Rate) or any combination of the foregoing. "Group of Loans" means at any time a group of Committed Loans of the same Class consisting of (i) all Base Rate Loans of such Class outstanding at such time or (ii) all Euro-Dollar Loans of such Class having the same Interest Period at such time, provided that, if a Committed Loan of any particular Bank is converted to or made as a Base Rate Loan pursuant to Article 8, such Loan shall be included in the same Group or Groups of Loans from time to time as it would have been if it had not been so converted or made. "Indebtedness" of any Person means at any date, without duplication, (i) all obligations of such Person for borrowed money, (ii) all indebtedness of such Person for the deferred purchase price of property or services purchased, (iii) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired, (iv) all indebtedness under leases which shall have been or should be, in accordance with generally accepted accounting principles, recorded as capital leases in respect of which such Person is liable as lessee, (v) the face amount of letter of credit indebtedness available or to be available to be drawn (other than letter of credit obligations relating to indebtedness included in Indebtedness pursuant to another clause of this definition) and, without duplication, the unreimbursed amount of all drafts drawn thereunder, (vi) indebtedness secured by any Lien on property or assets of such Person, whether or not assumed (but in any event not exceeding the fair market value of the property or asset), (vii) all direct guarantees of Indebtedness referred to above of another Person, (viii) all amounts payable in connection with mandatory redemptions or repurchases of preferred stock and (ix) any obligations of such Person (in the nature of principal or interest) in respect of acceptances or similar obligations issued or created for the account of such Person. "Interest Period" means: (1) with respect to each Euro-Dollar Loan, the period commencing on the date of borrowing specified in the applicable Notice of Borrowing or on the date specified in an applicable Notice of Interest Rate Election and ending one, two, three or six, or, if deposits of a corresponding maturity are generally available in the London interbank market, nine or twelve, months thereafter, as the Borrower may elect in such notice; provided that: 6 (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Euro-Dollar Business Day; and (b) any Interest Period which begins on the last Euro-Dollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Euro-Dollar Business Day of a calendar month; (2) with respect to each Bid Rate (Index) Loan, the period commencing on the date of borrowing specified in the applicable Notice of Borrowing and ending such number of months thereafter (but not less than one month) as the Borrower may elect in accordance with Section 2.03; provided that: (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Euro-Dollar Business Day; and (b) any Interest Period which begins on the last Euro-Dollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Euro-Dollar Business Day of a calendar month; and (3) with respect to each Bid Rate (General) Loan, the period commencing on the date of borrowing specified in the applicable Notice of Borrowing and ending such number of days thereafter (but not less than 7 days) as the Borrower may elect in accordance with Section 2.03; provided that any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day; and provided further that: (x) any Interest Period applicable to any Loan of any Bank which begins before such Bank's Commitment Termination Date and would otherwise end after such Bank's Commitment Termination Date shall end on such Bank's Commitment Termination Date; and (y) any Interest Period applicable to any Loan of any Bank which would otherwise end after such Bank's Final Maturity Date shall end on such Bank's Final Maturity Date. 7 "Internal Revenue Code" means the Internal Revenue Code of 1986, as amended, or any successor statute. "Investment Grade Status" exists as to any Person at any date if all senior debt securities of such Person outstanding at such date which had been rated by S&P or Moody's are rated BBB- or higher by S&P or Baa3 or higher by Moody's, as the case may be. "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset. For the purposes of this Agreement, the Borrower or any Subsidiary shall be deemed to own subject to a Lien any asset which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset. "Loan" means a Base Rate Loan or a Euro-Dollar Loan or a Bid Rate Loan and "Loans" means Base Rate Loans or Euro-Dollar Loans or Bid Rate Loans or any combination of the foregoing. "London Interbank Offered Rate" has the meaning set forth in Section 2.07(b). "Material Adverse Effect" means a material adverse effect on the business, financial position, results of operations or prospects of the Borrower. "Material Debt" means Indebtedness of the Borrower or any of its Subsidiaries in an aggregate principal amount exceeding $100,000,000. "Material Plan" has the meaning set forth in Section 6.01(i). "Material Subsidiary" means at any time any Subsidiary of the Borrower having, together with its Subsidiaries, consolidated assets in excess of 10% of the total assets of the Borrower and its Consolidated Subsidiaries, determined on a consolidated basis as of such time. "Moody's" means Moody's Investor Service, Inc. "Notes" means promissory notes of the Borrower, in the form required by Section 2.05, evidencing the obligation of the Borrower to repay the Loans, and "Note" means any one of such promissory notes issued hereunder. "Notice of Borrowing" means a Notice of Committed Borrowing (as defined in Section 2.02) or a Notice of Bid Rate Borrowing (as defined in Section 2.03(f)). 8 "Notice of Interest Rate Election" has the meaning set forth in Section 2.10(b). "Parent" means, with respect to any Bank, any Person controlling such Bank. "Participant" has the meaning set forth in Section 9.06(b). "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "Person" means an individual, a corporation, a partnership, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Plan" means at any time an employee pension benefit plan which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Internal Revenue Code and is either (i) maintained by a member of the ERISA Group for employees of a member of the ERISA Group or (ii) maintained pursuant to a collective bargaining agreement or any other arrangement under which more than one employer makes contributions and to which a member of the ERISA Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions. "Prime Rate" means the rate of interest publicly announced by The Chase Manhattan Bank in New York City from time to time as its Prime Rate. Each change in the Prime Rate shall be effective from and including the day such change is publicly announced. "Principal Subsidiary" means each of Texas Eastern Transmission Corporation, Algonquin Gas Transmission Company, PanEnergy Corp, and their respective successors. "Quarterly Payment Date" means the first Domestic Business Day of each January, April, July and October. "Regulation U" means Regulation U of the Board of Governors of the Federal Reserve System, as in effect from time to time. "Required Banks" means at any time Banks (i) having at least 51% of the sum of the aggregate amount of the Commitments and the aggregate outstanding principal amount of the Term Loans or (ii) if the Commitments shall have been terminated, having at least 51% of the aggregate unpaid principal amount of the Loans. 9 "Revolving Credit Loan" means a loan made or to be made by a Bank pursuant to Section 2.01(a); provided that, if any such loan or loans (or portions thereof) are combined or subdivided pursuant to a Notice of Interest Rate Election, the term "Revolving Credit Loan" shall refer to the combined principal amount resulting from such combination or to each of the separate principal amounts resulting from such subdivision, as the case may be. "Revolving Credit Period" means, with respect to any Bank, the period from and including the Effective Date to but not including its Commitment Termination Date. "S&P" means Standard & Poor's Rating Services, a division of The McGraw-Hill Companies, Inc. "Subsidiary" means, as to any Person, any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by such Person; unless otherwise specified, "Subsidiary" means a Subsidiary of the Borrower. "Substantial Assets" means assets sold or otherwise disposed of in a single transaction or a series of related transactions representing 25% or more of the consolidated assets of the Borrower and its Consolidated Subsidiaries, taken as a whole. "Term Loan" means a loan made or to be made by a Bank pursuant to Section 2.01(b); provided that, if any such loan or loans (or portions thereof) are combined or subdivided pursuant to a Notice of Interest Rate Election, the term "Term Loan" shall refer to the combined principal amount resulting from such combination or to each of the separate principal amounts resulting from such subdivision, as the case may be. "United States" means the United States of America, including the States and the District of Columbia, but excluding its territories and possessions. "Unfunded Vested Liabilities" means, with respect to any Plan at any time, the amount (if any) by which (i) the present value of all benefits under such Plan exceeds (ii) the fair market value of all Plan assets allocable to such benefits, all determined as of the then most recent valuation date for such Plan, but only to the extent that such excess represents a potential liability of a member of the ERISA Group to the PBGC or the Plan under Title IV of ERISA. Section 1.02. Accounting Terms and Determinations. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements 10 required to be delivered hereunder shall be prepared in accordance with generally accepted accounting principles as in effect from time to time, applied on a basis consistent (except for changes concurred in by the Borrower's independent public accountants) with the most recent audited consolidated financial statements of the Borrower and its Consolidated Subsidiaries delivered to the Banks. Section 1.03. Types and Classes of Borrowings. The term "Borrowing" denotes the aggregation of Loans of one or more Banks to be made to the Borrower pursuant to Article 2 on a single date and for a single Interest Period. Borrowings are classified for purposes of this Agreement either by reference to the pricing of Loans comprising such Borrowing (e.g., a "Fixed Rate Borrowing" is a Euro-Dollar Borrowing or a Bid Rate Borrowing (excluding any such Borrowing consisting of Bid Rate (Indexed) Loans bearing interest at the Base Rate), and a "Euro-Dollar Borrowing" is a Borrowing comprised of Euro- Dollar Loans) or by reference to the provisions of Article 2 under which participation therein is determined (i.e., a "Committed Borrowing" is a Borrowing under Section 2.01 in which all Banks participate in proportion to their Commitments, while a "Bid Rate Borrowing" is a Borrowing under Section 2.03 in which the Bank participants are determined on the basis of their bids in accordance therewith) or by reference to the Class of Loans comprising such Borrowing (e.g. a "Term Borrowing" is a Borrowing comprised of Term Loans). ARTICLE 2 The Credits Section 2.01. Commitments to Lend. (a) Revolving Credit Loans. During its Revolving Credit Period, each Bank severally agrees, on the terms and conditions set forth in this Agreement, to make loans to the Borrower pursuant to this subsection from time to time in amounts such that the aggregate principal amount of Revolving Credit Loans by such Bank at any one time outstanding shall not exceed the amount of its Commitment. Each Borrowing under this subsection shall be in an aggregate principal amount of $10,000,000 or any larger multiple of $1,000,000 (except that any such Borrowing may be in the aggregate amount available in accordance with Section 3.02(b)) and shall be made from the several Banks ratably in proportion to their respective Commitments in effect on the date of Borrowing; provided that, if the Interest Period selected by the Borrower for a Borrowing would otherwise end after the Commitment Termination Dates of some but not all Banks, the Borrower may in its Notice of Committed Borrowing elect not to borrow from those Banks whose Commitment Termination Dates fall prior to the end of such Interest Period. Within the foregoing limits, the Borrower may borrow under this subsection (a), or to the 11 extent permitted by Section 2.12, prepay Loans and reborrow at any time during the Revolving Credit Periods under this subsection (a). (b) Term Loans. Each Bank severally agrees, on the terms and conditions set forth in this Agreement, to make a loan to the Borrower on its Commitment Termination Date in an amount up to but not exceeding the amount of its Commitment. Each Borrowing under this subsection (b) shall be made from the several Banks having the same Commitment Termination Date ratably in proportion to their respective Commitments. (c) Extension of Commitments. On no more than four separate occasions, the Borrower may, upon not less than 45 days but no earlier than 60 days notice prior to the then current Commitment Termination Dates to the Administrative Agent (which shall notify each Bank of receipt of such request), propose to extend the Revolving Credit Periods for an additional 364 days measured from the Commitment Termination Dates then in effect. Each Bank shall endeavor to respond to such request, whether affirmatively or negatively (such determination in the sole discretion of such Bank), by notice to the Borrower and the Administrative Agent not more than 45 days nor less than 30 days prior to such Bank's Commitment Termination Date. Subject to the execution by the Borrower, the Administrative Agent and such Banks of a duly completed Extension Agreement in substantially the form of Exhibit H, the Commitment Termination Date applicable to the Commitment of each Bank so affirmatively notifying the Borrower and the Administrative Agent shall be extended for the period specified above; provided that no Commitment Termination Date of any Bank shall be extended unless Banks having at least 66*% in aggregate amount of the Commitments in effect at the time any such extension is requested shall have elected so to extend their Commitments. Any Bank which does not give such notice to the Borrower and the Administrative Agent shall be deemed to have elected not to extend as requested, and the Commitment of each non-extending Bank shall terminate on its Commitment Termination Date determined without giving effect to such requested extension. The Borrower may, in accordance with Section 8.06, designate another bank or other financial institution (which may be, but need not be, an extending Bank) to replace a non-extending Bank. Section 2.02. Notice of Committed Borrowings. The Borrower shall give the Administrative Agent notice (a "Notice of Committed Borrowing") not later than 10:30 A.M. (New York City time) on (x) the date of each Base Rate Borrowing and (y) the third Euro-Dollar Business Day before each Euro-Dollar Borrowing, specifying: 12 (a) the date of such Borrowing, which shall be a Domestic Business Day in the case of a Domestic Borrowing or a Euro-Dollar Business Day in the case of a Euro-Dollar Borrowing, (b) the aggregate amount of such Borrowing, (c) whether the Loans comprising such Borrowing are to bear interest initially at the Base Rate or a Euro-Dollar Rate, (d) the Class of Loans comprising such Borrowing, and (e) in the case of a Euro-Dollar Borrowing, the duration of the initial Interest Period applicable thereto, subject to the provisions of the definition of Interest Period. Section 2.03. Bid Rate Borrowings. (a) The Bid Rate Option. In addition to Committed Borrowings pursuant to Section 2.01, the Borrower may, as set forth in this Section, request the Banks at any time prior to their respective Commitment Termination Dates to make offers to make Bid Rate Loans to the Borrower. The Banks may, but shall have no obligation to, make such offers and the Borrower may, but shall have no obligation to, accept any such offers in the manner set forth in this Section. (b) Bid Rate Quote Request. When the Borrower wishes to request offers to make Bid Rate Loans under this Section, it shall transmit to the Administrative Agent by telex or facsimile transmission a Bid Rate Quote Request substantially in the form of Exhibit B hereto so as to be received no later than 10:00 A.M. (New York City time) on (x) the fourth Euro-Dollar Business Day prior to the date of Borrowing proposed therein, in the case of a Bid Rate (Indexed) Auction or (y) the Domestic Business Day next preceding the date of Borrowing proposed therein, in the case of a Bid Rate (General) Auction (or, in either case, such other time or date as the Borrower and the Administrative Agent shall have mutually agreed and shall have notified to the Banks not later than the date of the Bid Rate Quote Request for the first Bid Rate (Indexed) Auction or Bid Rate (General) Auction for which such change is to be effective) specifying: (i) the proposed date of Borrowing, which shall be a Euro-Dollar Business Day, (ii) the aggregate amount of such Borrowing, which shall be $10,000,000 or a larger multiple of $1,000,000, (iii) the duration of the Interest Period applicable thereto, subject to the provisions of the definition of Interest Period, and 13 (iv) whether the Bid Rate Quotes requested are to set forth a Bid Rate (Indexed) or a Bid Rate (General) Rate. The Borrower may request offers to make Bid Rate Loans for more than one Interest Period in a single Bid Rate Quote Request. (c) Invitation for Bid Rate Quotes. Promptly upon receipt of a Bid Rate Quote Request, the Administrative Agent shall send to the Banks by telex or facsimile transmission an Invitation for Bid Rate Quotes substantially in the form of Exhibit C hereto, which shall constitute an invitation by the Borrower to each Bank to submit Bid Rate Quotes offering to make the Bid Rate Loans to which such Bid Rate Quote Request relates in accordance with this Section. (d) Submission and Contents of Bid Rate Quotes. (i) Each Bank may submit a Bid Rate Quote containing an offer or offers to make Bid Rate Loans in response to any Invitation for Bid Rate Quotes. Each Bid Rate Quote must comply with the requirements of this subsection (d) and must be submitted to the Administrative Agent by telex or facsimile transmission at its offices specified in or pursuant to Section 9.01 not later than (x) 2:00 P.M. (New York City time) on the fourth Euro-Dollar Business Day prior to the proposed date of Borrowing, in the case of a Bid Rate (Indexed) Auction or (y) 9:30 A.M. (New York City time) on the proposed date of Borrowing, in the case of an Bid Rate (General) Auction (or, in either case, such other time or date as the Borrower and the Administrative Agent shall have mutually agreed and shall have notified to the Banks not later than the date of the Bid Rate Quote Request for the first Bid Rate (Indexed) Auction or Bid Rate (General) Auction for which such change is to be effective); provided that Bid Rate Quotes submitted by the Administrative Agent (or any affiliate of the Administrative Agent) in the capacity of a Bank may be submitted, and may only be submitted, if the Administrative Agent or such affiliate notifies the Borrower of the terms of the offer or offers contained therein not later than (x) 1:00 P.M. (New York City time) on the fourth Euro- Dollar Business Day prior to the proposed date of Borrowing, in the case of a Bid Rate (Indexed) Auction or (y) 9:15 A.M. (New York City time) on the proposed date of Borrowing, in the case of an Bid Rate (General) Auctions. Subject to Articles 3 and 6, any Bid Rate Quote so made shall be irrevocable except with the written consent of the Administrative Agent given on the instructions of the Borrower. (ii) Each Bid Rate Quote shall be in substantially the form of Exhibit D hereto and shall in any case specify: (A) the proposed date of Borrowing, 14 (B) the principal amount of the Bid Rate Loan for which each such offer is being made, which principal amount (w) may be greater than or less than the Commitment of the quoting Bank, (x) must be $5,000,000 or a larger multiple of $1,000,000 and (y) may not exceed the principal amount of Bid Rate Loans for each Interest Period for which offers were requested and (z) may be subject to an aggregate limitation as to the principal amount of Bid Rate Loans for which offers being made by such quoting Bank may be accepted, (C) in the case of a Bid Rate (Indexed) Auction, the margin above or below the applicable London Interbank Offered Rate (the "Bid Rate (Indexed) Margin") offered for each such Bid Rate Loan, expressed as a percentage (specified to the nearest 1/10,000th of 1%) to be added to or subtracted from such base rate, (D) in the case of a Bid Rate (General)Auction, the rate of interest per annum (specified to the nearest 1/10,000th of 1%) (the "Bid Rate (General)") offered for each such Bid Rate Loan, and (E) the identity of the quoting Bank. A Bid Rate Quote may set forth up to five separate offers by the quoting Bank with respect to each Interest Period specified in the related Invitation for Bid Rate Quotes. (iii) Any Bid Rate Quote shall be disregarded if: (A) it is not substantially in conformity with Exhibit D hereto or does not specify all of the information required by subsection 2.03(d)(ii); (B) it contains qualifying, conditional or similar language beyond that contemplated by Exhibit D; (C) it proposes terms other than or in addition to those set forth in the applicable Invitation for Bid Rate Quotes; (D) it arrives after the time set forth in subsection 2.03(d)(i); or (E) the Commitment Termination Date of the Bank submitting such Bid Rate Quote falls prior to the last day of the requested Interest Period for which such Bank offers to make a Bid Rate Loan. 15 (e) Notice to Borrower. The Administrative Agent shall promptly but in no event later than 10:00 A.M. (New York City time) notify the Borrower of the terms (x) of any Bid Rate Quote submitted by a Bank that is in accordance with subsection (d) and (y) of any Bid Rate Quote that amends, modifies or is otherwise inconsistent with a previous Bid Rate Quote submitted by such Bank with respect to the same Bid Rate Quote Request. Any such subsequent Quote shall be disregarded by the Administrative Agent unless such subsequent Quote is submitted solely to correct a manifest error in such former Quote. The Administrative Agent's notice to the Borrower shall specify (A) the aggregate principal amount of Loans for which offers have been received for each Interest Period specified in the related Bid Rate Quote Request, (B) the respective principal amounts and Bid Rate (Indexed) Margins or Bid Rate (General) Rates, as the case may be, so offered and (C) if applicable, limitations on the aggregate principal amount of Bid Rate Loans for which offers in any single Bid Rate Quote may be accepted. (f) Acceptance and Notice by Borrower. Not later than 10:30 A.M. (New York City time) on (x) the third Euro-Dollar Business Day prior to the proposed date of Borrowing, in the case of a Bid Rate (Indexed) Auction or (y) the proposed date of Borrowing, in the case of an Bid Rate (General) Auction (or, in either case, such other time or date as the Borrower and the Administrative Agent shall have mutually agreed and shall have notified to the Banks not later than the date of the Bid Rate Quote Request for the first Bid Rate (Indexed) Auction or Bid Rate (General) Auction for which such change is to be effective), the Borrower shall notify the Administrative Agent of its acceptance or non- acceptance of the offers so notified to it pursuant to subsection (e). In the case of acceptance, such notice (a "Notice of Bid Rate Borrowing") shall specify the aggregate principal amount of offers for each Interest Period that are accepted. The Borrower may accept any Bid Rate Quote in whole or in part; provided that: (i) the aggregate principal amount of each Bid Rate Borrowing may not exceed the applicable amount set forth in the related Bid Rate Quote Request, (ii) the principal amount of each Bid Rate Borrowing must be $10,000,000 or a larger multiple of $1,000,000, and (iii) acceptance of offers may only be made on the basis of ascending Bid Rate (Indexed) Margins or Bid Rate (General) Rates, as the case may be. (g) Allocation by Administrative Agent. If offers are made by two more Banks with the same Bid Rate (Indexed) Margins or Bid Rate (General), as the 16 case may be, for a greater aggregate principal amount than the amount in respect of which such offers are accepted for the related Interest Period, the principal amount of Bid Rate Loans in respect of which such offers are accepted shall be allocated by the Administrative Agent among such Banks as nearly as possible (in multiples of $1,000,000, as the Administrative Agent may deem appropriate) in proportion to the aggregate principal amounts of such offers. Determinations by the Administrative Agent of the amounts of Bid Rate Loans shall be conclusive in the absence of manifest error. Section 2.04. Notice to Banks; Funding of Loans. (a) Upon receipt of a Notice of Borrowing, the Administrative Agent shall promptly notify each Bank of the contents thereof and of such Bank's share (if any) of such Borrowing and such Notice of Borrowing shall not thereafter be revocable by the Borrower. (b) Not later than 12:00 Noon (New York City time) on the date of each Borrowing, each Bank participating therein shall (except as provided in subsection (c) of this Section) make available its share of such Borrowing, in Federal or other funds immediately available in New York City, to the Administrative Agent at its address specified in or pursuant to Section 9.01. Unless the Administrative Agent determines that any applicable condition specified in Article 3 has not been satisfied, the Administrative Agent will make the funds so received from the Banks available to the Borrower at the Administrative Agent's aforesaid address. (c) Unless the Administrative Agent shall have received notice from a Bank prior to the date of any Borrowing that such Bank will not make available to the Administrative Agent such Bank's share of such Borrowing, the Administrative Agent may assume that such Bank has made such share available to the Administrative Agent on the date of such Borrowing in accordance with subsection (b) of this Section 2.04 and the Administrative Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Bank shall not have so made such share available to the Administrative Agent, such Bank and, if such Bank shall not have made such payment within two Domestic Business Days of demand therefor, the Borrower severally agree to repay to the Administrative Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Administrative Agent, at (i) in the case of the Borrower, a rate per annum equal to the higher of the Federal Funds Rate and the interest rate applicable thereto pursuant to Section 2.07 and (ii) in the case of such Bank, the Federal Funds Rate. If such Bank shall repay to the Administrative Agent such corresponding amount, such amount so repaid shall constitute such Bank's Loan included in such Borrowing for purposes of this Agreement. 17 (d) The failure of any Bank to make the Loan to be made by it as part of any Borrowing shall not relieve any other Bank of its obligation, if any, hereunder to make a Loan on the date of such Borrowing, but no Bank shall be responsible for the failure of any other Bank to make a Loan to be made by such other Bank. Section 2.05. Registry; Notes. (a) The Administrative Agent shall maintain a register (the "Register") on which it will record the Commitment of each Bank, each Loan made by such Bank and each repayment of any Loan made by such Bank. Any such recordation by the Administrative Agent on the Register shall be conclusive, absent manifest error. Failure to make any such recordation, or any error in such recordation, shall not affect the Borrower's obligations hereunder. (b) The Borrower hereby agrees that, promptly upon the request of any Bank at any time, the Borrower shall deliver to such Bank a duly executed Note, in substantially the form of Exhibit A hereto, payable to the order of such Bank and representing the obligation of the Borrower to pay the unpaid principal amount of the Loans made to the Borrower by such Bank, with interest as provided herein on the unpaid principal amount from time to time outstanding. (c) Each Bank shall record the date, amount and maturity of each Loan made by it and the date and amount of each payment of principal made by the Borrower with respect thereto, and each Bank receiving a Note pursuant to this Section, if such Bank so elects in connection with any transfer or enforcement of its Note, may endorse on the schedule forming a part thereof appropriate notations to evidence the foregoing information with respect to each such Loan then outstanding; provided that the failure of such Bank to make any such recordation or endorsement shall not affect the obligations of the Borrower hereunder or under the Notes. Such Bank is hereby irrevocably authorized by the Borrower so to endorse its Note and to attach to and make a part of its Note a continuation of any such schedule as and when required. Section 2.06. Maturity of Loans. (a) Each Revolving Credit Loan made by any Bank shall mature, and the principal amount thereof shall be due and payable together with accrued interest thereon, on the Commitment Termination Date of such Bank. (b) The Term Loans of each Bank shall mature, and the principal amount thereof shall be due and payable, together with accrued interest thereon, on the Final Maturity Date of such Bank. (c) Each Bid Rate Loan included in any Bid Rate Borrowing shall mature, and the principal amount thereof shall be due and payable (together with 18 interest accrued thereon), on the last day of the Interest Period applicable to such Bid Rate Borrowing. Section 2.07. Interest Rates. (a) Each Base Rate Loan shall bear interest on the outstanding principal amount thereof, for each day from the date such Loan is made until it becomes due, at a rate per annum equal to the Base Rate for such day. Such interest shall be payable quarterly in arrears on each Quarterly Payment Date, at maturity and on the date of termination of the Commitments in their entirety. Any overdue principal of or overdue interest on any Base Rate Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 1% plus the Base Rate for such day. (b) Each Euro-Dollar Loan shall bear interest on the outstanding principal amount thereof, for each day during each Interest Period applicable thereto, at a rate per annum equal to the sum of the Euro-Dollar Margin for such day plus the London Interbank Offered Rate applicable to such Interest Period. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than three months, at intervals of three months after the first day thereof. The "London Interbank Offered Rate" applicable to any Interest Period means the rate appearing on Page 3750 of the Telerate Service (or on any successor or substitute page of such service, or any successor to or substitute for such service, providing rate quotations comparable to those currently provided on such page of the Telerate Service, as may be nominated by the British Bankers' Association for purposes of providing quotations of interest rates applicable to dollar deposits in the London interbank market) as of 11:00 A.M. (London time) two Euro-Dollar Business Days prior to the commencement of such Interest Period, as the rate for dollar deposits with a maturity comparable to such Interest Period. In the event that such rate is not so available at such time for any reason, then the "London Interbank Offered Rate" for such Interest Period shall be the average (rounded upward, if necessary, to the next higher 1/16 of 1%) of the respective rates per annum at which deposits in dollars are offered to each of the Euro-Dollar Reference Banks in the London interbank market at approximately 11:00 A.M. (London time) two Euro-Dollar Business Days before the first day of such Interest Period in an amount approximately equal to the principal amount of the Loan of such Euro-Dollar Reference Bank to which such Interest Period is to apply and for a period of time comparable to such Interest Period. If any Euro-Dollar Reference Bank does not furnish a timely quotation, the Administrative Agent shall determine the relevant interest rate on the basis of the quotation furnished by the remaining Euro-Dollar Reference Bank or, if none of such quotations is available on a timely basis, the provisions of Section 8.01 shall apply. 19 (c) Any overdue principal of or overdue interest on any Euro-Dollar Loan shall bear interest, payable on demand, for each day from and including the date payment thereof was due to but excluding the date of actual payment, at a rate per annum equal to the sum of 1% plus the higher of (i) the sum of the Euro-Dollar Margin for such day plus the London Interbank Offered Rate applicable to such Loan at the date such payment was due and (ii) the Base Rate for such day. (d) Subject to Section 8.01(a), each Bid Rate (Indexed) Loan shall bear interest on the outstanding principal amount thereof, for the Interest Period applicable thereto, at a rate per annum equal to the sum of the London Interbank Offered Rate for such Interest Period (determined in accordance with Section 2.07(b) as if each Euro-Dollar Reference Bank were to participate in the related Bid Rate (Indexed) Borrowing ratably in proportion to its Commitment) plus (or minus) the Bid Rate (Indexed) Margin quoted by the Bank making such Loan in accordance with Section 2.03. Each Bid Rate (General) Loan shall bear interest on the outstanding principal amount thereof, for the Interest Period applicable thereto, at a rate per annum equal to the Bid Rate (General) quoted by the Bank making such Loan in accordance with Section 2.03. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than three months, at intervals of three months after the first day thereof. Any overdue principal of or overdue interest on any Bid Rate Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 1% plus the Base Rate for such day. (e) The Administrative Agent shall determine each interest rate applicable to the Loans hereunder. The Administrative Agent shall give prompt notice to the Borrower and the participating Banks by telecopy, telex or cable of each rate of interest so determined, and its determination thereof shall be conclusive in the absence of manifest error unless the Borrower raises an objection thereto within five Domestic Business Days after receipt of such notice. Section 2.08. Fees. (a) Facility Fee. The Borrower shall pay to the Administrative Agent for the account of each Bank a facility fee at the Facility Fee Rate (determined daily in accordance with the Pricing Schedule). Such facility fee shall accrue (i) from and including the Effective Date to but excluding such Bank's Commitment Termination Date, on the daily average aggregate amount of such Bank's Commitment (whether used or unused) and (ii) from and including such Bank's Commitment Termination Date to but excluding the date such Bank's Loans shall be repaid in their entirety, on the daily average aggregate outstanding principal amount of such Bank's Committed Loans. (b) Payments. Accrued fees under this Section for the account of any Bank shall be payable quarterly in arrears on each Quarterly Payment Date and 20 upon such Bank's Commitment Termination Date and Final Maturity Date (and, if later, the date the Loans of such Bank shall be repaid in their entirety); provided, that accrued facility fees shall be paid in equal quarterly installments on the Quarterly Payment Date following each full quarter during which the aggregate amount of Commitments remains unchanged. Section 2.09. Optional Termination or Reduction of Commitments. The Borrower may, upon at least three Domestic Business Days' notice to the Administrative Agent, (i) terminate the Commitments at any time, if no Loans are outstanding at such time or (ii) ratably reduce from time to time by an aggregate amount of $10,000,000 or any larger multiple of $1,000,000 the aggregate amount of the Commitments in excess of the aggregate outstanding principal amount of the Revolving Credit and Bid Rate Loans. Section 2.10. Method of Electing Interest Rates. (a) The Loans included in each Committed Borrowing shall bear interest initially at the type of rate specified by the Borrower in the applicable Notice of Committed Borrowing. Thereafter, the Borrower may from time to time elect to change or continue the type of interest rate borne by each Group of Loans (subject in each case to the provisions of Article 8 and the last sentence of this subsection (a)), as follows: (i) if such Loans are Base Rate Loans, the Borrower may elect to convert such Loans to Euro-Dollar Loans as of any Euro-Dollar Business Day; and (ii) if such Loans are Euro-Dollar Loans, the Borrower may elect to convert such Loans to Base Rate Loans or elect to continue such Loans as Euro-Dollar Loans for an additional Interest Period, subject to Section 2.14 in the case of any such conversion or continuation effective on any day other than the last day of the then current Interest Period applicable to such Loans. Each such election shall be made by delivering a notice (a "Notice of Interest Rate Election") to the Administrative Agent not later than 10:30 A.M. (New York City time) on the third Euro-Dollar Business Day before the conversion or continuation selected in such notice is to be effective. A Notice of Interest Rate Election may, if it so specifies, apply to only a portion of the aggregate principal amount of the relevant Group of Loans, provided that (i) such portion is allocated ratably among the Loans comprising such Group and (ii) the portion to which such notice applies, and the remaining portion to which it does not apply, are each $10,000,000 or any larger multiple of $1,000,000. (b) Each Notice of Interest Rate Election shall specify: 21 (i) the Group of Loans (or portion thereof) to which such notice applies; (ii) the date on which the conversion or continuation selected in such notice is to be effective, which shall comply with the applicable clause of subsection 2.10(a) above; (iii) if the Loans comprising such Group are to be converted, the new type of Loans and, if the Loans being converted are to be Fixed Rate Loans, the duration of the next succeeding Interest Period applicable thereto; and (iv) if such Loans are to be continued as Euro-Dollar Loans for an additional Interest Period, the duration of such additional Interest Period. Each Interest Period specified in a Notice of Interest Rate Election shall comply with the provisions of the definition of the term "Interest Period". (c) Promptly after receiving a Notice of Interest Rate Election from the Borrower pursuant to subsection 2.10(a) above, the Administrative Agent shall notify each Bank of the contents thereof and such notice shall not thereafter be revocable by the Borrower. If no Notice of Interest Rate Election is timely received prior to the end of an Interest Period for any Group of Loans, the Borrower shall be deemed to have elected that such Group of Loans be converted to Base Rate Loans as of the last day of such Interest Period. (d) An election by the Borrower to change or continue the rate of interest applicable to any Group of Loans pursuant to this Section shall not constitute a "Borrowing" subject to the provisions of Section 3.02. Section 2.11. Mandatory Termination of Commitments. The Commitment of each Bank shall terminate on such Bank's Commitment Termination Date, and any Revolving Credit or Bid Rate Loans of such Bank then outstanding (together with accrued interest thereon) shall be due and payable on such date. Section 2.12. Optional Prepayments. (a) The Borrower may (i) upon notice to the Administrative Agent not later than 10:30 A.M. (New York City time) on any Domestic Business Day prepay on such Domestic Business Day any Group of Base Rate Loans or any Bid Rate Borrowing bearing interest at the Base Rate pursuant to Section 8.01(a) and (ii) upon at least three Euro-Dollar Business Days' notice to the Administrative Agent not later than 10:30 A.M. (New York City time) prepay any Group of Euro-Dollar Loans, in each case in whole at any time, or from time to time in part in amounts aggregating $5,000,000 or any larger 22 multiple of $1,000,000, by paying the principal amount to be prepaid together with accrued interest thereon to the date of prepayment and together with any additional amounts payable pursuant to Section 2.14. Each such optional prepayment shall be applied to prepay ratably the Loans of the several Banks included in such Group or Borrowing. (b) Except as provided in subsection 2.12(a), the Borrower may not prepay all or any portion of the principal amount of any Bid Rate Loan prior to the maturity thereof. (c) Upon receipt of a notice of prepayment pursuant to this Section, the Administrative Agent shall promptly notify each Bank of the contents thereof and of such Bank's share (if any) of such prepayment and such notice shall not thereafter be revocable by the Borrower. Section 2.13. General Provisions as to Payments. (a) The Borrower shall make each payment of principal of, and interest on, the Loans and of fees hereunder, not later than 12:00 Noon (New York City time) on the date when due, in Federal or other funds immediately available in New York City, to the Administrative Agent at its address referred to in Section 9.01. The Administrative Agent will promptly distribute to each Bank its ratable share of each such payment received by the Administrative Agent for the account of the Banks. Whenever any payment of principal of, or interest on, the Base Rate Loans, or of fees shall be due on a day which is not a Domestic Business Day, the date for payment thereof shall be extended to the next succeeding Domestic Business Day. Whenever any payment of principal of, or interest on, the Euro- Dollar Loans shall be due on a day which is not a Euro-Dollar Business Day, the date for payment thereof shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case the date for payment thereof shall be the next preceding Euro-Dollar Business Day. Whenever any payment of principal of, or interest on, the Bid Rate Loans shall be due on a day which is not a Euro-Dollar Business Day, the date for payment thereof shall be extended to the next succeeding Euro- Dollar Business Day. If the date for any payment of principal is extended by operation of law or otherwise, interest thereon shall be payable for such extended time. (b) Unless the Administrative Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Banks hereunder that the Borrower will not make such payment in full, the Administrative Agent may assume that the Borrower has made such payment in full to the Administrative Agent on such date and the Administrative Agent may, in reliance upon such assumption, cause to be distributed to each Bank on such due date an amount equal to the amount then due such Bank. If and to the extent that the 23 Borrower shall not have so made such payment, each Bank shall repay to the Administrative Agent forthwith on demand such amount distributed to such Bank together with interest thereon, for each day from the date such amount is distributed to such Bank until the date such Bank repays such amount to the Administrative Agent, at the Federal Funds Rate. Section 2.14. Funding Losses. If the Borrower makes any payment of principal with respect to any Fixed Rate Loan or any Euro-Dollar Loan is converted to a Base Rate Loan or continued as a Euro-Dollar Loan for a new Interest Period (pursuant to Article 2, 6 or 8 or otherwise) on any day other than the last day of an Interest Period applicable thereto, or if the Borrower fails to borrow, prepay, convert or continue any Fixed Rate Loans after notice has been given to any Bank in accordance with Section 2.04(a), 2.10(c) or 2.12(c), the Borrower shall reimburse each Bank within 15 days after demand for any resulting loss or expense incurred by it (or by an existing or prospective Participant in the related Loan), including (without limitation) any loss incurred in obtaining, liquidating or employing deposits from third parties, but excluding loss of margin for the period after any such payment or conversion or failure to borrow, prepay, convert or continue, provided that such Bank shall have delivered to the Borrower a certificate setting forth in reasonable detail the calculation of the amount of such loss or expense, which certificate shall be conclusive in the absence of manifest error. Section 2.15. Computation of Interest and Fees. Interest based on the Prime Rate and facility fees hereunder shall be computed on the basis of a year of 365 days (or 366 days in a leap year) and paid for the actual number of days elapsed (including the first day but excluding the last day); provided that facility fees for the account of any Bank shall be paid in equal quarterly installments for each full quarter in which the Commitment of such Bank remains unchanged. All other interest shall be computed on the basis of a year of 360 days and paid for the actual number of days elapsed (including the first day but excluding the last day). Section 2.16. Regulation D Compensation. In the event that a Bank is required to maintain reserves of the type contemplated by the definition of "Euro-Dollar Reserve Percentage", such Bank may require the Borrower to pay, contemporaneously with each payment of interest on the Euro-Dollar Loans, additional interest on the related Euro-Dollar Loan of such Bank at a rate per annum determined by such Bank up to but not exceeding the excess of (i) (A) the applicable London Interbank Offered Rate divided by (B) one minus the Euro- Dollar Reserve Percentage over (ii) the applicable London Interbank Offered Rate. Any Bank wishing to require payment of such additional interest (x) shall so notify the Borrower and the Administrative Agent, in which case such additional interest on the Euro-Dollar Loans of such Bank shall be payable to such 24 Bank at the place indicated in such notice with respect to each Interest Period commencing at least three Euro-Dollar Business Days after the giving of such notice and (y) shall notify the Borrower at least three Euro-Dollar Business Days prior to each date on which interest is payable on the Euro-Dollar Loans of the amount then due it under this Section. Each such notification shall be accompanied by such information as the Borrower may reasonably request. "Euro-Dollar Reserve Percentage" means for any day that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement for a member bank of the Federal Reserve System in New York City with deposits exceeding five billion dollars in respect of "Eurocurrency liabilities" (or in respect of any other category of liabilities which includes deposits by reference to which the interest rate on Euro-Dollar Loans is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of any Bank to United States residents). Section 2.17. Increased Commitments; Additional Banks. (a) Subsequent to the Effective Date, the Borrower may, on no more than three occasions, upon at least 30 days' notice to the Administrative Agent (which shall promptly provide a copy of such notice to the Banks), propose to increase the aggregate amount of the Commitments by an amount not to exceed in the aggregate for all such increases $60,000,000 (the amount of any such increase, the "Increased Commitments"). Each Bank party to this Agreement at such time shall have the right (but no obligation), for a period of 15 days following receipt of such notice, to elect by notice to the Borrower and the Administrative Agent to increase its Commitment by a principal amount which bears the same ratio to the Increased Commitments as its then Commitment bears to the aggregate Commitments then existing. (b) If any Bank party to this Agreement shall not elect to increase its Commitment pursuant to subsection (a) of this Section, the Borrower may designate one or more banks or other financial institutions (which may be, but need not be, one or more of the existing Banks) which at the time agree in the case of any existing Bank to increase its Commitment and, in the case of any other such bank (an "Additional Bank"), to become a party to this Agreement and assume a Commitment hereunder. The sum of the increases in the Commitments of the existing Banks pursuant to this subsection (b) plus the Commitments of the Additional Banks shall not in the aggregate exceed the unsubscribed amount of the Increased Commitments. (c) An increase in the aggregate amount of the Commitments pursuant to this Section 2.17 shall become effective upon the receipt of the Administrative 25 Agent of an agreement in form and substance satisfactory to the Administrative Agent signed by the Borrower, by each Additional Bank and by each other Bank whose Commitment is to be increased, setting forth the new Commitments of such Banks and setting forth the agreement of each Additional Bank to become a party to this Agreement and to be bound by all the terms and provisions hereof, together with such evidence of appropriate corporate authorization on the part of the Borrower with respect to the Increased Commitments and such opinions of counsel for the Borrower with respect to the Increased Commitments as the Administrative Agent may reasonably request. (d) Upon any increase in the aggregate amount of the Commitments pursuant to this Section 2.17, within five Domestic Business Days, in the case of Base Rate Loans then outstanding, and at the end of the then current Interest Period with respect thereto, in the case of Euro-Dollar Loans then outstanding, the Borrower shall prepay or repay such Loans in their entirety and, to the extent the Borrower elects to do so and subject to the conditions specified in Article 3, the Borrower shall reborrow Committed Loans from the Banks in proportion to their respective Commitments after giving effect to such increase, until such time as all outstanding Committed Loans are held by the Banks in such proportion. ARTICLE 3 Conditions Section 3.01. Effectiveness. This Agreement shall become effective on the date that each of the following conditions shall have been satisfied (or waived in accordance with Section 9.05): (a) receipt by the Administrative Agent of counterparts hereof signed by each of the parties hereto (or, in the case of any party as to which an executed counterpart shall not have been received, receipt by the Administrative Agent in form satisfactory to it of telegraphic, telecopy, telex or other written confirmation from such party of execution of a counterpart hereof by such party); (b) receipt by the Administrative Agent of an opinion of the General Counsel of the Borrower substantially in the form of Exhibit E hereto and covering such additional matters relating to the transactions contemplated hereby as the Required Banks may reasonably request; (c) receipt by the Administrative Agent of an opinion of Davis Polk & Wardwell, special counsel for the Administrative Agent, substantially in the form of Exhibit F hereto and covering such additional matters relating to the transactions contemplated hereby as the Required Banks may reasonably request; 26 (d) receipt by the Administrative Agent of a certificate signed by a Vice President, the Treasurer or the Controller of the Borrower, dated the Effective Date, to the effect set forth in clauses (c) and (d) of Section 3.02; (e) receipt by the Administrative Agent of all documents it may have reasonably requested prior to the date hereof relating to the existence of the Borrower, the corporate authority for and the validity of this Agreement and the Notes, and any other matters relevant hereto, all in form and substance satisfactory to the Administrative Agent; and (f) receipt by the Administrative Agent of evidence satisfactory to it of the payment of all principal of and interest on any loans outstanding under, and all accrued commitment fees under, the Existing Credit Agreement and the cancellation or the expiration of any letter of credit issued thereunder; provided that this Agreement shall not become effective or be binding on any party hereto unless all of the foregoing conditions are satisfied not later than August 23, 1999. The Administrative Agent shall promptly notify the Borrower and the Banks of the Effective Date, and such notice shall be conclusive and binding on all parties hereto. The Borrower and the Banks party to the Existing Credit Agreement, comprising the "Required Banks" as defined therein, hereby agree that (i) the commitments of the lenders under the Existing Credit Agreement shall terminate in their entirety immediately and automatically upon the effectiveness of this Agreement, without further action by any party to the Existing Credit Agreement, (ii) all accrued fees under the Existing Credit Agreement shall be due and payable at such time and (iii) subject to the funding loss indemnities in the Existing Credit Agreement, the Borrower may prepay any and all loans outstanding thereunder on the date of effectiveness of this Agreement. Section 3.02. Borrowings. The obligation of any Bank to make a Loan on the occasion of any Borrowing is subject to the satisfaction of the following conditions: (a) receipt by the Administrative Agent of a Notice of Borrowing as required by Section 2.02 or 2.03; (b) the facts that, immediately after such Borrowing the aggregate outstanding principal amount of the Revolving Credit Loans and the Bid Rate Loans will not exceed the aggregate amount of the Commitments (exclusive of Commitments terminating on the date of such Borrowing); (c) the fact that, immediately after such Borrowing, no Default shall have occurred and be continuing; and 27 (d) the fact that the representations and warranties of the Borrower contained in this Agreement (except the representations and warranties set forth in Sections 4.04(c) and 4.05) shall be true on and as of the date of such Borrowing. Each Borrowing hereunder shall be deemed to be a representation and warranty by the Borrower on the date of such Borrowing as to the facts specified in clauses (b), (c) and (d) of this Section . ARTICLE 4 Representations and Warranties The Borrower represents and warrants that: Section 4.01. Corporate Existence and Power. The Borrower is a corporation duly incorporated, validly existing and in good standing under the laws of Delaware, and has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted and is duly qualified to do business as a foreign corporation in each jurisdiction where such qualification is required, except where the failure so to qualify would not have a material adverse effect on the business, financial position or results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole. Section 4.02. Corporate and Governmental Authorization; No Contravention. The execution, delivery and performance by the Borrower of this Agreement and the Notes are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action, require no action by or in respect of, or filing with, any governmental body, agency or official and do not contravene, or constitute a default under, any provision of applicable law or regulation or of the articles of incorporation or by-laws of the Borrower or of any agreement, judgment, injunction, order, decree or other instrument binding upon the Borrower or result in the creation or imposition of any Lien on any asset of the Borrower or any of its Material Subsidiaries. Section 4.03. Binding Effect. This Agreement constitutes a valid and binding agreement of the Borrower and each Note, if and when executed and delivered in accordance with this Agreement, will constitute a valid and binding obligation of the Borrower, in each case enforceable in accordance with its terms, except as the same may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and by general principles of equity. 28 Section 4.04. Financial Information. (a) The consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of December 31, 1998 and the related consolidated statements of income, cash flows, capitalization and retained earnings for the fiscal year then ended, reported on by Deloitte & Touche, copies of which have been delivered to each of the Banks, fairly present, in conformity with generally accepted accounting principles, the consolidated financial position of the Borrower and its Consolidated Subsidiaries as of such date and their consolidated results of operations and cash flows for such fiscal year. (b) The unaudited consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of June 30, 1999 and the related unaudited consolidated statements of income and cash flows for the six months then ended, copies of which have been delivered to each of the Banks, fairly present, in conformity with generally accepted accounting principles applied on a basis consistent with the financial statements referred to in subsection (a) of this Section, the consolidated financial position of the Borrower and its Consolidated Subsidiaries as of such date and their consolidated results of operations and changes in financial position for such six month period (subject to normal year-end adjustments and the absence of footnotes). (c) Since the respective dates set forth above, there has been no material adverse change in the business, financial position or results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole. Section 4.05. Litigation. (a) Except as disclosed in the reports referred to in Section 4.04, or in reports hereafter filed by the Borrower with the Securities and Exchange Commission, copies of which have been made available to each of the Banks, there is no action, suit or proceeding pending against, or to the knowledge of the Borrower threatened against or affecting, the Borrower or any of its Subsidiaries before any court or arbitrator or any governmental body, agency or official which would be likely to be decided adversely to Borrower and, as a result, have a material adverse effect upon the business, consolidated financial position or results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole, or which in any manner draws into question the validity of this Agreement or any Note. Section 4.06. Compliance with Laws. The Borrower and each Material Subsidiary is in compliance in all material respects with all applicable laws, ordinances, rules, regulations and requirements of governmental authorities (including, without limitation, ERISA and Environmental Laws) except where (i) non-compliance would not have a material adverse affect on the business, financial position or results of operations of the Borrower and its Consolidated 29 Subsidiaries, considered as a whole, or (ii) the necessity of compliance therewith is contested in good faith by appropriate proceedings. Section 4.07. Taxes. The Borrower and its Material Subsidiaries have filed all United States Federal income tax returns and all other material tax returns which are required to be filed by them and have paid all taxes due pursuant to such returns or pursuant to any assessment received by the Borrower or any Material Subsidiary except (i) where nonpayment would not have a material adverse effect on the business, financial position or results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole or (ii) where the same are contested in good faith by appropriate proceedings. The charges, accruals and reserves on the books of the Borrower and its Material Subsidiaries in respect of taxes or other governmental charges are, in the opinion of the Borrower, adequate. Section 4.08. Public Utility Holding Company Act. The Borrower is not a holding company under the Public Utility Holding Company Act of 1935, as amended. Section 4.09. Year 2000. The cost to the Borrower of (i) any reprogramming required to permit the proper functioning, in and following year 2000 of (a) the Borrower's critical computer systems and (b) Borrower's critical equipment containing embedded microchips (including systems and equipment supplied by others), (ii) the testing of all such systems and equipment, as so reprogrammed, and (iii) the reasonably foreseeable consequences of year 2000 to the Borrower (including, without limitation, reprogramming errors and the failure of others' systems or equipment) will not result in a Default or a Material Adverse Effect. Except for such of the reprogramming referred to in the preceding sentence as may be necessary, the computer and management information systems of the Borrower and its Subsidiaries are and, with ordinary course upgrading and maintenance, will continue for the term of this Agreement, to be sufficient to permit the Borrower to conduct its business without Material Adverse Effect. ARTICLE 5 Covenants The Borrower agrees that, so long as any Bank has any Commitment hereunder or any amount payable hereunder remains unpaid: Section 5.01. Information. The Borrower will deliver to each of the Banks: 30 (a) as soon as available and in any event within 120 days after the end of each fiscal year of the Borrower, a consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of the end of such fiscal year and the related consolidated statements of income, cash flows, capitalization and retained earnings for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, all reported on in a manner consistent with the requirements of the Securities and Exchange Commission by Deloitte & Touche or other independent public accountants of nationally recognized standing; (b) as soon as available and in any event within 60 days after the end of each of the first three quarters of each fiscal year of the Borrower, a consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of the end of such quarter and the related consolidated statements of income and cash flows for such quarter and for the portion of the Borrower's fiscal year ended at the end of such quarter, setting forth in each case in comparative form the figures for the corresponding quarter and the corresponding portion of the Borrower's previous fiscal year, all certified (subject to normal year-end adjustments) as to fairness of presentation, generally accepted accounting principles and consistency by an Approved Officer of the Borrower; (c) simultaneously with the delivery of each set of financial statements referred to in clauses (a) and (b) above, a certificate of an Approved Officer of the Borrower stating whether any Default exists on the date of such certificate and, if any Default then exists, setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto; (d) within five days after any officer of the Borrower with responsibility relating thereto obtains knowledge of any Default, if such Default is then continuing, a certificate of an Approved Officer of the Borrower setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto; (e) promptly upon the filing thereof, copies of all registration statements (other than the exhibits thereto and any registration statements on Form S-8 or its equivalent) and reports on Forms 10-K, 10-Q and 8-K (or their equivalents) which the Borrower shall have filed with the Securities and Exchange Commission; (f) if and when any member of the ERISA Group (i) gives or is required to give notice to the PBGC of any "reportable event" (as defined in Section 4043 of ERISA) with respect to any Material Plan which might constitute grounds for a termination of such Plan under Title IV of ERISA, or knows that the plan administrator of any Material Plan has given or is required to give notice of any such reportable event, a copy of the notice of such reportable event given or required to be given to the PBGC; (ii) receives notice of complete or partial 31 withdrawal liability under Title IV of ERISA or notice that any Material Plan is in reorganization, is insolvent or has been terminated, a copy of such notice; (iii) receives notice from the PBGC under Title IV of ERISA of an intent to terminate, impose material liability (other than for premiums under Section 4007 of ERISA) in respect of, or appoint a trustee to administer any Plan, a copy of such notice; (iv) applies for a waiver of the minimum funding standard under Section 412 of the Internal Revenue Code, a copy of such application; (v) gives notice of intent to terminate any Material Plan under Section 4041(c) of ERISA, a copy of such notice and other information filed with the PBGC; (vi) gives notice of withdrawal from any Material Plan pursuant to Section 4063 of ERISA, a copy of such notice; or (vii) fails to make any payment or contribution to any Material Plan or makes any amendment to any Material Plan which has resulted or could result in the imposition of a Lien or the posting of a bond or other security, a certificate of the chief financial officer or the chief accounting officer of the Borrower setting forth details as to such occurrence and action, if any, which the Borrower or applicable member of the ERISA Group is required or proposes to take; and (g) from time to time such additional information regarding the financial position or business of the Borrower and its Subsidiaries as the Administrative Agent, at the request of any Bank, may reasonably request. Information required to be delivered pursuant to this Sections 5.01(a), 5.01(b) and 5.01(e) shall be deemed to have been delivered on the date on which the Borrower provides notice to the Banks that such information has been posted on the Securities and Exchange Commission website on the Internet at sec.gov/edaux/searches.htm or at another website identified in such notice and accessible by the Banks without charge; provided that (i) such notice may be included in a certificate delivered pursuant to Section 5.01(c) and (ii) the Borrower shall deliver paper copies of the information referred to in Sections 5.01(a), 5.01(b) and 5.01(e) to any Bank which requests such delivery. Section 5.02. Payment of Taxes. The Borrower will pay and discharge, and will cause each Material Subsidiary to pay and discharge, at or before maturity, all their tax liabilities, except where (i) nonpayment would not have a material adverse effect on the business, financial position or results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole, or (ii) the same may be contested in good faith by appropriate proceedings, and will maintain, and will cause each Material Subsidiary to maintain, in accordance with generally accepted accounting principles, appropriate reserves for the accrual of any of the same. Section 5.03. Maintenance of Property; Insurance. (a) The Borrower will keep, and will cause each Material Subsidiary to keep, all property useful and 32 necessary in its business in good working order and condition, ordinary wear and tear excepted. (b) The Borrower will, and will cause each of its Material Subsidiaries to, maintain (either in the name of the Borrower or in such Subsidiary's own name) with financially sound and responsible insurance companies, insurance on all their respective properties in at least such amounts and against at least such risks (and with such risk retention) as are usually insured against in the same general area by companies of established repute engaged in the same or a similar business; provided that self-insurance by the Borrower or any such Material Subsidiary shall not be deemed a violation of this covenant to the extent that companies engaged in similar businesses and owning similar properties in the same general areas in which the Borrower or such Material Subsidiary operates self-insure; and will furnish to the Banks, upon request from the Administrative Agent, information presented in reasonable detail as to the insurance so carried. Section 5.04. Maintenance of Existence. The Borrower will preserve, renew and keep in full force and effect, and will cause each Material Subsidiary to preserve, renew and keep in full force and effect their respective corporate existence and their respective rights, privileges and franchises material to the normal conduct of their respective businesses; provided that nothing in this Section 5.04 shall prohibit the termination of any right, privilege or franchise of the Borrower or any Material Subsidiary or of the corporate existence of any Material Subsidiary if the Borrower in good faith determines that such termination is in the best interest of the Borrower and is not materially disadvantageous to the Banks. Section 5.05. Compliance with Laws. The Borrower will comply, and cause each Material Subsidiary to comply, in all material respects with all applicable laws, ordinances, rules, regulations, and requirements of governmental authorities (including, without limitation, ERISA and Environmental Laws) except where (i) noncompliance would not have a material adverse effect on the business, financial position or results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole, or (ii) the necessity of compliance therewith is contested in good faith by appropriate proceedings. Section 5.06. Books and Records. The Borrower will keep, and will cause each Material Subsidiary to keep, proper books of record and account in which full, true and correct entries shall be made of all financial transactions in relation to its business and activities in accordance with its customary practices; and will permit, and will cause each Material Subsidiary to permit, representatives of any Bank at such Bank's expense (accompanied by a representative of the Borrower, if the Borrower so desires) to visit any of their respective properties, to examine any of their respective books and records and to discuss their respective affairs, 33 finances and accounts with their respective officers, employees and independent public accountants, all upon such reasonable notice, at such reasonable times and as often as may reasonably be desired. Section 5.07. Maintenance of Ownership of Principal Subsidiaries. The Borrower will maintain ownership of all shares of the common stock of each Principal Subsidiary, directly or indirectly through Subsidiaries, free and clear of all Liens, provided that any Principal Subsidiary may merge with and into the Borrower or another Subsidiary. Section 5.08. Negative Pledge. The Borrower will not create, assume or suffer to exist any Lien on any asset now owned or hereafter acquired by it, except: (a) Liens granted by the Borrower existing on the date of this Agreement securing Indebtedness outstanding on the date of this Agreement in an aggregate principal amount not exceeding $100,000,000; (b) any Lien on any asset of any corporation existing at the time such corporation is merged or consolidated with or into the Borrower and not created in contemplation of such event; (c) any Lien existing on any asset prior to the acquisition thereof by the Borrower and not created in contemplation of such acquisition; (d) any Lien on any asset securing Indebtedness incurred or assumed for the purpose of financing all or any part of the cost of acquiring such asset, provided that such Lien attaches to such asset concurrently with or within 180 days after the acquisition thereof; (e) any Lien arising out of the refinancing, extension, renewal or refunding of any Indebtedness secured by any Lien permitted by any of the foregoing clauses of this Section, provided that such Indebtedness is not increased and is not secured by any additional assets; (f) Liens for taxes, assessments or other governmental charges or levies not yet due or which are being contested in good faith by appropriate proceedings and with respect to which adequate reserves or other appropriate provisions are being maintained in accordance with generally accepted accounting principles; (g) statutory Liens of landlords and Liens of carriers, warehousemen, mechanics, materialmen and other Liens imposed by law, created in the ordinary course of business and for amounts not past due for more than 60 days or which are being contested in good faith by appropriate proceedings which are sufficient 34 to prevent imminent foreclosure of such Liens, are promptly instituted and diligently conducted and with respect to which adequate reserves or other appropriate provisions are being maintained in accordance with generally accepted accounting principles; (h) Liens incurred or deposits made in the ordinary course of business (including, without limitation, surety bonds and appeal bonds) in connection with workers' compensation, unemployment insurance and other types of social security benefits or to secure the performance of tenders, bids, leases, contracts (other than for the repayment of Indebtedness), statutory obligations and other similar obligations or arising as a result of progress payments under government contracts; (i) easements (including, without limitation, reciprocal easement agreements and utility agreements), rights-of-way, covenants, consents, reservations, encroachments, variations and other restrictions, charges or encumbrances (whether or not recorded) affecting the use of real property; (j) Liens with respect to judgments and attachments which do not result in an Event of Default; (k) Liens, deposits or pledges to secure the performance of bids, tenders, contracts (other than contracts for the payment of money), leases (permitted under the terms of this Agreement), public or statutory obligations, surety, stay, appeal, indemnity, performance or other obligations arising in the ordinary course of business; and (l) other Liens including Liens imposed by Environmental Laws arising in the ordinary course of its business which (i) do not secure Indebtedness, (ii) do not secure any obligation in an amount exceeding $100,000,000 at any time at which Investment Grade Status does not exist as to the Borrower and (iii) do not in the aggregate materially detract from the value of its assets or materially impair the use thereof in the operation of its business. Section 5.09. Consolidations, Mergers and Sales of Assets. The Borrower will not (i) consolidate or merge with or into any other Person or (ii) sell, lease or otherwise transfer, directly or indirectly, Substantial Assets to any Person (other than a Subsidiary); provided that the Borrower may merge with another Person if the Borrower is the corporation surviving such merger and, after giving effect thereto, no Default shall have occurred and be continuing. Section 5.10. Use of Proceeds. The proceeds of the Loans made under this Agreement will be used by the Borrower for its general corporate purposes, including liquidity support for outstanding commercial paper. None of such 35 proceeds will be used, directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of buying or carrying any "margin stock" within the meaning of Regulation U. Section 5.11. Transactions with Affiliates. The Borrower will not, and will not permit any Subsidiary to, directly or indirectly, pay any funds to or for the account of, make any investment in, lease, sell, transfer or otherwise dispose of any assets, tangible or intangible, to, or participate in, or effect, any transaction with, any Affiliate unless all such transactions between the Borrower and its Subsidiaries on the one hand and any Affiliate on the other, taken in the aggregate and not individually, shall be on an arms-length basis on terms no less favorable to the Borrower or such Subsidiary than could have been obtained from a third party who was not an Affiliate; provided that the foregoing provisions of this Section shall not prohibit the Borrower and each Subsidiary from declaring or paying any lawful dividend so long as, after giving effect thereto, no Default shall have occurred and be continuing. Section 5.12. Indebtedness/Capitalization Ratio. The ratio of Consolidated Indebtedness to Consolidated Capitalization will at no time exceed 65%. ARTICLE 6 Defaults Section 6.01. Events of Default. If one or more of the following events ("Events of Default") shall have occurred and be continuing: (a) the Borrower shall fail to pay when due any principal of any Loan or shall fail to pay, within five days of the due date thereof, any interest, fees or any other amount payable hereunder; (b) the Borrower shall fail to observe or perform any covenant contained in Sections 5.08, 5.09, 5.12 or the second sentence of 5.10, inclusive; (c) the Borrower shall fail to observe or perform any covenant or agreement contained in this Agreement (other than those covered by clause (a) or (b) above) for 30 days after notice thereof has been given to the Borrower by the Administrative Agent at the request of any Bank; (d) any representation, warranty, certification or statement made by the Borrower in this Agreement or in any certificate, financial statement or other 36 document delivered pursuant to this Agreement shall prove to have been incorrect in any material respect when made (or deemed made); (e) the Borrower or any Subsidiary shall fail to make any payment in respect of Material Debt (other than the Loans) when due or within any applicable grace period; (f) any event or condition shall occur and shall continue beyond the applicable grace or cure period, if any, provided with respect thereto so as to result in the acceleration of the maturity of Material Debt; (g) the Borrower or any Material Subsidiary shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate action to authorize any of the foregoing; (h) an involuntary case or other proceeding shall be commenced against the Borrower or any Material Subsidiary seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 90 days; or an order for relief shall be entered against the Borrower or any Material Subsidiary under the federal bankruptcy laws as now or hereafter in effect; (i) any member of the ERISA Group shall fail to pay when due an amount or amounts aggregating in excess of $25,000,000 which it shall have become liable to pay to the PBGC or to a Plan under Title IV of ERISA; or notice of intent to terminate a Plan or Plans having aggregate Unfunded Vested Liabilities in excess of $50,000,000 (collectively, a "Material Plan") shall be filed under Title IV of ERISA by any member of the ERISA Group, any plan administrator or any combination of the foregoing; or the PBGC shall institute proceedings under Title IV of ERISA to terminate or to cause a trustee to be appointed to administer any Material Plan or a proceeding shall be instituted by a fiduciary of any Material Plan against any member of the ERISA Group to enforce Section 515 or 4219(c)(5) of ERISA and such proceeding shall not have been dismissed within 90 days thereafter; or a condition shall exist by reason of 37 which the PBGC would be entitled to obtain a decree adjudicating that any Material Plan must be terminated; (j) a judgment or other court order for the payment of money in excess of $50,000,000 shall be rendered against the Borrower or any Material Subsidiary and such judgment or order shall continue without being vacated, discharged, satisfied or stayed or bonded pending appeal for a period of 45 days; or (k) the Borrower shall cease to be a Subsidiary of Duke Energy Corporation; then, and in every such event, the Administrative Agent shall (i) if requested by Banks having more than 66*% in aggregate amount of the Commitments, by notice to the Borrower terminate the Commitments and they shall thereupon terminate and (ii) if requested by Banks holding more than 66% in aggregate principal amount of the Loans, by notice to the Borrower declare the Loans (together with accrued interest thereon) to be, and the Loans shall thereupon become, immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower; provided that in the case of any of the Events of Default specified in clause (g) or (h) above with respect to the Borrower, without any notice to the Borrower or any other act by the Administrative Agent or the Banks, the Commitments shall thereupon terminate and the Loans (together with accrued interest thereon) shall become immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower. Section 6.02. Notice of Default. The Administrative Agent shall give notice to the Borrower under Section 6.01(c) promptly upon being requested to do so by any Bank and shall thereupon notify all the Banks thereof. ARTICLE 7 The Administrative Agent Section 7.01. Appointment and Authorization. Each Bank irrevocably appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under this Agreement and the Notes as are delegated to the Administrative Agent by the terms hereof or thereof, together with all such powers as are reasonably incidental thereto. Section 7.02. Administrative Agent and Affiliates. The Chase Manhattan Bank shall have the same rights and powers under this Agreement as any other 38 Bank and may exercise or refrain from exercising the same as though it were not the Administrative Agent, and The Chase Manhattan Bank and its affiliates may accept deposits from, lend money to, and generally engage in any kind of business with the Borrower or any Subsidiary or affiliate of the Borrower as if it were not the Administrative Agent hereunder. Section 7.03. Action by Administrative Agent. The obligations of the Administrative Agent hereunder are only those expressly set forth herein. Without limiting the generality of the foregoing, the Administrative Agent shall not be required to take any action with respect to any Default, except as expressly provided in Article 6. Section 7.04. Consultation with Experts. The Administrative Agent may consult with legal counsel (who may be counsel for the Borrower), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts. Section 7.05. Liability of Administrative Agent. Neither the Administrative Agent nor any of its affiliates nor any of their respective directors, officers, agents or employees shall be liable to any Bank for any action taken or not taken by it in connection herewith (i) with the consent or at the request of the Required Banks or (ii) in the absence of its own gross negligence or willful misconduct. Neither the Administrative Agent nor any of its affiliates nor any of their respective directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into or verify (i) any statement, warranty or representation made in connection with this Agreement or any borrowing hereunder; (ii) the performance or observance of any of the covenants or agreements of the Borrower; (iii) the satisfaction of any condition specified in Article 3, except receipt of items required to be delivered to the Administrative Agent; or (iv) the validity, effectiveness or genuineness of this Agreement, the Notes or any other instrument or writing furnished in connection herewith. The Administrative Agent shall not incur any liability by acting in reliance upon any notice, consent, certificate, statement, or other writing (which may be a bank wire, telex or similar writing) believed by it in good faith to be genuine or to be signed by the proper party or parties. Without limiting the generality of the foregoing, the use of the term "agent" in this Agreement with reference to the Administrative Agent is not intended to connote any fiduciary or other implied (or express) obligations arising under agency doctrine of any applicable law. Instead, such term is used merely as a matter of market custom and is intended to create or reflect only an administrative relationship between independent contracting parties. 39 Section 7.06. Indemnification. Each Bank shall, ratably in accordance with its Commitment, indemnify the Administrative Agent, its affiliates and their respective directors, officers, agents and employees (to the extent not reimbursed by the Borrower) against any cost, expense (including counsel fees and disbursements), claim, demand, action, loss or liability (except such as result from the such indemnitees' gross negligence or willful misconduct) that such indemnitees may suffer or incur in connection with this Agreement or any action taken or omitted by such indemnitees thereunder. Section 7.07. Credit Decision. Each Bank acknowledges that it has, independently and without reliance upon the Administrative Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Bank also acknowledges that it will, independently and without reliance upon the Administrative Agent or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking any action under this Agreement. Section 7.08. Successor Administrative Agent. The Administrative Agent may resign at any time by giving notice thereof to the Banks and the Borrower. Upon any such resignation, the Borrower, with the consent of the Required Banks, (such consent not to be unreasonably withheld or delayed), shall have the right to appoint a successor Administrative Agent. If no successor Administrative Agent shall have been so appointed, and shall have accepted such appointment, within 30 days after the retiring Administrative Agent gives notice of resignation, then the retiring Administrative Agent may, on behalf of the Banks, appoint a successor Administrative Agent, which shall be a commercial bank organized or licensed under the laws of the United States of America or of any State thereof and having a combined capital and surplus of at least $250,000,000. Upon the acceptance of its appointment as Administrative Agent hereunder by a successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder; provided that if such successor Administrative Agent is appointed without the consent of the Borrower, such successor Administrative Agent may be replaced by the Borrower with the consent of the Required Banks. After any retiring Administrative Agent's resignation hereunder as Administrative Agent, the provisions of this Article shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent. Section 7.09. Administrative Agent's Fee. The Borrower shall pay to the Administrative Agent for its own account fees in the amounts and at the times previously agreed upon between the Borrower and the Administrative Agent. 40 ARTICLE 8 Change in Circumstances Section 8.01. Basis for Determining Interest Rate Inadequate or Unfair. If on or prior to the first day of any Interest Period for any Euro-Dollar Borrowing or Bid Rate (Indexed) Borrowing: (a) the Administrative Agent is advised by the Euro-Dollar Reference Banks that deposits in dollars (in the applicable amounts) are not being offered to the Euro-Dollar Reference Banks in the relevant market for such Interest Period, or (b) in the case of a Euro-Dollar Borrowing, Banks having 66*% or more of the aggregate amount of the affected Loans advise the Administrative Agent that the London Interbank Offered Rate as determined by the Administrative Agent will not adequately and fairly reflect the cost to such Banks of funding their Euro-Dollar Loans for such Interest Period, the Administrative Agent shall forthwith give notice thereof to the Borrower and the Banks, whereupon until the Administrative Agent notifies the Borrower that the circumstances giving rise to such suspension no longer exist, (i) the obligations of the Banks to make Euro- Dollar Loans or to continue or convert outstanding Loans as or into Euro-Dollar Loans shall be suspended and (ii) each outstanding Euro-Dollar Loan shall be converted into a Base Rate Loan on the last day of the then current Interest Period applicable thereto. Unless the Borrower notifies the Administrative Agent at least one Domestic Business Day before the date of any Fixed Rate Borrowing for which a Notice of Borrowing has previously been given that it elects not to borrow on such date, (i) if such Fixed Rate Borrowing is a Committed Borrowing, such Borrowing shall instead be made as a Base Rate Borrowing and (ii) if such Borrowing is a Bid Rate (Indexed) Borrowing, the Loans comprising such Borrowing shall bear interest for each day from and including the first day to but excluding the last day of the Interest Period applicable thereto at the Base Rate for such day. Section 8.02. Illegality. If, on or after the date of this Agreement, the adoption of any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Euro-Dollar Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable 41 agency shall make it unlawful or impossible for any Bank (or its Euro-Dollar Lending Office) to make, maintain or fund any of its Euro-Dollar Loans and such Bank shall so notify the Administrative Agent, the Administrative Agent shall forth with give notice thereof to the other Banks and the Borrower, whereupon until such Bank notifies the Borrower and the Administrative Agent that the circumstances giving rise to such suspension no longer exist, the obligation of such Bank to make Euro-Dollar Loans, or to continue or convert outstanding Loans as or into Euro-Dollar Loans, shall be suspended. Before giving any notice to the Administrative Agent pursuant to this Section, such Bank shall designate a different Euro-Dollar Lending Office if such designation will avoid the need for giving such notice and will not be otherwise disadvantageous to such Bank in the good faith exercise of its discretion. If such notice is given, each Euro-Dollar Loan of such Bank then outstanding shall be converted to a Base Rate Loan either (a) on the last day of the then current Interest Period applicable to such Euro- Dollar Loan if such Bank may lawfully continue to maintain and fund such Loan to such day or (b) immediately if such Bank shall determine that it may not lawfully continue to maintain and fund such Loan to such day. Section 8.03. Increased Cost and Reduced Return. (a) If on or after (x) the date of this Agreement, in the case of any Committed Loan or any obligation to make Committed Loans or (y) the date of any related Bid Rate Quote, in the case of any Bid Rate Loan, the adoption of any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Applicable Lending Office) with any request or directive (whether or not having the force of law) issued on or after such date of any such authority, central bank or comparable agency shall impose, modify or deem applicable any reserve, special deposit or similar requirement (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System, but excluding with respect to any Euro- Dollar Loan any such requirement included in an applicable Euro-Dollar Reserve Percentage) against assets of, deposits with or for the account of, or credit extended by, any Bank (or its Applicable Lending Office) or shall impose on any Bank (or its Applicable Lending Office) or on the London interbank market any other condition (other than in respect of Taxes or Other Taxes) affecting its Fixed Rate Loans, its Note or its obligation to make Fixed Rate Loans and the result of any of the foregoing is to increase the cost to such Bank (or its Applicable Lending Office) of making or maintaining any Fixed Rate Loan, or to reduce the amount of any sum received or receivable by such Bank (or its Applicable Lending Office) under this Agreement or under its Note with respect thereto, by an amount deemed by such Bank to be material, then, within 15 days after demand by such Bank (with a copy to the Administrative Agent), the Borrower shall pay to such Bank such additional amount or amounts as will compensate 42 such Bank for such increased cost or reduction; provided that no such amount shall be payable with respect to any period commencing more than 90 days prior to the date such Bank first notifies the Borrower of its intention to demand compensation therefor under this Section 8.03(a). (b) If any Bank shall have determined that, on or after the date of this Agreement, the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change in any such law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency given or made after the date of this Agreement, has or would have the effect of reducing the rate of return on capital of such Bank (or its Parent) as a consequence of such Bank's obligations hereunder to a level below that which such Bank (or its Parent) could have achieved but for such adoption, change, request or directive (taking into consideration its policies with respect to capital adequacy) by an amount deemed by such Bank to be material, then from time to time, within 15 days after demand by such Bank (with a copy to the Administrative Agent), the Borrower shall pay to such Bank such additional amount or amounts as will compensate such Bank (or its Parent) for such reduction; provided that no such amount shall be payable with respect to any period commencing less than 30 days after the date such Bank first notifies the Borrower of its intention to demand compensation under this Section 8.03(b). (c) Each Bank will promptly notify the Borrower and the Administrative Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Bank to compensation pursuant to this Section and will designate a different Applicable Lending Office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. A certificate of any Bank claiming compensation under this Section and setting forth the additional amount or amounts to be paid to it hereunder shall be conclusive in the absence of manifest error. In determining such amount, such Bank may use any reasonable averaging and attribution methods. Section 8.04. Taxes. (a) For purposes of this Section 8.04, the following terms have the following meanings: "Taxes" means any and all present or future taxes, duties, levies, imports, deductions, charges or withholdings with respect to any payment by the Borrower pursuant to this Agreement or any Note, and all liabilities with respect thereto, excluding (i) in the case of each Bank and the Administrative Agent, taxes imposed on its income, net worth or gross receipts and franchise or similar taxes 43 imposed on it by a jurisdiction under the laws of which such Bank or the Administrative Agent (as the case may be) is organized or in which its principal executive office is located or, in the case of each Bank, in which its Applicable Lending Office is located and (ii) in the case of each Bank, any United States withholding tax imposed on such payments except to the extent that such Bank is subject to United States withholding tax by reason of a U.S. Tax Law Change. "Other Taxes" means any present or future stamp or documentary taxes and any other excise or property taxes, or similar charges or levies, which arise from any payment made pursuant to this Agreement or under any Note or from the execution or delivery of, or otherwise with respect to, this Agreement or any Note. "U.S. Tax Law Change" means with respect to any Bank or Participant the occurrence (x) in the case of each Bank listed on the signature pages hereof, after the date of its execution and delivery of this Agreement and (y) in the case of any other Bank, after the date such Bank shall have become a Bank hereunder, and (z) in the case of each Participant, after the date such Participant became a Participant hereunder, of the adoption of any applicable U.S. federal law, U.S. federal rule or U.S. federal regulation relating to taxation, or any change therein, or the entry into force, modification or revocation of any income tax convention or treaty to which the United States is a party. (b) Any and all payments by the Borrower to or for the account of any Bank or the Administrative Agent hereunder or under any Note shall be made without deduction for any Taxes or Other Taxes; provided that, if the Borrower shall be required by law to deduct any Taxes or Other Taxes from any such payments, (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 8.04) such Bank or the Administrative Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions, (iii) the Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law and (iv) the Borrower shall furnish to the Administrative Agent, at its address referred to in Section 9.01, the original or a certified copy of a receipt evidencing payment thereof. (c) The Borrower agrees to indemnify each Bank and the Administrative Agent for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed or asserted by any jurisdiction on amounts payable under this Section 8.04) paid by such Bank or the Administrative Agent (as the case may be) and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto. This indemnification shall be paid 44 within 15 days after such Bank or the Administrative Agent (as the case may be) makes demand therefor. (d) Each Bank organized under the laws of a jurisdiction outside the United States, on or prior to the date of its execution and delivery of this Agreement in the case of each Bank listed on the signature pages hereof and on or prior to the date on which it becomes a Bank in the case of each other Bank, and from time to time thereafter as required by law (but only so long as such Bank remains lawfully able to do so), shall provide the Borrower two completed and duly executed copies of Internal Revenue Service form 1001 or 4224, as appropriate, or any successor form prescribed by the Internal Revenue Service, or other documentation reasonably requested by the Borrower, certifying that such Bank is entitled to benefits under an income tax treaty to which the United States is a party which exempts the Bank from United States withholding tax or reduces the rate of withholding tax on payments of interest for the account of such Bank or certifying that the income receivable pursuant to this Agreement is effectively connected with the conduct of a trade or business in the United States. (e) For any period with respect to which a Bank has failed to provide the Borrower with the appropriate form pursuant to Section 8.04(d) (unless such failure is due to a U.S. Tax Law Change), such Bank shall not be entitled to indemnification under Section 8.04(b) or 8.04(c) with respect to any Taxes or Other Taxes which would not have been payable had such form been so provided, provided that if a Bank, which is otherwise exempt from or subject to a reduced rate of withholding tax, becomes subject to Taxes because of its failure to deliver a form required hereunder, the Borrower shall take such steps as such Bank shall reasonably request to assist such Bank to recover such Taxes (it being understood, however, that the Borrower shall have no liability to such Bank in respect of such Taxes). (f) If the Borrower is required to pay additional amounts to or for the account of any Bank pursuant to this Section 8.04, then such Bank will take such action (including changing the jurisdiction of its Applicable Lending Office) as in the good faith judgment of such Bank (i) will eliminate or reduce any such additional payment which may thereafter accrue and (ii) is not otherwise disadvantageous to such Bank. (g) If any Bank or the Administrative Agent receives a refund (including a refund in the form of a credit against taxes that are otherwise payable by the Bank or the Administrative Agent) of any Taxes or Other Taxes for which the Borrower has made a payment under Section 8.04(b) or (c) and such refund was received from the taxing authority which originally imposed such Taxes or Other Taxes, such Bank or the Administrative Agent agrees to reimburse the Borrower to the extent of such refund, provided that nothing contained in this 45 paragraph (g) shall require any Bank or the Administrative Agent to make available its tax returns (or any other information relating to its taxes which it deems to be confidential). Section 8.05. Base Rate Loans Substituted for Affected Fixed Rate Loans. If (i) the obligation of any Bank to make or to continue or convert outstanding Loans as or into Euro-Dollar Loans has been suspended pursuant to Section 8.02 or (ii) any Bank has demanded compensation under Section 8.03(a) or 8.04 with respect to its Euro-Dollar Loans and the Borrower shall, by at least five Euro- Dollar Business Days' prior notice to such Bank through the Administrative Agent, have elected that the provisions of this Section shall apply to such Bank, then, unless and until such Bank notifies the Borrower that the circumstances giving rise to such suspension or demand for compensation no longer apply: (a) all Loans which would otherwise be made by such Bank as (or continued as or converted to) Euro-Dollar Loans, as the case may be, shall instead be Base Rate Loans (on which interest and principal shall be payable contemporaneously with the related Euro-Dollar Loans of the other Banks), and (b) after each of its Euro-Dollar Loans has been repaid, all payments of principal which would otherwise be applied to repay such Loans shall be applied to repay its Base Rate Loans instead. If such Bank notifies the Borrower that the circumstances giving rise to such suspension or demand for compensation no longer exist, the principal amount of each such Base Rate Loan shall be converted into a Euro-Dollar Loan on the first day of the next succeeding Interest Period applicable to the related Euro-Dollar Loans of the other Banks. Section 8.06. Substitution of Bank Termination Option. If (i) the obligation of any Bank to make or to convert or continue outstanding Loans as or into Euro-Dollar Loans has been suspended pursuant to Section 8.02, (ii) any Bank has demanded compensation under Section 8.03 or 8.04, or (iii) any Bank exercises its right not to extend its Commitment Termination Date pursuant to Section 2.01(c) or (iv) Investment Grade Status ceases to exist as to any Bank, then: (a) the Borrower shall have the right, with the assistance of the Administrative Agent, to designate a substitute bank or banks (which may be one or more of the Banks) mutually satisfactory to the Borrower and the Administrative Agent (whose consent shall not be unreasonably withheld or delayed) to purchase for cash, pursuant to an Assignment and Assumption Agreement in substantially the form of Exhibit G hereto, the outstanding Loans of such Bank and assume the Commitment of such Bank, without recourse to or 46 warranty by, or expense to, such Bank, for a purchase price equal to the principal amount of all of such Bank's outstanding Loans plus any accrued but unpaid interest thereon and the accrued but unpaid fees in respect of such Bank's Commitment hereunder plus such amount, if any, as would be payable pursuant to Section 2.14 if the outstanding Loans of such Bank were prepaid in their entirety on the date of consummation of such assignment; and (b) if at the time Investment Grade Status exists as to the Borrower, the Borrower may elect to terminate this Agreement as to such Bank, provided that (i) the Borrower notifies such Bank through the Administrative Agent of such election at least three Euro-Dollar Business Days before the effective date of such termination and (ii) the Borrower repays or prepays the principal amount of all outstanding Loans made by such Bank plus any accrued but unpaid interest thereon and the accrued but unpaid fees in respect of such Bank's Commitment hereunder plus all other amounts payable by the Borrower to such Bank hereunder, not later than the effective date of such termination. Upon satisfaction of the foregoing conditions, the Commitment of such Bank shall terminate on the effective date specified in such notice. ARTICLE 9 Miscellaneous Section 9.01. Notices. All notices, requests and other communications to any party hereunder shall be in writing (including bank wire, telex, facsimile transmission or similar writing) and shall be given to such party: (x) in the case of the Borrower or the Administrative Agent, at its address or telecopy or telex number set forth on the signature pages hereof, (y) in the case of any Bank, at its address or telecopy or telex number set forth in its Administrative Questionnaire or (z) in the case of any party, such other address or telecopy or telex number as such party may hereafter specify for the purpose by notice to the Administrative Agent and the Borrower. Each such notice, request or other communication shall be effective (i) if given by telecopy or telex, when such telecopy or telex is transmitted to the telecopy or telex number specified in this Section and the appropriate answerback or confirmation slip, as the case may be, is received, (ii) if given by mail, 84 hours after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid or (iii) if given by any other means, when delivered at the address specified in this Section; provided that notices to the Administrative Agent under Article 2 or Article 3 shall not be effective until delivered. 47 Section 9.02. No Waivers. No failure or delay by the Administrative Agent or any Bank in exercising any right, power or privilege hereunder or under any Note shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. Section 9.03. Expenses; Indemnification. (a) The Borrower shall pay (i) all reasonable out-of-pocket expenses of the Administrative Agent, including reasonable fees and disbursements of special counsel for the Administrative Agent, in connection with the preparation of this Agreement, any waiver or consent hereunder or any amendment hereof or any Default or alleged Default hereunder and (ii) if an Event of Default occurs, all reasonable out-of-pocket expenses incurred by the Administrative Agent or any Bank, including reasonable fees and disbursements of counsel, in connection with such Event of Default and collection and other enforcement proceedings resulting therefrom. (b) The Borrower agrees to indemnify the Administrative Agent and each Bank, their respective affiliates and the respective directors, officers, agents and employees of the foregoing (each an "Indemnitee") and hold each Indemnitee harmless from and against any and all liabilities, losses, damages, costs and expenses of any kind, including, without limitation, the reasonable fees and disbursements of counsel, which may be incurred by such Indemnitee in connection with any investigative, administrative or judicial proceeding (whether or not such Indemnitee shall be designated a party thereto) relating to or arising out of this Agreement or any actual or proposed use of proceeds of Loans hereunder; provided that no Indemnitee shall have the right to be indemnified hereunder for such Indemnitee's own gross negligence or willful misconduct as determined by a court of competent jurisdiction. Section 9.04. Sharing of Set-offs. Each Bank agrees that if it shall, by exercising any right of set-off or counterclaim or otherwise, receive payment of a proportion of the aggregate amount then due with respect to the Loans held by it which is greater than the proportion received by any other Bank in respect of the aggregate amount then due with respect to the Loans held by such other Bank, the Bank receiving such proportionately greater payment shall purchase such participations in the Loans held by the other Banks, and such other adjustments shall be made, as may be required so that all such payments with respect to the Loans held by the Banks shall be shared by the Banks pro rata; provided that nothing in this Section shall impair the right of any Bank to exercise any right of set-off or counterclaim it may have and to apply the amount subject to such exercise to the payment of indebtedness of the Borrower other than its indebtedness under this Agreement. 48 Section 9.05. Amendments and Waivers. Any provision of this Agreement or the Notes may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by the Borrower and the Required Banks (and, if the rights or duties of the Administrative Agent, are affected thereby, by the Administrative Agent); provided that no such amendment or waiver shall, unless signed by all the Banks, (i) increase or decrease the Commitment of any Bank (except (x) as contemplated by Section 2.17 or (y) for a ratable decrease in the Commitments of all Banks) or subject any Bank to any additional obligation, (ii) reduce the principal of or rate of interest on any Loan or any fees hereunder, (iii) postpone the date fixed for any payment of principal of or interest on any Loan or interest thereon or any fees hereunder or for termination of any Commitment or (iv) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Loans, or the number of Banks, which shall be required for the Banks or any of them to take any action under this Section or any other provision of this Agreement. Section 9.06. Successors and Assigns. (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Borrower may not assign or otherwise transfer any of its rights under this Agreement without the prior written consent of all Banks. (b) Any Bank may, with the consent of the Borrower (such consent not to be unreasonably withheld or delayed), at any time grant to one or more banks or other institutions (each a "Participant") participating interests in its Commitment or any or all of its Loans. In the event of any such grant by a Bank of a participating interest to a Participant, whether or not upon notice to the Administrative Agent, such Bank shall remain responsible for the performance of its obligations hereunder, and the Borrower and the Administrative Agent shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement. Any agreement pursuant to which any Bank may grant such a participating interest shall provide that such Bank shall retain the sole right and responsibility to enforce the obligations of the Borrower hereunder including, without limitation, the right to approve any amendment, modification or waiver of any provision of this Agreement; provided that such participation agreement may provide that such Bank will not agree to any modification, amendment or waiver of this Agreement described in clause (i), (ii) or (iii) of Section 9.05 without the consent of the Participant. The Borrower agrees that each Participant shall, to the extent provided in its participation agreement, be entitled to the benefits of Article 8 with respect to its participating interest, subject to the performance by such Participant of the obligations of a Bank thereunder. An assignment or other transfer which is not permitted by subsection (c) or (d) below shall be given effect for purposes of this Agreement 49 only to the extent of a participating interest granted in accordance with this subsection (b). (c) Any Bank may at any time assign to one or more banks or other financial institutions (each an "Assignee") all, or a proportionate part (equivalent to an initial Commitment of not less than $20,000,000 (unless the Borrower and the Administrative Agent shall otherwise agree)) of all, of its rights and obligations under this Agreement and its Note (if any), and such Assignee shall assume such rights and obligations, pursuant to an Assignment and Assumption Agreement in substantially the form of Exhibit G hereto executed by such Assignee and such transferor Bank, with (and only with and subject to) the prior written consent of the Borrower (given in its sole discretion) and the Administrative Agent (which shall not be unreasonably withheld or delayed), provided that unless such assignment is of the entire right, title and interest of the transferor Bank hereunder, after making any such assignment such transferor Bank shall have a Commitment of at least $20,000,000 (unless the Borrower and the Administrative Agent shall otherwise agree). Upon execution and delivery of such instrument of assumption and payment by such Assignee to such transferor Bank of an amount equal to the purchase price agreed between such transferor Bank and such Assignee, such Assignee shall be a Bank party to this Agreement and shall have all the rights and obligations of a Bank with a Commitment as set forth in such instrument of assumption, and the transferor Bank shall be released from its obligations hereunder to a corresponding extent, and no further consent or action by any party shall be required. Upon the consummation of any assignment pursuant to this subsection (c), the transferor Bank, the Administrative Agent and the Borrower shall make appropriate arrangements so that, if required by the Assignee, a Note is issued to the Assignee. If the Assignee is not incorporated under the laws of the United States of America or a state thereof, it shall, prior to the first date on which interest or fees are payable hereunder for its account, deliver to the Borrower and the Administrative Agent certification as to exemption from deduction or withholding of any United States federal income taxes in accordance with Section 8.04. All assignments shall be subject to a transaction fee established by, and payable by the transferor Bank to, the Administrative Agent for its own account (which shall not exceed $5,000). (d) Any Bank may at any time assign all or any portion of its rights under this Agreement and its Note (if any) to a Federal Reserve Bank. No such assignment shall release the transferor Bank from its obligations hereunder or modify any such obligations. (e) No Assignee, Participant or other transferee of any Bank's rights (including any Applicable Lending Office other than such Bank's initial Applicable Lending Office) shall be entitled to receive any greater payment under Section 8.03 or 8.04 than such Bank would have been entitled to receive with 50 respect to the rights transferred, unless such transfer is made by reason of the provisions of Section 8.02, 8.03 or 8.04 requiring such Bank to designate a different Applicable Lending Office under certain circumstances or at a time when the circumstances giving rise to such greater payment did not exist. Section 9.07. Collateral. Each of the Banks represents to the Administrative Agent and each of the other Banks that it in good faith is not relying upon any "margin stock" (as defined in Regulation U) as collateral in the extension or maintenance of the credit provided for in this Agreement. Section 9.08. Confidentiality. The Administrative Agent and each Bank agrees to keep any information delivered or made available by the Borrower pursuant to this Agreement confidential from anyone other than persons employed or retained by such Bank and its affiliates who are engaged in evaluating, approving, structuring or administering the credit facility contemplated hereby; provided that nothing herein shall prevent any Bank from disclosing such information (a) to any other Bank or to the Administrative Agent, (b) to any other Person if reasonably incidental to the administration of the credit facility contemplated hereby, (c) upon the order of any court or administrative agency, (d) upon the request or demand of any regulatory agency or authority, (e) which had been publicly disclosed other than as a result of a disclosure by the Administrative Agent or any Bank prohibited by this Agreement, (f) in connection with any litigation to which the Administrative Agent, any Bank or its subsidiaries or Parent may be a party, (g) to the extent necessary in connection with the exercise of any remedy hereunder, (h) to such Bank's or Administrative Agent's legal counsel and independent auditors and (i) subject to provisions substantially similar to those contained in this Section 9.08, to any actual or proposed Participant or Assignee. Section 9.09. Governing Law; Submission to Jurisdiction. This Agreement and each Note (if any) shall be construed in accordance with and governed by the law of the State of New York. The Borrower hereby submits to the nonexclusive jurisdiction of the United States District Court for the Southern District of New York and of any New York State court sitting in New York City for purposes of all legal proceedings arising out of or relating to this Agreement or the transactions contemplated hereby. The Borrower irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. Section 9.10. Counterparts; Integration. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement constitutes the entire agreement and understanding among the parties hereto and supersedes any and all prior agreements and understandings, oral or 51 written, relating to the subject matter hereof. Section 9.11. WAIVER OF JURY TRIAL. EACH OF THE BORROWER, THE ADMINISTRATIVE AGENT AND THE BANKS, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO UNDER APPLICABLE LAW, HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. - -------------------------------------------------------------------------------- DUKE CAPITAL CORPORATION By: /s/ David L. Hauser -------------------------------- Title: Vice President & Treasurer Address: 422 South Church Street Charlotte, NC 28202-1904 Attention: David L. Hauser Telecopy number: (704) 382-1452 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 52 - -------------------------------------------------------------------------------- Commitment - ---------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- $55,000,000 THE CHASE MANHATTAN BANK - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- By: /s/ Paul V. Farrell Title: Vice President - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- $55,000,000 MORGAN GUARANTY TRUST COMPANY OF NEW YORK - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- By: /s/ Robert Bottamedi Title: Vice President - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- $30,000,000 BANK OF AMERICA, NA - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- By: /s/ Michelle Schoenfeld Title: Associate - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- $30,000,000 BARCLAYS BANK PLC - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- By: /s/ Jonathan Berman Title: Director - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Commitment - ---------- - -------------------------------------------------------------------------------- $30,000,000 CITIBANK, N.A. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- By: /s/ J. Nicholas McKee Title: Vice President - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- $30,000,000 FIRST UNION NATIONAL BANK - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- By: /s/ Michael J. Kolosowsky Title: Vice President - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- $30,000,000 WACHOVIA BANK, N.A. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- By: /s/ Christopher L. Fincher Title: Senior Vice President - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- $30,000,000 THE FIRST NATIONAL BANK OF CHICAGO - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- By: /s/ Madeleine N. Pember - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Commitment - ---------- - -------------------------------------------------------------------------------- Title: Assistant Vice President - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- $30,000,000 THE BANK OF NEW YORK - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- By: /s/ Steven Kalachman Title: Vice President - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- $20,000,000 AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- By: /s/ Elizabeth M. Waters Title: Vice President - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- $20,000,000 BANK OF MONTREAL - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- By: /s/ Mary Lee Latta Title: Director - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- $20,000,000 BANKBOSTON, N.A. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- By: /s/ Michael M. Parker Title: Managing Director - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Commitment - ---------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- $20,000,000 CIBC INC. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- By: /s/ Denis P. O'Meara Title: Executive Director - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- $20,000,000 DRESDNER BANK AG, NEW YORK AND GRAND CAYMAN BRANCHES - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- By: /s/ Andrew Schroeder Title: Vice President - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- By: /s/ Robert Preminger Title: Assistant Vice President - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- $20,000,000 THE INDUSTRIAL BANK OF JAPAN, LIMITED - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- By: /s/ Minami Miura Title: Vice President - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- $20,000,000 NATIONAL AUSTRALIA BANK LIMITED - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Commitment - ---------- - -------------------------------------------------------------------------------- By: /s/ R. Adams Perry III Title: Senior Vice President & Head of Corporate Banking & Finance - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- $20,000,000 THE NORTHERN TRUST COMPANY - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- By: /s/ Lisa M. Taylor Title: Second Vice President - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- $20,000,000 SUNTRUST BANK, ATLANTA - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- By: /s/ John A. Fields, Jr. Title: Vice President - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- $20,000,000 TORONTO DOMINION (TEXAS), INC. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- By: /s/ Carol Brandt Title: Vice President - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- $20,000,000 UBS AG, STAMFORD BRANCH - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Commitment - ---------- - -------------------------------------------------------------------------------- By: /s/ Paul R. Morrison Title: Executive Director - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- By: /s/ Andrew N. Taylor Title: Associate Director - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- $20,000,000 WESTPAC BANKING CORPORATION - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- By: /s/ Tony Smith Title: Vice President - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- $20,000,000 MELLON BANK, N.A. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- By: /s/ Roger E. Howard Title: Vice President - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- $20,000,000 SOCIETE GENERALE - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- By: /s/ David Bird Title: Vice President - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- __________________ Total Commitments $600,000,000 ================== THE CHASE MANHATTAN BANK, as Administrative Agent -------------------------- By: /s/ Paul V. Farrell Title: Vice President Address: 270 Park Avenue New York, NY 10017 Attention: Paul V. Farrell Telecopy number: (212) 270-3089 Pricing Schedule ---------------- The "Facility Fee Rate" and the "Euro-Dollar Margin" for any day are the respective percentages set forth below in the applicable row under the column corresponding to the Status that exists on such day:
LEVEL I LEVEL II LEVEL III LEVEL IV LEVEL V LEVEL VI - ------------------------------------------------------------------------------------------- Facility Fee .055% .060% .065% .070% .085% .100% - ------------------------------------------------------------------------------------------- Euro-Dollar Margin Utilization *25% .145% .165% .185% .205% .215% .250% Utilization **25% .270% .290% .310% .330% .340% .375% - -------------------------------------------------------------------------------------------
For purposes of this Schedule, the following terms have the following meanings: "Level I Status" exists at any date if, at such date, the Borrower is rated "AA-" or higher by S&P or "Aa3" or higher by Moody's. "Level II Status" exists at any date if, at such date, (i) the Borrower is rated "A+" or higher by S&P or "A1" or higher by Moody's and (ii) Level I Status does not exist. "Level III Status" exists at any date if, at such date, (i) the Borrower is rated "A" or higher by S&P or "A2" or higher by Moody's and (ii) neither Level I Status nor Level II Status exists. "Level IV Status" exists at any date if, at such date, (i) the Borrower is rated "A-" by S&P or "A3" by Moody's and (ii) neither Level I Status, Level II Status nor Level III Status exists. "Level V Status" exists at any date if, at such date, (i) the Borrower is rated "BBB+" by S&P or "Baa1" by Moody's and (ii) neither Level I Status, Level II Status, Level III Status nor Level IV Status exists. "Level VI Status" exists at any date if, at such date, no other Status exists. "Status" refers to the determination of which of Level I Status, Level II Status, Level III Status, Level IV Status, Level V Status or Level VI Status exists at any date. "Utilization" means, at any date, the percentage equivalent of a fraction (i) the numerator of which is the aggregate outstanding principal amount of the * = less than ** = greater than or equal to Loans at such date and (ii) the denominator of which is the aggregate amount of the Commitments at such date. If for any reason any Loans remain outstanding following termination of the Commitments, Utilization shall be deemed to be in excess of 25%. The credit ratings to be utilized for purposes of this Schedule are those indicated for or assigned to the senior unsecured long-term debt securities of the Borrower without third-party credit enhancement, and any rating indicated for or assigned to any other debt security of the Borrower shall be disregarded. The ratings in effect for any day are those in effect at the close of business on such day. A change in credit rating will result in an immediate change in the applicable Status. In the case of split ratings from S&P and Moody's, the rating to be used to determine the applicable Status is the higher of the two. EXHIBIT A NOTE New York, New York August __, 1999 For value received, Duke Capital Corporation, a Delaware corporation (the "Borrower"), promises to pay to the order of _______________________ (the "Bank"), for the account of its Applicable Lending Office, the unpaid principal amount of each Loan made by the Bank to the Borrower pursuant to the Credit Agreement referred to below on the date specified in the Credit Agreement. The Borrower promises to pay interest on the unpaid principal amount of each such Loan on the dates and at the rate or rates provided for in the Credit Agreement. All such payments of principal and interest shall be made in lawful money of the United States in Federal or other immediately available funds at the office of The Chase Manhattan Bank, 270 Park Avenue, New York, New York. All Loans made by the Bank, the respective types and maturities thereof and all repayments of the principal thereof shall be recorded by the Bank and, the Bank, if the Bank so elects in connection with any transfer or enforcement of its Note, may endorse on the schedule attached hereto appropriate notations to evidence the foregoing information with respect to the Loans then outstanding; provided that the failure of the Bank to make any such recordation or endorsement shall not affect the obligations of the Borrower hereunder or under the Credit Agreement. This note is one of the Notes referred to in the 364-Day Credit Agreement dated as of August 23, 1999 among the Borrower, the banks listed on the signature pages thereof and The Chase Manhattan Bank, as Administrative Agent (as the same may be amended from time to time, the "Credit Agreement"). Terms defined in the Credit Agreement are used herein with the same meanings. Reference is made to the Credit Agreement for provisions for the prepayment hereof and the acceleration of the maturity hereof. DUKE CAPITAL CORPORATION By___________________________ Title: Note (cont'd) LOANS AND PAYMENTS OF PRINCIPAL
Date Amount Type Amount of Maturity Notation of Loan of Loan Principal Date Made By Repaid - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------
EXHIBIT B FORM OF BID RATE QUOTE REQUEST ------------------------------ [Date] To: The Chase Manhattan Bank (the "Administrative Agent") From: Duke Capital Corporation Re: 364-Day Credit Agreement (the "Credit Agreement") dated as of August __, 1999 among the Borrower, the Banks listed on the signature pages thereof and the Administrative Agent We hereby give notice pursuant to Section 2.03 of the Credit Agreement that we request Bid Rate Quotes for the following proposed Bid Rate Borrowing(s): Date of Borrowing: __________________ Principal Amount* Interest Period** - ---------------- --------------- $ Such Bid Rate Quotes should offer a Bid Rate [(General), (Indexed) or both]. [The applicable base rate is the London Interbank Offered Rate.] Terms used herein have the meanings assigned to them in the Credit Agreement. DUKE CAPITAL CORPORATION By______________________ Title: ___________________ *Amount must be $10,000,000 or a larger multiple of $1,000,000. **Not less than one month (Bid Rate (Indexed) Auction) or not less than 7 days (Bid Rate (General) Auction), subject to the provisions of the definition of Interest Period. EXHIBIT C FORM OF INVITATION FOR BID RATE QUOTES -------------------------------------- To: [Name of Bank] Re: Invitation for Bid Rate Quotes to Duke Capital Corporation (the "Borrower") Pursuant to Section 2.03 of the 364-Day Credit Agreement dated as of August __, 1999 among the Borrower, the Banks parties thereto and the undersigned, as Administrative Agent, we are pleased on behalf of the Borrower to invite you to submit Bid Rate Quotes to the Borrower for the following proposed Bid Rate Borrowing(s): Date of Borrowing: __________________ Principal Amount Interest Period - ---------------- --------------- $ Such Bid Rate Quotes should offer a Bid Rate [(Indexed) (General) or both]. [The applicable base rate is the London Interbank Offered Rate.] Please respond to this invitation by no later than [2:00 P.M.] [9:30 A.M.] (New York City time) on [date]. THE CHASE MANHATTAN BANK By________________________ Authorized Officer EXHIBIT D FORM OF BID RATE QUOTE ---------------------- To: The Chase Manhattan Bank, as Administrative Agent 270 Park Avenue New York, New York 10017 Attention: Re: Bid Rate Quote to Duke Capital Corporation (the "Borrower") In response to your invitation on behalf of the Borrower dated _____________, 19__, we hereby make the following Bid Rate Quote on the following terms: 1. Quoting Bank: ________________________________ 2. Person to contact at Quoting Bank: _____________________________ 3. Date of Borrowing: ____________________* 4. We hereby offer to make Bid Rate Loan(s) in the following principal amounts, for the following Interest Periods and at the following rates: Principal Interest Bid Rate Amount** Period*** [(Indexed)****] [(General)*****] - -------- --------- --------------- ---------------- __________________ *As specified in the related Invitation. **Principal amount bid for each Interest Period may not exceed principal amount requested. Specify aggregate limitation if the sum of the individual offers exceeds the amount the Bank is willing to lend. Bids must be made for $5,000,000 or a larger of multiple of $1,000,000. ***Not less than one month or less than 30 days, as specified in the related Invitation, but no bid may be submitted for an Interest Period extending beyond bidder's Commitment Termination Date. No more than five bids are permitted for each Interest Period. $ $ provided, that the aggregate principal amount of Bid Rate Loans for which the above offers may be accepted shall not exceed $____________.]** We understand and agree that the offer(s) set forth above, subject to the satisfaction of the applicable conditions set forth in the 364-Day Credit Agreement dated as of August __, 1999 among the Borrower, the Banks listed on the signature pages thereof and yourselves, as Administrative Agent, irrevocably obligates us to make the Bid Rate Loan(s) for which any offer(s) are accepted, in whole or in part. Very truly yours, [NAME OF BANK] Dated: By:_________________________ Authorized Officer ________________________________________________________________________________ ****Margin over or under the London Interbank Offered Rate determined for the applicable Interest Period. Specify percentage (rounded to the nearest 1/10,000 of 1%) and specify whether "PLUS" or "MINUS". *****Specify rate of interest per annum (rounded to the nearest 1/10,000th of 1%). EXHIBIT E OPINION OF GENERAL COUNSEL FOR THE BORROWER [Effective Date] To the Banks and the Administrative Agent Referred to Below c/o The Chase Manhattan Bank as Administrative Agent 270 Park Avenue New York, New York 10017 Ladies and Gentlemen: I am the General Counsel of Duke Capital Corporation (the "Borrower") and have acted as its counsel in connection with the 364-Day Credit Agreement (the "Credit Agreement") dated as of August 23, 1999 among the Borrower, the banks listed on the signature pages thereof and The Chase Manhattan Bank, as Administrative Agent. Terms defined in the Credit Agreement are used herein as therein defined. In such capacity, I or attorneys under my direct supervision have examined originals or copies, certified or otherwise identified to my satisfaction, of such documents, corporate records, certificates of public officials and other instruments and have conducted such other investigations of fact and law as I have deemed necessary or advisable for purposes of this opinion. Upon the basis of the foregoing, I am of the opinion that: 1. The Borrower is a corporation duly incorporated, validly existing and in good standing under the laws of Delaware and has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. 2. The execution, delivery and performance by the Borrower of the Credit Agreement and any Notes are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action, require no action by or in respect of, or filing with, any governmental body, agency or official and do not contravene, or constitute a default under, any provision of applicable law or regulation or of the certificate of incorporation or by-laws of the Borrower or, to my knowledge, of any agreement, judgment, injunction, order, decree or other instrument binding upon the Borrower or, to my knowledge, result in the creation or imposition of any Lien on any asset of the Borrower or any of its Material Subsidiaries. 3. The Credit Agreement constitutes a valid and binding agreement of the Borrower and the Notes, if and when issued, will constitute valid and binding obligations of the Borrower, enforceable in accordance with their respective terms, except as the same may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and by general principles of equity. 4. Except as disclosed in the reports referred to in Section 4.04 of the Credit Agreement, to my knowledge (but without independent investigation), there is no action, suit or proceeding pending or threatened against or affecting, the Borrower or any of its Subsidiaries before any court or arbitrator or any governmental body, agency or official, which would be likely to be decided adversely to Borrower or such Subsidiary and, as a result, to have a material adverse effect upon the business, consolidated financial position or consolidated results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole or which in any manner draws into question the validity of the Credit Agreement or any Notes. 5. Borrower is not a holding company under the Public Utility Holding Company Act of 1935, as amended. The phrase "to my knowledge", as used in the foregoing opinion, refers to my actual knowledge without any independent investigation as to any such matters. I am a member of the Bar of the State of North Carolina and do not express any opinion herein concerning any law other than the law of the State of North Carolina, the General Corporation Law of the State of Delaware and the federal law of the United States of America. Without limiting the generality of the foregoing, I note that the governing law of the Loan Documents is expressed to be the law of the State of New York; in giving the opinion set forth in paragraph 3 above I have assumed, with your permission, that instead the governing law is the law of the State of North Carolina. 2 This opinion is rendered to you in connection with the above matter and may not be relied upon by you for any other purpose, or relied upon by, or furnished to, any other person, firm or corporation without my prior written consent, except for Additional Banks and Participants. Very truly yours, 3 EXHIBIT F OPINION OF DAVIS POLK & WARDWELL, SPECIAL COUNSEL FOR THE ADMINISTRATIVE AGENT [Effective Date] To the Banks and the Administrative Agent Referred to Below c/o The Chase Manhattan Bank, as Administrative Agent 270 Park Avenue New York, New York 10017 Ladies and Gentlemen: We have participated in the preparation of the 364-Day Credit Agreement (the "Credit Agreement") dated as of August __, 1999 among Duke Capital Corporation, a Delaware corporation (the "Borrower"), the banks listed on the signature pages thereof (the "Banks") and The Chase Manhattan Bank, as Administrative Agent (the "Administrative Agent"), and have acted as special counsel for the Administrative Agent for the purpose of rendering this opinion pursuant to Section 3.01(d) of the Credit Agreement. Terms defined in the Credit Agreement are used herein as therein defined. We have examined originals or copies, certified or otherwise identified to our satisfaction, of such documents, corporate records, certificates of public officials and other instruments and have conducted such other investigations of fact and law as we have deemed necessary or advisable for purposes of this opinion. Upon the basis of the foregoing, we are of the opinion that: 1. The execution, delivery and performance by the Borrower of the Credit Agreement and the Notes are within the Borrower's corporate powers and have been duly authorized by all necessary corporate action. 2. The Credit Agreement constitutes a valid and binding agreement of the Borrower and the Notes, if and when issued, constitute valid and binding obligations of the Borrower enforceable in accordance with their respective terms, except as the same may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and by general principles of equity. In giving the foregoing opinion, we express no opinion as to the effect (if any) of any law of any jurisdiction (except the State of New York) in which any Bank is located which limits the rate of interest that such Bank may charge or collect. This opinion is rendered solely to you in connection with the above matter. This opinion may not be relied upon by you for any other purpose or relied upon by or furnished to any other person, firm or corporation without our prior written consent, except for Additional Banks and all Participants. Very truly yours, 2 EXHIBIT G ASSIGNMENT AND ASSUMPTION AGREEMENT AGREEMENT dated as of _________, 19__ among [ASSIGNOR] (the "Assignor"), [ASSIGNEE] (the "Assignee"), DUKE CAPITAL CORPORATION (the "Company") and THE CHASE MANHATTAN BANK, as Administrative Agent (the "Administrative Agent"). W I T N E S S E T H WHEREAS, this Assignment and Assumption Agreement (the "Agreement") relates to the 364-Day Credit Agreement dated as of August __, 1999 among the Company, the Assignor and the other Banks party thereto, as Banks, and the Administrative Agent (the "Credit Agreement"); WHEREAS, as provided under the Credit Agreement, the Assignor has a Commitment to make Loans in an aggregate principal amount at any time outstanding not to exceed $__________;* WHEREAS, Committed Loans made to the Borrower by the Assignor under the Credit Agreement in the aggregate principal amount of $__________ are outstanding at the date hereof; and WHEREAS, the Assignor proposes to assign to the Assignee all of the rights of the Assignor under the Credit Agreement in respect of a portion of its Commitment thereunder in an amount equal to $__________ (the "Assigned Amount"), together with a corresponding portion of its outstanding Committed Loans, and the Assignee proposes to accept assignment of such rights and assume the corresponding obligations from the Assignor on such terms;* NOW, THEREFORE, in consideration of the foregoing and the mutual agreements contained herein, the parties hereto agree as follows: Section 1. Definitions. All capitalized terms not otherwise defined herein shall have the respective meanings set forth in the Credit Agreement. Section 2. Assignment. The Assignor hereby assigns and sells to the Assignee all of the rights of the Assignor under the Credit Agreement to the extent of the Assigned Amount, and the Assignee hereby accepts such assignment _______________________ *The asterisked provisions shall be appropriately revised in the event of an assignment after the Commitment Termination Date. from the Assignor and assumes all of the obligations of the Assignor under the Credit Agreement to the extent of the Assigned Amount, including the purchase from the Assignor of the corresponding portion of the principal amount of the Committed Loans made by the Assignor outstanding at the date hereof. Upon the execution and delivery hereof by the Assignor, the Assignee, the Company and the Administrative Agent and the payment of the amounts specified in Section 3 required to be paid on the date hereof (i) the Assignee shall, as of the date hereof, succeed to the rights and be obligated to perform the obligations of a Bank under the Credit Agreement with a Commitment in an amount equal to the Assigned Amount, and (ii) the Commitment of the Assignor shall, as of the date hereof, be reduced by a like amount and the Assignor released from its obligations under the Credit Agreement to the extent such obligations have been assumed by the Assignee. The assignment provided for herein shall be without recourse to the Assignor. Section 3. Payments. As consideration for the assignment and sale contemplated in Section 2 hereof, the Assignee shall pay to the Assignor on the date hereof in Federal funds the amount heretofore agreed between them.* It is understood that facility fees accrued to the date hereof in respect of the Assigned Amount are for the account of the Assignor and such fees accruing from and including the date hereof are for the account of the Assignee. Each of the Assignor and the Assignee hereby agrees that if it receives any amount under the Credit Agreement which is for the account of the other party hereto, it shall receive the same for the account of such other party to the extent of such other party's interest therein and shall promptly pay the same to such other party. Section 4. Consent of the Borrower and the Administrative Agent. This Agreement is conditioned upon the consent of the Borrower and the Administrative Agent pursuant to Section 9.06(c) of the Credit Agreement. The execution of this Agreement by the Borrower and the Administrative Agent is evidence of this consent. Pursuant to Section 9.06(c) the Borrower agrees to execute and deliver a Note, if required by the Assignee, payable to the order of the Assignee to evidence the assignment and assumption provided for herein. ______________________ *Amount should combine principal together with accrued interest and breakage compensation, if any, to be paid by the Assignee. It may be preferable in an appropriate case to specify these amounts generically or by formula rather than as a fixed sum. 2 Section 5. Non-reliance on Assignor. The Assignor makes no representation or warranty in connection with, and shall have no responsibility with respect to, the solvency, financial condition, or statements of any Borrower, or the validity and enforceability of the obligations of any Borrower in respect of the Credit Agreement or any Note. The Assignee acknowledges that it has, independently and without reliance on the Assignor, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement and will continue to be responsible for making its own independent appraisal of the business, affairs and financial condition of the Borrowers. Section 6. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. Section 7. Counterparts. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. Section 8. Administrative Questionnaire. Attached is an Administrative Questionnaire duly completed by the Assignee. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered by their duly authorized officers as of the date first above written. ______________________________ [ASSIGNOR] By Title: ______________________________ [ASSIGNEE] By Title: 3 DUKE CAPITAL CORPORATION By ______________________________________ Title: THE CHASE MANHATTAN BANK, as Administrative Agent By ______________________________________ Title: 4 EXHIBIT H EXTENSION AGREEMENT The Chase Manhattan Bank, as Administrative Agent under the Credit Agreement referred to below 270 Park Avenue New York, New York 10017 Ladies and Gentlemen: Effective as of [date], the undersigned hereby agrees to extend its Commitment and Commitment Termination Date under the 364-Day Credit Agreement dated as of August __, 1999 among Duke Capital Corporation (the "Borrower"), the banks parties thereto and The Chase Manhattan Bank, as Administrative Agent (the "Credit Agreement") for 364 days to [date to which its Commitment Termination Date is to be extended] pursuant to Section 2.01(c) of the Credit Agreement. Terms defined in the Credit Agreement are used herein as therein defined. This Extension Agreement shall be construed in accordance with and governed by the law of the State of New York. This Extension Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. [NAME OF BANK] By ___________________________________ Title: Agreed and Accepted: DUKE CAPITAL CORPORATION, as Borrower By _____________________________________ Title: THE CHASE MANHATTAN BANK, as Administrative Agent By _____________________________________ Title: 2 CROSS-REFERENCE TARGET LIST NOTE: Due to the number of targets some target names may not appear in the target pull-down list. (This list is for the use of the wordprocessor only, is not a part of this document and may be discarded.)
ARTICLE/SECTION TARGET NAME ARTICLE/SECTION TARGET NAME ARTICLE/SECTION TARGET NAME ARTICLE/SECTION TARGET NAME =============== =========== =============== =========== =============== =========== =============== =========== 1.03..............types.borrowing 9.01.............notices.requests 2.........................credits 9.05...............amends.waivers 2.01..................commit.lend 9.06(b).....................grant 2.01(a)..........syndicated.loans 9.06(c)........rights.obligations 2.01(b)...........swingline.loans 2.01(c).................extension EXHIBIT G REFERENCES: 2.02.......................notice 2......................assignment 2.02(b).........borrow.aggreg.amt 3........................payments 2.03..........money.market.borrow 8............change.circumstances 2.03(d)................submission 6.01(i).............material.plan 2.03(d)(i)........bank.may.submit 2.03(d)(ii)....money.market.quote 2.03(f)................acceptance 2.04....notice.banks.funding.loan 2.04(a)..............notice.banks 2.05........................notes 2.07...............interest.rates 2.07(b)........euro.bear.interest 2.07(c).........overdue.principal 2.09..............opt.termination 2.10(a)....synd.bor.loan.interest 2.10(b)........notice.of.interest 2.11........mandatory.termination 2.12...................opt.prepay 2.12(a)...........borrower.prepay 2.12(c)..............upon.receipt 2.13...........general.provisions 2.14..................fund.losses 2.15..................computation ?.....................with.tax.ex ?...............letters.of.credit ?...............bank.issue.credit ?..................borr.give.bank ?.......................no.letter ?.................receipt.benefic ?.....................obliga.borr ?................borr.indemnifies 2.16...........reg.d.compensation ?..........takeout.of.swngln.loan ?................unrefunded.swing 2.17................increased.com 2.17(a)...........increased.com.a 3......................conditions 3.01................effectiveness 3.01(a)...........effectiveness.d 3.02...................borrowings 3.02(a).......receipt by AA or IB 3.02(b)........aggregate.outstand 4.04...................finan.info 4.04(c)..............finan.info.c 4.05...................litigation 5.04...................main.exist 5.08...................neg.pledge 5.09..............con.merge.sales 5.10..............use.of.proceeds 5.12.............indebt/cap.ratio 6........................defaults 6.01...............events.default 6.01(c)..........events.default.c 7.....................admin.agent 8.............change.circumstance 8.01....................... basis 8.01(a)...................advised 8.02...................illegality 8.03.............inc.cost.red.ret 8.03(a)........inc.cost.red.ret.a 8.03(b)........inc.cost.red.ret.b 8.05....................base.rate 8.06............substitution.bank 2.03(g)......alloc.by.admin.agent 8.04........................taxes
EX-10.BB 5 KEY EMPLOYEE SEVERANCE AGREEMENT AND RELEASE Exhibit 10.BB KEY EMPLOYEE SEVERANCE AGREEMENT AND RELEASE This Severance Agreement and Release ("Agreement") is made and entered into this day of _____________ (the "Effective Date"), by and between DUKE ENERGY CORPORATION ("Duke"), a North Carolina corporation with its principal executive offices in Charlotte, North Carolina, and ___________________________ (the "Employee"). W I T N E S S E T H: WHEREAS, Duke has determined that it is in the best interests of Duke, its affiliates and its stockholders to assure that Duke will have the continued undivided time, attention, loyalty and dedication of the Employee, notwithstanding the possibility or anticipation of a termination of employment; WHEREAS, Duke believes it is imperative to diminish the inevitable distraction of the Employee by virtue of the personal uncertainties and risks created by any pending or threatened termination of employment and to encourage the Employee's full undivided time, attention, loyalty, and dedication to Duke currently and in the event of any pending or threatened termination of employment; and WHEREAS, it is Duke's intention that the Employee be assured of compensation and benefit arrangements if his or her employment terminates which are competitive with those of peer executive or management employees of similarly situated corporations, and the Employee is willing to enter into an agreement to that end, upon the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the premises and of the mutual covenants contained herein, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. Term of Agreement. The term of this Agreement (the "Agreement ----------------- Term") shall commence on the date first written above (the "Commencement Date") and shall terminate on ______, in the event a termination of the Employee's employment shall not have occurred by such date; provided, however, that such -------- ------- termination date shall be automatically extended for consecutive one-month periods effective on the first day of each month (each, a "Renewal Date") following the Commencement Date unless either party gives written notice to the other party not less than ten (10) days prior to a Renewal Date of its intention to terminate the Agreement at the end of the then-current Agreement Term. In the event a termination of the Employee's employment shall have occurred prior to the expiration of the Agreement Term, this Agreement will continue in force and effect until the satisfaction of all of the parties' obligations hereunder. 2. Severance Benefits. ------------------ (a) General. In the event the Employee's employment by Duke and/or ------- any entity that controls, is controlled by, or is under common control with Duke (a "Duke Affiliate") is terminated during the Agreement Term (so that the Employee is no longer employed by Duke or any Duke Affiliate), the Employee shall be entitled to the compensation and termination benefits set forth in this Section 2; provided, however, that the obligations of Duke under Section 2(c) -------- ------- hereof shall be subject to the forfeiture and repayment provisions of Section 3(e) hereof and to the regulations regarding a release of claims under Section 16 hereof. Any lump-sum payments required under this Section 2 will be made by Duke in cash as soon as practicable after the effective date of the Employee's termination of employment. This Agreement does not grant the Employee any right or entitlement to be retained by Duke or any Duke Affiliate and shall not affect or prejudice the right of Duke or any Duke Affiliate to terminate the employment of the Employee at any time for any reason, subject to the payment and benefit provisions of this Section 2. In the event of the termination of Employee's employment with Duke and all Duke Affiliates, the Employee agrees to immediately resign all of his positions as an officer or director of Duke and any Duke Affiliates. (b) Termination on Account of Death, Disability, Cause or Voluntary --------------------------------------------------------------- Quit. In the event that the Employee's employment hereunder is terminated: - ---- (i) due to the death of the Employee, (ii) due to any mental or physical impairment which prevents the Employee from performing the essential functions of his or her position with Duke for a period of 180 days during any 12-month period, or which has resulted in the Employee's becoming eligible for benefits under any long-term disability income program maintained by Duke or any Duke Affiliate, (iii) for "Cause," which is defined as the occurrence of any one of the following (provided the Employee receives written notice from Duke identifying the acts or omissions constituting Cause and is given a 30- day opportunity to cure, if such acts or omissions are capable of cure): (A) a final conviction of a felony or a crime involving moral turpitude; (B) an egregious act of dishonesty (including, without limitation, theft or embezzlement) in connection with employment, or a malicious action by the Employee toward the customers or employees of Duke or any Duke Affiliate; (C) a violation of the provisions of Section 3 or Section 4 hereof; or (D) material failure to carry out, or malfeasance or gross insubordination in carrying out, reasonably assigned duties or instructions consistent with his or her position (provided that material failure to carry out reasonably assigned duties shall be deemed to constitute Cause only after a finding by Duke's Chief Executive Officer of material failure on the part of the Employee), or 2 (iv) voluntarily by the Employee, then the Employee shall be entitled only to salary amounts payable in the normal course for service through the date of his or her termination of employment and any rights or payments that have become vested or that are otherwise due in accordance with the terms of any employee benefit, incentive or compensation plan or arrangement maintained by Duke or any Duke Affiliate that the Employee participated in at the time of his or her termination of employment (together, the "Accrued Rights"). (c) Termination by Duke other than for Cause. In the event that the ---------------------------------------- Employee's employment is terminated by Duke or the applicable Duke Affiliate other than as described in clauses (b)(i), (ii) or (iii) above, the Employee will be paid and entitled to the following: (i) the payments and benefits representing the Employee's Accrued Rights; (ii) a lump-sum payment equal to (A) the Employee's annual bonus payment earned for any completed bonus year prior to termination of employment, if not previously paid, plus (B) a pro-rata amount of the Employee's target bonus under any Bonus Plan (as defined below) for the year in which the termination occurs, determined as if all program goals had been met (the "Target Bonus"), pro-rated based on the number of days of service during the bonus year occurring prior to termination of employment; (iii) a lump-sum payment equal to two (2) times the sum of the Employee's then-current Base Salary and Target Bonus; (iv) continued coverage for the Severance Period (as defined below) under the medical and dental (but not medical spending account or employee assistance) and basic life insurance plans that the Employee participated in at the time of his or her termination, or their equivalent, under the same terms and at the same cost to the Employee as though the Employee had not terminated employment; provided, however, that in the event the Employee becomes covered or -------- ------- eligible for coverage under substitute medical or life insurance plans of another employer during this period, subject to applicable requirements of the Consolidated Omnibus Budget Reconsiliation Act of 1985, as amended and the regulations thereunder ("COBRA"), Duke will no longer be obligated to provide such coverage to the Employee under this Section 2(c)(iv); and, provided, further, that in lieu of -------- ------- providing medical coverage (as described above) hereunder, Duke may make a lump-sum payment to the Employee in an amount equal to the aggregate cost of such coverage for the Severance Period, based on the premium costs being utilized for the provision of such coverage to former employees under COBRA at the time of the Employee's termination of employment, and/or in lieu of providing basic life insurance coverage hereunder, Duke may make a lump-sum payment to the Employee in an amount equal to the anticipated cost of such coverage for the Severance Period, based on Duke's assumed costs for such 3 coverage for internal accounting purposes at the time of the Employee's termination of employment; (v) a lump-sum payment equal to the present value (determined based on a six (6) percent interest rate assumption and, in the case of any pension plan accrual, the applicable mortality table for calculating optional forms of benefits under such plan) of any employer contribution (other than a contribution under section 401(k) of the Internal Revenue Code of 1986, as amended), benefit accrual or employer-financed account allocation that would have been made or accrued during the Severance Period under any qualified or non- qualified pension or savings plan maintained by Duke or any Duke Affiliate in which the Employee participated at the time of his or her termination, determined using the Employee's Base Salary and Target Bonus (if relevant) at the time of termination and assuming the maximum elective deferral by the Employee permitted by such plans, if applicable; (vi) notwithstanding the terms of any award agreement or plan document to the contrary, continued vesting of any long term incentive awards (excluding Chairman's Awards), including awards of stock options or restricted stock, held by the Employee at the time of his or her termination of employment that are not vested or exercisable on such date, in accordance with their terms as if the Employee's employment had not terminated, for the duration of the Severance Period, with any options or similar rights to remain exercisable (to the extent exercisable at the end of the Severance Period) for a period of 90 days following the close of the Severance Period, but not beyond the maximum original term of such options or rights; and (vii) in the event that the Employee would have satisfied the eligibility requirements of any retiree medical plan or program maintained by Duke or any Duke Affiliate generally for its retirees (a "Retiree Plan") within two years after the date of his or her termination of employment, the provision of such retiree medical benefits to the Employee from and after the date he or she would have satisfied such requirements (assuming continued employment) on a basis substantially equivalent to the retiree medical benefits provided generally under the Retiree Plan, subject to such terms and conditions and requirements for participation as apply under the Retiree Plan from time to time and as such Retiree Plan may be amended or terminated by Duke or a Duke Affiliate, as the case may be, at any time. (d) Definitions. For purposes of this Agreement, the terms below shall ----------- have the following definitions: (1) "Bonus Plan" shall mean any bonus plan, program or arrangement in which the Employee participates where bonus payments are based upon achievement of performance targets by Duke, a Duke Affiliate, any business unit thereof or the Employee. 4 (2) "Base Salary" shall mean the annualized amount of the Employee's regular salary during any payroll period reductions for elective deferrals or salary reductions but excluding any overtime, incentive or other special compensation. (3) "Severance Period" shall be the 24-month period following the Employee's termination of employment. 3. Restrictive Covenants. --------------------- (a) Noncompetition and Nonsolicitation. The Employee agrees that he or ---------------------------------- she shall not, during the "Restricted Period" (as defined below), without Duke's prior written consent, for any reason, directly or indirectly, either as principal, agent, manager, employee, partner, shareholder, director, officer, consultant or otherwise (A) become engaged or involved in any business (other than as a less-than 3% equity owner of any corporation traded on any national, international or regional stock exchange or in the over-the-counter market) that competes with Duke or any Duke Affiliate in the business of production, transmission, distribution or retail or wholesale marketing or selling of electricity, gathering, processing or transmission of natural gas, resale or arranging for the purchase or for resale, brokering, marketing or trading of natural gas, electricity or derivatives thereof, energy management and energy solution provision, or national or international energy development; or (B) induce or attempt to induce any customer, client, supplier, employee, agent or independent contractor of Duke or any Duke Affiliate to reduce, terminate, restrict or otherwise alter its business relationship with Duke or any Duke Affiliate. The provisions of this Section 3(a) shall be limited in scope and effective only within the following geographical areas: (i) any country in the world where Duke or any Duke Affiliate has $25 million in capital deployed as of the date of termination; (ii) the Continent of North America; (iii) the United States of America; and (iv) the states of North Carolina, South Carolina, Virginia, Georgia, Florida, Texas, California, Massachusetts, Illinois, Michigan and New York. The parties intend the above geographical areas to be completely severable and independent, and any invalidity or unenforceability of this Agreement with respect to any one area shall not render this Agreement unenforceable as applied to any one or more of the other areas. (b) Restricted Period. For purposes hereof, the "Restricted Period" shall ----------------- be the period of the Employee's employment during the Agreement Term and, in the event of a termination of the Employee's employment that is covered by Section 2(c) hereof, the twelve-month period following the such termination of employment. (c) Severability. If any provision or part of this Section 3 is held to be ------------ unenforceable because of the duration of such provision or the area covered thereby, the parties hereto agree to modify such provision, or that the court making such determination shall have the power to modify such provision, to reduce the duration or area of such provision or both, or to delete specific words or phrases therefrom ("blue-penciling"), and in its reduced or blue- penciled form, such provision shall then be enforceable and shall be enforced. The parties intend the above restrictions on competition to be completely severable and independent, and any invalidity 5 or unenforceability of any one or more of such restrictions shall not render invalid or unenforceable any one or more of the other restrictions. (d) Enforcement. The Employee acknowledges that Duke may have no adequate ----------- means to protect its rights under this Section 3 other than by securing an injunction (a court order prohibiting the Employee from violating this Agreement). The Employee agrees that Duke may enforce this Agreement by obtaining a preliminary and permanent injunction and any other appropriate equitable relief in any court of competent jurisdiction. The Employee acknowledges that the recovery of damages will not be an adequate means to redress a breach of this Agreement, but nothing in this Section 3 shall prohibit Duke from pursuing any remedies in addition to injunctive relief, including recovery of damages and/or any forfeiture or repayment obligations provided for herein. (e) Forfeitures and Repayments. The Employee agrees that, in the event he -------------------------- or she violates the provisions of Section 3(a) hereof during the Restricted Period, he or she will forfeit and not be entitled to any cash severance payments or any non-cash benefits or rights (including, without limitation, stock option rights), other than Accrued Rights, to which he or she would otherwise be entitled to under Section 2(c) hereof (together, the "Termination Benefits"). The Employee further agrees that, in the event he or she violates the provisions of Section 3(a) hereof following the payment or commencement of any Termination Benefits, (i) he or she will forfeit and not be entitled to any further Termination Benefits, and (ii) he or she will be obligated to repay to Duke an amount in respect of the cash payments previously made to him or her under Section 2(c) hereof (the "Repayment Amount"). The Repayment Amount shall be determined by aggregating the cash severance payments made to the Employee under Sections 2(c)(ii), 2(c)(iii),2(c)(iv) and 2(c)(v) hereof, and multiplying the resulting amount by a fraction, the numerator of which is the number of full and partial calendar months remaining in the Severance Period at the time of the violation (rounded to the nearest quarter of a month), and the denominator of which is twenty-four (24). The Repayment Amount shall be paid to Duke in cash in a single sum within ten (10) business days after the first date of the violation, whether or not Duke has knowledge of the violation or has made a demand for payment. Any such payment made following such date shall bear interest at a rate equal to six (6) percent. Furthermore, in the event the Employee violates the provisions of Section 3(a) hereof, and notwithstanding the terms of any award agreement or plan document to the contrary (which shall be considered to be amended to the extent necessary to reflect the terms hereof), the Employee shall immediately forfeit the right to exercise any stock option or similar rights that are outstanding at the time of the violation, and the Repayment Amount, calculated as provided above, shall be increased by the amount of any gains (measured by the difference between the aggregate fair market value on the date of exercise of shares underlying the stock option or similar right and the aggregate exercise price of such stock option or similar right) realized by the Employee upon the exercise of stock options or similar rights within the one-year period prior to the first date of the violation. (f) Permissive Release. The Employee may request that Duke release him or ------------------ her from the restrictive covenants of Section 3(a) hereof upon the occurrence of the forfeiture and repayment of termination benefits and rights provided for in Section 3(e) hereof. Duke may, in its sole discretion, grant such a release in whole or in part or may reject such request and continue to enforce its rights under this Section 3. 6 (g) Consideration; Survival. The Employee acknowledges and agrees ----------------------- that the compensation and benefits provided in this Agreement constitute adequate and sufficient consideration for the covenants made by the Employee in this Section 3 and in the remainder of this Agreement. The Employee's obligations under this Section 3 shall survive any termination of his or her employment as specified herein. 4. Confidentiality. The Employee acknowledges that during the --------------- Employee's employment with Duke or any Duke Affiliate, the Employee will acquire, be exposed to and have access to, material, data and information of Duke and the Duke Affiliates and/or their customers or clients that is confidential, proprietary, and/or a trade secret. At all times, both during and after the Agreement Term, the Employee shall keep and retain in confidence and shall not disclose, except as required and authorized in the course of the Employee's employment with Duke or any Duke Affiliate, to any person, firm or corporation, or use for his or her own purposes, any of this proprietary, confidential or trade secret information. For purposes of this paragraph, such information shall include, but shall not be limited to: sales methods, information concerning principals or customers, advertising methods, financial affairs or methods of procurement, marketing and business plans, strategies, projections, business opportunities, client lists, sales and cost information and financial results and performance. The Employee acknowledges that the obligations pertaining to the confidentiality and non-disclosure of information shall remain in effect for a period of five (5) years after termination of employment, or until Duke or a Duke Affiliate has released any such information into the public domain, in which case the Employee's obligation hereunder shall cease with respect only to such information so released into the public domain. The Employee's obligations under this Section 4 shall survive any termination of his or her employment. If the Employee receives a subpoena or other judiciary process requiring that he or she produce, provide or testify about information that is confidential property and/or a trade secret, the Employee shall notify Duke and cooperate fully with Duke in resisting disclosure of confidential information. Duke at its expense has the right either in the name of the Employee or in its own name to oppose or move to quash any subpoena or other legal process directed to the Employee regarding confidential information. If Duke does not successfully oppose or move successfully to quash any subpoena or other legal process directed to the Employee after being notified of it by him or her, he or she shall be free to respond to the subpoena as he or she determines to be appropriate. 5. Post-Employment Obligations. --------------------------- (a) Duke Property. All records, files, lists, including, computer ------------- generated lists, drawings, documents, equipment and similar items relating to the business of Duke and the Duke Affiliates which the Employee shall prepare or receive from Duke or the Duke Affiliates shall remain the sole and exclusive property of Duke and the Duke Affiliates. Upon termination of the Employee's employment for any reason, the Employee shall promptly return all property of Duke or any Duke Affiliate in his or her possession. The Employee further represents that he or she will not copy or cause to be copied, print out or cause to be printed out any software, documents or other materials originating with or belonging to Duke or any Duke Affiliate. The Employee additionally represents that, upon termination of his or her employment with Duke or a Duke Affiliate, he or she will not retain in his or her possession any such software, documents or other materials. 7 (b) Cooperation. The Employee agrees to cooperate with and provide ----------- assistance to Duke and the Duke Affiliates and their legal counsel in connection with any litigation (including arbitration or administrative hearings) or investigation affecting Duke or any Duke Affiliate, in which, in the reasonable judgment of the counsel of Duke or any Duke Affiliate, the Employee's assistance or cooperation is needed. The Employee shall, when requested by Duke or any Duke Affiliate, provide testimony or other assistance and shall travel at the request of Duke or any Duke Affiliate in order to fulfill this obligation; provided, -------- however, that, in connection with such litigation or investigation, Duke or the - ------- Duke Affiliate, as the case may be, shall attempt to accommodate the Employee's schedule, shall provide him or her with reasonable notice in advance of the times in which his or her cooperation or assistance is needed, and shall reimburse the Employee for any reasonable expenses incurred in connection with such matters, as well as for any actual lost wages suffered as a result from absences from employment. 6. Tax Withholding. Duke may withhold from any amounts payable under --------------- this Agreement such federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. 7. Notice. Any notices to be given hereunder by either party to the ------ other may be effectuated either by personal delivery in writing or by mail, registered or certified, postage prepaid, with return receipt requested. Mailed notices shall be addressed to the parties at the following addresses: If to Duke or any other Duke Affiliate: Mr. Richard Priory Chairman, President and CEO Duke Energy Corporation Post Office Box 1006, EC3XB Charlotte, North Carolina 28201-1006 cc: Mr. Christopher C. Rolfe Vice President, Corporate Human Resources Duke Energy Corporation Post Office Box 1244, PB04J Charlotte, North Carolina 28201-1244 8. Waiver of Breach. The waiver by any party to a breach of any ---------------- provision in this Agreement cannot operate or be construed as a waiver of any subsequent breach by a party. Any waiver or consent from Duke with respect to any term or provision of this Agreement or any other aspect of the Employee's conduct or employment shall be effective only in the specific instance and for the specific purpose for which given and shall not be deemed, regardless of frequency given, to be a further or continuing waiver or consent. The failure or delay of Duke at any time or times to require performance of, or to exercise any of its powers, rights or remedies with respect to, any term or provision of this Agreement or any other aspect of the Employee's conduct or employment shall in no manner (except as otherwise expressly provided herein) affect Duke's right at a later time to enforce any such term or provision. 8 9. Severability. The validity or unenforceability of any particular ------------ provision in this Agreement shall not affect the other provisions hereof, and this Agreement shall be construed in all respects as if the invalid or unenforceable provision were omitted. 10. Entire Agreement. Except as otherwise provided herein, this ---------------- Agreement covers the entire understanding of the parties with respect to the subject matter hereof, superseding all prior understandings and agreements [including, without limitation, the Employment Agreement between the Employee and Duke dated November 24, 1996, as amended]. No modifications or amendments of the terms and conditions herein shall be effective unless in writing and signed by the parties or their respective duly authorized agents. 11. Applicability of Change in Control Agreement. Notwithstanding -------------------------------------------- anything to the contrary in this Agreement, if a termination of employment by the Employee shall be covered by a "Change in Control Agreement" (or similar change in control severance agreement) between the Employee and Duke, the provisions of such Change in Control Agreement shall be controlling and this Agreement shall cease to be of any further effect. 12. Governing Law. This Agreement shall be interpreted, construed and ------------- governed according to the laws of the State of North Carolina, without reference to conflicts of law principles thereof. 13. Successors and Assigns. Neither this Agreement, nor any of the ---------------------- parties' respective rights, powers, duties or obligations hereunder, may be assigned by either party without the prior written consent of the other party. This Agreement shall be binding upon and inure to the benefit of the Employee and his or her heirs and legal representatives of Duke and its successors. Successors of Duke shall include, without limitation, any company or companies acquiring, directly or indirectly, all or substantially all of the assets of Duke, whether by merger, consolidation, purchase, lease or otherwise, and such successor shall thereafter be deemed "Duke" for the purpose hereof. 14. Forum Selection. The Employee agrees that any claim against Duke --------------- or any Duke Affiliate arising out of or relating in any way to this Agreement or to the Employee's employment with Duke or any Duke Affiliate (including without limitation any claim arising under the federal civil rights statutes) shall be brought exclusively in the Superior Court of Mecklenburg County, North Carolina, or the United States District Court for the Western District of North Carolina, and in no other forum. The Employee hereby consents to the personal and subject matter of jurisdiction of these courts for the purpose of adjudicating any claims subject to this forum selection clause. The Employee also agrees that any dispute of any kind arising out of or relating to this Agreement or to the Employee's employment (including without limitation any claim arising under the federal civil rights statutes) shall at the sole election or demand of Duke or the applicable Duke Affiliate be submitted to final, conclusive and binding arbitration before and according to the rules then prevailing of the American Arbitration Association in Mecklenburg County, North Carolina, which election or demand may be made by Duke or the applicable Duke Affiliate at any time prior to the last day to answer and/or respond to a summons and/or complaint made by the Employee. The results of any such arbitration proceeding shall be final and binding both upon Duke or the applicable Duke Affiliate and upon the Employee, and shall be subject to judicial confirmation as provided by the Federal 9 Arbitration Act or the North Carolina Arbitration Act, including specifically the terms of N.C. Gen. Stat. (S) 1-567.2, which are incorporated herein by reference. 15. Legal Fees. To provide the Employee with reasonable assurance ---------- that the purposes of this Agreement will not be frustrated by the cost of enforcement, Duke shall pay and be solely responsible for reasonable attorneys' fees and expenses incurred by the Employee as a result of a claim that Duke has breached or otherwise failed to perform its obligations under this Agreement or any provision hereof, regardless of which party, if any, prevails in the contest; provided, however, that Duke shall not be responsible for such fees and -------- ------- expenses to the extent incurred in connection with a claim made by the Employee that the trier of fact in any such contest finds to be frivolous. 16. Release of Claims. In consideration of the obligations of Duke ----------------- under this Agreement, the Employee agrees to execute and honor the release of claims in the form attached as Exhibit A hereto upon a termination of employment that is covered by Section 2(c) hereof. The obligations of Duke under Section 2(c) hereof shall be contingent upon the execution, nonrevocation and continued compliance by the Employee with this release of claims. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on _____________. DUKE ENERGY CORPORATION By:_______________________________ Title:____________________________ EMPLOYEE __________________________ 10 EXHIBIT A --------- RELEASE OF CLAIMS AND COVENANT NOT TO SUE ----------------------------------------- This RELEASE OF CLAIMS AND COVENANT NOT TO SUE (the "Release") is executed and delivered by _____________ (the "Employee") to DUKE ENERGY CORPORATION ("Duke"). In consideration of the agreement by Duke to provide the Employee with the rights, payments and benefits under the Severance Agreement between the Employee and Duke dated _____________ (the "Severance Agreement"), the Employee hereby agrees as follows: Section 1. Release and Covenant. The Employee, of his or her own -------------------- free will, voluntarily releases and forever discharges Duke, its subsidiaries, affiliates, their directors, officers, employees, agents, stockholders, successors and assigns (both individually and in their official capacities with Duke) from, and covenants not to sue or proceed against any of the foregoing on the basis of, any and all past or present causes of action, suits, agreements or other claims which the Employee, his or her dependents, relatives, heirs, executors, administrators, successors and assigns has or may hereafter have from the beginning of time to the date hereof against Duke upon or by reason of any matter, cause or thing whatsoever, including, but not limited to, any matters arising out of his or her employment by Duke and the cessation of said employment, and including, but not limited to, any alleged violation of the Civil Rights Acts of 1964 and 1991, the Equal Pay Act of 1963, the Age Discrimination in Employment Act of 1967, the Rehabilitation Act of 1973, the Older Workers Benefit Protection Act of 1990, the Americans with Disabilities Act of 1990, the Family and Medical Leave Act of 1993 and any other federal, state or local law, regulation or ordinance, or public policy, contract or tort law having any bearing whatsoever on the terms and conditions of employment or termination of employment. This Release shall not, however, constitute a waiver of any of the Employee's rights under the Severance Agreement. Section 2. Due Care. The Employee acknowledges that he or she has -------- received a copy of this Release prior to its execution and has been advised hereby of his or her opportunity to review and consider this Release for 21 days prior to its execution. The Employee further acknowledges that he or she has been advised hereby to consult with an attorney prior to executing this Release. The Employee enters into this Release having freely and knowingly elected, after due consideration, to execute this Release and to fulfill the promises set forth herein. This Release shall be revocable by the Employee during the 7-day period following its execution, and shall not become effective or enforceable until the expiration of such 7-day period. In the event of such a revocation, the Employee shall not be entitled to the consideration for this Release set forth above. Section 3. Nonassignment of Claims. The Employee represents and ----------------------- warrants that there has been no assignment or other transfer of any interest in any claim which the Employee may have against Duke. The Employee agrees to indemnify and hold Duke harmless from any liability, claims, demands, damages, costs, expenses and attorneys' fees incurred as a result of any person asserting such assignment or transfer of any rights or claims under any such assignment or transfer. It is the intention of the Employee and Duke that this indemnity does not require payment as a condition precedent to recovery by Duke from the Employee under this indemnity. Section 4. Reliance by Employee. The Employee acknowledges that, in -------------------- his or her decision to enter into this Release, he or she has not relied on any representations, promises or agreements of any kind, including oral statements by representatives of Duke, except as set forth in this Release. This RELEASE OF CLAIMS AND COVENANT NOT TO SUE is executed by the Employee and delivered to Duke on _____________________. EMPLOYEE ____________________________________________________ [not to be signed upon execution of Severance Agreement] A-2 EX-10.CC 6 CHANGE IN CONTROL AGREEMENT Exhibit 10.CC CHANGE IN CONTROL AGREEMENT CHANGE IN CONTROL AGREEMENT (the "Agreement"), effective as of __________, by and between _____________ (the "Employee") and DUKE ENERGY CORPORATION ("Duke"), a North Carolina corporation with its principal executive offices in Charlotte, North Carolina. WHEREAS, Duke has determined that it is in the best interests of Duke, its affiliates and its stockholders to assure that Duke will have the continued undivided time, attention, loyalty and dedication of the Employee, notwithstanding the possibility, threat or occurrence of a Change in Control (as defined below); WHEREAS, Duke believes it is imperative to diminish the inevitable distraction of the Employee by virtue of the personal uncertainties and risks created by any pending or threatened Change in Control and to encourage the Employee's full undivided time, attention, loyalty, and dedication to Duke currently and in the event of any pending or threatened Change in Control; and WHEREAS, it is Duke's intention that the Employee be assured of compensation and benefit arrangements if his or her employment terminates as a result of a Change in Control which are competitive with those of peer executive or management employees of similarly situated corporations, and the Employee is willing to enter into an agreement to that end, upon the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the premises and of the mutual covenants contained herein, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. Term of Agreement. ----------------- The term of this Agreement (the "Agreement Term") shall commence on the date first written above (the "Commencement Date") and shall terminate on August 19, 2001, in the event a Change in Control shall not have occurred by such date; provided, however, that such termination date shall be automatically -------- ------- extended for consecutive one-month periods effective on the first date of each month (each, a "Renewal Date") following the Commencement Date unless either party gives written notice to the other party not less than ten (10) days prior to a Renewal Date of its intention to terminate the Agreement at the end of the then-current Agreement Term. In the event a Change in Control shall have occurred prior to the expiration of the Agreement Term, this Agreement will continue in force and effect until the satisfaction of all of the parties' obligations hereunder. 2. Covered Termination. ------------------- (a) General. The Employee shall be treated as having incurred a "Covered ------- Termination" if during the period beginning on the date of a Change in Control that occurs during the Agreement Term and ending on the close of the 24th full calendar month following such Change in Control (the "Covered Period"), either (i) Duke and/or any entity that controls, is controlled by, or is under common control with Duke (a "Duke Affiliate") terminates his or her employment other than for Cause (as defined below)(so that the Employee is no longer employed by Duke or any Duke Affiliate) or (ii) the Employee terminates his or her employment with Duke and all Duke Affiliates for Good Reason (as defined below). The Employee shall not be treated as having incurred a Covered Termination if his or her employment shall terminate on account of his or her death, disability, a termination by Duke or any Duke Affiliate for Cause, a termination by the Employee other than for Good Reason, or a termination for any reason other than during the Covered Period. (b) Cause. For purposes of this Agreement, "Cause" shall mean the ----- occurrence of any one of the following (provided the Employee receives written notice from Duke identifying the acts or omissions constituting Cause and is given a 30-day opportunity to cure, if such acts or omissions are capable of cure): (A) a final conviction of a felony or a crime involving moral turpitude; (B) an egregious act of dishonesty (including, without limitation, theft or embezzlement) in connection with employment, or a malicious action by the Employee toward the customers or employees of Duke or any Duke Affiliate; or (C) a material failure to carry out, or malfeasance or gross insubordination in carrying out, reasonably assigned duties or instructions consistent with his or her position (provided that material failure to carry out reasonably assigned duties shall be deemed to constitute Cause only after a finding by Duke's Chief Executive Officer of material failure on the part of the Employee). (c) Good Reason. For purposes of this Agreement, "Good Reason" shall ----------- mean the occurrence of any one of the following, without the written consent of the Employee, during the Covered Period (provided Duke receives written notice from the Employee, within 60 days of the occurrence of the event that gives rise to Good Reason, which identifies the acts or omissions constituting Good Reason and Duke is given a 30-day opportunity to cure): (i) any reduction in the Employee's Base Salary (as defined below) as in effect immediately prior to the Change in Control; (ii) any reduction in the Employee's annual bonus opportunity (as a percentage of Base Salary) from that which was in effect under the applicable Bonus Plan (as defined below) at the time of the Change in Control; (iii) any material diminution in the Employee's overall level of authority or responsibility with Duke and all Duke Affiliates (or their successors) as in effect immediately prior to the Change in Control; or (iv) any requirement that the Employee relocate his principal place of business, as in effect immediately prior to a Change in Control, by more than 50 miles. (d) Change in Control. For purposes of this Agreement, a "Change in ----------------- Control" shall be deemed to have occurred upon the first to occur of one of the following events prior to the Expiration Date: (i) an acquisition subsequent to the date hereof by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of thirty percent (30%) or more of either (A) the then outstanding shares of Duke common stock (the "Common Stock") or (B) the combined voting power of the then outstanding voting securities of Duke entitled to vote generally in the election of directors (the "Outstanding Corporation Voting Securities"); 2 excluding, however, the following: (1) any acquisition directly from Duke, other than an acquisition by virtue of the exercise of a conversion privilege unless the security being so converted was itself acquired directly from Duke, (2) any acquisition by Duke and (3) any acquisition by an Employee benefit plan (or related trust) sponsored or maintained by Duke or any of its subsidiaries; (ii) during any period of two (2) consecutive years (not including any period prior to the date hereof), individuals who at the beginning of such period constitute the Board (and any new directors whose election by the Board or nomination for election by Duke's shareholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was so approved) cease for any reason (except for death, disability or voluntary retirement) to constitute a majority thereof; (iii) the approval by the shareholders of Duke and consummation of a merger, consolidation, reorganization or similar corporate transaction, whether or not Duke is the surviving corporation in such transaction, other than a merger, consolidation, or reorganization that would result in the voting securities of Duke outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the combined voting power of the voting securities of Duke (or such surviving entity) outstanding immediately after such merger, consolidation, or reorganization; (iv) the approval by the shareholders of Duke and consummation of (A) the sale or other disposition of all or substantially all of the assets of Duke or (B) a complete liquidation or dissolution of Duke; or (v) adoption by the Board of a resolution to the effect that any person has acquired effective control of the business and affairs of Duke. 3. Termination Benefits. -------------------- (a) General. In the event of a Covered Termination, the Employee ------- shall be entitled to the compensation and termination benefits set forth in Section 3(b) hereof. Any lump-sum payments required under this Section 3 will be made by Duke in cash within 10 business days after the effective date of the Employee's Covered Termination. This Agreement does not grant the Employee any right or entitlement to be retained by Duke or any Duke Affiliate and shall not affect or prejudice the right of Duke or any Duke Affiliate to terminate the employment of the Employee at any time for any reason, subject to the termination payments described in this Section 3. In the event of the termination of the Employee's employment with Duke and all Duke Affiliates, the Employee agrees to immediately resign all of his or her positions as an officer or director of Duke or any Duke Affiliate. 3 (b) Covered Termination Payments and Benefits. In the event that the ----------------------------------------- Employee's employment hereunder is terminated on account of a Covered Termination, the Employee will be paid and entitled to the following: (i) any salary or compensation earned through the date of termination and any rights or payments that have become vested or that are otherwise due under any employee benefit, incentive or compensation plan or arrangement maintained by Duke or a Duke Affiliate that the Employee participated in at the time of his or her termination of employment; (ii) a lump-sum payment equal to (A) the Employee's annual bonus payment earned for any completed bonus year to termination of employment, if not previously paid, plus (B) a pro-rata amount of the Employee's target bonus under any Bonus Plan (as defined below) for the year in which the termination occurs, determined as if all program goals had been met (the "Target Bonus"), pro-rated based on the number of days of service during the bonus year occurring prior to termination of employment; (iii) a lump-sum payment equal to the sum of the Employee's then- current Base Salary and Target Bonus for each year of the Severance Period (as defined below), including a pro-rata amount (determined on a daily basis) for any partial years during this period; (iv) continued coverage for the Severance Period (as defined below) under the medical and dental (but not medical spending account or employee assistance) and basic life insurance plans that the Employee participated in at the time of his or her termination, or their equivalent, under the same terms and at the same cost to the Employee as though the Employee had not terminated employment; provided, however, that in the event the -------- ------- Employee becomes covered or eligible for coverage under substitute medical or life insurance plans of another employer during this period, subject to applicable requirements of the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended and the regulations thereunder ("COBRA"), Duke will no longer be obligated to provide such coverage to the Employee under this subparagraph; and, provided, -------- further, that in lieu of providing medical coverage (as described -------- above) hereunder, Duke may make a lump-sum payment to the Employee in an amount equal to the aggregate cost of such coverage for the Severance Period, based on the premium costs being utilized for the provision of such coverage to former employees under COBRA at the time of the Employee's termination of employment, and/or in lieu of providing basic life insurance coverage hereunder, Duke may make a lump-sum payment to the Employee in an amount equal to the anticipated cost of such coverage for the Severance Period, based on Duke's assumed costs for such coverage for internal accounting purposes at the time of the Employee's termination of employment; (v) a lump-sum payment equal to the present value (determined based on a six (6) percent interest rate assumption and, in the case of any pension plan accrual, the applicable mortality table for calculating optional forms of benefits 4 under such plan) of any employer contribution (other than a contribution under section 401(k) of the Internal Revenue Code of 1986, as amended), benefit accrual or employer-financed account allocation that would have been made or accrued during the Severance Period under any qualified or non-qualified pension or savings plan maintained by Duke or any Duke Affiliate in which the Employee participated at the time of his or her termination, determined using the Employee's Base Salary and Target Bonus (if relevant) at the time of termination and assuming the maximum elective deferral by the Employee permitted by such plans, if applicable; (vi) notwithstanding the terms of any award agreement or plan document to the contrary, continued vesting of any long term incentive awards, including awards of stock options or restricted stock (but excluding any award that is designated by Duke as a "Chairman's Award"), held by the Employee at the time of his or her termination of employment that are not vested or exercisable on such date, in accordance with their terms as if the Employee's employment had not terminated, for the duration of the Severance Period, with any options or similar rights to remain exercisable (to the extent exercisable at the end of the Severance Period) for a period of 90 days following the close of the Severance Period, but not beyond the maximum original term of such options or rights; and (vii) in the event that the Employee would have satisfied the eligibility requirements of any retiree medical plan or program maintained by Duke or any Duke Affiliate generally for its retirees (a "Retiree Plan") within two years after the date of his or her termination of employment, the provision of such retiree medical benefits to the Employee from and after the date he or she would have satisfied such requirements (assuming continued employment) on a basis substantially equivalent to the retiree medical benefits provided generally under the Retiree Plan, subject to such terms and conditions and requirements for participation as apply under the Retiree Plan from time to time and as such Retiree Plan may be amended or terminated by Duke or a Duke Affiliate, as the case may be, at any time. (c) Definitions. For purposes of this Agreement, the terms below ----------- shall have the following definitions: (1) "Bonus Plan" shall mean any bonus plan, program or arrangement in which the Employee participates where bonus payments are based upon achievement of performance targets by Duke, Duke Affiliates, any business unit thereof or the Employee. (2) "Base Salary" shall mean the annualized amount of the Employee's regular salary during any payroll period, prior to any reductions for elective deferrals or salary reductions but excluding any overtime, incentive or other special compensation. (3) "Severance Period" shall be the period beginning on the date of the Covered Termination and ending on the earlier of (i) the end of the __th month following 5 such Covered Termination or (ii) the Employee's attainment of age 65 (with any fraction of a month to be rounded to the nearest whole month). (d) Other Termination Benefits. In the event of a termination of the -------------------------- Employee's employment that does not constitute a Covered Termination, the Employee will not be due any payments, rights or benefits under this Agreement other than those provided for in Section 3(b)(i) hereof. 4. Excise Tax Provision. -------------------- (a) If it shall be determined that any amount, right or benefit paid, distributed or treated as paid or distributed by Duke or any Duke Affiliate to or for the Employee's benefit (whether paid or payable or distributed or distributable hereunder or otherwise, but determined without regard to any additional payments required under this Section 4) (a "Payment") would be subject to the excise tax imposed by section 4999 of the Code, or any interest or penalties are incurred by the Employee with respect to such excise tax (such excise tax, together with any such interest and penalties, collectively, the "Excise Tax"), then the Employee shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Employee of all federal, state and local taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Employee retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) All determinations required to be made under this Section 4, including whether and when a Gross-Up Payment is required, the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by a nationally recognized accounting firm designated jointly by the Employee and Duke (the "Accounting Firm"), which shall be permitted to designate an independent counsel to advise it for this purpose. The Accounting Firm shall provide detailed supporting calculations both to Duke and the Employee within 15 business days of the receipt of notice from the Employee or Duke that there has been a Payment, or such earlier time as is requested by Duke. All fees and expenses of the Accounting Firm and its legal counsel shall be paid by Duke. Any Gross-Up Payment, as determined pursuant to this Section 4, shall be paid by Duke to the Employee (or to the Internal Revenue Service on the Employee's behalf) within five days of the receipt of the Accounting Firm's determination. All determinations made by the Accounting Firm shall be binding upon Duke and the Employee. As a result of the uncertainty regarding the application of section 4999 of the Code hereunder, it is possible that the Internal Revenue Service may assert that an Excise Tax is due that was not included in the Accounting Firm's calculation of the Gross-Up Payments (an "Underpayment"). In the event that Duke exhausts its remedies pursuant to this Section 4 and the Employee thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any additional Gross-Up Payments that are due as a result thereof shall be promptly paid by Duke to the Employee (or to the Internal Revenue Service on the Employee's behalf). 6 (c) The Employee shall notify Duke in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by Duke of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than 10 business days after the Employee receives written notification of such claim and shall apprise Duke of the nature of such claim and the date on which such claim is requested to be paid. The Employee shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to Duke (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If Duke notifies the Employee in writing prior to the expiration of such period that it desires to contest such claim, the Employee shall: (i) give Duke all information reasonably requested by Duke relating to such claim; (ii) take such action in connection with contesting such claim as Duke shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney selected by Duke and reasonably acceptable to the Employee and ceasing all efforts to contest such claim; (iii) cooperate with Duke in good faith in order to effectively contest such claim; and (iv) permit Duke to participate in any proceeding relating to such claim; provided, however, that Duke shall bear and pay directly all -------- ------- reasonable costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Employee harmless, on an after-tax basis, from any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expense. Without limiting the foregoing provisions of this Section 4, Duke shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Employee to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Employee agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as Duke shall determine and direct; provided, however, that if Duke directs the Employee -------- ------- to pay such claim and sue for a refund, Duke shall advance the amount of such payment to the Employee, on an interest-free basis, and shall indemnify and hold the Employee harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the Employee's taxable year with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, Duke's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Employee shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the Employee's receipt of an amount advanced by Duke pursuant to this Section 4, the Employee becomes entitled to receive any refund with respect to such claim, the Employee shall pay to Duke within 10 business days the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the Employee's receipt of an amount advanced by Duke pursuant to this Section 4, a determination is made that the Employee shall not be entitled to any refund with respect to such claim and Duke does not notify the Employee in writing of its intent to contest such denial of refund prior to the expiration of 30 days after Duke's receipt of notice of such determination, then such advance shall be 7 forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 5. Lapse of Restrictive Covenants. Upon the occurrence of a Covered ------------------------------ Termination, the Employee will no longer be bound by any non-competition restriction or other restrictive covenant to which he or she is a party with respect to Duke or any Duke Affiliate. 6. Tax Withholding. Duke may withhold from any amounts payable under --------------- this Agreement such federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. 7. Notice. Any notices to be given hereunder by either party to the ------ other may be effectuated either by personal delivery in writing or by mail, registered or certified, postage prepaid, with return receipt requested. Mailed notices shall be addressed to the parties at the following addresses: If to Duke or any other Duke Affiliate: Mr. Richard Priory Chairman, President and CEO Duke Energy Corporation Post Office Box 1006, EC3XB Charlotte, North Carolina 28201-1006 cc: Mr. Christopher C. Rolfe Vice President, Corporate Human Resources Duke Energy Corporation Post Office Box 1244, PB04J Charlotte, North Carolina 28201-1244 8. Waiver of Breach. The waiver by any party to a breach of any ---------------- provision in this Agreement cannot operate or be construed as a waiver of any subsequent breach by a party. Any waiver or consent from Duke with respect to any term or provision of this Agreement or any other aspect of the Employee's conduct or employment shall be effective only in the specific instance and for the specific purpose for which given and shall not be deemed, regardless of frequency given, to be a further or continuing waiver or consent. The failure or delay of Duke at any time or times to require performance of, or to exercise any of its powers, rights or remedies with respect to, any term or provision of this Agreement or any other aspect of the Employee's conduct or employment shall in no manner (except as otherwise expressly provided herein) affect Duke's right at a later time to enforce any such term or provision. 9. Severability. The validity or unenforceability of any particular ------------ provision in this Agreement shall not affect the other provisions hereof, and this Agreement shall be construed in all respects as if the invalid or unenforceable provision were omitted. 10. Entire Agreement. Except as otherwise provided herein, this ---------------- Agreement covers the entire understanding of the parties with respect to the subject matter hereof, superseding all prior understandings and agreements. No modifications or amendments of the 8 terms and conditions herein shall be effective unless in writing and signed by the parties or their respective duly authorized agents. 11. Applicability of Key Employee Severance Agreement. In the event ------------------------------------------------- of a Covered Termination following a Change in Control, this Agreement will supersede any "Key Employee Severance Agreement and Release" (or similar severance agreement) to which the Employee is a party, but shall have no effect on any such agreement in the event of a termination of employment that is not treated as a Covered Termination under this Agreement. 12. Governing Law. This Agreement shall be interpreted, construed ------------- and governed according to the laws of the State of North Carolina, without reference to conflicts of law principles thereof. 13. Successors and Assigns. Neither this Agreement, nor any of the ---------------------- parties' respective rights, powers, duties or obligations hereunder, may be assigned by either party without the prior written consent of the other party. This Agreement shall be binding upon and inure to the benefit of the Employee and his or her heirs and legal representatives and Duke and its successors. Successors of Duke shall include, without limitation, any company or companies acquiring, directly or indirectly, all or substantially all of the assets of Duke, whether by merger, consolidation, purchase, lease or otherwise, and such successor shall thereafter be deemed "Duke" for the purpose hereof. 14. Forum Selection. The Employee agrees that any claim against Duke --------------- or any Duke Affiliate arising out of or relating in any way to this Agreement or to the Employee's employment with Duke or any Duke Affiliate (including without limitation any claim arising under the federal civil rights statutes) shall be brought exclusively in the Superior Court of Mecklenburg County, North Carolina, or the United States District Court for the Western District of North Carolina, and in no other forum. The Employee hereby consents to the personal and subject matter of jurisdiction of these courts for the purpose of adjudicating any claims subject to this forum selection clause. The Employee also agrees that any dispute of any kind arising out of or relating to this Agreement or to the Employee's employment (including without limitation any claim arising under the federal civil rights statutes) shall at the sole election or demand of Duke or the applicable Duke Affiliate be submitted to final, conclusive and binding arbitration before and according to the rules then prevailing of the American Arbitration Association in Mecklenburg County, North Carolina, which election or demand may be made by Duke or the applicable Duke Affiliate at any time prior to the last day to answer and/or respond to a summons and/or complaint made by the Employee. The results of any such arbitration proceeding shall be final and binding both upon Duke or the applicable Duke Affiliate and upon the Employee, and shall be subject to judicial confirmation as provided by the Federal Arbitration Act or the North Carolina Arbitration Act, including specifically the terms of N.C. Gen. Stat. (S) 1-567.2, which are incorporated herein by reference. 15. Legal Fees. To provide the Employee with reasonable assurance ---------- that the purposes of this Agreement will not be frustrated by the cost of enforcement, Duke shall pay and be solely responsible for reasonable attorneys' fees and expenses incurred by the Employee as a result of a claim that Duke has breached or otherwise failed to perform its obligations under this Agreement or any provision hereof, regardless of which party, if any, prevails in the contest; 9 provided, however, that Duke shall not be responsible for such fees and - -------- ------- expenses to the extent incurred in connection with a claim made by the Employee that the trier of fact in any such contest finds to be frivolous. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on __________. DUKE ENERGY CORPORATION By:_____________________________ Title: ___________________________ EMPLOYEE __________________________ 10 EX-12 7 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
- ------------------------------------------------------------------------------------------------------------ Dollars in Millions Year Ended December 31 - ------------------------------------------------------------------------------------------------------------ 1999 1998 /a/ 1997 /a/ 1996 /a/ 1995 /a/ ----------------------------------------------------------------- Earnings before income taxes $1,300 $2,037 $1,613 $1,789 $1,682 Fixed charges 670 555 520 540 556 ----------------------------------------------------------------- Total $1,970 $2,592 $2,133 $2,329 $2,238 ================================================================= Fixed charges: Interest on debt $ 644 $ 533 $ 497 $ 514 $ 536 Interest component of rentals 26 22 23 26 20 ----------------------------------------------------------------- Fixed charges $ 670 $ 555 $ 520 $ 540 $ 556 ================================================================= Ratio of earnings to fixed charges 2.9 4.7 4.1 4.3 4.0 - ------------------------------------------------------------------------------------------------------------
/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 January 1, 1995. EX-21 8 LIST OF SUBSIDIARIES EXHIBIT 21 LIST OF SUBSIDIARIES The following is a list of certain subsidiaries of the registrant and their respective states of incorporation (100% owned unless otherwise indicated): Crescent Resources, Inc. (South Carolina) Duke Capital Corporation (Delaware) Duke Energy Natural Gas Corporation (Delaware) Texas Eastern Transmission Corporation (Delaware) PanEnergy Corp (Delaware) EX-23.A 9 INDEPENDENT AUDITOR'S CONSENT Exhibit No. 23(a) INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 333- 79065, 333-81573, 33-50543, 33-50617, 33-50715, 333-02571, 333-02575, 333-14209, 333-30263, 333-40679 and 333-59327 of Duke Energy Corporation on Form S-3 and Registration Statement Nos. 333-29563, 333-29585, 333-29587, 333-34655, 333- 12093, 333-50317 and 333-59279 of Duke Energy Corporation on Form S-8 of our report dated February 11, 2000, appearing in this Annual Report on Form 10-K of Duke Energy Corporation for the year ended December 31, 1999. Deloitte & Touche LLP Charlotte, North Carolina March 20, 2000 EX-24.A 10 POWER OF ATTORNEY Exhibit 24(a) DUKE ENERGY CORPORATION Power of Attorney ----------------- FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1999 (Annual Report) The undersigned Duke Energy Corporation, a North Carolina corporation and certain of its officers and/or directors, do each hereby constitute and appoint Richard J. Osborne, Ellen T. Ruff, and Sandra P. Meyer, and each of them, to act as attorneys-in-fact for and in the respective names, places, and stead of the undersigned, to execute, seal, sign, and file with the Securities and Exchange Commission the Annual Report of said Duke Energy Corporation on Form 10-K and any and all amendments thereto, hereby granting to said attorneys-in-fact, and each of them, full power and authority to do and perform all and every act and thing whatsoever requisite, necessary, or proper to be done in and about the premises, as fully to all intents and purposes as the undersigned, or any of them, might or could do if personally present, hereby ratifying and approving the acts of said attorneys-in-fact. Executed as of the 6th day of March, 2000. DUKE ENERGY CORPORATION By /s/ R.B. Priory ----------------------------------- Chairman, President and Chief Executive Officer (Corporate Seal) ATTEST: /s/ Robert T. Lucas III - ------------------------------ Assistant Secretary /s/ R. B. Priory Chairman, President and - ---------------------------- Chief Executive Officer R. B. Priory (Principal Executive Officer and Director) /s/ Richard J. Osborne Executive Vice President and Chief Financial - ---------------------------- Officer (Principal Financial Officer) Richard J. Osborne /s/ Sandra P. Meyer Vice President and Corporate Controller - ---------------------------- (Principal Accounting Officer) Sandra P. Meyer /s/ G. Alex Bernhardt (Director) - ---------------------------- G. Alex Bernhardt /s/ Robert J. Brown (Director) - ---------------------------- Robert J. Brown /s/ William A. Coley (Director) - ---------------------------- William A. Coley /s/ William T. Esrey (Director) - ---------------------------- William T. Esrey /s/ Ann M. Gray (Director) - ---------------------------- Ann M. Gray /s/ Dennis R. Hendrix (Director) - ---------------------------- Dennis R. Hendrix /s/ Harold S. Hook (Director) - ---------------------------- Harold S. Hook /s/ George Dean Johnson, Jr. (Director) - ---------------------------- George Dean Johnson, Jr. /s/ Max Lennon (Director) - ---------------------------- Max Lennon /s/ Leo E. Linbeck, Jr. (Director) - ---------------------------- Leo E. Linbeck, Jr. /s/ James G. Martin (Director) - ---------------------------- James G. Martin /s/ Russell M. Robinson, II (Director) - ---------------------------- Russell M. Robinson, II EX-24.B 11 CERTIFIED COPY OF RESOLUTION Exhibit No. 24(B) Certified Copy of Resolutions Adopted by Unanimous Written Consent to Action without a Meeting of the Management Committee of the Board of Directors of Duke Energy Corporation Effective March 16, 2000 FURTHER RESOLVED, That the Power of Attorney as presented to the meeting and executed by all the Directors present be and hereby is approved in form and content for purposes of filing the Form 10-K Annual Report with the Securities and Exchange Commission. * * * * * * * * I, Robert T. Lucas III, Assistant Secretary of Duke Energy Corporation, do hereby certify that the above is a full, true and complete extract from resolutions adopted by unanimous written consent to action without a meeting of the Management Committee of the Board of Directors of Duke Energy Corporation effective on March 16, 2000. IN WITNESS WHEREOF, I have hereunto set my hand and affixed the Corporate Seal of said Duke Energy Corporation this 16th day of March, 2000. _____________________________ Robert T. Lucas III Assistant Secretary EX-27 12 FINANCIAL DATA SCHEDULE
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED STATEMENTS OF INCOME CONSOLIDATED STATEMENTS OF CASH FLOWS, AND CONSOLIDATED BALANCE SHEETS AS OF AND FOR YEAR TO DATE 12/31/99 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 0000030371 DUKE ENERGY CORPORATION 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 PER-BOOK 9,753,000 15,952,000 6,171,000 1,533,000 0 33,409,000 4,603,000 0 4,397,000 8,998,000 71,000 209,000 8,683,000 3,000 0 1,763,000 482,000 33,000 214,000 32,000 14,666,000 33,409,000 21,742,000 453,000 19,947,000 20,400,000 1,795,000 248,000 2,108,000 601,000 1,507,000 20,000 1,487,000 802,000 187,000 2,684,000 4.08 4.07 REPRESENTS BASIC EARNINGS PER SHARE
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