-----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, TNG2Hc4/l9ae1BBK/uihpr+RxifcYe4gKTwmpkyh4QsM6LDDFfjNgY8CZtWmujrY 0z9sH/7jz/MO0/HRyQ2Sog== 0000950168-98-000916.txt : 19980331 0000950168-98-000916.hdr.sgml : 19980331 ACCESSION NUMBER: 0000950168-98-000916 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 17 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 SROS: NYSE 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: 98577281 BUSINESS ADDRESS: STREET 1: 422 S CHURCH ST CITY: CHARLOTTE STATE: NC ZIP: 28242-0001 BUSINESS PHONE: 7045940887 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 DUKE ENERGY CORPORATION - 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- FORM 10-K (Mark One) [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1997 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _______ to _______ Commission file number 1-4928 DUKE ENERGY CORPORATION (Exact name of registrant as specified in its charter) North Carolina 56-0205520 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 422 South Church Street, Charlotte, North Carolina 28202-1904 (Address of principal executive offices) (Zip Code)
704-594-6200 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange Title of each class on which registered - ------------------------------------------------------------------------- ------------------------------ 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 2005 New York Stock Exchange, Inc. First and Refunding Mortgage Bonds, 7% Due 2033 New York Stock Exchange, Inc. First and Refunding Mortgage Bonds, 7 3/8% Due 2023 New York Stock Exchange, Inc. First and Refunding Mortgage Bonds, 7 1/2% Series B Due 2025 New York Stock Exchange, Inc. First and Refunding Mortgage Bonds, 7 7/8% Due 2024 New York Stock Exchange, Inc. First and Refunding Mortgage Bonds, 8% Series B Due 1999 New York Stock Exchange, Inc. 7.20% Quarterly Income Preferred Securities issued by Duke Energy Capital Trust I and guaranteed by Duke Energy Corporation New York Stock Exchange, Inc.
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 27, 1998 .................... $20,010,800,000 Number of shares of Common Stock, without par value, outstanding at February 27, 1998 .................................................... 360,149,391 Documents incorporated by reference: The registrant is incorporating herein by reference certain sections of the proxy statement relating to the 1998 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, 1997 TABLE OF CONTENTS
Item Page - ------------------------------------------------------------------------------------------ ----- PART I. 1. Business ........................................................................ 1 General ......................................................................... 1 Electric Operations ............................................................. 1 Natural Gas Transmission ........................................................ 4 Energy Services ................................................................. 6 Other Operations ................................................................ 9 Environmental Matters ........................................................... 9 Other Matters ................................................................... 10 Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 10 Operating Statistics ............................................................ 11 Executive Officers of the Corporation ........................................... 12 2. Properties ...................................................................... 12 3. Legal Proceedings ............................................................... 14 4. Submission of Matters to a Vote of Security Holders ............................. 14 PART II. 5. Market for Registrant's Common Equity and Related Stockholder Matters ........... 15 6. Selected Financial Data ......................................................... 15 7. Management's Discussion and Analysis of Results of Operations and Financial 16 Condition 7A. Quantitative and Qualitative Disclosures About Market Risk ...................... 26 8. Financial Statements and Supplementary Data ..................................... 27 9. Changes in and Disagreements with Accountants on Accounting and Financial 61 Disclosure PART III. 10. Directors and Executive Officers of the Registrant .............................. 61 11. Executive Compensation .......................................................... 61 12. Security Ownership of Certain Beneficial Owners and Management .................. 61 13. Certain Relationships and Related Transactions .................................. 61 PART IV. 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ................ 62 Signatures ....................................................................... 63 Exhibit Index .................................................................... 64
PART I. Item 1. Business. GENERAL On June 18, 1997, Duke Power Company (Duke Power) changed its name to Duke Energy Corporation (the Corporation) in accordance with the terms of a merger agreement with PanEnergy Corp (PanEnergy), pursuant to which the Corporation issued 158.3 million shares of its common stock in exchange for all of the outstanding common stock of PanEnergy (the merger). PanEnergy was involved in the gathering, processing, transportation and storage of natural gas, the production of natural gas liquids and the marketing of natural gas, electricity, liquefied petroleum gases and related energy services. Pursuant to the merger, each share of PanEnergy common stock outstanding was converted into the right to receive 1.0444 shares of the Corporation's common stock. In addition, each outstanding option to purchase PanEnergy common stock became an option to purchase common stock of the Corporation, adjusted accordingly. The merger was accounted for as a pooling of interests. As a result of the merger, the Corporation is an integrated energy and energy services provider with the ability to offer physical delivery and management of both electricity and natural gas throughout the United States and abroad. The Corporation provides these services through four business segments: Electric Operations, Natural Gas Transmission, Energy Services, and Other Operations. The Electric Operations segment is engaged in the generation, transmission, distribution and sale of electric energy in central and western North Carolina and the western portion of South Carolina. 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). The Natural Gas Transmission segment is involved in interstate transportation and storage of natural gas for customers primarily in the Mid-Atlantic, New England and Midwest states. The interstate natural gas transmission and storage operations are also subject to the rules and regulations of the FERC. The Energy Services segment is comprised of several separate business units: Field Services gathers and processes natural gas, produces and markets natural gas liquids (NGLs) and transports and trades crude oil; Trading and Marketing markets natural gas, electricity and other energy-related products; Global Asset Development develops, owns and operates energy-related facilities worldwide; and Other Energy Services provides engineering consulting, construction and integrated energy solutions. Other Operations include the real estate operations of Crescent Resources, Inc. (Crescent Resources) and communications services. Corporate costs and intersegment eliminations are also reflected in the financial results of this segment. A discussion of the current business and operations of each of the Corporation's segments follows. The Corporation expects moderate growth in its Electric Operations segment, consistent with historical trends. In the Natural Gas Transmission segment, relatively slow growth is expected due to increased competition. The Corporation is seeking to significantly grow its Energy Services segment through acquisition, construction and expansion opportunities. For further discussion of the operating outlook of the Corporation and its segments, see "Management's Discussion and Analysis of Results of Operations and Financial Condition, Current Issues -- Operations Outlook." For financial information concerning the Corporation's business segments, see Note 4 to the Consolidated Financial Statements, "Business Segments." The Corporation is a North Carolina corporation with its principal executive offices located at 422 South Church Street, Charlotte, NC 28202-1904. The telephone number is 704-594-6200. ELECTRIC OPERATIONS Service Area and Customers The Electric Operations service area, approximately two-thirds of which lies in North Carolina, covers about 20,000 square miles with an estimated population of 5.1 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 1 by customer type, see "Business, Operating Statistics." For further discussion of the Catawba Nuclear Station joint ownership, see Note 6 to the Consolidated Financial Statements, "Joint Ownership of Generating Facilities." The Electric Operations service area is undergoing increasingly diversified industrial development. The textile industry, machinery and equipment manufacturing, and chemical and chemical-related industries are of major significance to the economy of the area. Other industrial activities include rubber and plastic products, paper and allied products, and various other light and heavy manufacturing and service businesses. The largest industry served is the textile industry, which accounted for approximately $457 million of the revenues of the Electric Operations segment for 1997, representing 10% of electric revenues and 38% of industrial revenues. Electric Operations normally experiences seasonal peak loads in summer and winter which are relatively in balance. Shown below is the Electric Operations service area, in which business is conducted under the name "Duke Power" and by Nantahala Power and Light Company, a subsidiary of the Corporation. [Map of North and South Carolina depicting Electric Operations Service Area appears here] Capability and Resources of Energy Electric energy required to supply the needs of the customers of Electric Operations is primarily generated through three nuclear generating stations with a combined net capability of 5,078 MW (Oconee Nuclear Station -- 2,538 MW, McGuire Nuclear Station -- 2,258 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, twenty hydroelectric stations with a combined capability of 2,685 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 open market purchases. For statistics regarding sources of electric energy see "Business, Operating Statistics." Fuel Supply Electric Operations presently relies principally on coal and nuclear fuel for the generation of electric energy. Electric Operations reliance on oil and gas is minimal. Information regarding the utilization of sources of power and cost of fuels for each of the three years in the period ended December 31, 1997 is set forth in the following table: 2
Cost of Fuel per Net Generation by Source Kilowatt-hour Generated (Percent) (Cents) ----------------------------- ----------------------------- 1997 1996 1995 1997 1996 1995 --------- --------- --------- --------- --------- --------- Coal .......................................... 59.3 54.0 43.7 1.30 1.40 1.56 Nuclear (a) ................................... 38.8 44.0 53.7 0.48 0.53 0.57 Oil and gas (b) ............................... .4 .3 .3 5.58 6.74 5.06 ----- ----- ----- All fuels (cost based on weighted average) (a) 98.5 98.3 97.7 0.99 1.02 1.03 Hydroelectric (c) ............................. 1.5 1.7 2.3 ----- ----- ----- 100.0 100.0 100.0 ===== ===== =====
- --------- (a) Statistics related to nuclear generation and all fuels reflect the Electric Operations' 12.5% ownership interest in the Catawba Nuclear Station. (b) Cost statistics include amounts for light-off fuel at the Electric Operations' coal-fired stations. (c) Generating figures are net of output required to replenish pumped storage units during off-peak periods. Coal. Electric Operations obtains a large amount of its coal under supply contracts with mining operators utilizing both underground and surface mining. Electric Operations currently has an adequate supply of coal. Electric Operations' supply contracts, all of which have price adjustment provisions, have expiration dates ranging from 1998 to 2003. The Corporation believes that it will be able to renew such contracts as they expire or to enter into similar contractual arrangements with other coal suppliers for the quantities and qualities of coal required. The coal purchased under these supply contracts is produced from mines located in eastern Kentucky, southern West Virginia and southwestern Virginia. Coal requirements not met by supply contracts have been and are expected to be fulfilled with spot market purchases. The average sulfur content of coal being purchased by Electric Operations is approximately 1%. Such coal satisfies the current emission limitation for sulfur dioxide for existing facilities. See also "Management's Discussion and Analysis of Results of Operations and Financial Condition, Current Issues -- Environmental, Air Quality Control" for additional information regarding particulate matter. Nuclear. Generally, the supply of fuel for nuclear generating units involves the mining and milling of uranium ore to produce uranium concentrates, the conversion of uranium concentrates to uranium hexafluoride, enrichment of that gas and fabrication of the enriched uranium hexafluoride into usable fuel assemblies. After a region (approximately one-third of the nuclear fuel assemblies in the reactor at any time) of spent fuel is removed from a nuclear reactor, it is placed in temporary storage for cooling in a spent fuel pool at the nuclear station site. Electric Operations has contracted for uranium materials and services required to fuel the Oconee, McGuire and Catawba Nuclear Stations. Based upon current projections, these contracts will meet Electric Operations' requirements through the following years:
Uranium Conversion Enrichment Fabrication Nuclear Station Material Service Service Service - ----------------------- ---------- ------------ ------------ ------------ Oconee .......... 1998 1998 2000 2006 McGuire ......... 1998 1998 2000 2009 Catawba ......... 1998 1998 2000 2009
Uranium material requirements will be met through various supplier contracts, with uranium material produced primarily in the United States and Canada. The Corporation believes that it will be able to renew contracts as they expire or to enter into similar contractual arrangements with other suppliers of nuclear fuel materials and services. Requirements not met by long-term supply contracts have been and are expected to be fulfilled with uranium spot market purchases. Under provisions of the Nuclear Waste Policy Act of 1982, the Corporation entered into contracts with the Department of Energy (DOE) for the disposal of spent nuclear fuel. The DOE delayed in accepting the waste materials on the contract date of January 31, 1998. The Corporation has joined with 35 other utilities in a lawsuit attempting to force the DOE to meet its obligations as called for in the contract. The Corporation has satisfactory plans in place to provide storage of spent nuclear fuel if the DOE cannot accept it. 3 Competition Competition for retail electric customers is not generally allowed in the Electric Operations' service territory. However, there are discussions and events at the national level and within certain states regarding retail competition which are resulting in changes in the industry. For further discussion, see "Management's Discussion and Analysis of Results of Operations and Financial Condition, Current Issues -- Electric Competition." Electric Operations is subject to competition in some areas from government-owned power systems, municipally-owned electric systems, rural electric cooperatives and, in certain instances, from 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 the Electric Operations' rates for electric sales to wholesale customers. For further discussion of rate matters and fuel and purchased power cost adjustment procedures, see Note 5 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 the 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. 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 rights to sell at market-based rates up to 2,500 megawatts (MW) of capacity and energy 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 Nuclear Regulatory Commission (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 12 to the Consolidated Financial Statements, "Nuclear Decommissioning Costs & Spent Nuclear Fuel" and Note 15 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 2008 to 2036. The nuclear generating facilities of the 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. 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 During 1997, the Natural Gas Transmission segment completed the organization of its operations into the Northeast Pipelines, which includes Texas Eastern Transmission Corporation (TETCO) and Algonquin Gas Transmission Company (Algonquin), and the Midwest Pipelines, which includes Panhandle Eastern Pipe Line Company (PEPL) and Trunkline Gas Company (Trunkline). 4 In 1997, consolidated natural gas deliveries by the Natural Gas Transmission segment's interstate pipelines totaled 2,862 TBtu (Trillion British thermal units), compared to 2,939 TBtu in 1996, which represented approximately 12% of the natural gas consumed in the United States. A substantial majority of the delivered volumes of the Natural Gas Transmission segment's interstate pipelines represents gas transported under long-term firm service agreements with local distribution company (LDC) customers in the pipelines' market areas. Firm transportation services are also provided under contract to gas marketers, producers, other pipelines, electric power generators and a variety of end-users. In addition, the pipelines offer interruptible transportation to customers on a short-term or seasonal basis. See natural gas deliveries statistics under "Business, Operating Statistics." Demand for gas transmission of the Natural Gas Transmission segment's interstate pipeline systems is seasonal, with the highest throughput occurring during the colder periods in the first and fourth quarters. The Natural Gas Transmission segment's 37,500 mile interstate pipeline system is fully interconnected and can receive natural gas from most major North American producing regions for delivery to markets throughout the Northeast and Midwest states, as shown in the map below. [Map of United States depicting the Natural Gas Transmission segment Interstate Pipelines and Storage Fields appears here] Northeast Pipelines TETCO's major customers are located in Pennsylvania, New Jersey and New York, and include LDCs serving the Pittsburgh, Philadelphia, Newark and New York City metropolitan areas. Algonquin's major customers include LDCs and electric power generators located in the Boston, Hartford, New Haven, Providence and Cape Cod areas. TETCO also provides firm and interruptible open-access storage services. Since the implementation of the FERC Order 636 restructuring, storage is offered as a stand-alone unbundled service or as part of a no-notice bundled service. TETCO's storage services utilize two joint venture storage facilities in Pennsylvania and one wholly owned and operated storage field in Maryland. TETCO also leases storage capacity. TETCO's certificated working capacity in these three fields is 70 Billion cubic feet (Bcf), and the combined working gas in storage was 55 Bcf on December 31, 1997. Algonquin owns no storage fields. For further discussion of Order 636, see "Business, Natural Gas Transmission -- Regulation." Midwest Pipelines PEPL's market volumes are concentrated among approximately 20 utilities located in the Midwest market area that encompasses large portions of Michigan, Ohio, Indiana, Illinois and Missouri. Trunkline's major customers include eight utilities located in portions of Tennessee, Missouri, Illinois, Indiana and Michigan. PEPL also owns and operates three underground storage fields located in Illinois, Michigan and Oklahoma. Trunkline owns and operates one storage field in Louisiana. The combined maximum working gas capacity of the four fields is 44 5 Bcf. Additionally, PEPL, through a subsidiary, Pan Gas Storage Company (Pan Gas), is the owner of a storage field in Kansas with an estimated maximum capacity of 26 Bcf. PEPL is the operator of the field. Since the implementation of Order 636, each of PEPL, Trunkline and Pan Gas offer firm and interruptible storage on an open-access basis. In addition to owning and operating storage fields, PEPL also leases storage capacity. PEPL and Trunkline have retained the right to use up to 15 Bcf and 10 Bcf, respectively, of their storage capacity for system needs. See further discussion of Order 636 in "Business, Natural Gas Transmission -- Regulation." Competition The Corporation'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. The Corporation's pipelines continue to offer selective discounting to maximize revenues from existing capacity and to advance projects that provide expanded services to meet the specific needs of customers. In the Mid-Atlantic and New England markets, TETCO competes directly with Transcontinental Gas Pipe Line Corporation, Tennessee Gas Pipeline Company (TGPC), Iroquois Gas Transmission System (Iroquois), CNG Transmission Corporation and Columbia Gas Transmission Corporation. Algonquin competes directly in certain market areas with TGPC and Iroquois. PEPL and Trunkline compete directly with ANR Pipeline Company, Natural Gas Pipeline Company of America and Texas Gas Transmission Corporation in the Midwest market area. Natural gas competes with other forms of energy available to the Corporation's customers and end-users, including electricity, coal and fuel oils. The primary competitive factor is price. Changes in the availability or price of natural gas and other forms of energy, the level of business activity, conservation, legislation and governmental regulations, the capability to convert to alternative fuels, and other factors, including weather, affect the demand for natural gas in the areas served by the Corporation. Regulation The FERC has authority to regulate rates and charges for natural gas transported in or stored for interstate commerce or sold by a natural gas company in interstate commerce for resale. For further discussion of rate matters, see Note 5 to the Consolidated Financial Statements, "Regulatory Matters -- Natural Gas Operations." The FERC also has authority over the construction and operation of pipeline and related facilities utilized in the transportation and sale of natural gas in interstate commerce, including the extension, enlargement or abandonment of such facilities. TETCO, Algonquin, PEPL, Trunkline and Pan Gas hold certificates of public convenience and necessity issued by the FERC, authorizing them to construct and operate the pipelines, facilities and properties now in operation for which such certificates are required, and to transport and store natural gas in interstate commerce. The Natural Gas Transmission segment's pipelines operate as open-access transporters of natural gas. In 1992, the FERC issued Order 636, which requires open-access pipelines to provide firm and interruptible transportation services on an equal basis for all gas supplies, whether purchased from the pipeline or from another gas supplier. To implement this requirement, Order 636 provided, among other things, for mandatory unbundling of services that have historically been provided by pipelines into separate open-access transportation, sales and storage services. Order 636 allows pipelines to recover eligible costs, known as "transition costs," resulting from the implementation of Order 636. For further discussion of Order 636, see Note 5 to the Consolidated Financial Statements, "Regulatory Matters -- Natural Gas Operations." The Natural Gas Transmission segment is subject to the jurisdiction of the EPA and state environmental agencies. For a discussion of environmental regulation, see "Business, Environmental Matters." The Natural Gas Transmission segment is also subject to the Natural Gas Pipeline Safety Act of 1968, which regulates gas pipeline safety requirements, and to the Hazardous Liquid Pipeline Safety Act of 1979, which regulates oil and petroleum pipelines. ENERGY SERVICES The Energy Services segment is comprised of several separate business units: Field Services, Trading and Marketing, Global Asset Development and Other Energy Services. See certain operating statistics of the Energy Services segment under "Operating Statistics." Activities of the Energy Services segment can fluctuate in response to the seasonality affecting both electricity and natural gas. 6 Field Services Field Services owns and operates approximately 17,000 miles of natural gas gathering systems, including intrastate pipelines, and 27 natural gas processing plants in the United States. Field Services also has ownership interests in 11 other natural gas processing plants in the United States. Field Services' gathering systems are located in 10 states, which serve major gas-producing regions in the Rocky Mountain, Permian Basin, Mid-Continent and Gulf Coast (offshore and onshore) areas. Field Services' gathering operations also include several intrastate pipeline systems and two natural gas storage facilities. Field Services' NGL processing operations involve the extraction of NGLs from natural gas and, at certain facilities, the fractionation of the NGLs into their individual components (ethane, propane, butane and natural gasoline). The natural gas used in Field Services' processing operations is generally gathered on its own gathering system or from the natural gas stream on the Corporation's transmission system. Field Services also operates approximately 450 miles of NGL pipelines in the Texas Gulf Coast area which transport NGLs received from 12 processing plants in South Texas. NGLs are sold by Field Services to a variety of customers ranging from large multi-national petrochemical and refining companies to small family-owned retail propane distributors. NGL sales are based upon current market-related prices. Field Services also provides, on a more limited basis, processing services to producers and others for a stipulated fee and produces helium at the National Helium facility. Field Services also operates approximately 1,500 miles of intrastate crude oil pipelines in the Mid-Continent and South Texas areas. The crude oil pipeline system provides gathering and mainline transportation service, for a volumetric fee, based on published tariffs. Crude oil is also purchased from producers and sold to end users. Trading and Marketing The Corporation's energy marketing operations are conducted through Duke Energy Trading and Marketing L.L.C. in the United States, Duke Energy Marketing Limited Partnership in Canada (collectively, DETM) and Duke/Louis Dreyfus L.L.C. (D/LD). DETM was formed in August 1996 as a natural gas and power marketing joint venture with Mobil Corporation (Mobil). All of Mobil's United States and Canadian natural gas production is committed to be marketed through DETM for at least a 10-year period. The Corporation, through its affiliates, operates the joint venture and owns a 60% interest, with Mobil owning a 40% minority interest. In June 1997, a wholly owned subsidiary of the Corporation acquired the remaining 50% ownership interest in D/LD not already owned from affiliates of Louis Dreyfus Corp. A substantial portion of the Corporation's trading and marketing of electricity is conducted through D/LD. Trading and Marketing markets natural gas primarily to LDCs, electric power generators, municipalities, industrial end-users and energy marketing companies and markets electricity to investor owned utilities, municipal power generators and other power marketers. Operations are primarily in the United States and, to a lesser extent, in Canada, and are serviced through 13 offices or operating centers. Natural gas marketing operations encompass both on-system and off-system sales. With respect to on-system sales, Trading and Marketing generally purchases natural gas from the Corporation's Field Services facilities and delivers the gas to an intrastate or interstate pipeline for redelivery to another customer. The Corporation's Natural Gas Transmission pipelines are utilized for deliveries when prudent. With respect to off-system sales, Trading and Marketing purchases natural gas from producers, pipelines and other suppliers not connected with the Corporation's facilities for resale to customers. Trading and Marketing has a portfolio of short-term and long-term sales agreements with customers, the vast majority of which incorporate market-sensitive pricing terms. Long-term gas purchase agreements with producers, principally entered into in connection with on-system sales, also generally include market-sensitive pricing provisions. Purchases and sales of off-system gas and electricity supply are normally made under short-term contracts. Purchase and sales commitments involving significant price and location risk are generally hedged with commodity futures, swaps and options. For information concerning the Corporation's risk-management activities, see "Management's Discussion and Analysis of Results of Operations and Financial Condition, Quantitative and Qualitative Information About Market Risk -- Commodity Price Risk" and Note 8 to the Consolidated Financial Statements, "Financial Instruments and Risk Management -- Commodity Derivative Instruments." 7 Trading and Marketing also provides energy management services, such as supply and market aggregation, peaking services, dispatching, balancing, transportation, storage, tolling, contract negotiation and administration, as well as energy commodity risk management products and services. Global Asset Development Global Asset Development is an active participant in competitive power markets worldwide and has ownership interests in more than 6,500 megawatts of generation worldwide, including projects under construction and under contract. Global Asset Development is comprised of three units: Duke Energy Power Services (DEPS), Duke Energy Industrial Asset Development, and Duke Energy International. DEPS develops, owns and operates electric generation projects for customers in the United States and Canada. DEPS focuses on acquisitions of existing energy production facilities, greenfield opportunities and operating energy assets. Domestic investments include a 32.5% indirect ownership interest in American Ref-Fuel Company, which owns five waste to energy facilities in New York, New Jersey, Massachusetts and Connecticut. Such facilities process about 4 million tons of municipal solid waste per year and have an aggregate generating capacity of 286 megawatts. DEPS projects under construction include an ownership interest in the Bridgeport Energy Project, a 520 megawatt combined cycle natural gas fired merchant generation plant which will be Connecticut's largest non-nuclear power plant. On November 18, 1997, DEPS entered into an agreement with Pacific Gas & Electric Company (PG&E) for the purchase of three electric generating plants in California for approximately $500 million. The plants have a combined net operating capacity of 2,645 megawatts. The sale is expected to close during 1998. Pursuant to California's electric restructuring law, DEPS must contract with PG&E to operate and maintain the facilities for two years following the sale. Energy and capacity from the plants will be sold into the California power exchange and under separate contracts. Duke Energy Industrial Asset Development was formed in July 1997 to develop, own, manage and operate on-site, inside-the-fence electric generation and energy conversion facilities for industrial customers. Its market focus is the United States and Canada. This unit is currently working with prospective customers from the textile, pulp and paper, petrochemical, agricultural, food and automotive industries and the federal privatization sector. Duke Energy International develops, owns and operates energy projects worldwide. This unit focuses on projects involving natural gas exploration, production, processing, transportation and supply. Additionally, projects include generation, delivery and marketing of electric power and thermal energy. Its ownership interests include investments in Argentina, Chile, Peru, Indonesia and Saudi Arabia. Other Energy Services Other Energy Services provides engineering consulting, construction and integrated energy solutions, primarily through Duke Engineering & Services, Inc. (DE&S), Duke/Flour Daniel and DukeSolutions, Inc. (DukeSolutions). DE&S specializes in energy and environmental projects and provides comprehensive engineering, quality assurance, project and construction management and operating and maintenance services for all phases of hydroelectric, nuclear and renewable power generation projects worldwide. Duke/Flour Daniel, operating through several entities, provides full service siting, permitting, licensing, engineering, procurement, construction, start-up, operating and maintenance services for fossil-fired plants, both domestically and internationally. DukeSolutions provides integrated energy solutions to industrial, commercial, institutional, governmental and wholesale customers and focuses on increasing customers' efficiency, productivity and profitability through energy cost savings. Competition Field Services and Trading and Marketing compete with major integrated oil companies, major interstate pipelines and their marketing affiliates, national and local natural gas gatherers, brokers, marketers and distributors and electric utilities and other electric power marketers for natural gas supplies, in gathering and processing natural gas and in marketing and transporting natural gas, electricity, NGLs and crude oil. Competition for natural gas supplies is primarily based on efficiency, reliability, availability of transportation and the ability to obtain a satisfactory price for the producer's natural gas. Competition for customers is based primarily upon reliability and price of delivered natural gas, NGLs and crude oil. Competition in the energy marketing business is driven by the price of commodities and services delivered, along with the quality and reliability of services provided. 8 The Global Asset Development and Other Energy Services business units experience substantial competition in their fields from utility companies in the United States or abroad and from independent companies. Regulation The intrastate pipelines owned by the Field Services group are subject to state regulation and, to the extent they provide services under Section 311 of the Natural Gas Policy Act of 1978 (NGPA), are also subject to FERC regulation. The natural gas gathering activities of the Field Services group are generally not subject to regulation by the FERC, but are subject to state regulation. The energy marketing activities of the Trading and Marketing group may, in certain circumstances, be subject to the jurisdiction of the FERC. Current FERC policies permit the Trading and Marketing entities subject to the FERC jurisdiction to market natural gas and electricity at market-based rates. The NCUC, PSCSC and FERC have implemented regulations governing access to regulated electric customer data by non-regulated entities and services provided between regulated and non-regulated affiliated entities. These regulations affect Energy Services' activities with the Corporation's Electric Operations segment. The Energy Services segment is subject to the jurisdiction of the EPA and state environmental agencies. For a discussion of environmental regulation, see "Business, Environmental Matters." The Energy Services segment is also subject to the Natural Gas Pipeline Safety Act of 1968, which regulates gas pipeline and LNG plant safety requirements, and to the Hazardous Liquid Pipeline Safety Act of 1979, which regulates oil and petroleum pipelines. OTHER OPERATIONS The Other Operations segment includes the Corporation's non-energy related subsidiaries, including Crescent Resources and DukeNet Communications, Inc. (DukeNet). Crescent Resources develops high quality commercial and residential real estate projects and manages substantial forest holdings. At December 31, 1997, Crescent Resources owned 3.5 million square feet of commercial space, of which 75% of the operating space was leased. Crescent Resources' portfolio included 2.1 million square feet of warehouse space, 1.1 million square feet of office space and .3 million square feet of retail space. In 1997, Crescent Resources sold 884 residential developed lots compared to 869 lots in 1996. At December 31, 1997, Crescent Resources also had approximately .2 million acres of land under its management. DukeNet develops and manages communications systems, including fiber optic and wireless digital network services. DukeNet provides a network for communications and other services to commercial, industrial and residential markets. ENVIRONMENTAL MATTERS The Corporation is subject to federal, state and local regulations with regard to air and water quality, hazardous and solid waste disposal and other environmental matters. Certain environmental regulations affecting the Corporation include: o The Clean Air Act Amendments of 1990, which require a two-phase reduction by electric utilities in aggregate annual emissions of sulfur dioxide and nitrogen oxide by 2000; o State Implementation Plans (SIP), which were issued by the EPA to 22 states related to existing and new national ambient air quality standards for ozone; o The Federal Water Pollution Control Act Amendments of 1987, which require permits for facilities that discharge treated wastewater into the environment; and o The Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), which can require any individual or entity which may have owned or operated a disposal site, as well as transporters or generators of hazardous wastes which were sent to such site, to share in remediation costs for the site. For further discussion of environmental matters involving the Corporation, including possible liability and capital costs, see "Management's Discussion and Analysis of Results of Operations and Financial Condition, Current Issues - -- Environmental" and Note 15 to the Consolidated Financial Statements, "Commitments and Contingencies -- Environmental." Except as set 9 forth therein, compliance with federal, state and local provisions which have been enacted or adopted regulating the discharge of materials into the environment, or otherwise protecting the environment, is not expected to have a material adverse effect on the consolidated results of operations or financial position of the Corporation. OTHER MATTERS The Corporation is exempt from regulation as a holding company under the Public Utility Holding Company Act of 1935 (PUHCA), except with respect to the acquisition of the securities of other public utilities. The issuance of debt or equity securities by the Corporation is subject to the regulation of the NCUC and the PSCSC. Foreign operations and export sales are not material to the Corporation's business as a whole. For a discussion of risks associated with the Corporation's foreign operations, see "Management's Discussion and Analysis of Results of Operations and Financial Condition, Quantitative and Qualitative Disclosures About Market Risk -- Foreign Operations Risk." At December 31, 1997, the Corporation had approximately 23,000 employees. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 From time to time, the Corporation may make statements regarding its expectations, intent or beliefs about future events. These statements are intended as "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. The Corporation cautions that assumptions, projections and expectations about future events may and often do vary from actual results, the differences between assumptions, projections and expectations and actual results can be material, and there can be no assurance that the forward-looking statements will be realized. 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." 10 OPERATING STATISTICS
Years Ended December 31 ---------------------------------------------------- 1997 1996 1995 1994 1993 ---------------------------------------------------- Electric Operations Sources of Electric Energy, GWh (a) Generated -- net output: Coal .............................................................. 45,234 40,649 32,389 32,714 34,097 Nuclear ........................................................... 29,569 33,177 39,836 35,587 34,390 Hydro ............................................................. 1,129 1,319 1,685 1,460 1,582 Oil and gas ....................................................... 301 199 255 35 43 ------ ------ ------ ------ ------ Total generation ............................................... 76,233 75,344 74,165 69,796 70,112 Purchased power and net interchange ............................... 3,776 3,587 1,175 1,276 1,750 ------ ------ ------ ------ ------ Total output ................................................... 80,009 78,931 75,340 71,072 71,862 Plus: Purchases from other Catawba joint owners ................... 2,316 2,662 6,070 9,046 8,810 ------ ------ ------ ------ ------ Total sources of energy ........................................ 82,325 81,593 81,410 80,118 80,672 Less: Line loss and company usage ................................. 4,784 4,741 4,673 4,555 4,614 ------ ------ ------ ------ ------ Total GWh sales ................................................ 77,541 76,852 76,737 75,563 76,058 ====== ====== ====== ====== ====== Electric Energy Sales, GWh Residential ....................................................... 20,005 20,992 19,669 18,870 19,465 General service ................................................... 19,368 19,269 18,160 17,289 16,904 Industrial Textile ......................................................... 11,950 11,599 12,151 12,285 11,954 Other ........................................................... 18,253 18,021 17,631 17,005 16,244 Other energy and wholesale ........................................ 7,555 7,028 8,330 10,274 11,337 ------ ------ ------ ------ ------ Total GWh sales billed ......................................... 77,131 76,909 75,941 75,723 75,904 Unbilled GWh sales ............................................ 410 (57) 796 (160) 154 ------ ------ ------ ------ ------ Total GWh sales ............................................. 77,541 76,852 76,737 75,563 76,058 ====== ====== ====== ====== ======
Natural Gas Transmission Throughput Volumes, TBtu (b): Northeast Pipelines TETCO ........................................................... 1,300 1,349 1,234 1,194 1,115 Algonquin ....................................................... 341 327 331 288 245 ----- ----- ----- ----- ------ Total Northeast Pipelines ...................................... 1,641 1,676 1,565 1,482 1,360 Midwest Pipelines PEPL ............................................................ 659 687 663 626 607 Trunkline ....................................................... 620 632 519 560 633 ----- ----- ----- ----- ------ Total Midwest Pipelines ........................................ 1,279 1,319 1,182 1,186 1,240 Intercompany eliminations ........................................ (58) (56) (44) (91) (125) ----- ----- ----- ----- ------ Total Natural Gas Transmission .................................... 2,862 2,939 2,703 2,577 2,475 ===== ===== ===== ===== ====== Energy Services Field Services Natural Gas Gathered/Processed, TBtu/d (c) ......... 3.4 2.9 1.9 1.6 1.4 Field Services NGL Production, MBbl/d (d) ......................... 103.9 76.5 54.8 49.4 42.0 Trading and Marketing Natural Gas Marketed, TBtu/d ................ 6.9 5.5 3.6 2.7 2.1 Trading and Marketing Electricity Marketed, GWh ................... 64,650 4,229 513 -- --
- --------- (a) Gigawatt-hour (b) Trillion British thermal units (c) Trillion British thermal units per day (d) Thousand barrels per day 11 Executive Officers of the Corporation RICHARD B. PRIORY, 51, Chairman of the Board and Chief Executive Officer. Mr. Priory served as President and Chief Operating Officer from 1994 until he assumed his present position in 1997. He was Executive Vice President, Power Generation Group, from 1991 to 1994. PAUL M. ANDERSON, 52, President and Chief Operating Officer. Mr. Anderson served as Chairman of the Board, President and Chief Executive Officer of PanEnergy prior to the merger, when he assumed his present position. Mr. Anderson was elected Chairman of the Board of PanEnergy in 1997, Chief Executive Officer in 1995 and President in 1993. He was Executive Vice President of PanEnergy from 1991 to 1993. WILLIAM A. COLEY, 54, Group President, Duke Power. Mr. Coley served as President, Associated Enterprises Group, from 1994 to 1997 when he assumed his present position following the merger. Mr. Coley served as Executive Vice President, Customer Group, from 1991 to 1994. FRED J. FOWLER, 52, 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, President of 1Source Corporation from 1993 to 1994 and President of Trunkline Gas Company from 1991 to 1993. JAMES T. HACKETT, 44, Group President, Energy Services. Mr. Hackett served as Executive Vice President of PanEnergy from 1996 until the merger, when he assumed his present position. Prior to joining PanEnergy, Mr. Hackett served as Senior Vice President of NGC Corporation (formerly Natural Gas Clearinghouse) from 1990 to 1995. RICHARD W. BLACKBURN, 55, Executive Vice President and General Counsel. Mr. Blackburn was named to his present position in October 1997. Prior to joining the Corporation, he served as President and Group Executive of NYNEX Corporation's Worldwide Communications and Media Group from 1995 to 1997. He was Chief Operating Officer, Worldwide Communications and Media Group, of NYNEX from 1993 to 1995 and Senior Vice President for Business Development and General Counsel of NYNEX from 1991 to 1993. RICHARD J. OSBORNE, 46, Executive Vice President and Chief Financial Officer. Mr. Osborne served as Senior Vice President and Chief Financial Officer from 1994 until he assumed his present position in 1997 following the merger. Mr. Osborne served as Vice President and Chief Financial Officer from 1991 to 1994. RUTH G. SHAW, 50, Executive Vice President and Chief Administrative Officer. Ms. Shaw served as Senior Vice President, Corporate Resources, from 1994 until she assumed her present position following the merger. Ms. Shaw was Vice President, Corporate Communications, from 1992 to 1994, and prior to joining the Corporation, she served as President of Central Piedmont Community College from 1986 to 1992. JEFFREY L. BOYER, 41, Vice President and Corporate Controller. Mr. Boyer served as Controller from 1994 to 1997, when he assumed his present position following the merger. He was Director of Corporate Accounting from 1992 to 1994. Executive officers are elected annually by the Board of Directors and serve until the first meeting of the Board of Directors following the annual meeting of shareholders and until their successors are duly elected. There are no family relationships between any of the executive officers nor any arrangement or understanding between any executive officer and any other person pursuant to which the officer was selected. Item 2. Properties. ELECTRIC OPERATIONS At December 31, 1997, the Corporation's Electric Operations segment operated three nuclear generating stations with a combined net capability of 5,078 MW (which includes Electric Operations' 12.5% ownership share in the Catawba Nuclear Station), eight coal-fired stations with a combined capability of 7,699 MW, twenty hydroelectric stations with a combined capability of 2,685 MW and six combustion turbine stations with a combined capability of 1,784 MW, all of which are located in North Carolina or South Carolina. In addition, the Corporation owned, as of December 31, 1997, approximately 12,800 conductor miles of electric transmission lines, including 600 conductor miles of 500 kilovolts, 2,600 conductor miles of 220 kilovolts, 6,400 conductor miles of 100 kilovolts, and 3,200 conductor miles of 13 to 66 kilovolts. The Corporation also owned approximately 75,000 conductor miles of electric distribution lines, including 47,300 conductor miles of rural overhead lines, 15,000 conductor miles of urban overhead lines, 7,000 conductor miles of rural underground lines and 5,700 conductor miles of urban underground 12 lines. At December 31, 1997, the Corporation's electric transmission and distribution systems comprised approximately 1,600 substations with an installed transformer capacity of approximately 84,100,000 kVA (kilovolt-ampere). Substantially all electric plant is mortgaged under the Indenture relating to the First and Refunding Mortgage Bonds of the Corporation. NATURAL GAS TRANSMISSION TETCO's gas transmission system extends approximately 1,700 miles from producing fields in the Gulf Coast region of Texas and Louisiana to Ohio, Pennsylvania, New Jersey and New York. It consists of two parallel systems, one consisting of three large-diameter parallel pipelines and the other consisting of from one to three large-diameter pipelines over its length. TETCO's system, including its gathering systems, has 73 compressor stations. The TETCO system connects with the PEPL and Trunkline systems in Lebanon, Ohio. TETCO also owns and operates two offshore Louisiana gas supply systems, which extend over 100 miles into the Gulf of Mexico and consist of 490 miles of pipeline. Algonquin's transmission system connects with TETCO's facilities in New Jersey, and extends through New Jersey, New York, Connecticut, Rhode Island and Massachusetts. The system consists of approximately 250 miles of pipeline with 6 compressor stations. PEPL's transmission system, which consists of four large-diameter parallel pipelines and 13 mainline compressor stations, extends a distance of approximately 1,300 miles from producing areas in the Anadarko Basin of Texas, Oklahoma and Kansas through the states of Missouri, Illinois, Indiana and Ohio into Michigan. Trunkline's transmission system extends approximately 1,400 miles from the Gulf Coast areas of Texas and Louisiana through the states of Arkansas, Mississippi, Tennessee, Kentucky, Illinois and Indiana to a point on the Indiana-Michigan border. The system consists principally of three large-diameter parallel pipelines and 18 mainline compressor stations. Trunkline also owns and operates two offshore Louisiana gas supply systems consisting of 337 miles of pipeline extending approximately 81 miles into the Gulf of Mexico. For information concerning natural gas storage properties, see "Business, Natural Gas Transmission." ENERGY SERVICES For information regarding the properties of Field Services, see "Business, Energy Services -- Field Services." Global Asset Development owns two liquid natural gas (LNG) ships, each with a transportation capacity of 125,000 cubic meters of LNG. Both vessels have been chartered to Nigeria LNG Limited (Nigeria LNG) for 22 years starting in 1999. Under the terms of the charter, Nigeria LNG will have the right to purchase the vessels. Global Asset Development also owns a marine terminal, storage and regasification facility for LNG located in Louisiana. This LNG facility has a design output capacity of approximately 700 million cubic feet per day (MMcf/d) and a storage capacity of approximately 1.8 million barrels, which approximates 6 Bcf. Other generation, transmission and distribution properties of Global Asset Development are owned primarily through joint ventures in which the Corporation's ownership interest is 50% or less. Properties of Trading and Marketing and Other Energy Services are not considered material to the Corporation's operations as a whole. OTHER OPERATIONS None of the other properties used in connection with the Corporation's other business activities are considered material to the Corporation's operations as a whole. 13 Item 3. Legal Proceedings. See Note 15 to the Consolidated Financial Statements, "Commitments and Contingencies" and "Management's Discussion and Analysis of Results of Operations and Financial Condition, Current Issues -- Environmental" for a discussion of legal proceedings. Item 4. Submission of Matters to a Vote of Security Holders. No matters were submitted to a vote of the Corporation's security holders during the last quarter of 1997. 14 PART II. Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. The common stock of the Corporation is listed for trading on the New York Stock Exchange. At February 27, 1998, there were approximately 155,619 holders of record of such common stock. The following table sets forth for the periods indicated the dividends paid per share of common stock and the high and low sales prices of such shares reported by the New York Stock Exchange Composite Transactions:
Dividends 1997 Per Share (a) Stock Price Range - ------------------- --------------- ---------------------- High Low ---------- ----------- First Quarter .. $.40 $ 48 $ 43 3/8 Second Quarter . .40 48 42 1/8 Third Quarter .. .55 51 1/8 47 11/16 Fourth Quarter . .55 56 3/16 45 3/4
Dividends 1996 Per Share (a) Stock Price Range - ------------------ --------------- -------------------- High Low --------- ---------- First Quarter ... $.38 $53 $46 7/8 Second Quarter .. .39 51 1/2 45 3/4 Third Quarter ... .40 51 3/8 45 3/4 Fourth Quarter .. .40 49 1/8 43 3/8
- --------- (a) Financial information reflects accounting for the 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, 1996. Item 6. Selected Financial Data.
1997 (a) 1996 (a) 1995 (a) 1994 (a) 1993 (a) -------------- -------------- ------------- ------------- ------------- In Millions (except per share amounts) Income Statement Operating Revenues ....................................... $ 16,308.9 $ 12,302.4 $ 9,694.7 $ 9,115.0 $ 8,784.3 Operating Expenses ....................................... 14,338.9 10,143.8 7,626.4 7,309.0 7,068.6 ---------- ---------- ---------- ---------- ---------- Operating Income ......................................... 1,970.0 2,158.6 2,068.3 1,806.0 1,715.7 Other Income and Expenses ................................ 138.1 135.6 122.2 101.0 137.5 ---------- ---------- ---------- ---------- ---------- Earnings Before Interest and Taxes ....................... 2,108.1 2,294.2 2,190.5 1,907.0 1,853.2 Interest Expense ......................................... 471.8 499.2 508.2 484.5 526.3 Minority Interests ....................................... 23.0 6.2 -- -- -- ---------- ---------- ---------- ---------- ---------- Earnings Before Income Taxes ............................. 1,613.3 1,788.8 1,682.3 1,422.5 1,326.9 Income Taxes ............................................. 638.9 697.8 664.2 558.4 528.9 ---------- ---------- ---------- ---------- ---------- Income Before Extraordinary Item ......................... 974.4 1,091.0 1,018.1 864.1 798.0 Extraordinary Item ....................................... -- 16.7 -- -- -- ----------- ---------- ---------- ---------- ---------- Net Income ............................................... 974.4 1,074.3 1,018.1 864.1 798.0 Dividends and Premiums on Redemptions of Preferred and Preference Stock ........................................ 72.8 44.2 48.9 49.7 52.4 ----------- ---------- ---------- ---------- ---------- Earnings for Common Stockholders ......................... $ 901.6 $ 1,030.1 $ 969.2 $ 814.4 $ 745.6 =========== ========== ========== ========== ========== Common Stock Data Shares of common stock Year-end ................................................ 359.8 359.4 361.8 360.6 359.1 Average ................................................. 359.8 361.2 361.2 360.2 353.6 Basic earnings per share (before extraordinary item) ..... $ 2.51 $ 2.90 $ 2.68 $ 2.26 $ 2.11 Basic earnings per share ................................. $ 2.51 $ 2.85 $ 2.68 $ 2.26 $ 2.11 Dividends per share ...................................... $ 1.90 $ 1.57 $ 1.50 $ 1.44 $ 1.39 Balance Sheet Total Assets ............................................. $ 24,028.8 $ 22,366.2 $ 20,867.9 $ 20,254.2 $ 19,717.4 Long-term Debt ........................................... $ 6,530.0 $ 5,485.1 $ 5,803.0 $ 5,930.8 $ 5,370.9 Preferred Stock with Sinking Fund Requirements ........... $ 149.0 $ 234.0 $ 234.0 $ 279.5 $ 281.0
- --------- (a) Financial information reflects accounting for the 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, 1993. 15 Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition. INTRODUCTION On June 18, 1997, Duke Power Company (Duke Power) changed its name to Duke Energy Corporation (the Corporation) in accordance with the terms of a merger agreement with PanEnergy Corp (PanEnergy), pursuant to which the Corporation issued 158.3 million shares of its common stock in exchange for all of the outstanding common stock of PanEnergy (the merger). PanEnergy was involved in the gathering, processing, transportation and storage of natural gas, the production of natural gas liquids and the marketing of natural gas, electricity, liquefied petroleum gases and related energy services. Pursuant to the merger, each share of PanEnergy common stock outstanding was converted into the right to receive 1.0444 shares of the Corporation's common stock. In addition, each outstanding option to purchase PanEnergy common stock became an option to purchase common stock of the Corporation, adjusted accordingly. As a result of the merger, the Corporation is an integrated energy and energy services provider with the ability to offer physical delivery and management of both electricity and natural gas throughout the United States and abroad. The Corporation provides these services through four business segments: Electric Operations, Natural Gas Transmission, Energy Services, and Other Operations. The Electric Operations segment is engaged in the generation, transmission, distribution and sale of electric energy in central and western North Carolina and the western portion of South Carolina. 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). The Natural Gas Transmission segment is involved in interstate transportation and storage of natural gas for customers primarily in the Mid-Atlantic, New England and Midwest states. The interstate natural gas transmission and storage operations are also subject to the rules and regulations of the FERC. The Energy Services segment is comprised of several separate business units: Field Services gathers and processes natural gas, produces and markets natural gas liquids and transports and trades crude oil; Trading and Marketing markets natural gas, electricity and other energy-related products; Global Asset Development develops, owns and operates energy-related facilities worldwide; and Other Energy Services provides engineering consulting, construction and integrated energy solutions. Other Operations include the real estate operations of Crescent Resources, Inc. (Crescent Resources), communications services, corporate costs and intersegment eliminations. The merger was accounted for as a pooling of interests and, accordingly, the Consolidated Financial Statements included in this Annual Report are presented as if the merger was consummated as of the beginning of the earliest period presented. Portions of the following discussion provide information related to material changes in the Corporation's consolidated results of operations and financial condition between the periods presented, based on the combined historical information of Duke Power and PanEnergy. Management's Discussion and Analysis should be read in conjunction with the Consolidated Financial Statements of the Corporation. RESULTS OF OPERATIONS Earnings available for common stockholders of the Corporation decreased 12% in 1997 as compared to 1996, from $1,030.1 million or $2.85 per share in 1996 to $901.6 million or $2.51 per share in 1997. The decrease was due primarily to increases in non-recurring merger related costs, a provision for non-recurring severance costs associated with the work force reduction in Electric Operations, premiums associated with the redemption and tender offer for ten issues of preferred stock and higher expenses as a result of increased outages at the Electric Operations' nuclear stations. Partially offsetting the decrease were lower expenses in 1997 as compared to 1996 when major storms affected the Electric Operations' distribution costs. In 1996, earnings available for common stockholders increased 6% over 1995, from $969.2 million or $2.68 per share in 1995 to $1,030.1 million or $2.85 per share in 1996. Contributing to the increase were Electric Operations' customer growth, business expansion projects placed in service in both the Natural Gas Transmission and the Energy Services segments and increased volumes in Energy Services due primarily to the joint venture formed with Mobil Corporation (Mobil) 16 in August 1996. Partially offsetting the increase were expenses related to major storms in 1996, which affected the Electric Operations' distribution costs, non-recurring merger related costs and an extraordinary item related to the early retirement of debt in 1996. Operating income of the Corporation for 1997 was $1,970 million compared to $2,158.6 million in 1996 and $2,068.3 million in 1995. Earnings before interest and taxes (EBIT) were $2,108.1 million, $2,294.2 million and $2,190.5 million for 1997, 1996 and 1995, respectively. Operating income and earnings before interest and taxes are not materially different, and are affected by the same fluctuations for the Corporation and each of its business segments. Earnings before interest and taxes by business segment are summarized below, and the explanation of these results by business segment are discussed thereafter. Earnings Before Interest and Taxes by Business Segment is as follows:
1997 1996 1995 ------------- ------------- ------------- In Millions Electric Operations Duke Power ................................ $ 1,266.1 $ 1,404.8 $ 1,370.9 Nantahala Power and Light Company ......... 15.7 14.7 10.3 ---------- ---------- ---------- Total Electric Operations ............... 1,281.8 1,419.5 1,381.2 ---------- ---------- ---------- Natural Gas Transmission Northeast Pipelines ....................... 420.5 399.4 370.5 Midwest Pipelines ......................... 203.9 196.1 197.1 ---------- ---------- ---------- Total Natural Gas Transmission .......... 624.4 595.5 567.6 ---------- ---------- ---------- Energy Services Field Services ............................ 157.0 151.6 106.1 Trading and Marketing ..................... 44.4 57.9 17.1 Global Asset Development .................. 4.5 -- 26.8 Other Energy Services ..................... 18.2 20.0 23.7 ---------- ---------- ---------- Total Energy Services ................... 224.1 229.5 173.7 ---------- ---------- ---------- Crescent Resources ......................... 97.6 87.7 64.0 Other Operations ........................... (119.8) (38.0) 4.0 ---------- ---------- ---------- Consolidated EBIT .......................... $ 2,108.1 $ 2,294.2 $ 2,190.5 ========== ========== ==========
Net income for 1997 is net of a full year of the minority interests associated with the August 1996 joint venture with Mobil in the Trading and Marketing operations of the Energy Services segment (see Note 3 to the Consolidated Financial Statements). Included in the amounts discussed below are intercompany transactions that do not have a material impact on consolidated earnings before interest and taxes. Electric Operations
1997 1996 1995 ------------- ------------- ------------- Dollars In Millions Revenue ............................... $ 4,401.7 $ 4,498.4 $ 4,512.4 Operating Expenses .................... 3,221.4 3,194.8 3,203.7 ---------- ---------- ---------- Operating Income ...................... 1,180.3 1,303.6 1,308.7 Other Income, Net of Expenses ......... 101.5 115.9 72.5 ---------- ---------- ---------- EBIT .................................. $ 1,281.8 $ 1,419.5 $ 1,381.2 ========== ========== ========== Volumes, GWh Sales (a) ................ 77,541 76,852 76,737
- --------- (a) Gigawatt-hour sales In 1997, earnings before interest and taxes for the Electric Operations segment declined 10% as compared to 1996 primarily as a result of the provision for non-recurring severance costs associated with the work force reduction and the increase in nuclear expenses, due primarily to increased outage days. Also contributing to the decrease were lower electric revenues, 17 which were due primarily to mild weather and to the South Carolina rate reduction, which was effective June 1, 1996. Partially offsetting the decrease in earnings were lower expenses in 1997 as compared to 1996 when major storms affected distribution costs. Although the unusually mild weather reduced residential sales during the year, general service and industrial sales continued to show strong growth. Residential kilowatt-hour sales, the most sensitive to weather, declined 4.7% during the year. Textile sales increased 3.0% and other industrial sales were up 1.3%, for a total growth in industrial sales of 2.0%. Sales to general service customers increased 0.5%. The number of customers in the Electric Operations' service territory increased 2.7% over 1996. In 1996, earnings before interest and taxes for Electric Operations increased 3% over 1995 due to growth in the number of residential and general service customers and increased retail kilowatt-hour sales to weather-sensitive customer classes. Increased retail sales were partially offset by the South Carolina rate reduction, which was effective June 1, 1996 and by a 16% decrease in wholesale sales primarily due to a decrease of 24% in supplemental sales requirements to the other joint owners of the Catawba Nuclear Station (Catawba). The effect on earnings before interest and taxes of the decrease in supplemental sales was partially offset by declines in purchased power expense from the other joint owners. For more information on the Catawba joint ownership, see Note 6 to the Consolidated Financial Statements. Natural Gas Transmission
1997 1996 1995 ------------- ------------- ------------- Dollars In Millions Revenue ............................... $ 1,572.1 $ 1,556.3 $ 1,533.4 Operating Expenses .................... 964.4 972.5 971.1 ---------- ---------- ---------- Operating Income ...................... 607.7 583.8 562.3 Other Income, Net of Expenses ......... 16.7 11.7 5.3 ---------- ---------- ---------- EBIT .................................. $ 624.4 $ 595.5 $ 567.6 ========== ========== ========== Volumes, TBtu (a) ..................... 2,862 2,939 2,703
- --------- (a) Trillion British thermal units During 1997, the Natural Gas Transmission segment completed the organization of its operations into the Northeast Pipelines, which includes Texas Eastern Transmission Corporation (TETCO) and Algonquin Gas Transmission Company (Algonquin), and the Midwest Pipelines, which includes Panhandle Eastern Pipe Line Company (PEPL) and Trunkline Gas Company (Trunkline). Earnings before interest and taxes for the Natural Gas Transmission segment increased 5% in 1997 over the prior year, with increases in earnings at Northeast Pipelines and Midwest Pipelines of 5% and 4%, respectively. Earnings before interest and taxes increased primarily due to market-expansion projects placed in service and the favorable resolution of regulatory matters in 1997 in amounts in excess of those resolved in 1996. The resolution of regulatory matters was reflected as additional revenue and other income. The increases were partially offset by certain litigation expenses recorded in 1997. In 1996, earnings before interest and taxes for the Natural Gas Transmission segment increased 5% over 1995. This was primarily due to a 9% increase in throughput resulting from new pipeline expansion projects placed in service in late 1995 and due to colder weather, which increased revenues. Operating expenses in 1995 included a charge for higher Order 636 transition cost estimates, partially offset by the benefit of lower-than-projected PCB (polychlorinated biphenyl) clean-up costs (see Note 5 to the Consolidated Financial Statements). Energy Services Earnings before interest and taxes for the Energy Services segment in 1997 decreased slightly as compared to 1996, which was 32% higher than 1995 earnings before interest and taxes. During 1997, 1996 and 1995, these fluctuations were driven primarily by the results of operations of Field Services and Trading and Marketing. 18 Field Services
1997 1996 1995 ------------- ------------- ------------- Dollars In Millions Revenue ............................................ $ 3,054.6 $ 2,636.5 $ 1,791.4 Operating Expenses ................................. 2,897.9 2,487.1 1,694.6 ---------- ---------- ---------- Operating Income ................................... 156.7 149.4 96.8 Other Income, Net of Expenses ...................... 0.3 2.2 9.3 ---------- ---------- ---------- EBIT ............................................... $ 157.0 $ 151.6 $ 106.1 ========== ========== ========== Volumes Natural Gas Gathered/Processed, TBtu/d (a) ......... 3.4 2.9 1.9 NGL Production, MBbl/d (b) ......................... 103.9 76.5 54.8
- --------- (a) Trillion British thermal units per day (b) Thousand barrels per day Field Services' earnings before interest and taxes increased 4% for 1997 over 1996 primarily due to higher volumes as a result of acquisitions in 1996. Natural gas gathered and processed volumes increased 17% and natural gas liquids (NGL) production increased 36%. Partially offsetting these increases were higher natural gas prices, which increased operating expenses, and a decrease in NGL prices of 8%, which decreased revenues. Earnings before interest and taxes for Field Services increased 43% in 1996 as compared with 1995. Strong processing margins and increased gathering and processing volumes related to expansion projects and asset acquisitions, primarily the acquisition of assets from Mobil, contributed to the increase in revenues. Average NGL prices increased 30%, while NGL production increased 40%. These improvements were partially offset by increased operating expenses and depreciation as a result of the Mobil asset acquisition and other projects placed in service. A gain on the sale of an investment in Seagull Shoreline System in 1995 caused a comparative reduction in other income. Trading and Marketing
1997 1996 1995 ------------- ------------- ------------- Dollars In Millions Revenue ............................... $ 7,488.7 $ 3,814.0 $ 1,866.7 Operating Expenses .................... 7,446.0 3,757.7 1,846.7 ---------- ---------- ---------- Operating Income ...................... 42.7 56.3 20.0 Other Income, Net of Expenses ......... 1.7 1.6 (2.9) ---------- ---------- ---------- EBIT .................................. $ 44.4 $ 57.9 $ 17.1 ========== ========== ========== Volumes Natural Gas Marketed, TBtu/d .......... 6.9 5.5 3.6 Electricity Marketed, GWh (a) ......... 64,650 4,229 513
- --------- (a) Gigawatt-hours A wholly owned subsidiary of the Corporation acquired the remaining 50% ownership interest in the Duke/Louis Dreyfus, L.L.C. (D/LD) joint venture in June 1997. This acquisition, coupled with a full year of operations of the joint venture with Mobil formed in August 1996, accounted for the significant increases in Trading and Marketing revenues, related operating expenses and volumes in 1997 over 1996. Natural gas marketed volumes increased 25%, in addition to increases in natural gas margins from trading activities, which were largely offset by the emerging electric power trading and marketing activities. Higher operating expenses, driven mainly by increased personnel levels and system development costs to provide the necessary infrastructure for growth in the trading and marketing business, resulted in a decrease in earnings before interest and taxes in 1997 as compared to 1996. In 1996, Trading and Marketing's earnings before interest and taxes increased $40.8 million as compared to 1995 primarily as a result of expanded operations due to the joint venture with Mobil formed in August 1996. The increase resulted primarily from higher gas volumes, improved margins resulting from colder weather and gas price volatility, and higher trading margins. Total gas volumes marketed increased 53%. The increase in margins was partially offset by higher operating expenses related to the joint venture with Mobil. 19 Other Operations Earnings before interest and taxes for Crescent Resources increased 11% in 1997 over 1996. The increase is primarily due to gains associated with bulk land sales in 1997. In 1996, earnings before interest and taxes for Crescent Resources increased 37% over 1995 resulting from increased developed lot sales as well as bulk land sales. Earnings before interest and taxes for Other Operations, excluding Crescent Resources, declined $81.8 million in 1997 as compared to 1996. Contributing to the decrease were merger related expenses of $71.2 million in 1997, compared to 1996 merger expenses of $13.9 million, and the 1997 amortization of goodwill associated with the purchase of the remaining 50% ownership interest of the D/LD joint venture. This decline was partially offset by the sale of the Corporation's ownership interest in the Midland Cogeneration Venture in 1997. In 1996, earnings before interest and taxes for Other Operations, excluding Crescent Resources, decreased $42 million as compared to 1995 primarily as a result of 1996 expenses related to the merger and losses related to the start-up activities of a wireless communications joint venture. Other Impacts on Earnings Available for Common Stockholders In 1997, interest expense decreased $27.4 million, or 5%, as compared to 1996 as a result of lower interest rates. Interest expense in 1996 decreased 2% compared with 1995 as a result of lower average interest rates and lower average debt balances outstanding. Minority interests in 1997 and 1996 relate primarily to the joint venture with Mobil formed in August 1996. On October 1, 1996, a subsidiary of the Corporation redeemed its $150 million, 10% debentures and its $100 million, 10 1/8% debentures both due 2011. The Corporation recorded a non-cash extraordinary item of $16.7 million (net of income tax of $10.3 million) related to the unamortized discount on this early retirement of debt. In December 1997, the Corporation redeemed four issues of preferred stock and commenced a tender offer to purchase a portion of an additional six issues of preferred stock. Premiums related to these redemptions were included in Dividends and Premiums on Redemptions of Preferred and Preference Stock in the Consolidated Statements of Income. LIQUIDITY AND CAPITAL RESOURCES OPERATING CASH FLOW. Operating cash flows decreased $195.1 million from 1996 to 1997. This decrease primarily reflects the cash impact of costs associated with the merger and natural gas transition cost recoveries. Operating cash flows increased $503 million from 1995 to 1996. This increase primarily reflects the cash impact of purchased capacity levelization and natural gas transition cost recoveries. Additionally, improved working capital caused cash flows from operations to increase in 1996. Assets and liabilities recorded in the Consolidated Balance Sheets related to purchased capacity levelization and the natural gas transition cost recoveries and the related cash flow impacts are effected by state and federal regulatory initiatives and specific agreements. For more information on the purchased capacity levelization and the natural gas transition cost recoveries, see Notes 6 and 5, respectively, to the Consolidated Financial Statements. INVESTING CASH FLOW. Capital and investment expenditures were approximately $2.0 billion in 1997 compared with approximately $1.6 billion in 1996. Increased capital and investment expenditures were partially due to the acquisition of the remaining 50% ownership interest in the D/LD joint venture and the acquisition of an ownership interest in American Ref-Fuel Company. Additionally, increased Electric Operations' construction costs, primarily due to steam generator replacements at certain of the Corporation's nuclear plants and increased distribution line construction and business expansion for the Natural Gas Transmission segment caused expenditures to increase. These increases were partially offset by the 1996 acquisition of certain assets from Mobil. The Corporation participated in the marketing of electric power and natural gas through its 50% ownership interest in D/LD. On June 17, 1997, the Corporation, through one of its subsidiaries, acquired the remaining 50% ownership interest in D/LD from affiliates of Louis Dreyfus Corp. for $247 million. The purchase price substantially represents goodwill, which will be amortized over 10 years. Also in June 1997, the Corporation signed a letter of intent to build a $265 million, 520-megawatt combined cycle natural gas fired merchant generation plant in Bridgeport, Connecticut. The Corporation will be majority owner, with the first phase of the project scheduled to provide power in mid-1998. The project is currently under construction. 20 During December 1997, a wholly owned subsidiary of the Corporation formed a joint venture with UAE Ref-Fuel L.L.C. (UAE), a wholly owned subsidiary of United American Energy Corp. The Corporation owns a 65% interest in the joint venture, with UAE owning a 35% minority interest. The joint venture acquired a 50% ownership interest in American Ref-Fuel Company, a waste-to-energy firm, with operations primarily in New York and New Jersey. Thus, the Corporation has an indirect 32.5% ownership interest in American Ref-Fuel Company and provided $237 million of investment and financing to the venture. During 1997, the Corporation sold its ownership in trading and marketing operations in the United Kingdom and its equity interest in certain affiliates. Proceeds from these sales were $87 million. Capital and investment expenditures in 1996 included the acquisition of certain assets of Mobil for approximately $300 million by Field Services. The increase in capital and investment expenditures in 1996 over 1995 was a result of this acquisition and other Energy Services expansion projects, partially offset by decreased Electric Operations' construction costs as a result of the completion of certain generating facilities in 1995. The Corporation plans to maintain its regulated facilities and pursue business expansion of its regulated operations as opportunities arise. Projected 1998 capital and investment expenditures for the Electric Operations and the Natural Gas Transmission segments, including allowance for funds used during construction, are approximately $700 million and $300 million, respectively. These projections are subject to periodic review and revisions. Actual expenditures incurred may vary from such estimates due to various factors, including revised electric load estimates, business expansion opportunities, environmental matters and cost and availability of capital. The Energy Services segment plans to spend approximately $100 million in 1998 for required capital expenditures at its existing facilities. In addition, the Corporation is seeking to significantly grow its Energy Services businesses, primarily through the Global Asset Development business unit. One expansion opportunity includes the 520-megawatt combined cycle natural gas fired merchant generation plant in Bridgeport, Connecticut already under construction. Another growth opportunity includes the recently announced agreement to purchase from Pacific Gas & Electric Company three power plants in California. The power plants have a combined capacity of 2,645 megawatts. The purchase price is estimated at approximately $500 million and the transaction is expected to close during 1998. Other similar initiatives in 1998 will likely require significant capital and investment expenditures, which will be subject to periodic review and revision and may vary significantly depending on the value-added opportunities presented. Projected capital and investment expenditures for 1998 of the Other Operations segment are approximately $200 million. These projected capital and investment expenditures are subject to periodic review and revision and may vary significantly depending on the value-added opportunities presented. FINANCING CASH FLOW. The Corporation's consolidated capital structure at December 31, 1997, including short-term debt, was 45% debt, 3% preferred stock, 50% common equity and 2% other capitalization. Fixed charges coverage, using the SEC method, was 4.1 times for 1997 compared to 4.3 and 4.0 times for 1996 and 1995, respectively. Subsequent to the merger, several rating agencies reviewed and in some cases revised their debt ratings for the Corporation and its subsidiaries PanEnergy, PEPL, and TETCO. As of December 31, 1997, Duke Energy Corporation's senior indebtedness ratings were as follows: AA- by Standard & Poor's Group and Fitch Investors Service; Aa3 by Moody's Investors Service; and AA by Duff & Phelps. The Corporation's intent is to maintain these current credit ratings. During August 1997, the Corporation instituted a new commercial paper program, increasing its available commercial paper facilities to $2.5 billion. The commercial paper facilities consist of $1.25 billion for the Corporation and $1.25 billion for Duke Capital Corporation (Duke Capital), a wholly owned subsidiary of the Corporation. Duke Capital serves as the parent for the Corporation's business segments except the Electric Operations and certain other operations. The Corporation's total commercial paper facilities were $780 million at December 31, 1996. These facilities are supported by various bank credit agreements which totaled $2.7 billion and $1.5 billion at December 31, 1997 and 1996, respectively. As a result of the revised commercial paper program and the related credit facilities, the Corporation terminated the prior commercial paper program and related bank facilities held by the Corporation and PanEnergy. At December 31, 1997, $1.7 billion of commercial paper and $93 million of bank borrowings were outstanding. On December 8, 1997, Duke Energy Capital Trust I (the Trust), a business trust which is treated as a subsidiary of the Corporation for financial reporting purposes, issued $350 million of its 7.2% trust preferred securities, at an $11 million discount, representing preferred undivided beneficial interests in the assets of the Trust. Payment of distributions on such preferred securities is guaranteed by the Corporation, but only to the extent the Trust has funds legally and immediately available to make such distributions. 21 Since December 31, 1996, $647.6 million of the Corporation's first and refunding mortgage bonds and $114.5 million of the Corporation's medium term notes matured or were redeemed. These retirements were funded primarily through the Corporation's commercial paper facilities. During July 1996, the Corporation began purchasing shares of its common stock. In 1996, the Corporation repurchased approximately 3.3 million shares of common stock for $159 million. On January 28, 1997, the Board of Directors amended the program to expressly limit the number of shares authorized for repurchase under the program, from the initiation of the program through a date two years after the consummation of the merger, to an amount not to exceed 15 million shares. No repurchases of common stock were made in 1997, and none are anticipated in the future. The Corporation plans to use authorized but unissued shares of its common stock to meet 1998 employee benefit plan contribution requirements instead of purchasing shares on the open market. The Corporation and its subsidiaries have authority to issue up to $1.3 billion aggregate principal amount of debt and other securities under shelf registration statements filed with the Securities and Exchange Commission. Such securities may be issued as First and Refunding Mortgage Bonds, Senior Notes, Subordinated Debentures, or Preferred Stock. Dividends and debt repayments, along with operating and investing requirements, are expected to be funded by cash from operations, debt and commercial paper issuances and available credit facilities. As noted previously, the Corporation is seeking to significantly grow its Energy Services businesses, which will likely require significant additional financing. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE RISK. The Corporation is exposed to changes in interest rates as a result of significant financing through its issuance of variable-rate debt, fixed-rate debt, commercial paper and auction market preferred stock, as well as fixed-to-floating interest rate swaps. The Corporation manages its interest rate exposure by limiting its variable-rate exposure to a certain percentage of total capitalization, as set by policy, and by monitoring the effects of market changes in interest rates. (See Notes 11 and 14 to the Consolidated Financial Statements.) If market interest rates average 1% more in 1998 than in 1997, the Corporation's interest expense, after considering the effect of the interest rate swap agreements, would increase, and income before taxes would decrease by approximately $23.6 million. This amount has been determined by considering the impact of the hypothetical interest rates on the Corporation's variable-rate debt balances, commercial paper balances, auction market preferred stock balances and interest rate swap agreements as of December 31, 1997. These analyses do not consider the effects of the reduced level of overall economic activity that could exist in such an environment. In the event of a significant change in interest rates, management would likely take actions to further mitigate 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 the Corporation's financial structure. COMMODITY PRICE RISK. The Corporation, substantially through its subsidiaries, is exposed to the impact of market fluctuations in the price and transportation costs of natural gas, electricity and petroleum products marketed and employs established policies and procedures to manage its risks associated with these market fluctuations using various commodity derivatives, including futures, swaps and options. (See Note 8 to the Consolidated Financial Statements.) The Corporation measures the risk in its commodity derivative portfolio on a daily basis utilizing a Value-at-Risk (VAR) model to determine the maximum potential one-day favorable or unfavorable impact on its earnings and monitors its risk in comparison to established thresholds. The Corporation also utilizes other measures to monitor the risk in its commodity derivative portfolio on a monthly, quarterly and annual basis. The VAR computations are based on an historical simulation, which utilizes price movements over a specified period to simulate forward price curves in the energy markets to estimate the favorable or unfavorable impact of one-day's price movement on the existing portfolio. The VAR computations utilize several key assumptions, including the confidence level for the resultant price movement and the holding period chosen for the calculation. The Corporation's calculation includes commodity derivative instruments held for trading purposes and excludes the effects of written and embedded physical options in the trading portfolio. At December 31, 1997, the Corporation's estimated potential one-day favorable or unfavorable impact on income before taxes, as measured by VAR, related to its commodity derivatives held for trading purposes was approximately $2 million. Changes in markets inconsistent with historical trends could cause actual results to exceed predicted limits. Market risks associated with commodity derivatives held for purposes other than trading were not material at December 31, 1997. Subsidiaries of the Corporation are also exposed to market fluctuations in the price of natural gas liquids (NGLs) related to their ongoing gathering and processing operating activities. Because the Corporation generally does not maintain an 22 inventory of NGLs or actively trade commodity derivatives related to NGLs, the Corporation was not exposed to this risk at December 31, 1997. However, the Corporation closely monitors the risks associated with NGL price changes on its future operations. EQUITY PRICE RISK. The Corporation maintains trust funds, as required by the Nuclear Regulatory Commission, to fund certain costs of nuclear decommissioning. (See Note 12 to the Consolidated Financial Statements.) As of December 31, 1997, these funds were invested primarily in domestic and international equity securities, fixed-rate, fixed income securities and cash and cash equivalents. By maintaining a portfolio that includes long-term equity investments, the Corporation is maximizing 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 the Corporation's portfolio are exposed to price fluctuation in equity markets, and the fixed-rate, fixed income securities are exposed to changes in interest rates. The Corporation 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 to various investment options. Because the accounting for nuclear decommissioning recognizes that costs are recovered through the Corporation's Electric Operations' rates, fluctuations in equity prices or interest rates do not affect the earnings of the Corporation. FOREIGN OPERATIONS RISK. The Corporation has investments in several international operations, many of which are joint ventures. At December 31, 1997, the Corporation had investments in international affiliates of $230.1 million. These investments represent primarily investments in affiliates which own energy-related production, generation and transmission facilities. The Corporation is exposed to foreign currency risk, sovereign risk and other foreign operations risks, primarily through investments in affiliates of $43.6 million in Asia and $100.7 million in South America. In order to mitigate risks associated with foreign currency fluctuations, the majority of contracts entered into by the Corporation or its affiliates are denominated in or indexed to the U.S. dollar. Other exposures to foreign currency risk, sovereign risk or other foreign operations risk are periodically reviewed by management and were not material to the Corporation's consolidated results of operations or financial position during the period. CURRENT ISSUES OPERATIONS OUTLOOK. The Electric Operations segment is expected to grow moderately, consistent with historical trends. Expansion will be primarily as a result of continued economic growth in its service territory. In 1997, as a result of the merger, the Corporation signed various agreements with the NCUC, PSCSC and the FERC in which the Corporation agreed to cap base rates to retail and wholesale electric customers at existing levels through 2000. In addition, the Corporation signed agreements with the other joint owners of Catawba providing for a cap on certain rates charged under interconnection agreements. In response to these rate agreements and competitive pressures, the Electric Operations segment is striving to maintain low costs and competitive rates for its customers and to provide high quality customer service. The Corporation does not expect a negative impact as a result of such agreements on its results of operations or financial position. (See further discussion in the Electric Competition section below.) Due to increased competition, especially for the Midwest Pipelines, relatively slow growth is expected for future operations of the Corporation's Natural Gas Transmission segment. The Natural Gas Transmission segment continues to offer selective discounting to maximize revenues from existing capacity and to advance projects that provide expanded services to meet the specific needs of customers. Several projects have been announced that position the Natural Gas Transmission segment to meet increasing demand for gas in northeast markets by providing continuous paths from new supplies in both eastern and western Canada in addition to traditional domestic supply basins. The Corporation is seeking to significantly grow its Energy Services segment. Deregulation of energy markets in the U.S. and abroad is providing substantial opportunities for the Energy Services business units to capitalize on their broad capabilities. Growth is expected to be achieved through acquisitions, construction of greenfield projects and expansion of existing facilities as value-added opportunities present themselves. The strong real estate market in the southeast continues to present substantial growth opportunities for Crescent Resources. In 1997, Crescent Resources initiated development of significant office and industrial facilities in each of its established markets to capitalize on market conditions. ELECTRIC COMPETITION. The Energy Policy Act of 1992 (EPACT) and the FERC's subsequent rulemaking activities are major drivers towards a more competitive market for electric operations. EPACT amended provisions of the Public Utility 23 Holding Corporation Act of 1935 (PUHCA) and Part II of the Federal Power Act to remove certain barriers to electric competition. 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 the 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 the Corporation, with opportunities to sell and deliver capacity and energy at market-based prices. The Corporation and several of the Corporation's non-regulated subsidiaries were granted authority by the FERC to act as power marketers in late 1995. The Electric Operations obtained from the FERC open-access rights to sell at market-based rates up to 2,500 megawatts of capacity and energy from its own assets. Open-access provides another supply option through which the Corporation can purchase at attractive rates a portion of capacity and energy requirements resulting in lower overall costs to customers and thus improving the Corporation's competitive position. Open-access also provides the Corporation's existing wholesale customers with competitive opportunities to seek other suppliers for their capacity and energy requirements. Wholesale sales represented approximately 9.4 percent of the Corporation's total gigawatt-hour sales for the Electric Operations segment in 1997. Supplemental sales to the other joint owners of Catawba comprised the majority of wholesale sales. Such supplemental sales will continue to decline in 1998 as a result of the retention of larger portions of ownership entitlement by the other joint owners. Two of the Catawba joint owners gave notice of their intent to end their supplemental capacity requirements on January 1, 2001 and January 1, 2002, respectively. In addition, as a result of the merger, the other joint owners have the right to end their supplemental capacity requirements as of January 1, 2001 with written notice to the Corporation due by December 31, 1999. Another joint owner gave notice of its intent to end its interconnection agreement with the Corporation effective January 1, 2006 (see Note 6 to the Consolidated Financial Statements). Competition for retail electric customers is not generally allowed in the Corporation's service territory. However, there are discussions and events at the national level and within certain states regarding retail competition which are resulting in changes in the industry. Such changes will impact all entities owning electric generating assets. During 1997, both North and South Carolina have taken steps to address retail competition among electric utilities. In May 1997, North Carolina passed a bill that created a study commission to assess deregulation of electric utilities in the state. The commission's report to the state General Assembly is expected to be completed by early 1999. Members of the study commission include legislators, utility representatives, customers and a member of an environmental group. South Carolina has considered several proposals during 1997 to restructure the electric industry, the most significant of which would have provided retail customers with a choice of suppliers by January 1, 1998. None of these proposals has been approved. However, in May 1997, the PSCSC requested interested parties to file restructuring proposals for the electric industry. On June 30, 1997, the Corporation filed its proposal for introducing electric competition in South Carolina with the PSCSC. The Corporation's plan proposes that electric generation be deregulated while transmission and distribution continue to be regulated by the FERC and the PSCSC, respectively, providing for an orderly transition to competition that takes all stakeholders into consideration. The Corporation's plan also provides for recovery of stranded investment. The PSCSC held hearings on August 19, 1997 on the various restructuring proposals it received and presented its report to the state legislature on February 3, 1998. The report proposes a five year transition period before starting full-fledged electric competition. In addition, customers could receive two separate electric bills, one from the distribution company, and one from the generator or supplier of electricity. The report leaves the final decisions to the General Assembly of South Carolina. Currently, the electric utility industry is predominantly regulated on a basis designed to recover the cost of providing electric power to its 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. The regulatory assets of the Corporation are included in the Consolidated Balance Sheets. The portion of these regulatory assets related to electric operations is $1.7 billion, including primarily purchased capacity costs, debt expense, and deferred taxes related to regulatory assets. Currently, the Corporation is recovering substantially all of these regulatory assets through its wholesale and retail electric rates and would attempt to continue to recover these assets should cost-based regulation be discontinued. In addition, the Corporation would seek to recover the costs of its electric generating facilities in excess of the market price of power at the time of transition. 24 The Corporation seeks to move toward an orderly transition to retail competition that provides for consideration of the interests of all stakeholders in the retail electric sales arena. Management cannot predict the potential impact, if any, of these competitive forces on the Corporation's future financial position and consolidated results of operations. NUCLEAR DECOMMISSIONING COSTS. The Corporation's estimated site-specific nuclear decommissioning costs, including the cost of decommissioning plant components not subject to radioactive contamination, total approximately $1.3 billion stated in 1994 dollars based on decommissioning studies completed in 1994. In order to fund these costs, the Corporation contributes to an external decommissioning trust fund and maintains an internal reserve. The balance of the external funds as of December 31, 1997 and 1996, was $471.1 million and $362.6 million respectively. The balance of the internal reserve as of December 31, 1997 and 1996, was $210.8 million and $207.8 million, respectively, and is reflected in Accumulated Depreciation and Amortization in the Consolidated Balance Sheets. Both the NCUC and the PSCSC have granted the Corporation recovery of estimated decommissioning costs through retail rates over the expected remaining service periods of the Corporation's nuclear plants. Management is of the opinion that funding of the decommissioning costs will not have a material adverse effect on the consolidated results of operations and financial position of the Corporation. (See Note 12 to the Consolidated Financial Statements.) ENVIRONMENTAL. The Corporation is subject to 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. The Corporation was an operator of manufactured gas plants until the early 1950s. The Corporation 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. The Corporation is considered by regulators to be a potentially responsible party and may be subject to future liability at nine federal Superfund sites and one state Superfund site. While the cost of remediation of the remaining sites may be substantial, the Corporation will share in any liability associated with remediation of contamination at such sites with other potentially responsible parties. Management is of the opinion that resolution of these matters will not have a material adverse effect on the consolidated results of operations or financial position of the Corporation. PCB (Polychlorinated Biphenyl) Assessment and Clean-up Programs. TETCO, a wholly owned subsidiary of the Corporation, is currently conducting PCB assessment and clean-up programs at certain of its compressor station sites under conditions stipulated by a U.S. Consent Decree. The programs include on- and off-site assessment, installation of on-site source control equipment and groundwater monitoring wells, and on- and off-site clean-up work. TETCO expects to complete these clean-up programs during 1998. Groundwater monitoring activities will continue at several sites beyond 1998. In 1987, the Commonwealth of Kentucky instituted a suit in state court against TETCO, alleging improper disposal of PCBs at TETCO's three compressor station sites in Kentucky. This suit is still pending. In 1996, TETCO completed clean-up of these sites under the U.S. Consent Decree. The Corporation has also identified environmental contamination at certain sites on the PEPL and Trunkline systems and is undertaking clean-up programs at these sites. The contamination resulted from the past use of lubricants containing PCBs and the prior use of wastewater collection facilities and other on-site disposal areas. Soil and sediment testing, to date, has detected no significant off-site contamination. The Corporation has communicated with the Environmental Protection Agency (EPA) and appropriate state regulatory agencies on these matters. Environmental clean-up programs are expected to continue until 2002. At December 31, 1997 and 1996, the Corporation had accrued liabilities for remaining estimated clean-up costs on the TETCO, PEPL and Trunkline systems, which were included in Environmental Clean-up Liabilities in the Consolidated Balance Sheets. These cost estimates represent gross clean-up costs expected to be incurred, have not been discounted or reduced by customer recoveries and do not include fines, penalties or third-party claims. Costs expected to be recovered from customers are included in the Consolidated Balance Sheets as of December 31, 1997 and 1996, as Regulatory Assets and Deferred Debits. The federal and state clean-up programs are not expected to interrupt or diminish the Corporation's ability to deliver natural gas to customers. Based on the Corporation's experience to date and costs incurred for clean-up operations, management believes the resolution of matters relating to the environmental issues discussed above will not have a material adverse effect on the consolidated results of operations or financial position of the Corporation. 25 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. The Corporation currently meets all requirements of Phase I. The Corporation 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 2000, the Corporation'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 are substantially complete, and future one-time capital costs associated with meeting Phase II requirements range from $14 million to $24 million. 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. Additionally, the Corporation would be effected by a proposed call for new State Implementation Plans (SIP) issued by the EPA to 22 states related to existing and new national ambient air quality standards for ozone. Costs to the Corporation related to the SIP call may range from $123 million to $517 million, depending on final EPA implementation plans and schedules. In 1994, the State of Missouri issued a Notice of Violation to PEPL alleging violations of Missouri air pollution regulations at the Corporation's Houstonia compressor station. The Corporation is in negotiations with the State to resolve this matter. The State is seeking a penalty and correction of the alleged violations. In December 1997, the United Nations held negotiations in Kyoto, Japan to determine how to achieve worldwide stabilization of greenhouse gas emissions, including carbon dioxide emissions from fossil-fired generating facilities. Because this matter is in the early stages of discussion, the Corporation cannot estimate the effects on future consolidated results of operations or financial position of the Corporation. LITIGATION AND CONTINGENCIES. For information concerning litigation and other commitments and contingencies, see Note 15 to the Consolidated Financial Statements. COMPUTER SYSTEMS CHANGES FOR THE YEAR 2000. The Corporation is incurring incremental costs to modify existing computer systems to accommodate the year 2000 and beyond. The Corporation is currently making modifications to its programs and is of the opinion that remaining modifications will be completed before they become problematic. Management is of the opinion that the costs associated with these modifications will not have a material adverse effect on the consolidated results of operations or financial position of the Corporation. FORWARD-LOOKING STATEMENTS. From time to time, the Corporation may make statements regarding its expectations, intent or beliefs about future events. These statements are intended as "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. The Corporation cautions that assumptions, projections and expectations about future events may and often do vary from actual results, the differences between assumptions, projections and expectations and actual results can be material, and there can be no assurance that the forward-looking statements will be realized. The following are some of the factors that could cause actual achievements and events to differ materially from those expressed or implied in such forward-looking statements: state and federal legislative and regulatory initiatives that affect cost and investment recovery, have an impact on rate structures, and affect the speed and degree to which competition enters the electric and natural gas industries; industrial, commercial and residential growth in the service territories of the Corporation and its subsidiaries; the weather and other natural phenomena; the timing and extent of changes in commodity prices and interest rates; changes in environmental and other laws and regulations to which the Corporation and its subsidiaries are subject or other external factors over which the Corporation has no control; the results of financing efforts; growth in opportunities for the Corporation's subsidiaries and diversified operations; and the effect of the Corporation's accounting policies, in each case during the periods covered by the forward-looking statements. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. See "Management's Discussion and Analysis of Results of Operations and Financial Condition, Quantitative and Qualitative Disclosures About Market Risk." 26 Item 8. Financial Statements and Supplementary Data. DUKE ENERGY CORPORATION CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31 ------------------------------------------ 1997 1996 1995 ------------- ------------- -------------- (In Millions, except per share amounts) Operating Revenues Natural gas and petroleum products (Notes 2 and 5) Sales, trading and marketing of natural gas and petroleum products ........... $ 8,150.7 $ 5,848.0 $ 3,397.2 Transportation and storage of natural gas .................................... 1,503.5 1,522.9 1,500.6 Electric (Notes 2 and 5) Generation, transmission and distribution .................................... 4,334.5 4,436.6 4,454.6 Trading and marketing of electricity ......................................... 1,664.9 77.8 9.8 Other (Note 9) ................................................................. 655.3 417.1 332.5 ---------- ---------- ---------- Total operating revenues .................................................... 16,308.9 12,302.4 9,694.7 ---------- ---------- ---------- Operating Expenses Natural gas and petroleum products purchased (Note 2) .......................... 7,705.2 5,414.3 3,119.3 Fuel used in electric generation (Note 2) ...................................... 742.8 758.5 744.2 Net interchange and purchased power (Notes 2, 5 and 6) ......................... 1,960.2 456.8 480.2 Other operation and maintenance (Notes 5, 12 and 15) ........................... 2,720.9 2,382.8 2,209.0 Depreciation and amortization (Notes 2 and 6) .................................. 841.0 789.4 737.1 Property and other taxes ....................................................... 368.8 342.0 336.6 ---------- ---------- ---------- Total operating expenses .................................................... 14,338.9 10,143.8 7,626.4 ---------- ---------- ---------- Operating Income ................................................................ 1,970.0 2,158.6 2,068.3 ---------- ---------- ---------- Other Income and Expenses Deferred returns and allowance for funds used during construction (Note 2) ..... 109.4 104.8 113.9 Other, net ..................................................................... 28.7 30.8 8.3 ---------- ---------- ---------- Total other income and expenses ............................................. 138.1 135.6 122.2 ---------- ---------- ---------- Earnings Before Interest and Taxes .............................................. 2,108.1 2,294.2 2,190.5 Interest Expense (Notes 8 and 11) ............................................... 471.8 499.2 508.2 Minority Interests (Note 3) ..................................................... 23.0 6.2 -- ---------- ---------- ----------- Earnings Before Income Taxes .................................................... 1,613.3 1,788.8 1,682.3 Income Taxes (Notes 2 and 7) .................................................... 638.9 697.8 664.2 ---------- ---------- ----------- Income Before Extraordinary Item ................................................ 974.4 1,091.0 1,018.1 Extraordinary Item (net of tax) ................................................. -- 16.7 -- ---------- ---------- ----------- Net Income ...................................................................... 974.4 1,074.3 1,018.1 ---------- ---------- ----------- Dividends and Premiums on Redemptions of Preferred and Preference Stock (Note 14) ................................................. 72.8 44.2 48.9 ---------- ---------- ----------- Earnings Available for Common Stockholders ...................................... $ 901.6 $ 1,030.1 $ 969.2 ========== ========== =========== Common Stock Data (Note 2) Average shares outstanding ..................................................... 359.8 361.2 361.2 Earnings per share (before extraordinary item) Basic ........................................................................ $ 2.51 $ 2.90 $ 2.68 Dilutive ..................................................................... $ 2.50 $ 2.88 $ 2.67 Earnings per share Basic ........................................................................ $ 2.51 $ 2.85 $ 2.68 Dilutive ..................................................................... $ 2.50 $ 2.83 $ 2.67 Dividends per share ............................................................ $ 1.90 $ 1.57 $ 1.50
See Notes to Consolidated Financial Statements. 27 DUKE ENERGY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31 ----------------------------------------- 1997 1996 1995 ------------- ------------- ------------- (In Millions) CASH FLOWS FROM OPERATING ACTIVITIES Net Income ....................................................... $ 974.4 $ 1,074.3 $ 1,018.1 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization .................................... 982.5 964.9 953.8 Deferred income taxes and investment tax credit amortization ..... 105.7 74.7 115.2 Purchased capacity levelization .................................. 56.4 73.5 (33.1) Transition cost recoveries ....................................... (35.6) 90.9 (85.2) (Increase) Decrease in Receivables ..................................................... (266.5) (645.6) (286.0) Inventory ....................................................... (6.6) 45.1 (26.2) Other current assets ............................................ (18.4) 16.7 90.5 Increase (Decrease) in Accounts payable ................................................ ( 72.1) 576.7 53.5 Taxes accrued ................................................... 50.0 (11.0) 25.7 Interest accrued ................................................ ( 13.1) (18.5) 5.6 Other current liabilities ....................................... 326.2 (10.0) 17.7 Other, net ....................................................... 57.2 103.5 (17.4) ---------- ---------- ---------- Net cash provided by operating activities ....................... 2,140.1 2,335.2 1,832.2 ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures ............................................. (1,323.2) (1,393.9) (1,223.0) Investment expenditures .......................................... (704.4) (156.1) (67.7) Decommissioning, retirements and other ........................... 33.9 (18.2) (26.9) ---------- ---------- ---------- Net cash used in investing activities ........................... (1,993.7) (1,568.2) (1,317.6) ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from the issuance of Long-term debt .................................................. 1,617.6 362.8 421.5 Guaranteed preferred beneficial interests in Corporation's subordinated notes ............................................. 339.0 -- -- Common stock and stock options .................................. 14.9 11.8 16.5 Payments for the redemption of Long-term debt .................................................. (868.5) (527.0) (480.9) Common stock .................................................... (25.4) (159.0) -- Preferred stock ................................................. (223.6) -- (100.5) Net change in notes payable and commercial paper ................. (290.2) 159.3 193.2 Dividends paid ................................................... (726.4) (609.3) (590.5) Other ............................................................ (40.4) (12.1) (4.8) ---------- ---------- ---------- Net cash used in financing activities ........................... (203.0) (773.5) (545.5) ---------- ---------- ---------- Net decrease in cash and cash equivalents ........................ (56.6) (6.5) (30.9) Cash and cash equivalents at beginning of year ................... 166.0 172.5 203.4 ---------- ---------- ---------- Cash and cash equivalents at end of year ......................... $ 109.4 $ 166.0 $ 172.5 ========== ========== ========== Supplemental Disclosures Cash paid for interest (net of amount capitalized) ............... $ 475.9 $ 493.1 $ 481.6 Cash paid for income taxes ....................................... $ 469.8 $ 549.9 $ 519.9
See Notes to Consolidated Financial Statements. 28 DUKE ENERGY CORPORATION CONSOLIDATED BALANCE SHEETS
December 31 --------------------------- 1997 1996 ------------- ------------- (In Millions) ASSETS Current Assets (Note 2) Cash and cash equivalents (Note 8) ............................ $ 109.4 $ 166.0 Receivables (Note 8) .......................................... 2,280.8 1,888.0 Inventory ..................................................... 440.1 433.5 Current portion of natural gas transition costs ............... 66.9 67.9 Current portion of purchased capacity costs ................... 76.2 51.3 Unrealized gains on mark to market transactions (Note 8) ...... 551.3 397.2 Other (Note 8) ................................................ 160.5 142.1 ---------- ---------- Total current assets ......................................... 3,685.2 3,146.0 ---------- ---------- Investments and Other Assets Investments in affiliates (Notes 9 and 15) .................... 685.9 502.9 Nuclear decommissioning trust funds (Notes 8 and 12) .......... 471.1 362.6 Pre-funded pension costs (Note 18) ............................ 337.5 360.6 Goodwill, net (Notes 2, 3 and 7) .............................. 503.6 222.1 Notes receivable .............................................. 239.6 63.5 Other ......................................................... 209.9 108.0 ---------- ---------- Total investments and other assets ........................... 2,447.6 1,619.7 ---------- ---------- Property, Plant and Equipment (Notes 2, 6, 10, 11, 12 and 15) Cost .......................................................... 25,448.1 24,468.2 Less accumulated depreciation and amortization ................ 9,712.2 9,199.1 ---------- ---------- Net property, plant and equipment ............................ 15,735.9 15,269.1 ---------- ---------- Regulatory Assets and Deferred Debits (Note 2) Purchased capacity costs (Note 6) ............................. 759.4 840.7 Debt expense .................................................. 253.1 244.0 Regulatory asset related to income taxes ...................... 511.0 493.5 Natural gas transition costs .................................. 193.7 250.0 Environmental clean-up costs .................................. 103.6 153.2 Other ......................................................... 339.3 350.0 ---------- ---------- Total regulatory assets and deferred debits .................. 2,160.1 2,331.4 ---------- ---------- Total Assets .................................................... $ 24,028.8 $ 22,366.2 ========== ==========
See Notes to Consolidated Financial Statements. 29 DUKE ENERGY CORPORATION CONSOLIDATED BALANCE SHEETS -- (Continued)
December 31 --------------------------- 1997 1996 ------------- ------------- (In Millions) LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable ....................................................................... $ 1,358.7 $ 1,286.5 Notes payable and commercial paper (Notes 8 and 11) .................................... 169.5 459.7 Taxes accrued (Note 2) ................................................................. 124.8 74.8 Interest accrued ....................................................................... 111.2 124.3 Current portion of natural gas transition liabilities (Note 2) ......................... 35.0 84.4 Current portion of environmental clean-up liabilities (Notes 2 and 15) ................. 26.4 32.4 Current maturities of long-term debt (Note 11) ......................................... 77.3 350.6 Unrealized losses on mark to market transactions (Notes 2 and 8) ....................... 537.8 388.5 Other (Note 2) ......................................................................... 834.5 508.3 ---------- ---------- Total current liabilities ............................................................. 3,275.2 3,309.5 ---------- ---------- Long-term Debt (Notes 8 and 11) .......................................................... 6,530.0 5,485.1 ---------- ---------- Deferred Credits and Other Liabilities (Note 2) Deferred income taxes (Note 7) ......................................................... 3,706.5 3,568.5 Investment tax credit (Note 7) ......................................................... 238.9 250.1 Nuclear decommissioning costs externally funded (Notes 8 and 12) ....................... 471.1 362.6 Natural gas transition liabilities ..................................................... 78.4 121.9 Environmental clean-up liabilities (Note 15) ........................................... 157.6 188.9 Other .................................................................................. 1,035.1 971.0 ---------- ---------- Total deferred credits and other liabilities .......................................... 5,687.6 5,463.0 ---------- ---------- Minority Interests (Note 3) .............................................................. 168.3 83.4 ---------- ---------- Guaranteed Preferred Beneficial Interests in Corporation's Subordinated Notes (Notes 8 and 13) ....................................................................... 339.0 -- ---------- ---------- Preferred and Preference Stock (Notes 8 and 14) Preferred and preference stock with sinking fund requirements .......................... 149.0 234.0 Preferred and preference stock without sinking fund requirements ....................... 340.0 450.0 ---------- ---------- Total preferred and preference stock .................................................. 489.0 684.0 ---------- ---------- Commitments and Contingencies (Notes 6, 12 and 15) Common Stockholders' Equity (Notes 16 and 17) Common stock, no par, 500 million shares authorized; 359.8 million and 359.4 million shares outstanding at December 31, 1997 and 1996, respectively ........................... 4,283.7 4,289.3 Retained earnings ...................................................................... 3,256.0 3,051.9 ---------- ---------- Total common stockholders' equity ..................................................... 7,539.7 7,341.2 ---------- ---------- Total Liabilities and Stockholders' Equity ............................................... $ 24,028.8 $ 22,366.2 ========== ==========
See Notes to Consolidated Financial Statements. 30 DUKE ENERGY CORPORATION CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
Years Ended December 31 ----------------------------------------- 1997 1996 1995 ------------- ------------- ------------- (In Millions) Common Stock Balance at beginning of year ....................................................... $ 4,289.3 $ 4,296.8 $ 4,275.8 Stock issued for purchase of assets ................................................ -- -- 2.5 Stock repurchased (Note 16) ........................................................ -- (30.8) -- Dividend reinvestment and employee benefits ........................................ (9.9) 23.3 18.5 Other capital stock transactions, net .............................................. 4.3 -- -- ---------- ---------- ---------- Balance at end of year ............................................................ 4,283.7 4,289.3 4,296.8 ---------- ---------- ---------- Retained Earnings Balance at beginning of year ....................................................... 3,051.9 2,715.7 2,292.2 Net income ......................................................................... 974.4 1,074.3 1,018.1 Common stock dividends ............................................................. (682.2) (565.6) (542.2) Preferred and preference stock dividends and premiums on redemptions (Note 14) ..... (72.8) (44.2) (48.9) Other capital stock transactions, net .............................................. (15.3) (128.3) (3.5) ---------- ---------- ---------- Balance at end of year ............................................................ 3,256.0 3,051.9 2,715.7 ---------- ---------- ---------- Total Common Stockholders' Equity .................................................... $ 7,539.7 $ 7,341.2 $ 7,012.5 ========== ========== ==========
See Notes to Consolidated Financial Statements. 31 DUKE ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For The Years Ended December 31, 1997, 1996 and 1995 NOTE 1. NATURE OF OPERATIONS On June 18, 1997, Duke Power Company (Duke Power) changed its name to Duke Energy Corporation (the Corporation) in accordance with the terms of a merger agreement with PanEnergy Corp (PanEnergy), pursuant to which the Corporation issued 158.3 million shares of its common stock in exchange for all of the outstanding common stock of PanEnergy (the merger). PanEnergy was involved in the gathering, processing, transportation and storage of natural gas, the production of natural gas liquids, and the marketing of natural gas, electricity, liquefied petroleum gases and related energy services. Pursuant to the merger, each share of PanEnergy common stock outstanding was converted into the right to receive 1.0444 shares of the Corporation's common stock. In addition, each outstanding option to purchase PanEnergy common stock became an option to purchase common stock of the Corporation, adjusted accordingly. The merger was accounted for as a pooling of interests and, accordingly, the consolidated financial statements for periods prior to the combination were restated to include the operations of PanEnergy. Operating revenues and net income previously reported by the separate companies and the combined amounts presented in the accompanying consolidated financial statements for the years ended December 31, 1996 and 1995 are as follows:
Duke Power PanEnergy Adjustments Combined -------------- -------------- ------------- --------------- In Millions 1996 Operating revenues ........................ $ 4,758.0 $ 7,505.6 $ 38.8 $ 12,302.4 Net income before extraordinary item ...... $ 729.9 $ 361.1 -- $ 1,091.0 Net income ................................ $ 729.9 $ 344.4 -- $ 1,074.3 1995 Operating revenues ........................ $ 4,676.6 $ 4,967.5 $ 50.6 $ 9,694.7 Net income ................................ $ 714.5 $ 303.6 -- $ 1,018.1
The adjustment to operating revenues reflects a reclassification of PanEnergy's equity in earnings of unconsolidated affiliates from other income to revenues to be consistent with the Corporation's financial statement presentation. The Corporation is an integrated energy and energy services provider with the ability to offer physical delivery and management of both electricity and natural gas throughout the United States and abroad. The Corporation provides these services through its four business segments: Electric Operations -- Generation, transmission, distribution and sale of electric energy in central and western North Carolina and the western portion of South Carolina. Duke Energy Corporation (doing business as Duke Power) and its wholly owned subsidiary Nantahala Power and Light Company serve this area. 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 -- Interstate transportation and storage of natural gas for customers in the Mid-Atlantic, New England and Midwest states. The interstate natural gas transmission and storage operations of the Corporation's wholly owned subsidiaries Texas Eastern Transmission Corporation (TETCO), Algonquin Gas Transmission Company (Algonquin), Panhandle Eastern Pipe Line Company (PEPL), and Trunkline Gas Company (Trunkline) are also subject to the rules and regulations of the FERC. Energy Services -- Comprised of several separate business units: Field Services -- gathers and processes natural gas, produces and markets natural gas liquids and transport and trades crude oil; Trading and Marketing -- markets natural gas, electricity and other energy-related products; Global Asset Development -- develops, owns and operates energy-related facilities worldwide; and Other Energy Services -- provides engineering consulting, construction and integrated energy solutions. Other Operations -- Real estate operations of Crescent Resources, Inc., communications services, corporate costs and intersegment eliminations. 32 DUKE ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION. The consolidated financial statements reflect consolidation of all of the Corporation's majority-owned subsidiaries after the elimination of intercompany transactions. Investments in other entities that are not majority owned and where the Company has significant influence over operations are accounted for using the equity method. The consolidated financial statements are prepared in conformity with generally accepted accounting principles appropriate in the circumstances to reflect in all material respects the substance of events and transactions which should be included. In preparing these statements, management makes informed judgments and estimates of the expected effects of events and transactions that are currently being reported. However, actual results could differ from these estimates. CASH AND CASH EQUIVALENTS. All liquid investments with maturities at date of purchase of three months or less are considered cash equivalents. 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. COMMODITY DERIVATIVE INSTRUMENTS. The Corporation, primarily through its subsidiaries, holds and issues instruments that reduce exposure to market fluctuations in the price and transportation costs of natural gas, petroleum products and electric power marketed. The Corporation uses futures, swaps and options to manage and hedge price and location risk related to market exposures. In order to qualify as a hedge, the price movements in the commodity derivatives must be highly correlated with the underlying hedged commodity. Gains and losses related to commodity derivatives which qualify as hedges of commodity commitments are recognized in income when the underlying hedged physical transaction closes (the deferral method) and are included in Natural Gas and Petroleum Products Purchased or Net Interchange and Purchased Power in the Consolidated Statements of Income. Gains and losses related to such instruments, to the extent not yet settled in cash, are reported as Current Assets or Liabilities, as appropriate, in the Consolidated Balance Sheets until recognized in income. If the derivative instrument is no longer sufficiently correlated to the underlying commodity, or if the underlying commodity transaction closes earlier than anticipated, the deferred gains or losses are recognized in income. In addition to non-trading activities, the Corporation also engages in the trading of commodity derivatives and therefore experiences net open positions. Gains and losses on derivatives utilized for trading are recognized in income on a current basis (the mark to market method) and are also included in Natural Gas and Petroleum Products Purchased or Net Interchange and Purchased Power. GOODWILL AMORTIZATION. The Corporation amortizes goodwill related to the purchases of Duke/Louis Dreyfus, L.L.C. (D/LD) and Texas Eastern Corporation (TEC), and certain other natural gas gathering, transmission and processing facilities and engineering consulting businesses on a straight-line basis over 10 years, 40 years, and 15 years, respectively. Accumulated amortization of goodwill at December 31, 1997 and 1996 was $123.6 million and $99.7 million, respectively. PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment is stated at original cost. The Corporation capitalizes all construction-related direct labor and materials, 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 is also capitalized. The cost of repairs and replacements is charged to expense. Depreciation is generally computed using the straight-line method. The Corporation's composite weighted-average depreciation rates, excluding nuclear fuel, were 3.67, 3.77 and 3.97 percent for 1997, 1996, and 1995, respectively. At the time property, plant and equipment maintained by the Corporation's regulated operations are retired, the original cost plus the cost of retirement, less salvage, is charged to accumulated depreciation and amortization. When entire regulated operating units are sold or non-regulated properties are retired or sold, the property and related accumulated depreciation and amortization accounts are reduced and any gain or loss is recorded in income, unless otherwise required by the FERC. 33 DUKE ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued UNAMORTIZED DEBT PREMIUM, DISCOUNT AND EXPENSE. Expenses incurred in connection with the issuance of presently outstanding long-term debt, and premiums and discounts relating to such debt, are amortized over the terms of the respective issues. Also, any call premiums or unamortized expenses associated with refinancing higher-cost debt obligations used to finance regulated assets and operations are amortized consistent with regulatory treatment of these items. ENVIRONMENTAL EXPENDITURES. Expenditures that relate to an existing condition caused by past operations, and do not contribute to current or future revenue generation, are expensed. Environmental expenditures relating to current or future revenues are expensed or capitalized as appropriate. Liabilities are recorded when environmental assessments and/or clean-ups are probable and the costs can be reasonably estimated. Certain of these environmental assessments and clean-up costs have been deferred and are included in Regulatory Assets and Deferred Debits as they are expected to be recovered from Natural Gas Transmission customers. COST-BASED REGULATION. The regulated operations of the Corporation are subject to the provisions of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation." Accordingly, the Corporation records certain assets and liabilities that result from the effects of the ratemaking process that would not be recorded under generally accepted accounting principles for non-regulated entities. The regulatory assets and regulatory liabilities of the Corporation are classified as Regulatory Assets and Deferred Debits and Deferred Credits and Other Liabilities, respectively, in the Consolidated Balance Sheets. The Corporation regularly evaluates the continued applicability of SFAS No. 71, considering such factors as regulatory changes and the impact of competition. Discontinuance of cost-based regulation or increased competition might require entities to reduce their asset balances to reflect a market basis less than cost and would also require entities to write off their associated regulatory assets. Management cannot predict the potential impact, if any, of discontinuance of cost-based regulation or increased competition on the Corporation's future financial position and results of operations. However, the Corporation continues to position itself to effectively meet these challenges by maintaining prices that are competitive. COMMON STOCK OPTIONS. The Corporation follows the intrinsic value method of accounting for common stock options and awards issued to employees. REVENUES. The Corporation recognizes revenues on sales of electricity and transportation and storage of natural gas as service is provided and on sales of natural gas and petroleum products in the period of delivery. Receivables on the Consolidated Balance Sheets included $231.6 million and $210 million as of December 31, 1997 and 1996, respectively, for electric service that has been provided but not yet billed to customers. When rate cases associated with the transportation of natural gas are pending final FERC approval, a portion of the revenues collected by the interstate natural gas pipelines is subject to possible refund. The Corporation has established reserves where required for such cases. NUCLEAR FUEL. Amortization of nuclear fuel is included in Fuel Used in Electric Generation in the Consolidated Statements of Income. 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 Corporation's 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, the Corporation is permitted to recover these costs, including a fair return, through their inclusion in rate base and in the provision for depreciation. Rates used for capitalization of deferred returns and AFUDC by the Corporation's regulated operations are calculated in compliance with FERC rules. DERIVATIVE FINANCIAL INSTRUMENTS. The Corporation uses interest rate swaps to manage the interest rate characteristics of its outstanding debt. Interest rate differentials to be paid or received as interest rates change are accrued and recognized 34 DUKE ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued as an adjustment of interest expense related to the designated debt (the accrual method). The amount payable to or receivable from counterparties related to the interest rate differential is included in Regulatory Assets and Deferred Debits in the Consolidated Balance Sheets. The fair values of interest rate swaps are not recognized in the financial statements. INCOME TAXES. Prior to the merger, Duke Power and PanEnergy filed separate consolidated federal income tax returns. Subsequent to the merger, the Corporation and its subsidiaries file a consolidated federal income tax return. Federal income taxes have been provided by the Corporation on the basis of its separate company income and deductions in accordance with established practices of the consolidated group. Deferred income taxes have been provided for temporary differences. Temporary differences occur when events and transactions recognized for financial reporting result in taxable or tax-deductible amounts in different periods. Duke Power's investment tax credits have been deferred and are being amortized over the estimated useful lives of the related properties. EARNINGS PER COMMON SHARE. The Financial Accounting Standards Board issued SFAS No. 128, "Earnings per Share" which replaces the presentation of primary and fully diluted earnings per share with basic and diluted earnings per share. Basic earnings per share is computed by dividing net earnings available for common stockholders by the weighted average number of common shares outstanding for the year. Basic earnings per share in the Consolidated Statements of Income is identical to the primary earnings per share previously presented for all periods. Diluted earnings per share reflects the potential dilution that could occur if securities or other agreements to issue common stock were exercised or converted into common stock. Dilutive earnings per share is computed based upon the weighted average number of common shares and dilutive common equivalent shares outstanding. Common stock options, which are common stock equivalents, had a dilutive effect on earnings per share and increased the weighted average number of common shares by 1.9 million, 2.3 million and 2.6 million shares for 1997, 1996, and 1995, respectively. The weighted average number of common shares, for dilutive purposes, was 361.7 million, 363.5 million and 363.8 million shares for 1997, 1996 and 1995, respectively. RECLASSIFICATIONS. Certain amounts have been reclassified in the consolidated financial statements to conform to the current presentation. NOTE 3. BUSINESS COMBINATIONS AND ACQUISITIONS DUKE/LOUIS DREYFUS, L.L.C. (D/LD). On June 17, 1997, a wholly owned subsidiary of the Corporation acquired the remaining 50% ownership interest in D/LD from affiliates of Louis Dreyfus Corp. for $247 million. D/LD markets electric power, natural gas and energy-related services to utilities, municipalities and other large energy users in North America. The acquisition was accounted for by the purchase method, and the assets and liabilities and results of operations of D/LD have been consolidated in the Corporation's financial statements since the date of purchase. The purchase price substantially represents goodwill. DUKE/UAE L.L.C. During December 1997, a wholly owned subsidiary of the Corporation formed a joint venture with UAE Ref-Fuel L.L.C. (UAE), a wholly owned subsidiary of United American Energy Corp. The Corporation owns a 65% interest in the joint venture, with UAE owning a 35% minority interest. The joint venture acquired a 50% ownership interest in American Ref-Fuel Company, a waste-to-energy firm with operations primarily in New York and New Jersey. Thus, the Corporation has an indirect 32.5% ownership interest in American Ref-Fuel Company and provided $237 million of investment and financing to the venture. DUKE ENERGY TRADING AND MARKETING, L.L.C. On August 1, 1996, a wholly owned subsidiary of the Corporation formed a natural gas and power marketing joint venture with Mobil Corporation (Mobil) affiliates. The marketing company (DETM) conducts business as Duke Energy Trading and Marketing, L.L.C. (formerly PanEnergy Trading and Market Services, L.L.C.) in the United States and as Duke Energy Marketing L.P. (formerly PanEnergy Marketing L.P.) in Canada. The Corporation operates the joint venture and owns a 60% interest, with Mobil owning a 40% minority interest. 35 DUKE ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued NOTE 4. BUSINESS SEGMENTS Business segment financial information follows for each of the three years in the period ended December 31, 1997. Other Operations include intersegment eliminations.
Unaffiliated Intersegment Total Revenues Revenues Revenues -------------- -------------- -------------- 1997 In Millions Electric Operations ................ $ 4,401.7 $ -- $ 4,401.7 Natural Gas Transmission ........... 1,467.8 104.3 1,572.1 Energy Services Trading and Marketing ............. 7,411.0 77.7 7,488.7 Field Services .................... 2,480.5 574.1 3,054.6 Global Asset Development .......... 109.2 14.2 123.4 Other Energy Services ............. 342.8 32.8 375.6 Energy Services' Eliminations ..... -- (655.1) (655.1) ----------- ---------- ----------- Total Energy Services ........... 10,343.5 43.7 10,387.2 Other Operations ................... 95.9 (148.0) (52.1) ----------- ---------- ----------- Total Consolidated ................ $ 16,308.9 $ -- $ 16,308.9 =========== ========== =========== 1996 Electric Operations ................ $ 4,498.4 $ -- $ 4,498.4 Natural Gas Transmission ........... 1,470.2 86.1 1,556.3 Energy Services Trading and Marketing ............. 3,773.5 40.5 3,814.0 Field Services .................... 2,215.6 420.9 2,636.5 Global Asset Development .......... 65.0 6.6 71.6 Other Energy Services ............. 182.8 21.4 204.2 Energy Services' Eliminations ..... -- (456.5) (456.5) ----------- ---------- ----------- Total Energy Services ........... 6,236.9 32.9 6,269.8 Other Operations ................... 96.9 (119.0) (22.1) ----------- ---------- ----------- Total Consolidated ................ $ 12,302.4 $ -- $ 12,302.4 =========== ========== =========== 1995 Electric Operations ................ $ 4,512.4 $ -- $ 4,512.4 Natural Gas Transmission ........... 1,480.3 53.1 1,533.4 Energy Services Trading and Marketing ............. 1,838.3 28.4 1,866.7 Field Services .................... 1,607.1 184.3 1,791.4 Global Asset Development .......... 75.3 4.0 79.3 Other Energy Services ............. 94.5 0.8 95.3 Energy Services' Eliminations ..... -- (216.9) (216.9) ----------- ---------- ----------- Total Energy Services ........... 3,615.2 0.6 3,615.8 Other Operations ................... 86.8 (53.7) 33.1 ----------- ---------- ----------- Total Consolidated ................ $ 9,694.7 $ -- $ 9,694.7 =========== ========== =========== Operating Earnings Before Depreciation & Income Interest & Taxes Amortization -------------- ------------------ --------------- 1997 In Millions Electric Operations ................ $ 1,180.3 $ 1,281.8 $ 497.8 Natural Gas Transmission ........... 607.7 624.4 229.6 Energy Services Trading and Marketing ............. 42.7 44.4 7.0 Field Services .................... 156.7 157.0 71.4 Global Asset Development .......... (6.4) 4.5 8.7 Other Energy Services ............. 23.2 18.2 5.8 Energy Services' Eliminations ..... -- -- -- ----------- ----------- --------- Total Energy Services ........... 216.2 224.1 92.9 Other Operations ................... (34.2) (22.2) 20.7 ----------- ----------- --------- Total Consolidated ................ $ 1,970.0 $ 2,108.1 $ 841.0 =========== =========== ========= 1996 Electric Operations ................ $ 1,303.6 $ 1,419.5 $ 481.1 Natural Gas Transmission ........... 583.8 595.5 228.2 Energy Services Trading and Marketing ............. 56.3 57.9 3.8 Field Services .................... 149.4 151.6 58.7 Global Asset Development .......... (1.2) -- 6.9 Other Energy Services ............. 19.9 20.0 3.5 Energy Services' Eliminations ..... -- -- -- ----------- ----------- --------- Total Energy Services ........... 224.4 229.5 72.9 Other Operations ................... 46.8 49.7 7.2 ----------- ----------- --------- Total Consolidated ................ $ 2,158.6 $ 2,294.2 $ 789.4 =========== =========== ========= 1995 Electric Operations ................ $ 1,308.7 $ 1,381.2 $ 451.2 Natural Gas Transmission ........... 562.3 567.6 228.5 Energy Services Trading and Marketing ............. 20.0 17.1 2.3 Field Services .................... 96.8 106.1 40.3 Global Asset Development .......... 24.9 26.8 6.8 Other Energy Services ............. 23.6 23.7 0.8 Energy Services' Eliminations ..... -- -- -- ----------- ----------- --------- Total Energy Services ........... 165.3 173.7 50.2 Other Operations ................... 32.0 68.0 7.2 ----------- ----------- --------- Total Consolidated ................ $ 2,068.3 $ 2,190.5 $ 737.1 =========== =========== =========
36 DUKE ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued NOTE 4. BUSINESS SEGMENTS -- Continued
Capital and Investment Expenditures Identifiable Assets -------------------------------------- ------------------------------- 1997 1996 1995 1997 1996 ------------ ------------ ------------ --------------- --------------- In Millions Electric Operations .................... $ 742.6 $ 609.8 $ 704.0 $ 12,958.5 $ 12,625.2 Natural Gas Transmission ............... 247.3 194.0 230.5 5,088.9 5,216.4 Energy Services Trading and Marketing ................. 17.9 6.6 15.3 1,857.3 1,403.5 Field Services ........................ 156.5 530.8 187.2 1,979.8 1,769.4 Global Asset Development .............. 348.3 34.8 53.5 987.6 522.3 Other Energy Services ................. 47.2 39.1 1.0 223.2 130.1 Energy Services' Eliminations ......... -- -- -- (169.1) (247.0) ---------- ---------- ---------- ------------ ------------ Total Energy Services ............... 569.9 611.3 257.0 4,878.8 3,578.3 Other Operations ....................... 467.8 134.9 99.2 1,102.6 946.3 ---------- ---------- ---------- ------------ ------------ Total Consolidated .................... $ 2,027.6 $ 1,550.0 $ 1,290.7 $ 24,028.8 $ 22,366.2 ========== ========== ========== ============ ============
NOTE 5. REGULATORY MATTERS Electric Operations. The NCUC and the PSCSC approve rates for retail electric sales within their respective states. The FERC approves the Corporation's rates for electric sales to wholesale customers. Electric sales to the other joint owners of the Catawba Nuclear Station (Catawba), which represent a substantial majority of the Corporation's electric wholesale revenues, are set through contractual agreements. In 1997, the Corporation signed stipulation agreements with the NCUC and the PSCSC as a result of the merger in which the Corporation agreed to cap the base electric rates at existing levels through 2000, with very limited exceptions, for retail customers. The Corporation also signed an agreement with the FERC to freeze rates, except for the market-based rates, for the Corporation's transmission and wholesale electric sales. In addition, the Corporation signed agreements with the other joint owners of Catawba providing for a cap on the rates charged under 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 is of the opinion that these agreements will not have a material adverse effect on the consolidated results of operations or financial position of the Corporation. Fuel costs are reviewed semiannually in the wholesale jurisdiction and annually in the South Carolina retail jurisdiction, with provisions for changing 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 the Corporation to adjust electric rates for past over- or under-recovery of fuel costs. Therefore, the Corporation reflects in revenues the difference between actual fuel costs incurred for electric operations and fuel costs recovered through rates. The stipulation agreements related to the merger do not apply to the fuel cost adjustments. The PSCSC, on May 7, 1996, ordered a rate reduction in the form of a decrement rider of 0.432 cents per kilowatt-hour, or an average of approximately 8 percent, affecting South Carolina retail customers. South Carolina retail sales represent approximately 30 percent of the Corporation's total regulated electric sales. The rate reduction was reflected on bills rendered on or after June 1, 1996. This net decrement rider reflects an interim true-up decrement adjustment associated with the levelization of Catawba purchased capacity costs and an interim true-up increment associated with amortization of the demand-side management deferral account. The rate adjustment was made because, in the South Carolina retail jurisdiction, cumulative levelized revenues associated with the recovery of Catawba purchased capacity costs had exceeded purchased capacity payments and accrual of deferred returns, and certain demand-side costs had exceeded the level reflected in rates. Certain of the Corporation's electric wholesale customers, excluding the other Catawba joint owners, initiated proceedings in 1995 before the FERC concerning rate related matters. The Corporation and nine of its eleven wholesale customers entered into a settlement in July 1996 which reduced the customers' electric rates by approximately 9 percent and renewed their contracts with the Corporation through 2000. Both of the customers that did not enter into the settlement have signed 37 DUKE ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued NOTE 5. REGULATORY MATTERS -- Continued agreements and have begun purchasing electricity from other suppliers in 1997. Early in 1998, the Corporation reached agreements, subject to FERC approval, with both of these former customers to recover the stranded costs incurred to serve these customers. Management is of the opinion that these agreements will not have a material adverse impact on the consolidated results of operations or financial position of the Corporation. Natural Gas Operations. FERC Order 636 and Natural Gas Transition Costs. The Corporation's interstate natural gas pipelines primarily provide transportation and storage services pursuant to FERC Order 636. Order 636 allows pipelines to recover eligible costs resulting from implementation of the order (transition costs). In 1994, the FERC approved TETCO's settlement resolving regulatory issues related primarily to Order 636 transition costs and a number of other issues related to services prior to Order 636. TETCO's liability for transition costs is estimated based on the amount of producers' natural gas reserves and other factors. TETCO's final and nonappealable settlement provides for the recovery of certain of these transition costs from customers through volumetric and reservation charges through 2002 and beyond, if necessary. Pursuant to the settlement, TETCO will absorb a certain portion of the transition costs, the amount of which continues to be subject to change dependent upon natural gas prices and deliverability levels. In 1995, based upon producers' discoveries of additional natural gas reserves, TETCO increased the estimated liabilities for transition costs by $125.8 million. Under the terms of the existing settlement, regulatory assets were increased $85.8 million for amounts expected to be collected from customers and TETCO recognized a $40 million charge to operating expenses ($26 million after tax). On July 16, 1996, the U.S. Court of Appeals for the District of Columbia upheld, in general, all aspects of Order 636 and remanded certain issues for further explanation. One of the issues remanded for further explanation is whether pipelines should be entitled to recover 100% of gas supply realignment (GSR) costs. This matter is substantially mitigated by TETCO's transition cost settlements. The Corporation believes the exposure associated with gas purchase contract commitments is substantially mitigated by transition cost recoveries pursuant to customer settlements, Order 636 and other mechanisms, and that this issue will not have a material adverse effect on consolidated results of operations or financial position of the Corporation. Jurisdictional Transportation and Sales Rates. On April 1, 1992 and November 1, 1992, PEPL placed into effect, subject to refund, general rate increases. On February 26, 1997, the FERC approved PEPL's settlement agreement which provided final resolution of refund matters and established prospective rates. The agreement terminated other actions relating to these proceedings as well as PEPL's restructuring of rates and transition cost recoveries related to FERC Order 636. The settlement will not have a material impact on future operating revenues or financial position of the Corporation. As a result of the resolution of these and certain other proceedings, PEPL recorded earnings before interest and taxes of $32.7 million, $8 million, and $20.6 million in 1997, 1996, and 1995, respectively. NOTE 6. JOINT OWNERSHIP OF GENERATING FACILITIES The Corporation previously sold interests in both units of Catawba. The other owners of portions of Catawba and supplemental information regarding their ownership are as follows:
Owner Ownership Interest in the Station - --------------------------------------------------------------- ---------------------------------- North Carolina Municipal Power Agency Number 1 (NCMPA) .. 37.5% North Carolina Electric Membership Corporation (NCEMC) .. 28.125% Piedmont Municipal Power Agency (PMPA) .................. 12.5% Saluda River Electric Cooperative, Inc. (Saluda River) .. 9.375%
Each owner has provided its own financing for its ownership interest in Catawba. The Corporation retains a 12.5 percent ownership interest in Catawba. As of December 31, 1997, $507.8 million of Property, Plant and Equipment represented the Corporation's investment in Units 1 and 2. Accumulated depreciation and 38 DUKE ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued NOTE 6. JOINT OWNERSHIP OF GENERATING FACILITIES -- Continued amortization of $198.3 million associated with Catawba was recorded as of year-end 1997. The Corporation's share of operating costs of Catawba is included in the Consolidated Statements of Income. In connection with the joint ownership, the Corporation has entered into contractual interconnection agreements with the other joint owners to purchase declining percentages of the generating capacity and energy from the plant. These purchased power agreements were effective beginning with the commercial operation of each unit. Units 1 and 2 began commercial operation in June 1985 and August 1986, respectively. The purchased power agreements were established for 15 years for NCMPA and PMPA and 10 years for NCEMC and Saluda River. While the purchased power agreements with NCMPA and PMPA extend for 15 years, a significant decrease in the percentage of capacity and energy the Corporation is obligated to purchase occurs in the 11th calendar year of operation for each unit. This significant decrease occurred in 1995 for Unit 1 and 1996 for Unit 2. The interconnection agreements also provide for supplemental power sales by the Corporation to the other joint owners. Such power sales are to satisfy capacity and energy needs of the other joint owners beyond the capacity and energy which they retain from Catawba 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 and Saluda River have given appropriate notice that they intend to acquire their supplemental capacity requirements outside of these agreements effective January 1, 2001 and January 1, 2002, respectively, thus relieving the Corporation of the obligation to serve this portion of load. In addition, as a result of the merger, the other joint owners of Catawba have the right to end their supplemental capacity requirements as of January 1, 2001 with written notice to the Corporation due by December 31, 1999. As the joint owners retain more capacity and energy from Catawba or a third party, supplemental power sales are expected to decline. Management is of the opinion that this will not have a material adverse effect on the consolidated results of operations or the financial position of the Corporation. The interconnection agreements with each of the other joint owners include provisions that the Corporation will provide generating reserves to backstand the other joint owners' retained capacity in the Catawba plant at the system average cost of installed capacity. Additionally, the agreements include certain reliability exchanges designed to manage outage-related risks by exchanging energy entitlements between Catawba and the McGuire Nuclear Station, impacting the Corporation as well as all the other joint owners. The agreements also provide the other joint owners the ability to terminate the interconnection agreements in their entirety upon eight years written notice to the Corporation. PMPA has rendered such notice effective January 1, 2006. This termination will relieve the Corporation of the obligation to serve this portion of load as well as provide the reserves associated with PMPA's retained capacity. Management is of the opinion that this will not have a material adverse effect on the consolidated results of operations or the financial position of the Corporation. Purchased energy cost payments are based on variable operating costs and are a function of the generation output of Catawba. Purchased capacity payments are based on the fixed costs of the plant and include the capital costs and fixed operating and maintenance costs. Actual purchased capacity costs for 1997 and projected obligations through 2000, the last year of the purchase buy-backs, are $99.8 million, $72 million, $52.9 million and $6.6 million, respectively. Effective in its November 1991 rate order, the NCUC reaffirmed the Corporation's recovery from retail electric customers, on a levelized basis, of the capital costs and fixed operating and maintenance costs of capacity purchased from the other joint owners. The PSCSC in its November 1991 rate order reaffirmed the Corporation's recovery on a levelized basis of the capital costs of capacity purchased from the other joint owners. Levelization was reaffirmed through inclusion in rates approved in March 1992 by the FERC. The portion of purchased capacity subject to levelization not currently recovered in rates is being deferred, and the Corporation is recording a deferred return on the accumulated balance. The Corporation is recovering the accumulated balance, including the deferred return, when the sum of the declining purchased capacity payments and accrual of deferred returns for the current period drops below the levelized revenues. Jurisdictional levelizations are intended to recover total costs, including deferred returns, and are subject to adjustments, including final true-ups. The Corporation recovers the costs of purchased energy and the non-levelized portion of purchased capacity on a current basis. The current levelized revenues approved in the Corporation's last general rate proceedings are $211.4 million, $94.1 million and $6.8 million for North Carolina retail, South Carolina retail and Other Wholesale (FERC), respectively. Purchased power costs, subject to levelization, are deferred based on allocation factors of approximately 62 percent, 26 percent 39 DUKE ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued NOTE 6. JOINT OWNERSHIP OF GENERATING FACILITIES -- Continued and 2 percent for North Carolina retail, South Carolina retail and Other Wholesale (FERC), respectively. The PSCSC, on May 7, 1996, ordered a rate reduction in the form of a decrement rider for an interim true-up adjustment. The Corporation also recovers an allocated amount of purchased power costs in the pricing of supplemental sales made to the other joint owners on a current basis. During 1996, in the North Carolina retail and the FERC wholesale jurisdictions, annual levelized revenues exceeded purchased capacity payments and the accrual of deferred returns for the first time. In the South Carolina retail jurisdiction, cumulative levelized revenues have exceeded purchased capacity payments and accrual of deferred returns. For the years ended December 31, 1997, 1996 and 1995, the Corporation recorded purchased capacity and energy costs from the other joint owners of $120.1 million, $151.2 million, and $388.2 million, respectively. These amounts, after adjustments for the costs of capacity purchased not reflected in current rates, are included in Net Interchange and Purchased Power in the Consolidated Statements of Income. As of December 31, 1997 and 1996, $835.6 million and $892 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. NOTE 7. INCOME TAXES Income tax expense as presented in the Consolidated Statements of Income is summarized as follows:
1997 1996 1995 ------------ ------------ ------------ In Millions Current income taxes Federal ................................... $ 432.7 $ 514.3 $ 452.0 State ..................................... 100.5 108.8 97.0 --------- --------- --------- Total current income taxes ............... 533.2 623.1 549.0 --------- --------- --------- Deferred income taxes, net Federal ................................... 111.9 73.1 105.2 State ..................................... 8.9 12.8 21.2 --------- --------- --------- Total deferred income taxes, net ......... 120.8 85.9 126.4 --------- --------- --------- Investment tax credit amortization .......... (15.1) (11.2) (11.2) --------- --------- --------- Total income tax expense .................... $ 638.9 $ 697.8 $ 664.2 ========= ========= =========
Total income tax differs from the amount computed by applying the federal income tax rate of 35% to income before income taxes. The reasons for this difference are as follows:
1997 1996 1995 ------------ ------------ ------------ In Millions Income tax, computed at the statutory rate .......... $ 564.7 $ 626.1 $ 588.8 Adjustments resulting from: State income tax, net of federal income tax effect 70.8 78.6 76.5 Other items, net .................................. 3.4 (6.9) (1.1) -------- --------- --------- Total income tax expense ............................ $ 638.9 $ 697.8 $ 664.2 ======== ========= ========= Effective tax rate .................................. 39.6% 39.0% 39.5%
40 DUKE ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued NOTE 7. INCOME TAXES -- Continued The tax effects of temporary differences that resulted in deferred income tax assets and liabilities, and a description of the significant items that created these differences as of December 31, 1997 and 1996, are as follows:
1997 1996 --------------- --------------- In Millions Deferred credits and other liabilities ..................... $ 408.4 $ 418.2 Alternative minimum tax credit carryforward ................ 30.3 72.6 Other ...................................................... 46.3 -- ----------- ----------- Total deferred income tax assets ......................... 485.0 490.8 Valuation allowance and other tax reserves ................. (146.1) (141.1) ----------- ----------- Net deferred income tax assets ........................... 338.9 349.7 ----------- ----------- Investments and other assets ............................... (263.1) (208.8) Property, plant and equipment .............................. (2,357.7) (2,268.7) Regulatory assets and deferred debits ...................... (623.2) (642.6) Regulatory asset related to restating to pre-tax basis ..... (437.8) (433.2) Other ...................................................... -- (5.9) ----------- ----------- Total deferred income tax liabilities .................... (3,681.8) (3,559.2) ----------- ----------- State deferred income tax, net of federal tax effect ....... (363.6) (359.0) ----------- ----------- Net deferred income tax liability .......................... $ (3,706.5) $ (3,568.5) ============ ============
The alternative minimum tax credit carryforward can be carried forward indefinitely. In 1990, PanEnergy established a provision for certain tax issues related to the purchase of TEC, which resulted in an increase in goodwill and deferred income tax liability. Following discussions with the Internal Revenue Service, PanEnergy revised its estimates in 1995 and 1996 with respect to these issues. As a result, the related goodwill and deferred income tax liability were reduced by approximately $40 million and $100 million in 1996 and 1995, respectively. If tax benefits relating to the valuation allowance for deferred income tax assets and other tax reserves are recognized subsequent to December 31, 1997, approximately $29.4 million will be allocated as an adjustment to goodwill. NOTE 8. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT FINANCIAL INSTRUMENTS. In order to obtain variable rate financing at an attractive cost, the Corporation entered into interest rate swap agreements in which the Corporation effectively exchanged $200 million of 8% Series B First and Refunding Mortgage Bonds for floating rate debt at the three month London Interbank Offered Rate (LIBOR) plus a .074% margin and $100 million of 7.5% Series B First and Refunding Mortgage Bonds for floating rate debt at three month LIBOR plus a 1.1272% margin. The interest rate swaps expire in 1999 and 2000, respectively, and rates are reset quarterly. As a result of the interest rate swap contracts, interest expense on the Consolidated Statements of Income is recognized at the weighted average rate for the year tied to LIBOR. The weighted average rates for 1997, 1996 and 1995 are as follows (dollars in millions):
Weighted Average Rate -------------------------------- Series Issued Year Due Face Value 1997 1996 1995 - ----------------------------- -------- ---------- ------------ ---------- ---------- ---------- 8% Series B ........... 1994 1999 $ 200 5.78% 5.64% 6.14% 7.5% Series B ......... 1995 2025 $ 100 6.83% 6.69% 7.06%
In 1996, TETCO received $98.6 million from the financing of the right to collect certain Order 636 natural gas transition costs, with limited recourse. At December 31, 1997 and 1996, $52.8 million and $87.3 million, respectively, remained outstanding related to the transition cost recovery rights and were included in Other Current Liabilities in the Consolidated Balance Sheets. In the opinion of management, the probability that the Corporation will be required to perform under the recourse provisions is remote. 41 DUKE ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued NOTE 8. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT -- Continued During 1997, the Corporation terminated its agreement to sell accounts receivable which was entered into in 1996. Also in 1997, the LNG settlement receivables sale agreement, which was entered into in 1993, expired, as all the receivables were collected. Amounts outstanding at December 31, 1996 under these agreements were $100 million and $29.9 million, respectively. FAIR VALUE OF FINANCIAL INSTRUMENTS. The fair value of the Corporation's financial instruments is summarized below. Judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates determined as of December 31, 1997 and 1996 are not necessarily indicative of the amounts the Corporation could have realized in current market exchanges.
1997 1996 Assets (Liabilities) Assets (Liabilities) ---------------------------- ----------------------------- Approximate Approximate Book Value Fair Value Book Value Fair Value -------------- ------------- -------------- -------------- In Millions Long-term debt (a) ............................. $ (6,607.3) $ (6,842.8) $ (5,835.7) $ (5,999.0) Interest rate swaps (b) ........................ -- 9.5 -- 12.0 Guaranteed preferred beneficial interests in Corporation's subordinated notes (a) .......... (339.0) (356.2) -- -- Preferred stock (a) ............................ (489.0) (530.2) (684.0) (699.0)
- --------- (a) The majority of the estimated fair value amounts of long-term debt, guaranteed preferred beneficial interests in Corporation's subordinated notes and preferred stock were obtained from independent parties. (b) Amounts shown for interest rate swaps represent estimated amounts the Corporation would receive if agreements were settled at current market rates. The fair value of cash and cash equivalents, notes receivable, notes payable and commercial paper and nuclear decommissioning trust funds are not materially different from their carrying amounts because of the short-term nature of these instruments or the stated rates approximating market rates. The following financial instruments have no book value associated with them and there are no fair values readily determinable since quoted market prices are not available: guarantees made to affiliates or recourse provisions from affiliates and sales agreements for trade accounts receivables, LNG project settlement and Order 636 natural gas transition cost recovery. COMMODITY DERIVATIVE INSTRUMENTS. At December 31, 1997 and 1996, the Corporation held or issued several instruments that reduce exposure to market fluctuations relative to price and transportation costs of natural gas, electricity and petroleum products. The Corporation's market exposure, primarily within DETM and D/LD, arises from natural gas storage inventory balances and fixed-price purchase and sale commitments that extend for periods of up to 9 years. The Corporation uses futures, swaps and options to manage and hedge price and location risk related to these market exposures. DETM and D/LD also provide risk management services to its customers through a variety of energy commodity instruments including forward contracts involving physical delivery of an energy commodity, energy commodity futures, over-the-counter swap agreements and options. In addition to hedging activities, the Corporation also engages in the trading of such instruments, and therefore experiences net open positions. The Corporation manages open positions with strict policies which limit its exposure to market risk and require daily reporting to management of potential financial exposure. These policies include statistical risk tolerance limits using historical price movements to calculate a daily earnings at risk as well as a total Value-at-Risk (VAR) measurement. The weighted-average life of the Corporation's commodity risk portfolio was approximately 7 months at December 31, 1997. Energy commodity futures involve the buying or selling of natural gas, electricity or other energy-related commodities at a fixed price. Over-the-counter swap agreements require the Corporation to receive or make payments based on the difference between a specified price and the actual price of the underlying commodity. The Corporation uses futures and swaps to manage margins on underlying fixed-price purchase or sale commitments for physical quantities of natural gas, electricity and other energy-related commodities. Energy commodity options held to mitigate price risk provide the right, but not 42 DUKE ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued NOTE 8. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT -- Continued the requirement, to buy or sell energy-related commodities at a fixed price. The Corporation utilizes options to manage margins and to limit overall price risk exposure. DETM and D/LD account for these activities using the mark to market method of accounting. At December 31, 1997 and 1996, the Corporation had outstanding futures, swaps and options for an absolute notional contract quantity of 4,810 billion cubic feet (Bcf) and 3,425 Bcf of natural gas, respectively, some of which were in place to offset the risk of price fluctuations under fixed-price commitments for purchasing and delivering natural gas. At December 31, 1997 and 1996, outstanding futures, swaps and options related to electric contracts and other energy-related commodities were not material. The gains, losses and costs related to those commodity instruments that qualify as a hedge are not recognized until the underlying physical transaction occurs. At December 31, 1997 and 1996, the Corporation had current unrecognized net gains of $13.5 million and $8.7 million, respectively, related to commodity instruments. The fair value of energy commodity swaps held at December 31, 1997 was a liability of $158.6 million. During 1997, 1996 and 1995, the Corporation recognized net gains of $33.6 million, $25.4 million, and $10.5 million, respectively, from trading activities. The values of energy commodity futures, swaps and options held for trading purposes were as follows:
1997 1996 ------------------------ --------------------- Assets Liabilities Assets Liabilities ---------- ------------- -------- ------------ In Millions Fair value at December 31 ........... $ 1,626 $ 1,470 $ 833 $ 941 Notional amount at December 31 ...... 2,009 1,825 407 530 Average fair value for the year ..... 595 700 588 653
MARKET AND CREDIT RISK. New York Mercantile Exchange (Exchange) traded futures and option contracts are guaranteed by the Exchange and have nominal credit risk. On all other transactions described above, the Corporation is exposed to credit risk in the event of nonperformance by the counterparties. For each counterparty, the Corporation analyzes the financial condition prior to entering into an agreement, establishes credit limits and monitors the appropriateness of these limits on an ongoing basis. The change in market value of Exchange-traded futures and options contracts requires daily cash settlement in margin accounts with brokers. Swap contracts and most other over-the-counter instruments are generally settled at the expiration of the contract term and may be subject to margin requirements with the counterparty. NOTE 9. INVESTMENT IN AFFILIATES Certain investments, where the Corporation's ownership in domestic and international affiliates is 50 percent or less, are accounted for by the equity method. These investments include undistributed earnings of $20.6 million in 1997 and $49.7 million in 1996. The Corporation's proportionate share of net income from these affiliates for the years ended December 31, 1997, 1996 and 1995 was $38.4 million, $32.7 million, and $59.8 million, respectively. These amounts are reflected in Other Operating Revenues in the Consolidated Statements of Income. Investment in affiliates as of December 31, 1997 and 1996 includes the following: 43 DUKE ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued NOTE 9. INVESTMENT IN AFFILIATES -- Continued
1997 1996 ----------- ----------- In Millions Natural Gas Transmission -- domestic ......... $ 67.5 $ 46.5 -------- -------- Energy Services Field Services -- domestic .................. 159.8 129.6 Global Asset Development Domestic .................................. 174.5 14.5 International ............................. 207.8 183.5 Other Energy Services Domestic .................................. 15.9 49.5 International ............................. 9.7 1.4 -------- -------- Total Energy Services .................... 567.7 378.5 -------- -------- Other Operations Domestic .................................... 38.1 65.3 International ............................... 12.6 12.6 -------- -------- Total Other Operations ................... 50.7 77.9 -------- -------- Total Investments in Affiliates .............. $ 685.9 $ 502.9 ======== ========
NATURAL GAS TRANSMISSION. Investments primarily include ownership interests in natural gas pipeline joint ventures which transport gas from Canada to the United States. FIELD SERVICES. Among other investments, Field Services holds an interest in a partnership which owns natural gas gathering systems in the Gulf of Mexico, a master limited partnership that owns and operates a petroleum pipeline, and a joint venture that provides gathering, processing and marketing services for natural gas producers in Oklahoma. GLOBAL ASSET DEVELOPMENT. Global Asset Development has investments in various natural gas and electric generation and transmission facilities world-wide, and in a joint venture that owns and operates a methanol plant and a MTBE (methyl tertiary butyl ether) plant in Jubail, Saudi Arabia. OTHER ENERGY SERVICES. Investments include the participation in various construction and support activities for fossil-fueled generating plants. OTHER OPERATIONS. This segment holds investments in various real estate development projects and a joint venture that provides wireless personal communication services. 44 DUKE ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued NOTE 9. INVESTMENT IN AFFILIATES -- Continued Summarized combined balance sheet and income statement information of the entities that are accounted for using the equity method are as follows:
1997 1996 1995 ------------- -------------- ------------ In Millions Assets Current Assets ........................ $ 642.0 $ 1,025.2 $ 617.0 Noncurrent Assets ..................... 5,867.8 5,660.5 5,090.2 ---------- ----------- ---------- Total Assets ......................... $ 6,509.8 $ 6,685.7 $ 5,707.2 ========== =========== ========== Liabilities and Equity Current Liabilities ................... $ 757.4 $ 879.3 $ 468.5 Noncurrent Liabilities ................ 3,257.2 3,461.4 3,376.0 Equity ................................ 2,495.2 2,345.0 1,862.7 ---------- ----------- ---------- Total Liabilities and Equity ......... $ 6,509.8 $ 6,685.7 $ 5,707.2 ========== =========== ========== Income Operating Revenues .................... $ 905.0 $ 3,133.2 $ 1,391.2 Operating Expenses .................... 702.8 2,494.1 667.1 Net Income ............................ 72.4 160.1 236.2
The Corporation had outstanding loans to certain affiliates of $87.1 million and $2.9 million at December 31, 1997 and 1996, respectively. 45 DUKE ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued NOTE 10. PROPERTY, PLANT AND EQUIPMENT A summary of property, plant and equipment by classification as of December 31, 1997 and 1996 is as follows:
1997 1996 -------------- -------------- In Millions Electric Plant In Service Production ............................................................. $ 7,575.5 $ 7,278.4 Transmission ........................................................... 1,566.3 1,543.7 Distribution ........................................................... 4,517.5 4,303.9 General plant .......................................................... 1,118.6 1,068.3 Nuclear fuel ........................................................... 643.9 604.8 Construction work in progress .......................................... 222.5 389.0 ----------- ----------- Total electric plant in service ....................................... 15,644.3 15,188.1 ----------- ----------- Natural Gas Plant In Service Transmission ........................................................... 6,094.4 5,994.1 Gathering .............................................................. 812.5 643.0 Processing ............................................................. 502.4 508.4 Underground storage .................................................... 488.8 450.6 LNG facilities and vessels ............................................. 751.7 751.0 General plant .......................................................... 310.7 348.7 Construction work in progress .......................................... 159.9 126.7 ----------- ----------- Total natural gas plant in service .................................... 9,120.4 8,822.5 ----------- ----------- Other Property and Equipment ............................................. 683.4 457.6 ----------- ----------- Total Property, Plant and Equipment ...................................... 25,448.1 24,468.2 Less accumulated depreciation (including amortization of nuclear fuel: 1997-- $370.0 million; 1996 -- $363.3 million).......................... 9,712.2 9,199.1 ----------- ----------- Net property, plant and equipment ..................................... $ 15,735.9 $ 15,269.1 =========== ===========
A summary of accumulated depreciation for property, plant and equipment by classification as of December 31, 1997 and 1996 is as follows:
1997 1996 -------------- -------------- In Millions Electric Plant In Service ............ $ 6,067.7 $ 5,801.8 Natural Gas Plant In Service ......... 3,602.9 3,365.8 Other Property and Equipment ......... 41.6 31.5 ----------- ----------- Total Accumulated Depreciation ......... $ 9,712.2 $ 9,199.1 =========== ===========
46 DUKE ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued NOTE 11. DEBT AND CREDIT FACILITIES The following credit facilities were available to the Corporation at December 31, 1997 and 1996:
1997 1996 -------------------------- ------------------------- Credit Credit Facilities Outstanding Facilities Outstanding ------------ ------------- ------------ ------------ In Millions Annually renewable facilities .......... $ 54.0 $ 16.3 $ 64.9 $ 8.6 364-day facilities ..................... 300.0 -- 400.0 -- Two-year revolving facilities (a) ...... 40.0 -- 40.0 -- Four-year revolving facilities (b) ..... 125.0 77.0 235.0 42.0 Five-year revolving facilities ......... 2,200.0 -- 755.0 -- ---------- -------- ---------- ------- Total Consolidated ................... $ 2,719.0 $ 93.3 $ 1,494.9 $ 50.6 ========== ======== ========== =======
- --------- (a) At December 31, 1997 and 1996, the Corporation had $40 million of pollution control bonds, included in long-term debt, backed by the two-year revolving facilities. (b) The outstanding balance was included in long-term debt. The 364-day and five-year credit facilities support the Corporation's commercial paper facilities of $2.5 billion and $780 million at December 31, 1997 and 1996, respectively. Amounts outstanding under the commercial paper facilities at December 31, 1997 and 1996 were as follows:
1997 1996 -------------- ------------ In Millions Total commercial paper outstanding ......... $ 1,749.2 $ 324.2 Less portion classified as short-term ...... 149.2 194.2 ----------- --------- Portion classified as long-term debt ....... $ 1,600.0 $ 130.0 =========== =========
In addition to amounts borrowed under the credit facilities and commercial paper facilities, the Corporation had $251.9 million of short-term borrowings from banks outstanding at December 31, 1996. Also, at December 31, 1997 and 1996, the Corporation had a note payable to an affiliate of $4 million and $5 million, respectively. A summary of short-term debt is as follows:
1997 1996 1995 ------------ ------------ ------------ Dollars In Millions Amount outstanding at end of year .................. $ 169.5 $ 459.7 $ 300.3 Weighted-average rate at end of year ............... 6.04% 6.16% 6.09% Maximum amount outstanding during the year ......... $ 889.1 $ 501.4 $ 409.3 Average amount outstanding during the year ......... $ 417.6 $ 182.4 $ 152.8 Weighted-average interest rate for the year -- computed on a daily basis ......................... 5.65% 5.92% 6.15%
47 DUKE ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued NOTE 11. DEBT AND CREDIT FACILITIES -- Continued
Year Due 1997 1996 ----------- ------------ ------------- In Millions Duke Energy Corporation (a) First and refunding mortgage bonds: 5.17% ................................................................. 1998 $ 50.0 $ 50.0 5.76% - 8% ............................................................ 1999 425.0 425.0 7% .................................................................... 2000 200.0 200.0 5 7/8% - 7.41% ........................................................ 2001-2004 600.0 600.0 6 3/8% - 7% ........................................................... 2005-2008 325.0 325.0 6 3/4% - 8.30% ........................................................ 2023-2025 878.0 878.0 7% - 8.95% ............................................................ 2027-2033 165.5 165.6 Mortgage bonds redeemed or matured during 1997 ........................ -- 647.6 Pollution control bonds -- 3.58% - 7.75% ................................ 2012-2017 172.0 172.0 Commercial paper, 5.9% and 6.23% weighted average rate at December 31, 1997 and 1996, respectively .............................. 800.0 130.0 Other debt .............................................................. 25.7 27.8 Duke Capital Corp. Commercial paper, 6.03% weighted-average rate at December 31, 1997 ...... 800.0 -- PanEnergy Bonds: 7 3/4% ................................................................ 2022 328.0 328.0 8 5/8% Debentures ..................................................... 2025 100.0 100.0 Notes: 9.55%, maturing serially .............................................. 1996-1999 27.5 41.3 9.9%, maturing serially ............................................... 2000-2003 45.0 45.0 7% - 8 5/8% ........................................................... 1999-2006 450.0 450.0 Notes converted or matured during 1997 ................................ -- 124.5 TETCO Notes: 8% - 10 3/8% .......................................................... 2000-2004 500.0 500.0 Medium term, Series A, 7.64 - 9.07% ................................... 1999-2012 100.0 100.0 Algonquin 9.13% Notes ............................................................. 2001-2003 100.0 100.0 PEPL 7 7/8% Notes ............................................................ 2004 100.0 100.0 7.2% - 7.95% Debentures ................................................. 2023-2024 200.0 200.0 Crescent Resources, Inc. (b) Construction and mortgage loans, 6.02% - 7.10% .......................... 1998-2011 116.7 76.0 Revolving credit facilities, 6.30% and 5.95% weighted-average rate at December 31, 1997 and 1996, respectively .............................. 2001 77.0 42.0 Nantahala Power and Light Company 6.90% - 9.21% Senior Notes, maturing serially ........................... 2011-2016 67.3 68.0 Other ................................................................... 1998-2001 .2 .4 Unamortized debt discount and premium, net .............................. (45.6) (60.5) ---------- ---------- Total long-term debt .................................................... 6,607.3 5,835.7 Current maturities of long-term debt .................................... (77.3) (350.6) ---------- ---------- Total long-term portion ................................................. $ 6,530.0 $ 5,485.1 ========== ==========
- --------- (a) Substantially all of the Corporation's electric plant was mortgaged as of December 31, 1997. (b) Substantial amounts of Crescent Resources, Inc.'s real estate development projects, land and buildings are pledged as collateral. 48 DUKE ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued NOTE 11. DEBT AND CREDIT FACILITIES -- Continued The annual maturities of consolidated long-term debt at December 31, 1997 were $77.3 million, $612.1 million, $427 million, $403 million and $192.5 million for 1998 through 2002, respectively. On October 1, 1996, TETCO redeemed its $150 million, 10% debentures and its $100 million, 10 1/8% debentures due 2011. TETCO recorded a non-cash extraordinary item of $16.7 million (net of income tax of $10.3 million) related to the unamortized discount on this early retirement of debt. Earnings per common share for 1996 were reduced $0.05 as a result of this charge. NOTE 12. NUCLEAR DECOMMISSIONING COSTS & SPENT NUCLEAR FUEL NUCLEAR DECOMMISSIONING COSTS. Estimated site-specific nuclear decommissioning costs, including the cost of decommissioning plant components not subject to radioactive contamination, total approximately $1.3 billion stated in 1994 dollars based on decommissioning studies completed in 1994. This amount includes the Corporation's 12.5 percent ownership in Catawba. The other joint owners of Catawba are responsible for decommissioning costs related to their ownership interests in the station. Both the NCUC and the PSCSC have granted the Corporation recovery of estimated decommissioning costs through retail rates over the expected remaining service periods of the Corporation's nuclear plants. 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 the Corporation'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 1997 and 1996, the Corporation expensed approximately $56.5 million which was contributed to the external funds for decommissioning costs and accrued an additional $3.0 million and $1.6 million to the internal reserve in 1997 and 1996, respectively. Nuclear units are depreciated at an annual rate of 4.7 percent, of which 1.61 percent is for decommissioning. The balance of the external funds as of December 31, 1997 and 1996, was $471.1 million and $362.6 million respectively. The balance of the internal reserve as of December 31, 1997 and 1996, was $210.8 million and $207.8 million, respectively, and is reflected in Accumulated Depreciation and Amortization in the Consolidated Balance Sheets. Management's opinion is that the decommissioning costs being recovered through rates, when coupled with assumed after-tax fund earnings of 5.5 to 5.9 percent, 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 uranium enrichment plants of the Department of Energy (DOE). 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 as Fuel Used in Electric Generation in the Consolidated Statements of Income. The Corporation paid $9.7 million during 1997 and has paid $54.7 million cumulatively related to its ownership interests in nuclear plants. The Corporation has reflected the remaining liability and regulatory asset of $87.1 million and $94.7 million in the Consolidated Balance Sheets at December 31, 1997 and 1996, respectively, and were classified 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, the Corporation has entered into contracts with the DOE for the disposal of spent nuclear fuel. The DOE delayed in accepting the waste materials on the contract date of January 31, 1998. The Corporation has satisfactory plans in place to provide storage of spent nuclear fuel if the DOE cannot accept it. Payments made to the DOE for disposal costs are based on nuclear output and are included in Fuel Used in Electric Generation in the Consolidated Statements of Income. NOTE 13. GUARANTEED PREFERRED BENEFICIAL INTERESTS IN CORPORATION'S SUBORDINATED NOTES On December 8, 1997, Duke Energy Capital Trust I (the Trust), issued $350 million of its 7.2% trust preferred securities, at an $11 million discount, representing preferred undivided beneficial interests in the assets of the Trust. Payment of distributions on such preferred securities is guaranteed by the Corporation, but only to the extent the Trust has funds legally and immediately available to make such distributions. The Trust is a statutory business trust, of which the Corporation owns all the common securities, established for the purpose of issuing and selling such preferred securities and investing the gross proceeds in the 7.2% Series A Junior Subordinated Notes of the Corporation due September 30, 2037. 49 DUKE ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued NOTE 14. PREFERRED AND PREFERENCE STOCK The following shares of stock were authorized with or without sinking fund requirements as of December 31, 1997 and 1996:
Shares Par Value (in millions) ----------- -------------- Preferred Stock ............. $100 12.5 Preferred Stock A ........... $ 25 10.0 Preference Stock ............ $100 1.5
As of December 31, 1997 and 1996, there were no shares of preference stock outstanding. Preferred stock with sinking fund requirements as of December 31, 1997 and 1996, was as follows (dollars in millions):
Rate/Series Year Issued Shares Outstanding 1997 1996 - ---------------------------------- ------------- -------------------- ----------- ----------- 5.95% B (Preferred Stock A) 1992 800,000 $ 20.0 $ 20.0 6.10% C (Preferred Stock A) 1992 800,000 20.0 20.0 6.20% D (Preferred Stock A) 1992 800,000 20.0 20.0 6.20% T .................... 1992 130,000 13.0 13.0 6.30% U .................... 1992 130,000 13.0 13.0 6.40% V .................... 1992 130,000 13.0 13.0 6.75% X .................... 1993 500,000 50.0 50.0 7.50% R .................... 1992 850,000 -- 85.0 -------- -------- Total .................... $ 149.0 $ 234.0 ======== ========
The annual sinking fund requirements for 1998 through 2002 are $0, $20.0 million, $33.0 million, $33.0 million and $13.0 million, respectively. Some additional redemptions are permitted at the Corporation's option. The call provisions for the outstanding preferred stock specify various redemption prices not exceeding 104 percent of par value, plus accumulated dividends to the redemption date. Preferred stock without sinking fund requirements as of December 31, 1997 and 1996, was as follows (dollars in millions):
Rate/Series Year Issued Shares Outstanding 1997 1996 - --------------------------------------- ------------- -------------------- ----------- ----------- 4.50% C ......................... 1964 350,000 $ 35.0 $ 35.0 7.85% S ......................... 1992 600,000 60.0 60.0 7.00% W ......................... 1993 500,000 50.0 50.0 7.04% Y ......................... 1993 600,000 60.0 60.0 6.375% (Preferred Stock A) ...... 1993 2,400,000 60.0 60.0 Auction Series A ................ 1990 750,000 75.0 75.0 5.72% D ......................... 1966 350,000 -- 35.0 6.72% E ......................... 1968 350,000 -- 35.0 7.72% (Preferred Stock A) ....... 1992 1,600,000 -- 40.0 -------- -------- Total ......................... $ 340.0 $ 450.0 ======== ========
During December 1997, the Corporation redeemed approximately 3.2 million shares of preferred stock for $203.4 million. On December 18, 1997, the Corporation also commenced a tender offer to purchase a portion of six of its preferred issues totaling $315 million. The tender offer expired on February 3, 1998, with acceptances limited to a maximum of 50 percent of the outstanding shares of each issue. The premiums related to these redemptions were included in Dividends and Premiums on Redemptions of Preferred and Preference Stock in the Consolidated Statements of Income. 50 DUKE ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued NOTE 15. COMMITMENTS AND CONTINGENCIES FUTURE CONSTRUCTION COSTS. The Corporation plans to maintain its regulated facilities, and pursue business expansion of its regulated operations as opportunities arise. Projected 1998 capital and investment expenditures for the Electric Operations and the Natural Gas Transmission segments, including AFUDC, are approximately $700 million and $300 million, respectively. These projections are subject to periodic review and revisions. Actual expenditures incurred may vary from such estimates due to various factors, including revised electric load estimates, business expansion opportunities, environmental matters and cost and availability of capital. The Energy Services segment plans to spend approximately $100 million in 1998 for required capital expenditures at its existing facilities. In addition, the Corporation is seeking to significantly grow its Energy Services businesses, primarily through the Global Asset Development business unit. One opportunity includes the 520-megawatt combined cycle natural gas fired merchant generation plant in Bridgeport, Connecticut already under construction. Another growth opportunity includes the recently announced agreement to purchase from Pacific Gas & Electric Company three power plants in California. The power plants have a combined capacity of 2,645 megawatts. The purchase price is estimated at approximately $500 million and this transaction is expected to close during 1998. Other similar initiatives in 1998 will likely require significant capital and investment expenditures which will be subject to periodic review and revision and may vary significantly depending on the value-added opportunities presented. Projected capital and investment expenditures for 1998 of the Other Operations segment are approximately $200 million. These projected capital and investment expenditures are also subject to periodic review and revision and may vary significantly depending on the value-added opportunities presented. NUCLEAR INSURANCE. The Corporation owns and operates the McGuire and Oconee nuclear facilities with two and three nuclear reactors, respectively, and operates and has a partial ownership interest in the Catawba nuclear facility with two nuclear reactors. The Corporation maintains nuclear insurance coverage in three program areas: liability coverage; property, decontamination and decommissioning coverage; and business interruption and/or extra expense coverage. The Corporation is being reimbursed by the other joint owners of Catawba for certain expenses associated with nuclear insurance premiums paid by the Corporation. Pursuant to the Price-Anderson Act, the Corporation is required to insure against public liability claims resulting from nuclear incidents to the full limit of liability of approximately $8.9 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 $8.7 billion of coverage through the Price-Anderson Act's mandatory industry-wide excess secondary insurance program of risk pooling. The $8.7 billion of coverage is the sum of the current potential cumulative retrospective premium assessments of $79.3 million per licensed commercial nuclear reactor. This $8.7 billion will be increased by $79.3 million as each additional commercial nuclear reactor is licensed, or reduced by $79.3 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 $79.3 million for each of their licensed reactors, payable at a rate not to exceed $10 million a year per licensed reactor for each incident. The $79.3 million amount is subject to indexing for inflation and may be subject to state premium taxes. The Corporation is a member of Nuclear Electric Insurance Limited (NEIL), which provides property and business interruption insurance coverages for the Corporation'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 the Corporation's nuclear facilities. Excess Property Insurance. This policy provides excess property, decontamination and decommissioning liability insurance in the following amounts; $2.25 billion for Catawba and $1.5 billion for each of the Oconee and McGuire Nuclear Stations. 51 DUKE ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued NOTE 15. COMMITMENTS AND CONTINGENCIES -- Continued 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 $3.5 million per week and the Oconee Nuclear Station units are insured for up to approximately $2.8 million per week. Coverage amounts per unit decline if more than one unit is involved in an accidental outage. Initial coverage begins after a 17-week deductible period and continues at 100 percent for 52 weeks and 80 percent for the next 104 weeks. If NEIL's losses ever exceed its reserves for any of the above three programs, the Corporation will be liable for assessments of up to five times the Corporation's annual premiums. The current potential maximum assessments are as follows: Primary Property Insurance - $30 million; Excess Property Insurance - $31 million; Business Interruption Insurance - $27 million. The other joint owners of Catawba 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. The Corporation is subject to federal, state and local regulations regarding air and water quality, hazardous and solid waste disposal, and other environmental matters. TETCO is currently conducting PCB (polychlorinated biphenyl) assessment and clean-up programs at certain of its compressor station sites under conditions stipulated by a U.S. Consent Decree. The programs include on- and off-site assessment, installation of on-site source control equipment and groundwater monitoring wells, and on- and off-site clean-up work. TETCO expects to complete these clean-up programs during 1998. Groundwater monitoring activities will continue at several sites beyond 1998. In 1987, the Commonwealth of Kentucky instituted a suit in state court against TETCO, alleging improper disposal of PCBs at TETCO's three compressor station sites in Kentucky. This suit is still pending. In 1996, TETCO completed clean-up of these sites under the U.S. Consent Decree. The Corporation has also identified environmental contamination at certain sites on the PEPL and Trunkline systems and is undertaking clean-up programs at these sites. The contamination resulted from the past use of lubricants containing PCBs and the prior use of wastewater collection facilities and other on-site disposal areas. Soil and sediment testing, to date, has detected no significant off-site contamination. The Corporation has communicated with the Environmental Protection Agency and appropriate state regulatory agencies on these matters. Environmental clean-up programs are expected to continue until 2002. At December 31, 1997 and 1996, the Corporation had accrued liabilities for remaining estimated clean-up costs on the TETCO, PEPL and Trunkline systems which are included in Environmental Clean-up Liabilities in the Consolidated Balance Sheets. These cost estimates represent gross clean-up costs expected to be incurred, have not been discounted or reduced by customer recoveries and do not include fines, penalties or third-party claims. Costs to be recovered from customers are included in the Consolidated Balance Sheets as of December 31, 1997 and 1996, as Regulatory Assets and Deferred Debits. The federal and state clean-up programs are not expected to interrupt or diminish the Corporation's ability to deliver natural gas to customers. Based on the Corporation'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 results of operations or financial position of the Corporation. LITIGATION. In December 1996, TETCO received notification that Marathon Oil Company (Marathon) intended to commence substitution of other gas reserves, deliverability and leases for those dedicated to a certain natural gas purchase contract (the Marathon Contract) with TETCO. In TETCO's view, the tendered substitute gas reserves, deliverability and leases are not subject to the Marathon Contract; therefore TETCO filed a declaratory judgment action on December 17, 1996 in the U.S. District Court for the Eastern District of Louisiana seeking a ruling that Marathon's interpretation of the Marathon Contract is incorrect. Marathon filed a counterclaim seeking a declaratory judgment enforcing its interpretation of the Marathon Contract. On January 7, 1997, Marathon filed an answer and a counterclaim to TETCO's complaint seeking declaratory judgment enforcing its interpretation of the Marathon Contract. 52 DUKE ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued NOTE 15. COMMITMENTS AND CONTINGENCIES -- Continued On February 18, 1997, Amerada Hess Corporation (Amerada Hess) notified TETCO that it intended to commence substitution of other gas reserves, deliverability and leases for those dedicated to its natural gas purchase contract (the Amerada Hess Contract) with TETCO. On the same date, Amerada Hess also filed a petition in the District Court of Harris County, Texas, 157th Judicial District, seeking a declaratory judgment that its interpretation of the Amerada Hess Contract, which covers the same leases and reserves as the Marathon Contract, is correct. TETCO filed a declaratory judgment action with respect to Amerada Hess' contentions in the U.S. District Court for the Eastern District of Louisiana on February 21, 1997. The two actions have been transferred to the judge presiding over the Marathon Contract matter. On September 26, 1997, the judge presiding over the Marathon and Amerada Hess contract matters issued summary judgments in both actions in favor of TETCO. Marathon and Amerada Hess subsequently filed notices of appeal of the summary judgments. On January 5, 1998, TETCO entered into an agreement with Marathon settling all issues associated with the Marathon Contract. The potential liability of the Company associated with the Amerada Hess Contract should TETCO be contractually obligated to purchase natural gas based upon the substitute gas reserves, deliverability and leases, and the effect of transition cost recoveries pursuant to TETCO's Order 636 settlement involves numerous complex legal and factual matters which will take a substantial period of time to resolve. However, the Corporation does not believe that Amerada Hess will prevail on its appeal of the lower court's summary judgment. Management is of the opinion that the final disposition of this matter will not have a material adverse effect on the consolidated results of operations or financial position of the Corporation. On April 25, 1997, a group of affiliated plaintiffs that own and/or operate various pipeline and marketing companies and partnerships primarily in Kansas filed suit against PEPL in the U.S. District Court for the Western District of Missouri. The plaintiffs allege that PEPL has engaged in unlawful and anti-competitive conduct with regard to requests for interconnects with the PEPL system for service to the Kansas City area. Asserting that PEPL has violated the antitrust laws and tortiously interfered with the plaintiffs' contracts with third parties, the plaintiffs seek compensatory and punitive damages in unspecified amounts. Periodically, similar disputes arise with other natural gas marketers and pipeline companies concerning interconnections and other issues involving access to the Corporation's natural gas transmission systems. Management is of the opinion that the final disposition of these proceedings will not have a material adverse effect on the consolidated results of operations or financial position of the Corporation. The Corporation and its subsidiaries are also involved in legal, tax and regulatory proceedings before various courts, regulatory commissions and governmental agencies regarding matters arising in the ordinary course of business, some of which involve substantial amounts. Where appropriate, the Corporation has made accruals in accordance with SFAS No. 5, "Accounting for Contingencies," in order to provide for such matters. Management is of the opinion that the final disposition of these matters will not have a material adverse effect on the consolidated results of operations or financial position of the Corporation. OTHER COMMITMENTS AND CONTINGENCIES. The Corporation has a 10% ownership interest in TEPPCO Partners, L.P., a master limited partnership (MLP) that owns and operates a petroleum products pipeline. A subsidiary partnership of the MLP had $326.5 million in First Mortgage Notes outstanding at December 31, 1997 with recourse to the general partner, a subsidiary of the Corporation. In January 1998, the Corporation acquired a 9.8% ownership in Alliance Pipeline. This pipeline is designed to transport natural gas from western Canada to the Chicago-area market center for distribution throughout North America. The pipeline is scheduled to begin commercial operation in late 1999, provided the necessary U.S. and Canadian regulatory approvals are secured. In addition to buying an ownership interest in the pipeline project, the Corporation has a contractual commitment for 67.25 million cubic feet per day of capacity on the line over 15 years for an estimated total of $315 million. Periodically, the Corporation may become involved in contractual disputes with natural gas transmission customers involving potential or threatened abrogation of contracts by the customers, including for example attempted transfers of contractual obligations to less creditworthy subsidiaries of the customers. If the customers are successful, the Corporation may not receive the full value of anticipated benefits under the contracts. 53 DUKE ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued NOTE 15. COMMITMENTS AND CONTINGENCIES -- Continued In the normal course of business, certain of the Corporation's affiliates enter into various contracts, including agreements for debt, natural gas transmission service and construction contracts, which contain certain schedule and performance requirements. Such affiliates use risk management techniques to mitigate their exposure associated with such contracts. Certain subsidiaries of the Corporation have guaranteed performance by such affiliates under some of these contracts. Management is of the opinion that these commitments and contingencies will not have a material adverse effect on the consolidated results of operations or the financial position of the Corporation. LEASES. The Corporation utilizes assets under operating leases in several areas of operations. Consolidated rental expense amounted to $91.7 million, $84.2 million, and $61.7 million in 1997, 1996, and 1995, respectively. Future minimum rental payments under the Corporation's various operating leases for the years 1998 through 2002 are $87.4 million, $76.3 million, $68.9 million, $66.5 million, and $48.7 million, respectively. NOTE 16. COMMON STOCK On February 27, 1996, the Board of Directors authorized the Corporation to repurchase up to $1 billion of its common stock over the next five years. As of December 31, 1996, approximately 3.3 million shares had been repurchased for $159 million. On January 28, 1997, the Board of Directors amended the program to expressly limit the number of shares authorized for repurchase under the program, from the initiation of the program through a date two years after the consummation of the merger, to an amount not to exceed 15 million shares. No repurchases of common stock were made in 1997, and none are anticipated in the future. NOTE 17. STOCK BASED COMPENSATION STOCK OPTIONS AND AWARDS. Effective with the merger, each share of PanEnergy common stock outstanding immediately prior to the merger was converted into the right to receive 1.0444 shares of the Corporation's common stock. Each option to purchase PanEnergy common stock that was outstanding prior to the merger was assumed by the Corporation and became exercisable upon the same terms as under the applicable PanEnergy stock option plan and option agreement, except that such options became an option to purchase shares of the Corporation's common stock, appropriately adjusted. Each award of restricted shares of PanEnergy common stock outstanding and not vested prior to the merger was assumed by the Corporation and such restricted shares of PanEnergy common stock were exchanged for restricted shares of the Corporation's common stock. Under the Corporation's 1996 Stock Incentive Plan, stock options and awards for up to two 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 the Corporation's common stock on the date of grant. Vesting periods range from one to five years with a maximum exercise term of 10 years. In 1997, the Corporation granted 115,615 shares of performance-based stock awards and 1,000 fixed stock awards with an average grant date fair value of $44 per share. The Corporation recognized compensation expense of $4.4 million in 1997, $8.3 million in 1996 and none in 1995 for such stock awards. 54 DUKE ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued NOTE 17. STOCK BASED COMPENSATION -- Continued A summary of the Corporation's stock option grants follows:
Options Average (000's) Exercise Price ----------- --------------- Outstanding at December 31, 1994 3,737 $ 16 Granted ........................ 959 20 Exercised ...................... (1,075) 13 Forfeited ...................... (62) 22 ------ Outstanding at December 31, 1995 3,559 18 Granted ........................ 498 28 Exercised ...................... (712) 16 Forfeited ...................... (71) 22 ------ 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 ======
The Corporation had 2.2 million options and 2.4 million options exercisable at December 31, 1996 and 1995, with average exercise prices of $19 and $16 per option, respectively. Details of stock options outstanding and options exercisable at December 31, 1997 follows:
Outstanding Exercisable ----------------------------------- ------------------- Average Average Average Range of Number Remaining Exercise Number Exercise Exercise Prices (000's) Life (Years) Price (000's) Price - --------------------------- --------- -------------- ---------- --------- --------- $10 to $14 ......... 193 3.5 $ 11 193 $ 11 $15 to $20 ......... 966 5.8 18 966 18 $21 to $25 ......... 808 5.6 22 808 22 $26 to $31 ......... 396 8.1 28 396 28 $41 to $50 ......... 366 9.1 44 14 42 --- --- Total ............. 2,729 2,377 21 ===== =====
FAIR VALUE INFORMATION. The weighted-average fair value of options granted was $10, $9, and $7 per option during 1997, 1996 and 1995, respectively. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for 1997, 1996 and 1995, respectively: stock dividend yield of 3.5%, 2.6% and 2.6%; expected stock price volatility of 20.7%, 26% and 26%; risk-free interest rates of 6.5%, 5.7% and 7.7%; and expected option lives of seven years. Had compensation expense for stock-based compensation been determined based on the fair value at the grant dates, the Corporation's 1997 net income would have been $971.4 million, or $2.50 per share; 1996 net income would have been $1,073.7 million, or $2.85 per share; and 1995 net income would have been $1,016.9 million, or $2.68 per share. NOTE 18. BENEFIT PLANS RETIREMENT PLANS. The Corporation and its subsidiaries have multiple non-contributory defined benefit retirement plans covering most employees with minimum service requirements. Effective January 1, 1997, the Duke Power retirement plan was amended to a plan under which benefits are based upon a cash balance formula. Under a cash balance formula, a plan participant accumulates a benefit based upon a percentage of current salary, which may vary with age and years of service, and interest credits. Prior to January 1, 1997, the Duke Power retirement plan benefits were based on an age-related formula which took into account years of benefit accrual service and the employee's highest average eligible earnings. 55 DUKE ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued NOTE 18. BENEFIT PLANS -- Continued The PanEnergy plan provides retirement benefits (i) for eligible employees of certain subsidiaries that are generally based on an employee's years of benefit accrual service and highest average eligible earnings, and (ii) for eligible employees of certain other subsidiaries under a cash balance formula. The Corporation's policy is to fund amounts, as necessary, on an actuarial basis to provide assets sufficient to meet benefits to be paid to plan members. On December 30, 1997 assets and related liabilities of $235.6 million and $204 million, respectively, for certain PanEnergy participants were transferred to the Duke Power plan. As a result of this transfer, no contributions to the Duke Power plan were necessary in 1997. Net periodic pension cost includes the following components for the years ended December 31, 1997, 1996 and 1995:
1997 1996 1995 ------------- ------------- ------------- In Millions Actual return on plan assets ...................... $ (455.3) $ (302.6) $ (413.1) Amount deferred for recognition ................... 246.5 110.4 237.4 ---------- ---------- ---------- Expected return on plan assets .................... (208.8) (192.2) ( 175.7) Service cost benefit earned during the year ....... 62.2 62.7 57.8 Interest cost on projected benefit obligation ..... 163.7 152.8 147.9 Net amortization .................................. 7.8 6.4 3.3 ---------- ---------- ---------- Net periodic pension cost ....................... $ 24.9 $ 29.7 $ 33.3 ========== ========== ==========
A reconciliation of the funded status of the plans to the amounts recognized in the Consolidated Balance Sheets as of December 31, 1997 and 1996 is as follows:
1997 1996 --------------- --------------- In Millions Accumulated benefit obligation Vested benefits ............................. $ (2,011.9) $ (1,814.9) Nonvested benefits .......................... (18.3) (26.7) ------------ ------------ Accumulated benefit obligation ................ $ (2,030.2) $ (1,841.6) ============ ============ Fair market value of plan assets (a) .......... $ 2,724.7 $ 2,445.3 Projected benefit obligation .................. (2,372.1) (2,126.4) Unrecognized net experience loss .............. 81.3 123.1 Unrecognized prior service cost reduction ..... (64.8) (45.1) Unrecognized net asset ........................ (31.6) (36.3) ------------ ------------ Pre-funded pension cost ..................... $ 337.5 $ 360.6 ============ ============
- --------- (a) Principally equity and fixed income securities Assumptions used in the Corporation's pension accounting (reflecting weighted averages across all plans) include:
1997 1996 1995 --------- --------- --------- Percent (%) Discount rate ................................... 7.25 7.50 7.50 Salary increase ................................. 4.15 4.80 4.81 Expected long-term rate of return on plan assets 9.25 9.18 9.18
During 1995, the Corporation offered to certain employees an Enhanced Vested Benefits program (EVB). The Corporation recorded an additional one-time expense for special termination benefits associated with the EVB of approximately $42.2 million, including $21.6 million of additional retirement plan costs. 56 DUKE ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued NOTE 18. BENEFIT PLANS -- Continued The Corporation also sponsors employee savings plans which cover substantially all employees. The Corporation expensed plan contributions of $52.8 million, $34.8 million and $34.9 million in 1997, 1996 and 1995, respectively. OTHER POSTRETIREMENT BENEFITS. The Corporation 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. The Corporation accrues such benefit costs 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. The Corporation is using an investment account under section 401(h) of the Internal Revenue Code, a retired lives reserve (RLR) and multiple voluntary employees' beneficiary association (VEBA) trusts under section 501(c)(9) of the Internal Revenue Code to partially fund postretirement benefits. The 401(h) vehicles, which provide for tax deductions for contributions and tax-free accumulation of investment income, partially fund the Corporation's postretirement health care benefits. The Corporation uses the RLR, which has tax attributes similar to 401(h) funding, to partially fund its postretirement life insurance obligations. Certain subsidiaries use the VEBA trusts to partially fund accrued postretirement health care benefits and fund postretirement life insurance obligations. Net periodic postretirement benefit cost of the plans include the following components for the years ended December 31, 1997, 1996 and 1995:
1997 1996 1995 ------------ ------------ ------------ In Millions Actual return on plan assets ....................................... $ (45.1) $ (20.5) $ (29.6) Amount deferred for recognition .................................... 26.4 4.2 16.2 --------- --------- --------- Expected return on plan assets ..................................... (18.7) (16.3) (13.4) Service cost benefit earned during the year ........................ 10.0 8.4 7.6 Interest cost on accumulated postretirement benefit obligation ..... 46.2 43.3 43.5 Net amortization ................................................... 20.3 19.3 16.5 --------- --------- --------- Net periodic postretirement benefit cost ......................... $ 57.8 $ 54.7 $ 54.2 ========= ========= =========
A reconciliation of the funded status of the plans to the amounts recognized in the Consolidated Balance Sheets as of December 31, 1997 and 1996 is as follows:
1997 1996 ------------- ------------- In Millions Accumulated postretirement benefit obligation Retirees ............................................ $ (428.6) $ (440.5) Fully eligible active plan participants ............. (57.0) (42.6) Other active plan participants ...................... (181.4) (158.6) ---------- ---------- Accumulated post retirement benefit obligation ..... (667.0) (641.7) Fair market value of plan assets (a) .................. 266.2 225.3 Unrecognized prior service cost ....................... 64.6 66.7 Unrecognized net experience loss ...................... 3.7 27.0 Unrecognized transitional obligation .................. 255.9 273.0 ---------- ---------- Accrued postretirement benefit cost ................. $ (76.6) $ (49.7) ========== ==========
- --------- (a) Principally equity and fixed income securities 57 DUKE ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued NOTE 18. BENEFIT PLANS -- Continued Assumptions used in the Corporation's postretirement benefits accounting (reflecting weighted-averages across all plans) include:
1997 1996 1995 --------- --------- --------- Percent (%) Discount rate ..................................... 7.25 7.50 7.50 Salary increase ................................... 4.33 4.84 4.84 Expected long-term rate of return on 401(h) assets 9.25 9.00 9.00 Expected long-term rate of return on RLR assets ... 6.75 6.50 8.00 Expected long-term rate of return on VEBA assets .. 9.25 9.50 9.50 Assumed tax rate (a) .............................. 39.60 39.60 39.60
- --------- (a) Health care portion of postretirement benefits in VEBA trusts. The weighted-average health care cost trend rate used to estimate postretirement benefits was 7.75% in 1997. This rate is expected to decrease, with a 4.75% weighted-average ultimate trend rate expected to be achieved by 2005. The effect of a 1% increase in the assumed health care cost trend rate for each future year would result in a $2.4 million increase in the annual aggregate postretirement benefit cost and a $29.5 million increase in the accumulated postretirement benefit obligation at December 31, 1997. NOTE 19. QUARTERLY FINANCIAL DATA (UNAUDITED)
First Quarter Second Quarter --------------- ---------------- In Millions (except per share data) 1997 Operating revenues ............................... $ 3,785.8 $ 3,112.8 Operating income ................................. 610.0 352.0 Net income ....................................... 311.7 168.6 Basic earnings per share ......................... $ 0.84 $ 0.43 1996 Operating revenues ............................... $ 2,859.1 $ 2,559.3 Operating income ................................. 575.7 479.2 Income before extraordinary item ................. 293.1 237.1 Net income ....................................... 293.1 237.1 Basic earnings per share (before extraordinary item) ........................................... $ 0.78 $ 0.62 Basic earnings per share ......................... $ 0.78 $ 0.62 Third Quarter Fourth Quarter Total --------------- ---------------- --------------- In Millions (except per share data) 1997 Operating revenues ............................... $ 4,820.6 $ 4,589.7 $ 16,308.9 Operating income ................................. 606.3 401.7 1,970.0 Net income ....................................... 309.5 184.6 974.4 Basic earnings per share ......................... $ 0.83 $ 0.41 $ 2.51 1996 Operating revenues ............................... $ 3,133.4 $ 3,750.6 $ 12,302.4 Operating income ................................. 653.1 450.6 2,158.6 Income before extraordinary item ................. 351.2 209.6 1,091.0 Net income ....................................... 351.2 192.9 1,074.3 Basic earnings per share (before extraordinary item) ........................................... $ 0.94 $ 0.56 $ 2.90 Basic earnings per share ......................... $ 0.94 $ 0.51 $ 2.85
Amounts reported on a quarterly basis are not necessarily indicative of amounts expected for the respective years due to the effects of seasonal temperature variations on energy consumption and the timing of maintenance of certain electric generating units. 58 DUKE ENERGY CORPORATION SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Allowance for Doubtful Accounts (a) Other Reserves (a), (b) ----------------------- ------------------------ In Millions Balance at December 31, 1997 ...... $ 22.5 $ 306.2 Balance at December 31, 1996 ...... 20.0 261.4 Balance at December 31, 1995 ...... 16.5 271.1
- --------- (a) Financial information reflects accounting for the 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 December 31, 1995. (b) Principally consists of injuries 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. 59 INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF DUKE ENERGY CORPORATION We have audited the consolidated balance sheets of Duke Energy Corporation and subsidiaries (the Corporation) as of December 31, 1997 and 1996, and the related consolidated statements of income, common stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. 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 the Corporation's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits. The consolidated financial statements and consolidated financial statement schedule give retroactive effect to the merger of Duke Power Company and PanEnergy Corp, which has been accounted for as a pooling of interests as described in Note 1 to the consolidated financial statements. We did not audit the balance sheet of PanEnergy Corp and subsidiaries as of December 31, 1996, or the related statements of income, common stockholders' equity, and cash flows of PanEnergy Corp and subsidiaries for each of the two years in the period ended December 31, 1996, which statements reflect total assets of (in millions) $8,567.8 as of December 31, 1996 and total operating revenues of (in millions), $7,536.8 and $4,967.5 for the years ended December 31, 1996, and 1995, respectively. Those financial statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for PanEnergy Corp and subsidiaries for 1996, and 1995, is based solely on the report of such other auditors. 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 and the report of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Corporation as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. Also, in our opinion, such consolidated 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 13, 1998 RESPONSIBILITY FOR FINANCIAL STATEMENTS The financial statements of Duke Energy Corporation are prepared by management, which is responsible for their integrity and objectivity. The statements are prepared in conformity with generally accepted accounting principles appropriate in the circumstances to reflect in all material respects the substance of events and transactions which should be included. The other information in the annual report is consistent with the financial statements. In preparing these statements, management makes informed judgments and estimates of the expected effects of events and transactions that are currently being reported. The Corporation's system of internal accounting control is designed to provide reasonable assurance that assets are safeguarded and transactions are executed according to management's authorization. Internal accounting controls also provide reasonable assurance that transactions are recorded properly, so that financial statements can be prepared according to generally accepted accounting principles. In addition, the Corporation's accounting controls provide reasonable assurance that errors or irregularities which could be material to the financial statements are prevented or are detected by employees within a timely period as they perform their assigned functions. The Corporation's accounting controls are continually reviewed for effectiveness. In addition, written policies, standards and procedures, and a strong internal audit program augment the Corporation'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 the Corporation. The audit committee meets with management and internal auditors periodically to review the work of each group and to monitor each group's discharge of its responsibilities. The audit committee also meets periodically with the Corporation'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. JEFFREY L. BOYER Vice President and Controller 60 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 the Corporation" included in "Item 1. Business" of this report. See "Election of Directors", "Information Regarding the Board of Directors" and "Other Matters" in the proxy statement relating to the Corporation's 1998 annual meeting of shareholders (the Proxy Statement), incorporated herein by reference. Item 11. Executive Compensation. See "Executive Compensation" and "Compensation of Directors" in the Proxy Statement, incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. See "Security Ownership of Nominees, Directors and Executive Officers" in the Proxy Statement, incorporated herein by reference. Item 13. Certain Relationships and Related Transactions. See "Information Regarding the Board of Directors" in the Proxy Statement, incorporated herein by reference. 61 PART IV. Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) Consolidated Financial Statements, Supplemental Financial Data and Supplemental Schedules included in Part II of this annual report are as follows: Consolidated Financial Statements Consolidated Statements of Income for the Years Ended December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995 Consolidated Balance Sheets as of December 31, 1997 and 1996 Consolidated Statements of Common Stockholders' Equity for the Years Ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements Quarterly Financial Data (unaudited) (included in Note 19 to the Consolidated Financial Statements) Consolidated Financial Statement Schedule Schedule II -- Valuation and Qualifying Accounts and Reserves for the Years Ended December 31, 1997, 1996 and 1995 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 November 18, 1997 contained disclosures under Item 5, Other Events, and Item 7, Financial Statements and Exhibits. A Current Report on Form 8-K filed on December 4, 1997 contained disclosures under Item 7, Financial Statements and Exhibits. The following audited consolidated financial statements were filed as Exhibit 99.1 to such report: Consolidated Statements of Income for the Years Ended December 31, 1996, 1995 and 1994 Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994 Consolidated Balance Sheets as of December 31, 1996 and 1995 Consolidated Statements of Common Stockholders' Equity for the Years Ended December 31, 1996, 1995 and 1994 Notes to Consolidated Financial Statements Independent Auditors' Report (c) Exhibits -- See Exhibit Index immediately following the signature page. 62 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 27, 1998 DUKE ENERGY CORPORATION (Registrant) By: RICHARD B. PRIORY Richard B. Priory Chairman of the Board 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 and Chief Executive Officer (ii) Principal financial officer: Richard J. Osborne Executive Vice President and Chief Financial Officer (iii) Principal accounting officer: Jeffrey L. Boyer Vice President and Corporate Controller (iv) A majority of the Directors: Richard B. Priory Paul M. Anderson G. Alex Bernhardt, Sr. Robert J. Brown William A. Coley William T. Esrey Ann Maynard Gray Dennis R. Hendrix George Dean Johnson, Jr. Max Lennon Leo E. Linbeck, Jr. James G. Martin Buck Mickel Russell M. Robinson, II Date: March 27, 1998 Richard J. Osborne, by signing his name hereto, does hereby sign this document on behalf of the registrant and on behalf of each of the above-named persons pursuant to a power of attorney duly executed by the registrant and such persons, filed with the Securities and Exchange Commission as an exhibit hereto. By: /s/ RICHARD J. OSBORNE ------------------------------------ Richard J. Osborne Attorney-In-Fact 63 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 -- By-Laws of registrant, as amended (filed with Form S-8, No. 333-34655, effective August 29, 1997, as Exhibit 4(D)). 4-B-1 -- First and Refunding Mortgage from registrant to Guaranty Trust Company of New York, Trustee, dated as of December 1, 1927 (filed with Form S-1, File No. 2-7224, effective October 15, 1947, as Exhibit 7(a)). 4-B-2 -- Supplemental Indenture, dated as of March 12, 1930, supplementing said Mortgage (filed with Form S-1, File No. 2-7224, effective October 15, 1947, as Exhibit 7(b)). 4-B-5 -- Supplemental Indenture, dated as of September 1, 1936, supplementing said Mortgage (filed with Form S-1, File No. 2-7224, effective October 15, 1947, as Exhibit 7(e)). 4-B-6 -- Supplemental Indenture, dated as of January 1, 1941, supplementing said Mortgage (filed with Form S-1, File No. 2-7224, effective October 15, 1947, as Exhibit 7(f)). 4-B-7 -- Supplemental Indenture, dated as of April 1, 1944, supplementing said Mortgage (filed with Form S-1, File No. 2-7224, effective October 15, 1947, as Exhibit 7(g)). 4-B-8 -- Supplemental Indenture, dated as of September 1, 1947, supplementing said Mortgage (filed with Form S-1, File No. 2-7224, effective October 15, 1947, as Exhibit 7(h)). 4-B-9 -- Supplemental Indenture, dated as of September 8, 1947, supplementing said Mortgage (filed with Form S-1, File No. 2-10401, effective August 21, 1953, as Exhibit 4-B-9). 4-B-10 -- Supplemental Indenture, dated as of February 1, 1949, supplementing said Mortgage (filed with Form S-1, File No. 2-7808, effective February 3, 1949, as Exhibit 7(j)). 4-B-11 -- Supplemental Indenture, dated as of March 1, 1949, supplementing said Mortgage (filed with Form S-1, File No. 2-8877, effective April 6, 1951, as Exhibit 7(k)). 4-B-14 -- Supplemental Indenture, dated as of October 1, 1954, supplementing said Mortgage (filed with Form S-9, File No. 2-11297, effective December 30, 1954, as Exhibit 2-B-14). 4-B-17 -- Supplemental Indenture, dated as of January 1, 1960, supplementing said Mortgage (filed with Form 10, effective June 29, 1961, as Exhibit 3-B-18). 4-B-18 -- Supplemental Indenture, dated as of February 1, 1960, supplementing said Mortgage (filed with Form 10, effective June 29, 1961, as Exhibit 3-B-19). 4-B-21 -- Supplemental Indenture, dated as of June 15, 1964, supplementing said Mortgage (filed with Form S-1, File No. 2-25367, effective August 3, 1966, as Exhibit 4-B-20). 4-B-24 -- Supplemental Indenture, dated as of February 1, 1968, supplementing said Mortgage (filed with Form S-9, File No. 2-31304, effective January 21, 1969, as Exhibit 2-B-26). 4-B-48 -- Supplemental Indenture, dated as of September 1, 1983, supplementing said Mortgage (filed with Form S-3, File No. 2-95931, effective April 1, 1985, as Exhibit 4-B-48). 4-B-49 -- Supplemental Indenture, dated as of September 1, 1984, supplementing said Mortgage (filed with Form S-3, File No. 2-95931, effective April 1, 1985, as Exhibit 4-B-49). 4-B-56 -- Supplemental Indenture, dated as of February 15, 1987, supplementing said Mortgage (filed with Form 10-K for the year ended December 31, 1986, File No. 1-4928, as Exhibit 4-B-56). 4-B-58 -- Supplemental Indenture, dated as of October 1, 1987, supplementing said Mortgage (filed with Form 10-K for the year ended December 31, 1987, File No. 1-4928, as Exhibit 4-B-58). 4-B-60 -- Supplemental Indenture, dated as of March 1, 1990, supplementing said Mortgage (filed with Form 10-K for the year ended December 31, 1990, File No. 1-4928, as Exhibit 4-B-60). 4-B-62 -- Supplemental Indenture, dated as of May 15, 1990, supplementing said Mortgage (filed with Form 10-K for the year ended December 31, 1990, File No. 1-4928, as Exhibit 4-B-62). 4-B-64 -- Supplemental Indenture, dated as of July 1, 1991, supplementing said Mortgage (filed with Form S-3, File No. 33-45501, effective February 13, 1992, as Exhibit 4-B-64). 4-B-67 -- Supplemental Indenture, dated as of June 1, 1992, supplementing said Mortgage (filed with Form S-3, File No. 33-50592, effective August 11, 1992, as Exhibit 4-B-67).
64
Exhibit Number - -------- 4-B-68 -- Supplemental Indenture, dated as of July 1, 1992, supplementing said Mortgage (filed with Form S-3, File No. 33-50592, effective August 11, 1992, as Exhibit 4-B-68). 4-B-69 -- Supplemental Indenture, dated as of September 1, 1992, supplementing said Mortgage (filed with Form S-3, File No. 33-53308, effective November 24, 1992, as Exhibit 4-B-69). 4-B-70 -- Supplemental Indenture, dated as of February 1, 1993, supplementing said Mortgage (filed with Form 10-K for the year ended December 31, 1992, File No. 1-4928, as Exhibit 4-B-70). 4-B-71 -- Supplemental Indenture, dated as of March 1, 1993, supplementing said Mortgage (filed with Form S-3, File No. 33-59448, effective March 17, 1993, as Exhibit 4-B-71). 4-B-72 -- Supplemental Indenture, dated as of April 1, 1993, supplementing said Mortgage (filed with Form S-3, File No. 33-50543, effective October 20, 1993, as Exhibit 4-B-72). 4-B-73 -- Supplemental Indenture, dated as of May 1, 1993, supplementing said Mortgage (filed with Form S-3, File No. 33-50543, effective October 20, 1993, as Exhibit 4-B-73). 4-B-74 -- Supplemental Indenture, dated as of June 1, 1993, supplementing said Mortgage (filed with Form S-3, File No. 33-50543, effective October 20, 1993, as Exhibit 4-B-74). 4-B-75 -- Supplemental Indenture, dated as of July 1, 1993, supplementing said Mortgage (filed with Form S-3, File No. 33-50543, effective October 20, 1993, as Exhibit 4-B-75). 4-B-76 -- Supplemental Indenture, dated as of August 1, 1993, supplementing said Mortgage (filed with Form S-3, File No. 33-50543, effective October 20, 1993, as Exhibit 4-B-76). 4-B-77 -- Supplemental Indenture, dated as of August 20, 1993, supplementing said Mortgage (filed with Form S-3, File No. 33-50543, effective October 20, 1993, as Exhibit 4-B-77). 4-B-78 -- Supplemental Indenture, dated as of May 1, 1994, supplementing said Mortgage (filed with Form 10-K for the year ended December 31, 1994, File No. 1-4928, as Exhibit 4-B-78). 4-B-79 -- Supplemental Indenture, dated as of November 1, 1994, supplementing said Mortgage (filed with Form 10-K for the year ended December 31, 1994, File No. 1-4928, as Exhibit 4-B-79). 4-B-80 -- Supplemental Indenture, dated as of August 1, 1995, supplementing said Mortgage (filed with Form 10-K for the year ended December 31, 1995, File No. 1-4928, as Exhibit 4-B-80). 4-C -- Instrument of Resignation, Appointment and Acceptance among Duke Power Company, Morgan Guaranty Trust Company of New York, as Trustee, and Chemical Bank, as Successor Trustee, dated as of August 30, 1994 (filed with Form 10-K for the year ended December 31, 1994, File No. 1-4928, as Exhibit 4-C). 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** -- Employee Incentive Plan (filed with Form 10-K for the year ended December 31, 1993, File No. 1-4928, as Exhibit 10-F). 10-F** -- 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-G** -- Estate Conservation Plan (filed with Form 10-K for the year ended December 31, 1992, File No. 1-4928, as Exhibit 10-R). 10-H** -- Supplemental Insurance Plan (filed with Form 10-K for the year ended December 31, 1992, File No. 1-4928, as Exhibit 10-S). 10-I** -- Executive Short-Term Incentive Plan (filed with Form 10-K for the year ended December 31, 1994, File No. 1-4928, as Exhibit 10-V). 10-J** -- Executive Savings Plan (filed with Form 10-K for the year ended December 31, 1996, File No. 1-4928, as Exhibit 10-Z). 10-K** -- Executive Cash Balance Plan (filed with Form 10-K for the year ended December 31, 1996, File No. 1-4928, as Exhibit 10-AA). 10-L** -- Directors' Savings Plan (filed with Form 10-K for the year ended December 31, 1996, File No. 1-4928, as Exhibit 10-BB). 10-M** -- Duke Power Company Stock Incentive Plan (filed as Appendix A to Schedule 14A of registrant, March 18, 1996, File No. 1-4928). 10-N** -- 1989 Nonemployee 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)).
65
Exhibit Number - -------- 10-O** -- 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-P** -- Employees Savings Plan of Panhandle Eastern Corporation and Participating Affiliates (filed with Form 10-K of Panhandle Eastern Corporation for the year ended December 31, 1990, File No. 1-8157, as Exhibit 10.12). 10-Q** -- 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-R -- $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. *10-S -- $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. *10-T -- $300,000,000 364-Day Credit Agreement dated as of August 25, 1997, among Duke Capital Corporation, the banks listed therein and The Chase Manhattan Bank, as Administrative Agent. 10-U** -- 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 herewith. 10-V** -- Employment Agreement by and among PanEnergy Corp, the registrant and Paul M. Anderson dated November 24, 1996 (incorporated by reference to Exhibit B-1 of Exhibit 2 to this Form 10-K), and the First Amendment thereto dated October 24, 1997, filed herewith. 10-W** --- Employment Agreement by and among PanEnergy Corp, the registrant and James T. Hackett dated November 24, 1996 (incorporated by reference to Exhibit B-2 of Exhibit 2 to this Form 10-K), and the First Amendment thereto dated October 24, 1997, filed herewith. 10-X** -- 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 herewith. 10-Y** -- 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 herewith. 10-Z** -- 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-AA -- 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). *12 -- Computation of Ratio of Earnings to Fixed Charges. *21 -- List of Subsidiaries. *23(a) -- Consent of Deloitte & Touche LLP. *23(b) -- Consent of KPMG Peat Marwick LLP. *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. *24(b) -- Certified copy of resolution of the Board of Directors of the registrant authorizing power of attorney. *27 -- Financial Data Schedule. *99 -- Independent Auditors' Report of KPMG Peat Marwick LLP to the Board of Directors of PanEnergy Corp, dated January 16, 1997.
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. 66 EX-10 2 EXHIBIT 10-R CONFORMED COPY $1,250,000,000 FIVE-YEAR CREDIT AGREEMENT dated as of August 25, 1997 among Duke Energy Corporation, The Banks Listed Herein and Morgan Guaranty Trust Company of New York, as Administrative Agent -------------------------------------------------------- J.P. Morgan Securities Inc., Arranger TABLE OF CONTENTS ----------------------
PAGE ---- ARTICLE 1 DEFINITIONS SECTION 1.01. DEFINITIONS......................................................................1 SECTION 1.02. ACCOUNTING TERMS AND DETERMINATIONS.............................................11 SECTION 1.03. TYPES OF BORROWINGS.............................................................11 ARTICLE 2 THE CREDITS SECTION 2.01. COMMITMENTS TO LEND.............................................................12 SECTION 2.02. NOTICE OF COMMITTED BORROWINGS..................................................13 SECTION 2.03. BID RATE BORROWINGS.............................................................14 SECTION 2.04. NOTICE TO BANKS; FUNDING OF LOANS...............................................18 SECTION 2.05. REGISTRY; NOTES.................................................................19 SECTION 2.06. MATURITY OF LOANS...............................................................19 SECTION 2.07. INTEREST RATES..................................................................19 SECTION 2.08. FEES............................................................................21 SECTION 2.09. OPTIONAL TERMINATION OR REDUCTION OF COMMITMENTS................................22 SECTION 2.10. METHOD OF ELECTING INTEREST RATES...............................................22 SECTION 2.11. MANDATORY TERMINATION OF COMMITMENTS............................................24 SECTION 2.12. OPTIONAL PREPAYMENTS............................................................24 SECTION 2.13. GENERAL PROVISIONS AS TO PAYMENTS...............................................24 SECTION 2.14. FUNDING LOSSES..................................................................25 SECTION 2.15. COMPUTATION OF INTEREST AND FEES................................................25 SECTION 2.16. LETTERS OF CREDIT...............................................................26 SECTION 2.17. REGULATION D COMPENSATION.......................................................29 SECTION 2.18. TAKEOUT OF SWINGLINE LOANS......................................................30 SECTION 2.19. INCREASED COMMITMENTS; ADDITIONAL BANKS.........................................31 ARTICLE 3 CONDITIONS SECTION 3.01. EFFECTIVENESS...................................................................32 SECTION 3.02. BORROWINGS AND ISSUANCE OF LETTERS OF CREDITS...................................33 PAGE ---- ARTICLE 4 REPRESENTATIONS AND WARRANTIES SECTION 4.01. CORPORATE EXISTENCE AND POWER...................................................34 SECTION 4.02. CORPORATE AND GOVERNMENTAL AUTHORIZATION; NO CONTRAVENTION............................................................34 SECTION 4.03. BINDING EFFECT..................................................................35 SECTION 4.04. FINANCIAL INFORMATION...........................................................35 SECTION 4.05. LITIGATION......................................................................36 SECTION 4.06. COMPLIANCE WITH LAWS............................................................36 SECTION 4.07. TAXES...........................................................................36 SECTION 4.08. PUBLIC UTILITY HOLDING COMPANY ACT..............................................36 ARTICLE 5 COVENANTS SECTION 5.01. INFORMATION.....................................................................37 SECTION 5.02. PAYMENT OF TAXES................................................................38 SECTION 5.03. MAINTENANCE OF PROPERTY; INSURANCE..............................................39 SECTION 5.04. MAINTENANCE OF EXISTENCE........................................................39 SECTION 5.05. COMPLIANCE WITH LAWS............................................................39 SECTION 5.06. BOOKS AND RECORDS...............................................................40 SECTION 5.07. NEGATIVE PLEDGE.................................................................40 SECTION 5.08. CONSOLIDATIONS, MERGERS AND SALES OF ASSETS.....................................41 SECTION 5.09. USE OF PROCEEDS.................................................................42 ARTICLE 6 DEFAULTS SECTION 6.01. EVENTS OF DEFAULT...............................................................42 SECTION 6.02. NOTICE OF DEFAULT...............................................................44 SECTION 6.03. CASH COVER......................................................................44 ARTICLE 7 THE ADMINISTRATIVE AGENT SECTION 7.01. APPOINTMENT AND AUTHORIZATION...................................................45 SECTION 7.02. ADMINISTRATIVE AGENT AND AFFILIATES.............................................45 SECTION 7.03. ACTION BY ADMINISTRATIVE AGENT..................................................45 SECTION 7.04. CONSULTATION WITH EXPERTS.......................................................45 SECTION 7.05. LIABILITY OF ADMINISTRATIVE AGENT...............................................45 ii PAGE ---- SECTION 7.06. INDEMNIFICATION.................................................................46 SECTION 7.07. CREDIT DECISION.................................................................46 SECTION 7.08. SUCCESSOR ADMINISTRATIVE AGENT..................................................46 SECTION 7.09. ADMINISTRATIVE AGENT'S FEE......................................................47 ARTICLE 8 CHANGE IN CIRCUMSTANCES SECTION 8.01. BASIS FOR DETERMINING INTEREST RATE INADEQUATE OR UNFAIR........................47 SECTION 8.02. ILLEGALITY......................................................................48 SECTION 8.03. INCREASED COST AND REDUCED RETURN...............................................48 SECTION 8.04. TAXES...........................................................................50 SECTION 8.05. BASE RATE LOANS SUBSTITUTED FOR AFFECTED FIXED RATE LOANS.......................52 SECTION 8.06. SUBSTITUTION OF BANK; TERMINATION OPTION........................................53 ARTICLE 9 MISCELLANEOUS SECTION 9.01. NOTICES.........................................................................54 SECTION 9.02. NO WAIVERS......................................................................54 SECTION 9.03. EXPENSES; INDEMNIFICATION.......................................................54 SECTION 9.04. SHARING OF SET-OFFS.............................................................55 SECTION 9.05. AMENDMENTS AND WAIVERS..........................................................55 SECTION 9.06. SUCCESSORS AND ASSIGNS..........................................................56 SECTION 9.07. COLLATERAL......................................................................57 SECTION 9.08. CONFIDENTIALITY.................................................................58 SECTION 9.09. GOVERNING LAW; SUBMISSION TO JURISDICTION.......................................58 SECTION 9.10. COUNTERPARTS; INTEGRATION.......................................................58 SECTION 9.11. WAIVER OF JURY TRIAL............................................................58 PRICING SCHEDULE SCHEDULE I - Duke Energy Corporation Credit Facility (Being Replaced by $1,250,000,000 Revolving Credit Facility) 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 Counsel for the Borrower iii PAGE ---- EXHIBIT F - Opinion of Davis Polk & Wardwell, Special Counsel for the Administrative Agent EXHIBIT G - Assignment and Assumption Agreement EXHIBIT H - Extension Agreement
iv FIVE-YEAR CREDIT AGREEMENT FIVE-YEAR CREDIT AGREEMENT dated as of August 25, 1997 among DUKE ENERGY CORPORATION, the BANKS listed on the signature pages hereof, and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, 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 2.19 or (ii) the replacement of a Bank pursuant to Section 8.06. "ADMINISTRATIVE AGENT" means Morgan Guaranty Trust Company of New York 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. "ANNIVERSARY DATE" means, for each calendar year succeeding 1997, the month and day of the Effective Date. "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, (iii) in the case of its Bid Rate Loans, its Bid Rate Lending Office and (iv) in the case of its Swingline Loans, its Swingline Lending Office. "APPROVED OFFICER" means the president, the chief financial officer, the senior vice president and treasurer, a vice president 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 Syndicated 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. 2 "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)). "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 Energy Corporation, a North Carolina corporation, and its successors. "BORROWING" has the meaning set forth in Section 1.03. "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 2.19(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 2.19(a), 8.06 or 9.06(c). "COMMITTED LOAN" means a Syndicated Loan or a Swingline Loan. "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. 3 "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. "ENDOWMENT" means the Duke Endowment, a charitable common law trust established by James B. Duke by Indenture dated December 11, 1924. "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. "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 Syndicated Loan which bears interest at a Euro-Dollar Rate pursuant to the applicable Notice of Committed Borrowing or 4 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 REFERENCE BANKS" means the principal London offices of Morgan Guaranty Trust Company of New York and The Chase Manhattan Bank. "EURO-DOLLAR RESERVE PERCENTAGE" has the meaning set forth in Section 2.17. "EVENT OF DEFAULT" has the meaning set forth in Section 6.01. "EXISTING CREDIT AGREEMENT" means the credit facility identified in Schedule I hereto, as amended and in effect on the Effective Date. "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 Morgan Guaranty Trust Company of New York (or its successor as Administrative Agent) on such day on such transactions as determined by the Administrative Agent. "FIXED RATE LOANS" means Euro-Dollar Loans, Swingline Loans or Bid Rate Loans (excluding Swingline Loans or 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 Loans consisting of (i) all Loans which are Base Rate Loans at such time or (ii) all Euro-Dollar Loans 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. 5 "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: (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 Swingline 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 more than 10 Euro-Dollar Business Days) as the Borrower may elect in such notice; PROVIDED that any Interest Period which 6 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; (3) 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 (4) 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 any Interest Period applicable to a Loan of any Bank which would otherwise end after such Bank's Termination Date shall end on such Bank's Termination Date. "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. "ISSUING BANK" means Morgan Guaranty Trust Company of New York and any other Bank that may agree to issue letters of credit hereunder, in each case as issuer of a Letter of Credit hereunder. 7 "LETTER OF CREDIT" means a letter of credit to be issued or issued hereunder by the Issuing Bank in accordance with Section 2.16. "LETTER OF CREDIT LIABILITIES" means, for any Bank and at any time, such Bank's ratable participation in the sum of (x) the amounts then owing by the Borrower in respect of amounts drawn under Letters of Credit and (y) the aggregate amount then available for drawing under all Letters of Credit. "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 Committed Loan or a Bid Rate Loan and "LOANS" means Committed 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 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. "MORTGAGE INDENTURE" means the First and Refunding Mortgage between the Borrower and The Chase Manhattan Bank, as successor trustee, dated as of December 1, 1927, as amended or supplemented from time to time. "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. 8 "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)). "NOTICE OF INTEREST RATE ELECTION" has the meaning set forth in Section 2.10(b). "NOTICE OF ISSUANCE" has the meaning set forth in Section 2.16(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 Morgan Guaranty Trust Company of New York 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. "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. 9 "REQUIRED BANKS" means at any time Banks having at least 51% of the aggregate amount of the Commitments or, if the Commitments shall have been terminated, holding at least 51% of the sum of the aggregate unpaid principal amount of the Loans and the aggregate Letter of Credit Liabilities. "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. "SWINGLINE BANK" means Morgan Guaranty Trust Company of New York and its successors. "SWINGLINE LENDING OFFICE" means, as to the Swingline Bank, its office located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Swingline Lending Office) or such other office as such Bank may hereafter designate as its Swingline Lending Office by notice to the Borrower and the Administrative Agent. "SWINGLINE LOAN" means a loan made by the Swingline Bank pursuant to Section 2.01(b). "SWINGLINE TAKEOUT LOAN" means a Base Rate Loan made pursuant to Section 2.18. "SYNDICATED LOAN" means a Loan made by a Bank pursuant to Section 2.01(a); PROVIDED that, if any loan or loans (or portions thereof) are combined or subdivided pursuant to a Notice of Interest Rate Election, the term "Syndicated Loan" shall refer to the combined principal amount resulting from such 10 combination or to each of the separate principal amounts resulting from such subdivision, as the case may be. "TERMINATION DATE" means, for each Bank, August 25, 2002, or such later date to which the Termination Date of such Bank may be extended pursuant to Section 2.01(c) or, if such day is not a Euro-Dollar Business Day, the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case the Termination Date shall be the next preceding Euro-Dollar Business Day. "TRUST" means The Doris Duke Trust, a trust established by James B. Duke by Indenture dated December 11, 1924 for the benefit of certain relatives. "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. "UNREFUNDED SWINGLINE LOANS" has the meaning set forth in Section 2.18(b). 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 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 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, a Swingline Borrowing or a Bid Rate Borrowing (excluding any such Borrowing consisting of Swingline Loans or Bid Rate (Indexed) Loans bearing interest at the Base Rate), and a "EURO-DOLLAR 11 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). ARTICLE 2 THE CREDITS SECTION 2.01. COMMITMENTS TO LEND. (a) SYNDICATED 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 Committed Loans by such Bank, together with its Letter of Credit Liabilities and its participating interests in any Unrefunded Swingline Loans, at any one time outstanding shall not exceed the amount of its Commitment. Each Borrowing under this subsection (other than a Swingline Takeout Borrowing) 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 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 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 extent permitted by Section 2.12, prepay Loans and reborrow at any time during the Revolving Credit Periods under this subsection (a). (b) SWINGLINE LOANS. From time to time prior to its Termination Date, the Swingline Bank 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 (i) the aggregate principal amount of its Committed Loans at any one time outstanding together with its Letter of Credit Liabilities shall not exceed the amount of its Commitment and (ii) the aggregate principal amount of Swingline Loans at any time outstanding shall not exceed $100,000,000. Within the foregoing limits, the Borrower may borrow under this subsection, repay or, to the extent permitted by Section 2.11, prepay Loans and 12 reborrow at any time; PROVIDED that the proceeds of a Swingline Borrowing may not be used, in whole or in part, to refund any prior Swingline Borrowing. 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). (c) EXTENSION OF COMMITMENTS. On any Anniversary Date but on no more than two separate occasions, the Borrower may, upon not less than 45 days notice prior to such Anniversary Date to the Administrative Agent (which shall notify each Bank of receipt of such request), propose to extend the Termination Dates for an additional one-year period measured from the 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 within 15 days of receipt of such request. 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 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 Termination Date of any Bank shall be extended unless Banks having at least 66 2/3% 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 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 or Swingline Borrowing and (y) the third Euro-Dollar Business Day before each Euro-Dollar Borrowing, specifying: (a) the date of such Borrowing, which shall be a Domestic Business Day in the case of a Domestic Borrowing or a Swingline Borrowing or a Euro-Dollar Business Day in the case of a Euro-Dollar Borrowing, (b) the aggregate amount of such Borrowing, 13 (c) whether the Loans comprising such Borrowing are to be Swingline Loans or Syndicated Loans, (d) in the case of a Syndicated Borrowing, whether the Loans comprising such Borrowing are to bear interest initially at the Base Rate or a Euro-Dollar Rate; and, (e) in the case of a Euro-Dollar Borrowing or a Swingline 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 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 (iv) whether the Bid Rate Quotes requested are to set forth a Bid Rate (Indexed) or a Bid Rate (General) Rate. 14 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, (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 15 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 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. (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 16 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 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 17 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 subsections (b) and (c) of this Section 2.04(a) 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. 18 (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 Syndicated Loan made by any Bank shall mature, and the principal amount thereof shall be due and payable together with accrued interest thereon, on the Termination Date of such Bank. (b) Each Swingline Loan included in any Swingline Borrowing and each Bid Rate Loan included in any Bid Rate Borrowing shall mature, and the principal amount thereof shall be due and payable (together with interest accrued thereon), on the last day of the Interest Period applicable to such 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 19 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 Company (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 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 Reference Bank to which such Interest Period is to apply and for a period of time comparable to such Interest Period. If any 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 Reference Bank or, if none of such quotations is available on a timely basis, the provisions of Section 8.01 shall apply. (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 20 applicable to such Loan at the date such payment was due and (ii) the Base Rate for such day. (d) Each Swingline Loan shall bear interest on the outstanding principal amount thereof, for each day during the Interest Period applicable thereto, at a rate per annum equal to the Base Rate for such day or such other rate as may be from time to time determined by mutual agreement between the Swingline Bank and the Borrower. Interest on each Swingline Loan shall be payable at the maturity of such Loan. Any overdue principal of or interest on any Swingline 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) 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. (f) 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 earlier of (x) the Effective Date and (y) September 5, 1997 to but excluding such Bank's 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 Termination Date to but 21 excluding the date such Bank's Loans and Letter of Credit Liabilities shall be repaid in their entirety, on the daily average aggregate outstanding principal amount of such Bank's Committed Loans and Letter of Credit Liabilities. (b) The Borrower shall pay to the Administrative Agent (i) for the account of the Banks ratably a letter of credit fee accruing daily on the aggregate amount then available for drawing under all outstanding Letters of Credit at a rate per annum equal to the Euro-Dollar Margin and (ii) for the account of each Issuing Bank a letter of credit fronting fee accruing daily on the aggregate amount then available for drawing under all Letters of Credit issued by such Issuing Bank at a rate per annum mutually agreed from time to time by the Borrower and such Issuing Bank. (c) PAYMENTS. Accrued fees under this Section for the account of any Bank shall be payable quarterly in arrears on each Quarterly Payment Date and upon the date of termination of such Bank's Commitment in its entirety (and, if later, the date the Loans and Letter of Credit Liabilities 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 or Letter of Credit Liabilities 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 Loans and Letter of Credit Liabilities. SECTION 2.10. METHOD OF ELECTING INTEREST RATES. (a) The Loans included in each Syndicated 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 22 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: (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. 23 (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 Termination Date, and any 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, any Swingline Borrowing 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 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, Swingline Loans or Letter of Credit Liabilities 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 24 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 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 25 365 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 and Letter of Credit fees 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. LETTERS OF CREDIT. (a) Subject to the terms and conditions hereof, the Issuing Bank agrees to issue Letters of Credit hereunder from time to time before the eleventh day before its Termination Date upon the request of the Borrower; PROVIDED that, immediately after each Letter of Credit is issued (i) the aggregate amount of the Letter of Credit Liabilities plus the aggregate outstanding amount of all Loans shall not exceed the aggregate amount of the Commitments and (ii) the aggregate Letter of Credit Liabilities shall not exceed $250,000,000. Upon the date of issuance by the Issuing Bank of a Letter of Credit, the Issuing Bank shall be deemed, without further action by any party hereto, to have sold to each Bank, and each Bank shall be deemed, without further action by any party hereto, to have purchased from the Issuing Bank, a participation in such Letter of Credit and the related Letter of Credit Liabilities in the proportion its Commitment bears to the aggregate Commitments; PROVIDED that if the scheduled Termination Date of a Bank falls prior to the expiry date of a Letter of Credit then outstanding, such Bank's participation in such Letter of Credit shall terminate on its Termination Date, and the participations of the other Banks therein shall be redetermined pro rata in proportion to their Commitments after giving effect to the termination of the Commitment of such former Bank. (b) The Borrower shall give the Issuing Bank notice at least three Domestic Business Days prior to the requested issuance of a Letter of Credit specifying the date such Letter of Credit is to be issued, and describing the terms of such Letter of Credit and the nature of the transactions to be supported thereby (such notice, including any such notice given in connection with the extension of a Letter of Credit, a "NOTICE OF ISSUANCE"). Upon receipt of a Notice of Issuance, the Issuing Bank shall promptly notify the Administrative Agent, and the Administrative Agent shall promptly notify each Bank of the contents thereof and of the amount of such Bank's participation in such Letter of Credit. The issuance by the Issuing Bank of each Letter of Credit shall, in addition to the conditions precedent set forth in Article 3, be subject to the conditions precedent that such Letter of Credit shall be in such form and contain such terms as shall be reasonably satisfactory to the Issuing Bank and that the Borrower shall have executed and delivered such other instruments and agreements relating to such Letter of Credit as the Issuing Bank shall have reasonably requested. The Borrower shall also pay to the Issuing Bank for its own account issuance, 26 drawing, amendment and extension charges in the amounts and at the times as agreed between the Borrower and the Issuing Bank. The extension or renewal of any Letter of Credit shall be deemed to be an issuance of such Letter of Credit, and if any Letter of Credit contains a provision pursuant to which it is deemed to be extended unless notice of termination is given by the Issuing Bank, the Issuing Bank shall timely give such notice of termination unless it has theretofore timely received a Notice of Issuance and the other conditions to issuance of a Letter of Credit have also theretofore been met with respect to such extension. (c) No Letter of Credit shall have a term extending or extendible beyond the tenth day preceding the Termination Date of the Issuing Bank. (d) Upon receipt from the beneficiary of any Letter of Credit of any notice of a drawing under such Letter of Credit, the Issuing Bank shall notify the Administrative Agent and the Administrative Agent shall promptly notify the Borrower and each other Bank as to the amount to be paid as a result of such demand or drawing and the payment date. The Borrower shall be irrevocably and unconditionally obligated forthwith to reimburse the Issuing Bank for any amounts paid by the Issuing Bank upon any drawing under any Letter of Credit, without presentment, demand, protest or other formalities of any kind. All such amounts paid by the Issuing Bank and remaining unpaid by the Borrower shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the Base Rate for such day plus, if such amount remains unpaid for more than two Domestic Business Days, 1%. In addition, each Bank will pay to the Administrative Agent, for the account of the Issuing Bank, immediately upon the Issuing Bank's demand at any time during the period commencing after such drawing until reimbursement therefor in full by the Borrower, an amount equal to such Bank's ratable share of such drawing (in proportion to its participation therein), together with interest on such amount for each day from the date of the Issuing Bank's demand for such payment (or, if such demand is made after 12:00 Noon (New York City time) on such date, from the next succeeding Domestic Business Day) to the date of payment by such Bank of such amount at a rate of interest per annum equal to the Federal Funds Rate. The Issuing Bank will pay to each Bank ratably all amounts received from the Borrower for application in payment of its reimbursement obligations in respect of any Letter of Credit, but only to the extent such Bank has made payment to the Issuing Bank in respect of such Letter of Credit pursuant hereto. (e) The obligations of the Borrower and each Bank under subsection 2.16(d) above shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement, under all circumstances whatsoever, including without limitation the following circumstances: 27 (i) the use which may be made of the Letter of Credit by, or any acts or omission of, a beneficiary of a Letter of Credit (or any Person for whom the beneficiary may be acting); (ii) the existence of any claim, set-off, defense or other rights that the Borrower may have at any time against a beneficiary of a Letter of Credit (or any Person for whom the beneficiary may be acting), the Banks (including the Issuing Bank) or any other Person, whether in connection with this Agreement or the Letter of Credit or any document related hereto or thereto or any unrelated transaction; (iii) any statement or any other document presented under a Letter of Credit proving to be forged, fraudulent or invalid in any respect or any statement therein being untrue or inaccurate in any respect whatsoever; (iv) payment under a Letter of Credit to the beneficiary of such Letter of Credit against presentation to the Issuing Bank of a draft or certificate that does not comply with the terms of the Letter of Credit; PROVIDED that the determination by the Issuing Bank to make such payment shall not have been the result of its willful misconduct or gross negligence; or (v) any other act or omission to act or delay of any kind by any Bank (including the Issuing Bank), the Administrative Agent or any other Person or any other event or circumstance whatsoever that might, but for the provisions of this subsection (v), constitute a legal or equitable discharge of the Borrower's or the Bank's obligations hereunder. (f) The Borrower hereby indemnifies and holds harmless each Bank (including the Issuing Bank) and the Administrative Agent from and against any and all claims, damages, losses, liabilities, costs or expenses which such Bank or the Administrative Agent may incur (including, without limitation, any claims, damages, losses, liabilities, costs or expenses which the Issuing Bank may incur by reason of or in connection with the failure of any other Bank to fulfill or comply with its obligations to such Issuing Bank hereunder (but nothing herein contained shall affect any rights the Borrower may have against such defaulting Bank)), and none of the Banks (including the Issuing Bank) nor the Administrative Agent nor any of their officers or directors or employees or agents shall be liable or responsible, by reason of or in connection with the execution and delivery or transfer of or payment or failure to pay under any Letter of Credit, including without limitation any of the circumstances enumerated in subsection 2.16(d) above, as well as (i) any error, omission, interruption or delay in 28 transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise, (ii) any loss or delay in the transmission of any document required in order to make a drawing under a Letter of Credit, and (iii) any consequences arising from causes beyond the control of the Issuing Bank, including without limitation any government acts, or any other circumstances whatsoever in making or failing to make payment under such Letter of Credit; PROVIDED that the Borrower shall not be required to indemnify the Issuing Bank for any claims, damages, losses, liabilities, costs or expenses, and the Borrower shall have a claim for direct (but not consequential) damage suffered by it, to the extent found by a court of competent jurisdiction to have been caused by (x) the willful misconduct or gross negligence of the Issuing Bank in determining whether a request presented under any Letter of Credit complied with the terms of such Letter of Credit or (y) the Issuing Bank's failure to pay under any Letter of Credit after the presentation to it of a request strictly complying with the terms and conditions of the Letter of Credit. Nothing in this subsection 2.16(f) is intended to limit the obligations of the Borrower under any other provision of this Agreement. To the extent the Borrower does not indemnify the Issuing Bank as required by this subsection, the Banks agree to do so ratably in accordance with their Commitments. SECTION 2.17. 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 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 29 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 2.18. TAKEOUT OF SWINGLINE LOANS. (a) In the event that any Swingline Borrowing shall not be repaid in full at or prior to the maturity thereof the Administrative Agent shall, on behalf of the Borrower (the Borrower hereby irrevocably directing and authorizing the Administrative Agent so to act on its behalf), give a Notice of Borrowing requesting the Banks, including the Swingline Bank, to make a Base Rate Borrowing on the maturity date of such Swingline Borrowing in an amount equal to the unpaid principal amount of such Swingline Borrowing. Each Bank will make the proceeds of its Base Rate Loan included in such Borrowing available to the Administrative Agent for the account of the Swingline Bank on such date in accordance with Section 2.04. The proceeds of such Base Rate Borrowing shall be immediately applied to repay such Swingline Borrowing. (b) If, for any reason, a Base Rate Borrowing may not be (as determined by the Administrative Agent in its sole discretion), or is not, made pursuant to subsection (a) above to refund Swingline Loans as required by said clause, then, effective on the date such Borrowing would otherwise have been made, each Bank severally, unconditionally and irrevocably agrees that it shall purchase an undivided participating interest in such Swingline Loans ("UNREFUNDED SWINGLINE LOANS") in an amount equal to the amount of the Loan which otherwise would have been made by such Bank pursuant to subsection (a), which purchase shall be funded by the time such Loan would have been required to be funded pursuant to Section 2.04 by transfer to the Administrative Agent, for the account of the Swingline Bank, in immediately available funds, of the amount of its participation. (c) Whenever, at any time after the Swingline Bank has received from any Bank payment in full for such Bank's participating interest in a Swingline Loan, the Swingline Bank (or the Administrative Agent on its behalf) receives any payment on account thereof, the Swingline Bank (or the Administrative Agent, as the case may be) will promptly distribute to such Bank its participating interest in such payment (appropriately adjusted, in the case of interest payments, to reflect the period of time during which such Bank's participating interest was outstanding and funded); provided, however, that in the event that such payment is subsequently required to be returned, such Bank will return to the Swingline Bank (or the Administrative Agent, as the case may be) any portion thereof 30 previously distributed by the Swingline Bank (or the Administrative Agent, as the case may be) to it. (d) Each Bank's obligation to purchase and fund participating interests pursuant to this Section shall be absolute and unconditional and shall not be affected by any circumstance, including, without limitation: (i) any setoff, counterclaim, recoupment, defense or other right which such Bank or the Borrower may have against the Swingline Bank, or any other Person for any reason whatsoever; (ii) the occurrence or continuance of a Default or the failure to satisfy any of the conditions specified in Article 3; (iii) any adverse change in the condition (financial or otherwise) of the Borrower; (iv) any breach of this Agreement by the Borrower or any Bank; or (v) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing. SECTION 2.19. 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 $250,000,000 (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, with the approval of Morgan Guaranty Trust Company of New York, in its capacity as Issuing Bank, each other Bank that has issued a Letter of Credit which is still outstanding, each other Bank with a commitment outstanding to issue a Letter of Credit and the Swingline Bank, 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 2.19 shall become effective upon the receipt of the Administrative 31 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 2.19, 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 Syndicated Loans from the Banks in proportion to their respective Commitments after giving effect to such increase, until such time as all outstanding Syndicated 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 Dewey Ballantine, special counsel for 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; 32 (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; 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 September 25, 1997. 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 AND ISSUANCE OF LETTERS OF CREDITS. The obligation of any Bank to make a Loan on the occasion of any Borrowing and the obligation of the Issuing Bank to issue (or renew or extend the term of) any Letter of Credit is subject to the satisfaction of the following conditions; PROVIDED that if such Borrowing is a Swingline Takeout Borrowing, only the conditions set forth in clauses 3.02(a) and 3.02(b) must be satisfied: (a) receipt by the Administrative Agent of a Notice of Borrowing as required by Section 2.02 or 2.03 or receipt by the Issuing Bank of a Notice of Issuance as required by Section 2.16(b), as the case may be; (b) the facts that, immediately after such Borrowing or issuance of such Letter of Credit (and, in the case of any Swingline Borrowing or issuance of a 33 Letter of Credit, at any time prior to the tenth day following the maturity or expiry date thereof), (i) the sum of the aggregate outstanding principal amount of the Loans and the aggregate amount of Letters of Credit Liabilities will not exceed the aggregate amount of the Commitments, (ii) the aggregate outstanding principal amount of Swingline Loans will not exceed $100,000,000 and (iii) the aggregate amount of Letter of Credit Liabilities will not exceed $250,000,000; (c) the fact that, immediately after such Borrowing or issuance of such Letter of Credit, no Default shall have occurred and be continuing; and (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 or issuance of such Letter of Credit. Each Borrowing and issuance of a Letter of Credit 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 (unless such Borrowing is a Swingline Takeout Borrowing, in which case the Borrower shall be deemed to represent and warrant as to the facts specified in clause (b) 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 North Carolina, 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 34 duly authorized by all necessary corporate action, require no action by or in respect of, or filing with, any governmental body, agency or official (except for the approval of the obtaining of credit pursuant to this Agreement by the North Carolina Utilities Commission and The Public Service Commission of South Carolina which shall have been obtained not later than the Effective Date) 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. SECTION 4.04. FINANCIAL INFORMATION. (a) The consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of December 31, 1996 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 March 31, 1997 and the related unaudited consolidated statements of income and cash flows for the three 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 three 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. 35 SECTION 4.05. LITIGATION. Except as disclosed in the reports referred to in Section 4.04 or in the Borrower's quarterly report on Form 10-Q for the quarter ended June 30, 1997, copies of which have been delivered 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 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 a holding company exempt from all provisions of the Public Utility Holding Company Act of 1935, as amended (the "1935 Act") except Section 9(a)(2) thereof under Section 3(a)(2) pursuant to Rule 2 of the 1935 Act. 36 ARTICLE 5 COVENANTS The Borrower agrees that, so long as any Bank has any Commitment hereunder or any amount payable hereunder remains unpaid or any Letter of Credit Liabilities remain outstanding: SECTION 5.01. INFORMATION. The Borrower will deliver to each of the Banks: (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; 37 (e) promptly upon the mailing thereof to the shareholders of the Borrower generally, copies of all financial statements, reports and proxy statements so mailed; (f) 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; (g) 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 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 (h) 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. 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 38 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 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. 39 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, 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. 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) the Lien of the Mortgage Indenture securing Indebtedness outstanding on the date of this Agreement or issued hereafter; (c) 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; (d) any Lien existing on any asset prior to the acquisition thereof by the Borrower and not created in contemplation of such acquisition; (e) 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; (f) 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; (g) Liens for taxes, assessments or other governmental charges or levies not yet due or which are being contested in good faith by appropriate proceedings 40 and with respect to which adequate reserves or other appropriate provisions are being maintained in accordance with generally accepted accounting principles; (h) 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 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; (i) 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; (j) 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; (k) Liens with respect to judgments and attachments which do not result in an Event of Default; (l) 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 (m) 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 5.08. CONSOLIDATIONS, MERGERS AND SALES OF ASSETS. The Borrower will not (i) consolidate or merge with or into any other Person or (ii) 41 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 5.09. 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 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. 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 5.07, 5.08 or the second sentence of 5.09, 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 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; 42 (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 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 43 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) any person or group of persons (within the meaning of Section 13 or 14 of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) other than trustees and participants in employee benefit plans of the Borrower and its Subsidiaries or the Endowment or Trust, shall have acquired beneficial ownership (within the meaning of Rule 13d-3 promulgated by the Securities and Exchange Commission under the Exchange Act) of 50% or more of the outstanding shares of common stock of the Borrower; or, during any period of twelve consecutive calendar months, individuals who were directors of the Borrower on the first day of such period (together with any successors nominated or appointed by such directors in the ordinary course) shall cease to constitute a majority of the board of directors of the Borrower; then, and in every such event, the Administrative Agent shall (i) if requested by Banks having more than 66-2/3% 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 66-2/3% 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. SECTION 6.03. CASH COVER. The Borrower agrees, in addition to the provisions of Section 6.01 hereof, that upon the occurrence and during the continuance of any Event of Default, it shall, if requested by the Administrative Agent upon the instruction of the Banks having at least 66 2/3% in the aggregate amount of the Commitments (or, if the Commitments shall have been terminated, holding at least 66 2/3% of the Letter of Credit Liabilities), pay to the Administrative Agent an amount in immediately available funds (which funds shall be held as collateral pursuant to arrangements satisfactory to the Administrative Agent) equal to the aggregate amount available for drawing under 44 all Letters of Credit then outstanding at such time, PROVIDED that, upon the occurrence of any Event of Default specified in Section 6.01(g) or 6.01(h) with respect to the Borrower, the Borrower shall pay such amount forthwith without any notice or demand or any other act by the Administrative Agent or the Banks. 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. Morgan Guaranty Trust Company of New York shall have the same rights and powers under this Agreement as any other Bank and may exercise or refrain from exercising the same as though it were not the Administrative Agent, and Morgan Guaranty Trust Company of New York 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 45 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. 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 46 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. 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 66-2/3% 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 47 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 Syndicated 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 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 forthwith 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 Letter of Credit or any obligation to make Committed Loans or issue or participate in any Letter of Credit 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 48 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 or its obligations hereunder in respect of Letters of Credit 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 of issuing or participating in any Letter of Credit, 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 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 49 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, imposts, 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 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. 50 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 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. 51 (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 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 52 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 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, the Administrative Agent, the Issuing Banks and the Swingline Bank (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 and Letter of Credit Liabilities of such Bank, without recourse to or warranty by, or expense to, such Bank, for a purchase price equal to the principal amount of all of such Bank's outstanding Loans and funded Letter of Credit Liabilities 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, (ii) the Borrower repays or prepays all outstanding Loans made by such Bank not later than the effective date of such termination and (iii) if at the effective date of such termination, any Letter of Credit Liabilities or Swingline Loans are outstanding, the conditions specified in Section 3.02 would be satisfied 53 (after giving effect to such termination) were the related Letters of Credit and Swingline Loans made on such date. 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 or any Issuing Bank under Article 2 or Article 3 shall not be effective until delivered. 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 54 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 and Letter of Credit Liabilities 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 and Letter of Credit Liabilities held by such other Bank, the Bank receiving such proportionately greater payment shall purchase such participations in the Loans and Letter of Credit Liabilities 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 and Letter of Credit Liabilities 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. 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, the Swingline Bank or any Issuing Bank are affected thereby, by such Person); 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 2.19 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 the amount to be reimbursed in respect of any Letter of Credit or any interest thereon or any fees hereunder, (iii) postpone the date fixed for any payment of principal of or interest on any Loan or for reimbursement in 55 respect of any Letter of Credit 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 and Letter of Credit Liabilities, 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 and Letter of Credit Liabilities. 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, the Issuing Banks, the Swingline Bank 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 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) 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 56 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), the Issuing Banks, the Swingline Bank 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. 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 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 57 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 written, relating to the subject matter hereof. SECTION 9.11. WAIVER OF JURY TRIAL. EACH OF THE BORROWER, THE ADMINISTRATIVE AGENT, THE ISSUING BANKS, 58 THE SWINGLINE BANK 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. 59 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 ENERGY CORPORATION By /s/ Paul F. Ferguson, Jr. ---------------------------------- Title: Senior Vice President and Treasurer 422 South Church Street Charlotte, North Carolina 28242-1904 Attention: Paul F. Ferguson, Jr. Telecopy number: (704) 382-4964 Commitments - ----------- $ 88,750,000 MORGAN GUARANTY TRUST COMPANY OF NEW YORK By /s/ Oliver W. Wesson, Jr. ---------------------------------- Title: Vice President $ 88,750,000 THE CHASE MANHATTAN BANK By /s/ Paul V. Farrell ---------------------------------- Title: Vice President $ 65,000,000 BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By /s/ Michael J. Dillon ---------------------------------- Title: Managing Director $ 65,000,000 THE BANK OF NEW YORK By /s/ Ian K. Stewart ---------------------------------- Title: Senior Vice President $ 65,000,000 BARCLAYS BANK PLC NEW YORK BRANCH By /s/ N.A. Bell ---------------------------------- Title: Director Portfolio Management $ 65,000,000 CITIBANK, N.A. By /s/ Philip C. Kron ---------------------------------- Title: As Attorney In Fact $65,000,000 THE FIRST NATIONAL BANK OF CHICAGO By /s/ Madeleine N. Pember ---------------------------------- Title: Corporate Banking Officer $ 65,000,000 FIRST UNION NATIONAL BANK By /s/ Michael J. Kolosowsky ---------------------------------- Title: Vice President $ 65,000,000 NATIONSBANK, N.A. By /s/ Gretchen P. Burud ---------------------------------- Title: Vice President $ 65,000,000 WACHOVIA BANK, N.A. By /s/ Christopher L. Fincher ---------------------------------- Title: Vice President $ 42,500,000 BANK OF MONTREAL By /s/ Natasha Glossop ---------------------------------- Title: Director $ 42,500,000 THE BANK OF TOKYO- MITSUBISHI, LTD. By /s/ William L. Otott, Jr. ---------------------------------- Title: Vice President $ 42,500,000 BANKBOSTON, N.A. By /s/ Rita M. Cahill ---------------------------------- Title: Vice President $ 42,500,000 CIBC, INC. By /s/ Aleksandra K. Dymanus ---------------------------------- Title: Authorized Signatory $ 42,500,000 DRESDNER BANK AG NEW YORK AND/OR GRAND CAYMAN BRANCHES By /s/ Thomas Lake ---------------------------------- Title: Vice President By /s/ Michael E. Terry ---------------------------------- Title: Assistant Vice President $ 42,500,000 THE INDUSTRIAL BANK OF JAPAN, LIMITED, ATLANTA AGENCY By /s/ Koichi Hasegawa ---------------------------------- Title: Senior Vice President and Deputy General Manager $ 42,500,000 MELLON BANK, N.A. By /s/ Brad S. Miller ---------------------------------- Title: Assistant Vice President $ 42,500,000 THE NORTHERN TRUST COMPANY By /s/ John J. Conway ---------------------------------- Title: Vice President $ 42,500,000 ROYAL BANK OF BANK OF CANADA By /s/ Tom J. Oberaigner ---------------------------------- Title: Manager $ 42,500,000 THE SANWA BANK, LIMITED By /s/ William M. Plough ---------------------------------- Title: Vice President By /s/ Andrew N. Hammond ---------------------------------- Title: Vice President - Senior Manager Credit $ 42,500,000 SOCIETE GENERALE By /s/ Gordon Eadon ---------------------------------- Title: Vice President $ 42,500,000 TORONTO DOMINION (NEW YORK), INC. By /s/ Jorge A. Garcia ---------------------------------- Title: Vice President $ 42,500,000 UNION BANK OF SWITZERLAND, NEW YORK BRANCH By /s/ Paul R. Morrison ---------------------------------- Title: Director By /s/ Michele von Kroemer ---------------------------------- Title: Assistant Treasurer - --------------------------- Total Commitments $1,250,000,000 - --------------------------- MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Administrative Agent By /s/ Oliver W. Wesson, Jr. ---------------------------------- Title: Vice President 60 Wall Street New York, NY 10260 Attention: Loan Department Telex number: 177615 MGT Telecopy number: (212) 648-5023 PRICING SCHEDULE The "EURO-DOLLAR MARGIN" and the "FACILITY FEE RATE" 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 .055% .060% .065% .070% .085% .100% Fee - --------------------------------------------------------------------------------------------------------- Euro- .095% .115% .135% .155% .165% .200% Dollar Margin - ---------------------------------------------------------------------------------------------------------
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. 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. 2 SCHEDULE I DUKE ENERGY CORPORATION CREDIT FACILITY (Being Replaced by $1,250,000,000 Revolving Credit Facility) 1. Credit Agreement dated as of August 16, 1989, as amended, among Duke Energy Company, the lenders party thereto and Morgan Guaranty Trust Company of New York, as agent. EXHIBIT A NOTE New York, New York August 25, 1997 For value received, Duke Energy Corporation, a North Carolina 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 Morgan Guaranty Trust Company of New York, 60 Wall Street, 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 Five-Year Credit Agreement dated as of August 25, 1997 among the Borrower, the banks listed on the signature pages thereof and Morgan Guaranty Trust Company of New York, 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 ENERGY CORPORATION By _____________________________________ Title: Note (cont'd) LOANS AND PAYMENTS OF PRINCIPAL
- ----------------------------------------------------------------------------------------------------- Amount of Amount Type Principal Maturity Notation Date of Loan of Loan Repaid Date Made By - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------
2 EXHIBIT B FORM OF BID RATE QUOTE REQUEST [Date] To: Morgan Guaranty Trust Company of New York (the "ADMINISTRATIVE AGENT") From: Duke Energy Corporation Re: Five-Year Credit Agreement (the "CREDIT AGREEMENT") dated as of August 25, 1997 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 ENERGY 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 Energy Corporation (the "BORROWER") Pursuant to Section 2.03 of the Five-Year Credit Agreement dated as of August 25, 1997 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]. MORGAN GUARANTY TRUST COMPANY OF NEW YORK By ____________________________________ Authorized Officer EXHIBIT D FORM OF BID RATE QUOTE To: Morgan Guaranty Trust Company of New York, as Administrative Agent 60 Wall Street New York, New York 10260 Attention: Re: Bid Rate Quote to Duke Energy 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)*****] - -------- --------- --------------- ---------------- $ $ provided, that the aggregate principal amount of Bid Rate Loans for which the above offers may be accepted shall not exceed $_______________.]** - -------- *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 Termination Date. No more than five bids are permitted for each Interest Period. ****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%). 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 Five-Year Credit Agreement dated as of August 25, 1997 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 2 EXHIBIT E OPINION OF COUNSEL FOR THE BORROWER [Effective Date] To the Banks and the Administrative Agent Referred to Below c/o Morgan Guaranty Trust Company of New York as Administrative Agent 60 Wall Street New York, New York 10260 Dear Sirs: We have acted as counsel for Duke Energy Corporation (the "BORROWER") in connection with the Five-Year Credit Agreement (the "CREDIT AGREEMENT") dated as of August 25, 1997 among the Borrower, the banks listed on the signature pages thereof and Morgan Guaranty Trust Company of New York, as Administrative Agent. 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 Borrower is a corporation duly incorporated, validly existing and in good standing under the laws of North Carolina, 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 (except for the approval of the obtaining of credit pursuant to this Agreement by the North Carolina Utilities Commission and The South Carolina Public Service Commission which has been obtained) 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, to our knowledge, of any agreement, judgment, injunction, order, decree or other instrument binding upon the Borrower or, to our 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 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. 4. Except as disclosed in the reports referred to in Section 4.04 of the Credit Agreement or in the Borrower's quarterly report on Form 10-Q for the quarter ended June 30, 1997, to our 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. The Borrower is a holding company exempt from all provisions of the Public Utility Holding Company Act of 1935 (the "1935 Act") except Section 9(a)(2) thereof under Section 3(a)(2) pursuant to Rule 2 of the 1935 Act. The phrase "to the best of our knowledge", as used in the foregoing opinion, refers to the actual knowledge of this firm without any independent investigation as to any such matters. We are members of the Bar of the State of New York and we do not express any opinion herein concerning any law other than the law of the State of New York, and the federal law of the United States of America. In rendering the foregoing opinion, we are, with your approval, relying as to all matters of North Carolina law upon the opinion of _______ and as to matters of South Carolina law upon the opinion of __________. 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 2 furnished to, any other person, firm or corporation without our prior written consent, except for Additional Banks and all 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 Morgan Guaranty Trust Company of New York, as Administrative Agent 60 Wall Street New York, New York 10260 Dear Sirs: We have participated in the preparation of the Five-Year Credit Agreement (the "CREDIT AGREEMENT") dated as of August 25, 1997 among Duke Energy Corporation, a North Carolina corporation (the "BORROWER"), the banks listed on the signature pages thereof (the "BANKS") and Morgan Guaranty Trust Company of New York, 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(c) 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, (i) 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 and (ii) we have relied, without independent investigation, as to all matters governed by the laws of North Carolina, upon the opinion of [counsel for the Borrower], dated _______ __, 1997, a copy of which has been delivered to you. 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 ENERGY CORPORATION (the "COMPANY"), MORGAN GUARANTY TRUST COMPANY OF NEW YORK [AND OTHER ISSUING BANK(S)], as Issuing Bank(s), MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Swingline Bank and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, 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 Five-Year Credit Agreement dated as of August 25, 1997 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 to the Borrower and participate in Letters of Credit in an aggregate principal amount at any time outstanding not to exceed $----------; WHEREAS, Syndicated 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, Letters of Credit with a total amount available for drawing thereunder 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 Letter of Credit Liabilities, 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 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 Syndicated Loans made by, and Letter of Credit Liabilities of, the Assignor outstanding at the date hereof. Upon the execution and delivery hereof by the Assignor, the Assignee, the Borrower, the Issuing Banks, the Swingline Bank and the Administrative Agent, 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 and Letter of Credit 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 TO ASSIGNMENT. This Agreement is conditioned upon the consent of the Borrower, the Issuing Banks, the Swingline Bank and the Administrative Agent pursuant to Section 9.06(c) of the Credit Agreement. The execution of this Agreement by the Borrower, the Issuing Banks, Swingline Bank and the Administrative Agent is evidence of this consent. Pursuant to Section - -------- *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 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. 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: 3 [ASSIGNEE] By ____________________________________ Title: DUKE ENERGY CORPORATION By ____________________________________ Title: MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Issuing Bank, Swingline Bank and Administrative Agent By _____________________________________ Title: [ISSUING BANK] By _____________________________________ Title: 4 EXHIBIT H EXTENSION AGREEMENT Morgan Guaranty Trust Company of New York, as Administrative Agent under the Credit Agreement referred to below 60 Wall Street New York, New York 10260 Ladies and Gentlemen: Effective as of [date], the undersigned hereby agrees to extend its Commitment and Termination Date under the Five-Year Credit Agreement dated as of August 25, 1997 among Duke Energy Corporation, (the "BORROWER"), the banks parties thereto and Morgan Guaranty Trust Company of New York, as Administrative Agent (the "CREDIT AGREEMENT") for one year to [date to which its 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 ENERGY CORPORATION, as Borrower By ______________________________________ Title: MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Administrative Agent By ______________________________________ Title: 2 EX-10 3 EXHIBIT 10-S CONFORMED COPY $950,000,000 FIVE-YEAR CREDIT AGREEMENT dated as of August 25, 1997 among Duke Capital Corporation, The Banks Listed Herein and The Chase Manhattan Bank, as Administrative Agent -------------------------------------------------------- Chase Securities Inc., Arranger
TABLE OF CONTENTS ---------------------- PAGE ---- ARTICLE 1 DEFINITIONS SECTION 1.01. DEFINITIONS......................................................................1 SECTION 1.02. ACCOUNTING TERMS AND DETERMINATIONS.............................................11 SECTION 1.03. TYPES OF BORROWINGS.............................................................12 ARTICLE 2 THE CREDITS SECTION 2.01. COMMITMENTS TO LEND.............................................................12 SECTION 2.02. NOTICE OF COMMITTED BORROWINGS..................................................14 SECTION 2.03. BID RATE BORROWINGS.............................................................14 SECTION 2.04. NOTICE TO BANKS; FUNDING OF LOANS...............................................18 SECTION 2.05. REGISTRY; NOTES.................................................................19 SECTION 2.06. MATURITY OF LOANS...............................................................20 SECTION 2.07. INTEREST RATES..................................................................20 SECTION 2.08. FEES............................................................................22 SECTION 2.09. OPTIONAL TERMINATION OR REDUCTION OF COMMITMENTS................................22 SECTION 2.10. METHOD OF ELECTING INTEREST RATES...............................................22 SECTION 2.11. MANDATORY TERMINATION OF COMMITMENTS............................................24 SECTION 2.12. OPTIONAL PREPAYMENTS............................................................24 SECTION 2.13. GENERAL PROVISIONS AS TO PAYMENTS...............................................25 SECTION 2.14. FUNDING LOSSES..................................................................25 SECTION 2.15. COMPUTATION OF INTEREST AND FEES................................................26 SECTION 2.16. LETTERS OF CREDIT...............................................................26 SECTION 2.17. REGULATION D COMPENSATION.......................................................29 SECTION 2.18. TAKEOUT OF SWINGLINE LOANS......................................................30 SECTION 2.19. INCREASED COMMITMENTS; ADDITIONAL BANKS.........................................31 ARTICLE 3 CONDITIONS SECTION 3.01. EFFECTIVENESS...................................................................32 SECTION 3.02. BORROWINGS AND ISSUANCE OF LETTERS OF CREDITS...................................33 PAGE ---- ARTICLE 4 REPRESENTATIONS AND WARRANTIES SECTION 4.01. CORPORATE EXISTENCE AND POWER...................................................34 SECTION 4.02. CORPORATE AND GOVERNMENTAL AUTHORIZATION; NO CONTRAVENTION...................................................................35 SECTION 4.03. BINDING EFFECT..................................................................35 SECTION 4.04. FINANCIAL INFORMATION...........................................................35 SECTION 4.05. LITIGATION......................................................................36 SECTION 4.06. COMPLIANCE WITH LAWS............................................................37 SECTION 4.07. TAXES...........................................................................37 SECTION 4.08. PUBLIC UTILITY HOLDING COMPANY ACT..............................................37 ARTICLE 5 COVENANTS SECTION 5.01. INFORMATION.....................................................................38 SECTION 5.02. PAYMENT OF TAXES................................................................39 SECTION 5.03. MAINTENANCE OF PROPERTY; INSURANCE..............................................40 SECTION 5.04. MAINTENANCE OF EXISTENCE........................................................40 SECTION 5.05. COMPLIANCE WITH LAWS............................................................40 SECTION 5.06. BOOKS AND RECORDS...............................................................40 SECTION 5.07. MAINTENANCE OF OWNERSHIP OF PRINCIPAL SUBSIDIARIES..............................41 SECTION 5.08. NEGATIVE PLEDGE.................................................................41 SECTION 5.09. CONSOLIDATIONS, MERGERS AND SALES OF ASSETS.....................................42 SECTION 5.10. USE OF PROCEEDS.................................................................43 SECTION 5.11. TRANSACTIONS WITH AFFILIATES....................................................43 SECTION 5.12. INDEBTEDNESS/CAPITALIZATION RATIO...............................................43 ARTICLE 6 DEFAULTS SECTION 6.01. EVENTS OF DEFAULT...............................................................43 SECTION 6.02. NOTICE OF DEFAULT...............................................................45 SECTION 6.03. CASH COVER......................................................................45 ARTICLE 7 THE ADMINISTRATIVE AGENT SECTION 7.01. APPOINTMENT AND AUTHORIZATION...................................................46 SECTION 7.02. ADMINISTRATIVE AGENT AND AFFILIATES.............................................46 ii PAGE ---- SECTION 7.03. ACTION BY ADMINISTRATIVE AGENT..................................................46 SECTION 7.04. CONSULTATION WITH EXPERTS.......................................................46 SECTION 7.05. LIABILITY OF ADMINISTRATIVE AGENT...............................................46 SECTION 7.06. INDEMNIFICATION.................................................................47 SECTION 7.07. CREDIT DECISION.................................................................47 SECTION 7.08. SUCCESSOR ADMINISTRATIVE AGENT..................................................47 SECTION 7.09. ADMINISTRATIVE AGENT'S FEE......................................................48 ARTICLE 8 CHANGE IN CIRCUMSTANCES SECTION 8.01. BASIS FOR DETERMINING INTEREST RATE INADEQUATE OR UNFAIR........................48 SECTION 8.02. ILLEGALITY......................................................................49 SECTION 8.03. INCREASED COST AND REDUCED RETURN...............................................50 SECTION 8.04. TAXES...........................................................................51 SECTION 8.05. BASE RATE LOANS SUBSTITUTED FOR AFFECTED FIXED RATE LOANS.......................53 SECTION 8.06. SUBSTITUTION OF BANK; TERMINATION OPTION........................................54 ARTICLE 9 MISCELLANEOUS SECTION 9.01. NOTICES.........................................................................55 SECTION 9.02. NO WAIVERS......................................................................55 SECTION 9.03. EXPENSES; INDEMNIFICATION.......................................................55 SECTION 9.04. SHARING OF SET-OFFS.............................................................56 SECTION 9.05. AMENDMENTS AND WAIVERS..........................................................56 SECTION 9.06. SUCCESSORS AND ASSIGNS..........................................................57 SECTION 9.07. COLLATERAL......................................................................59 SECTION 9.08. CONFIDENTIALITY.................................................................59 SECTION 9.09. GOVERNING LAW; SUBMISSION TO JURISDICTION.......................................59 SECTION 9.10. COUNTERPARTS; INTEGRATION.......................................................59 SECTION 9.11. WAIVER OF JURY TRIAL............................................................60 PRICING SCHEDULE SCHEDULE I - Duke Capital Corporation Credit Facilities (Being Replaced by $950,000,000 Revolving Credit Facility) EXHIBIT A - Note EXHIBIT B - Form of Bid Rate Quote Request EXHIBIT C - Form of Invitation for Bid Rate Quotes iii EXHIBIT D - Form of Bid Rate Quote EXHIBIT E - Opinion of 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 FIVE-YEAR CREDIT AGREEMENT FIVE-YEAR CREDIT AGREEMENT dated as of August 25, 1997 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 2.19 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. "ANNIVERSARY DATE" means, for each calendar year succeeding 1997, the month and day of the Effective Date. "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, (iii) in the case of its Bid Rate Loans, its Bid Rate Lending Office and (iv) in the case of its Swingline Loans, its Swingline 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 Syndicated 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 2 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)). "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. "CHURCH STREET CAPITAL CORP." is a former name of the Borrower. "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 2.19(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 2.19(a), 8.06 or 9.06(c). "COMMITTED LOAN" means a Syndicated Loan or a Swingline Loan. "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. 3 "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. "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 4 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. "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 Syndicated 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 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 2.17. "EVENT OF DEFAULT" has the meaning set forth in Section 6.01. "EXISTING CREDIT AGREEMENTS" means the credit facilities identified in Schedule I hereto, as amended and in effect on the Effective Date. "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 5 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. "FIXED RATE LOANS" means Euro-Dollar Loans, Swingline Loans or Bid Rate Loans (excluding Swingline Loans or 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 Loans consisting of (i) all Loans which are Base Rate Loans at such time or (ii) all Euro-Dollar Loans 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: (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 6 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 Swingline 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 more than 10 Euro-Dollar Business Days) as the Borrower may elect in such notice; 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; (3) 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 (4) 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 7 PROVIDED FURTHER that any Interest Period applicable to a Loan of any Bank which would otherwise end after such Bank's Termination Date shall end on such Bank's Termination Date. "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. "ISSUING BANK" means The Chase Manhattan Bank and any other Bank that may agree to issue letters of credit hereunder, in each case as issuer of a Letter of Credit hereunder. "LETTER OF CREDIT" means a letter of credit to be issued or issued hereunder by the Issuing Bank in accordance with Section 2.16. "LETTER OF CREDIT LIABILITIES" means, for any Bank and at any time, such Bank's ratable participation in the sum of (x) the amounts then owing by the Borrower in respect of amounts drawn under Letters of Credit and (y) the aggregate amount then available for drawing under all Letters of Credit. "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 Committed Loan or a Bid Rate Loan and "LOANS" means Committed 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 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). 8 "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)). "NOTICE OF INTEREST RATE ELECTION" has the meaning set forth in Section 2.10(b). "NOTICE OF ISSUANCE" has the meaning set forth in Section 2.16(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. 9 "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, Panhandle Eastern Pipe Line Company and Trunkline Gas Company, 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 having at least 51% of the aggregate amount of the Commitments or, if the Commitments shall have been terminated, holding at least 51% of the sum of the aggregate unpaid principal amount of the Loans and the aggregate Letter of Credit Liabilities. "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. "SWINGLINE BANK" means The Chase Manhattan Bank and its successors. "SWINGLINE LENDING OFFICE" means, as to the Swingline Bank, its office located at its address set forth in its Administrative Questionnaire (or identified in 10 its Administrative Questionnaire as its Swingline Lending Office) or such other office as such Bank may hereafter designate as its Swingline Lending Office by notice to the Borrower and the Administrative Agent. "SWINGLINE LOAN" means a loan made by the Swingline Bank pursuant to Section 2.01(b). "SWINGLINE TAKEOUT LOAN" means a Base Rate Loan made pursuant to Section 2.18. "SYNDICATED LOAN" means a Loan made by a Bank pursuant to Section 2.01(a); PROVIDED that, if any loan or loans (or portions thereof) are combined or subdivided pursuant to a Notice of Interest Rate Election, the term "Syndicated 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. "TERMINATION DATE" means, for each Bank, August 25, 2002, or such later date to which the Termination Date of such Bank may be extended pursuant to Section 2.01(c) or, if such day is not a Euro-Dollar Business Day, the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case the Termination Date shall be the next preceding Euro-Dollar Business Day. "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. "UNREFUNDED SWINGLINE LOANS" has the meaning set forth in Section 2.18(b). 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 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 11 accountants) with the most recent audited consolidated financial statements of the Borrower and its Consolidated Subsidiaries delivered to the Banks. SECTION 1.03. TYPES 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, a Swingline Borrowing or a Bid Rate Borrowing (excluding any such Borrowing consisting of Swingline Loans or 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). ARTICLE 2 THE CREDITS SECTION 2.01. COMMITMENTS TO LEND. (a) SYNDICATED 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 Committed Loans by such Bank, together with its Letter of Credit Liabilities and its participating interests in any Unrefunded Swingline Loans, at any one time outstanding shall not exceed the amount of its Commitment. Each Borrowing under this subsection (other than a Swingline Takeout Borrowing) 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 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 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 extent permitted by Section 2.12, prepay Loans and 12 reborrow at any time during the Revolving Credit Periods under this subsection (a). (b) SWINGLINE LOANS. From time to time prior to its Termination Date, the Swingline Bank 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 (i) the aggregate principal amount of its Committed Loans at any one time outstanding together with its Letter of Credit Liabilities shall not exceed the amount of its Commitment and (ii) the aggregate principal amount of Swingline Loans at any time outstanding shall not exceed $100,000,000. Within the foregoing limits, the Borrower may borrow under this subsection, repay or, to the extent permitted by Section 2.11, prepay Loans and reborrow at any time; PROVIDED that the proceeds of a Swingline Borrowing may not be used, in whole or in part, to refund any prior Swingline Borrowing. 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). (c) EXTENSION OF COMMITMENTS. On any Anniversary Date but on no more than two separate occasions, the Borrower may, upon not less than 45 days notice prior to such Anniversary Date to the Administrative Agent (which shall notify each Bank of receipt of such request), propose to extend the Termination Dates for an additional one-year period measured from the 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 within 15 days of receipt of such request. 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 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 Termination Date of any Bank shall be extended unless Banks having at least 66 2/3% 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 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. 13 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 or Swingline Borrowing and (y) the third Euro-Dollar Business Day before each Euro-Dollar Borrowing, specifying: (a) the date of such Borrowing, which shall be a Domestic Business Day in the case of a Domestic Borrowing or a Swingline 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 be Swingline Loans or Syndicated Loans, (d) in the case of a Syndicated Borrowing, whether the Loans comprising such Borrowing are to bear interest initially at the Base Rate or a Euro-Dollar Rate; and, (e) in the case of a Euro-Dollar Borrowing or a Swingline 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 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: 13 (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 (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 14 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, (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; 15 (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 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. (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, 16 (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 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 subsections (b) and (c) of this Section 2.04(a) 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 17 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. (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. 18 SECTION 2.06. MATURITY OF LOANS. (a) Each Syndicated Loan made by any Bank shall mature, and the principal amount thereof shall be due and payable together with accrued interest thereon, on the Termination Date of such Bank. (b) Each Swingline Loan included in any Swingline Borrowing and each Bid Rate Loan included in any Bid Rate Borrowing shall mature, and the principal amount thereof shall be due and payable (together with interest accrued thereon), on the last day of the Interest Period applicable to such 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 Company (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 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 Reference Bank to which such Interest Period is to apply and for a period of 19 time comparable to such Interest Period. If any 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 Reference Bank or, if none of such quotations is available on a timely basis, the provisions of Section 8.01 shall apply. (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) Each Swingline Loan shall bear interest on the outstanding principal amount thereof, for each day during the Interest Period applicable thereto, at a rate per annum equal to the Base Rate for such day or such other rate as may be from time to time determined by mutual agreement between the Swingline Bank and the Borrower. Interest on each Swingline Loan shall be payable at the maturity of such Loan. Any overdue principal of or interest on any Swingline 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) 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. (f) 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 20 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 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 Termination Date to but excluding the date such Bank's Loans and Letter of Credit Liabilities shall be repaid in their entirety, on the daily average aggregate outstanding principal amount of such Bank's Committed Loans and Letter of Credit Liabilities. (b) The Borrower shall pay to the Administrative Agent (i) for the account of the Banks ratably a letter of credit fee accruing daily on the aggregate amount then available for drawing under all outstanding Letters of Credit at a rate per annum equal to the Euro-Dollar Margin and (ii) for the account of each Issuing Bank a letter of credit fronting fee accruing daily on the aggregate amount then available for drawing under all Letters of Credit issued by such Issuing Bank at a rate per annum mutually agreed from time to time by the Borrower and such Issuing Bank. (c) PAYMENTS. Accrued fees under this Section for the account of any Bank shall be payable quarterly in arrears on each Quarterly Payment Date and upon the date of termination of such Bank's Commitment in its entirety (and, if later, the date the Loans and Letter of Credit Liabilities 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 or Letter of Credit Liabilities 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 Loans and Letter of Credit Liabilities. SECTION 2.10. METHOD OF ELECTING INTEREST RATES. (a) The Loans included in each Syndicated Borrowing shall bear interest initially at the type of rate specified by the Borrower in the applicable Notice of Committed Borrowing. 21 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: (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. 22 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 Termination Date, and any 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, any Swingline Borrowing 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 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. 23 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, Swingline Loans or Letter of Credit Liabilities 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 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 24 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 and Letter of Credit fees 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. LETTERS OF CREDIT. (a) Subject to the terms and conditions hereof, the Issuing Bank agrees to issue Letters of Credit hereunder from time to time before the eleventh day before its Termination Date upon the request of the Borrower; PROVIDED that, immediately after each Letter of Credit is issued (i) the aggregate amount of the Letter of Credit Liabilities plus the aggregate outstanding amount of all Loans shall not exceed the aggregate amount of the Commitments and (ii) the aggregate Letter of Credit Liabilities shall not exceed $250,000,000. Upon the date of issuance by the Issuing Bank of a Letter of Credit, the Issuing Bank shall be deemed, without further action by any party hereto, to have sold to each Bank, and each Bank shall be deemed, without further action by any party hereto, to have purchased from the Issuing Bank, a participation in such Letter of Credit and the related Letter of Credit Liabilities in the proportion its Commitment bears to the aggregate Commitments; PROVIDED that if the scheduled Termination Date of a Bank falls prior to the expiry date of a Letter of Credit then outstanding, such Bank's participation in such Letter of Credit shall terminate on its Termination Date, and the participations of the other Banks therein shall be redetermined pro rata in proportion to their Commitments after giving effect to the termination of the Commitment of such former Bank. (b) The Borrower shall give the Issuing Bank notice at least three Domestic Business Days prior to the requested issuance of a Letter of Credit specifying the date such Letter of Credit is to be issued, and describing the terms of such Letter of Credit and the nature of the transactions to be supported thereby (such notice, including any such notice given in connection with the extension of 25 a Letter of Credit, a "NOTICE OF ISSUANCE"). Upon receipt of a Notice of Issuance, the Issuing Bank shall promptly notify the Administrative Agent, and the Administrative Agent shall promptly notify each Bank of the contents thereof and of the amount of such Bank's participation in such Letter of Credit. The issuance by the Issuing Bank of each Letter of Credit shall, in addition to the conditions precedent set forth in Article 3, be subject to the conditions precedent that such Letter of Credit shall be in such form and contain such terms as shall be reasonably satisfactory to the Issuing Bank and that the Borrower shall have executed and delivered such other instruments and agreements relating to such Letter of Credit as the Issuing Bank shall have reasonably requested. The Borrower shall also pay to the Issuing Bank for its own account issuance, drawing, amendment and extension charges in the amounts and at the times as agreed between the Borrower and the Issuing Bank. The extension or renewal of any Letter of Credit shall be deemed to be an issuance of such Letter of Credit, and if any Letter of Credit contains a provision pursuant to which it is deemed to be extended unless notice of termination is given by the Issuing Bank, the Issuing Bank shall timely give such notice of termination unless it has theretofore timely received a Notice of Issuance and the other conditions to issuance of a Letter of Credit have also theretofore been met with respect to such extension. (c) No Letter of Credit shall have a term extending or extendible beyond the tenth day preceding the Termination Date of the Issuing Bank. (d) Upon receipt from the beneficiary of any Letter of Credit of any notice of a drawing under such Letter of Credit, the Issuing Bank shall notify the Administrative Agent and the Administrative Agent shall promptly notify the Borrower and each other Bank as to the amount to be paid as a result of such demand or drawing and the payment date. The Borrower shall be irrevocably and unconditionally obligated forthwith to reimburse the Issuing Bank for any amounts paid by the Issuing Bank upon any drawing under any Letter of Credit, without presentment, demand, protest or other formalities of any kind. All such amounts paid by the Issuing Bank and remaining unpaid by the Borrower shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the Base Rate for such day plus, if such amount remains unpaid for more than two Domestic Business Days, 1%. In addition, each Bank will pay to the Administrative Agent, for the account of the Issuing Bank, immediately upon the Issuing Bank's demand at any time during the period commencing after such drawing until reimbursement therefor in full by the Borrower, an amount equal to such Bank's ratable share of such drawing (in proportion to its participation therein), together with interest on such amount for each day from the date of the Issuing Bank's demand for such payment (or, if such demand is made after 12:00 Noon (New York City time) on such date, from the next succeeding Domestic Business Day) to the date of payment by such Bank of such amount at a rate of 26 interest per annum equal to the Federal Funds Rate. The Issuing Bank will pay to each Bank ratably all amounts received from the Borrower for application in payment of its reimbursement obligations in respect of any Letter of Credit, but only to the extent such Bank has made payment to the Issuing Bank in respect of such Letter of Credit pursuant hereto. (e) The obligations of the Borrower and each Bank under subsection 2.16(d) above shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement, under all circumstances whatsoever, including without limitation the following circumstances: (i) the use which may be made of the Letter of Credit by, or any acts or omission of, a beneficiary of a Letter of Credit (or any Person for whom the beneficiary may be acting); (ii) the existence of any claim, set-off, defense or other rights that the Borrower may have at any time against a beneficiary of a Letter of Credit (or any Person for whom the beneficiary may be acting), the Banks (including the Issuing Bank) or any other Person, whether in connection with this Agreement or the Letter of Credit or any document related hereto or thereto or any unrelated transaction; (iii) any statement or any other document presented under a Letter of Credit proving to be forged, fraudulent or invalid in any respect or any statement therein being untrue or inaccurate in any respect whatsoever; (iv) payment under a Letter of Credit to the beneficiary of such Letter of Credit against presentation to the Issuing Bank of a draft or certificate that does not comply with the terms of the Letter of Credit; PROVIDED that the determination by the Issuing Bank to make such payment shall not have been the result of its willful misconduct or gross negligence; or (v) any other act or omission to act or delay of any kind by any Bank (including the Issuing Bank), the Administrative Agent or any other Person or any other event or circumstance whatsoever that might, but for the provisions of this subsection (v), constitute a legal or equitable discharge of the Borrower's or the Bank's obligations hereunder. (f) The Borrower hereby indemnifies and holds harmless each Bank (including the Issuing Bank) and the Administrative Agent from and against any and all claims, damages, losses, liabilities, costs or expenses which such Bank or 27 the Administrative Agent may incur (including, without limitation, any claims, damages, losses, liabilities, costs or expenses which the Issuing Bank may incur by reason of or in connection with the failure of any other Bank to fulfill or comply with its obligations to such Issuing Bank hereunder (but nothing herein contained shall affect any rights the Borrower may have against such defaulting Bank)), and none of the Banks (including the Issuing Bank) nor the Administrative Agent nor any of their officers or directors or employees or agents shall be liable or responsible, by reason of or in connection with the execution and delivery or transfer of or payment or failure to pay under any Letter of Credit, including without limitation any of the circumstances enumerated in subsection 2.16(d) above, as well as (i) any error, omission, interruption or delay in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise, (ii) any loss or delay in the transmission of any document required in order to make a drawing under a Letter of Credit, and (iii) any consequences arising from causes beyond the control of the Issuing Bank, including without limitation any government acts, or any other circumstances whatsoever in making or failing to make payment under such Letter of Credit; PROVIDED that the Borrower shall not be required to indemnify the Issuing Bank for any claims, damages, losses, liabilities, costs or expenses, and the Borrower shall have a claim for direct (but not consequential) damage suffered by it, to the extent found by a court of competent jurisdiction to have been caused by (x) the willful misconduct or gross negligence of the Issuing Bank in determining whether a request presented under any Letter of Credit complied with the terms of such Letter of Credit or (y) the Issuing Bank's failure to pay under any Letter of Credit after the presentation to it of a request strictly complying with the terms and conditions of the Letter of Credit. Nothing in this subsection 2.16(f) is intended to limit the obligations of the Borrower under any other provision of this Agreement. To the extent the Borrower does not indemnify the Issuing Bank as required by this subsection, the Banks agree to do so ratably in accordance with their Commitments. SECTION 2.17. 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 Bank at the place indicated in such notice with respect to each Interest Period 28 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 2.18. TAKEOUT OF SWINGLINE LOANS. (a) In the event that any Swingline Borrowing shall not be repaid in full at or prior to the maturity thereof the Administrative Agent shall, on behalf of the Borrower (the Borrower hereby irrevocably directing and authorizing the Administrative Agent so to act on its behalf), give a Notice of Borrowing requesting the Banks, including the Swingline Bank, to make a Base Rate Borrowing on the maturity date of such Swingline Borrowing in an amount equal to the unpaid principal amount of such Swingline Borrowing. Each Bank will make the proceeds of its Base Rate Loan included in such Borrowing available to the Administrative Agent for the account of the Swingline Bank on such date in accordance with Section 2.04. The proceeds of such Base Rate Borrowing shall be immediately applied to repay such Swingline Borrowing. (b) If, for any reason, a Base Rate Borrowing may not be (as determined by the Administrative Agent in its sole discretion), or is not, made pursuant to subsection (a) above to refund Swingline Loans as required by said clause, then, effective on the date such Borrowing would otherwise have been made, each Bank severally, unconditionally and irrevocably agrees that it shall purchase an undivided participating interest in such Swingline Loans ("UNREFUNDED SWINGLINE LOANS") in an amount equal to the amount of the Loan which otherwise would have been made by such Bank pursuant to subsection (a), which purchase shall be funded by the time such Loan would have been required to be funded pursuant to Section 2.04 by transfer to the Administrative Agent, for the account of the Swingline Bank, in immediately available funds, of the amount of its participation. 29 (c) Whenever, at any time after the Swingline Bank has received from any Bank payment in full for such Bank's participating interest in a Swingline Loan, the Swingline Bank (or the Administrative Agent on its behalf) receives any payment on account thereof, the Swingline Bank (or the Administrative Agent, as the case may be) will promptly distribute to such Bank its participating interest in such payment (appropriately adjusted, in the case of interest payments, to reflect the period of time during which such Bank's participating interest was outstanding and funded); provided, however, that in the event that such payment is subsequently required to be returned, such Bank will return to the Swingline Bank (or the Administrative Agent, as the case may be) any portion thereof previously distributed by the Swingline Bank (or the Administrative Agent, as the case may be) to it. (d) Each Bank's obligation to purchase and fund participating interests pursuant to this Section shall be absolute and unconditional and shall not be affected by any circumstance, including, without limitation: (i) any setoff, counterclaim, recoupment, defense or other right which such Bank or the Borrower may have against the Swingline Bank, or any other Person for any reason whatsoever; (ii) the occurrence or continuance of a Default or the failure to satisfy any of the conditions specified in Article 3; (iii) any adverse change in the condition (financial or otherwise) of the Borrower; (iv) any breach of this Agreement by the Borrower or any Bank; or (v) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing. SECTION 2.19. 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 $190,000,000 (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, with the approval of The Chase Manhattan Bank, in its capacity as Issuing Bank, each other Bank that has issued a Letter of Credit which is still outstanding, each other Bank with a commitment outstanding to issue a Letter of Credit and the Swingline Bank, designate one or more banks or other financial institutions (which may be, 30 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 2.19 shall become effective upon the receipt of the Administrative 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 2.19, 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 Syndicated Loans from the Banks in proportion to their respective Commitments after giving effect to such increase, until such time as all outstanding Syndicated 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); 31 (b) receipt by the Administrative Agent of an opinion of Dewey Ballantine, special counsel for 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; (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 Agreements 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 29, 1997. 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 Agreements, comprising the "Required Lenders" as defined therein, hereby agree that (i) the commitments of the lenders under the Existing Credit Agreements shall terminate in their entirety immediately and automatically upon the effectiveness of this Agreement, without further action by any party to the Existing Credit Agreements, (ii) all accrued fees under the Existing Credit Agreements shall be due and payable at such time and (iii) subject to the funding loss indemnities in the Existing Credit Agreements, the Borrower may prepay any and all loans outstanding thereunder on the date of effectiveness of this Agreement. SECTION 3.02. BORROWINGS AND ISSUANCE OF LETTERS OF CREDITS. The obligation of any Bank to make a Loan on the occasion of any Borrowing and the 32 obligation of the Issuing Bank to issue (or renew or extend the term of) any Letter of Credit is subject to the satisfaction of the following conditions; PROVIDED that if such Borrowing is a Swingline Takeout Borrowing, only the conditions set forth in clauses 3.02(a) and 3.02(b) must be satisfied: (a) receipt by the Administrative Agent of a Notice of Borrowing as required by Section 2.02 or 2.03 or receipt by the Issuing Bank of a Notice of Issuance as required by Section 2.16(b), as the case may be; (b) the facts that, immediately after such Borrowing or issuance of such Letter of Credit (and, in the case of any Swingline Borrowing or issuance of a Letter of Credit, at any time prior to the tenth day following the maturity or expiry date thereof), (i) the sum of the aggregate outstanding principal amount of the Loans and the aggregate amount of Letters of Credit Liabilities will not exceed the aggregate amount of the Commitments, (ii) the aggregate outstanding principal amount of Swingline Loans will not exceed $100,000,000 and (iii) the aggregate amount of Letter of Credit Liabilities will not exceed $250,000,000; (c) the fact that, immediately after such Borrowing or issuance of such Letter of Credit, no Default shall have occurred and be continuing; and (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(f) and 4.05) shall be true on and as of the date of such Borrowing or issuance of such Letter of Credit. Each Borrowing and issuance of a Letter of Credit 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 (unless such Borrowing is a Swingline Takeout Borrowing, in which case the Borrower shall be deemed to represent and warrant as to the facts specified in clause (b) 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 33 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. SECTION 4.04. FINANCIAL INFORMATION. (a) The consolidated balance sheet of Church Street Capital Corp. and its Consolidated Subsidiaries as of December 31, 1996 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 Church Street Capital Corp. 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 Church Street Capital Corp. and its Consolidated Subsidiaries as of March 31, 1997 and the related unaudited consolidated statements of income and cash flows for the three 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 Church Street Capital Corp. and its 34 Consolidated Subsidiaries as of such date and their consolidated results of operations and changes in financial position for such three month period (subject to normal year-end adjustments and the absence of footnotes). (c) The consolidated balance sheet of PanEnergy Corp and its Consolidated Subsidiaries as of December 31, 1996 and the related consolidated statements of income, cash flows, capitalization and retained earnings for the fiscal year then ended, reported on by KPMG Peat Marwick LLP, 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 PanEnergy Corp and its Consolidated Subsidiaries as of such date and their consolidated results of operations and cash flows for such fiscal year. (d) The unaudited consolidated balance sheet of PanEnergy Corp and its Consolidated Subsidiaries as of March 31, 1997 and the related unaudited consolidated statements of income and cash flows for the three 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 PanEnergy Corp and its Consolidated Subsidiaries as of such date and their consolidated results of operations and changes in financial position for such three month period (subject to normal year-end adjustments and the absence of footnotes). (e) The unaudited pro forma consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of December 31, 1996 and the related unaudited pro forma consolidated statement of earnings for the year then ended, copies of which have been delivered to each of the Banks, are complete and correct in all material respects and have been prepared on the basis described therein and otherwise in conformity with generally accepted accounting principles applied on a basis consistent with the financial statements referred to in subsection (a) of this Section and show the consolidated financial position and results of operations of the Borrower as if the Borrower had acquired PanEnergy Corp, in the case of the pro forma consolidated balance sheet, on December 31, 1996, and in the case of the pro forma consolidated statement of earnings, as of January 1, 1996. (f) 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. Except as disclosed in the reports referred to in Section 4.04 or in the PanEnergy Corp quarterly report on Form 10-Q for the 35 quarter ended June 30, 1997, copies of which have been delivered 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 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. 36 ARTICLE 5 COVENANTS The Borrower agrees that, so long as any Bank has any Commitment hereunder or any amount payable hereunder remains unpaid or any Letter of Credit Liabilities remain outstanding: SECTION 5.01. INFORMATION. The Borrower will deliver to each of the Banks: (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; 37 (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 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. 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. 38 SECTION 5.03. MAINTENANCE OF PROPERTY; INSURANCE. (a) The Borrower will keep, and will cause each Material Subsidiary to keep, all property useful and 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 39 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, 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; 40 (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 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 41 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 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; 42 (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 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 43 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 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 66-2/3% 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 66-2/3% 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. SECTION 6.03. CASH COVER. The Borrower agrees, in addition to the provisions of Section 6.01 hereof, that upon the occurrence and during the continuance of any Event of Default, it shall, if requested by the Administrative Agent upon the instruction of the Banks having at least 66 2/3% in the aggregate amount of the Commitments (or, if the Commitments shall have been terminated, 44 holding at least 66 2/3% of the Letter of Credit Liabilities), pay to the Administrative Agent an amount in immediately available funds (which funds shall be held as collateral pursuant to arrangements satisfactory to the Administrative Agent) equal to the aggregate amount available for drawing under all Letters of Credit then outstanding at such time, PROVIDED that, upon the occurrence of any Event of Default specified in Section 6.01(g) or 6.01(h) with respect to the Borrower, the Borrower shall pay such amount forthwith without any notice or demand or any other act by the Administrative Agent or the Banks. 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 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 45 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. 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 46 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. 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 66-2/3% 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, 47 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 Syndicated 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 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 forthwith 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. 48 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 Letter of Credit or any obligation to make Committed Loans or issue or participate in any Letter of Credit 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 or its obligations hereunder in respect of Letters of Credit 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 of issuing or participating in any Letter of Credit, 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 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 49 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, imposts, 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 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. 50 "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 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 51 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 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 52 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 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, the Administrative Agent, the Issuing Banks and the Swingline Bank (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 and Letter of Credit Liabilities of such Bank, without recourse to or warranty by, or expense to, such Bank, for a purchase price equal to the principal amount of all of such Bank's outstanding Loans and funded Letter of Credit Liabilities 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 53 election at least three Euro-Dollar Business Days before the effective date of such termination, (ii) the Borrower repays or prepays all outstanding Loans made by such Bank not later than the effective date of such termination and (iii) if at the effective date of such termination, any Letter of Credit Liabilities or Swingline Loans are outstanding, the conditions specified in Section 3.02 would be satisfied (after giving effect to such termination) were the related Letters of Credit and Swingline Loans made on such date. 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 or any Issuing Bank under Article 2 or Article 3 shall not be effective until delivered. 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 54 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 and Letter of Credit Liabilities 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 and Letter of Credit Liabilities held by such other Bank, the Bank receiving such proportionately greater payment shall purchase such participations in the Loans and Letter of Credit Liabilities 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 and Letter of Credit Liabilities 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. 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, the Swingline Bank or any Issuing Bank are affected thereby, by such Person); 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 55 by Section 2.19 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 the amount to be reimbursed in respect of any Letter of Credit or any interest thereon or any fees hereunder, (iii) postpone the date fixed for any payment of principal of or interest on any Loan or for reimbursement in respect of any Letter of Credit 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 and Letter of Credit Liabilities, 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 and Letter of Credit Liabilities. 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, the Issuing Banks, the Swingline Bank 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 only to the extent of a participating interest granted in accordance with this subsection (b). 56 (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) 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), the Issuing Banks, the Swingline Bank 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. 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 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 57 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 58 hereto and supersedes any and all prior agreements and understandings, oral or written, relating to the subject matter hereof. SECTION 9.11. WAIVER OF JURY TRIAL. EACH OF THE BORROWER, THE ADMINISTRATIVE AGENT, THE ISSUING BANKS, THE SWINGLINE BANK 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. 59 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/ Paul F. Ferguson, Jr. ----------------------------------- Title: Treasurer Address: 1105 North Market Street Wilmington, DE 19899 Attention: Paul F. Ferguson, Jr. Telecopy number: (704) 382-4964 Commitments $ 67,450,000 THE CHASE MANHATTAN BANK By /s/ Paul V. Farrell ----------------------------------- Title: Vice President $ 67,450,000 MORGAN GUARANTY TRUST COMPANY OF NEW YORK By /s/ Oliver W. Wesson, Jr. ----------------------------------- Title: Vice President $ 49,400,000 BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By /s/ Michael J. Dillon ----------------------------------- Title: Managing Director $ 49,400,000 THE BANK OF NEW YORK By /s/ Ian K. Stewart ----------------------------------- Title: Senior Vice President $ 49,400,000 BARCLAYS BANK PLC NEW YORK BRANCH By /s/ N. A. Bell ----------------------------------- Title: Director Portfolio Management $ 49,400,000 CITIBANK, N.A. By /s/ Philip C. Kron ----------------------------------- Title: As Attorney-In-Fact $49,400,000 THE FIRST NATIONAL BANK OF CHICAGO By /s/ Madeleine N. Pember ----------------------------------- Title: Corporate Banking Officer $ 49,400,000 FIRST UNION NATIONAL BANK By /s/ Michael J. Kolosowsky ----------------------------------- Title: Vice President $ 49,400,000 NATIONSBANK, N.A. By /s/ Gretchen P. Burud ----------------------------------- Title: Vice President $ 49,400,000 WACHOVIA BANK, N.A. By /s/ Christopher L. Fincher ----------------------------------- Title: Vice President $ 32,300,000 BANK OF MONTREAL By /s/ Natasha Glossop ----------------------------------- Title: Director $ 32,300,000 THE BANK OF TOKYO- MITSUBISHI, LTD. By /s/ William L. Otott, Jr. ----------------------------------- Title: Vice President $ 32,300,000 BANKBOSTON, N.A. By /s/ Rita M. Cahill ----------------------------------- Title: Vice President $ 32,300,000 CIBC, INC. By /s/ Aleksandra K. Dymanus ----------------------------------- Title: Authorized Signatory $ 32,300,000 DRESDNER BANK AG NEW YORK AND/OR GRAND CAYMAN BRANCHES By /s/ Thomas Lake ----------------------------------- Title: Vice President By /s/ Michael E. Terry ----------------------------------- Title: Assistant Vice President $ 32,300,000 THE INDUSTRIAL BANK OF JAPAN, LIMITED, ATLANTA AGENCY By /s/ Koichi Hasegawa ----------------------------------- Title: Senior Vice President and Deputy General Manager $ 32,300,000 MELLON BANK, N.A. By /s/ Brad S. Miller ----------------------------------- Title: Assistant Vice President $ 32,300,000 THE NORTHERN TRUST COMPANY By /s/ John J. Conway ----------------------------------- Title: Vice President $ 32,300,000 ROYAL BANK OF BANK OF CANADA By /s/ Tom J. Oberaigner ----------------------------------- Title: Manager $ 32,300,000 THE SANWA BANK, LIMITED By /s/ William M. Plough ----------------------------------- Title: Vice President By /s/ Andrew N. Hammond ----------------------------------- Title: Vice President - Senior Manager Credit $ 32,300,000 SOCIETE GENERALE By /s/ Gordon Eadon ----------------------------------- Title: Vice President $ 32,300,000 TORONTO DOMINION (NEW YORK), INC. By /s/ Jorge A. Garcia ----------------------------------- Title: Vice President $ 32,300,000 UNION BANK OF SWITZERLAND, NEW YORK BRANCH By /s/ Paul R. Morrison ----------------------------------- Title: Director By /s/ Michele von Kroemer ----------------------------------- Title: Assistant Treasurer - --------------------------- Total Commitments $950,000,000 - ----------------------- - ----------------------- 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) 270-7625 PRICING SCHEDULE The "EURO-DOLLAR MARGIN" and the "FACILITY FEE RATE" 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 .055% .060% .065% .070% .085% .100% Fee - ------------------------------------------------------------------------------------------------------------ Euro- .095% .115% .135% .155% .165% .200% Dollar Margin - ------------------------------------------------------------------------------------------------------------
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. 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. 2 SCHEDULE I DUKE CAPITAL CORPORATION CREDIT FACILITIES (Being Replaced by $950,000,000 Revolving Credit Facility) 1. Revolving Credit Agreement dated as of December 1, 1995 among Church Street Capital Corp., the lenders party thereto and The First National Bank of Chicago, as administrative agent. 2. Credit Agreement dated as of January 31, 1996 among Panhandle Eastern Corporation (d/b/a/ PanEnergy Corp), the lenders party thereto and The Chase Manhattan Bank, as administrative agent. 3. Credit Agreement (Five-Year Facility) dated as of January 31, 1996 among Panhandle Eastern Corporation (d/b/a/ PanEnergy Corp), the lenders party thereto and The Chase Manhattan Bank, as administrative agent. EXHIBIT A NOTE New York, New York August 25, 1997 For value received, Duke Capital Corporation, a North Carolina 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 Five-Year Credit Agreement dated as of August 25, 1997 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
- ----------------------------------------------------------------------------------------------------- Amount of Amount Type Principal Maturity Notation Date of Loan of Loan Repaid Date Made By - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------
2 EXHIBIT B FORM OF BID RATE QUOTE REQUEST [Date] To: The Chase Manhattan Bank (the "ADMINISTRATIVE AGENT") From: Duke Capital Corporation Re: Five-Year Credit Agreement (the "CREDIT AGREEMENT") dated as of August 25, 1997 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 Five-Year Credit Agreement dated as of August 25, 1997 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)*****] - -------- --------- --------------- ---------------- $ $ provided, that the aggregate principal amount of Bid Rate Loans for which the above offers may be accepted shall not exceed $___________.]** - -------- *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 Termination Date. No more than five bids are permitted for each Interest Period. ****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%). 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 Five-Year Credit Agreement dated as of August 25, 1997 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 2 EXHIBIT E OPINION OF 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 Dear Sirs: We have acted as counsel for Duke Capital Corporation (the "BORROWER") in connection with the Five-Year Credit Agreement (the "CREDIT AGREEMENT") dated as of August 25, 1997 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. 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 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 articles of incorporation or by-laws of the Borrower or, to our knowledge, of any agreement, judgment, injunction, order, decree or other instrument binding upon the Borrower or, to our knowledge (but without independent investigation), 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 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. 4. Except as disclosed in the reports referred to in Section 4.04 of the Credit Agreement or in the PanEnergy Corp quarterly report on Form 10-Q for the quarter ended June 30, 1997, to our 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. The phrase "TO THE BEST OF OUR KNOWLEDGE", as used in the foregoing opinion, refers to the actual knowledge of this firm without any independent investigation as to any such matters. We are members of the Bar of the State of New York and we do not express any opinion herein concerning any law other than the law of the State of New York, the General Corporation Law of the State of Delaware and the federal law of the United States of America. 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 prior written consent, except for Additional Banks and Participants. Very truly yours, 2 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 Dear Sirs: We have participated in the preparation of the Five-Year Credit Agreement (the "CREDIT AGREEMENT") dated as of August 25, 1997 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(c) 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"), THE CHASE MANHATTAN BANK [AND OTHER ISSUING BANK(S)], as Issuing Bank(s), THE CHASE MANHATTAN BANK, as Swingline Bank, 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 Five-Year Credit Agreement dated as of August 25, 1997 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 to the Borrower and participate in Letters of Credit in an aggregate principal amount at any time outstanding not to exceed $----------; WHEREAS, Syndicated 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, Letters of Credit with a total amount available for drawing thereunder 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 Letter of Credit Liabilities, 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 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 Syndicated Loans made by, and Letter of Credit Liabilities of, the Assignor outstanding at the date hereof. Upon the execution and delivery hereof by the Assignor, the Assignee, the Borrower, the Issuing Banks, the Swingline Bank and the Administrative Agent, 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 and Letter of Credit 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 TO ASSIGNMENT. This Agreement is conditioned upon the consent of the Borrower, the Issuing Banks, the Swingline Bank and the Administrative Agent pursuant to Section 9.06(c) of the Credit Agreement. The execution of this Agreement by the Borrower, the Issuing Banks , the Swingline Bank and the Administrative Agent is evidence of this consent. Pursuant to - -------- *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 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. 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. 3 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: DUKE CAPITAL CORPORATION By _______________________________________________ Title: THE CHASE MANHATTAN BANK, as Issuing Bank, Swingline Bank and Administrative Agent By _______________________________________________ Title: [ISSUING BANK] 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 Termination Date under the Five-Year Credit Agreement dated as of August 25, 1997 among Duke Capital Corporation, (the "BORROWER"), the banks parties thereto and The Chase Manhattan Bank, as Administrative Agent (the "CREDIT AGREEMENT") for one year to [date to which its 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 EX-10 4 EXHIBIT 10-T CONFORMED COPY $300,000,000 364-DAY CREDIT AGREEMENT dated as of August 25, 1997 among Duke Capital Corporation, The Banks Listed Herein and The Chase Manhattan Bank, as Administrative Agent -------------------------------------------------------- Chase Securities Inc., Arranger TABLE OF CONTENTS ----------------------
PAGE ---- ARTICLE 1 DEFINITIONS SECTION 1.01. DEFINITIONS......................................................................1 SECTION 1.02. ACCOUNTING TERMS AND DETERMINATIONS.............................................11 SECTION 1.03. TYPES AND CLASSES OF BORROWINGS.................................................11 ARTICLE 2 THE CREDITS SECTION 2.01. COMMITMENTS TO LEND.............................................................12 SECTION 2.02. NOTICE OF COMMITTED BORROWINGS..................................................13 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...............................................................19 SECTION 2.07. INTEREST RATES..................................................................19 SECTION 2.08. FEES............................................................................21 SECTION 2.09. OPTIONAL TERMINATION OR REDUCTION OF COMMITMENTS................................21 SECTION 2.10. METHOD OF ELECTING INTEREST RATES...............................................22 SECTION 2.11. MANDATORY TERMINATION OF COMMITMENTS............................................23 SECTION 2.12. OPTIONAL PREPAYMENTS............................................................23 SECTION 2.13. GENERAL PROVISIONS AS TO PAYMENTS...............................................24 SECTION 2.14. FUNDING LOSSES..................................................................24 SECTION 2.15. COMPUTATION OF INTEREST AND FEES................................................25 SECTION 2.16. REGULATION D COMPENSATION.......................................................25 SECTION 2.17. INCREASED COMMITMENTS; ADDITIONAL BANKS.........................................26 ARTICLE 3 CONDITIONS SECTION 3.01. EFFECTIVENESS...................................................................27 SECTION 3.02. BORROWINGS......................................................................28 ARTICLE 4 REPRESENTATIONS AND WARRANTIES SECTION 4.01. CORPORATE EXISTENCE AND POWER...................................................29 PAGE ---- SECTION 4.02. CORPORATE AND GOVERNMENTAL AUTHORIZATION; NO CONTRAVENTION...............................................................29 SECTION 4.03. BINDING EFFECT..................................................................29 SECTION 4.04. FINANCIAL INFORMATION...........................................................30 SECTION 4.05. LITIGATION......................................................................31 SECTION 4.06. COMPLIANCE WITH LAWS............................................................31 SECTION 4.07. TAXES...........................................................................31 SECTION 4.08. PUBLIC UTILITY HOLDING COMPANY ACT..............................................32 ARTICLE 5 COVENANTS SECTION 5.01. INFORMATION.....................................................................32 SECTION 5.02. PAYMENT OF TAXES................................................................34 SECTION 5.03. MAINTENANCE OF PROPERTY; INSURANCE..............................................34 SECTION 5.04. MAINTENANCE OF EXISTENCE........................................................34 SECTION 5.05. COMPLIANCE WITH LAWS............................................................35 SECTION 5.06. BOOKS AND RECORDS...............................................................35 SECTION 5.07. MAINTENANCE OF OWNERSHIP OF PRINCIPAL SUBSIDIARIES..............................35 SECTION 5.08. NEGATIVE PLEDGE.................................................................35 SECTION 5.09. CONSOLIDATIONS, MERGERS AND SALES OF ASSETS.....................................37 SECTION 5.10. USE OF PROCEEDS.................................................................37 SECTION 5.11. TRANSACTIONS WITH AFFILIATES....................................................37 SECTION 5.12. INDEBTEDNESS/CAPITALIZATION RATIO...............................................37 ARTICLE 6 DEFAULTS SECTION 6.01. EVENTS OF DEFAULT...............................................................38 SECTION 6.02. NOTICE OF DEFAULT...............................................................40 ARTICLE 7 THE ADMINISTRATIVE AGENT SECTION 7.01. APPOINTMENT AND AUTHORIZATION...................................................40 SECTION 7.02. ADMINISTRATIVE AGENT AND AFFILIATES.............................................40 SECTION 7.03. ACTION BY ADMINISTRATIVE AGENT..................................................40 SECTION 7.04. CONSULTATION WITH EXPERTS.......................................................40 SECTION 7.05. LIABILITY OF ADMINISTRATIVE AGENT...............................................40 SECTION 7.06. INDEMNIFICATION.................................................................41 SECTION 7.07. CREDIT DECISION.................................................................41 ii PAGE ---- SECTION 7.08. SUCCESSOR ADMINISTRATIVE AGENT..................................................41 SECTION 7.09. ADMINISTRATIVE AGENT'S FEE......................................................42 ARTICLE 8 CHANGE IN CIRCUMSTANCES SECTION 8.01. BASIS FOR DETERMINING INTEREST RATE INADEQUATE OR UNFAIR........................42 SECTION 8.02. ILLEGALITY......................................................................43 SECTION 8.03. INCREASED COST AND REDUCED RETURN...............................................44 SECTION 8.04. TAXES...........................................................................45 SECTION 8.05. BASE RATE LOANS SUBSTITUTED FOR AFFECTED FIXED RATE LOANS.......................47 SECTION 8.06. SUBSTITUTION OF BANK TERMINATION OPTION.........................................48 ARTICLE 9 MISCELLANEOUS SECTION 9.01. NOTICES.........................................................................49 SECTION 9.02. NO WAIVERS......................................................................49 SECTION 9.03. EXPENSES; INDEMNIFICATION.......................................................49 SECTION 9.04. SHARING OF SET-OFFS.............................................................50 SECTION 9.05. AMENDMENTS AND WAIVERS..........................................................50 SECTION 9.06. SUCCESSORS AND ASSIGNS..........................................................51 SECTION 9.07. COLLATERAL......................................................................52 SECTION 9.08. CONFIDENTIALITY.................................................................52 SECTION 9.09. GOVERNING LAW; SUBMISSION TO JURISDICTION.......................................53 SECTION 9.10. COUNTERPARTS; INTEGRATION.......................................................53 SECTION 9.11. WAIVER OF JURY TRIAL............................................................53 PRICING SCHEDULE SCHEDULE I - Duke Capital Corporation Credit Facilities (Being Replaced by $300,000,000 Revolving Credit Facility) 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 Counsel for the Borrower EXHIBIT F - Opinion of Davis Polk & Wardwell, Special Counsel for the Administrative Agent iii EXHIBIT G - Assignment and Assumption Agreement EXHIBIT H - Extension Agreement
iv 364-DAY CREDIT AGREEMENT 364-DAY CREDIT AGREEMENT dated as of August 25, 1997 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 2 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)). "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. "CHURCH STREET CAPITAL CORP." is a former name of the Borrower. "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 24, 1998, 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. 3 "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. "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, 4 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. "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 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 AGREEMENTS" means the credit facilities identified in Schedule I hereto, as amended and in effect on the Effective Date. 5 "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. "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 25, 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 6 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: (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 7 (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. "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 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). 8 "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)). "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 9 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, Panhandle Eastern Pipe Line Company and Trunkline Gas Company, 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. "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 10 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 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 11 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 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 six 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 12 Administrative Agent not 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 2/3% 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: (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 13 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 (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 14 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, (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 15 (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. (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. 16 (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 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 17 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 subsections (b) and (c) of this Section 2.04(a) 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. (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, 18 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 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 19 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 Company (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 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 Reference Bank to which such Interest Period is to apply and for a period of time comparable to such Interest Period. If any 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 Reference Bank or, if none of such quotations is available on a timely basis, the provisions of Section 8.01 shall apply. (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 20 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 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. 21 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: (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 22 (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 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. 23 (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 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 24 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 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. 25 "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 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 26 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 Dewey Ballantine, special counsel for 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; (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; 27 (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 Agreements 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 29, 1997. 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 Agreements, comprising the "Required Lenders" as defined therein, hereby agree that (i) the commitments of the lenders under the Existing Credit Agreements shall terminate in their entirety immediately and automatically upon the effectiveness of this Agreement, without further action by any party to the Existing Credit Agreements, (ii) all accrued fees under the Existing Credit Agreements shall be due and payable at such time and (iii) subject to the funding loss indemnities in the Existing Credit Agreements, 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 28 (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(f) 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. 29 SECTION 4.04. FINANCIAL INFORMATION. (a) The consolidated balance sheet of Church Street Capital Corp. and its Consolidated Subsidiaries as of December 31, 1996 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 Church Street Capital Corp. 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 Church Street Capital Corp. and its Consolidated Subsidiaries as of March 31, 1997 and the related unaudited consolidated statements of income and cash flows for the three 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 Church Street Capital Corp. and its Consolidated Subsidiaries as of such date and their consolidated results of operations and changes in financial position for such three month period (subject to normal year-end adjustments and the absence of footnotes). (c) The consolidated balance sheet of PanEnergy Corp and its Consolidated Subsidiaries as of December 31, 1996 and the related consolidated statements of income, cash flows, capitalization and retained earnings for the fiscal year then ended, reported on by KPMG Peat Marwick LLP, 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 PanEnergy Corp and its Consolidated Subsidiaries as of such date and their consolidated results of operations and cash flows for such fiscal year. (d) The unaudited consolidated balance sheet of PanEnergy Corp and its Consolidated Subsidiaries as of March 31, 1997 and the related unaudited consolidated statements of income and cash flows for the three 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 PanEnergy Corp and its Consolidated Subsidiaries as of such date and their consolidated results of operations and changes in financial position for such three month period (subject to normal year-end adjustments and the absence of footnotes). (e) The unaudited pro forma consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of December 31, 1996 and the related 30 unaudited pro forma consolidated statement of earnings for the year then ended, copies of which have been delivered to each of the Banks, are complete and correct in all material respects and have been prepared on the basis described therein and otherwise in conformity with generally accepted accounting principles applied on a basis consistent with the financial statements referred to in subsection (a) of this Section and show the consolidated financial position and results of operations of the Borrower as if the Borrower had acquired PanEnergy Corp, in the case of the pro forma consolidated balance sheet, on December 31, 1996, and in the case of the pro forma consolidated statement of earnings, as of January 1, 1996. (f) 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. Except as disclosed in the reports referred to in Section 4.04 or in the PanEnergy Corp quarterly report on Form 10-Q for the quarter ended June 30, 1997, copies of which have been delivered 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 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 31 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. 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: (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; 32 (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 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 33 (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. 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 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. 34 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, 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; 35 (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 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, 36 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 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%. 37 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 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; 38 (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 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 66-2/3% 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 66-2/3% 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 39 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 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, 40 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. 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 41 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. 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 66-2/3% or more of the aggregate amount of the affected Loans advise the Administrative Agent that the London Interbank Offered Rate as determined by the 42 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 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 forthwith 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. 43 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 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 44 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, imposts, 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 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 45 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 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 46 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 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: 47 (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 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 all outstanding Loans made by such Bank not later than the effective date of such termination. Upon 48 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. 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. 49 (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. 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. 50 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 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) 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. Upon execution and delivery of such instrument of assumption and payment by such Assignee to such 51 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 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 52 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 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. 53 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/ Paul F. Ferguson, Jr. ----------------------------------- Title: Treasurer Address: 1105 North Market Street Wilmington, DE 19899 Attention: Paul F. Ferguson, Jr. Telecopy number: (704) 382-4964 Commitments $ 21,300,000 THE CHASE MANHATTAN BANK By /s/ Paul V. Farrell ----------------------------------- Title: Vice President $ 21,300,000 MORGAN GUARANTY TRUST COMPANY OF NEW YORK By /s/ Oliver W. Wesson, Jr. ----------------------------------- Title: Vice President $ 15,600,000 BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By /s/ Michael J. Dillon ----------------------------------- Title: Managing Director $ 15,600,000 THE BANK OF NEW YORK By /s/ Ian K. Stewart ----------------------------------- Title: Senior Vice President $ 15,600,000 BARCLAYS BANK PLC NEW YORK BRANCH By /s/ N. A. Bell ----------------------------------- Title: Director Portfolio Management $ 15,600,000 CITIBANK, N.A. By /s/ Philip C. Kron ----------------------------------- Title: As Attorney-In-Fact $ 15,600,000 THE FIRST NATIONAL BANK OF CHICAGO By /s/ Madeleine N. Pember ----------------------------------- Title: Corporate Banking Officer $ 15,600,000 FIRST UNION NATIONAL BANK By /s/ Michael J. Kolosowsky ----------------------------------- Title: Vice President $ 15,600,000 NATIONSBANK, N.A. By /s/ Gretchen P. Burud ----------------------------------- Title: Vice President $ 15,600,000 WACHOVIA BANK, N.A. By /s/ Christopher L. Fincher ----------------------------------- Title: Vice President $ 10,200,000 BANK OF MONTREAL By /s/ Natasha Glossop ----------------------------------- Title: Director $ 10,200,000 THE BANK OF TOKYO- MITSUBISHI, LTD. By /s/ William L. Otott, Jr. ----------------------------------- Title: Vice President $ 10,200,000 BANKBOSTON, N.A. By /s/ Rita M. Cahill ----------------------------------- Title: Vice President $ 10,200,000 CIBC, INC. By /s/ Aleksandra K. Dymanus ----------------------------------- Title: Authorized Signatory $ 10,200,000 DRESDNER BANK AG NEW YORK AND/OR GRAND CAYMAN BRANCHES By /s/ Thomas Lake ----------------------------------- Title: Vice President By /s/ Michael E. Terry ----------------------------------- Title: Assistant Vice President $ 10,200,000 THE INDUSTRIAL BANK OF JAPAN, LIMITED, ATLANTA AGENCY By /s/ Koichi Hasegawa ----------------------------------- Title: Senior Vice President and Deputy General Manager $ 10,200,000 MELLON BANK, N.A. By /s/ Brad S. Miller ----------------------------------- Title: Assistant Vice President $ 10,200,000 THE NORTHERN TRUST COMPANY By /s/ John J. Conway ----------------------------------- Title: Vice President $ 10,200,000 ROYAL BANK OF BANK OF CANADA By /s/ Tom J. Oberaigner ----------------------------------- Title: Manager $ 10,200,000 THE SANWA BANK, LIMITED By /s/ William M. Plough ----------------------------------- Title: Vice President By /s/ Andrew N. Hammond ----------------------------------- Title: Vice President - Senior Manager Credit $ 10,200,000 SOCIETE GENERALE By /s/ Gordon Eadon ----------------------------------- Title: Vice President $ 10,200,000 TORONTO DOMINION (NEW YORK), INC. By /s/ Jorge A. Garcia ----------------------------------- Title: Vice President $ 10,200,000 UNION BANK OF SWITZERLAND, NEW YORK BRANCH By /s/ Paul R. Morrison ----------------------------------- Title: Director By /s/ Michele von Kroemer ----------------------------------- Title: Assistant Treasurer - ------------------ Total Commitments $300,000,000 - ------------------- 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) 270-7625 PRICING SCHEDULE The "EURO-DOLLAR MARGIN" and the "FACILITY FEE RATE" 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 .035% .040% .045% .050% .065% .080% Fee - ----------------------------------------------------------------------------------------------------- Euro- .115% .135% .155% .175% .185% .220% Dollar Margin - -----------------------------------------------------------------------------------------------------
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. 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. 2 SCHEDULE I DUKE CAPITAL CORPORATION CREDIT FACILITIES (Being Replaced by $300,000,000 Revolving Credit Facility) 1. Revolving Credit Agreement dated as of December 1, 1995 among Church Street Capital Corp., the lenders party thereto and The First National Bank of Chicago, as administrative agent. 2. Credit Agreement dated as of January 31, 1996 among Panhandle Eastern Corporation (d/b/a/ PanEnergy Corp), the lenders party thereto and The Chase Manhattan Bank, as administrative agent. 3. Credit Agreement (Five-Year Facility) dated as of January 31, 1996 among Panhandle Eastern Corporation (d/b/a/ PanEnergy Corp), the lenders party thereto and The Chase Manhattan Bank, as administrative agent. EXHIBIT A NOTE New York, New York August 25, 1997 For value received, Duke Capital Corporation, a North Carolina 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 25, 1997 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
- ------------------------------------------------------------------------------------------------------ Amount of Amount Type Principal Maturity Notation Date of Loan of Loan Repaid Date Made By - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------
2 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 25, 1997 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 25, 1997 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. ****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%). 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 25, 1997 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 2 EXHIBIT E OPINION OF 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 Dear Sirs: We have acted as counsel for Duke Capital Corporation (the "BORROWER") in connection with the 364-Day Credit Agreement (the "CREDIT AGREEMENT") dated as of August 25, 1997 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. 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 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 articles of incorporation or by-laws of the Borrower or, to our knowledge, of any agreement, judgment, injunction, order, decree or other instrument binding upon the Borrower or, to our 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 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. 4. Except as disclosed in the reports referred to in Section 4.04 of the Credit Agreement or in the PanEnergy Corp quarterly report on Form 10-Q for the quarter ended June 30, 1997, to our 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 THE BEST OF OUR KNOWLEDGE", as used in the foregoing opinion, refers to the actual knowledge of this firm without any independent investigation as to any such matters. We are members of the Bar of the State of New York and we do not express any opinion herein concerning any law other than the law of the State of New York, the General Corporation Law of the State of Delaware and the federal law of the United States of America. 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 our prior written consent, except for Additional Banks and Participants. Very truly yours, 2 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 Dear Sirs: We have participated in the preparation of the 364-Day Credit Agreement (the "CREDIT AGREEMENT") dated as of August 25, 1997 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(c) 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 25, 1997 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. - -------- *The asterisked provisions shall be appropriately revised in the event of an assignment after the Commitment Termination Date. 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 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. SECTION 5. NON-RELIANCE ON ASSIGNOR. The Assignor makes no representation or warranty in connection with, and shall have no responsibility - -------- *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 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 25, 1997 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 EX-10 5 EXHIBIT 10(U) FIRST AMENDMENT TO EMPLOYMENT AGREEMENT This FIRST AMENDMENT TO EMPLOYMENT AGREEMENT, by and between Duke Energy Corporation, a North Carolina corporation (the "Company"), and Richard B. Priory (the "Executive"), is made as of this 22nd day of October, 1997. WHEREAS, the Executive has entered into an employment agreement, dated November 24, 1996, with the Company (f.k.a. Duke Power Company) (the "Employment Agreement"); WHEREAS, the Employment Agreement provides that it may be amended by the written agreement of the parties; and WHEREAS, the Company and the Executive now wish to amend the Employment Agreement in certain respects. NOW, THEREFORE, in consideration of the premises and the mutual agreements hereinafter contained, the parties do hereby amend the Employment Agreement as follows: 1. Section 3(b) (ii) of the Employment Agreement is hereby amended by deleting the text thereof in its entirety and replacing it with the following: "(ii) Annual Bonus. (a) In respect of calendar year 1997, the Executive shall be eligible, based upon the achievement of performance goals during such year, to receive a bonus with a target level not less than the target level applicable to the Executive for the 1996 calendar year under the Company's Executive Short Term Incentive Plan. The establishment of the performance goals, the evaluation of the actual performance against such goals, and the determination of the bonus (if any) actually payable to the Executive (which may be at, above or below the target level) shall be made by the Compensation Committee of the Board acting in its sole discretion. (b) Commencing in calendar year 1998, the Executive shall be eligible, based upon the achievement of performance goals during such year, to receive an annual bonus with a target level of 100% of the Executive's base salary for purposes of the applicable annual bonus plan. The establishment of the performance goals, the evaluation of the actual performance against such goals, and the determination of the bonus (if any) actually payable to the Executive (which may be at, above or below the target level) shall be made by the Compensation Committee of the Board acting in its sole discretion. At the discretion of the Board, such bonus may be made payable pursuant to the terms of an annual bonus plan that is intended to comply with the requirements of Section 162(m) of the Internal Revenue Code, and that is subject to the approval of the Company's stockholders at its 1998 annual meeting. (c) For purposes of Section 5(a) hereof concerning the Company's obligations upon termination of employment, the term "Target Annual Bonus" shall mean the target level of the Executive's annual bonus multiplied by his Annual Base Salary, each as in effect under this Section 3 immediately prior to the Date of Termination." 2. Section 3(b)(iii) of the Employment Agreement is hereby amended by deleting the text thereof in its entirety and by replacing it with the following: "(iii) Long-Term Incentives. The Compensation Committee of the Board shall award to the Executive one or more nonqualified stock options to purchase an aggregate of 500,000 shares of the Company's common stock, without par value (the "Option"), pursuant to the terms of the Company's Stock Incentive Plan (the "Plan"). The number of shares covered by the Option in excess of 100,000 (400,000 shares) shall be subject to the approval by the stockholders of the Company of an amendment to the Plan to increase the number of shares that may be subject to stock options granted during a year to any one participant. The option may be granted in one or more installments at the discretion of the Compensation Committee, but in any event shall be fully granted by the date of the 1998 annual meeting (subject to stockholder approval as described above). The exercise price per share of the Option shall be the fair market value of the Common Stock on the date(s) of grant, determined in accordance with the terms of the Plan. The Option shall vest in accordance with a schedule no less favorable than equal annual installments of 20 percent each as to the number of shares subject to the Option, commencing on the first anniversary of the date(s) of grant, and shall have a maximum term of exercise of 10 years from the date(s) of grant (subject in each case to your continued employment by the Company). The Option shall also include provisions consistent with the Plan with respect to the vesting and term of the Option in connection with a "change of control" of the Company and the death or disability of the Executive. The foregoing and other applicable terms and conditions of the Option shall be set forth in a stock option agreement approved by the Compensation Committee of the Board. Notwithstanding any prior agreement between the Company and the Executive, the Company is under no obligation to make any other stock option or other long-term incentive awards to the Executive during the Employment Period." Except as amended and modified hereby, the terms of the Employment Agreement shall remain in full force and effect. 2 IN WITNESS WHEREOF, the parties hereto have entered into this First Amendment to Employment Agreement as of the day and year first above written. /s/ R. B. Priory ---------------- Richard B. Priory DUKE ENERGY CORPORATION /s/ P.M. Anderson ----------------- By: P.M. Anderson Title: President & COO 3 EX-10 6 EXHIBIT 10(V) FIRST AMENDMENT TO EMPLOYMENT AGREEMENT This FIRST AMENDMENT TO EMPLOYMENT AGREEMENT, by and between Duke Energy Corporation, a North Carolina corporation ("Duke"), PanEnergy Corp, a Delaware corporation ("PanEnergy"), and Paul M. Anderson (the "Executive"), is made as of this 24th day of October, 1997. WHEREAS, the Executive has entered into an employment agreement, dated November 24, 1996, with Duke and PanEnergy (the "Employment Agreement"); WHEREAS, the Employment Agreement provides that it may be amended by the written agreement of the parties; and WHEREAS, the parties hereto now wish to amend the Employment Agreement in certain respects. NOW, THEREFORE, in consideration of the premises and the mutual agreements hereinafter contained, the parties do hereby amend the Employment Agreement as follows: 1. Section 3(b) (ii) of the Employment Agreement is hereby amended by deleting the text thereof in its entirety and replacing it with the following: "(ii) Annual Bonus. (a) In respect of calendar year 1997, the Executive shall be eligible, based upon the Executive's achievement of performance goals (set by the Compensation Committee of the Board, in consultation with the Executive, at levels substantially consistent with past practice) during such fiscal year, to receive a bonus at a target level of not less than 70% of the Annual Base Salary, with the opportunity, substantially consistent with past practice, to earn in excess of such amount based upon the attainment of agreed upon performance goals. Such bonus shall be paid no later than March 31, 1998. (b) Commencing in calendar year 1998, the Executive shall be eligible, based upon the achievement of performance goals during such year, to receive an annual bonus with a target level of 90% of the Executive's base salary for purposes of the applicable annual bonus plan. The establishment of the performance goals, the evaluation of the actual performance against such goals, and the determination of the bonus (if any) actually payable to the Executive (which may be at, above or below the target level) shall be made by the Compensation Committee of the Board acting in its sole discretion. At the discretion of the Board, such bonus may be made payable pursuant to the terms of an annual bonus plan that is intended to comply with the requirements of Section 162(m) of the Internal Revenue Code, and that is subject to the approval of the Company's stockholders at its 1998 annual meeting. (c) For purposes of Section 5(a) hereof concerning the Company's obligations upon termination of employment, the term "Target Annual Bonus" shall mean the target level of the Executive's annual bonus multiplied by his annual Base Salary, each as in effect under this Section 3 immediately prior to the Date of Termination." 2. Section 3(b)(iii) of the Employment Agreement is hereby amended by deleting the text thereof in its entirety and by replacing it with the following: "(iii) Long-Term Incentives. The Compensation Committee of the Board shall award to the Executive one or more nonqualified stock options to purchase an aggregate of 400,000 shares of the Company's common stock, without par value (the "Option"), pursuant to the terms of the Company's Stock Incentive Plan (the "Plan"). The number of shares covered by the Option in excess of 100,000 (300,000 shares) shall be subject to the approval by the stockholders of the Company of an amendment to the Plan to increase the number of shares that may be subject to stock options granted during a year to any one participant. The option may be granted in one or more installments at the discretion of the Compensation Committee, but in any event shall be fully granted by the date of the 1998 annual meeting (subject to stockholder approval as described above). The exercise price per share of the Option shall be the fair market value of the Common Stock on the date(s) of grant, determined in accordance with the terms of the Plan. The Option shall vest in accordance with a schedule no less favorable than equal annual installments of 20 percent each as to the number of shares subject to the Option, commencing on the first anniversary of the date(s) of grant, and shall have a maximum term of exercise of 10 years from the date(s) of grant (subject in each case to your continued employment by the Company). The Option shall also include provisions consistent with the Plan with respect to the vesting and term of the Option in connection with a "change of control" of the Company and the death or disability of the Executive. The foregoing and other applicable terms and conditions of the Option shall be set forth in a stock option agreement approved by the Compensation Committee of the Board. Notwithstanding any prior agreement between the Company and the Executive, the Company is under no obligation to make any other stock option or other long-term incentive awards to the Executive during the Employment Period." Except as amended and modified hereby, the terms of the Employment Agreement shall remain in full force and effect. 2 IN WITNESS WHEREOF, the parties hereto have entered into this First Amendment to Employment Agreement as of the day and year first above written. /s/ P.M. Anderson ----------------- Paul M. Anderson DUKE ENERGY CORPORATION /s/ R.B. Priory --------------- By: R.B. Priory Title: Chairman & CEO PANENERGY CORP /s/ James T. Hackett -------------------- By: James T. Hackett Title: President Energy Services 3 EX-10 7 EXHIBIT 10(W) FIRST AMENDMENT TO EMPLOYMENT AGREEMENT This FIRST AMENDMENT TO EMPLOYMENT AGREEMENT, by and between Duke Energy Corporation, a North Carolina corporation ("Duke"), PanEnergy Corp, a Delaware corporation ("PanEnergy"), and James T. Hackett (the "Executive"), is made as of this 24th day of October, 1997. WHEREAS, the Executive has entered into an employment agreement, dated November 24, 1996, with PanEnergy (the "Employment Agreement"); WHEREAS, the parties hereto intend that all rights and obligations of PanEnergy under the Employment Agreement be assumed by Duke; WHEREAS, the Employment Agreement provides that it may be amended by the written agreement of the parties; and WHEREAS, the parties hereto now wish to amend the Employment Agreement in certain respects. NOW, THEREFORE, in consideration of the premises and the mutual agreements hereinafter contained, the parties do hereby amend the Employment Agreement as follows: 1. Section 3(b) (ii) of the Employment Agreement is hereby amended by deleting the text thereof in its entirety and replacing it with the following: "(ii) Annual Bonus. (a) In respect of calendar year 1997, the Executive shall be eligible, based upon the Executive's achievement of performance goals (set by the Compensation Committee of the Board, in consultation with the Executive, at levels substantially consistent with past practice) during such fiscal year, to receive a bonus at a target level of not less than 55% of the Annual Base Salary, with the opportunity, substantially consistent with past practice, to earn in excess of such amount based upon the attainment of agreed upon performance goals. Such bonus shall be paid no later than March 31, 1998. (b) Commencing in calendar year 1998, the Executive shall be eligible, based upon the achievement of performance goals during such year, to receive an annual bonus with a target level of 70% of the Executive's base salary for purposes of the applicable annual bonus plan. The establishment of the performance goals, the evaluation of the actual performance against such goals, and the determination of the bonus (if any) actually payable to the Executive (which may be at, above or below the target level) shall be made by the Compensation Committee of the Board acting in its sole discretion. At the discretion of the Board, such bonus may be made payable pursuant to the terms of an annual bonus plan that is intended to comply with the requirements of Section 162(m) of the Internal Revenue Code, and that is subject to the approval of the Company's stockholders at its 1998 annual meeting. (c) For purposes of Section 5(a) hereof concerning the Company's obligations upon termination of employment, the term "Target Annual Bonus" shall mean the target level of the Executive's annual bonus multiplied by his Annual Base Salary, each as in effect under this Section 3 immediately prior to the Date of Termination." 2. Section 3(b)(iii) of the Employment Agreement is hereby amended by deleting the text thereof in its entirety and by replacing it with the following: "(iii) Long-Term Incentives. The Compensation Committee of the Board shall award to the Executive one or more nonqualified stock options to purchase an aggregate of 250,000 shares of the Company's common stock, without par value (the "Option"), pursuant to the terms of the Company's Stock Incentive Plan (the "Plan"). The number of shares covered by the Option in excess of 100,000 (150,000 shares) shall be subject to the approval by the stockholders of the Company of an amendment to the Plan to increase the number of shares that may be subject to stock options granted during a year to any one participant. The option may be granted in one or more installments at the discretion of the Compensation Committee, but in any event shall be fully granted by the date of the 1998 annual meeting (subject to stockholder approval as described above). The exercise price per share of the Option shall be the fair market value of the Common Stock on the date(s) of grant, determined in accordance with the terms of the Plan. The Option shall vest in accordance with a schedule no less favorable than equal annual installments of 20 percent each as to the number of shares subject to the Option, commencing on the first anniversary of the date(s) of grant, and shall have a maximum term of exercise of 10 years from the date(s) of grant (subject in each case to your continued employment by the Company). The Option shall also include provisions consistent with the Plan with respect to the vesting and term of the Option in connection with a "change of control" of the Company and the death or disability of the Executive. The foregoing and other applicable terms and conditions of the Option shall be set forth in a stock option agreement approved by the Compensation Committee of the Board. Notwithstanding any prior agreement between the Company and the Executive, the Company is under no obligation to make any other stock option or other long-term incentive awards to the Executive during the Employment Period." 2 3. All rights and obligations of PanEnergy under the Employment Agreement are hereby assigned to and assumed by Duke, and all references to "the Company" in the Employment Agreement, as amended hereby, shall hereinafter be deemed to be references to Duke. Except as amended and modified hereby, the terms of the Employment Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the parties hereto have entered into this First Amendment to Employment Agreement as of the day and year first above written. /s/ James T. Hackett -------------------- James T. Hackett DUKE ENERGY CORPORATION /s/ P.M. Anderson ----------------- By: P.M. Anderson Title: President & COO PANENERGY CORP /s/ P.M. Anderson ----------------- By: P.M. Anderson Title: President & CEO 3 EX-10 8 EXHIBIT 10(X) FIRST AMENDMENT TO EMPLOYMENT AGREEMENT This FIRST AMENDMENT TO EMPLOYMENT AGREEMENT, by and between Duke Energy Corporation, a North Carolina corporation (the "Company"), and William A. Coley (the "Executive"), is made as of this 24th day of October, 1997. WHEREAS, the Executive has entered into an employment agreement, dated November 24, 1996, with the Company (f.k.a. Duke Power Company) (the "Employment Agreement"); WHEREAS, the Employment Agreement provides that it may be amended by the written agreement of the parties; and WHEREAS, the Company and the Executive now wish to amend the Employment Agreement in certain respects. NOW, THEREFORE, in consideration of the premises and the mutual agreements hereinafter contained, the parties do hereby amend the Employment Agreement as follows: 1. Section 3(b) (ii) of the Employment Agreement is hereby amended by deleting the text thereof in its entirety and replacing it with the following: "(ii) Annual Bonus. (a) In respect of calendar year 1997, the Executive shall be eligible, based upon the achievement of performance goals during such year, to receive a bonus with a target level not less than the target level applicable to the Executive for the 1996 calendar year under the Company's Executive Short Term Incentive Plan. The establishment of the performance goals, the evaluation of the actual performance against such goals, and the determination of the bonus (if any) actually payable to the Executive (which may be at, above or below the target level) shall be made by the Compensation Committee of the Board acting in its sole discretion. (b) Commencing in calendar year 1998, the Executive shall be eligible, based upon the achievement of performance goals during such year, to receive an annual bonus with a target level of 60% of the Executive's base salary for purposes of the applicable annual bonus plan. The establishment of the performance goals, the evaluation of the actual performance against such goals, and the determination of the bonus (if any) actually payable to the Executive (which may be at, above or below the target level) shall be made by the Compensation Committee of the Board acting in its sole discretion. At the discretion of the Board, such bonus may be made payable pursuant to the terms of an annual bonus plan that is intended to comply with the requirements of Section 162(m) of the Internal Revenue Code, and that is subject to the approval of the Company's stockholders at its 1998 annual meeting. (c) For purposes of Section 5(a) hereof concerning the Company's obligations upon termination of employment, the term "Target Annual Bonus" shall mean the target level of the Executive's annual bonus multiplied by his Annual Base Salary, each as in effect under this Section 3 immediately prior to the Date of Termination." 2. Section 3(b)(iii) of the Employment Agreement is hereby amended by deleting the text thereof in its entirety and by replacing it with the following: "(iii) Long-Term Incentives. The Compensation Committee of the Board shall award to the Executive one or more nonqualified stock options to purchase an aggregate of 200,000 shares of the Company's common stock, without par value (the "Option"), pursuant to the terms of the Company's Stock Incentive Plan (the "Plan"). The number of shares covered by the Option in excess of 100,000 (100,000 shares) shall be subject to the approval by the stockholders of the Company of an amendment to the Plan to increase the number of shares that may be subject to stock options granted during a year to any one participant. The option may be granted in one or more installments at the discretion of the Compensation Committee, but in any event shall be fully granted by the date of the 1998 annual meeting (subject to stockholder approval as described above). The exercise price per share of the Option shall be the fair market value of the Common Stock on the date(s) of grant, determined in accordance with the terms of the Plan. The Option shall vest in accordance with a schedule no less favorable than equal annual installments of 20 percent each as to the number of shares subject to the Option, commencing on the first anniversary of the date(s) of grant, and shall have a maximum term of exercise of 10 years from the date(s) of grant (subject in each case to your continued employment by the Company). The Option shall also include provisions consistent with the Plan with respect to the vesting and term of the Option in connection with a "change of control" of the Company and the death or disability of the Executive. The foregoing and other applicable terms and conditions of the Option shall be set forth in a stock option agreement approved by the Compensation Committee of the Board. Notwithstanding any prior agreement between the Company and the Executive, the Company is under no obligation to make any other stock option or other long-term incentive awards to the Executive during the Employment Period." Except as amended and modified hereby, the terms of the Employment Agreement shall remain in full force and effect. 2 IN WITNESS WHEREOF, the parties hereto have entered into this First Amendment to Employment Agreement as of the day and year first above written. /s/ William A. Coley -------------------- William A. Coley DUKE ENERGY CORPORATION /s/ R.B. Priory --------------- By: R.B. Priory Title: Chairman & CEO 3 EX-10 9 EXHIBIT 10(Y) FIRST AMENDMENT TO EMPLOYMENT AGREEMENT This FIRST AMENDMENT TO EMPLOYMENT AGREEMENT, by and between Duke Energy Corporation, a North Carolina corporation (the "Company"), and Richard J. Osborne (the "Executive"), is made as of this 27th day of October, 1997. WHEREAS, the Executive has entered into an employment agreement, dated November 24, 1996, with the Company (f.k.a. Duke Power Company) (the "Employment Agreement"); WHEREAS, the Employment Agreement provides that it may be amended by the written agreement of the parties; and WHEREAS, the Company and the Executive now wish to amend the Employment Agreement in certain respects. NOW, THEREFORE, in consideration of the premises and the mutual agreements hereinafter contained, the parties do hereby amend the Employment Agreement as follows: 1. Section 3(b) (ii) of the Employment Agreement is hereby amended by deleting the text thereof in its entirety and replacing it with the following: "(ii) Annual Bonus. (a) In respect of calendar year 1997, the Executive shall be eligible, based upon the achievement of performance goals during such year, to receive a bonus with a target level not less than the target level applicable to the Executive for the 1996 calendar year under the Company's Executive Short Term Incentive Plan. The establishment of the performance goals, the evaluation of the actual performance against such goals, and the determination of the bonus (if any) actually payable to the Executive (which may be at, above or below the target level) shall be made by the Compensation Committee of the Board acting in its sole discretion. (b) Commencing in calendar year 1998, the Executive shall be eligible, based upon the achievement of performance goals during such year, to receive an annual bonus with a target level of 60% of the Executive's base salary for purposes of the applicable annual bonus plan. The establishment of the performance goals, the evaluation of the actual performance against such goals, and the determination of the bonus (if any) actually payable to the Executive (which may be at, above or below the target level) shall be made by the Compensation Committee of the Board acting in its sole discretion. At the discretion of the Board, such bonus may be made payable pursuant to the terms of an annual bonus plan that is intended to comply with the requirements of Section 162(m) of the Internal Revenue Code, and that is subject to the approval of the Company's stockholders at its 1998 annual meeting. (c) For purposes of Section 5(a) hereof concerning the Company's obligations upon termination of employment, the term "Target Annual Bonus" shall mean the target level of the Executive's annual bonus multiplied by his Annual Base Salary, each as in effect under this Section 3 immediately prior to the Date of Termination." 2. Section 3(b)(iii) of the Employment Agreement is hereby amended by deleting the text thereof in its entirety and by replacing it with the following: "(iii) Long-Term Incentives. The Compensation Committee of the Board shall award to the Executive one or more nonqualified stock options to purchase an aggregate of 100,000 shares of the Company's common stock, without par value (the "Option"), pursuant to the terms of the Company's Stock Incentive Plan (the "Plan"). The option may be granted in one or more installments at the discretion of the Compensation Committee, but in any event shall be fully granted by the date of the 1998 annual meeting (subject to stockholder approval as described above). The exercise price per share of the Option shall be the fair market value of the Common Stock on the date(s) of grant, determined in accordance with the terms of the Plan. The Option shall vest in accordance with a schedule no less favorable than equal annual installments of 20 percent each as to the number of shares subject to the Option, commencing on the first anniversary of the date(s) of grant, and shall have a maximum term of exercise of 10 years from the date(s) of grant (subject in each case to your continued employment by the Company). The Option shall also include provisions consistent with the Plan with respect to the vesting and term of the Option in connection with a "change of control" of the Company and the death or disability of the Executive. The foregoing and other applicable terms and conditions of the Option shall be set forth in a stock option agreement approved by the Compensation Committee of the Board. Notwithstanding any prior agreement between the Company and the Executive, the Company is under no obligation to make any other stock option or other long-term incentive awards to the Executive during the Employment Period." Except as amended and modified hereby, the terms of the Employment Agreement shall remain in full force and effect. 2 IN WITNESS WHEREOF, the parties hereto have entered into this First Amendment to Employment Agreement as of the day and year first above written. /s/ Richard J. Osborne ---------------------- Richard J. Osborne DUKE ENERGY CORPORATION /s/ R.B. Priory --------------- By: R.B. Priory Title: Chairman & CEO 3 EX-12 10 EXHIBIT 12 EXHIBIT 12 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Year Ended December 31 -------------------------------------------------------------------------- 1997 (a) 1996 (a) 1995 (a) 1994 (a) 1993 (a) -------------- -------------- -------------- -------------- -------------- Dollars in Millions Earnings before income taxes ............ $ 1,613.3 $ 1,788.8 $ 1,682.3 $ 1,422.5 $ 1,326.9 Fixed charges ........................... 519.8 540.2 556.2 537.7 576.6 ----------- ----------- ----------- ----------- ----------- Total ................................. $ 2,133.1 $ 2,329.0 $ 2,238.5 $ 1,960.2 $ 1,903.5 =========== =========== =========== =========== =========== Fixed charges: Interest on debt ...................... $ 496.7 $ 513.6 $ 535.7 $ 519.8 $ 559.9 Interest component of rentals ......... 23.1 26.6 20.5 17.9 16.7 ----------- ----------- ----------- ----------- ----------- Fixed charges ........................ $ 519.8 $ 540.2 $ 556.2 $ 537.7 $ 576.6 =========== =========== =========== =========== =========== Ratio of earnings to fixed charges ...... 4.1 4.3 4.0 3.6 3.3
- --------- (a) Financial information reflects accounting for the 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, 1993. 67 EX-21 11 EXHIBIT 21 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): Algonquin Gas Transmission Company (Delaware) Crescent Resources, Inc. (South Carolina) Duke Capital Corporation (Delaware) Duke Energy Field Services, Inc. (Colorado) Duke Energy Natural Gas Corporation (Delaware) Duke Energy Trading and Marketing, L.L.C. (Delaware) (60% owned) Duke Engineering and Services, Inc. (North Carolina) Nantahala Power and Light Company (North Carolina) PanEnergy Corp (Delaware) Panhandle Eastern Pipe Line Company (Delaware) Texas Eastern Transmission Corporation (Delaware) Trunkline Gas Company (Delaware) 68 EX-23 12 EXHIBIT 23(A) Exhibit No. 23(a) CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in Registration Statement Nos. 33-50543, 33-50617, 33-50715, 333-02571, 33-59926, 33-60314, 333-02575, 333-14209 and 333-30263 of Duke Energy Corporation on Form S-3 and Registration Statement Nos. 333-29563, 333-29585, 333-29587, and 333-34655 of Duke Energy Corporation on Form S-8 of our report dated February 13, 1998, appearing in this Form 10-K of Duke Energy Corporation for the year ended December 31, 1997. /s/ DELOITTE & TOUCHE, LLP ---------------------------------------- Charlotte, North Carolina March 27, 1998 EX-23 13 EXHIBIT 23(B) Exhibit No. 23(b) CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in Registration Statement Nos. 33-50543, 33-50617, 33-50715, 333-02571, 33-59926, 33-60314, 333-02575, 333-14209 and 333-30263 of Duke Energy Corporation on Form S-3 and Registration Statement Nos. 333-29563, 333-29585, 333-29587, and 333-34655 of Duke Energy Corporation on Form S-8 of our report on the consolidated financial statements of PanEnergy Corp as of and for the years ended December 31, 1996 and 1995, dated January 16, 1997, appearing in this Form 10-K of Duke Energy Corporation for the year ended December 31, 1997. /s/ KPMG PEAT MARWICK LLP ---------------------------------------- Houston, Texas March 27, 1998 EX-24 14 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, 1997 (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, Robert S. Lilien, W. Edward Poe, Jr. and Jeffrey L. Boyer, and each of them, to act as attorneys-in-fact for and in the respective names, places, and stead of the undersigned, to execute, seal, sign, and file with the Securities and Exchange Commission the Annual Report of said 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 the 18th day of February, 1998 DUKE ENERGY CORPORATION By: R. B. PRIORY ------------------------------------ Chairman and Chief Executive Officer (Corporate Seal) ATTEST: ROBERT T. LUCAS III Assistant Secretary - ------------------------------ Robert T. Lucas III R. B. PRIORY Chairman and Chief Executive Officer - ------------------------------ (Principal Executive Officer and Director) R. B. Priory RICHARD J. OSBORNE Executive Vice President and Chief Financial - ------------------------------ Officer (Principal Financial Officer) Richard J. Osborne JEFFREY L. BOYER Vice President and Corporate Controller - ------------------------------ (Principal Accounting Officer) Jeffrey L. Boyer PAUL M. ANDERSON (Director) - ------------------------------ Paul M. Anderson G. ALEX BERNHARDT (Director) - ------------------------------ G. Alex Bernhardt ROBERT J. BROWN (Director) - ------------------------------ Robert J. Brown
WILLIAM A. COLEY (Director) ------------------------------ William A. Coley WILLIAM T. ESREY (Director) ------------------------------ William Esrey ANN M. GRAY (Director) ------------------------------ Ann M. Gray DENNIS R. HENDRIX (Director) ------------------------------ Dennis R. Hendrix HAROLD S. HOOK (Director) ------------------------------ Harold S. Hook GEORGE DEAN JOHNSON, JR. (Director) ------------------------------ George Dean Johnson, Jr. (Director) ------------------------------ W. W. Johnson MAX LENNON (Director) ------------------------------ Max Lennon LEO E. LINBECK, JR. (Director) ------------------------------ Leo E. Linbeck, Jr. JAMES G. MARTIN (Director) ------------------------------ James G. Martin BUCK MICKEL (Director) ------------------------------ Buck Mickel RUSSELL M. ROBINSON, II (Director) ------------------------------ Russell M. Robinson, II
EX-24 15 EXHIBIT 24(B) Exhibit No. 24(b) Certified Copy of Resolutions from the Minutes of a Regular Meeting of the Board of Directors of Duke Energy Corporation Held on February 18, 1998 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 the Minutes of the regular meeting of the Board of Directors of Duke Energy Corporation held on February 18, 1998, at which meetings a quorum was present, as taken from and compared with the original Minutes of said meeting. IN WITNESS WHEREOF, I have hereunto set my hand and affixed the Corporate Seal of said Duke Energy Corporation this 27th day of March, 1998. Robert T. Lucas III ------------------- Robert T. Lucas III Assistant Secretary [SEAL] EX-27 16 FDS -- DUKE ENERGY
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 12/31/97 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 0000030371 DUKE ENERGY CORPORATION 1000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 PER-BOOK 9,576,500 8,607,000 3,685,200 2,160,100 0 24,028,800 4,283,700 0 3,256,000 7,539,700 149,000 340,000 6,530,000 35,700 0 1,733,800 77,300 0 9,744 1,640 9,223,300 24,028,800 16,308,900 638,900 14,338,900 14,977,800 1,970,000 138,100 1,446,200 471,800 974,400 72,800 901,600 682,200 228,738 2,140,100 2.51 2.50
EX-99 17 EXHIBIT 99 Exhibit 99 INDEPENDENT AUDITORS' REPORT The Board of Directors PanEnergy Corp: We have audited the consolidated balance sheet of PanEnergy Corp and Subsidiaries as of December 31, 1996, and the related consolidated statements of income, common stockholders' equity, and cash flows for the year ended December 31, 1996 and 1995 (not presented herein). These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our 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, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of PanEnergy Corp and Subsidiaries as of December 31, 1996 and the results of their operations and their cash flows for the years ended December 31, 1996 and 1995 in conformity with generally accepted accounting principles. /s/ KPMG PEAT MARWICK LLP ---------------------------------------- Houston, Texas January 16, 1997 -----END PRIVACY-ENHANCED MESSAGE-----