-----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, PrzUBOwQMfv+SCaT2KlsJMLr+j9Bhtzba8UaYxDK+tAPqZHnjg2rOf5MQAO3rDPF 6ctxt85GtRZsHPRMzf0nLA== 0000950168-01-000714.txt : 20010409 0000950168-01-000714.hdr.sgml : 20010409 ACCESSION NUMBER: 0000950168-01-000714 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010402 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: 1592051 BUSINESS ADDRESS: STREET 1: 526 SOUTH CHURCH STREET CITY: CHARLOTTE STATE: NC ZIP: 28201-1006 BUSINESS PHONE: 7045946200 MAIL ADDRESS: STREET 1: 422 S CHURCH ST CITY: CHARLOTTE STATE: NC ZIP: 28242 FORMER COMPANY: FORMER CONFORMED NAME: DUKE POWER CO /NC/ DATE OF NAME CHANGE: 19920703 10-K 1 0001.txt DUKE ENERGY CORPORATION 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 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) 56-0205520 North Carolina (I.R.S. Employer Identification (State or other jurisdiction of No.) incorporation or organization) 28202-1904 526 South Church Street, Charlotte, (Zip Code) North Carolina (Address of principal executive offices) 704-594-6200 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on Title of each class 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 2033 New York Stock Exchange, Inc. First and Refunding Mortgage Bonds, 7 1/2% Series B Due 2025 New York Stock Exchange, Inc. First and Refunding Mortgage Bonds, 7 7/8% Due 2024 New York Stock Exchange, Inc. 7.20% Quarterly Income Preferred Securities issued by Duke Energy Capital Trust I and guaranteed by Duke Energy Corporation New York Stock Exchange, Inc. 7.20% Trust Preferred Securities issued by Duke Energy Capital Trust II and guaranteed by Duke Energy Corporation New York Stock Exchange, Inc. Preference Stock Purchase Rights New York Stock Exchange, Inc. Series C 6.60% Senior Notes Due 2038 New York Stock Exchange, Inc. Corporate Units 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 28, 2001.......... $30,197,000,000 Number of shares of Common Stock, without par value, outstanding at February 28, 2001.............................. 742,000,590
Documents incorporated by reference: The registrant is incorporating herein by reference certain sections of the proxy statement relating to the 2001 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, 2000 TABLE OF CONTENTS
Item Page ---- ---- PART I. 1. Business........................................................... 1 General......................................................... 1 Franchised Electric............................................. 3 Natural Gas Transmission........................................ 8 Field Services.................................................. 10 North American Wholesale Energy................................. 11 International Energy............................................ 15 Other Energy Services........................................... 16 Duke Ventures................................................... 16 Environmental Matters........................................... 17 Geographic Regions ............................................. 17 Employees....................................................... 17 Recent Financings............................................... 18 Operating Statistics............................................ 18 Executive Officers of Duke Energy............................... 19 2. Properties......................................................... 20 3. Legal Proceedings.................................................. 22 4. Submission of Matters to a Vote of Security Holders................ 24 PART II. 5. Market for Registrant's Common Equity and Related Stockholder Matters............................................................ 25 6. Selected Financial Data............................................ 26 7. Management's Discussion and Analysis of Results of Operations and Financial Condition................................................ 27 7A. Quantitative and Qualitative Disclosures About Market Risk......... 46 8. Financial Statements and Supplementary Data........................ 47 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................................... 88 PART III. 10. Directors and Executive Officers of the Registrant................. 88 11. Executive Compensation............................................. 88 12. Security Ownership of Certain Beneficial Owners and Management..... 88 13. Certain Relationships and Related Transactions..................... 88 PART IV. 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K.... 89 Signatures......................................................... 90 Exhibit Index...................................................... 91
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 From time to time, Duke Energy may make statements regarding its assumptions, projections, expectations, intentions or beliefs about future events. These statements are intended as "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. Duke Energy cautions that assumptions, projections, expectations, intentions or beliefs about future events may and often do vary from actual results, and the differences between assumptions, projections, expectations, intentions or beliefs and actual results can be material. Accordingly, there can be no assurance that the actual results will not differ materially from those expressed or implied by the forward-looking statements. For a discussion of some factors that could cause actual achievements and events to differ materially from those expressed or implied in such forward-looking statements, see "Management's Discussion and Analysis of Results of Operations and Financial Condition, Current Issues -- Forward-Looking Statements." PART I. Item 1. Business. GENERAL Duke Energy Corporation (collectively with its subsidiaries, "Duke Energy") is an integrated energy and energy services provider with the ability to offer physical delivery and management of both electricity and natural gas throughout the U.S. and abroad. Duke Energy provides these and other services through seven business segments. Franchised Electric generates, transmits, distributes and sells electric energy in central and western North Carolina and the western portion of South Carolina. Its operations are conducted primarily through Duke Power and Nantahala Power and Light. These electric operations are subject to the rules and regulations of the Federal Energy Regulatory Commission (FERC), the North Carolina Utilities Commission (NCUC) and the Public Service Commission of South Carolina (PSCSC). Natural Gas Transmission provides interstate transportation and storage of natural gas for customers primarily in the Mid-Atlantic, New England and southeastern states. Its operations are conducted primarily through Duke Energy Gas Transmission Corporation. The interstate natural gas transmission and storage operations are subject to the rules and regulations of the FERC. Field Services gathers, processes, transports, markets and stores natural gas and produces, transports, markets and stores natural gas liquids (NGLs). Its operations are conducted primarily through Duke Energy Field Services, LLC (DEFS), a limited liability company that is approximately 30% owned by Phillips Petroleum. Field Services operates gathering systems in western Canada and 11 contiguous states that serve major natural gas-producing regions in the Rocky Mountain, Permian Basin, Mid-Continent, East Texas-Austin Chalk-North Louisiana, as well as onshore and offshore Gulf Coast areas. North American Wholesale Energy's (NAWE's) activities include asset development, operation and management, primarily through Duke Energy North America, LLC (DENA), and commodity sales and services related to natural gas and power, primarily through Duke Energy Trading and Marketing, LLC (DETM). DETM is a limited liability company that is approximately 40% owned by Exxon Mobil Corporation. NAWE also includes Duke Energy Merchants (DEM), which develops new business lines in the evolving energy commodity markets. NAWE conducts its business throughout the U.S. and Canada. The operations of the previously segregated Trading and Marketing segment were combined by management into NAWE during 2000. International Energy conducts its operations through Duke Energy International, LLC. International Energy's activities include asset development, operation and management of natural gas and power facilities and energy trading and marketing of natural gas and electric power. This activity is targeted in the Latin American, Asia-Pacific and European regions. Other Energy Services is a combination of businesses that provide engineering, consulting, construction and integrated energy solutions worldwide, primarily through Duke Engineering & Services, Inc. (DE&S), Duke/Fluor Daniel (D/FD) and DukeSolutions, Inc. (DukeSolutions). D/FD is a 50/50 partnership between Duke Energy and Fluor Enterprises, Inc. Duke Ventures is comprised of other diverse businesses, primarily operating through Crescent Resources, Inc. (Crescent), DukeNet Communications, LLC (DukeNet) and Duke Capital Partners (DCP). Crescent develops high-quality commercial, residential and multi-family real estate projects and manages land holdings primarily in the southeastern U.S. DukeNet provides fiber optic networks for industrial, commercial and residential customers. DCP, a newly formed, wholly owned merchant finance company, provides financing, investment banking and asset management services to wholesale and commercial energy markets. 1 Certain terms used to describe Duke Energy's business are explained below. British Thermal Unit (Btu). A standard unit for measuring thermal energy or heat commonly used as a gauge for the energy content of natural gas and other fuels. Cubic Foot (cf). The most common unit of measurement of gas volume; the amount of natural gas required to fill a volume of one cubic foot under stated conditions of temperature, pressure and water vapor. Distribution. The system of lines, transformers and switches that connect the electric transmission system to customers. Federal Energy Regulatory Commission (FERC). The agency that regulates the transportation of electricity and natural gas in interstate commerce and authorizes the buying and selling of energy commodities at market-based rates. Gathering System. Pipeline, processing and related facilities that access production and other sources of natural gas supplies for delivery to mainline transmission systems. Generation. The process of transforming other forms of energy, such as nuclear or fossil fuels, into electricity. Also, the amount of electric energy produced, expressed in megawatt-hours. Greenfield Development. The development of a new power generating facility on an undeveloped site. Independent System Operator (ISO). Ensures non-discriminatory access to a regional transmission system, providing all customers access to the power exchange and clearing all bilateral contract requests for use of the electric transmission system. Also responsible for maintaining bulk electric system reliability. Liquefied Natural Gas (LNG). Natural gas that has been converted to a liquid by cooling it to -260 degrees Fahrenheit. Local Distribution Company (LDC). A company that obtains the major portion of its revenues from the operations of a retail distribution system for the delivery of electricity or gas for ultimate consumption. Natural Gas. A naturally occurring mixture of hydrocarbon and non- hydrocarbon gases found in porous geological formations beneath the earth's surface, often in association with petroleum. The principal constituent is methane. Natural Gas Liquids (NGLs). Liquid hydrocarbons extracted during the processing of natural gas. Principal commercial NGLs include butanes, propane, natural gasoline and ethane. Peak Load. The amount of electricity required during periods of highest demand. Peak periods fluctuate by season, generally occurring in the morning hours in winter and in late afternoon during the summer. Throughput. The amount of natural gas or natural gas liquids transported through a pipeline system. Transmission System (Electric). An interconnected group of electric transmission lines and related equipment for moving or transferring electric energy in bulk between points of supply and points at which it is transformed for delivery over a distribution system to customers, or for delivery to other electric transmission systems. Transmission System (Natural Gas). An interconnected group of natural gas pipelines and associated facilities for transporting natural gas in bulk between points of supply and delivery points to industrial customers, local distribution companies, or for delivery to other natural gas transmission systems. Watt. A measure of real power production or usage equal to one joule per second. A discussion of the current business and operations of each of Duke Energy's segments follows. For further discussion of the operating outlook of Duke Energy and its segments, see "Management's Discussion and Analysis of Results of Operations and Financial Condition, Introduction--Business Strategy." For financial information concerning Duke Energy's business segments, see Note 3 to the Consolidated Financial Statements, "Business Segments." Duke Energy is a North Carolina corporation with its principal executive offices located at 526 South Church Street, Charlotte, NC 28202-1904. The telephone number is 704-594-6200. 2 FRANCHISED ELECTRIC Service Area and Customers Franchised Electric generates, transmits, distributes and sells electricity over a service area which covers about 22,000 square miles with an estimated population of 5.3 million people in central and western portions of North Carolina and the western portion of South Carolina. Franchised Electric supplies electric service directly to approximately two million residential, commercial and industrial customers over 92,000 miles of distribution lines and a 12,700 mile transmission system. Electricity is sold at wholesale to incorporated municipalities and to several public and private utilities. In addition, sales are made through contractual agreements to municipal or cooperative customers who purchased portions of the Catawba Nuclear Station. For statistics related to gigawatt-hour sales by customer type, see "Operating Statistics." For further discussion of the Catawba Nuclear Station joint ownership, see Note 5 to the Consolidated Financial Statements, "Joint Ownership of Generating Facilities." Franchised Electric's service area is undergoing increasingly diversified industrial and commercial development. The textile industry, machinery and equipment manufacturing, and chemical and chemical-related industries are of major significance to the economy of the area. Other industrial activities include rubber and plastic products, paper and allied products, and various other light and heavy manufacturing and service businesses. The largest industry served is the textile industry, which accounted for approximately $419 million of Franchised Electric's revenues for 2000, representing 9% of total electric revenues and 35% of industrial revenues. Franchised Electric normally experiences seasonal peak loads in summer and winter. [MAP] 3 Capacity and Resources of Energy Electric energy required to supply the needs of Franchised Electric's customers is primarily generated by three nuclear generating stations with a combined net capacity of 5,409 megawatts (MW), eight coal-fired stations with a combined capacity of 7,572 MW, 31 hydroelectric stations with a combined capacity of 2,693 MW and six combustion turbine stations with a combined capacity of 2,081 MW. Energy and capacity are also supplied through contracts with other generators of electricity and purchased on the open market. Franchised Electric 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 Franchised Electric's customers are expected to be supplied through additional construction, purchased power contracts and open market purchases. For statistics regarding sources of electric energy, see "Operating Statistics." Fuel Supply Franchised Electric presently relies principally on coal and nuclear fuel for the generation of electric energy. Franchised Electric's 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, 2000 is set forth in the following table:
Cost of Fuel per Net Kilowatt-hour Generation by Generated Source (Percent) (Cents) ----------------- -------------- 2000 1999 1998 2000 1999 1998 ----- ----- ----- ---- ---- ---- Coal........................................... 50.9 50.4 50.7 1.29 1.33 1.32 Nuclear(a)..................................... 48.1 48.0 46.2 0.42 0.43 0.44 Oil and gas(b)................................. 0.5 0.8 1.0 7.32 4.51 4.01 ----- ----- ----- All fuels (cost based on weighted average)(a)................................... 99.5 99.2 97.9 0.91 0.92 0.93 Hydroelectric(c)............................... 0.5 0.8 2.1 ----- ----- ----- 100.0 100.0 100.0 ===== ===== =====
- -------- (a) Statistics related to nuclear generation and all fuels reflect Franchised Electric's 12.5% ownership interest in the Catawba Nuclear Station. (b) Cost statistics include amounts for light-off fuel at Franchised Electric's coal-fired stations. (c) Generating figures are net of output required to replenish pumped storage units during off-peak periods. Coal. Franchised Electric meets its coal demand through purchase supply contracts and spot agreements. Large amounts of its coal supply are obtained under supply contracts with mining operators utilizing both underground and surface mining. Franchised Electric has an adequate supply of coal to fuel its current operations. Its supply contracts, all of which have price adjustment provisions, have expiration dates ranging from 2001 to 2003. Duke Energy believes that it will be able to renew such contracts as they expire or to enter into similar contractual arrangements with other coal suppliers for the quantities and qualities of coal required. The coal purchased under these supply contracts is produced from mines located in eastern Kentucky, southern West Virginia and southwestern Virginia. Coal requirements not met by supply contracts have been and are expected to be fulfilled with spot market purchases. The average sulfur content of coal being purchased by Franchised Electric is approximately 1%. Such coal satisfies the current emission limitation for sulfur dioxide for existing facilities. See also "Management's Discussion and Analysis of Results of Operations and Financial Condition, Current Issues -- Environmental, Air Quality Control" for additional information regarding particulate matter. Nuclear. Generally, the process for developing nuclear generating fuel supply involves the mining and milling of uranium ore to produce uranium concentrates, the conversion of uranium concentrates to uranium hexafluoride, enrichment of that gas and fabrication of the enriched uranium hexafluoride into usable fuel assemblies. Franchised Electric has contracted for uranium materials and services required to fuel the Oconee, 4 McGuire and Catawba Nuclear Stations. Based upon current projections, these contracts will meet Franchised Electric's requirements through the following years:
Uranium Conversion Enrichment Fabrication Nuclear Station Material Service Service Service - --------------- -------- ---------- ---------- ----------- Oconee............................... 2002 2002 2002 2006 McGuire.............................. 2002 2002 2002 2009 Catawba.............................. 2002 2002 2002 2009
Uranium material requirements will be met through various supplier contracts, with uranium material produced primarily in the U.S. and Canada. Duke Energy believes that it will be able to renew contracts as they expire or to enter into similar contractual arrangements with other suppliers of nuclear fuel materials and services. Requirements not met by long-term supply contracts have been and are expected to be fulfilled with unfabricated uranium spot market purchases. Duke Energy owns and operates the McGuire and Oconee Nuclear Stations with two and three nuclear reactors, respectively, and operates and has a partial ownership interest in the Catawba Nuclear Station with two nuclear reactors. Nuclear insurance coverage is maintained in three program areas: liability coverage; property, decontamination and decommissioning coverage; and business interruption and/or extra expense coverage. Certain expenses associated with nuclear insurance premiums paid by Duke Energy are reimbursed by the other joint owners of the Catawba Nuclear Station. Pursuant to the Price-Anderson Act, Duke Energy is required to insure against public liability claims resulting from nuclear incidents to the full limit of liability of approximately $9.5 billion. See Note 14 to the Consolidated Financial Statements, "Commitments and Contingencies -- Nuclear Insurance" for further information. Estimated site-specific nuclear decommissioning costs, including the cost of decommissioning plant components not subject to radioactive contamination, total approximately $1.9 billion stated in 1999 dollars based on decommissioning studies completed in 1999. This amount includes Duke Energy's 12.5% ownership in the Catawba Nuclear Station. The other joint owners of Catawba Nuclear Station are responsible for decommissioning costs related to their ownership interests in the station. See Note 11 to the Consolidated Financial Statements, "Nuclear Decommissioning Costs" for further information. Duke Energy entered into a contract with the Department of Energy (DOE) to use mixed oxide fuel at its McGuire and Catawba nuclear stations. The mixed oxide fuel is fabricated from plutonium from the government's surplus and is similar to conventional uranium fuel. Before using the fuel, Duke Energy must apply for and receive amendments to the respective facility operating licenses from the Nuclear Regulatory Commission (NRC). Mixed oxide fuel is scheduled to be used at McGuire and Catawba nuclear stations in 2007. After spent fuel is removed from a nuclear reactor, it is placed in temporary storage for cooling in a spent fuel pool at the nuclear station site. Under provisions of the Nuclear Waste Policy Act of 1982, Duke Energy has entered into contracts with the DOE for the disposal of spent nuclear fuel. The DOE failed to begin accepting the spent nuclear fuel on January 31, 1998, the date provided by the Nuclear Waste Policy Act and by Duke Energy's contract with the DOE. On June 8, 1998, Duke Energy filed with the U.S. Court of Federal Claims a claim against the DOE for damages in excess of $1 billion arising out of the DOE's failure to begin accepting commercial spent nuclear fuel by January 31, 1998. Damages claimed in the suit are intended to recover costs that Duke Energy is incurring and will continue to incur as a result of the DOE's partial material breach of its contract with Duke Energy, including costs associated with securing additional spent fuel storage capacity. Duke Energy will continue to safely manage its spent nuclear fuel until the DOE accepts it. Competition Electric industry restructuring is being addressed in all 50 states and in the District of Columbia, which is resulting in changes in the industry. Duke Energy continues to monitor progress toward a more competitive environment and has actively participated in regulatory reform deliberations in North Carolina and South Carolina. Currently, however, movement toward retail deregulation in these states seems to be slowing as a consequence of recent developments related to deregulation of the electric industry in California. For further discussion, see "Management's Discussion and Analysis of Results of Operations and Financial Condition, Current Issues --Electric Competition and Current Issues--California Issues." 5 Franchised Electric is currently subject to competition in some areas from government owned power systems, municipally owned electric systems, rural electric cooperatives and, in certain instances, other private utilities. Currently, statutes in North Carolina and South Carolina provide for the assignment by the NCUC and the PSCSC, respectively, of all areas outside municipalities in such States to regulated electric utilities and rural electric cooperatives. Substantially all of the territory comprising Franchised Electric's service area has been so assigned. The remaining areas have been designated as unassigned and in such areas Franchised Electric 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, Franchised Electric 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 Franchised Electric's rates for certain electric sales to wholesale customers. For further discussion of rate matters, see Note 4 to the Consolidated Financial Statements, "Regulatory Matters -- Franchised Electric." The FERC, the NCUC and the PSCSC also have authority over the construction and operation of Franchised Electric's facilities. Franchised Electric holds certificates of public convenience and necessity issued by the FERC, the NCUC and the PSCSC, authorizing it to construct and operate the electric facilities now in operation for which certificates are required, and to sell electricity to retail and wholesale customers. Prior approval from the NCUC and the PSCSC is required to issue securities. The NCUC, PSCSC and FERC have implemented regulations governing access to regulated electric customer data by non-regulated entities and services provided between regulated and non-regulated affiliated entities. These regulations affect the activities of NAWE and Other Energy Services with Franchised Electric. 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, Franchised Electric obtained from the FERC open-access rule the rights to sell capacity and energy at market-based rates from its own assets. For further discussion, see "Management's Discussion and Analysis of Results of Operations and Financial Condition, Current Issues-- Electric Competition." On December 20, 1999 and February 25, 2000, the FERC issued its Order 2000 and Order 2000-A regarding Regional Transmission Organizations (RTOs). In these orders, the FERC stressed the voluntary nature of RTO participation by utilities and set minimum characteristics and functions that must be met by utilities that participate in an RTO, including exclusive and independent authority to propose rates, terms and conditions of transmission service provided over the facilities it operates. The order provides for an open, flexible structure for RTOs to meet the needs of the market and provides for the possibility of incentive ratemaking and other benefits for utilities that participate in an RTO. As a result of these rulemakings, on October 16, 2000, Duke Energy and two other investor-owned utilities, Progress Energy and South Carolina Electric & Gas, filed with the FERC to establish GridSouth Transco, LLC (GridSouth), as an RTO. If approved, GridSouth will be a for-profit, independent transmission company, responsible for operating and planning the companies' combined transmission systems. The target date for formation of GridSouth is December 15, 2001. However, the actual date that GridSouth becomes operational will depend upon the resolution of all necessary regulatory approvals and resolving all technical issues. Management believes that the establishment of GridSouth will not have a material adverse effect on Duke Energy's future consolidated results of operations, cash flows or financial position. 6 The Franchised Electric segment is subject to the jurisdiction of the NRC as to the design, construction and operation of its nuclear stations. The hydroelectric generating facilities of Franchised Electric are licensed by the FERC under Part I of the Federal Power Act, with license terms expiring from 2001 to 2036. The nuclear generating facilities of Franchised Electric are licensed by the NRC with license terms expiring from 2021 through 2034. The FERC has authority to grant extensions of hydroelectric generating licenses, and the NRC has authority to grant extensions of nuclear generating licenses. During 2000, the NRC renewed the operating license for Duke Energy's three Oconee nuclear units through 2033 to 2034. Duke Energy also initiated the license renewal process for the McGuire and Catawba Nuclear Stations in 2000. Duke Energy has filed a license application for one of its hydroelectric facilities for which it expects to receive a new license by the end of 2001. Duke Energy is also in various stages of relicensing other hydroelectric facilities whose licenses expire between 2005 and 2008. The Franchised Electric segment is subject to the jurisdiction of the Environmental Protection Agency (EPA) and state environmental agencies. For a discussion of environmental regulation, see "Environmental Matters." 7 NATURAL GAS TRANSMISSION Natural Gas Transmission provides interstate transportation and storage of natural gas through its operating subsidiaries, which include Texas Eastern Transmission Corporation (TETCO) and Algonquin Gas Transmission Company (Algonquin), East Tennessee Natural Gas Company (East Tennessee) and Market Hub Partners (MHP). East Tennessee and MHP were acquired in March 2000 and September 2000, respectively. Panhandle Eastern Pipe Line Company and Trunkline Gas Company, were also a part of Natural Gas Transmission until their sale to CMS Energy Corporation (CMS) in March 1999. See further discussion of the sale and acquisitions in Note 2 to the Consolidated Financial Statements, "Business Acquisitions and Dispositions." Investments include a 37.5% ownership interest in Maritimes & Northeast Pipeline, which has a design capacity of 530 million cubic feet per day (MMcf/d) in Canada and 400 MMcf/d in the U.S. Maritimes & Northeast Pipeline was placed in service and received the first delivery of natural gas from the Sable Offshore Energy Project near Nova Scotia in December 1999. Duke Energy operates the U.S. portion of the Maritimes & Northeast Pipeline. For 2000, consolidated natural gas deliveries by Natural Gas Transmission's interstate pipelines totaled 1,717 trillion British thermal units (TBtu), compared to 1,565 TBtu in 1999, a 10% increase from last year. The pipelines that were sold to CMS during 1999 also delivered 328 TBtu in 1999 prior to the sale. A majority of Natural Gas Transmission's contracted volumes are under long-term firm service agreements with local distribution company (LDC) customers in the pipelines' market areas. Firm transportation services are also provided to gas marketers, producers, other pipelines, electric power generators and a variety of end-users. In addition, the pipelines provide both firm and interruptible transportation to various customers on a short-term or seasonal basis. See natural gas deliveries statistics under "Operating Statistics." Demand for gas transmission on Natural Gas Transmission's interstate pipeline systems is seasonal, with the highest throughput occurring during the colder periods in the first and fourth quarters. Natural Gas Transmission's major pipeline customers are located in Pennsylvania, New Jersey, Connecticut, Virginia, Tennessee, Rhode Island and New York. [MAP] 8 Natural Gas Transmission's interstate pipeline systems consist of approximately 12,000 miles of pipe, which includes 830 miles related to the partial ownership interest in Maritimes & Northeast Pipeline. The pipeline systems receive natural gas from many major North American producing regions for delivery to markets primarily in the Mid-Atlantic, southeastern and New England states. Consistent with its growth strategy, Duke Energy and The Williams Companies, Inc. announced the closing on February 1, 2001 of their joint purchase of Coastal Corporation's Gulfstream Natural Gas System LLC. The planned 744-mile Gulfstream gas pipeline will originate near Mobile, Alabama, and cross the Gulf of Mexico to Manatee County, Florida. MHP owns natural gas salt cavern facilities in south Texas and Louisiana with a total storage capacity of 23 billion cubic feet (Bcf). Utilizing these facilities, MHP provides high deliverability firm storage services, real-time title tracking and other interruptible storage hub services to producers, end- users, LDCs, pipelines and natural gas marketers. TETCO and East Tennessee also provide firm and interruptible open-access storage services. Storage is offered as a stand-alone unbundled service or as part of a no-notice bundled service with transportation. TETCO's storage services utilize two joint venture storage facilities in Pennsylvania and one wholly owned and operated storage field in Maryland. TETCO's certificated working capacity in these three fields is 75 Bcf. East Tennessee's storage services utilize a liquefied natural gas (LNG) storage facility in Tennessee which has a certificated working capacity of 1.2 Bcf. Algonquin owns no storage fields. Competition Duke Energy's interstate pipeline and storage subsidiaries compete with other interstate and intrastate pipeline and storage facilities in the transportation and storage of natural gas. The principal elements of competition are rates, terms of service, and flexibility and reliability of service. Natural Gas Transmission competes directly with other interstate pipelines serving the Mid-Atlantic, northeastern and southeastern states, and various storage facilities in south Texas and Louisiana. Natural gas competes with other forms of energy available to Duke Energy's customers and end-users, including electricity, coal and fuel oils. The primary competitive factor is price. Changes in the availability or price of natural gas and other forms of energy, the level of business activity, conservation, legislation and governmental regulations, the capability to convert to alternative fuels, and other factors, including weather, affect the demand for natural gas in the areas served by Duke Energy. Regulation The FERC has authority to regulate rates and charges for natural gas transported in or stored for interstate commerce or sold by a natural gas company in interstate commerce for resale. For further discussion of rate matters, see Note 4 to the Consolidated Financial Statements, "Regulatory Matters--Natural Gas Transmission." The FERC also has authority over the construction and operation of pipeline and related facilities utilized in the transportation, storage and sale of natural gas in interstate commerce, including the extension, enlargement or abandonment of such facilities. TETCO, Algonquin, East Tennessee and MHP hold certificates of public convenience and necessity issued by the FERC, authorizing them to construct and operate the pipelines, facilities and properties now in operation for which such certificates are required, and to transport and store natural gas in interstate commerce. As required by FERC Order 636, Natural Gas Transmission's pipelines operate as open-access transporters of natural gas, providing unbundled firm and interruptible transportation and storage services on an equal basis for all gas supplies, whether purchased from the pipeline or from another gas supplier. The FERC has implemented regulations governing access to regulated natural gas transmission customer data by non-regulated entities and services provided between regulated and non-regulated affiliated entities. These regulations affect the activities of NAWE with Natural Gas Transmission. 9 Natural Gas Transmission is subject to the jurisdiction of the EPA and state environmental agencies. For a discussion of environmental regulation, see "Environmental Matters." Natural Gas Transmission is also subject to the Natural Gas Pipeline Safety Act of 1968, which regulates gas pipeline and LNG plant safety requirements, and to the Hazardous Liquid Pipeline Safety Act of 1979, which regulates oil and petroleum pipelines. FIELD SERVICES Field Services gathers, processes, transports, markets and stores natural gas and produces, transports, markets and stores NGLs. Field Services owns and operates approximately 57,000 miles of natural gas gathering systems, including intrastate pipelines, and 68 natural gas processing plants in the U.S. and Canada. Field Services also has ownership interests in 11 other natural gas processing plants in the U.S. Field Services gathers natural gas from production wellheads through gathering systems in western Canada and 11 contiguous states that serve major gas-producing regions in the Rocky Mountain, Permian Basin, Mid-Continent, East Texas-Austin Chalk-North Louisiana, as well as onshore and offshore Gulf Coast areas. Field Services' operations also include several intrastate pipeline systems and one high-deliverability natural gas storage facility. The map below includes Field Services' natural gas gathering systems, intrastate pipelines, region offices and supply areas. The map also shows the interstate systems of the Natural Gas Transmission segment. [MAP] 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 10 gasoline). The natural gas used in Field Services' processing operations is generally gathered on its own gathering system. NGLs are sold by Field Services to a variety of customers ranging from large, multi-national petrochemical and refining companies to small, family-owned retail propane distributors. Most NGL sales are based upon current market-related prices. Field Services also produces helium at the National Helium Corporation facility in Liberal, Kansas and the Ladder Creek facility in Colorado. Field Services' operating results are significantly impacted by changes in NGL prices, which increased approximately 56% in 2000 compared to 1999. See "Management's Discussion and Analysis of Results of Operations and Financial Condition, Quantitative and Qualitative Disclosures About Market Risk" for a discussion of Field Services' exposure to changes in commodity prices. In March 2000, Duke Energy, through a wholly owned subsidiary, completed the approximately $1.7 billion transaction that combined Field Services' gas gathering and processing business with Phillips Petroleum's Gas Gathering, Processing and Marketing unit (Phillips) to form a new midstream company, named DEFS. In addition to this transaction, Duke Energy transferred its interest in Texas Eastern Products Pipeline Company (TEPPCO), the general partner of TEPPCO Partners, L.P., to the newly formed company, DEFS. For further discussion of the Phillips transaction see Note 2 to the Consolidated Financial Statements, "Business Acquisitions and Dispositions." On March 31, 1999, Field Services completed the $1.35 billion acquisition of the natural gas gathering, processing, fractionation and NGL pipeline business from Union Pacific Resources (UPR), as well as UPR's natural gas and NGL marketing activities (collectively, "the UPR acquisition"). For further discussion of the UPR acquisition see Note 2 to the Consolidated Financial Statements, "Business Acquisitions and Dispositions." See certain operating statistics of Field Services under "Operating Statistics." Activities of Field Services can fluctuate in response to the seasonality affecting natural gas. Competition Field Services competes with major integrated oil companies, major interstate pipelines, national and local natural gas gatherers, brokers, marketers and distributors for natural gas supplies, in gathering and processing natural gas and in marketing and transporting natural gas and NGLs. Competition for natural gas supplies is primarily based on the efficiency and reliability of operations, the availability of transportation to high demand markets and the ability to obtain a satisfactory price for the producer's natural gas. Competition for sales customers is based primarily upon reliability and price of delivered natural gas and NGLs. Regulation The intrastate pipelines owned by Field Services are subject to state regulation and, to the extent they provide services under Section 311 of the Natural Gas Policy Act of 1978, are also subject to FERC regulation. However, the majority of the natural gas gathering activities of Field Services are not subject to regulation by the FERC. Field Services is subject to the jurisdiction of the EPA and state environmental agencies. For a discussion of environmental regulation, see "Environmental Matters." Certain operations of Field Services are subject to the jurisdiction of the Department of Transportation and certain similar state agencies whose regulations have incorporated certain provisions of the Natural Gas Pipeline Safety Act of 1968, the Hazardous Liquid Pipeline Safety Act of 1979, and subsequent amendments. NAWE NAWE's business activities include asset development, operation and management of merchant generation facilities, primarily through DENA, and commodity sales and services related to natural gas and power, primarily through DETM, a limited liability company that is approximately 40% owned by Exxon Mobil Corporation; NAWE also includes DEM, which develops new business lines in the evolving energy commodity markets. NAWE conducts its business throughout the U.S. and Canada. 11 DENA is an integrated energy business that develops, owns and manages a portfolio of merchant generation facilities. To capture the greatest value, DENA, through its portfolio management strategy, seeks opportunities to invest in markets that have capacity needs and to divest assets, in whole or in part, when significant value can be realized. DENA captures additional value by combining its project development, commercial and risk management expertise with the technical and operational skills of other Duke Energy business units to build and manage its projects with maximum efficiency. DENA also supplies competitively priced energy, integrated logistics and asset optimization services, as well as risk management products, to wholesale energy customers. DENA currently owns, operates or has substantial interests in approximately 6,200 MW of gross operating generation and has approximately 7,300 MW of projects under construction, which are slated for completion to meet summer peak demand: 3,200 MW in 2001 and 4,100 MW in 2002. In addition to the facilities in operation or under construction, DENA has approximately 13,500 MW in advanced development scheduled to begin operation between 2002 and 2004. The following map includes DENA's power generation facilities. [MAP] 12 DETM markets natural gas, electricity and other energy-related products to a wide range of customers across North America. Duke Energy owns a 60% interest in DETM's natural gas and electric power trading operations, with Exxon Mobil Corporation owning a 40% minority interest. Duke Energy and Exxon Mobil Corporation are in arbitration regarding the ownership of DETM. See "Management's Discussion and Analysis of Results of Operations and Financial Condition, Current Issues -- "Litigation and Contingencies, Exxon Mobil Corporation Arbitration" and Note 14 to the Consolidated Financial Statements, "Commitments and Contingencies -- Litigation." DETM markets natural gas primarily to LDCs, electric power generators (including DENA's generation facilities), municipalities, large industrial end- users and energy marketing companies. DETM markets electricity to investor owned utilities, municipal power generators and other power marketers. DETM also provides energy management services, such as supply and market aggregation, peaking services, dispatching, balancing, transportation, storage, tolling, contract negotiation and administration, as well as energy commodity risk management products and services. Operations are primarily in the U.S. and, to a lesser extent, in Canada, and are serviced through three operating centers. Natural gas marketing operations encompass both on-system and off-system supplies. With respect to on-system supplies, DETM generally purchases natural gas from producers who are connected to Field Services' facilities and delivers the gas to an intrastate or interstate pipeline for redelivery to another customer. Natural Gas Transmission's pipelines are utilized for deliveries when prudent. With respect to off-system supplies, DETM purchases natural gas from producers, pipelines and other suppliers not connected with Duke Energy's facilities for resale to customers. Substantially all of Mobil's U.S. and Canadian natural gas production is committed to be marketed by DETM through 2006. With respect to electricity marketing operations, DETM purchases electricity from third-party suppliers and from DENA's domestic generation facilities for resale to customers. DETM has a portfolio of short-term and long-term sales agreements with customers, the vast majority of which incorporate market-sensitive pricing terms. Long-term gas purchase agreements with producers, principally entered into in connection with on-system supplies, also generally include market- sensitive pricing provisions. Purchase and sales commitments involving significant price and location risk are generally hedged with offsetting commitments and commodity futures, swaps and options. For information concerning DETM's risk-management activities, see "Management's Discussion and Analysis of Results of Operations and Financial Condition, Quantitative and Qualitative Disclosures About Market Risk -- Commodity Price Risk" and Note 7 to the Consolidated Financial Statements, "Risk Management and Financial Instruments -- Commodity Derivatives -- Trading." DEM conducts physical and financial marketing and trading in evolving global energy commodity markets, and provides energy, financial and asset management services to producers, transporters and users of energy commodities and derivative products. Additionally, DEM invests capital in limited hydrocarbon exploration and production prospects through non-operating working interests. See certain operating statistics of NAWE under "Operating Statistics." Activities of DETM and DEM can fluctuate in response to the seasonality affecting electricity, natural gas and other energy-related commodities. Competition DETM and DEM compete with major integrated oil companies, major interstate pipelines and their marketing affiliates, brokers, marketers and distributors, and electric utilities and other electric power marketers for natural gas supplies and in marketing natural gas, electricity and other energy-related commodities. Competition in the energy marketing business is driven by the price of commodities and services delivered, along with the quality and reliability of services provided. DENA experiences substantial competition from existing utility companies as well as other merchant electric generation companies in the U.S. 13 Regulation The energy marketing activities of NAWE may, in certain circumstances, be subject to the jurisdiction of the FERC. Current FERC policies permit NAWE's trading and marketing entities to market natural gas, electricity and other energy-related commodities at market-based rates, subject to FERC jurisdiction. Most of DENA's operations are not subject to rate regulation. However, to the extent that DENA's generating stations in California sell electricity under "reliability must run" agreements to the California Independent System Operator, such sales are made at FERC regulated rates. As described in Note 14 to the Consolidated Financial Statements, "Commitments and Contingencies -- California Issues," a number of investigations have commenced to determine the causes of higher wholesale electric prices in California in 2000. During March 2001, the FERC ordered several electricity suppliers, including DETM, to (i) refund or offset prices that were bid for power in California during stage 3 emergencies in January and February 2001, to the extent such prices exceeded a FERC-approved market- clearing price or (ii) submit information supporting the prices that were bid. During the months of January and February 2001, DETM's bids included a commercially-based credit premium to cover the substantial risk of nonpayment that existed at the time. The credit premiums were responsible for the bids of DETM exceeding the FERC-approved market-clearing prices for January and February 2001. Although DETM believes that the credit premiums were appropriate, in a compliance filing with the FERC on March 23, 2001, DETM elected to offset the credit premium amounts against the bid prices, provided it was paid what it was owed based on the FERC-approved market-clearing price. Pursuant to such filing, the amount that DETM will offset totals approximately $20 million in the aggregate. It is expected that the FERC will issue additional orders with respect to sales in California covering the period from October 2 through December 31, 2000, and periods following February 2001. Various parties have expressed differing views on the FERC's actions in this area, and such actions may be subject to reconsideration or appeal. Although this matter is in its earliest stage, management believes this matter will not have a material effect on Duke Energy's consolidated results of operations, cash flows or financial position. NAWE is subject to federal, state and local environmental regulations. For a discussion of environmental regulation, see "Environmental Matters." 14 INTERNATIONAL ENERGY International Energy develops, owns and operates energy-related facilities worldwide. These facilities provide natural gas and power development and operations, as well as energy trading and marketing. International Energy conducts its operations primarily in Latin America, Asia Pacific and Europe, through Duke Energy International (DEI). Liberalization of energy markets abroad is providing substantial opportunities for International Energy to grow through acquisitions, construction of greenfield projects and expansion of existing facilities. International Energy is an active participant in international competitive energy-related markets, which include natural gas pipelines, power generation, energy trading and marketing and other services. International Energy owns, operates or has substantial interests in approximately 5,000 MW of generation and approximately 1,100 miles of pipeline systems. International Energy continues to focus on its regional target areas in Asia Pacific, Latin America and Europe for further expansion opportunities. In January 2000, DEI completed a series of transactions to purchase, for approximately $1.03 billion, an approximate 95% interest in Companhia de Geracao de Energia Eletrica Paranapanema (Paranapanema), an electric generating company in Brazil. From August 1999 through April 2000, DEI acquired Dominion Resources, Inc.'s portfolio of hydroelectric, natural gas and diesel power generation businesses in Argentina, Belize, Bolivia and Peru for approximately $405 million. Also, during 2000, DEI acquired 100% of Mobil Europe Gas Inc. (MEGAS) from Mobil Corporation. MEGAS is a gas marketing company located in the Netherlands. For additional information on significant business acquisitions, see "Management's Discussion and Analysis of Results of Operations and Financial Condition, Liquidity and Capital Resources -- Investing Cash Flows" and Note 2 to the Consolidated Financial Statements, "Business Acquisitions and Dispositions." The following map illustrates the locations of International Energy's worldwide energy facilities, including projects under construction or under contract. [MAP] 15 Competition and Regulation International Energy's operations are subject to country and region-specific market and competition regulations enacted by various regulatory authorities. Regulatory issues that are commonly addressed in various international regions include: rules governing open and competitive access to the gas and power transmission grids, dispatch rules for merchant power plant dispatch and remuneration, and rules that support the emergence of competitive gas and power trading and marketing. International Energy's operations are subject to international environmental regulations. For a discussion of environmental regulation, see "Environmental Matters." OTHER ENERGY SERVICES Other Energy Services provides engineering, consulting, construction and integrated energy solutions worldwide, primarily through DE&S, D/FD and 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, transmission and distribution projects worldwide. D/FD, operating through several entities, provides full service siting, permitting, licensing, engineering, procurement, construction, start-up, operating and maintenance services for fossil-fired plants, both domestically and internationally. Subsidiaries of Duke Energy and Fluor Enterprises, Inc. each own 50% of D/FD. DukeSolutions provides energy consulting services to large end users of energy by first identifying and then affecting points in a customer's operations where energy related costs are incurred, including procurement, production and disposal. The scope of services involves providing strategic solutions to reduce costs when customers buy energy, convert it into a usable form, use it to manufacture products and dispose of any waste. Other Energy Services experiences substantial competition from utilities and other independent companies in the U. S. and abroad. Other Energy Services is subject to the jurisdiction of the EPA and international, state and local environmental agencies. For a discussion of environmental regulation, see "Environmental Matters." DUKE VENTURES Duke Ventures is comprised of other diverse businesses, primarily operating through Crescent, DukeNet and DCP. Crescent develops high quality commercial, residential and multi-family real estate projects and manages land holdings primarily in the southeastern U.S. At December 31, 2000, Crescent owned 3.8 million square feet of commercial and industrial space, with an additional 2.3 million square feet under construction. This portfolio included 2.9 million square feet of office space, 0.8 million square feet of warehouse space and 0.1 million square feet of retail space. Crescent's residential developments include high-end, country club and golf course communities with individual lots sold to custom builders and tract developments with sales to national builders. In 2000, Crescent began development of two multi-family communities in Florida. At December 31, 2000, Crescent also had approximately 175,000 acres of land under its management. DukeNet provides fiber optic networks for industrial, commercial and residential customers and plans to enable networks for energy services applications. It owns and operates a 700-mile fiber optic communications network centered in the Carolinas that is interconnected with a 15,500-mile fiber optic communications network, through affiliate agreements with third parties, that stretches from Maine to Texas. DCP, a merchant finance company, provides financing, investment banking and asset management services to wholesale and commercial energy markets. During September 2000, DukeNet sold its 20% interest in BellSouth Carolina PCS to BellSouth Corporation. See further discussion of this sale in Note 2 of the Consolidated Financial Statements, "Business Acquisitions and Dispositions." 16 ENVIRONMENTAL MATTERS Duke Energy is subject to international, federal, state and local regulations with regard to air and water quality, hazardous and solid waste disposal and other environmental matters. Certain environmental regulations affecting Duke Energy include: . The Clean Air Act and the 1990 amendments to the Act, as well as state laws and regulations impacting air emissions that impose responsibilities on owners, operators or both of air emissions sources including obtaining permits and annual compliance and reporting obligations; . State Implementation Plans, which were issued by the EPA to 22 states, including North and South Carolina, and the District of Columbia related to existing and new national ambient air quality standards for ozone; . The Federal Water Pollution Control Act Amendments of 1987, which require permits for facilities that discharge treated wastewater into the environment; and . The Comprehensive Environmental Response, Compensation and Liability Act, which can require any individual or entity which may have owned or operated a disposal site, as well as transporters or generators of hazardous wastes which were sent to such site, to share in remediation costs for the site. For further discussion of environmental matters involving Duke Energy, including possible liability and capital costs, see "Item 3--Legal Proceedings," "Management's Discussion and Analysis of Results of Operations and Financial Condition, Current Issues -- Environmental" and Note 14 to the Consolidated Financial Statements, "Commitments and Contingencies -- Environmental." Compliance with international, federal, state and local provisions' regulating the discharge of materials into the environment, or otherwise protecting the environment, is not expected to have a material adverse effect on the competitive position, consolidated results of operations, cash flows or financial position of Duke Energy. GEOGRAPHIC REGIONS Duke Energy's significant geographic regions are as follows:
Latin Other U.S. Canada America Foreign Consolidated ------- ------ ------- ------- ------------ In millions 2000 Consolidated revenues.............. $43,282 $4,964 $ 512 $ 560 $49,318 Consolidated long-term assets...... 31,074 900 2,823 1,222 36,019 1999 Consolidated revenues.............. $19,336 $2,007 $ 171 $ 252 $21,766 Consolidated long-term assets...... 22,995 250 2,708 901 26,854 1998 Consolidated revenues.............. $16,589 $ 996 $ 31 $ 46 $17,662 Consolidated long-term assets...... 20,982 140 207 632 21,961
For a discussion of Duke Energy's foreign operations and the risks associated with them, see "Management's Discussion and Analysis of Results of Operations and Financial Condition, Quantitative and Qualitative Disclosures About Market Risk -- Foreign Currency Risk" and Notes 3 and 7 to the Consolidated Financial Statements, "Business Segments" and "Risk Management and Financial Instruments," respectively. EMPLOYEES At December 31, 2000, Duke Energy had approximately 23,000 employees. Approximately 1,580 operating and maintenance employees are represented by unions. Of these, approximately 1,400 are represented by the International Brotherhood of Electrical Workers (IBEW) at two operating units. During 2000, a new agreement was reached with the IBEW for the larger of these units. Negotiations are underway with the IBEW for the other unit, with a new contract anticipated in early 2001. An additional 65 employees are represented by the United Steelworkers and Rubberworkers of America. Approximately 37 employees are represented by the Paper, Allied, Chemical and Energy Workers Union (PACE) and 13 employees are represented by the PACE International Unit. A new labor agreement was reached with the PACE International Unit in 2000. Approximately 64 employees are represented by the International Union of Operating Engineers. 17 RECENT FINANCINGS In late March 2001, Duke Energy completed an offering of 25 million shares of common stock, at a price of $38.98 per share, before underwriting discount and other offering expenses. In addition, Duke Energy completed an offering of approximately 31 million units of mandatorily convertible securities (Equity Units) at a price of $25 per unit before underwriting discount and other offering expenses. The Equity Units consist of senior notes of Duke Energy's wholly owned subsidiary, Duke Capital Corporation and purchase contracts obligating the investors to purchase shares of Duke Energy's common stock in 2004. Also in late March 2001, the underwriters exercised options granted to them to purchase an additional 3.75 million shares of common stock and 4 million Equity Units at the original issue prices, less underwriting discounts, to cover over-allotments made during the offerings. Total net proceeds from the offerings were approximately $1.94 billion and were used to repay short-term debt and for other corporate purposes. OPERATING STATISTICS
Years Ended December 31, ------------------------------------- 2000 1999 1998 1997 1996 ------- ------- ------ ------ ------ Franchised Electric Sources of Electric Energy, GWh(a) Generated--net output: Coal................................... 43,526 41,306 42,164 45,234 40,649 Nuclear................................ 41,073 39,263 38,366 29,569 33,177 Hydro.................................. 394 638 1,714 1,633 1,802 Oil and gas............................ 459 662 846 301 199 ------- ------- ------ ------ ------ Total generation...................... 85,452 81,869 83,090 76,737 75,827 Purchased power and net interchange.... 4,497 3,617 2,659 3,781 3,885 ------- ------- ------ ------ ------ Total output.......................... 89,949 85,486 85,749 80,518 79,712 Plus: Purchases from other Catawba joint owners.......................... 150 1,233 1,656 2,316 2,662 ------- ------- ------ ------ ------ Total sources of energy............... 90,099 86,719 87,405 82,834 82,374 Less: Line loss and company usage...... 5,333 5,171 5,394 4,899 4,827 ------- ------- ------ ------ ------ Total GWh sales....................... 84,766 81,548 82,011 77,935 77,547 ======= ======= ====== ====== ====== Electric Energy Sales, GWh Residential............................ 22,884 21,897 22,002 20,483 21,484 General service........................ 22,845 21,807 21,093 19,687 19,593 Industrial Textile............................... 10,819 11,201 11,981 11,955 11,603 Other................................. 18,952 18,704 18,668 18,376 18,131 Other energy and wholesale............. 8,671 7,715 8,933 7,029 6,781 ------- ------- ------ ------ ------ Total GWh sales billed................ 84,171 81,324 82,677 77,530 77,592 Unbilled GWh sales................... 595 224 (666) 405 (45) ------- ------- ------ ------ ------ Total GWh sales..................... 84,766 81,548 82,011 77,935 77,547 ======= ======= ====== ====== ====== Natural Gas Transmission Throughput Volumes TBtu(b)(c):.......... 1,717 1,565 1,459 1,641 1,676 Field Services Natural Gas Gathered and Processed/Transported, TBtu/d(d)....... 7.6 5.1 3.6 3.4 2.9 NGL Production, MBbl/d(e)............... 358.5 192.4 110.2 108.2 78.5 Average Natural Gas Price per MMBtu(f).. $ 3.89 $ 2.27 $ 2.11 $ 2.59 $ 2.59 Average NGL Price per Gallon............ $ 0.53 $ 0.34 $ 0.26 $ 0.35 $ 0.39 Natural Gas Marketed, TBtu/d............ 0.7 0.5 0.4 0.4 0.5 NAWE Natural Gas Marketed, TBtu/d............ 11.9 10.5 8.0 6.9 5.5 Electricity Marketed, GWh............... 275,258 109,634 98,991 64,650 4,229
- -------- (a)Gigawatt-hour. (b)Trillion British thermal units. (c) Excludes throughput of pipelines sold in March 1999 to CMS Energy: 328 TBtu (1999); 1,141 TBtu (1998); 1,279 TBtu (1997); 1,319 TBtu (1996). (d)Trillion British thermal units per day. (e)Thousand barrels per day. (f)Million British thermal units. 18 EXECUTIVE OFFICERS OF DUKE ENERGY Richard B. Priory, 54, Chairman of the Board, President and Chief Executive Officer. Mr. Priory served as President and Chief Operating Officer from 1994 until he assumed his present position in 1997 following the merger with PanEnergy Corp (PanEnergy). William A. Coley, 57, Group President, Duke Power. Mr. Coley served as President of Duke Energy's Associated Enterprises Group from 1994 to 1997 when he assumed his present position following the PanEnergy merger. Fred J. Fowler, 55, Group President, Energy Transmission. Mr. Fowler served as Group Vice President of PanEnergy from 1996 until the PanEnergy merger, when he assumed his present position. Harvey J. Padewer, 53, Group President, Energy Services. Mr. Padewer assumed his present position on January 1, 1999. From 1995 through 1998, he served as Senior Vice President and General Manager of Utilicorp Energy Group. Richard W. Blackburn, 58, Executive Vice President, General Counsel and Secretary. Mr. Blackburn was named to his present position in 1997. Prior to joining Duke Energy, he served as President and Group Executive of NYNEX Corporation's Worldwide Communications and Media Group from 1995 to 1997. Richard J. Osborne, 50, Executive Vice President and Chief Risk Officer. Mr. Osborne assumed his present position in May 2000. Prior to his present position, Mr. Osborne served as Executive Vice President and Chief Financial Officer from 1997, following the PanEnergy merger. Prior to the merger, Mr. Osborne was the Senior Vice President and Chief Financial Officer beginning in 1994. Ruth G. Shaw, 53, 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 PanEnergy merger. Robert P. Brace, 51, Executive Vice President and Chief Financial Officer. Mr. Brace joined Duke Energy in 2000. He had served as Group Finance Director of British Telecommunications plc from 1993 until joining Duke Energy. Michael S. Tuckman, 56, Executive Vice President, Nuclear Generation, Duke Power. Mr. Tuckman assumed his present position in 1997. He had been Senior Vice President, Nuclear Generation, Duke Power, since 1993. Sandra P. Meyer, 46, Senior Vice President and Corporate Controller. Ms. Meyer assumed her present position in September 1999. Prior to her present position, Ms. Meyer served as Vice President, Duke Power Planning and Finance from 1997, following the PanEnergy merger. She served as Vice President and Controller of PanEnergy in 1994 and was named to the additional position of Treasurer in October 1996. David L. Hauser, 49, Senior Vice President and Treasurer. Mr. Hauser held various positions, including Controller, at Duke Power before being named Senior Vice President, Global Asset Development, in 1997 and to his current position in 1998. 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. 19 Item 2. Properties. FRANCHISED ELECTRIC At December 31, 2000, Franchised Electric operated three nuclear generating stations with a combined net capacity of 5,409 MW (which includes 12.5% ownership in the Catawba Nuclear Station), eight coal-fired stations with a combined capacity of 7,572 MW, 31 hydroelectric stations with a combined capacity of 2,693 MW and six combustion turbine stations with a combined capacity of 2,081 MW, all of which are located in North Carolina or South Carolina. In addition, Franchised Electric owned, as of December 31, 2000, approximately 13,000 conductor miles of electric transmission lines, including 600 conductor miles of 525 kilovolts, 2,600 conductor miles of 230 kilovolts, 6,500 conductor miles of 100 kilovolts, and 3,300 conductor miles of 13 to 66 kilovolts. Franchised Electric also owned approximately 92,300 conductor miles of electric distribution lines, including 62,300 conductor miles of rural overhead lines, 15,500 conductor miles of urban overhead lines, 7,900 conductor miles of rural underground lines and 6,600 conductor miles of urban underground lines. At December 31, 2000, the electric transmission and distribution systems comprised approximately 1,600 substations. Substantially all electric plant is mortgaged under the indenture relating to First and Refunding Mortgage Bonds. NATURAL GAS TRANSMISSION TETCO's gas transmission system extends approximately 1,700 miles from producing fields in the Gulf Coast region of Texas and Louisiana to Ohio, Pennsylvania, New Jersey and New York. It consists of two parallel systems, one consisting of three large-diameter parallel pipelines and the other consisting of from one to three large-diameter pipelines over its length. TETCO's system consists of approximately 9,000 miles of pipeline and has 70 compressor stations. TETCO also owns and operates two offshore Louisiana pipeline systems, which extend over 100 miles into the Gulf of Mexico and include 469 miles of TETCO's pipeline system. Algonquin's transmission system connects with TETCO's facilities in New Jersey, and extends approximately 250 miles through New Jersey, New York, Connecticut, Rhode Island and Massachusetts. The system consists of 1,066 miles of pipeline with six compressor stations. East Tennessee's transmission system crosses TETCO's system at two points in Tennessee and consists of two mainline systems totaling 1,100 miles of pipeline in Tennessee and Virginia with 18 compressor stations. For additional information and a map concerning natural gas transmission and storage properties, see "Business, Natural Gas Transmission." FIELD SERVICES For information and a map regarding the properties of Field Services, see "Business, Field Services." 20 NAWE The DENA generation portfolio includes:
Ownership Gross Interest Name MW Fuel Location (percentage) ---- ----- --------------- -------------- ------------ Moss Landing ................. 1,478 Natural gas CA 100 Morro Bay..................... 1,002 Natural gas CA 100 South Bay..................... 700 Natural gas CA 100 Madison....................... 640 Natural gas OH 50 Vermillion.................... 640 Natural gas IN 50 Maine Independence............ 520 Natural gas ME 100 Bridgeport.................... 480 Natural gas CT 67 American Ref-Fuel............. 286 Waste-to-energy CT, MA, NJ, NY 37 St. Francis................... 247 Natural gas MO 50 Oakland....................... 165 Oil CA 100 Fort Drum..................... 50 Coal NY 10 ----- Total......................... 6,208 =====
DENA has approximately 7,300 MW under construction in various high-growth markets, which are slated for completion to meet summer peak demand: 3,200 MW in 2001 and 4,100 MW in 2002. In addition to its facilities in operation or under construction, DENA has approximately 13,500 MW in advanced development scheduled to begin operation between 2002 and 2004. For additional information and a map regarding the properties of NAWE, see "Business, NAWE." INTERNATIONAL ENERGY The International Energy generation portfolio in operation includes:
Approximate Ownership Gross Interest Name MW Fuel Location (percentage) ---- ----- ------------- ----------- ----------- Paranapanema...................... 2,307 Hydro Brazil 95 Hidroelectrica Cerros Colorados... 547 Thermal/Hydro Argentina 91 Egenor............................ 529 Hydro/Thermal Peru 90 Acajutla.......................... 400 Thermal El Salvador 88 Puncakjaya Power.................. 389 Thermal Indonesia 43 Western Australia................. 280 Thermal Australia 100 Electroquil....................... 169 Thermal Ecuador 52 Aquaytia.......................... 160 Thermal Peru 22 Empressa Electrica Corani......... 126 Hydro Bolivia 50 New Zealand....................... 112 Thermal New Zealand 100 Mollejon.......................... 25 Hydro Belize 95 ----- Total............................. 5,044 =====
DEI has approximately 562 and 43 gross MWs under construction in Latin America and Australia, respectively. DEI owns approximately 1,320 miles of pipeline systems in Australia, including 434 miles under development. Additionally, DEI has an 11.84% ownership interest in 855 miles of pipeline systems in Australia and a 21.9% ownership interest in 190 miles of pipeline systems in Peru. Also as of December 31, 2000, DEI had a 25% indirect interest in National Methanol Company, which owns and operates a methanol and MTBE (methyl tertiary butyl ether) business in Jubail, Saudi Arabia. 21 For additional information and a map regarding the properties of International Energy, see "Business, International Energy." DUKE VENTURES For information regarding the properties of Duke Ventures, see "Business, Duke Ventures." OTHER None of the properties used in connection with Duke Energy's other business activities are considered material to Duke Energy's operations as a whole. Item 3. Legal Proceedings. Duke Energy's subsidiaries, DENA and DETM, have been named among 16 defendants in a class action lawsuit (the Gordon lawsuit) filed against companies identified as "generators and traders" of electricity in California markets. DETM also was named as one of numerous defendants in four additional lawsuits, including two class actions (the Hendricks and Pier 23 Restaurant lawsuits), filed against generators, marketers and traders and other unnamed providers of electricity in California markets. These suits were brought either by or on behalf of electricity consumers in the State of California. The Gordon and Hendricks class action suits were filed in the Superior Court of the State of California, San Diego County, in November 2000. The other three suits were filed in January 2001, one in the Superior Court of the State of California, San Diego County, and the other two in the Superior Court of the State of California, County of San Francisco. These suits generally allege that the defendants manipulated the wholesale electricity markets in violation of state laws against unfair and unlawful business practices and state antitrust laws. Plaintiffs in the Gordon suit seek aggregate damages of over $4 billion, and the plaintiffs in the other suits, to the extent damages are specified, allege damages in excess of $1 billion. The lawsuits each seek the disgorgement of alleged unlawfully obtained revenues for sales of electricity and, in three suits, an award of treble damages. For further information related to this lawsuit, see Note 14 to the Consolidated Financial Statements, "Commitments and Contingencies --California Issues," and "Management's Discussion and Analysis of Results of Operations and Financial Condition, Current Issues -- California Issues." On December 22, 2000, the U.S. Justice Department, acting on behalf of the EPA, filed a complaint against Duke Energy in the U.S. District Court in Greensboro, North Carolina, for alleged violations of the New Source Review (NSR) provisions of the Clean Air Act (CAA). The EPA is claiming that 29 projects performed at 25 of Duke Energy's coal-fired units were major modifications as defined in the CAA and that Duke Energy violated the CAA's NSR requirements when it undertook those projects without obtaining permits and installing emission controls for sulfur dioxide, nitrogen oxide and particulate matter. The complaint requests, among other things, that the court enjoin Duke Energy from operating the coal-fired units identified in the complaint, and order Duke Energy to install additional emission controls and pay unspecified civil penalties. This complaint appears to be part of the EPA's NSR enforcement initiative, in which the EPA claims that utilities and others have committed widespread violations of the CAA permitting requirements for the past 25 years. The EPA has sued or issued notices of violation of investigative information requests to at least 48 other electric utilities and cooperatives. The EPA's allegations run counter to previous EPA guidance regarding the applicability of the NSR permitting requirements. Duke Energy, along with other utilities, has routinely undertaken the type of repair, replacement, and maintenance projects that the EPA now claims are illegal. Duke Energy believes that all of its electric generation units are properly permitted and have been properly maintained, and intends to defend itself 22 vigorously against these alleged violations. However, because these matters are in a preliminary stage, management cannot estimate the effects of these matters on Duke Energy's future consolidated results of operations, cash flows or financial position. The CAA authorizes civil penalties of up to $27,500 per day per violation at each generating unit. Civil penalties, if ultimately imposed by the court, and the cost of any required new pollution control equipment, if the court accepts the EPA's contentions, could be substantial. For further information related to this lawsuit, see Note 14 to the Consolidated Financial Statements, "Commitments and Contingencies -- Environmental," and "Management's Discussion and Analysis of Results of Operations and Financial Condition, Current Issues -- Environmental." In December 2000, three subsidiaries of Duke Energy initiated binding arbitration against three subsidiaries of the Exxon Mobil Corporation (collectively, the "Exxon Mobil entities") concerning the parties' joint ownership of DETM and certain related affiliates (collectively, the "Ventures"). At issue is a buy-out right provision in the parties' agreement. The agreements governing the ownership of the Ventures contain provisions giving Duke Energy the right to purchase the Exxon Mobil entities' 40% interest in the Ventures in the event material business disputes arise between the Ventures' owners. Such disputes have arisen, and consequently, Duke Energy exercised its right to buy the Exxon Mobil entities' interest. Duke Energy claims that refusal by the Exxon Mobil entities to honor the exercise is a breach of the buy-out right provision, and seeks specific performance of the provision. Duke Energy also complains of the Exxon Mobil entities' lack of use of, and contributions to, the Ventures. In January 2001, the Exxon Mobil entities asserted counterclaims in the arbitration and claims in a separate Texas state court action alleging that Duke Energy breached its obligations to the Ventures and to the Exxon Mobil entities. The Exxon Mobil entities also claim that Duke Energy violated a Guaranty Agreement. While this matter is in its early stages, management believes that the final disposition of this action will not have a material adverse effect on Duke Energy's consolidated results of operations, cash flows or financial position. The Illinois Environmental Protection Agency has initiated an environmental enforcement proceeding against a former subsidiary of Duke Energy relating to alleged air quality permit violations at a natural gas compressor station. Duke Energy has agreed to indemnify the purchaser of this former subsidiary against liability for any penalty or fines resulting from these alleged violations. This proceeding could result in a penalty in excess of $100,000. Management believes that the resolution of this matter will not have a material adverse effect on consolidated results of operations, cash flows or financial position. Duke Energy's subsidiary, DEFS, is presently resolving non-compliance issues with the Texas Natural Resources Conservation Commission associated with the timing of air permit annual compliance certifications submitted to the agency in 1998 and 1999. This matter, the bulk of which was voluntarily self-disclosed to the agency, involves approximately 115 of DEFS' facilities that did not meet specific administrative filing deadlines for required air permit paperwork. Additionally, DEFS is actively resolving, with the New Mexico Environment Department, alleged non-compliance of various air permit requirements at four facilities in New Mexico. These matters, the majority of which were also voluntarily self-disclosed to the agency, generally involve document preparation and submittal as required by permits, compliance testing requirements at two facilities and compliance with permit emissions limits at one facility. DEFS believes that these apparent non-compliance issues being addressed with Texas and New Mexico agencies, under relevant air programs, will result in total penalty assessments of less than $500,000. Management believes that the resolution of this matter will not have a material adverse effect on consolidated results of operations, cash flows or financial position. 23 Duke Energy's subsidiary, DEFS, has been in discussions with the Colorado Air Pollution Control Division regarding various asserted non-compliance issues arising from agency inspections of DEFS' Colorado facilities in 1999 and 2000, as well as non-compliance issues either disclosed to the agency pursuant to permit requirements or voluntarily disclosed to the agency in 2000. These items relate to various specific and detailed terms of the Title V Operating Permits at seven gas plants and two compressor stations in Colorado, including, for example, record keeping requirements, parametric monitoring requirements, delayed filings, and operations inconsistent with throughput limits on particular pieces of equipment. As a result of these discussions, DEFS received from the agency in March 2001 a comprehensive proposed settlement agreement to resolve all of these various items related to air permit compliance at the nine facilities. Although DEFS is still discussing the appropriate resolution of these apparent instances of non-compliance with the Colorado Air Pollution Control Division, management believes that the comprehensive resolution for all nine facilities will result in a total penalty assessment of less than $575,000. For additional information concerning litigation and other contingencies, see Note 14 to the Consolidated Financial Statements, "Commitments and Contingencies," and "Management's Discussion and Analysis of Results of Operations and Financial Condition, Current Issues -- Environmental and Current Issues --California Issues and Current Issues -- Litigation and Contingencies." Item 4. Submission of Matters to a Vote of Security Holders. No matters were submitted to a vote of Duke Energy's security holders during the last quarter of 2000. 24 PART II. Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. The common stock of Duke Energy is listed for trading on the New York Stock Exchange. At February 28, 2001, there were approximately 148,000 holders of record of such common stock. Common Stock Data by Quarter(a)
2000 1999 ----------------------- ----------------------- Stock Price Stock Price Range Range Dividends ------------- Dividends ------------- Per Share High Low Per Share High Low --------- ------ ------ --------- ------ ------ First Quarter................... $0.275 $28.94 $23.19 $0.275 $32.34 $27.41 Second Quarter.................. 0.55 31.25 26.16 0.55 30.59 26.06 Third Quarter................... -- 42.88 28.31 -- 29.25 26.22 Fourth Quarter.................. 0.275 44.97 40.22 0.275 28.44 23.53
- -------- (a) Restated to reflect the two-for-one common stock split effective January 26, 2001. On December 17, 1998, Duke Energy's Board of Directors adopted a shareholder rights plan. Under the terms of the plan, one preference stock purchase right was distributed for each share of common stock outstanding on February 12, 1999 and for each share issued thereafter, subject to adjustment as specified therein. The distribution was approved by the NCUC and PSCSC. The plan is intended to assure the fair treatment of all shareholders in the event of a hostile takeover attempt and to encourage a potential acquirer to negotiate with the Board of Directors a fair price for all shareholders before attempting a takeover. The adoption of the plan was not in response to any takeover offer or threat. 25 Item 6. Selected Financial Data.
2000 1999(a) 1998 1997(b) 1996(b) ------- ------- ------- ------- ------- In millions, except per share amounts Income Statement Operating revenues.................. $49,318 $21,766 $17,662 $16,309 $12,302 Operating expenses.................. 45,505 19,947 15,177 14,339 10,143 ------- ------- ------- ------- ------- Operating income.................... 3,813 1,819 2,485 1,970 2,159 Other income and expenses........... 201 224 162 138 135 ------- ------- ------- ------- ------- Earnings before interest and taxes.. 4,014 2,043 2,647 2,108 2,294 Interest expense.................... 911 601 514 472 499 Minority interest expense........... 307 142 96 23 6 ------- ------- ------- ------- ------- Earnings before income taxes........ 2,796 1,300 2,037 1,613 1,789 Income taxes........................ 1,020 453 777 639 698 ------- ------- ------- ------- ------- Income before extraordinary item.... 1,776 847 1,260 974 1,091 Extraordinary gain (loss), net of tax................................ -- 660 (8) -- (17) ------- ------- ------- ------- ------- Net income.......................... 1,776 1,507 1,252 974 1,074 Dividends on preferred and preference stock................... 19 20 21 72 44 ------- ------- ------- ------- ------- Earnings available for common stockholders....................... $ 1,757 $ 1,487 $ 1,231 $ 902 $ 1,030 ======= ======= ======= ======= ======= Common Stock Data(c) Shares of common stock outstanding Year-end.......................... 739 733 726 720 718 Weighted average.................. 736 729 722 720 722 Earnings per share (before extraordinary item) Basic............................. $ 2.39 $ 1.13 $ 1.72 $ 1.26 $ 1.45 Diluted........................... 2.38 1.13 1.71 1.25 1.44 Earnings per share Basic............................. $ 2.39 $ 2.04 $ 1.70 $ 1.26 $ 1.43 Diluted........................... 2.38 2.03 1.70 1.25 1.42 Dividends per share................. 1.10 1.10 1.10 0.95 0.79 Balance Sheet Total assets........................ $58,176 $33,409 $26,806 $24,029 $22,366 Long-term debt, less current maturities......................... 11,019 8,683 6,272 6,530 5,485
- -------- (a) Financial information reflects a pre-tax $800 million charge for estimated injury and damages claims. The earnings per share effect of this charge was $0.67 per share. See Note 14 to the Consolidated Financial Statements, "Commitments and Contingencies -- Injury and Damages Claims," for additional information. (b) Financial information reflects accounting for the 1997 merger with PanEnergy as a pooling of interests. As a result, the financial information gives effect to the merger as if it had occurred January 1, 1996. (c) Restated to reflect the two-for-one common stock split effective January 26, 2001. 26 Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition. INTRODUCTION Management's Discussion and Analysis should be read in conjunction with the Consolidated Financial Statements. Business Segments. Duke Energy Corporation (collectively with its subsidiaries, "Duke Energy") is an integrated energy and energy services provider with the ability to offer physical delivery and management of both electricity and natural gas throughout the U.S. and abroad. Duke Energy provides these and other services through seven business segments. Franchised Electric generates, transmits, distributes and sells electric energy in central and western North Carolina and the western portion of South Carolina. Its operations are conducted primarily through Duke Power and Nantahala Power and Light. These electric operations are subject to the rules and regulations of the Federal Energy Regulatory Commission (FERC), the North Carolina Utilities Commission (NCUC) and the Public Service Commission of South Carolina (PSCSC). Natural Gas Transmission provides interstate transportation and storage of natural gas for customers primarily in the Mid-Atlantic, New England and southeastern states. Its operations are conducted primarily through Duke Energy Gas Transmission Corporation. The interstate natural gas transmission and storage operations are subject to the rules and regulations of the FERC. Field Services gathers, processes, transports, markets and stores natural gas and produces, transports, markets and stores natural gas liquids (NGLs). Its operations are conducted primarily through Duke Energy Field Services, LLC (DEFS), a limited liability company that is approximately 30% owned by Phillips Petroleum. Field Services operates gathering systems in western Canada and 11 contiguous states that serve major natural gas-producing regions in the Rocky Mountain, Permian Basin, Mid-Continent, East Texas-Austin Chalk-North Louisiana, as well as onshore and offshore Gulf Coast areas. North American Wholesale Energy's (NAWE's) activities include asset development, operation and management, primarily through Duke Energy North America, LLC (DENA), and commodity sales and services related to natural gas and power, primarily through Duke Energy Trading and Marketing, LLC (DETM). DETM is a limited liability company that is approximately 40% owned by Exxon Mobil Corporation. NAWE also includes Duke Energy Merchants, which develops new business lines in the evolving energy commodity markets. NAWE conducts its business throughout the U.S. and Canada. The operations of the previously segregated Trading and Marketing segment were combined by management into NAWE during 2000. Previous periods have been restated to conform to current period presentation. International Energy conducts its operations through Duke Energy International, LLC. International Energy's activities include asset development, operation and management of natural gas and power facilities and energy trading and marketing of natural gas and electric power. This activity is targeted in the Latin American, Asia-Pacific and European regions. Other Energy Services is a combination of businesses that provide engineering, consulting, construction and integrated energy solutions worldwide, primarily through Duke Engineering & Services, Inc. (DE&S), Duke/Fluor Daniel (D/FD) and DukeSolutions, Inc. (DukeSolutions). D/FD is a 50/50 partnership between Duke Energy and Fluor Enterprises, Inc. Duke Ventures is comprised of other diverse businesses, primarily operating through Crescent Resources, Inc. (Crescent), DukeNet Communications, LLC (DukeNet) and Duke Capital Partners (DCP). Crescent develops high-quality commercial, residential and multi-family real estate projects and manages land holdings primarily in the southeastern U.S. DukeNet provides fiber optic networks for industrial, commercial and residential customers. DCP, a newly formed, wholly owned merchant finance company, provides financing, investment banking and asset management services to wholesale and commercial energy markets. 27 Business Strategy. Duke Energy is one of the world's leading integrated energy companies. The company's business strategy is to develop integrated energy businesses in targeted regions where Duke Energy's extensive capabilities in developing energy assets, operating electric power, natural gas and NGL plants, optimizing commercial operations and managing risk can provide comprehensive energy solutions for customers and create superior value for shareholders. The growth in and restructuring of global energy markets are providing opportunities for Duke Energy's competitive business segments to capitalize on their comprehensive capabilities. Domestically, Duke Energy is aggressively investing in new merchant power plants throughout the U.S., expanding its natural gas pipeline infrastructure in the eastern U.S., rapidly increasing its leading position in natural gas gathering and processing and NGL marketing, and developing its trading and marketing structured origination expertise across the energy spectrum. Internationally, Duke Energy is currently focusing on integrated electric and natural gas opportunities in Latin America, Asia Pacific and Europe. Franchised Electric continues to add customers, maintain low costs and deliver high-quality customer service. Franchised Electric is expected to grow moderately, consistent with historical trends. Expansion will primarily result from continued economic growth in its service territory. Natural Gas Transmission has increased its earnings growth rate by executing a comprehensive strategy of selected acquisitions and expansions and by developing expanded services and incremental projects that meet changing customer needs. Field Services has developed market-leading size, scope and reliability of supply in natural gas gathering, processing and NGL marketing. Field Services plans to make additional investments in gathering, processing and NGL infrastructure. Field Services' interconnected natural gas processing operations provide an opportunity to capture fee-based investment opportunities in certain NGL assets, including pipelines, fractionators and terminals. NAWE plans to continue increasing earnings through acquisitions, divestitures, construction of greenfield projects and expansion of existing facilities as regional opportunities are identified, evaluated and realized throughout the North American marketplace. To capture the greatest value in the U.S., DENA, through its portfolio management strategy, seeks opportunities to invest in energy assets in markets that have capacity needs and to divest other assets, in whole or in part, when significant value can be realized. Commodity sales and services related to natural gas and power continue to expand as NAWE provides energy supply, structured origination, trading and marketing, risk management and commercial optimization services to large energy customers, energy aggregators and other wholesale companies. International Energy plans to continue expanding through acquisitions, divestitures, construction of greenfield projects and expansion of existing facilities in selected international regions. International Energy's combination of assets and capabilities and close working relationships with other subsidiaries of Duke Energy allow it to efficiently deliver natural gas pipeline, power generation, energy marketing and other services. Other Energy Services plans to grow by providing an expanding customer base with a variety of engineering and energy efficiency services that allow customers to more effectively deal with rapidly changing conditions in the energy marketplace. Duke Ventures plans to expand earnings capabilities in its real estate, telecommunications and capital financing business units by developing regional opportunities and by applying extensive experience to new project development. Duke Energy's business strategy and growth expectations can vary significantly depending on many factors, including, but not limited to, the pace and direction of industry restructuring, regulatory constraints, acquisition opportunities, market volatility and economic trends. However, Duke Energy's growth expectations do not rely on industry restructuring in North Carolina and South Carolina. 28 RESULTS OF OPERATIONS In 2000, earnings available for common stockholders were $1,757 million, or $2.39 per basic share, including a pre-tax gain of $407 million, or an after- tax gain of $0.34 per basic share, on the sale of Duke Energy's 20% interest in BellSouth Carolina PCS (BellSouth PCS). In 1999, earnings available for common stockholders were $1,487 million, or $2.04 per basic share, including an after- tax extraordinary gain of $660 million, or $0.91 per basic share resulting from the sale of the Panhandle Eastern Pipe Line Company (PEPL), Trunkline Gas Company (Trunkline) and additional storage related to those systems, which substantially comprised the Midwest Pipelines along with Trunkline LNG Company. The increase in earnings available for common stockholders in 2000 was primarily due to a 96% increase in segment earnings as described below, including the BellSouth PCS gain. Partially offsetting this increase was the 1999 extraordinary gain and higher interest and minority interest expense in the current year. Earnings available for common stockholders increased $256 million in 1999 from 1998 earnings of $1,231 million, or $1.70 per basic share. The increase in earnings available for common stockholders was primarily due to the 1999 extraordinary gain resulting from the sale of the Midwest Pipelines. This gain, along with the factors described below that affect segment earnings, was partially offset by a pre-tax $800 million charge for estimated injury and damages claims (see Note 14 to the Consolidated Financial Statements) and higher interest and minority interest expense. Earnings per share information provided above has been restated to reflect the two-for-one common stock split effective January 26, 2001. See Note 15 to the Consolidated Financial Statements for additional information. Operating income for 2000 was $3,813 million compared to $1,819 million in 1999 and $2,485 million in 1998. Earnings before interest and taxes (EBIT) were $4,014 million, $2,043 million and $2,647 million for 2000, 1999 and 1998, respectively. Management evaluates each business segment based on an internal measure of EBIT, after deducting minority interests. Operating income and EBIT are affected by the same fluctuations for Duke Energy and each of its business segments. The only notable difference between operating income and EBIT is the inclusion in EBIT of certain non-operating activities. See Note 3 to the Consolidated Financial Statements for additional information on business segments. EBIT is summarized in the following table and is discussed by business segment thereafter. EBIT by Business Segment
Years Ended December 31, ---------------------------- 2000 1999 1998 -------- -------- -------- In millions Franchised Electric............................... $ 1,704 $ 856 $ 1,513 Natural Gas Transmission.......................... 534 627 702 Field Services.................................... 296 144 76 North American Wholesale Energy................... 418 209 133 International Energy.............................. 331 42 12 Other Energy Services............................. (61) (94) 10 Duke Ventures..................................... 563 162 122 Other Operations.................................. (2) 5 22 EBIT attributable to minority interests........... 231 92 57 -------- -------- -------- Consolidated EBIT................................. $ 4,014 $ 2,043 $ 2,647 ======== ======== ========
Other Operations primarily include certain unallocated corporate costs. Included in the amounts discussed hereafter are intercompany transactions that are eliminated in the Consolidated Financial Statements. 29 Franchised Electric
Years Ended December 31, -------------------------------- 2000 1999 1998 ---------- ---------- ---------- In millions, except where noted Operating revenues............................ $ 4,946 $ 4,700 $ 4,626 Operating expenses............................ 3,316 3,966 3,228 ---------- ---------- ---------- Operating income.............................. 1,630 734 1,398 Other income, net of expenses................. 74 122 115 ---------- ---------- ---------- EBIT.......................................... $ 1,704 $ 856 $ 1,513 ========== ========== ========== Sales--GWh(a)................................. 84,766 81,548 82,011
- -------- (a) Gigawatt-hours. Franchised Electric's EBIT increased $848 million in 2000 when compared to 1999, primarily due to an $800 million charge in 1999 for estimated injury and damages claims (see Note 14 to the Consolidated Financial Statements). Overall favorable weather and growth in customers, partially offset by increased operating costs, also contributed to this increase in EBIT. The average number of customers in Franchised Electric's service territory increased 2.5% during 2000. Total gigawatt-hour sales to customers increased by 3.9% for 2000. Sales to general service and residential customers increased 4.7% and 4.4%, respectively, while total industrial sales decreased 0.5%. In 1999, Franchised Electric's EBIT decreased $657 million compared to 1998, primarily due to the above-mentioned charge for estimated injury and damages claims. Partially offsetting this decrease was a 2.8% increase in the number of customers in Franchised Electric's service territory during 1999, and the absence of 1998 severance and other costs related to closing Franchised Electric's merchandising business. Natural Gas Transmission
Years Ended December 31, -------------------------------- 2000 1999 1998 ---------- ---------- ---------- In millions, except where noted Operating revenues............................ $ 1,131 $ 1,230 $ 1,542 Operating expenses............................ 609 615 864 ---------- ---------- ---------- Operating income.............................. 522 615 678 Other income, net of expenses................. 12 12 24 ---------- ---------- ---------- EBIT.......................................... $ 534 $ 627 $ 702 ========== ========== ========== Throughput--TBtu(a)........................... 1,717 1,893 2,593
- -------- (a) Trillion British thermal units. In 2000, EBIT for Natural Gas Transmission decreased $93 million compared to 1999, primarily due to $132 million of EBIT in 1999 that did not reoccur in 2000. These items consisted of $70 million of EBIT related to the Midwest Pipelines, which were sold to CMS Energy Corporation (CMS) in March 1999; a $24 million gain resulting from the sale of Duke Energy's interest in the Alliance Pipeline project; and benefits totaling $38 million related to the completion of certain environmental cleanup programs below estimates. These items were partially offset by increased earnings from market-expansion projects and joint ventures such as the Maritimes & Northeast Pipeline, which was placed into service in December 1999, and earnings from East Tennessee Natural Gas Company and Market Hub Partners (MHP), which were acquired in March and 30 September 2000, respectively. See Note 2 to the Consolidated Financial Statements for additional information on the sale of the Midwest Pipelines and the acquisitions of East Tennessee Natural Gas Company and MHP. EBIT for Natural Gas Transmission decreased $75 million in 1999 compared to 1998. As a result of the sale of the Midwest Pipelines in March 1999, EBIT for the Midwest Pipelines decreased $156 million compared to 1998's full year of operation. For the remainder of Natural Gas Transmission, EBIT increased $81 million compared to 1998, primarily as a result of increased earnings from market-expansion projects and joint ventures, higher throughput and lower operating expenses. A $24 million gain resulting from the sale of Duke Energy's interest in the Alliance Pipeline project and benefits totaling $38 million related to the completion of certain environmental cleanup programs below estimates also increased EBIT in 1999. Partially offsetting these contributions to EBIT were the favorable impacts in 1998 in connection with the resolution of regulatory issues related to natural gas supply realignment costs and a refund from a state property tax ruling. Field Services
Years Ended December 31, --------------------------------- 2000 1999 1998 ---------- ---------- ---------- In millions, except where noted Operating revenues......................... $ 9,060 $ 3,590 $ 2,677 Operating expenses......................... 8,635 3,444 2,598 ---------- ---------- ---------- Operating income........................... 425 146 79 Other income, net of expenses.............. 6 (2) (3) Minority interest expense.................. 135 -- -- ---------- ---------- ---------- EBIT....................................... $ 296 $ 144 $ 76 ========== ========== ========== Natural gas gathered and processed/transported, TBtu/d(a).......... 7.6 5.1 3.6 NGL production, MBbl/d(b) 358.5 192.4 110.2 Natural gas marketed, TBtu/d............... 0.7 0.5 0.4 Average natural gas price per MMBtu(c)..... $ 3.89 $ 2.27 $ 2.11 Average NGL price per gallon(d)............ $ 0.53 $ 0.34 $ 0.26
- -------- (a) Trillion British thermal units per day. (b) Thousand barrels per day. (c) Million British thermal units. (d) Does not reflect results of commodity hedges. Field Services' EBIT increased $152 million in 2000 from 1999. The increase in EBIT and volume activity was primarily due to the combination of Field Services' natural gas gathering, processing and marketing business with Phillips Petroleum's Gas Gathering, Processing and Marketing unit (Phillips) in March 2000; the acquisition of the natural gas gathering, processing, fractionation and NGL pipeline business from Union Pacific Resources (UPR) (collectively, the "UPR acquisition") in April 1999; and other recent acquisitions and plant expansions. For additional information on the Phillips combination and the UPR acquisition, see Note 2 to the Consolidated Financial Statements. Improved average NGL prices, which increased 56% over 1999 prices, also contributed significantly to the increase in EBIT. In 1999, Field Services' EBIT increased $68 million compared to 1998. A significant portion of the increase resulted from earnings from the UPR acquisition. Improved average NGL prices, which were up 31% from the prior year, also contributed to the increase in EBIT. Partially offsetting these increases were $34 million of asset sale gains in 1998. 31 North American Wholesale Energy
Years Ended December 31, -------------------------------- 2000 1999 1998 ---------- ---------- ---------- In millions, except where noted Operating revenues............................. $ 33,874 $ 11,801 $ 8,783 Operating expenses............................. 33,386 11,591 8,619 ---------- ---------- --------- Operating income............................... 488 210 164 Other income, net of expenses.................. 3 60 20 Minority interest expense...................... 73 61 51 ---------- ---------- --------- EBIT........................................... $ 418 $ 209 $ 133 ========== ========== ========= Natural gas marketed, TBtu/d................... 11.9 10.5 8.0 Electricity marketed, GWh...................... 275,258 109,634 98,991 Proportional megawatt capacity owned(a)........ 8,984 5,799 5,098
- -------- (a) Includes under construction or under contract. NAWE's EBIT increased $209 million in 2000 compared to 1999. The increase was the result of increased earnings from asset positions, increased trading margins due to price volatility in natural gas and power and a $47 million increase in income from the sale of interests in generating facilities as a result of NAWE executing its portfolio management strategy. Operating revenues and expenses increased as the volumes of natural gas and power marketed increased 13% and 151%, respectively. These increases were partially offset by a $110 million charge related to receivables for energy sales in California, and increased operating and development costs associated with business expansion. See the Current Issues, California Issues section of Management's Discussion and Analysis, and Note 14 to the Consolidated Financial Statements for further information. In 1999, EBIT for NAWE increased $76 million from 1998. The increase included $99 million in income from the sale of partial interests in four generating facilities as a result of NAWE executing its portfolio management strategy. Partially offsetting these increases were lower natural gas trading margins, partially offset by higher power trading margins as well as margins associated with other trading activities and sales of natural gas interests associated with drilling activities. Higher operating expenses and increased development costs associated with business expansion also partially offset the earnings increases. International Energy
Years Ended December 31, --------------------------------- 2000 1999 1998 ----------- ---------- ---------- In millions, except where noted Operating revenues........................... $ 1,067 $ 357 $ 159 Operating expenses........................... 755 292 145 ----------- ---------- --------- Operating income............................. 312 65 14 Other income, net of expenses................ 42 8 4 Minority interest expense.................... 23 31 6 ----------- ---------- --------- EBIT......................................... $ 331 $ 42 $ 12 =========== ========== ========= Proportional megawatt capacity owned(a)...... 4,876 2,974 943 Proportional maximum pipeline capacity(a), MMcf/d(b)................................... 416 321 124
- -------- (a) Includes under construction or under contract. (b) Million cubic feet per day. 32 International Energy's EBIT increased $289 million in 2000 when compared to 1999. The increase was primarily attributable to increased earnings in Latin America, mainly resulting from new investments (see Note 2 to the Consolidated Financial Statements for a discussion of significant acquisitions). The increase also included $54 million from the February 2000 sale of certain assets relating to the transportation of liquefied natural gas. In 1999, International Energy's EBIT increased $30 million compared to 1998. Earnings from new investments in Latin America and Australia contributed $63 million to the increase. Partially offsetting these increases were higher operating expenses and increased development costs associated with business expansion. Other Energy Services
Years Ended December 31, ---------------------------- 2000 1999 1998 -------- --------- -------- In millions Operating revenues.................................. $ 695 $ 989 $ 521 Operating expenses.................................. 756 1,083 511 ------- --------- ------- EBIT................................................ $ (61) $ (94) $ 10 ======= ========= =======
In 2000, EBIT for Other Energy Services improved $33 million compared to 1999. New business activity and decreased operating expenses at DukeSolutions, and earnings related to new projects at D/FD were responsible for current year improved EBIT. The results for 2000 also include Duke Energy's portion of an estimated project loss recorded by D/FD of approximately $62 million, partially offset by 1999 charges of $38 million and $35 million at DE&S and DukeSolutions, respectively. The 1999 charges primarily related to expenses for severance and office closings associated with repositioning the companies for growth. EBIT for Other Energy Services decreased $104 million in 1999 compared to 1998. The decrease was primarily due to the above-mentioned charges of $38 million and $35 million at DE&S and DukeSolutions, respectively. Increased development costs at DukeSolutions and decreased earnings from projects of DE&S also contributed to lower EBIT. Duke Ventures
Years Ended December 31, -------------------------- 2000 1999 1998 -------- -------- -------- In millions Operating revenues................................... $ 642 $ 232 $ 171 Operating expenses................................... 79 70 49 -------- -------- -------- EBIT................................................. $ 563 $ 162 $ 122 ======== ======== ========
EBIT for Duke Ventures increased $401 million in 2000 when compared to 1999. This increase is primarily attributable to the sale by DukeNet of its 20% interest in BellSouth PCS to BellSouth Corporation for a pre-tax gain of $407 million. Slightly offsetting this increase in EBIT was a decrease in commercial project sales and land sales at Crescent. In 1999, EBIT for Duke Ventures increased $40 million compared to 1998. The increase was primarily due to Crescent's increased residential developed lot sales, land sales and commercial project sales, partially offset by decreased lake lot sales. Increased fiber optic revenues at DukeNet and decreased losses related to its interest in BellSouth PCS also contributed to increased EBIT. 33 Other Impacts on Earnings Available for Common Stockholders Interest expense increased $310 million in 2000 compared to 1999, and $87 million in 1999 compared to 1998 due to higher average debt balances outstanding, resulting from acquisitions and expansion. Minority interest expense increased $165 million in 2000 compared to 1999 and $46 million in 1999 compared to 1998. Included in minority interest expense is expense related to regular distributions on issuances of Duke Energy's trust preferred securities (see Note 12 to the Consolidated Financial Statements). This expense increased $21 million for 2000 and $43 million for 1999 due to additional issuances of Duke Energy's trust preferred securities during 1999 and 1998. In addition, the increase for 2000 includes minority interest expense related to Field Services' combination with Phillips Petroleum, and increased minority interest expense at NAWE related to its joint venture with Exxon Mobil Corporation, partially offset by decreased minority interest expense at International Energy related to its 1999 and 2000 acquisitions. The 1999 increase in minority interest expense over 1998 related primarily to International Energy's 1999 investments and NAWE's joint venture with Exxon Mobil Corporation. For additional information regarding acquisitions and new joint venture projects, see Notes 2 and 8 to the Consolidated Financial Statements. Duke Energy's effective income tax rate was approximately 37%, 35% and 38% for 2000, 1999 and 1998, respectively. The decrease in 1999 was primarily due to the favorable resolution of several income tax issues and the utilization of certain capital loss carryforwards due to the sale of the Midwest Pipelines. The sale of the Midwest Pipelines to CMS closed in March 1999 and resulted in a $660 million extraordinary gain, net of income tax of $404 million (see Note 2 to the Consolidated Financial Statements). In January 1998, TEPPCO Partners, LP, in which Duke Energy has a 21.1% ownership interest, redeemed certain First Mortgage Notes. This resulted in a non-cash extraordinary loss of $8 million, net of income tax of $5 million, related to Duke Energy's share of costs of the early retirement of debt. LIQUIDITY AND CAPITAL RESOURCES Operating Cash Flows Net cash provided by operations was $2,225 million in 2000, $2,684 million in 1999 and $2,331 million in 1998. Cash flows from operations decreased in 2000 compared to 1999 primarily due to tax payments made in 2000 related to the sale of the Midwest Pipelines. The increase in cash flows from operations in 1999 from 1998 was primarily due to net income resulting from business expansion. In 1999, Duke Energy established an accrual for estimated injury and damages claims. During 2000, Duke Energy paid approximately $253 million for the related insurance premium. Management believes that the long-term cash requirements of the projected liability will not have a material effect on Duke Energy's liquidity or cash flows. See Note 14 to the Consolidated Financial Statements for further discussion. Investing Cash Flows Capital and investment expenditures were approximately $5.6 billion in 2000 compared to $5.9 billion in 1999. The primary use of cash in investing activities for capital and investment expenditures reflects development and expansion expenditures, upgrades to existing assets and the acquisitions of various businesses and assets. The change in Natural Gas Transmission's capital expenditures is primarily due to business expansion related to the approximately $390 million acquisition of East Tennessee Natural Gas Company and the approximately $250 million of cash for the acquisition of MHP. In 2000, NAWE began construction of a number of power generation plants in the U.S. and continued capital expenditures on projects initiated prior to 2000. International Energy's business expansion included the completion of a tender offer to the minority 34 shareholders of Companhia de Geracao de Energia Eletrica Paranapanema (Paranapanema) for approximately $280 million and the completion of the approximately $405 million acquisition of Dominion Resources, Inc.'s portfolio of hydroelectric, natural gas and diesel power generation businesses in Latin America. Offsetting the capital and investing expenditures were cash proceeds of $400 million from the 2000 sale of Duke Energy's 20% interest in BellSouth PCS to BellSouth Corporation. For additional information concerning significant acquisitions and dispositions, see Note 2 to the Consolidated Financial Statements. Capital and Investment Expenditures by Business Segment
Years Ended December 31, -------------------------- 2000 1999 1998 -------- -------- -------- In millions Franchised Electric................................. $ 661 $ 759 $ 586 Natural Gas Transmission............................ 973 261 290 Field Services...................................... 376 1,630 304 North American Wholesale Energy..................... 1,937 1,028 796 International Energy................................ 980 1,779 239 Other Energy Services............................... 28 94 41 Duke Ventures....................................... 643 382 232 Other Operations.................................... 36 3 12 -------- -------- -------- Total consolidated.................................. $ 5,634 $ 5,936 $ 2,500 ======== ======== ========
Capital and investment expenditures in 1999 increased approximately $3.4 billion from 1998 capital and investment expenditures of approximately $2.5 billion. The increase primarily resulted from business expansion for the Field Services, NAWE and International Energy business segments. Business expansion for Field Services included the $1.35 billion UPR acquisition. In 1999, NAWE began construction of multiple power generation plants in the U.S. and continued capital expenditures on projects initiated prior to 1999. International Energy's business expansion included $1.7 billion for multiple acquisitions in Latin America, western Australia and New Zealand. Expenditures related to these activities were partially funded by $1.9 billion in cash proceeds from the sale of the Midwest Pipelines. For additional information concerning significant acquisitions and dispositions, see Note 2 to the Consolidated Financial Statements. Projected 2001 capital and investment expenditures for Duke Energy are approximately $7.9 billion, of which over 75% is planned to be for competitive business segments which are not subject to state rate regulation. This projection includes approximately $6.5 billion for acquisitions and other expansion opportunities and $1.4 billion for existing plant upgrades. Duke Energy's projected capital expenditures also include $800 million in expenditures over the next three years for its Gulfstream pipeline project. All projected capital and investment expenditures are subject to periodic review and revision and may vary significantly depending on a number of factors including, but not limited to, industry restructuring, regulatory constraints, acquisition opportunities, market volatility and economic trends. Financing Cash Flows Duke Energy's consolidated capital structure at December 31, 2000, including short-term debt, was 48% debt, 46% common equity and minority interests, 5% trust preferred securities and 1% preferred stock. Fixed charges coverage, calculated using the Securities and Exchange Commission (SEC) method, was 3.8 times, 2.9 times and 4.7 times for 2000, 1999 and 1998, respectively. Duke Energy's business expansion opportunities, along with dividends, debt repayments and operating requirements, are expected to be funded by cash from operations, external financing, common stock issuances and the proceeds from certain asset sales. Funding requirements met by external financing, common stock 35 issuances and proceeds from the sale of assets are dependent upon the opportunities presented and favorable market conditions. Management believes Duke Energy has adequate financial resources to meet its future needs. During 2000, Duke Energy issued a total of $550 million of Senior Notes at rates of approximately 7.250%. The proceeds were used for general corporate purposes. In April 2000, DEFS issued approximately $2.75 billion of commercial paper associated with the Phillips combination of which $1.22 billion was distributed to Phillips Petroleum. In August 2000, DEFS issued $1.7 billion of notes at rates from 7.50% to 8.125% and reduced the outstanding balance of its commercial paper. In December 2000, Texas Eastern Transmission Corporation (TETCO) issued $300 million of 7.30% notes due 2010. For additional information regarding debt, see Note 10 to the Consolidated Financial Statements. During 2000, Duke Energy formed Catawba River Associates, LLC, and third- party, non-controlling, preferred interest holders invested approximately $1,025 million. The preferred interest receives a preferred return equal to an adjusted floating reference rate (approximately 7.847% at December 31, 2000). See Note 2 to the Consolidated Financial Statements for further discussion. During 2000, Duke Energy repaid $380 million of 8.0% notes, $200 million of 7.0% notes, $200 million of 10.375% notes and made $323 million in scheduled debt repayments. In addition, Duke Energy made a tender offer for $115 million of the notes assumed with the acquisition of MHP. As of December 31, 2000, approximately $88 million of these notes had been retired. Under its commercial paper facilities and extendible commercial note programs (ECNs), Duke Energy had the ability to borrow up to $5.7 billion and $3.3 billion at December 31, 2000 and 1999, respectively. A summary of the available commercial paper and ECNs as of December 31, 2000, is as follows:
Duke Energy Duke Duke Capital Field Duke Energy Energy Corporation(a) Services International Total ------ -------------- ----------- ------------- ----- In billions Commercial paper.......... $1.25 $1.55 $1.00(b) $0.41(c) $4.21 ECNs...................... 0.50 1.00 -- -- 1.50 ----- ----- ----- ----- ----- Total..................... $1.75 $2.55 $1.00 $0.41 $5.71 ===== ===== ===== ===== =====
- -------- (a) Duke Capital Corporation is a wholly owned subsidiary of Duke Energy that provides financing and credit enhancement services for its subsidiaries. (b) Original availability of $2.8 billion was reduced to $1.0 billion upon DEFS' issuance of $1.7 billion in notes in August 2000. (c) Includes ability to issue medium-term notes. The amount of Duke Energy's bank credit and construction facilities available at December 31, 2000 and 1999, was approximately $4.2 billion and $3.7 billion, respectively. Certain of the bank credit facilities support the issuance of commercial paper; therefore, the issuance of commercial paper reduces the amount available under these credit facilities. At December 31, 2000, approximately $3.2 billion was outstanding under the commercial paper facilities and ECNs, and approximately $44 million was outstanding under bank credit and construction facilities. As of December 31, 2000, Duke Energy and its subsidiaries had the ability to issue up to $4.5 billion aggregate public offering price of debt and other securities under shelf registrations filed with the SEC. Such securities may be issued as Senior Notes, First and Refunding Mortgage Bonds, Subordinated Notes, Trust Preferred Securities, Duke Energy Common Stock, Stock Purchase Contracts or Stock Purchase Units. On December 20, 2000, Duke Energy announced a two-for-one common stock split effective January 26, 2001, to shareholders of record on January 3, 2001. All outstanding share and per-share amounts have been restated to reflect the stock split. 36 To maintain financial flexibility and reduce the amount of financing needed for growth opportunities, Duke Energy's Board of Directors adopted a dividend policy in December 2000 that maintains dividends at the current quarterly rate of $0.275 per share, subject to declarations from time to time by the Board of Directors. This policy is consistent with Duke Energy's growth profile and strikes a balance between providing a competitive dividend yield and ensuring that cash is available to fund Duke Energy's growth. Duke Energy has paid quarterly cash dividends for 74 consecutive years. Dividends on common and preferred stocks in 2001 are expected to be paid on March 16, June 18, September 17 and December 17, subject to the discretion of the Board of Directors. Duke Energy's InvestorDirect Choice Plan, a stock purchase and dividend reinvestment plan, allows investors to reinvest dividends in new issuances of common stock and to purchase common stock directly from Duke Energy. Issuances under this plan were not material in 2000, 1999 or 1998. Duke Energy used authorized but unissued shares of its common stock to meet 2000 and 1999 employee benefit plan contribution requirements. This practice is expected to continue in 2001. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Risk Policies Duke Energy is exposed to market risks associated with interest rates, commodity prices, equity prices and foreign currency exchange rates. Comprehensive risk management policies have been established by management to monitor and manage these market risks. Duke Energy's Policy Committee is responsible for the overall approval of market risk management policies and the delegation of approval and authorization levels. The Policy Committee is comprised of senior executives who receive periodic updates from the Chief Risk Officer (CRO) on market risk positions, corporate exposures, credit exposures and overall results of Duke Energy's risk management activities. The CRO has responsibility for the overall management of interest rate risk, foreign currency risk, credit risk and energy risk, including monitoring of exposure limits. Interest Rate Risk Duke Energy is exposed to risk resulting from changes in interest rates as a result of its issuance of variable-rate debt, fixed-rate securities, commercial paper and auction market preferred stock, as well as interest rate swaps and interest rate lock agreements. Duke Energy manages its interest rate exposure by limiting its variable-rate and fixed-rate exposures to certain percentages of total capitalization, as set by policy, and by monitoring the effects of market changes in interest rates. Duke Energy may also enter into financial derivative instruments, including, but not limited to, swaps, options and treasury lock agreements to manage and mitigate interest rate risk exposure. See Notes 1, 7, 10, 12 and 13 to the Consolidated Financial Statements for additional information. Based on a sensitivity analysis as of December 31, 2000, it was estimated that if market interest rates average 1% higher (lower) in 2001 than in 2000, earnings before income taxes would decrease (increase) by approximately $53 million. Comparatively, based on a sensitivity analysis as of December 31, 1999, had interest rates averaged 1% higher (lower) in 2000 than in 1999, it was estimated that earnings before income taxes would have decreased (increased) by approximately $24 million. These amounts were determined by considering the impact of the hypothetical interest rates on the variable-rate securities outstanding as of December 31, 2000 and 1999. The increase in interest rate sensitivity is primarily the result of the increase in outstanding variable-rate commercial paper. In the event of a significant change in interest rates, management would likely take actions to manage its exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no changes in Duke Energy's financial structure. 37 Commodity Price Risk Duke Energy, substantially through its subsidiaries, is exposed to the impact of market fluctuations in the price of natural gas, electricity and other energy-related products marketed and purchased. Duke Energy employs established policies and procedures to manage its risks associated with these market fluctuations using various commodity derivatives, including forward contracts, futures, swaps and options. See Notes 1 and 7 to the Consolidated Financial Statements for additional information. The risk in the commodity trading portfolio is measured and monitored on a daily basis utilizing a Value-at-Risk model to determine the maximum potential one-day favorable or unfavorable Daily Earnings at Risk (DER). The DER is monitored daily in comparison to established thresholds. Other measures are also utilized to limit and monitor the risk in the commodity trading portfolio on monthly and annual bases. The DER computations are based on a historical simulation, which utilizes price movements over a specified period to simulate forward price curves in the energy markets to estimate the favorable or unfavorable impact of one day's price movement on the existing portfolio. The historical simulation emphasizes the most recent market activity, which is considered the most relevant predictor of immediate future market movements for natural gas, electricity and other energy-related products. The DER computations utilize several key assumptions, including a 95% confidence level for the resultant price movement and the holding period specified for the calculation. Duke Energy's DER calculation includes commodity derivative instruments held for trading purposes. Duke Energy's DER amounts are depicted in the table below. The increase in DER amounts as compared to 1999 is a result of Duke Energy's expanding portfolio of energy-related products both domestically and internationally. Daily Earnings at Risk
Estimated One-Day Estimated One-Day Estimated Average Estimated Average Operational Impact on EBIT at Impact on EBIT at One-Day Impact on One-Day Impact on Locations December 31, 2000 December 31, 1999 EBIT for 2000 EBIT for 1999 ----------- ----------------- ----------------- ----------------- ----------------- In millions (a) North American.. $20 $10 $16 $11 Other international.. 11 -- 2 --
- -------- (a) Changes in markets inconsistent with historical trends could cause actual results to exceed predicted limits. Certain subsidiaries of Duke Energy are also exposed to market fluctuations in the prices of various commodities related to their ongoing power generating, natural gas gathering, processing and marketing activities. Duke Energy closely monitors the risks associated with these commodities' price changes on its future operations, and where appropriate, uses various commodity instruments, such as electricity, natural gas, crude oil and NGLs to hedge these price risks. Based on a sensitivity analysis as of December 31, 2000, it was estimated that if NGL prices average one cent per gallon less in 2001, EBIT would decrease by approximately $8 million, after considering the effect of Duke Energy's commodity hedge positions. Comparatively, the same sensitivity analysis as of December 31, 1999, estimated that EBIT would have decreased by approximately $6 million. Based on the sensitivity analyses associated with other commodities' price changes, net of Duke Energy's commodity hedge positions, the effect on EBIT was not material as of December 31, 2000 or 1999. Credit Risk Duke Energy's principal markets for power and natural gas marketing services are industrial end-users and utilities located throughout the U.S., Canada, Asia Pacific and Latin America. Duke Energy has concentrations of receivables from natural gas and electric utilities and their affiliates, as well as industrial customers throughout these regions. These concentrations of customers may affect Duke Energy's overall credit risk in that certain customers may be similarly affected by changes in economic, regulatory or other factors. On all transactions where Duke Energy is exposed to credit risk, Duke Energy analyzes the counterparties' financial 38 condition prior to entering into an agreement, establishes credit limits and monitors the appropriateness of these limits on an ongoing basis. As of December 31, 2000, Duke Energy had approximately $400 million in receivables related to energy sales in California. Duke Energy quantified its exposures with regard to those receivables and recorded a provision of $110 million. See the Current Issues, California Issues section of Management's Discussion and Analysis, and Note 14 to the Consolidated Financial Statements for further information regarding credit exposure. The change in market value of New York Mercantile Exchange-traded futures and options contracts requires daily cash settlement in margin accounts with brokers. Physical forward contracts and financial derivatives are generally settled at the expiration of the contract term or each delivery period; however, these transactions are also generally subject to margin agreements with the majority of Duke Energy's counterparties. Equity Price Risk Duke Energy maintains trust funds, as required by the Nuclear Regulatory Commission, to fund certain costs of nuclear decommissioning (see Note 11 to the Consolidated Financial Statements). As of December 31, 2000 and 1999, these funds were invested primarily in domestic and international equity securities, fixed-rate, fixed-income securities and cash and cash equivalents. Management believes that its exposure to fluctuations in equity prices or interest rates will not materially affect consolidated results of operations, cash flows or financial position. See further discussion in the Current Issues, Nuclear Decommissioning Costs section of Management's Discussion and Analysis. Foreign Currency Risk Duke Energy is exposed to foreign currency risk that arises from investments in international affiliates and businesses owned and operated in foreign countries. To mitigate risks associated with foreign currency fluctuations, when possible, contracts are denominated in or indexed to the U.S. dollar, or investments may be hedged through debt denominated in the foreign currency. Duke Energy also uses foreign currency derivatives, where possible, to manage its risk related to foreign currency fluctuations. To monitor its currency exchange rate risks, Duke Energy uses sensitivity analysis, which measures the impact of a devaluation of the foreign currencies to which it has exposure. At December 31, 2000, Duke Energy's primary foreign currency exchange rate exposures were the Brazilian real, the Peruvian nuevo sol, the Australian dollar, the El Salvadoran colon, the Argentine peso, the European euro and the Canadian dollar. Based on a sensitivity analysis as of December 31, 2000, a 10% devaluation in the currency exchange rates in Brazil would reduce Duke Energy's financial position by approximately $91 million and would not significantly affect Duke Energy's consolidated results of operations, cash flows or financial position over the next 12 months. Based on a sensitivity analysis as of December 31, 1999, a 10% devaluation in the Brazilian currency exchange rates would have reduced Duke Energy's financial position by approximately $65 million. The increase in sensitivity to the Brazilian real is primarily due to the increased investment in Paranapanema as a result of Duke Energy's tender offer in 2000. See Note 2 to the Consolidated Financial Statements for further information. Based on these sensitivity analyses, a 10% devaluation in other foreign currencies was insignificant to Duke Energy's consolidated results of operations, cash flows or financial position. CURRENT ISSUES Electric Competition. Wholesale Competition. The Energy Policy Act of 1992 and the FERC's subsequent rulemaking activities opened the wholesale energy market to competition. Open-access transmission for wholesale customers as defined by the FERC's final rules provides energy suppliers, including Duke Energy, with opportunities to sell and deliver capacity and energy at market-based prices. Franchised Electric obtained from the FERC's open-access rule the rights to sell capacity and energy at 39 market-based rates from its own assets, which allows Franchised Electric to purchase, at attractive rates, a portion of its capacity and energy requirements resulting in lower overall costs to customers. Open access also provides Franchised Electric's existing wholesale customers with competitive opportunities to seek other suppliers for their capacity and energy requirements. On December 20, 1999 and February 25, 2000, the FERC issued its Order 2000 and Order 2000-A regarding Regional Transmission Organizations (RTOs). In these orders, the FERC stressed the voluntary nature of RTO participation by utilities and set minimum characteristics and functions that must be met by utilities that participate in an RTO, including exclusive and independent authority to propose rates, terms and conditions of transmission service provided over the facilities it operates. The order provides for an open, flexible structure for RTOs to meet the needs of the market and provides for the possibility of incentive ratemaking and other benefits for utilities that participate in an RTO. As a result of these rulemakings, on October 16, 2000, Duke Energy and two other investor-owned utilities, Progress Energy and South Carolina Electric & Gas, filed with the FERC to establish GridSouth Transco, LLC (GridSouth), as an RTO. If approved, GridSouth will be a for-profit, independent transmission company, responsible for operating and planning the companies' combined transmission systems. The target date for formation of GridSouth is December 15, 2001. However, the actual date that GridSouth becomes operational will depend upon the resolution of all necessary regulatory approvals and resolving all technical issues. Management believes that the establishment of GridSouth will not have a material adverse effect on Duke Energy's future consolidated results of operations, cash flows or financial position. Retail Competition. Currently, Franchised Electric operates as a vertically integrated, investor-owned utility with exclusive rights to supply electricity in a franchised service territory -- a 22,000-square-mile service territory in the Carolinas. In its retail business, the NCUC and the PSCSC regulate Franchised Electric's service and rates. Electric industry restructuring is being addressed in all 50 states and in the District of Columbia. These restructurings will likely impact all entities owning electric generating assets. The NCUC and the PSCSC are studying the merits of restructuring the electric utility industry in the Carolinas. During 1999, three electric utility restructuring bills were filed in South Carolina's House of Representatives. All three bills addressed competition while allowing utilities to recover stranded costs, and have transition and phase-in periods ranging from five to six years. A task force formed by the South Carolina Senate is also examining issues related to deregulation of the state's electric utility business. Legislators anticipate that legislation is likely to be introduced during 2001. This task force will prepare a report for review, discussion and possible legislative action by the state's Senate Judiciary Committee and General Assembly as a whole. In May 1997, North Carolina passed a bill that established a study commission to examine whether competition should be implemented in the state. Members of this commission include legislators, customers, utilities and a member of an environmental group. The study commission unanimously approved a set of recommendations on electric restructuring in April 2000. The commission's report to the legislature containing these recommendations was submitted to the General Assembly in May. The report basically recommended retail deregulation beginning partially in 2005 and fully in 2006. However, recent events in California's power market have led the study commission to evaluate whether, and to what extent, proposed legislation should be introduced in 2001. In general, the commission has expressed interest in ensuring that a viable wholesale electric market is in place prior to opening the state's retail electric market. Currently, the electric utility industry is predominantly regulated on a basis designed to recover the cost of providing electric power to customers. If cost-based regulation were to be discontinued in the industry for any reason, including competitive pressure on the cost-based prices of electricity, profits could be reduced and electric utilities might be required to reduce their asset balances to reflect a market basis less than cost. Discontinuance of cost-based regulation would also require affected utilities to write off their associated regulatory assets. Duke Energy's regulatory assets are included in the Consolidated Balance Sheets. The portion 40 of these regulatory assets related to Franchised Electric is approximately $1.2 billion, including primarily purchased capacity costs, deferred debt expense and deferred taxes related to regulatory assets. Duke Energy is recovering substantially all of these regulatory assets through its current wholesale and retail electric rates and may attempt to continue to recover these assets during a transition to competition. In addition, Duke Energy would seek to recover the costs of its electric generating facilities in excess of the market price of power at the time of transition. Duke Energy supports a properly managed and orderly transition to competitive generation and retail services in the electric industry. However, transforming the current regulated industry into efficient, competitive generation and retail electric markets is a complex undertaking, which will require a carefully considered transition to a restructured electric industry. The key to effective retail competition is fairness among customers, service providers and investors. Duke Energy intends to continue to work with customers, legislators and regulators to address all the important issues. Management currently cannot predict the impact, if any, of these competitive forces on future consolidated results of operations, cash flows or financial position. Natural Gas Competition. Wholesale Competition. On February 9, 2000, the FERC issued Order 637, which sets forth revisions to its regulations governing short-term natural gas transportation services and policies governing the regulation of interstate natural gas pipelines. "Short-term" has been defined as all transactions of less than one year. Among the significant actions taken are the lifting of the price cap for short-term capacity release by pipeline customers for an experimental 2 1/2-year period ending September 1, 2002, and requiring that interstate pipelines file pro forma tariff sheets to (i) provide for nomination equality between capacity release and primary pipeline capacity; (ii) implement imbalance management services (for which interstate pipelines may charge fees) while at the same time reducing the use of operational flow orders and penalties; and (iii) provide segmentation rights if operationally feasible. Order 637 also narrows the right of first refusal to remove economic biases perceived in the current rule. Order 637 imposes significant new reporting requirements for interstate pipelines that were implemented by Duke Energy during the third quarter of 2000. Additionally, Order 637 permits pipelines to propose peak/off-peak rates and term-differentiated rates, and encourages pipelines to propose experimental capacity auctions. By Order 637-A, issued in February 2000, the FERC generally denied requests for rehearing and several parties, including Duke Energy, have filed appeals in the District of Columbia Court of Appeals seeking court review of various aspects of the Order. During the third quarter of 2000, Duke Energy's interstate pipelines made the required pro forma tariff sheet filings. These filings are currently subject to review and approval by the FERC. Management does not believe the effects of these matters will have a material effect on Duke Energy's future consolidated results of operations, cash flows or financial position. Retail Competition. Changes in regulation to allow retail competition could affect Duke Energy's natural gas transportation contracts with local natural gas distribution companies. Natural gas retail deregulation is in the very early stages of development and management cannot estimate the effects of this matter on future consolidated results of operations, cash flows or financial position. Nuclear Decommissioning Costs. Estimated site-specific nuclear decommissioning costs, including the cost of decommissioning plant components not subject to radioactive contamination, total approximately $1.9 billion stated in 1999 dollars based on decommissioning studies completed in 1999. Duke Energy contributes to an external decommissioning trust fund and maintains an internal reserve to fund these costs. The balance of the external fund as of December 31, 2000 and 1999, was $717 million and $703 million, respectively. The balance of the internal reserve as of December 31, 2000 and 1999, was $231 million and $223 million, respectively, and is reflected in the Consolidated Balance Sheets as Accumulated Depreciation and Amortization. Both the NCUC and the PSCSC have granted Duke Energy recovery of estimated decommissioning costs through retail rates over the expected remaining service periods of its nuclear plants. Management believes that 41 funding of the decommissioning costs will not have a material adverse effect on consolidated results of operations, cash flows or financial position. See Note 11 to the Consolidated Financial Statements for additional information. The external decommissioning trust fund is invested primarily in domestic and international equity securities, fixed-rate, fixed-income securities and cash and cash equivalents. These investments are exposed to price fluctuations in equity markets, and changes in interest rates. Because the accounting for nuclear decommissioning recognizes that costs are recovered through Franchised Electric's rates, fluctuations in equity prices or interest rates do not affect consolidated results of operations, cash flows or financial position. Nuclear Re-licensing. In May 2000, the Nuclear Regulatory Commission renewed the operating license for Duke Energy's three Oconee nuclear units through 2033 to 2034. Licenses for Duke Energy's other nuclear units expire between 2021 and 2026 and are also available for renewal. Environmental. Duke Energy is subject to international, federal, state and local regulations regarding air and water quality, hazardous and solid waste disposal and other environmental matters. Manufactured Gas Plants and Superfund Sites. Duke Energy was an operator of manufactured gas plants until the early 1950s and has entered into a cooperative effort with the State of North Carolina and other owners of certain former manufactured gas plant sites to investigate and, where necessary, remediate these contaminated sites. Duke Energy is considered by regulators to be a potentially responsible party and may be subject to future liability at eight federal Superfund sites and three state Superfund sites. While the cost of remediation of these sites may be substantial, Duke Energy will share in any liability associated with remediation of contamination at such sites with other potentially responsible parties. Management believes that resolution of these matters will not have a material adverse effect on consolidated results of operations, cash flows or financial position. PCB (Polychlorinated Biphenyl) Assessment and Cleanup Programs. In June 1999, the Environmental Protection Agency (EPA) certified that TETCO, a wholly owned subsidiary of Duke Energy, had completed cleanup of PCB-contaminated sites under conditions stipulated by a U.S. Consent Decree in 1989. TETCO was required to continue groundwater monitoring on a number of sites for two years. This required monitoring was completed as of the end of 2000, pending EPA concurrence. TETCO will be evaluating and discussing with the EPA, appropriate state authorities or both the need for additional remediation or monitoring. Under terms of the sales agreement with CMS discussed in Note 2 to the Consolidated Financial Statements, Duke Energy is obligated to complete cleanup of previously identified contamination resulting from the past use of PCB- containing lubricants and other discontinued practices at certain sites on the PEPL and Trunkline systems. Based on Duke Energy's experience to date and costs incurred for cleanup operations, management believes the resolution of matters relating to the environmental issues discussed above will not have a material adverse effect on consolidated results of operations, cash flows or financial position. Air Quality Control. The Clean Air Act (CAA) Amendments of 1990 required a two-phase reduction by electric utilities in aggregate annual emissions of sulfur dioxide and nitrogen oxide by 2000. All projects associated with these requirements have been completed and Duke Energy currently meets all requirements of Phase I and Phase II. In October 1998, the EPA issued a final rule on regional ozone control that required 22 eastern states and the District of Columbia to revise their State Implementation Plans (SIPs) to significantly reduce emissions of nitrogen oxide by May 1, 2003. The EPA's rule was challenged in court by various states, industry and other interests, including the states of North Carolina and South Carolina, and Duke Energy. In March 2000, the court upheld most aspects of the EPA's rule. The same court subsequently issued a decision that extended the compliance deadline for implementation of emission reductions to May 31, 2004. In January 2000, the EPA 42 finalized another ozone-related rule under Section 126 of the CAA that has virtually identical emission control requirements as its October 1998 action, but with a May 1, 2003 compliance date. The EPA's 2000 rule has been challenged in court. The court is expected to issue its decision during the spring of 2001. In response to the EPA's October 1998 rule, both North Carolina and South Carolina are in the process of finalizing the SIP revisions to implement the EPA rule's emission reduction requirements. Additionally, North Carolina has adopted a separate rule that caps nitrogen oxide emissions from coal-fired power plants in the event the EPA's SIP rule is eventually overturned. Depending on the resolution of these and related matters, management anticipates that costs to Duke Energy may range from $500 million to $900 million in capital costs for additional emission controls over an estimated time period which continues through 2007. Emission control retrofits of this type are large technical, design and construction projects. These projects will be managed closely to ensure the continuation of reliable electric service to Duke Energy's customers throughout the projects and upon their completion. On December 22, 2000, the U.S. Justice Department, acting on behalf of the EPA, filed a complaint against Duke Energy in the U.S. District Court in Greensboro, North Carolina, for alleged violations of the New Source Review (NSR) provisions of the CAA. The EPA is claiming that 29 projects performed at 25 of Duke Energy's coal-fired units were major modifications as defined in the CAA and that Duke Energy violated the CAA's NSR requirements when it undertook those projects without obtaining permits and installing emission controls for sulfur dioxide, nitrogen oxide and particulate matter. The complaint requests, among other things, that the court enjoin Duke Energy from operating the coal- fired units identified in the complaint, and order Duke Energy to install additional emission controls and pay unspecified civil penalties. This complaint appears to be part of the EPA's NSR enforcement initiative, in which the EPA claims that utilities and others have committed widespread violations of the CAA permitting requirements for the past 25 years. The EPA has sued or issued notices of violation of investigative information requests, to at least 48 other electric utilities and cooperatives. The EPA's allegations run counter to previous EPA guidance regarding the applicability of the NSR permitting requirements. Duke Energy, along with other utilities, has routinely undertaken the type of repair, replacement, and maintenance projects that the EPA now claims are illegal. Duke Energy believes that all of its electric generation units are properly permitted and have been properly maintained, and intends to defend itself vigorously against these alleged violations. However, because these matters are in a preliminary stage, management cannot estimate the effects of these matters on Duke Energy's future consolidated results of operations, cash flows or financial position. The CAA authorizes civil penalties of up to $27,500 per day per violation at each generating unit. Civil penalties, if ultimately imposed by the court, and the cost of any required new pollution control equipment, if the court accepts the EPA's contentions, could be substantial. Global Climate Change. In 1997, the United Nations held negotiations in Kyoto, Japan to determine how to minimize global warming. The resulting Kyoto Protocol prescribed, among other greenhouse gas emission reduction tactics, carbon dioxide emission reductions from fossil-fueled electric generating facilities in the U.S. and other developed nations, as well as methane emission reductions from natural gas operations. Several subsequent meetings have been held attempting to resolve operational details to clear the way for multinational ratification and implementation without resolution. If the Kyoto Protocol were to be adopted in its current form, it could have far-reaching implications for Duke Energy and the entire energy industry. However, the outcome and timing of these implications are highly uncertain, and Duke Energy cannot estimate the effects on future consolidated results of operations, cash flows or financial position. Duke Energy remains engaged with those developing public policy initiatives and continuously assesses the commercial implications for its markets around the world. California Issues. California Litigation. Duke Energy's subsidiaries, DENA and DETM, have been named among 16 defendants in a class action lawsuit (the Gordon lawsuit) filed against companies identified as "generators and traders" of electricity in California markets. DETM also was named as one of numerous 43 defendants in four additional lawsuits, including two class actions (the Hendricks and Pier 23 Restaurant lawsuits), filed against generators, marketers and traders and other unnamed providers of electricity in California markets. These suits were brought either by or on behalf of electricity consumers in the State of California. The Gordon and Hendricks class action suits were filed in the Superior Court of the State of California, San Diego County, in November 2000. The other three suits were filed in January 2001, one in the Superior Court of the State of California, San Diego County, and the other two in the Superior Court of the State of California, County of San Francisco. These suits generally allege that the defendants manipulated the wholesale electricity markets in violation of state laws against unfair and unlawful business practices and state antitrust laws. Plaintiffs in the Gordon suit seek aggregate damages of over $4 billion, and the plaintiffs in the other suits, to the extent damages are specified, allege damages in excess of $1 billion. The lawsuits each seek the disgorgement of alleged unlawfully obtained revenues for sales of electricity and, in three suits, an award of treble damages. California Wholesale Electricity Markets. As a result of high prices in the western U.S. wholesale electricity markets in 2000, several state and federal regulatory investigations and complaints have commenced to determine the causes of the prices and potentially to recommend remedial action. The FERC concluded its investigation by issuing on December 15, 2000, an Order Directing Remedies in California Wholesale Electricity Markets. In this conclusion, the FERC found no basis in allegations made by government officials in California that specific electric generators artificially drove up power prices. This conclusion is consistent with similar findings by the Compliance Unit of the California Power Exchange (CalPX) and the Northwest Power Planning Council. That Order is the subject of numerous rehearing requests. At the state level, the California Public Utilities Commission, the California Electricity Oversight Board, the California Bureau of State Audits and the California Office of the Attorney General all have separate ongoing investigations into the high prices and their causes. None of those investigations have been completed and no findings have been made in connection with any of them. California Utilities Defaults and Other Proceedings. Two California electric utilities recently defaulted on many of their obligations to suppliers and creditors. NAWE supplies electric power to these utilities directly and indirectly through contracts through the California Independent System Operator (CAISO) and the CalPX. NAWE also supplies natural gas to these utilities under direct contracts. With respect to electric power sales through the CAISO and CalPX, Duke Energy quantified its exposures at December 31, 2000 to these utilities and recorded a $110 million provision. As a result of these defaults and certain related government actions, Duke Energy has taken a number of steps, including initiating court actions, to mitigate its exposure. While these matters referenced above are in their earliest stages, management does not believe, based on its analysis to date of the factual background and the claims asserted in these matters, that their resolution will have a material adverse effect on Duke Energy's consolidated results of operations, cash flows or financial position. Litigation and Contingencies. Exxon Mobil Corporation Arbitration. In December 2000, three subsidiaries of Duke Energy initiated binding arbitration against three subsidiaries of the Exxon Mobil Corporation (collectively, the "Exxon Mobil entities") concerning the parties' joint ownership of DETM and certain related affiliates (collectively, the "Ventures"). At issue is a buy- out right provision in the parties' agreement. The agreements governing the ownership of the Ventures contain provisions giving Duke Energy the right to purchase the Exxon Mobil entities' 40% interest in the Ventures in the event material business disputes arise between the Ventures' owners. Such disputes have arisen, and consequently, Duke Energy exercised its right to buy the Exxon Mobil entities' interest. Duke Energy claims that refusal by the Exxon Mobil entities to honor the exercise is a breach of the buy-out right provision, and seeks specific performance of the provision. Duke Energy also complains of the Exxon Mobil entities' lack of use of, and contributions to, the Ventures. 44 In January 2001, the Exxon Mobil entities asserted counterclaims in the arbitration and claims in a separate Texas state court action alleging that Duke Energy breached its obligations to the Ventures and to the Exxon Mobil entities. The Exxon Mobil entities also claim that Duke Energy violated a Guaranty Agreement. While this matter is in its early stages, management believes that the final disposition of this action will not have a material adverse effect on Duke Energy's consolidated results of operations, cash flows or financial position. For information concerning litigation and other commitments and contingencies, see Note 14 to the Consolidated Financial Statements. New Accounting Standard. In June 1998, Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," was issued. Duke Energy was required to adopt this standard by January 1, 2001. SFAS No. 133 requires that all derivatives be recognized as either assets or liabilities and measured at fair value, and changes in the fair value of derivatives are reported in current earnings, unless the derivative is designated and effective as a hedge. If the intended use of the derivative is to hedge the exposure to changes in the fair value of an asset, a liability or a firm commitment, then changes in the fair value of the derivative instrument will generally be offset in the income statement by changes in the hedged item's fair value. However, if the intended use of the derivative is to hedge the exposure to variability in expected future cash flows, then changes in the fair value of the derivative instrument will generally be reported in Other Comprehensive Income (OCI). The gains and losses on the derivative instrument that are reported in OCI will be reclassified to earnings in the periods in which earnings are impacted by the hedged item. Duke Energy has determined the effect of implementing SFAS No. 133 and recorded a net-of-tax cumulative-effect adjustment of $96 million as a reduction in earnings. The net-of-tax cumulative-effect adjustment reducing OCI and Common Stockholders' Equity is estimated to be $921 million on January 1, 2001. Currently, there are ongoing discussions surrounding the implementation and interpretation of SFAS No. 133 by the Financial Accounting Standards Board's Derivatives Implementation Group. Duke Energy implemented SFAS No. 133 based on current rules and guidance in place as of January 1, 2001. However, if the definition of derivative instruments is altered, this may impact Duke Energy's transition adjustment amounts and subsequent reported operating results. Forward-Looking Statements. From time to time, Duke Energy's reports, filings and other public announcements may include assumptions, projections, expectations, intentions or beliefs about future events. These statements are intended as "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. Duke Energy cautions that assumptions, projections, expectations, intentions or beliefs about future events may and often do vary from actual results and the differences between assumptions, projections, expectations, intentions or beliefs and actual results can be material. Accordingly, there can be no assurance that actual results will not differ materially from those expressed or implied by the forward-looking statements. Some of the factors that could cause actual achievements and events to differ materially from those expressed or implied in such forward-looking statements include state, federal and foreign legislative and regulatory initiatives that affect cost and investment recovery, have an impact on rate structures and affect the speed and degree at which competition enters the electric and natural gas industries; industrial, commercial and residential growth in the service territories of Duke Energy and its subsidiaries; the weather and other natural phenomena; the timing and extent of changes in commodity prices, interest rates and foreign currency exchange rates; changes in environmental and other laws and regulations to which Duke Energy and its subsidiaries are subject or other external factors over which Duke Energy has no control; the results of financing efforts, including Duke Energy's ability to obtain financing on favorable terms, which can be affected by Duke Energy's credit rating and general economic conditions; growth in opportunities for Duke Energy's business units; and the effect of accounting policies issued periodically by accounting standard-setting bodies. 45 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." 46 Item 8. Financial Statements and Supplementary Data. DUKE ENERGY CORPORATION Consolidated Statements Of Income
Years Ended December 31, -------------------------- 2000 1999 1998 -------- -------- -------- In millions, except per share amounts Operating Revenues Sales, trading and marketing of natural gas and petroleum products (Notes 1 and 7)................ $ 28,310 $ 10,922 $ 7,854 Trading and marketing of electricity (Notes 1 and 7)................................................ 13,060 3,610 2,788 Generation, transmission and distribution of electricity (Notes 1 and 4)....................... 5,315 4,934 4,586 Transportation and storage of natural gas (Notes 1 and 4)............................................ 1,045 1,139 1,450 Gain on sale of equity investment (Notes 2 and 8).. 407 -- -- Other (Note 8)..................................... 1,181 1,161 984 -------- -------- ------- Total operating revenues.......................... 49,318 21,766 17,662 -------- -------- ------- Operating Expenses Natural gas and petroleum products purchased (Note 1)................................................ 27,670 10,636 7,497 Net interchange and purchased power (Notes 1, 4 and 5)................................................ 12,000 3,507 2,916 Fuel used in electric generation (Notes 1 and 11).. 781 764 767 Other operation and maintenance (Notes 4, 11 and 14)............................................... 3,469 3,701 2,738 Depreciation and amortization (Notes 1 and 5)...... 1,167 968 909 Property and other taxes........................... 418 371 350 -------- -------- ------- Total operating expenses.......................... 45,505 19,947 15,177 -------- -------- ------- Operating Income.................................... 3,813 1,819 2,485 -------- -------- ------- Other Income and Expenses Deferred returns and allowance for funds used during construction (Note 1)...................... 63 82 88 Other, net......................................... 138 142 74 -------- -------- ------- Total other income and expenses................... 201 224 162 -------- -------- ------- Earnings Before Interest and Taxes.................. 4,014 2,043 2,647 Interest Expense (Notes 7 and 10)................... 911 601 514 Minority Interest Expense (Notes 2 and 12).......... 307 142 96 -------- -------- ------- Earnings Before Income Taxes........................ 2,796 1,300 2,037 Income Taxes (Notes 1 and 6)........................ 1,020 453 777 -------- -------- ------- Income Before Extraordinary Item.................... 1,776 847 1,260 Extraordinary Gain (Loss), net of tax............... -- 660 (8) -------- -------- ------- Net Income.......................................... 1,776 1,507 1,252 Dividends on Preferred and Preference Stock (Note 13)................................................ 19 20 21 -------- -------- ------- Earnings Available For Common Stockholders.......... $ 1,757 $ 1,487 $ 1,231 ======== ======== ======= Common Stock Data (Note 1) Weighted average shares outstanding................ 736 729 722 Earnings per share (before extraordinary item) Basic............................................. $ 2.39 $ 1.13 $ 1.72 Diluted........................................... $ 2.38 $ 1.13 $ 1.71 Earnings per share Basic............................................. $ 2.39 $ 2.04 $ 1.70 Diluted........................................... $ 2.38 $ 2.03 $ 1.70 Dividends per share................................ $ 1.10 $ 1.10 $ 1.10
See Notes to Consolidated Financial Statements. 47 DUKE ENERGY CORPORATION Consolidated Statements Of Cash Flows
Years Ended December 31, ---------------------------- 2000 1999 1998 -------- -------- -------- In millions Cash Flows From Operating Activities Net income...................................... $ 1,776 $ 1,507 $ 1,252 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization................... 1,348 1,151 1,055 Net mark-to-market gain......................... (464) (24) (75) Extraordinary (gain) loss, net of tax........... -- (660) 8 Gain on sale of equity investment............... (407) -- -- Provision on NAWE receivables................... 110 -- -- Injury and damages accrual...................... -- 800 -- Deferred income taxes........................... 152 (210) (35) Purchased capacity levelization................. 138 104 88 Transition cost recoveries (payments), net...... 82 95 (28) (Increase) decrease in Receivables.................................... (4,812) (659) (18) Inventory...................................... (97) (89) (104) Other current assets........................... (796) (138) (39) Increase (decrease) in Accounts payable............................... 4,509 477 72 Taxes accrued.................................. (439) (57) (6) Interest accrued............................... 64 32 (2) Other current liabilities...................... 1,116 73 84 Other, net...................................... (55) 282 79 -------- -------- -------- Net cash provided by operating activities..... 2,225 2,684 2,331 -------- -------- -------- Cash Flows From Investing Activities Capital and investment expenditures............. (5,634) (5,936) (2,500) Proceeds from sale of subsidiaries and equity investment..................................... 400 1,900 -- Decommissioning, retirements and other.......... 204 236 24 -------- -------- -------- Net cash used in investing activities......... (5,030) (3,800) (2,476) -------- -------- -------- Cash Flows From Financing Activities Proceeds from the issuance of Long-term debt.................................. 3,206 3,221 1,357 Guaranteed preferred beneficial interests in subordinated notes of Duke Energy Corporation or Subsidiaries................................ -- 484 581 Common stock and stock options.................. 230 162 176 Payments for the redemption of Long-term debt.................................. (1,191) (1,505) (698) Preferred and preference stock.................. (33) (20) (180) Net change in notes payable and commercial paper.......................................... 1,484 58 (350) Distributions to minority interests............. (1,216) -- -- Contributions from minority interests........... 1,116 -- -- Dividends paid.................................. (828) (822) (814) Other........................................... (54) 22 6 -------- -------- -------- Net cash provided by financing activities..... 2,714 1,600 78 -------- -------- -------- Net (decrease) increase in cash and cash equivalents.................................... (91) 484 (67) Cash received from business acquisitions........ 100 49 38 Cash and cash equivalents at beginning of period......................................... 613 80 109 -------- -------- -------- Cash and cash equivalents at end of period...... $ 622 $ 613 $ 80 ======== ======== ======== Supplemental Disclosures Cash paid for interest, net of amount capitalized.................................... $ 817 $ 541 $ 490 Cash paid for income taxes...................... $ 1,177 $ 732 $ 733
See Notes to Consolidated Financial Statements. 48 DUKE ENERGY CORPORATION Consolidated Balance Sheets
December 31, --------------- 2000 1999 ------- ------- In millions ASSETS Current Assets (Note 1) Cash and cash equivalents (Note 7)............................ $ 622 $ 613 Receivables (Notes 1 and 7)................................... 8,293 3,248 Inventory..................................................... 736 599 Current portion of natural gas transition costs (Note 4)...... -- 81 Current portion of purchased capacity costs (Note 5).......... 149 146 Unrealized gains on mark-to-market transactions (Note 7)...... 11,038 1,131 Other (Note 7)................................................ 1,317 353 ------- ------- Total current assets........................................ 22,155 6,171 ------- ------- Investments and Other Assets Investments in affiliates (Notes 8 and 14).................... 1,370 1,299 Nuclear decommissioning trust funds (Note 11)................. 717 703 Pre-funded pension costs (Note 17)............................ 304 315 Goodwill, net (Notes 1 and 2)................................. 1,566 844 Notes receivable.............................................. 462 154 Unrealized gains on mark-to-market transactions (Notes 1 and 7)........................................................... 4,218 690 Other......................................................... 1,445 705 ------- ------- Total investments and other assets.......................... 10,082 4,710 ------- ------- Property, Plant and Equipment (Notes 1, 5, 9, 10 and 11) Cost.......................................................... 34,615 30,436 Less accumulated depreciation and amortization................ 10,146 9,441 ------- ------- Net property, plant and equipment........................... 24,469 20,995 ------- ------- Regulatory Assets and Deferred Debits (Note 1) Purchased capacity costs (Note 5)............................. 356 497 Deferred debt expense (Note 7)................................ 208 223 Regulatory asset related to income taxes...................... 506 500 Other (Notes 4 and 14)........................................ 400 313 ------- ------- Total regulatory assets and deferred debits................. 1,470 1,533 ------- ------- Total Assets................................................... $58,176 $33,409 ======= =======
See Notes to Consolidated Financial Statements. 49 DUKE ENERGY CORPORATION Consolidated Balance Sheets -- (Continued)
December 31, ---------------- 2000 1999 ------- ------- In millions LIABILITIES AND COMMON STOCKHOLDERS' EQUITY Current Liabilities Accounts payable............................................ $ 7,375 $ 2,312 Notes payable and commercial paper (Notes 7 and 10)......... 1,826 267 Taxes accrued (Note 1)...................................... 261 685 Interest accrued............................................ 208 139 Current maturities of long-term debt and preferred stock (Notes 10 and 13).......................................... 470 515 Unrealized losses on mark-to-market transactions (Notes 1 and 7)..................................................... 11,070 1,241 Other (Notes 1 and 14)...................................... 1,769 717 ------- ------- Total current liabilities................................. 22,979 5,876 ------- ------- Long-term Debt (Notes 7 and 10).............................. 11,019 8,683 ------- ------- Deferred Credits and Other Liabilities (Note 1) Deferred income taxes (Note 6).............................. 3,851 3,402 Investment tax credit (Note 6).............................. 211 225 Nuclear decommissioning costs externally funded (Note 11)... 717 703 Environmental cleanup liabilities (Note 14)................. 100 101 Unrealized losses on mark-to-market transactions (Note 7)... 3,581 438 Other (Note 14)............................................. 1,574 2,099 ------- ------- Total deferred credits and other liabilities.............. 10,034 6,968 ------- ------- Commitments and Contingencies (Notes 5, 11 and 14) Guaranteed Preferred Beneficial Interests in Subordinated Notes of Duke Energy Corporation or Subsidiaries (Notes 7 and 12).................................................... 1,406 1,404 ------- ------- Minority Interests (Note 2).................................. 2,435 1,200 ------- ------- Preferred and Preference Stock (Notes 7 and 13) Preferred and preference stock with sinking fund requirements............................................... 38 71 Preferred and preference stock without sinking fund requirements............................................... 209 209 ------- ------- Total preferred and preference stock...................... 247 280 ------- ------- Common Stockholders' Equity (Notes 1, 15 and 16) Common stock, no par, 1 billion shares authorized; 739 million and 733 million shares outstanding at December 31, 2000 and 1999, respectively................................ 4,797 4,603 Retained earnings........................................... 5,379 4,397 Accumulated other comprehensive income...................... (120) (2) ------- ------- Total common stockholders' equity......................... 10,056 8,998 ------- ------- Total Liabilities and Common Stockholders' Equity............ $58,176 $33,409 ======= =======
See Notes to Consolidated Financial Statements. 50 DUKE ENERGY CORPORATION Consolidated Statements Of Common Stockholders' Equity And Comprehensive Income
Accumulated Other Total Common Retained Comprehensive Comprehensive Stock Earnings Income Total Income ------ -------- ------------- ------- ------------- In millions Balance December 31, 1997.................... $4,284 $3,256 $ -- $ 7,540 Net income............... 1,252 1,252 $1,252 ------ Total comprehensive income.............. $1,252 ====== Dividend reinvestment and employee benefits (Note 16)..................... 165 165 Common stock dividends... (794) (794) Preferred and preference stock dividends (Note 13)............... (21) (21) Other capital stock transactions, net....... 8 8 ------ ------ ----- ------- Balance December 31, 1998.................... $4,449 $3,701 $ -- $ 8,150 ------ ------ ----- ------- Net income............... 1,507 1,507 $1,507 Other comprehensive income: Foreign currency translation adjustments (Note 1).. (2) (2) (2) ------ Total comprehensive income.............. $1,505 ====== Dividend reinvestment and employee benefits (Note 16)..................... 154 154 Common stock dividends... (802) (802) Preferred and preference stock dividends (Note 13)............... (20) (20) Other capital stock transactions, net....... 11 11 ------ ------ ----- ------- Balance December 31, 1999.................... $4,603 $4,397 $ (2) $ 8,998 ------ ------ ----- ------- Net income............... 1,776 1,776 $1,776 Other comprehensive income: Foreign currency translation adjustments (Note 1).. (118) (118) (118) ------ Total comprehensive income.............. $1,658 ====== Dividend reinvestment and employee benefits (Note 16)..................... 194 194 Common stock dividends... (809) (809) Preferred and preference stock dividends (Note 13)............... (19) (19) Other capital stock transactions, net....... 34 34 ------ ------ ----- ------- Balance December 31, 2000.................... $4,797 $5,379 $(120) $10,056 ====== ====== ===== =======
See Notes to Consolidated Financial Statements. 51 DUKE ENERGY CORPORATION Notes To Consolidated Financial Statements For the Years Ended December 31, 2000, 1999 and 1998 1. Summary of Significant Accounting Policies Consolidation. The Consolidated Financial Statements include the accounts of all of Duke Energy Corporation's majority-owned subsidiaries after the elimination of significant intercompany transactions and balances. Investments in other entities that are not controlled by Duke Energy Corporation, but where it has significant influence over operations, are accounted for using the equity method. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates are based on management's best available knowledge of current and expected future events, actual results could differ from those estimates. "Duke Energy" is used in these Notes as a collective reference to Duke Energy Corporation and its subsidiaries. Cash and Cash Equivalents. All liquid investments with maturities at date of purchase of three months or less are considered cash equivalents. Inventory. Inventory consists primarily of materials and supplies, natural gas and natural gas liquid (NGL) products held in storage for transmission, processing and sales commitments, and coal held for electric generation. Inventory is recorded at the lower of cost or market, primarily using the average cost method. Accounting for Risk Management and Commodity Trading Activities. Commodity derivatives utilized for trading purposes are accounted for using the mark-to- market method. Under this methodology, these instruments are adjusted to market value, and the unrealized gains and losses are recognized in current period income and are included in the Consolidated Statements of Income as Natural Gas and Petroleum Products Purchased or Net Interchange and Purchased Power, and in the Consolidated Balance Sheets as Unrealized Gains or Losses on Mark-to-Market Transactions. Commodity derivatives such as futures, forwards, over-the-counter swap agreements and options are also utilized for non-trading purposes to hedge the impact of market fluctuations in the price of natural gas, electricity and other energy-related products. To qualify as a hedge, the price movements in the commodity derivatives must be highly correlated with the underlying hedged commodity. Under the deferral method of accounting, gains and losses related to commodity derivatives that qualify as hedges are recognized in income when the underlying hedged physical transaction closes and are included in the Consolidated Statements of Income as Natural Gas and Petroleum Products Purchased, or Net Interchange and Purchased Power. If the commodity derivative is no longer sufficiently correlated to the underlying commodity, or if the underlying commodity transaction closes earlier than anticipated, the deferred gains or losses are recognized in income. Duke Energy periodically uses interest rate swaps, accounted for under the accrual method, to manage the interest rate characteristics associated with outstanding debt. Interest rate differentials to be paid or received as interest rates change are accrued and recognized as an adjustment to interest expense. The amount accrued as either a payable to or a receivable from counterparties is included in the Consolidated Balance Sheets as Deferred Debt Expense. Duke Energy also periodically utilizes interest rate lock agreements to hedge interest rate risk associated with new debt issuances. Under the deferral method of accounting, gains or losses on such agreements, when settled, are deferred in the Consolidated Balance Sheets as Long-Term Debt and are amortized in the Consolidated Statements of Income as an adjustment to Interest Expense. 52 DUKE ENERGY CORPORATION Notes To Consolidated Financial Statements -- Continued Duke Energy is exposed to foreign currency risk from investments in international affiliates and businesses owned and operated in foreign countries. To mitigate risks associated with foreign currency fluctuations, when possible, contracts are denominated in or indexed to the U.S. dollar or investments may be hedged through debt denominated in the foreign currency. Duke Energy also uses foreign currency derivatives, where possible, to hedge its risk related to foreign currency fluctuations. To qualify as a hedge, there must be a high degree of correlation between price movements in the derivative and the item designated as being hedged. Duke Energy also enters into foreign currency swap agreements to manage foreign currency risks associated with energy contracts denominated in foreign currencies. These agreements are accounted for under the mark-to-market method previously described. Goodwill. Goodwill represents the excess of acquisition costs over the fair value of the net assets of an acquired business. The goodwill created by Duke Energy's acquisitions is amortized on a straight-line basis over the useful lives of the assets, ranging from 10 to 40 years. The amount of goodwill reported on the Consolidated Balance Sheets as of December 31, 2000 and 1999, was $1,566 million and $844 million, net of accumulated amortization of $291 million and $218 million, respectively. See Note 2 to the Consolidated Financial Statements for information on significant goodwill additions. Property, Plant and Equipment. Property, plant and equipment are stated at original cost. Duke Energy capitalizes all construction-related direct labor and material costs, as well as indirect construction costs. Indirect costs include general engineering, taxes and the cost of money. The cost of renewals and betterments that extend the useful life of property, plant and equipment is also capitalized. The cost of repairs and replacements is charged to expense as incurred. Depreciation is generally computed using the straight-line method. The composite weighted-average depreciation rates, excluding nuclear fuel, were 3.97%, 3.73% and 3.82% for 2000, 1999 and 1998, respectively. When property, plant and equipment maintained by Duke Energy's regulated operations are retired, the original cost plus the cost of retirement, less salvage, is charged to accumulated depreciation and amortization. When entire regulated operating units are sold or non-regulated properties are retired or sold, the property and related accumulated depreciation and amortization accounts are reduced, and any gain or loss is recorded in income, unless otherwise required by the Federal Energy Regulatory Commission (FERC). Impairment of Long-Lived Assets. The recoverability of long-lived assets and intangible assets are reviewed whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Such evaluation is based on various analyses, including undiscounted cash flow projections. Unamortized Debt Premium, Discount and Expense. Premiums, discounts and expenses incurred in connection with the issuance of currently outstanding long-term debt are amortized over the terms of the respective issues. Any call premiums or unamortized expenses associated with refinancing higher-cost debt obligations used to finance regulated assets and operations are amortized consistent with regulatory treatment of those items. Environmental Expenditures. Environmental expenditures that relate to an existing condition caused by past operations and do not contribute to current or future revenue generation are expensed. Environmental expenditures relating to current or future revenues are expensed or capitalized as appropriate. Liabilities are recorded when environmental assessments and/or cleanups are probable and the costs can be reasonably estimated. Cost-Based Regulation. Duke Energy's regulated operations are subject to the provisions of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation." 53 DUKE ENERGY CORPORATION Notes To Consolidated Financial Statements -- Continued Accordingly, certain assets and liabilities that result from the regulated ratemaking process are recorded that would not be recorded under generally accepted accounting principles for non-regulated entities. These regulatory assets and liabilities are classified in the Consolidated Balance Sheets as Regulatory Assets and Deferred Debits, and Deferred Credits and Other Liabilities, respectively. The applicability of SFAS No. 71 is routinely evaluated, and factors such as regulatory changes and the impact of competition are considered. Discontinuing cost-based regulation or increasing competition might require companies to reduce their asset balances to reflect a market basis less than cost and to write off their associated regulatory assets. Management cannot predict the potential impact, if any, of discontinuing cost- based regulation or increasing competition on future consolidated results of operations, cash flows or financial position. However, Duke Energy continues to position itself to effectively meet these challenges by maintaining competitive prices. Common Stock Options. Duke Energy accounts for stock-based compensation using the intrinsic method of accounting. Under this method, compensation cost, if any, is measured as the excess of the quoted market price of Duke Energy's stock at the date of the grant over the amount an employee must pay to acquire the stock. Restricted stock grants and Company Performance Awards are recorded as compensation cost over the requisite vesting period based on the market value on the date of the grant. Pro forma disclosures utilizing the fair value accounting method are included in Note 16 to the Consolidated Financial Statements. All outstanding common stock amounts and compensation awards have been adjusted to reflect the two-for-one common stock split effective January 26, 2001. See Note 15 to the Consolidated Financial Statements for additional information on the stock split. Revenues. Revenues on sales of electricity and transportation and storage of natural gas are recognized as service is provided. Revenues on sales of natural gas and petroleum products, as well as electricity, gas and other energy products marketed, are recognized in the period of delivery. The allowance for doubtful accounts was approximately $200 million and $43 million as of December 31, 2000 and 1999, respectively. Receivables on the Consolidated Balance Sheets included $244 million and $207 million as of December 31, 2000 and 1999, respectively, for electric service that has been provided but not yet billed to customers. When rate cases are pending final approval, a portion of the revenues is subject to possible refund. Reserves are established where required for such cases. During 2000, Duke Energy adopted the provisions of Staff Accounting Bulletin (SAB) 101 issued by the Securities and Exchange Commission. The impact of adopting SAB 101 was not material to Duke Energy. Nuclear Fuel. Amortization of nuclear fuel is included in the Consolidated Statements of Income as Fuel Used in Electric Generation. The amortization is recorded using the units-of-production method. Deferred Returns and Allowance for Funds Used During Construction (AFUDC). Deferred returns represent the estimated financing costs associated with funding certain regulatory assets. These regulatory assets primarily arose from the funding of purchased capacity costs above levels collected in rates. Deferred returns are non-cash items and are primarily recognized as an addition to Purchased Capacity Costs with an offsetting credit to Other Income and Expenses. AFUDC represents the estimated debt and equity costs of capital funds necessary to finance the construction of new regulated facilities. AFUDC is a non-cash item and is recognized as a cost of Property, Plant and Equipment, with offsetting credits to Other Income and Expenses and to Interest Expense. After construction is completed, Duke Energy is permitted to recover these costs, including a fair return, through their inclusion in rate base and in the provision for depreciation. Rates used for capitalization of deferred returns and AFUDC by Duke Energy's regulated operations are calculated in compliance with FERC rules. 54 DUKE ENERGY CORPORATION Notes To Consolidated Financial Statements -- Continued Foreign Currency Translation. Assets and liabilities of Duke Energy's international operations, where the local currency is the functional currency, have been translated at year-end exchange rates, and revenues and expenses have been translated using average exchange rates prevailing during the year. Adjustments resulting from translation are included in the Consolidated Statements of Common Stockholders' Equity and Comprehensive Income as Foreign Currency Translation Adjustments. The financial statements of international operations, where the U.S. dollar is the functional currency, reflect certain transactions denominated in the local currency that have been remeasured in U.S. dollars. The remeasurement of local currencies into U.S. dollars resulting from foreign currency gains and losses is included in consolidated net income. Income Taxes. Duke Energy and its subsidiaries file a consolidated federal income tax return. Deferred income taxes have been provided for temporary differences. Temporary differences occur when events and transactions recognized for financial reporting result in taxable or tax-deductible amounts in different periods. Investment tax credits have been deferred and are being amortized over the estimated useful lives of the related properties. Earnings Per Common Share. Basic earnings per share is based on a simple weighted average of common shares outstanding. Diluted earnings per share reflects the potential dilution that could occur if securities or other agreements to issue common stock, such as stock options, were exercised or converted into common stock. The numerator for the calculation of basic and diluted earnings per share is earnings available for common stockholders. Denominator for Earnings per Share
2000 1999 1998 ----- ----- ----- In millions Denominator for basic earnings per share (weighted- average shares outstanding)............................ 735.7 729.3 722.0 Assumed exercise of diluted stock options............... 3.7 1.6 2.4 ----- ----- ----- Denominator for diluted earnings per share.............. 739.4 730.9 724.4 ===== ===== =====
All common stock amounts have been adjusted to reflect the two-for-one common stock split effective January 26, 2001. See Note 15 to the Consolidated Financial Statements for additional information on the stock split. Extraordinary Items. In 1999, Duke Energy realized an extraordinary gain of $660 million after tax, or $0.91 per share, relating to the sale of certain pipeline companies. See Note 2 to the Consolidated Financial Statements for additional information on the extraordinary item. In January 1998, TEPPCO Partners, LP (TEPPCO), in which Duke Energy has a 21.1% ownership interest, redeemed certain First Mortgage Notes. A non-cash extraordinary loss of $8 million, net of income tax of $5 million, was recorded related to costs of the early retirement of debt. Earnings per common share for 1998 were reduced by $0.01 as a result of this charge. New Accounting Standard. In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," was issued. Duke Energy was required to adopt this standard by January 1, 2001. SFAS No. 133 requires that all derivatives be recognized as either assets or liabilities and measured at fair value, and changes in the fair value of derivatives are reported in current earnings, unless the derivative is designated and effective as a hedge. If the intended use of the derivative is to hedge the exposure to changes in the fair value of an asset, a liability or a firm commitment, then changes in the fair value of the derivative 55 DUKE ENERGY CORPORATION Notes To Consolidated Financial Statements -- Continued instrument will generally be offset in the income statement by changes in the hedged item's fair value. However, if the intended use of the derivative is to hedge the exposure to variability in expected future cash flows, then changes in the fair value of the derivative instrument will generally be reported in Other Comprehensive Income (OCI). The gains and losses on the derivative instrument that are reported in OCI will be reclassified to earnings in the periods in which earnings are impacted by the hedged item. Duke Energy has determined the effect of implementing SFAS No. 133 and recorded a net-of-tax cumulative-effect adjustment of $96 million as a reduction in earnings. The net-of-tax cumulative-effect adjustment reducing OCI and Common Stockholders' Equity is estimated to be $921 million on January 1, 2001. Currently, there are ongoing discussions surrounding the implementation and interpretation of SFAS No. 133 by the Financial Accounting Standards Board's Derivatives Implementation Group. Duke Energy implemented SFAS No. 133 based on current rules and guidance in place as of January 1, 2001. However, if the definition of derivative instruments is altered, this may impact Duke Energy's transition adjustment amounts and subsequent reported operating results. Reclassifications. Certain prior period amounts have been reclassified in the Consolidated Financial Statements to conform to the current presentation. 2. Business Acquisitions and Dispositions Business Acquisitions: For acquisitions accounted for using the purchase method, assets and liabilities have been consolidated as of the purchase date and earnings from the acquisitions have been included in consolidated earnings of Duke Energy subsequent to the purchase date. Assets acquired and liabilities assumed are recorded at their estimated fair values, and the excess of the purchase price over the estimated fair value of the net identifiable assets and liabilities acquired is recorded as goodwill. Purchase price allocations are subject to adjustment when additional information concerning asset and liability valuations becomes available within one year after the acquisition. Market Hub Partners (MHP). In September 2000, Duke Energy, through a wholly owned subsidiary, completed the approximately $400 million acquisition of MHP from subsidiaries of NiSource Inc. for approximately $250 million in cash and the assumption of $150 million in debt. MHP provides natural gas storage services in Louisiana and Texas with a current capacity of 23 billion cubic feet with significant expansion capabilities. Approximately $159 million of goodwill was recorded in the transaction and is being amortized on a straight- line basis over 35 years. In association with the acquisition of MHP, a tender offer was made for $115 million of the assumed debt as required by the debt agreements. As of December 31, 2000, approximately $88 million of this debt was retired. Phillips Petroleum's Gas Gathering, Processing and Marketing Unit (Phillips). In March 2000, Duke Energy, through a wholly owned subsidiary, completed the approximately $1.7 billion transaction that combined Field Services' and Phillips' gas gathering, processing and marketing business to form a new midstream company, named Duke Energy Field Services, LLC (DEFS). In connection with the combination, DEFS issued approximately $2.75 billion of commercial paper in April 2000. The proceeds were used to make one-time cash distributions of approximately $1.53 billion to Duke Energy and $1.22 billion to Phillips Petroleum. Duke Energy owns approximately 70% of DEFS and Phillips Petroleum owns approximately 30%. Goodwill of approximately $429 million was recorded in connection with the transaction and is being amortized on a straight-line basis over 20 years. East Tennessee Natural Gas Company. In March 2000, Duke Energy, through a wholly owned subsidiary, completed the approximately $390 million acquisition of East Tennessee Natural Gas Company from El Paso 56 DUKE ENERGY CORPORATION Notes To Consolidated Financial Statements -- Continued Energy. East Tennessee Natural Gas Company owns a 1,100-mile interstate natural gas pipeline system that crosses Duke Energy's Texas Eastern Transmission Corporation's (TETCO's) pipeline and serves the southeastern region of the U.S. Dominion Resources' Hydroelectric, Natural Gas and Diesel Power Generation Businesses. In August 1999, Duke Energy, through its wholly owned subsidiary Duke Energy International, LLC (DEI), reached a definitive agreement to acquire Dominion Resources Inc.'s 1,200-megawatt portfolio of hydroelectric, natural gas and diesel power generation businesses in Latin America (collectively, the "Dominion acquisitions") for approximately $405 million. The Dominion acquisitions were completed in April 2000, and total goodwill related to these purchases was $109 million and is being amortized on a straight-line basis over 40 years. Companhia de Geracao de Energia Eletrica Paranapanema (Paranapanema). In January 2000, Duke Energy, through its wholly owned subsidiary DEI, completed a series of transactions to purchase for approximately $1.03 billion an approximate 95% interest in Paranapanema, an electric generating company in Brazil. Goodwill of approximately $134 million was recorded in relation to this acquisition and is being amortized on a straight-line basis over 40 years. Union Pacific Resources' Gathering, Processing and Marketing Operations. In March 1999, Duke Energy through its wholly owned subsidiary, Duke Energy Field Services, Inc., completed the $1.35 billion acquisition of the natural gas gathering, processing, fractionation and NGL pipeline business from Union Pacific Resources (UPR), as well as UPR's NGL marketing activities. Goodwill of $135 million has been recorded and is being amortized on a straight-line basis over 15 to 20 years. Dispositions: BellSouth Carolina PCS (BellSouth PCS). In September 2000, Duke Energy, through its wholly owned subsidiary DukeNet Communications, LLC (DukeNet), sold its 20% interest in BellSouth PCS for approximately $400 million to BellSouth Corporation. Operating revenues includes the resulting pre-tax gain of $407 million, or an after-tax gain of $0.34 per basic share. Catawba River Associates, LLC (Catawba River). During 2000, Duke Energy formed Catawba River, and third-party, non-controlling, preferred interest holders invested $1,025 million. Catawba River is a limited liability company with separate existence and identity from its members, and the assets of Catawba River are separate and legally distinct from Duke Energy. The preferred interest receives a preferred return equal to an adjusted floating reference rate (approximately 7.847% at December 31, 2000). The results of operations, cash flows and financial position of Catawba River are consolidated with Duke Energy. The preferred interest and the expense attributable to this interest are included in Minority Interests and Minority Interest Expense, respectively, on the Consolidated Financial Statements. PEPL Companies and Trunkline LNG. In March 1999, wholly owned subsidiaries of Duke Energy sold Panhandle Eastern Pipe Line Company (PEPL), Trunkline Gas Company (Trunkline) and additional storage related to those systems, which substantially comprised the Midwest Pipelines, along with Trunkline LNG Company to CMS Energy Corporation (CMS). The sales price of $2.2 billion involved cash proceeds of $1.9 billion and CMS' assumption of existing PEPL debt of approximately $300 million. The sale resulted in an extraordinary gain of $660 million, net of income tax of $404 million, and an increase in earnings per basic share of $0.91. In 1999 and 1998, earnings before interest and taxes (EBIT) of $70 million and $156 million, respectively, relating to the Midwest Pipelines was included in Duke Energy's operating results. Under the terms of the sales agreement with CMS, Duke Energy retained certain assets and liabilities, which will not have a material adverse effect on consolidated results of operations, cash flows or financial position. The pro forma results of operations for acquisitions and dispositions do not materially differ from reported results. 57 DUKE ENERGY CORPORATION Notes To Consolidated Financial Statements -- Continued 3. Business Segments Duke Energy is an integrated energy and energy services provider with the ability to offer physical delivery and management of both electricity and natural gas throughout the U.S. and abroad. Duke Energy provides these and other services through seven business segments. Franchised Electric generates, transmits, distributes and sells electric energy in central and western North Carolina and the western portion of South Carolina. Its operations are conducted primarily through Duke Power and Nantahala Power and Light. These electric operations are subject to the rules and regulations of the FERC, the North Carolina Utilities Commission (NCUC) and the Public Service Commission of South Carolina (PSCSC). Natural Gas Transmission provides interstate transportation and storage of natural gas for customers primarily in the Mid-Atlantic, New England and southeastern states. Its operations are conducted primarily through Duke Energy Gas Transmission Corporation. The interstate natural gas transmission and storage operations are subject to the rules and regulations of the FERC. Field Services gathers, processes, transports, markets and stores natural gas and produces, transports, markets and stores NGLs. Its operations are conducted primarily through DEFS, a limited liability company that is approximately 30% owned by Phillips Petroleum. Field Services operates gathering systems in western Canada and 11 contiguous states that serve major natural gas-producing regions in the Rocky Mountain, Permian Basin, Mid- Continent, East Texas-Austin Chalk-North Louisiana, as well as onshore and offshore Gulf Coast areas. North American Wholesale Energy's (NAWE's) activities include asset development, operation and management, primarily through Duke Energy North America, LLC (DENA), and commodity sales and services related to natural gas and power, primarily through Duke Energy Trading and Marketing, LLC (DETM). DETM is a limited liability company that is approximately 40% owned by Exxon Mobil Corporation. NAWE also includes Duke Energy Merchants, which develops new business lines in the evolving energy commodity markets. NAWE conducts its business throughout the U.S. and Canada. The operations of the previously segregated Trading and Marketing segment were combined by management into NAWE during 2000. Previous periods have been restated to conform to current period presentation. International Energy conducts its operations through DEI. International Energy's activities include asset development, operation and management of natural gas and power facilities and energy trading and marketing of natural gas and electric power. This activity is targeted in the Latin American, Asia- Pacific and European regions. Other Energy Services is a combination of businesses that provide engineering, consulting, construction and integrated energy solutions worldwide, primarily through Duke Engineering & Services, Inc., Duke/Fluor Daniel (D/FD) and DukeSolutions, Inc. D/FD is a 50/50 partnership between Duke Energy and Fluor Enterprises, Inc. Duke Ventures is comprised of other diverse businesses, primarily operating through Crescent Resources, Inc. (Crescent), DukeNet and Duke Capital Partners (DCP). Crescent develops high-quality commercial, residential and multi-family real estate projects and manages land holdings primarily in the southeastern U.S. DukeNet provides fiber optic networks for industrial, commercial and residential customers. DCP, a newly formed, wholly owned merchant finance company, provides financing, investment banking and asset management services to wholesale and commercial energy markets. 58 DUKE ENERGY CORPORATION Notes To Consolidated Financial Statements -- Continued Duke Energy's reportable segments are strategic business units that offer different products and services and are each managed separately. The accounting policies for the segments are the same as those described in Note 1 to the Consolidated Financial Statements. Management evaluates segment performance based on EBIT after deducting minority interests. EBIT presented in the accompanying table includes intersegment sales accounted for at prices representative of unaffiliated party transactions. Segment assets are provided as additional information in the accompanying table and are net of intercompany advances, intercompany notes receivable and investments in subsidiaries. Other Operations primarily include certain unallocated corporate items. Business Segment Data
Depreciation Capital and Unaffiliated Intersegment Total and Investment Segment Revenues Revenues Revenues EBIT Amortization Expenditures Assets ------------ ------------ -------- ------ ------------ ------------ ------- In millions Year Ended December 31, 2000 Franchised Electric..... $ 4,946 $ -- $ 4,946 $1,704 $ 565 $ 661 $12,819 Natural Gas Transmission........... 998 133 1,131 534 131 973 4,995 Field Services.......... 7,601 1,459 9,060 296 240 376 6,266 North American Wholesale Energy................. 33,590 284 33,874 418 75 1,937 28,213 International Energy.... 1,060 7 1,067 331 97 980 4,551 Other Energy Services... 528 167 695 (61) 13 28 543 Duke Ventures........... 642 -- 642 563 17 643 1,967 Other Operations........ (47) 68 21 (2) 29 36 2,749 Eliminations and minority interests..... -- (2,118) (2,118) 231 -- -- (3,927) ------- -------- ------- ------ ------ ------ ------- Total consolidated..... $49,318 $ -- $49,318 $4,014 $1,167 $5,634 $58,176 ======= ======== ======= ====== ====== ====== ======= Year Ended December 31, 1999 Franchised Electric..... $ 4,700 $ -- $ 4,700 $ 856 $ 542 $ 759 $13,133 Natural Gas Transmission........... 1,124 106 1,230 627 126 261 3,897 Field Services.......... 2,883 707 3,590 144 131 1,630 3,565 North American Wholesale Energy................. 11,623 178 11,801 209 57 1,028 6,268 International Energy.... 323 34 357 42 58 1,779 4,459 Other Energy Services... 886 103 989 (94) 14 94 612 Duke Ventures........... 232 -- 232 162 13 382 1,031 Other Operations........ (5) 44 39 5 27 3 1,250 Eliminations and minority interests..... -- (1,172) (1,172) 92 -- -- (806) ------- -------- ------- ------ ------ ------ ------- Total consolidated..... $21,766 $ -- $21,766 $2,043 $ 968 $5,936 $33,409 ======= ======== ======= ====== ====== ====== ======= Year Ended December 31, 1998 Franchised Electric..... $ 4,626 $ -- $ 4,626 $1,513 $ 522 $ 586 $12,953 Natural Gas Transmission........... 1,440 102 1,542 702 215 290 4,996 Field Services.......... 2,132 545 2,677 76 80 304 1,893 North American Wholesale Energy................. 8,727 56 8,783 133 27 796 4,394 International Energy.... 125 34 159 12 15 239 900 Other Energy Services... 436 85 521 10 12 41 376 Duke Ventures........... 171 -- 171 122 10 232 818 Other Operations........ 5 26 31 22 28 12 874 Eliminations and minority interests..... -- (848) (848) 57 -- -- (398) ------- -------- ------- ------ ------ ------ ------- Total consolidated..... $17,662 $ -- $17,662 $2,647 $ 909 $2,500 $26,806 ======= ======== ======= ====== ====== ====== =======
59 DUKE ENERGY CORPORATION Notes To Consolidated Financial Statements -- Continued Geographic Data
Latin Other U.S. Canada America Foreign Consolidated ------- ------ ------- ------- ------------ In millions 2000 Consolidated revenues........... $43,282 $4,964 $ 512 $ 560 $49,318 Consolidated long-term assets... 31,074 900 2,823 1,222 36,019 1999 Consolidated revenues........... $19,336 $2,007 $ 171 $ 252 $21,766 Consolidated long-term assets... 22,995 250 2,708 901 26,854 1998 Consolidated revenues........... $16,589 $ 996 $ 31 $ 46 $17,662 Consolidated long-term assets... 20,982 140 207 632 21,961
4. Regulatory Matters Franchised Electric. The NCUC and the PSCSC approve rates for retail electric sales within their respective states. The FERC approves Franchised Electric's rates for electric sales to wholesale customers. Electric sales to the other joint owners of the Catawba Nuclear Station, which represent a majority of Franchised Electric's wholesale revenues, are set through contractual agreements. Fuel costs are reviewed semiannually in the wholesale jurisdiction and annually in the South Carolina retail jurisdiction, with provisions for reviewing such costs in base rates. In the North Carolina retail jurisdiction, a review of fuel costs in rates is required annually and during general rate case proceedings. All jurisdictions allow Duke Energy to adjust electric rates for past over- or under-recovery of fuel costs. Therefore, the difference between actual fuel costs incurred for electric operations and fuel costs recovered through rates is reflected in revenues. On December 20, 1999 and February 25, 2000, the FERC issued its Order 2000 and Order 2000-A regarding Regional Transmission Organizations (RTOs). In these orders, the FERC stressed the voluntary nature of RTO participation by utilities and set minimum characteristics and functions that must be met by utilities that participate in an RTO, including exclusive and independent authority to propose rates, terms and conditions of transmission service provided over the facilities it operates. The order provides for an open, flexible structure for RTOs to meet the needs of the market and provides for the possibility of incentive ratemaking and other benefits for utilities that participate in an RTO. As a result of these rulemakings, on October 16, 2000, Duke Energy and two other investor-owned utilities, Progress Energy and South Carolina Electric & Gas, filed with the FERC to establish GridSouth Transco, LLC (GridSouth), as an RTO. If approved, GridSouth will be a for-profit, independent transmission company, responsible for operating and planning the companies' combined transmission systems. The target date for formation of GridSouth is December 15, 2001. However, the actual date that GridSouth becomes operational will depend upon the resolution of all necessary regulatory approvals and resolving all technical issues. Management believes that the establishment of GridSouth will not have a material adverse effect on future consolidated results of operations, cash flows or financial position. Natural Gas Transmission. On February 9, 2000, the FERC issued Order 637, which sets forth revisions to its regulations governing short-term natural gas transportation services and policies governing the regulation of interstate natural gas pipelines. "Short-term" has been defined as all transactions of less than one year. 60 DUKE ENERGY CORPORATION Notes To Consolidated Financial Statements -- Continued Among the significant actions taken are the lifting of the price cap for short- term capacity release by pipeline customers for an experimental 2 1/2-year period ending September 1, 2002, and requiring that interstate pipelines file pro forma tariff sheets to (i) provide for nomination equality between capacity release and primary pipeline capacity; (ii) implement imbalance management services (for which interstate pipelines may charge fees) while at the same time reducing the use of operational flow orders and penalties; and (iii) provide segmentation rights if operationally feasible. Order 637 also narrows the right of first refusal to remove economic biases perceived in the current rule. Order 637 imposes significant new reporting requirements for interstate pipelines that were implemented by Duke Energy during the third quarter of 2000. Additionally, Order 637 permits pipelines to propose peak/off-peak rates and term-differentiated rates, and encourages pipelines to propose experimental capacity auctions. By Order 637-A, issued in February 2000, the FERC generally denied requests for rehearing and several parties, including Duke Energy, have filed appeals in the District of Columbia Court of Appeals seeking court review of various aspects of the Order. During the third quarter of 2000, Duke Energy's interstate pipelines made the required pro forma tariff sheet filings. These filings are currently subject to review and approval by the FERC. Management does not believe the effects of these matters will have a material effect on Duke Energy's future consolidated results of operations, cash flows or financial position. 5. Joint Ownership of Generating Facilities Joint Ownership of Catawba Nuclear Station
Ownership Owner Interest ----- --------- North Carolina Municipal Power Agency Number 1 (NCMPA)................... 37.5% North Carolina Electric Membership Corporation (NCEMC)................... 28.1% Duke Energy Corporation.................................................. 12.5% Piedmont Municipal Power Agency (PMPA)................................... 12.5% Saluda River Electric Cooperative, Inc. (Saluda River)................... 9.4% ------ 100.0% ======
As of December 31, 2000, $525 million of property, plant and equipment and $268 million of accumulated depreciation and amortization represented Duke Energy's investment in Catawba Nuclear Station Units 1 and 2. Duke Energy's share of operating costs is included in the Consolidated Statements of Income. Duke Energy entered into contractual interconnection agreements with the other joint owners of Catawba Nuclear Station to purchase declining percentages of the generating capacity and energy from the station, which expired during 2000. The portion of purchased capacity costs subject to levelization in rates was deferred. As of December 31, 2000 and 1999, $505 million and $643 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. Duke Energy is recovering the accumulated balance, including returns on the deferred balance, over a period expected to end in 2004. Jurisdictional levelizations are intended to recover total costs, including deferred returns, and are subject to adjustments, including final true-ups. For the years ended December 31, 2000, 1999 and 1998, purchased capacity and energy costs from the other joint owners were approximately $7 million, $62 million and $88 million, respectively. These amounts, after adjustments for amounts in current rates, are included in the Consolidated Statements of Income as Net Interchange and Purchased Power. 61 DUKE ENERGY CORPORATION Notes To Consolidated Financial Statements -- Continued The interconnection agreements also provide for supplemental power sales by Duke Energy to the other joint owners of Catawba Nuclear Station to satisfy their capacity and energy needs beyond the capacity and energy which they retain from the station or potentially acquire in the form of other resources. The agreements further provide the other joint owners the ability to secure such supplemental requirements outside of these contractual agreements following an appropriate notice period. NCEMC, Saluda River and NCMPA have given such appropriate notice effective January 1, 2001. PMPA will continue to receive supplemental power sales from Duke Energy through December 31, 2005. As the other joint owners retain more capacity and energy from the station, or obtain additional capacity and energy from a third party, supplemental power sales are expected to decline. Management believes this will not have a material adverse effect on consolidated results of operations, cash flows or financial position. 6. Income Taxes Income Tax Expense
For the Years Ended December 31, ------------------- 2000 1999 1998 ------ ----- ---- In millions Current income taxes Federal.............................................. $ 679 $ 525 $673 State................................................ 109 138 138 Foreign.............................................. 18 1 -- ------ ----- ---- Total current income taxes......................... 806 664 811 ------ ----- ---- Deferred income taxes, net Federal.............................................. 187 (126) (15) State................................................ 13 (65) (4) Foreign.............................................. 29 (1) -- ------ ----- ---- Total deferred income taxes, net................... 229 (192) (19) ------ ----- ---- Investment tax credit amortization..................... (15) (19) (15) ------ ----- ---- Total income tax expense............................... $1,020 $ 453 $777 ====== ===== ==== Income Tax Expense Reconciliation to Statutory Rate For the Years Ended December 31, ------------------- 2000 1999 1998 ------ ----- ---- In millions Income tax, computed at the statutory rate of 35%...... $ 979 $ 455 $713 Adjustments resulting from: State income tax, net of federal income tax effect... 75 47 90 Favorable resolution of federal tax issues........... (18) (30) -- Other items, net..................................... (16) (19) (26) ------ ----- ---- Total income tax expense........................... $1,020 $ 453 $777 ------ ----- ---- Effective tax rate..................................... 36.5% 34.9% 38.1% ====== ===== ====
62 DUKE ENERGY CORPORATION Notes To Consolidated Financial Statements -- Continued Net Deferred Income Tax Liability Components
December 31, ---------------- 2000 1999 ------- ------- In millions Deferred credits and other liabilities.................... $ 429 $ 500 International property, plant, & equipment................ 153 -- Other..................................................... 10 8 ------- ------- Total deferred income tax assets........................ 592 508 Valuation allowance....................................... (9) (6) ------- ------- Net deferred income tax assets.......................... 583 502 ------- ------- Investments and other assets.............................. (320) (245) Property, plant and equipment............................. (2,707) (2,483) Regulatory assets and deferred debits..................... (326) (427) Regulatory asset related to restating to pre-tax basis.... (429) (432) ------- ------- Total deferred income tax liability..................... (3,782) (3,587) ------- ------- State deferred income tax, net of federal tax effect...... (320) (340) ------- ------- Total net deferred income tax liability................. $(3,519) $(3,425) ======= =======
7. Risk Management and Financial Instruments Commodity Derivatives -- Trading. Duke Energy provides risk management services to its customers through forward contracts, futures, over-the-counter swap agreements and options (collectively, "commodity derivatives"). Duke Energy engages in the trading of commodity derivatives, and therefore experiences net open positions, which are managed with strict policies that limit its exposure to market risk and require daily reporting to management of potential financial exposure. These policies include statistical risk tolerance limits using historical price movements to calculate a daily earnings at risk measurement. The weighted-average life of Duke Energy's commodity trading portfolio was approximately 25 months at December 31, 2000. Net Gains Recognized from Trading Activities
2000 1999 1998 ---- ---- ---- In millions Natural gas................................................... $212 $83 $114 Electricity................................................... 368 41 14 Other(a)...................................................... 46 -- --
-------- (a) Other includes refined products, fertilizer, crude oil and other miscellaneous commodities. Absolute Notional Contract Quantity of Commodity Derivatives Held for Trading Purposes
December 31, --------------- 2000 1999 ------- ------- Natural gas, in billion cubic feet........................... 39,716 17,248 Electricity, in gigawatt hours............................... 289,109 185,536 Fertilizer contracts, in thousands of tonnes................. 141,619 -- Refined products, in thousands of barrels.................... 451,133 --
63 DUKE ENERGY CORPORATION Notes To Consolidated Financial Statements -- Continued Fair Values of Commodity Derivatives -- Trading
2000 1999 -------------------- ------------------- Assets Liabilities Assets Liabilities ------- ----------- ------ ----------- In millions Fair values at December 31, Natural gas...................... $45,423 $45,104 $2,966 $2,855 Electricity...................... 9,436 9,254 1,302 1,271 Fertilizer contracts............. 5,886 5,850 -- -- Refined products................. 1,192 1,159 -- -- Other(a)......................... 303 268 -- -- Eliminations..................... (46,984) (46,984) (2,447) (2,447) ------- ------- ------ ------ Total fair values.............. $15,256 $14,651 $1,821 $1,679 ======= ======= ====== ====== Average fair values for the year Natural gas...................... 20,150 19,801 2,401 2,269 Electricity...................... 6,650 6,558 962 900 Fertilizer contracts............. 3,002 2,974 -- -- Refined products................. 1,345 1,309 -- -- Other(a)......................... 437 427 -- --
-------- (a) Other includes crude oil and other miscellaneous commodities. Commodity Derivatives -- Non-Trading. Duke Energy also manages its exposure to risk from existing assets, liabilities and commitments by hedging the impact of market fluctuations. At December 31, 2000 and 1999, Duke Energy held or issued several commodity derivatives, primarily in the form of swaps, that reduce exposure to market price fluctuations for certain power and NGL production facilities. At December 31, 2000, these commodity derivatives extended for periods up to 10 years and generally contain margin requirements. The gains, losses and costs related to non-trading commodity derivatives are not recognized until the underlying physical transaction closes. At December 31, 2000 and 1999, Duke Energy had unrealized net losses of $1,642 million and $120 million, respectively, related to non-trading commodity derivatives. These unrealized losses partially offset the unrealized market value gains related to future cash flows from underlying asset positions. Absolute Notional Contract Quantity of Commodity Derivatives Held for Non- Trading Purposes
December 31, ------------- 2000 1999 ------ ------ Natural gas, in billion cubic feet............................. 401 592 Electricity, in gigawatt hours................................. 75,932 45,877 Power capacity, in megawatt months............................. 35,325 25,950 Crude oil, in thousands of barrels............................. 43,991 32,764
Interest Rate Derivatives. Duke Energy periodically enters into financial derivative instruments including, but not limited to, swaps, options and interest rate locks to manage and mitigate interest rate risk related to existing and anticipated borrowings. The notional amounts shown in the following table serve solely as a basis for the calculation of payment streams to be exchanged. These notional amounts are not a measure of Duke Energy's exposure through its use of derivatives. Fair values shown in the following table represent estimated amounts that Duke Energy would have received (paid) if the swaps had been settled at current market rates on the respective dates. 64 DUKE ENERGY CORPORATION Notes To Consolidated Financial Statements -- Continued Interest Rate Derivatives
December 31, ------------------------------------------------- 2000 1999 ------------------------ ------------------------ Notional Fair Contracts Notional Fair Contracts Amounts Value Expire Amounts Value Expire -------- ----- --------- -------- ----- --------- Dollars in millions Fixed-to-floating rate swaps................... $275 $27 2009 $100 $ 1 2000 Cancelable fixed-to- floating rate swaps..... 630 20 2004-2022 -- -- -- CP(a) floating-to-fixed rate swaps.............. 100 (1) 2001 500 1 2000 Interest rate locks...... 275 (9) 2011 -- -- --
-------- (a) Commercial paper. Gains and losses that have been deferred in anticipation of planned financing transactions on interest rate swap derivatives have been capitalized and are being amortized over the life of the underlying debt. These deferred gains and losses were not material in 2000 or 1999. As a result of the interest rate swap contracts, interest expense for the relative notional amount is recognized at the weighted-average rates as depicted in the following table. Weighted-Average Rates for Interest Rate Swaps
For the Years Ended December 31, ---------------------- 2000 1999 1998 ------ ------ ------ Fixed-to-floating rate swaps......................... 6.50% 5.71% 6.04% Cancelable fixed-to-floating rate swaps.............. 5.09% -- -- Commercial paper swaps............................... 6.11% 4.95% --
Foreign Currency Derivatives. NAWE enters into foreign currency swap agreements to manage foreign currency risks associated with energy contracts denominated in foreign currencies, primarily in the Canadian dollar. As of December 31, 2000, the agreements had a notional contract amount of approximately $1,396 million, beginning in the year 2001 and extending through the year 2005, and had a weighted-average fixed exchange rate of 1.4672 Canadian dollars to one U.S. dollar. As of December 31, 1999, the agreements had a notional contract amount of approximately $762 million, beginning in the year 2000 and extending to the year 2005, and had a weighted-average fixed exchange rate of 1.470 Canadian dollars to one U.S. dollar. The fair value of foreign currency swap agreements was not material at December 31, 2000 or 1999. Market and Credit Risk. Duke Energy's principal markets for power and natural gas marketing services are industrial end-users and utilities located throughout the U.S., Canada, Asia Pacific and Latin America. Duke Energy has concentrations of receivables from natural gas and electric utilities and their affiliates, as well as industrial customers throughout these regions. These concentrations of customers may affect Duke Energy's overall credit risk in that certain customers may be similarly affected by changes in economic, regulatory or other factors. On all transactions where Duke Energy is exposed to credit risk, Duke Energy analyzes the counterparties' financial condition prior to entering into an agreement, establishes credit limits and monitors the appropriateness of these limits on an ongoing basis. As of December 31, 2000, Duke Energy had approximately $400 million in receivables related to energy sales in California. Duke Energy quantified its exposures with regard to those receivables and recorded a provision of $110 million. See Note 14 to the Consolidated Financial Statements for further information regarding credit exposure. 65 DUKE ENERGY CORPORATION Notes To Consolidated Financial Statements -- Continued The change in market value of New York Mercantile Exchange-traded futures and options contracts requires daily cash settlement in margin accounts with brokers. Physical forward contracts and financial derivatives are generally settled at the expiration of the contract term or each delivery period; however, these transactions are also generally subject to margin agreements with the majority of Duke Energy's counterparties. Financial Instruments. The fair value of financial instruments is summarized in the following table. Judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates determined as of December 31, 2000 and 1999, are not necessarily indicative of the amounts Duke Energy could have realized in current markets. The majority of the estimated fair value amounts were obtained from independent parties. Financial Instruments
2000 1999 ------------------- ------------------ Book Approximate Book Approximate Value Fair Value Value Fair Value ------- ----------- ------ ----------- In millions Long-term debt(a)................... $11,456 $12,198 $9,165 $8,891 Guaranteed preferred beneficial interests in subordinated notes of Duke Energy or subsidiaries........ 1,406 1,389 1,404 1,207 Preferred stock(a).................. 280 275 313 303
-------- (a) Includes current maturities. The fair value of cash and cash equivalents, notes receivable, notes payable and commercial paper are not materially different from their carrying amounts because of the short-term nature of these instruments or because the stated rates approximate market rates. Guarantees made on behalf of affiliates or recourse provisions from affiliates have no book value associated with them, and there are no fair values readily determinable since quoted market prices are not available. 8. Investment in Affiliates Investments in domestic and international affiliates that are not controlled by Duke Energy but where Duke Energy has significant influence over operations are accounted for by the equity method. These investments include undistributed earnings of $70 million and $6 million in 2000 and 1999, respectively. Duke Energy's share of net income from these affiliates is reflected in the Consolidated Statements of Income as Other Operating Revenues. Natural Gas Transmission. Investments primarily include ownership interests in natural gas pipeline joint ventures which transport natural gas to the U.S. from Canada. Investments include a 37.5% ownership interest in Maritimes & Northeast Pipeline, LLC. Field Services. Investments primarily include a 37% interest in a partnership which owns natural gas gathering systems in the Gulf of Mexico (Dauphin Island Gathering Partners) and a 21.1% ownership interest in TEPPCO. North American Wholesale Energy. Significant investments include a 50% indirect interest in VMC Generating Company, a merchant electric generating company, a 32.5% indirect interest in American Ref-Fuel, LLC and a 50% interest in Southwest Power Partners. 66 DUKE ENERGY CORPORATION Notes To Consolidated Financial Statements -- Continued International Energy. International Energy has investments in various natural gas and electric generation and transmission facilities in its targeted geographic areas. Significant investments include a 25% indirect interest in National Methanol Company, which owns and operates a methanol and MTBE (methyl tertiary butyl ether) business in Jubail, Saudi Arabia. Other Energy Services. Investments include the participation in various construction and support activities for fossil-fueled generating plants. Duke Ventures. Significant investments include various real estate development projects and a 20% interest in the BellSouth PCS joint venture until its sale in 2000. Investment in Affiliates
December 31, 2000 December 31, 1999 December 31, 1998 ----------------------------- ----------------------------- ---------------------------- Domestic International Total Domestic International Total Domestic International Total -------- ------------- ------ -------- ------------- ------ -------- ------------- ----- In millions Natural Gas Transmission........... $ 82 $ 88 $ 170 $ 67 $ 83 $ 150 $104 $ 37 $141 Field Services.......... 373 -- 373 439 -- 439 303 -- 303 North American Wholesale Energy................. 635 9 644 425 -- 425 171 -- 171 International Energy.... -- 154 154 -- 224 224 -- 223 223 Other Energy Services... 11 7 18 51 6 57 19 23 42 Duke Ventures........... 23 -- 23 10 -- 10 24 -- 24 Other Operations........ (12) -- (12) (6) -- (6) (2) -- (2) ------ ---- ------ ---- ---- ------ ---- ---- ---- Total.................. $1,112 $258 $1,370 $986 $313 $1,299 $619 $283 $902 ====== ==== ====== ==== ==== ====== ==== ==== ====
Equity in Earnings of Investment
For the years ended: ---------------------------------------------------------------------------------------- December 31, 2000 December 31, 1999 December 31, 1998 ---------------------------- ---------------------------- ---------------------------- Domestic International Total Domestic International Total Domestic International Total -------- ------------- ----- -------- ------------- ----- -------- ------------- ----- In millions Natural Gas Transmission........... $ 13 $ 4 $ 17 $ 16 $ 9 $ 25 $ 14 $ 3 $ 17 Field Services.......... 39 -- 39 44 -- 44 9 -- 9 North American Wholesale Energy................. 36 -- 36 47 -- 47 50 -- 50 International Energy.... -- 43 43 -- 10 10 -- 18 18 Other Energy Services... (13) -- (13) 10 3 13 1 13 14 Duke Ventures........... (9) -- (9) (22) -- (22) (29) -- (29) Other Operations........ (10) -- (10) (5) -- (5) -- -- -- ---- ---- ---- ---- ---- ---- ---- ---- ---- Total.................. $ 56 $ 47 $103 $ 90 $ 22 $112 $ 45 $ 34 $ 79 ==== ==== ==== ==== ==== ==== ==== ==== ====
67 DUKE ENERGY CORPORATION Notes To Consolidated Financial Statements -- Continued Summarized Combined Financial Information of Unconsolidated Affiliates
December 31, -------------------- 2000 1999 1998 ------ ------ ------ In millions Balance Sheet Current assets....................................... $1,242 $1,544 $ 848 Noncurrent assets.................................... 6,588 7,826 7,340 Current liabilities.................................. 888 1,155 1,084 Noncurrent liabilities............................... 4,404 4,727 3,884 ------ ------ ------ Net assets........................................... $2,538 $3,488 $3,220 ====== ====== ====== Income Statement Operating revenues................................... $4,617 $3,510 $1,667 Operating expenses................................... 4,039 3,104 1,166 Net income........................................... 440 193 263
Duke Energy had outstanding notes receivable from certain affiliates of $70 million and $72 million at December 31, 2000 and 1999, respectively. 9. Net Property, Plant and Equipment
December 31, ----------------- 2000 1999 -------- ------- In millions Land...................................................... $ 36 $ 25 Plant: Electric generation and transmission.................... 11,734 11,717 Natural gas transmission................................ 11,281 10,290 Gathering and processing facilities..................... 4,434 2,466 Other buildings and improvements........................ 1,339 1,310 Leasehold improvements.................................. 14 8 Nuclear fuel.............................................. 761 741 Equipment................................................. 92 83 Vehicles.................................................. 36 37 Construction in process................................... 2,209 1,220 Other..................................................... 2,679 2,539 -------- ------- Total property, plant and equipment................... 34,615 30,436 Total accumulated depreciation(a)..................... (10,146) (9,441) -------- ------- Total net property, plant and equipment............... $ 24,469 $20,995 ======== =======
-------- (a) Includes amortization of nuclear fuel: 2000--$503 million; 1999--$444 million. Capitalized interest of $67 million, $52 million and $28 million is included in the Consolidated Statements of Income for the years ended December 31, 2000, 1999 and 1998, respectively. 68 DUKE ENERGY CORPORATION Notes To Consolidated Financial Statements -- Continued 10. Debt and Credit Facilities Long-term Debt
December 31, ------------- Year Due 2000 1999 ---------- ------ ------ In millions Duke Energy First and refunding mortgage bonds:(a) 5.875%--6.375%...................................... 2001--2008 $ 625 $ 625 6.750%--8.30%....................................... 2023--2025 661 661 7.0%--8.950%........................................ 2027--2033 165 165 Pollution control debt, 3.850%--5.80%................. 2012--2017 172 172 Notes: 5.375%--9.210%...................................... 2009--2016 811 264 6.0%--6.60%......................................... 2028--2038 500 500 Commercial paper, 6.510% and 5.840% weighted-average rate at December 31, 2000 and 1999, respectively(b).. 1,256 1,184 Other debt............................................ 18 21 Notes matured during 2000............................. -- 200 Duke Capital Corporation Senior notes: 6.250%--7.50%....................................... 2004--2009 1,400 1,250 6.750%--8.50%....................................... 2018--2019 650 650 Commercial paper, 6.660% and 5.910% weighted-average rate at December 31, 2000 and 1999, respectively(b).................................... 1,378 535 Note payable to affiliate 6.140% and 5.030% weighted- average rate at December 31, 2000 and 1999, respectively......................................... 141 86 PanEnergy Corp Bonds: 7.750%.............................................. 2022 328 328 8.625% Debentures................................... 2025 100 100 Notes: 7.0%--9.90%, maturing serially...................... 2003--2006 384 395 TETCO Notes: 7.30%--10.375% 2001--2010 600 500 Medium-term, Series A, 7.640%--9.070%............... 2001--2012 51 51 Algonquin Gas Transmission Company 9.130% Notes.......................................... 2003 100 100 DEFS Notes, 7.50%--8.125%.................................. 2005--2030 1,700 -- Commercial paper, 7.390% weighted-average rate at December 31, 2000.................................... 346 -- DENA Bonds, 7.50%--10.0%................................... 2010--2030 302 -- Capital leases........................................ 2009--2028 272 207 Notes matured during 2000............................. -- 380
69 DUKE ENERGY CORPORATION Notes To Consolidated Financial Statements -- Continued
December 31, --------------- Year Due 2000 1999 ---------- ------- ------ In millions DEI Medium-term note, 7.250%.......................... 2004 139 162 Notes: 4.50%--18.0%.................................... 2001--2024 222 107 7.90%........................................... 2004--2013 138 161 6.0%--10.0%(c).................................. 2013--2017 477 485 Credit facilities, 6.130% and 6.010% weighted- average rate at December 31, 2000 and 1999, respectively..................................... 44 80 Commercial paper, 6.40% and 5.510% weighted- average at December 31, 2000 and 1999, respectively..................................... 223 49 Crescent(d) Construction and mortgage loans, 6.30%--9.50%..... 2001--2010 67 46 Other debt of subsidiaries........................ 103 34 Unamortized debt discount and premium, net........ (91) (66) ------- ------ Total long-term debt.............................. 13,282 9,432 Current maturities of long-term debt.............. (437) (482) Short-term notes payable and commercial paper..... (1,826) (267) ------- ------ Total long-term portion........................... $11,019 $8,683 ======= ======
- -------- (a) Substantially all of Franchised Electric's plant was mortgaged. (b) Extendible commercial notes are included in the 2000 amounts. (c) Paranapanema (Brazil) debt, principal is indexed annually to inflation. (d) Substantial amounts of Crescent's real estate development projects, land and buildings were pledged as collateral. The weighted-average interest rate on outstanding short-term notes payable and commercial paper at December 31, 2000 and 1999, was 6.80% and 5.720%, respectively. Annual Maturities
In millions ----------- 2001............................................................. $ 437 2002............................................................. 263 2003............................................................. 475 2004............................................................. 956 2005............................................................. 922 Thereafter....................................................... 8,403 ------- Total long-term debt............................................. $11,456 =======
Included in the annual maturities after 2005 is $1,536 million of long-term debt that has call options whereby Duke Energy has the option to repay the debt early. Based on the years in which Duke Energy may first exercise its redemption options, $95 million could potentially be repaid in 2001, $1,114 million in 2002, $227 million in 2003 and $100 million in 2005. 70 DUKE ENERGY CORPORATION Notes To Consolidated Financial Statements -- Continued Credit Facilities
December 31, 2000 December 31, 1999 ---------------------- ---------------------- Credit Credit Facilities Outstanding Facilities Outstanding ---------- ----------- ---------- ----------- In millions 364-day facilities(a)........ $1,796 $ -- $ 823 $ 10 Three-year revolving facilities.................. 84 44 565 450 Four-year revolving facilities.................. 125 -- 125 -- Five-year revolving facilities(a)............... 2,200 -- 2,200 -- ------ ----- ------ ---- Total consolidated......... $4,205 $ 44 $3,713 $460 ====== ===== ====== ====
-------- (a) Supported commercial paper facilities. 11. Nuclear Decommissioning Costs Nuclear Decommissioning Costs. Estimated site-specific nuclear decommissioning costs, including the cost of decommissioning plant components not subject to radioactive contamination, total approximately $1.9 billion stated in 1999 dollars based on decommissioning studies completed in 1999. This amount includes Duke Energy's 12.5% ownership in the Catawba Nuclear Station. The other joint owners of Catawba Nuclear Station are responsible for decommissioning costs related to their ownership interests in the station. Both the NCUC and the PSCSC have granted Duke Energy recovery of estimated decommissioning costs through retail rates over the expected remaining service periods of Duke Energy's nuclear stations. The operating licenses for Duke Energy's nuclear units are subject to extension. On May 23, 2000, Duke Energy was granted a license renewal for Oconee. The current operating licenses for Duke Energy's nuclear units are as follows: Operating Licenses for Nuclear Units
Unit Year ---- ---- McGuire 1............................................................. 2021 McGuire 2............................................................. 2023 Catawba 1............................................................. 2024 Catawba 2............................................................. 2026 Oconee 1 and 2........................................................ 2033 Oconee 3.............................................................. 2034
During 2000 and 1999, Duke Energy expensed approximately $57 million, which was contributed to the external funds for decommissioning costs, and accrued an additional $8 million to the internal reserve. Nuclear units are depreciated at an annual rate of 4.7%, of which 1.61% is for decommissioning. The balance of the external funds as of December 31, 2000 and 1999, was $717 million and $703 million, respectively. The balance of the internal reserve as of December 31, 2000 and 1999, was $231 million and $223 million, respectively, and is reflected in the Consolidated Balance Sheets as Accumulated Depreciation and Amortization. Management believes that the decommissioning costs being recovered through rates, when coupled with expected fund earnings, are currently sufficient to provide for the cost of decommissioning. A provision in the Energy Policy Act of 1992 established a fund for the decontamination and decommissioning of the Department of Energy's (DOE) uranium enrichment plants (the D&D Fund). Licensees are subject to an annual assessment for 15 years based on their pro rata share of past enrichment services. On June 12, 1998, Duke Energy and 21 other utilities filed a lawsuit challenging the constitutionality of the D&D Fund and seeking an injunction that prohibits the government from collecting the assessment and a refund of all 71 DUKE ENERGY CORPORATION Notes To Consolidated Financial Statements -- Continued assessments paid. The annual assessment is recorded in the Consolidated Statements of Income as Fuel Used in Electric Generation. Duke Energy paid $10 million during 2000 and has paid $85 million cumulatively related to its ownership interests in nuclear plants. The remaining liability and regulatory assets of $62 million and $70 million at December 31, 2000 and 1999, respectively, are reflected in the Consolidated Balance Sheets as Deferred Credits and Other Liabilities, and Regulatory Assets and Deferred Debits, respectively. Spent Nuclear Fuel. Under provisions of the Nuclear Waste Policy Act of 1982, Duke Energy has entered into contracts with the DOE for the disposal of spent nuclear fuel. The DOE failed to begin accepting the spent nuclear fuel on January 31, 1998, the date provided by the Nuclear Waste Policy Act and by Duke Energy's contract with the DOE. On June 8, 1998, Duke Energy filed with the U.S. Court of Federal Claims a claim against the DOE for damages in excess of $1 billion arising out of the DOE's failure to begin accepting commercial spent nuclear fuel by January 31, 1998. Damages claimed in the suit are intended to recover costs that Duke Energy is incurring and will continue to incur as a result of the DOE's partial material breach of its contract with Duke Energy, including costs associated with securing additional spent fuel storage capacity. Duke Energy will continue to safely manage its spent nuclear fuel until the DOE accepts it. Payments made to the DOE for disposal costs are based on nuclear output and are included in the Consolidated Statements of Income as Fuel Used in Electric Generation. 12. Guaranteed Preferred Beneficial Interests in Subordinated Notes of Duke Energy or Subsidiaries Duke Energy and certain subsidiaries have each formed business trusts for which they own all the respective common securities. The trusts issue and sell preferred securities and invest the gross proceeds in junior subordinated notes issued by the respective parent companies. Trust Preferred Securities
December 31, -------------- Issued Rate Due 2000 1999 ------ ------ ---- ------ ------ In millions 1997............................................ 7.20% 2037 $ 350 $ 350 1998............................................ 7.375% 2038 350 350 1998............................................ 7.375% 2038 250 250 1999............................................ 8.375% 2029 250 250 1999............................................ 7.20% 2039 250 250 Unamortized debt discount....................... (44) (46) ------ ------ $1,406 $1,404 ====== ======
These trust preferred securities represent preferred undivided beneficial interests in the assets of the respective trusts. Payment of distributions on these preferred securities is guaranteed by the respective parent company, but only to the extent the trusts have funds legally and immediately available to make such distributions. Dividends of $108 million, $87 million and $44 million related to the trust preferred securities have been included in the Consolidated Statements of Income as Minority Interest Expense for the years ended December 31, 2000, 1999 and 1998, respectively. 72 DUKE ENERGY CORPORATION Notes To Consolidated Financial Statements -- Continued 13. Preferred and Preference Stock Authorized Shares of Stock as of December 31, 2000 and 1999
Par Value Shares --------- ----------- In millions Preferred Stock........................................ $100 12.5 Preferred Stock A...................................... $ 25 10.0 Preference Stock....................................... $100 1.5
As of December 31, 2000 and 1999, there were no shares of preference stock outstanding. Preferred Stock with Sinking Fund Requirements
Shares Outstanding December 31, Year At December 31, --------------------- Rate/Series Issued 2000 2000 1999 ----------- ------ --------------- ---- ---------- Dollars in millions 6.20% D (Preferred Stock A)..... 1992 800,000 $ 20 $ 20 6.30% U......................... 1992 130,000 13 13 6.40% V......................... 1992 130,000 13 13 6.75% X......................... 1993 250,000 25 25 6.10% C (Preferred Stock A)(a).. 1992 -- -- 20 6.20% T(a)...................... 1992 -- -- 13 --------- ---------- Total........................... $ 71 $ 104 ========= ==========
- -------- (a) Preferred stock series C and T redeemed in September and December, 2000, respectively. The annual sinking fund requirements for 2001 through 2005 are $33 million, $13 million, $2 million, $2 million and $2 million, respectively. Some additional redemptions are permitted at Duke Energy's option. Preferred Stock without Sinking Fund Requirements
Shares Outstanding December 31, Year At December 31, ------------- Rate/Series Issued 2000 2000 1999 ----------- ------ --------------- ------ ------ Dollars in millions 4.50% C.................... 1964 175,000 $ 18 $ 18 7.85% S.................... 1992 300,000 30 30 7.00% W.................... 1993 249,989 25 25 7.04% Y.................... 1993 299,995 30 30 6.375% (Preferred Stock A)........................ 1993 1,257,185 31 31 Auction Series A........... 1990 750,000 75 75 ------ ------ Total...................... $ 209 $ 209 ====== ======
The call provisions for the outstanding preferred stock specify various redemption prices not exceeding 104% of par value, plus accumulated dividends to the redemption date. 14. Commitments and Contingencies Nuclear Insurance. Duke Energy owns and operates the McGuire and Oconee Nuclear Stations with two and three nuclear reactors, respectively, and operates and has a partial ownership interest in the Catawba 73 DUKE ENERGY CORPORATION Notes To Consolidated Financial Statements -- Continued Nuclear Station with two nuclear reactors. Nuclear insurance coverage is maintained in three program areas: liability coverage; property, decontamination and decommissioning coverage; and business interruption and/or extra expense coverage. Certain expenses associated with nuclear insurance premiums paid by Duke Energy are reimbursed by the other joint owners of the Catawba Nuclear Station. Pursuant to the Price-Anderson Act, Duke Energy is required to insure against public liability claims resulting from nuclear incidents to the full limit of liability of approximately $9.5 billion. Primary Liability Insurance. The maximum required private primary liability insurance of $200 million has been purchased along with a like amount to cover certain worker tort claims. Excess Liability Insurance. This policy currently provides approximately $9.3 billion of coverage through the Price-Anderson Act's mandatory industry- wide excess secondary insurance program of risk pooling. The $9.3 billion of coverage is the sum of the current potential cumulative retrospective premium assessments of $88 million per licensed commercial nuclear reactor. This $9.3 billion will be increased by $88 million as each additional commercial nuclear reactor is licensed, or reduced by $88 million for certain nuclear reactors that are no longer operational and may be exempted from the risk pooling insurance program. Under this program, licensees could be assessed retrospective premiums to compensate for damages in the event of a nuclear incident at any licensed facility in the nation. If such an incident occurs and public liability damages exceed primary insurances, licensees may be assessed up to $88 million for each of their licensed reactors, payable at a rate not to exceed $10 million a year per licensed reactor for each incident. The $88 million amount is subject to indexing for inflation and may be subject to state premium taxes. Duke Energy is a member of Nuclear Electric Insurance Limited (NEIL), which provides property and business interruption insurance coverage for Duke Energy's nuclear facilities under the following three policy programs: Primary Property Insurance. This policy provides $500 million in primary property damage coverage for each of Duke Energy's nuclear facilities. Excess Property Insurance. This policy provides excess property, decontamination and decommissioning liability insurance in the following amounts: $2.25 billion for the Catawba Nuclear Station and $1.5 billion each for the Oconee and McGuire Nuclear Stations. Business Interruption Insurance. This policy provides business interruption and/or extra expense coverage resulting from an accidental outage of a nuclear unit. Each unit of the McGuire and Catawba Nuclear Stations is insured for up to approximately $4 million per week and the Oconee Nuclear Station units are insured for up to approximately $3 million per week. Coverage amounts per unit decline if more than one unit is involved in an accidental outage. Initial coverage begins after a 12-week deductible period and continues at 100% for 52 weeks and 80% for the next 110 weeks. If NEIL's losses ever exceed its reserves for any of the above three programs, Duke Energy will be liable for assessments of up to five times its annual premiums. The current potential maximum assessments are as follows: Primary Property Insurance -- $18 million; Excess Property Insurance -- $18 million; Business Interruption Insurance -- $15 million. The other joint owners of the Catawba Nuclear Station are obligated to assume their pro rata share of any liabilities for retrospective premiums and other premium assessments resulting from the Price-Anderson Act's excess secondary insurance program of risk pooling or the NEIL policies. Environmental. Duke Energy is subject to international, federal, state and local regulations regarding air and water quality, hazardous and solid waste disposal and other environmental matters. 74 DUKE ENERGY CORPORATION Notes To Consolidated Financial Statements -- Continued Manufactured Gas Plants and Superfund Sites. Duke Energy was an operator of manufactured gas plants until the early 1950s and has entered into a cooperative effort with the State of North Carolina and other owners of certain former manufactured gas plant sites to investigate and, where necessary, remediate these contaminated sites. Duke Energy is considered by regulators to be a potentially responsible party and may be subject to future liability at eight federal Superfund sites and three state Superfund sites. While the cost of remediation of these sites may be substantial, Duke Energy will share in any liability associated with remediation of contamination at such sites with other potentially responsible parties. Management believes that resolution of these matters will not have a material adverse effect on consolidated results of operations, cash flows or financial position. PCB (Polychlorinated Biphenyl) Assessment and Cleanup Programs. In June 1999, the Environmental Protection Agency (EPA) certified that TETCO, a wholly owned subsidiary of Duke Energy, had completed cleanup of PCB-contaminated sites under conditions stipulated by a U.S. Consent Decree in 1989. TETCO was required to continue groundwater monitoring on a number of sites for two years. This required monitoring was completed as of the end of 2000, pending EPA concurrence. TETCO will be evaluating and discussing with the EPA, appropriate state authorities or both the need for additional remediation or monitoring. Under terms of the sales agreement with CMS discussed in Note 2 to the Consolidated Financial Statements, Duke Energy is obligated to complete cleanup of previously identified contamination resulting from the past use of PCB- containing lubricants and other discontinued practices at certain sites on the PEPL and Trunkline systems. Based on Duke Energy's experience to date and costs incurred for cleanup operations, management believes the resolution of matters relating to the environmental issues discussed above will not have a material adverse effect on consolidated results of operations, cash flows or financial position. Air Quality Control. In October 1998, the EPA issued a final rule on regional ozone control that required 22 eastern states and the District of Columbia to revise their State Implementation Plans (SIPs) to significantly reduce emissions of nitrogen oxide by May 1, 2003. The EPA's rule was challenged in court by various states, industry and other interests, including the states of North Carolina and South Carolina, and Duke Energy. In March 2000, the court upheld most aspects of the EPA's rule. The same court subsequently issued a decision that extended the compliance deadline for implementation of emission reductions to May 31, 2004. In January 2000, the EPA finalized another ozone-related rule under Section 126 of the Clean Air Act (CAA) that has virtually identical emission control requirements as its October 1998 action, but with a May 1, 2003 compliance date. The EPA's 2000 rule has been challenged in court. The court is expected to issue its decision during the spring of 2001. In response to the EPA's October 1998 rule, both North Carolina and South Carolina are in the process of finalizing the SIP revisions to implement the EPA rule's emission reduction requirements. Additionally, North Carolina has adopted a separate rule that caps nitrogen oxide emissions from coal-fired power plants in the event the EPA's SIP rule is eventually overturned. Depending on the resolution of these and related matters, management anticipates that costs to Duke Energy may range from $500 million to $900 million in capital costs for additional emission controls over an estimated time period which continues through 2007. Emission control retrofits of this type are large technical, design and construction projects. These projects will be managed closely to ensure the continuation of reliable electric service to Duke Energy's customers throughout the projects and upon their completion. On December 22, 2000, the U.S. Justice Department, acting on behalf of the EPA, filed a complaint against Duke Energy in the U.S. District Court in Greensboro, North Carolina, for alleged violations of the New Source Review (NSR) provisions of the CAA. The EPA is claiming that 29 projects performed at 25 of Duke Energy's coal-fired units were major modifications as defined in the CAA and that Duke Energy violated 75 DUKE ENERGY CORPORATION Notes To Consolidated Financial Statements -- Continued the CAA's NSR requirements when it undertook those projects without obtaining permits and installing emission controls for sulfur dioxide, nitrogen oxide and particulate matter. The complaint requests, among other things, that the court enjoin Duke Energy from operating the coal-fired units identified in the complaint, and order Duke Energy to install additional emission controls and pay unspecified civil penalties. This complaint appears to be part of the EPA's NSR enforcement initiative, in which the EPA claims that utilities and others have committed widespread violations of the CAA permitting requirements for the past 25 years. The EPA has sued or issued notices of violation or investigative information requests, to at least 48 other electric utilities and cooperatives. The EPA's allegations run counter to previous EPA guidance regarding the applicability of the NSR permitting requirements. Duke Energy, along with other utilities, has routinely undertaken the type of repair, replacement, and maintenance projects that the EPA now claims are illegal. Duke Energy believes that all of its electric generation units are properly permitted and have been properly maintained, and intends to defend itself vigorously against these alleged violations. However, because these matters are in a preliminary stage, management cannot estimate the effects of these matters on Duke Energy's future consolidated results of operations, cash flows or financial position. The CAA authorizes civil penalties of up to $27,500 per day per violation at each generating unit. Civil penalties, if ultimately imposed by the court, and the cost of any required new pollution control equipment, if the court accepts the EPA's contentions, could be substantial. Injury and Damages Claims. Duke Energy has experienced numerous claims relating to damages for personal injury alleged to have arisen from the exposure to or use of asbestos in connection with construction and maintenance activities conducted by Duke Energy on its electric generation plants during the 1960s and 1970s. During 1999, Duke Energy experienced a significant increase in the number of these claims. This increase, coupled with its cumulative experience in claims received, prompted Duke Energy to conduct a comprehensive review which was completed in late 1999 and to record an $800 million accrual, which is included in Other Deferred Credits and Other Liabilities in the Consolidated Balance Sheets, to reflect the purchase of a third-party insurance policy as well as estimated amounts for future claims not recoverable under such policy. The insurance policy, combined with amounts covered by self-insurance reserves, provides for claims paid up to an aggregate of $1.6 billion. Duke Energy currently believes the estimated claims relating to this exposure will not exceed such amount. While Duke Energy is uncertain as to the timing of when claims will be received, portions of the estimated claims may not be received and paid for 30 or more years. While Duke Energy has recorded an accrual related to this estimated liability, such estimates cannot be made with certainty. Factors, such as the frequency and magnitude of claims, could result in changes in the estimates of the injury and damages liability and insurance recoveries. Such changes could result in, over time, a difference from the amount currently reflected in the financial statements. However, due to Duke Energy's insurance program relating to this liability, management believes that any changes in the estimates would not have a material adverse effect on consolidated results of operations, cash flows or financial position. California Issues. California Litigation. Duke Energy's subsidiaries, DENA and DETM, have been named among 16 defendants in a class action lawsuit (the Gordon lawsuit) filed against companies identified as "generators and traders" of electricity in California markets. DETM also was named as one of numerous defendants in four additional lawsuits, including two class actions (the Hendricks and Pier 23 Restaurant lawsuits), filed against generators, marketers and traders and other unnamed providers of electricity in California markets. These suits were brought either by or on behalf of electricity consumers in the State of California. The Gordon and Hendricks class action suits were filed in the Superior Court of the State of California, San Diego County, in November 2000. The other three suits were filed in January 2001, one in the Superior Court of the State of California, San Diego County, and the other two in the Superior Court of the State of California, County of San Francisco. These suits generally allege that the defendants manipulated the 76 DUKE ENERGY CORPORATION Notes To Consolidated Financial Statements -- Continued wholesale electricity markets in violation of state laws against unfair and unlawful business practices and state antitrust laws. Plaintiffs in the Gordon suit seek aggregate damages of over $4 billion, and the plaintiffs in the other suits, to the extent damages are specified, allege damages in excess of $1 billion. The lawsuits each seek the disgorgement of alleged unlawfully obtained revenues for sales of electricity and, in three suits, an award of treble damages. California Wholesale Electricity Markets. As a result of high prices in the western U.S. wholesale electricity markets in 2000, several state and federal regulatory investigations and complaints have commenced to determine the causes of the prices and potentially to recommend remedial action. The FERC concluded its investigation by issuing on December 15, 2000, an Order Directing Remedies in California Wholesale Electricity Markets. In this conclusion, the FERC found no basis in allegations made by government officials in California that specific electric generators artificially drove up power prices. This conclusion is consistent with similar findings by the Compliance Unit of the California Power Exchange (CalPX) and the Northwest Power Planning Council. That Order is the subject of numerous rehearing requests. At the state level, the California Public Utilities Commission, the California Electricity Oversight Board, the California Bureau of State Audits and the California Office of the Attorney General all have separate ongoing investigations into the high prices and their causes. None of those investigations have been completed and no findings have been made in connection with any of them. California Utilities Defaults and Other Proceedings. Two California electric utilities recently defaulted on many of their obligations to suppliers and creditors. NAWE supplies electric power to these utilities directly and indirectly through contracts through the California Independent System Operator (CAISO) and the CalPX. NAWE also supplies natural gas to these utilities under direct contracts. With respect to electric power sales through the CAISO and CalPX, Duke Energy quantified its exposures at December 31, 2000 to these utilities and recorded a $110 million provision. As a result of these defaults and certain related government actions, Duke Energy has taken a number of steps, including initiating court actions, to mitigate its exposure. While these matters referenced above are in their earliest stages, management does not believe, based on its analysis to date of the factual background and the claims asserted in these matters, that their resolution will have a material adverse effect on Duke Energy's consolidated results of operations, cash flows or financial position. Litigation. Exxon Mobil Corporation Arbitration. In December 2000, three subsidiaries of Duke Energy initiated binding arbitration against three subsidiaries of the Exxon Mobil Corporation (collectively, the "Exxon Mobil entities") concerning the parties' joint ownership of DETM and certain related affiliates (collectively, the "Ventures"). At issue is a buy-out right provision in the parties' agreement. The agreements governing the ownership of the Ventures contain provisions giving Duke Energy the right to purchase the Exxon Mobil entities' 40% interest in the Ventures in the event material business disputes arise between the Ventures' owners. Such disputes have arisen, and consequently, Duke Energy exercised its right to buy the Exxon Mobil entities' interest. Duke Energy claims that refusal by the Exxon Mobil entities to honor the exercise is a breach of the buy-out right provision, and seeks specific performance of the provision. Duke Energy also complains of the Exxon Mobil entities' lack of use of, and contributions to, the Ventures. In January 2001, the Exxon Mobil entities asserted counterclaims in the arbitration and claims in a separate Texas state court action alleging that Duke Energy breached its obligations to the Ventures and to the Exxon Mobil entities. The Exxon Mobil entities also claim that Duke Energy violated a Guaranty Agreement. While this matter is in its early stages, management believes that the final disposition of this action will not have a material adverse effect on Duke Energy's consolidated results of operations, cash flows or financial position. 77 DUKE ENERGY CORPORATION Notes To Consolidated Financial Statements -- Continued Other Commitments and Contingencies. Financial Guarantees. Certain subsidiaries of Duke Energy have guaranteed debt agreements of affiliates and have provided surety bonds and letters of credit, all of which totaled approximately $1.9 billion and $853 million as of December 31, 2000 and 1999, respectively. The increase in the amount of these obligations is primarily due to increasing support for margin deposits and power exchange participation. Leases. Duke Energy utilizes assets under operating leases in several areas of operations. Consolidated rental expense amounted to $90 million, $87 million and $80 million in 2000, 1999 and 1998, respectively. Future minimum rental payments under Duke Energy's various operating leases for the years 2001 through 2005 are $74 million, $60 million, $51 million, $44 million and $38 million, respectively. 15. Common Stock On December 20, 2000, Duke Energy announced a two-for-one common stock split effective January 26, 2001, to shareholders of record on January 3, 2001. All outstanding share and per share amounts have been restated to reflect the stock split, and appropriate adjustments have been made in the exercise price and number of shares subject to stock options along with appropriate adjustments to stock amounts and other employee benefit programs. Effective with the stock split, the quarterly cash dividend rate on common stock is $0.275 per share, subject to declaration from time to time by the Board of Directors. At its December 20, 2000 meeting, the Board of Directors approved a proposal to increase the number of authorized shares of common stock from one billion to two billion. Such an increase is subject to shareholder approval at the Duke Energy Corporation Annual Meeting of Shareholders to be held on April 26, 2001. 16. Stock-Based Compensation All of the following information regarding outstanding common stock shares and options has been restated to reflect the two-for-one common stock split discussed in Note 15 to the Consolidated Financial Statements. Under Duke Energy's 1998 Long-term Incentive Plan (the 1998 Plan), stock options for up to 30 million shares of common stock may be granted to key employees. Under the 1998 Plan, the exercise price of each option granted is required to be no less than the market price of Duke Energy's common stock on the date of grant. Vesting periods range from one to five years with a maximum term of 10 years. An amendment to the 1998 Plan, subject to shareholder approval at the Duke Energy Corporation Annual Meeting of Shareholders to be held on April 26, 2001, will increase the number of shares of common stock available under the 1998 Plan to 60 million shares. 78 DUKE ENERGY CORPORATION Notes To Consolidated Financial Statements -- Continued Stock Option Activity
Weighted- Average Exercise Options Price ------------ --------- In thousands Outstanding at December 31, 1997...................... 5,459 $12 Granted............................................. 7,096 29 Exercised........................................... (1,896) 11 Forfeited........................................... (1,736) 29 ------ Outstanding at December 31, 1998...................... 8,923 23 Granted............................................. 10,308 27 Exercised........................................... (856) 12 Forfeited........................................... (750) 29 ------ Outstanding at December 31, 1999...................... 17,625 25 Granted............................................. 7,594 41 Exercised........................................... (2,047) 21 Forfeited........................................... (666) 27 ------ Outstanding at December 31, 2000...................... 22,506 31 ======
Stock Options at December 31, 2000
Outstanding Exercisable ----------------------------------- ---------------------- Weighted- Weighted- Weighted- Range of Average Average Average Exercise Remaining Exercise Exercise Prices Number Life Price Number Price -------- ------------- --------- --------- ------------ --------- (in thousands) (in years) In thousands $5 to $7 7 1.3 $ 7 7 $ 7 $8 to $10 944 3.1 10 944 10 $11 to $12 203 3.3 12 203 12 $13 to $16 220 5.1 14 220 14 $21 to $25 6,115 8.9 25 1,532 24 $26 to $30 7,726 7.7 29 2,111 29 $31 to $34 578 8.0 32 185 33 > $34 6,713 10.0 43 -- -- ------ ----- Total 22,506 5,202 $23 ====== =====
Duke Energy had 3.6 million and 3.0 million options exercisable at December 31, 1999 and 1998, with weighted-average exercise prices of $17 and $11 per option, respectively. The weighted-average fair value of options granted was $10, $5 and $4 per option during 2000, 1999 and 1998, respectively. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model. 79 DUKE ENERGY CORPORATION Notes To Consolidated Financial Statements -- Continued Weighted-Average Assumptions for Option-Pricing
2000 1999 1998 ------- ------- ------- Stock dividend yield................................. 3.7% 4.1% 4.2% Expected stock price volatility...................... 25.1% 18.8% 15.1% Risk-free interest rates............................. 5.3% 5.9% 5.6% Expected option lives................................ 7 years 7 years 7 years
Had compensation expense for stock-based compensation been determined based on the fair value at the grant dates, 2000 net income would have been $1,764 million, or $2.37 per basic share; 1999 net income would have been $1,498 million, or $2.03 per basic share; and 1998 net income would have been $1,250 million, or $1.70 per basic share. Under Duke Energy's 1996 Stock Incentive Plan (the 1996 Plan), four million shares of common stock were reserved for awards to employees. Restricted stock grants made under the 1996 Plan vest over periods ranging from one to five years. Duke Energy awarded 294,526 restricted shares (fair value at grant dates of approximately $8 million) in 2000 and 131,700 restricted shares (fair value at grant dates of approximately $4 million) in 1999. Compensation expense for the grants is charged to earnings over the restriction period and amounted to $4 million in 2000 and was not material in 1999 or 1998. Duke Energy granted Company Performance Awards under the 1998 Plan, under which 30 million shares of common stock have been reserved for employee and outside director awards. These share grants under the 1998 Plan vest over periods ranging between one and seven years. Duke Energy awarded 225,000 of these shares (fair value at grant dates of $7 million) in 2000 and 986,400 of these shares (fair value at grant dates of $26 million) in 1999. Compensation expense for the stock grants is charged to earnings over the vesting period, and amounted to $7 million in 2000, $3 million in 1999 and zero in 1998. 17. Employee Benefit Plans Retirement Plans. Duke Energy and its subsidiaries maintain a non- contributory defined benefit retirement plan covering most employees with minimum service requirements using a cash balance formula. Under a cash balance formula, a plan participant accumulates a retirement benefit based upon a percentage, which may vary with age and years of service, of current eligible earnings and current interest credits. On December 31, 1998, all defined benefit retirement plans maintained by Duke Energy and its subsidiaries, except for the PanEnergy retirement plan, were merged to form the Duke Energy Retirement Cash Balance Plan (the Duke Energy Plan). The plan merger changed the benefit for certain participants, from a formula based primarily on benefit accrual service and highest average earnings, to a cash balance formula. Through December 31, 1998, the PanEnergy retirement plan provided retirement benefits (i) for eligible employees of certain subsidiaries that are generally based on an employee's years of benefit accrual service and highest average eligible earnings, and (ii) for eligible employees of certain other subsidiaries under a cash balance formula. In 1998, a significant amount of lump sum payouts were made from the PanEnergy plan resulting in a settlement gain of $10 million. Effective January 1, 1999, the benefit formula under the PanEnergy plan, for all eligible employees, was changed to a cash balance formula. In connection with the 1999 sale of the Midwest Pipelines to CMS, benefit accruals under the PanEnergy plan were frozen on December 31, 1998, for all participants who, as a result of the sale, became employees of CMS and its subsidiaries. Once the transfer of the benefit obligation and related assets of the affected participants to CMS was completed, the PanEnergy plan was merged into the Duke Energy Plan. 80 DUKE ENERGY CORPORATION Notes To Consolidated Financial Statements -- Continued Duke Energy's policy is to fund amounts, as necessary, on an actuarial basis to provide assets sufficient to meet benefits to be paid to plan participants. No contributions to the Duke Energy Plan were necessary in 2000 or 1999. The net unrecognized transition asset, resulting from the implementation of accrual accounting, is being amortized over approximately 20 years. Components of Net Periodic Pension Costs
For the Years Ended December 31, ---------------------- 2000 1999 1998 ------ ------ ------ In millions Service cost benefit earned during the year.......... $ 70 $ 72 $ 63 Interest cost on projected benefit obligation........ 184 165 169 Expected return on plan assets....................... (244) (224) (218) Amortization of prior service cost................... (3) (3) (4) Amortization of net transition asset................. (4) (4) (4) Recognized net actuarial loss........................ -- 12 10 Settlement gain...................................... -- -- (10) ------ ------ ------ Net periodic pension costs........................... $ 3 $ 18 $ 6 ====== ====== ======
Reconciliation of Funded Status to Pre-funded Pension Costs
December 31, -------------- 2000 1999 ------ ------ In millions Change in Benefit Obligation Benefit obligation at beginning of year...................... $2,446 $2,540 Service cost................................................. 70 72 Interest cost................................................ 184 165 Actuarial (gain) loss........................................ 16 (41) Transfer to CMS.............................................. -- (85) Benefits paid................................................ (130) (205) ------ ------ Benefit obligation at end of year............................ $2,586 $2,446 ------ ------ Change in Plan Assets Fair value of plan assets at beginning of year(a)............ $3,121 $2,920 Actual return on plan assets................................. 47 491 Transfer to CMS.............................................. -- (85) Benefits paid................................................ (130) (205) ------ ------ Fair value of plan assets at end of year(a).................. $3,038 $3,121 ------ ------ Funded status................................................ $ 452 $ 675 Unrecognized net experience gain............................. (110) (315) Unrecognized prior service cost reduction.................... (22) (24) Unrecognized net transition asset............................ (16) (21) ------ ------ Pre-funded pension costs..................................... $ 304 $ 315 ====== ======
-------- (a) Principally equity and fixed-income securities. 81 DUKE ENERGY CORPORATION Notes To Consolidated Financial Statements -- Continued Assumptions Used for Pension Benefits Accounting(a)
2000 1999 1998 ---- ---- ---- Percent Discount rate................................................. 7.50 7.50 6.75 Salary increase............................................... 4.53 4.50 4.67 Expected long-term rate of return on plan assets.............. 9.25 9.25 9.25
-------- (a) Reflects weighted averages across all plans. Duke Energy also sponsors employee savings plans that cover substantially all employees. Employer matching contributions of $66 million, $68 million and $53 million were expensed in 2000, 1999 and 1998, respectively. Other Postretirement Benefits. Duke Energy and most of its subsidiaries provide certain health care and life insurance benefits for retired employees on a contributory and non-contributory basis. Employees become eligible for these benefits if they have met certain age and service requirements at retirement, as defined in the plans. Under plan amendments effective late 1998 and early 1999, health care benefits for future retirees were changed to limit employer contributions and medical coverage. Such benefit costs are accrued over the active service period of employees to the date of full eligibility for the benefits. The net unrecognized transition obligation, resulting from the implementation of accrual accounting, is being amortized over approximately 20 years. Components of Net Periodic Postretirement Benefit Costs
For the Years Ended December 31, ---------------- 2000 1999 1998 ---- ---- ---- In millions Service cost benefit earned during the year.............. $ 5 $ 7 $ 10 Interest cost on accumulated postretirement benefit obligation.............................................. 43 40 43 Expected return on plan assets........................... (23) (21) (18) Amortization of prior service cost....................... 1 1 7 Amortization of net transition obligation................ 18 18 16 Recognized net actuarial (gain) loss..................... -- (1) 1 ---- ---- ---- Net periodic postretirement benefit costs................ $ 44 $ 44 $ 59 ==== ==== ====
82 DUKE ENERGY CORPORATION Notes To Consolidated Financial Statements -- Continued Reconciliation of Funded Status to Accrued Postretirement Benefit Costs
December 31, -------------- 2000 1999 ------ ------ In millions Change in Benefit Obligation Accumulated postretirement benefit obligation at beginning of year................................................... $ 562 $ 625 Service cost............................................... 5 7 Interest cost.............................................. 43 40 Plan participants' contributions........................... 7 7 Actuarial (gain) loss...................................... 39 (68) Benefits paid.............................................. (42) (49) ------ ------ Accumulated postretirement benefit obligation at end of year...................................................... $ 614 $ 562 ------ ------ Change in Plan Assets Fair value of plan assets at beginning of year(a).......... $ 327 $ 305 Actual return on plan assets............................... 8 41 Employer contributions..................................... 25 23 Plan participants' contributions........................... 7 7 Benefits paid.............................................. (42) (49) ------ ------ Fair market value of plan assets at end of year(a)......... $ 325 $ 327 ------ ------ Funded status.............................................. $ (289) $ (235) Unrecognized net experience gain........................... (47) (110) Unrecognized prior service cost............................ 5 8 Unrecognized transition obligation......................... 214 229 ------ ------ Accrued postretirement benefit costs....................... $ (117) $ (108) ====== ======
-------- (a) Principally equity and fixed-income securities. Assumptions Used for Postretirement Benefits Accounting(a)
2000 1999 1998 ----- ----- ----- Percent Discount rate.............................................. 7.50 7.50 6.75 Salary increase............................................ 4.53 4.50 4.67 Expected long-term rate of return on assets................ 9.25 9.25 9.25 Assumed tax rate(b)........................................ 39.60 39.60 39.60
-------- (a) Reflects weighted averages across all plans. (b) Applicable to the health care portion of funded postretirement benefits. For measurement purposes, a 6% average annual rate of increase in the per capita cost of covered health care benefits was assumed for 2000 and beyond. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. 83 DUKE ENERGY CORPORATION Notes To Consolidated Financial Statements -- Continued Sensitivity to Changes in Assumed Health Care Cost Trend Rates
1-Percentage- 1-Percentage- Point Increase Point Decrease -------------- -------------- In millions Effect on total service and interest costs.... $ 2 $ (2) Effect on postretirement benefit obligation... 27 (25)
18. Quarterly Financial Data (Unaudited)
First Second Third Fourth Quarter Quarter Quarter Quarter Total ------- ------- ------- ------- ------- In millions, except per share data 2000 Operating revenues................ $7,290 $10,926 $15,691 $15,411 $49,318 Operating income.................. 812 794 1,501 706 3,813 EBIT.............................. 859 837 1,556 762 4,014 Net income........................ 393 329 770 284 1,776 Earnings per share(a) Basic........................... $ 0.53 $ 0.44 $ 1.04 $ 0.38 $ 2.39 Diluted......................... $ 0.53 $ 0.44 $ 1.03 $ 0.38 $ 2.38 1999 Operating revenues................ $4,178 $ 4,691 $ 6,676 $ 6,221 $21,766 Operating income.................. 645 531 866 (223) 1,819 EBIT.............................. 683 568 908 (116) 2,043 Income before extraordinary item.. 307 288 441 (189) 847 Net income........................ 967 288 441 (189) 1,507 Earnings per share (before extraordinary item)(a) Basic........................... $ 0.41 $ 0.39 $ 0.60 $ (0.27) $ 1.13 Diluted......................... $ 0.41 $ 0.39 $ 0.60 $ (0.27) $ 1.13 Earnings per share(a) Basic........................... $ 1.32 $ 0.39 $ 0.60 $ (0.27) $ 2.04 Diluted......................... $ 1.32 $ 0.39 $ 0.60 $ (0.27) $ 2.03
-------- (a) Restated to reflect the two-for-one common stock split effective January 26, 2001. 84 DUKE ENERGY CORPORATION SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Additions --------------------- Balance at Charged to Balance at Beginning Charged to Other End of Period Expense Accounts Deductions of Period ---------- ---------- ---------- ---------- ---------- In millions December 31, 2000: Injuries and Damages.. $ 902 $ 18 $ 2 $391 $ 531 Allowance for Doubtful Accounts............. 43 165 8 16 200 Other(a).............. 317 40 60 40 377 ------ ------ --- ---- ------ $1,262 $ 223 $70(b) $447 $1,108 December 31, 1999: Injuries and Damages.. $ 113 $ 900 $-- $111 $ 902 Allowance for Doubtful Accounts............. 29 16 6 8 43 Other(a).............. 225 134 54 96 317 ------ ------ --- ---- ------ $ 367 $1,050 $60(b) $215 $1,262 December 31, 1998(c).... $ 367
(a) Principally consists of property insurance reserves and litigation and other contingency reserves which are included in "Other Current Liabilities" or "Deferred Credits and Other Liabilities" in the Consolidated Balance Sheets. (b) Principally litigation and other contingency reserves assumed in business acquisitions. (c) Principally consists of injury and damages reserves, property insurance reserves and litigation and other contingency reserves which are included in "Other Current Liabilities" or "Deferred Credits and Other Liabilities" in the Consolidated Balance Sheets. 85 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Duke Energy Corporation: We have audited the accompanying consolidated balance sheets of Duke Energy Corporation and subsidiaries (Duke Energy) as of December 31, 2000 and 1999, and the related consolidated statements of income, common stockholders' equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2000. Our audits also included the consolidated financial statement schedule listed in the Index at Item 14. These financial statements and financial statement schedule are the responsibility of Duke Energy's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Duke Energy as of December 31, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP Deloitte & Touche LLP Charlotte, North Carolina January 18, 2001 86 RESPONSIBILITY FOR FINANCIAL STATEMENTS The financial statements of Duke Energy Corporation (Duke Energy) are prepared by management, who are responsible for their integrity and objectivity. The statements are prepared in conformity with generally accepted accounting principles in all material respects and necessarily include judgments and estimates of the expected effects of events and transactions that are currently being reported. Duke Energy's system of internal accounting control is designed to provide reasonable assurance that assets are safeguarded and transactions are executed according to management's authorization. Internal accounting controls also provide reasonable assurance that transactions are recorded properly, so that financial statements can be prepared according to generally accepted accounting principles. In addition, accounting controls provide reasonable assurance that errors or irregularities which could be material to the financial statements are prevented or are detected by employees within a timely period as they perform their assigned functions. Duke Energy's accounting controls are continually reviewed for effectiveness. In addition, written policies, standards and procedures, and a strong internal audit program augment Duke Energy's accounting controls. The Board of Directors pursues its oversight role for the financial statements through the audit committee, which is composed entirely of independent directors who are not employees of Duke Energy. The audit committee meets with management and internal auditors periodically to review accounting control issues and to monitor each group's discharge of its responsibilities. The audit committee also meets periodically with Duke Energy's independent auditors, Deloitte & Touche LLP. The independent auditors have free access to the audit committee and the Board of Directors to discuss internal accounting control, auditing and financial reporting matters without the presence of management. /s/ Sandra P. Meyer Sandra P. Meyer Senior Vice President and Corporate Controller 87 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. PART III. Item 10. Directors and Executive Officers of the Registrant. Reference is made to "Executive Officers of Duke Energy" included in "Item 1. Business" of this report. See "The Board of Directors," "Information on the Board of Directors" and "Other Information" in the proxy statement relating to Duke Energy's 2001 annual meeting of shareholders (the Proxy Statement), incorporated herein by reference. Item 11. Executive Compensation. See "Compensation" and "Information on the Board of Directors--Compensation of Directors" in the Proxy Statement, incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. See "Beneficial Ownership" in the Proxy Statement, incorporated herein by reference. Item 13. Certain Relationships and Related Transactions. None. 88 PART IV. Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K. (a) Consolidated Financial Statements, Supplemental Financial Data and Supplemental Schedule included in Part II of this annual report are as follows: Consolidated Financial Statements Consolidated Statements of Income for the Years Ended December 31, 2000, 1999 and 1998 Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 1999 and 1998 Consolidated Balance Sheets as of December 31, 2000 and 1999 Consolidated Statements of Common Stockholders' Equity and Comprehensive Income for the Years Ended December 31, 2000, 1999 and 1998 Notes to Consolidated Financial Statements Quarterly Financial Data (unaudited) (included in Note 18 to the Consolidated Financial Statements) Consolidated Financial Statement Schedule II -- Valuation and Qualifying Accounts and Reserves for the Years Ended December 31, 2000, 1999 and 1998 Independent Auditors' Report All other schedules are omitted because of the absence of the conditions under which they are required or because the required information is included in the financial statements or notes thereto. (b) Reports on Form 8-K A Current Report on Form 8-K filed on December 19, 2000 contained disclosures under Item 5, Other Events. (c) Exhibits -- See Exhibit Index immediately following the signature page. 89 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 30, 2001 DUKE ENERGY CORPORATION (Registrant) Richard B. Priory By: _________________________________ Richard B. Priory Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. (i) Principal executive officer: Richard B. Priory Chairman of the Board, President and Chief Executive Officer (ii) Principal financial officer: Robert P. Brace Executive Vice President and Chief Financial Officer (iii) Principal accounting officer: Sandra P. Meyer Senior Vice President and Corporate Controller (iv) All of the Directors: Richard B. Priory G. Alex Bernhardt, Sr. Robert J. Brown William A. Coley William T. Esrey Ann Maynard Gray Dennis R. Hendrix Harold S. Hook George Dean Johnson, Jr. Max Lennon Leo E. Linbeck, Jr. James G. Martin Date: March 30 , 2001 Robert P. Brace, by signing his name hereto, does hereby sign this document on behalf of the registrant and on behalf of each of the above-named persons pursuant to a power of attorney duly executed by the registrant and such persons, filed with the Securities and Exchange Commission as an exhibit hereto. /s/ Robert P. Brace By: _________________________________ Attorney-In-Fact 90 EXHIBIT INDEX Exhibits filed herewith are designated by an asterisk (*). All exhibits not so designated are incorporated by reference to a prior filing, as indicated. Items constituting management contracts or compensatory plans or arrangements are designated by a double asterisk (**).
Exhibit Number ------- 2 Agreement and Plan of Merger, dated as of November 24, 1996, as amended and restated as of March 10, 1997, among registrant, Duke Transaction Corporation and PanEnergy Corp (filed with Form 8-K dated March 20, 1997, File No. 1-4928, as Exhibit 2(a)). 3-A Restated Articles of Incorporation of registrant, dated June 18, 1997 (filed with Form S-8, No. 333-29563, effective June 19, 1997, as Exhibit 4(G)). 3-B Articles of Amendment to Restated Articles of Incorporation of registrant (filed with Form 10-K of the registrant for the year ended December 31, 1999, as Exhibit 3-A). 3-C By-Laws of registrant, as amended (filed with Form S-3, File No. 333- 52204, as Exhibit 4(B)). 4 Rights Agreement, dated as of December 17, 1998, between the registrant and The Bank of New York, as Rights Agent (filed with Form 8-K dated February 11, 1999). 10-A Agreement, dated March 6, 1978, between the registrant and the North Carolina Municipal Power Agency No. 1 (filed with Form 8-K for the month of March 1978, File No. 1-4928). 10-B Agreement, dated August 1, 1980, between the registrant and Piedmont Municipal Power Agency (filed with Form 8-K for the month of August 1980, File No. 1-4928). 10-C Agreement, dated October 14, 1980, between the registrant and North Carolina Electric Membership Corporation (filed with Form 10-Q for the quarter ended September 30, 1980, File No. 1-4928). 10-D Agreement, dated October 14, 1980, between the registrant and Saluda River Electric Cooperative, Inc. (filed with Form 10-Q for the quarter ended September 30, 1980, File No. 1-4928). 10-E** Directors' Charitable Giving Program (filed with Form 10-K for the year ended December 31, 1992, File No. 1-4928, as Exhibit 10-P). 10-F** Estate Conservation Plan (filed with Form 10-K for the year ended December 31, 1992, File No. 1-4928, as Exhibit 10-R). 10-G** Duke Power Company Stock Incentive Plan (filed as Appendix A to Schedule 14A of registrant, March 18, 1996, File No. 1-4928). 10-H $1,250,000,000 Five-Year Credit Agreement dated as of August 25, 1997, among registrant, the banks listed therein and Morgan Guaranty Trust Company of New York, as Administrative Agent (filed with Form 10-K for the year ended December 31, 1997, as Exhibit 10-R). 10-I $950,000,000 Five-Year Credit Agreement dated as of August 25, 1997, among Duke Capital Corporation, the banks listed therein and The Chase Manhattan Bank, as Administrative Agent (filed with Form 10-K for the year ended December 31, 1997, as Exhibit 10-S). *10-J $600,000,000 364-Day Credit Agreement dated as of August 1, 2000, among Duke Capital Corporation, the banks listed therein and The Chase Manhattan Bank, as Administrative Agent. 10-K 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).
91
Exhibit Number ------- 10-L** Duke Energy Corporation Long-Term Incentive Plan, as amended (filed as Exhibit A to Schedule 14A of the registrant, March 16, 1998). 10-M** Duke Energy Corporation Policy Committee Short-Term Incentive Plan (filed as Appendix B to Schedule 14A of the registrant, March 16, 1998). 10-N Stock Purchase Agreement between PanEnergy Corp, Texas Eastern Corporation and CMS Energy Corporation, dated as of October 31, 1998 (filed as Exhibit 10 to Form 8-K of the registrant, File No. 1-4928, filed November 5, 1998). 10-O Merger and Purchase Agreement among Union Pacific Resources Company, Union Pacific Fuels, Inc., Duke Energy Field Services, Inc. and DEFS Merger Sub Corp., dated as of November 20, 1998 (filed as Exhibit 10 to Form 8-K of the registrant, File No. 1-4928, filed December 1, 1998). 10-P** Duke Energy Corporation Executive Savings Plan (filed with Form 10-K Report of TEPPCO Partners, LP, File No. 1-10403, for the year ended December 31, 1999, as Exhibit 10.7). 10-Q** Duke Energy Corporation Executive Cash Balance Plan (filed with Form 10-K Report of TEPPCO Partners, LP, File No. 1-10403, for the year ended December 31, 1999, as Exhibit 10.8). 10-R** Duke Energy Corporation Retirement Benefit Equalization Plan (filed with Form 10-K Report of TEPPCO Partners, LP, File No. 1-10403, for the year ended December 31, 1999, as Exhibit 10.9). 10-S** Form of Key Employee Severance Agreement and Release between the registrant and certain key executives (filed with Form 10-K of the registrant for the year ended December 31, 1999, as Exhibit 10-BB). 10-T** Form of Change in Control Agreement between the registrant and certain key executives (filed with Form 10-K of the registrant for the year ended December 31, 1999, as Exhibit 10-CC). 10-U Contribution Agreement by and among Phillips Petroleum Company, Duke Energy Corporation and Duke Energy Field Services L.L.C., dated as of December 16, 1999 (filed as Exhibit 2.1 to Form 8-K of the registrant, filed December 30, 1999). 10-V Governance Agreement by and among Phillips Petroleum Company, Duke Energy Corporation and Duke Energy Field Services L.L.C., dated as of December 16, 1999 (filed as Exhibit 2.2 to Form 8-K of the registrant, filed December 30, 1999). 10-W First Amendment to Contribution and Governance Agreement dated as of March 23, 2000 among Phillips Petroleum Company, Duke Energy Corporation and Duke Energy Field Services, LLC (incorporated by reference to Exhibit 10.7 (b) to Registration Statement on Form S-1/A (Registration No. 333-32502) of Duke Energy Field Services Corporation, filed on March 27, 2000). 10-X Parent Company Agreement dated as of March 31, 2000 among Phillips Petroleum Company, Duke Energy Corporation, Duke Energy Field Services, LLC and Duke Energy Field Services Corporation (incorporated by reference to Exhibit 10.10 to Registration Statement on Form S-1/A (Registration No. 333-32502) of Duke Energy Field Services Corporation, filed on May 4, 2000). 10-Y Amended and Restated Limited Liability Company Agreement of Duke Energy Field Services, LLC by and between Phillips Gas Company and Duke Energy Field Services Corporation, dated as of March 31, 2000 (filed as Exhibit 3.1 to Form 10 of Duke Energy Field Services LLC, File No. 000-31095, filed July 20, 2000). 10-Z First Amendment to the Parent Company Agreement dated as of May 25, 2000 among Phillips Petroleum Company, Duke Energy Corporation, Duke Energy Field Services, LLC and Duke Energy Field Services Corporation (filed as Exhibit 10.8 (b) to Form 10 of Duke Energy Field Services LLC, File No. 000-31095, filed July 20, 2000).
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Exhibit Number ------- *12 Computation of Ratio of Earnings to Fixed Charges. *21 List of Subsidiaries. *23(a) Independent Auditors' Consent. *24(a) Power of attorney authorizing Robert P. Brace 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.
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. 93 EX-10.J 2 0002.txt CREDIT AGREEMENT Exhibit 10-J CONFORMED COPY $600,000,000 364-DAY CREDIT AGREEMENT dated as of August 21, 2000 among Duke Capital Corporation, The Banks Listed Herein and The Chase Manhattan Bank, as Administrative Agent -------------------------------------------------------- Morgan Guaranty Trust Company of New York, Syndication Agent Chase Securities Inc. J.P. Morgan Securities Inc., Co-Lead Arrangers and Co-Book Managers TABLE OF CONTENTS
PAGE ---- ARTICLE 1 DEFINITIONS SECTION 1.01. Definitions................................................................ 1 SECTION 1.02. Accounting Terms and Determinations........................................ 10 SECTION 1.03. Types and Classes of Borrowings............................................ 11 ARTICLE 2 THE CREDITS SECTION 2.01. Commitments to Lend........................................................ 11 SECTION 2.02. Notice of Committed Borrowings............................................. 12 SECTION 2.03. Bid Rate Borrowings........................................................ 13 SECTION 2.04. Notice to Banks; Funding of Loans.......................................... 17 SECTION 2.05. Registry; Notes............................................................ 18 SECTION 2.06. Maturity of Loans.......................................................... 18 SECTION 2.07. Interest Rates............................................................. 19 SECTION 2.08. Fees....................................................................... 20 SECTION 2.09. Optional Termination or Reduction of Commitments........................... 21 SECTION 2.10. Method of Electing Interest Rates.......................................... 21 SECTION 2.11. Mandatory Termination of Commitments....................................... 22 SECTION 2.12. Optional Prepayments....................................................... 22 SECTION 2.13. General Provisions as to Payments.......................................... 23 SECTION 2.14. Funding Losses............................................................. 24 SECTION 2.15. Computation of Interest and Fees........................................... 24 SECTION 2.16. Regulation D Compensation.................................................. 24 SECTION 2.17. Increased Commitments; Additional Banks.................................... 25 ARTICLE 3 CONDITIONS SECTION 3.01. Effectiveness.............................................................. 26 SECTION 3.02. Borrowings................................................................. 27 ARTICLE 4 REPRESENTATIONS AND WARRANTIES SECTION 4.01. Corporate Existence and Power.............................................. 28 SECTION 4.02. Corporate and Governmental Authorization; No Contravention................. 28 SECTION 4.03. Binding Effect............................................................. 29
i SECTION 4.04. Financial Information...................................................... 29 SECTION 4.05. Litigation................................................................. 29 SECTION 4.06. Compliance with Laws....................................................... 30 SECTION 4.07. Taxes...................................................................... 30 SECTION 4.08. Public Utility Holding Company Act......................................... 30 ARTICLE 5 COVENANTS SECTION 5.01. Information................................................................ 30 SECTION 5.02. Payment of Taxes........................................................... 32 SECTION 5.03. Maintenance of Property; Insurance......................................... 32 SECTION 5.04. Maintenance of Existence................................................... 33 SECTION 5.05. Compliance with Laws....................................................... 33 SECTION 5.06. Books and Records.......................................................... 33 SECTION 5.07. Maintenance of Ownership of Principal Subsidiaries......................... 33 SECTION 5.08. Negative Pledge............................................................ 34 SECTION 5.09. Consolidations, Mergers and Sales of Assets................................ 35 SECTION 5.10. Use of Proceeds............................................................ 35 SECTION 5.11. Transactions with Affiliates............................................... 35 SECTION 5.12. Indebtedness/Capitalization Ratio.......................................... 36 ARTICLE 6 DEFAULTS SECTION 6.01. Events of Default.......................................................... 36 SECTION 6.02. Notice of Default.......................................................... 38 ARTICLE 7 THE ADMINISTRATIVE AGENT SECTION 7.01. Appointment and Authorization.............................................. 38 SECTION 7.02. Administrative Agent and Affiliates........................................ 38 SECTION 7.03. Action by Administrative Agent............................................. 39 SECTION 7.04. Consultation with Experts.................................................. 39 SECTION 7.05. Liability of Administrative Agent.......................................... 39 SECTION 7.06. Indemnification............................................................ 39 SECTION 7.07. Credit Decision............................................................ 40 SECTION 7.08. Successor Administrative Agent............................................. 40 SECTION 7.09. Administrative Agent's Fee................................................. 40 ARTICLE 8 CHANGE IN CIRCUMSTANCES SECTION 8.01. Basis for Determining Interest Rate Inadequate or Unfair................... 41
ii SECTION 8.02. Illegality................................................................. 41 SECTION 8.03. Increased Cost and Reduced Return.......................................... 42 SECTION 8.04. Taxes...................................................................... 43 SECTION 8.05. Base Rate Loans Substituted for Affected Fixed Rate Loans.................. 46 SECTION 8.06. Substitution of Bank Termination Option.................................... 46 ARTICLE 9 MISCELLANEOUS SECTION 9.01. Notices.................................................................... 47 SECTION 9.02. No Waivers................................................................. 47 SECTION 9.03. Expenses; Indemnification.................................................. 48 SECTION 9.04. Sharing of Set-offs........................................................ 48 SECTION 9.05. Amendments and Waivers..................................................... 48 SECTION 9.06. Successors and Assigns..................................................... 49 SECTION 9.07. Collateral................................................................. 51 SECTION 9.08. Confidentiality............................................................ 51 SECTION 9.09. Governing Law; Submission to Jurisdiction.................................. 51 SECTION 9.10. Counterparts; Integration.................................................. 51 SECTION 9.11. WAIVER OF JURY TRIAL....................................................... 51
iii PAGE ---- iv PRICING SCHEDULE EXHIBIT A - Note EXHIBIT B - Form of Bid Rate Quote Request EXHIBIT C - Form of Invitation for Bid Rate Quotes EXHIBIT D - Form of Bid Rate Quote EXHIBIT E - Opinion of General Counsel for the Borrower EXHIBIT F - Opinion of Davis Polk & Wardwell, Special Counsel for the Administrative Agent EXHIBIT G - Assignment and Assumption Agreement EXHIBIT H - Extension Agreement 364-DAY CREDIT AGREEMENT 364-DAY CREDIT AGREEMENT dated as of August 21, 2000 among DUKE CAPITAL CORPORATION, the BANKS listed on the signature pages hereof and THE CHASE MANHATTAN BANK, as Administrative Agent. The parties hereto agree as follows: ARTICLE 1 DEFINITIONS SECTION 1.01. Definitions. The following terms, as used herein, have the following meanings: "Additional Bank" means any financial institution that becomes a Bank for purposes hereof in connection with (i) an increase in the aggregate amount of the Commitments pursuant to Section 2.17 or (ii) the replacement of a Bank pursuant to Section 8.06. "Administrative Agent" means The Chase Manhattan Bank in its capacity as administrative agent for the Banks hereunder, and its successors in such capacity. "Administrative Questionnaire" means, with respect to each Bank, the administrative questionnaire in the form submitted to such Bank by the Administrative Agent and submitted to the Administrative Agent (with a copy to the Borrower) duly completed by such Bank. "Affiliate" means (i) any Person that directly, or indirectly through one or more intermediaries, controls the Borrower (a "Controlling Person") or (ii) any Person (other than the Borrower or a Subsidiary) which is controlled by or is under common control with a Controlling Person. As used herein, the term "control" means possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ownership of voting securities, by contract or otherwise. "Applicable Lending Office" means, with respect to any Bank, (i) in the case of its Domestic Loans, its Domestic Lending Office, (ii) in the case of its Euro-Dollar Loans, its Euro-Dollar Lending Office and (iii) in the case of its Bid Rate Loans, its Bid Rate Lending Office. "Approved Officer" means the president, a vice president or the treasurer or assistant treasurer of the Borrower or such other representative of the Borrower as may be designated by any one of the foregoing with the consent of the Administrative Agent. "Assignee" has the meaning set forth in Section 9.06(c). "Bank" means each bank or other financial institution listed on the signature pages hereof, each Additional Bank, each Assignee which becomes a Bank pursuant to Section 9.06(c), and their respective successors. "Base Rate" means, for any day, a rate per annum equal to the higher of (i) the Prime Rate for such day and (ii) the sum of 1/2 of 1% plus the Federal Funds Rate for such day. "Base Rate Loan" means (i) a Committed Loan which bears interest at the Base Rate pursuant to the applicable Notice of Committed Borrowing or Notice of Interest Rate Election or the provisions of Article 8 or (ii) an overdue amount which was a Base Rate Loan immediately before it became overdue. "Bid Rate (General)" has the meaning set forth in Section 2.03(d). "Bid Rate (General) Auction" means a solicitation of Bid Rate Quotes setting forth Bid Rates (General) pursuant to Section 2.03. "Bid Rate (General) Loan" means a loan made or to be made by a Bank pursuant to a Bid Rate (General) Auction. "Bid Rate (Indexed) Auction" means a solicitation of Bid Rate Quotes setting forth Bid Rate (Indexed) Margins based on the London Interbank Offered Rate pursuant to Section 2.03. "Bid Rate Lending Office" means, as to each Bank, its Domestic Lending Office or such other office, branch or affiliate of such Bank as it may hereafter designate as its Bid Rate Lending Office by notice to the Borrower and the Administrative Agent; provided that any Bank may from time to time by notice to the Borrower and the Administrative Agent designate separate Bid Rate Lending Offices for its Bid Rate (Indexed) Loans, on the one hand, and its Bid Rate (General) Loans, on the other hand, in which case all references herein to the Bid Rate Lending Office of such Bank shall be deemed to refer to either or both of such offices, as the context may require. "Bid Rate (Indexed) Loan" means a loan made or to be made by a Bank pursuant to a Bid Rate (Indexed) Auction (including such a loan bearing interest at the Base Rate pursuant to Section 8.01(a)). 2 "Bid Rate Loan" means a Bid Rate (Indexed) Loan or a Bid Rate (General) Loan. "Bid Rate (Indexed) Margin" has the meaning set forth in Section 2.03(d). "Bid Rate Quote" means an offer by a Bank to make a Bid Rate Loan in accordance with Section 2.03. "Borrower" means Duke Capital Corporation, a Delaware corporation, and its successors. "Borrowing" has the meaning set forth in Section 1.03. "Class" refers to the determination whether a Loan is a Committed Loan (and, if a Committed Loan, whether a Revolving Credit Loan or a Term Loan) or a Bid Rate Loan. "Commitment" means (i) with respect to each Bank listed on the signature pages hereof, the amount set forth opposite the name of such Bank on the signature pages hereof, and (ii) with respect to each Additional Bank or Assignee which becomes a bank pursuant to Sections 2.17(a), 2.01(c) and 9.06(c), the amount of the Commitment thereby assumed by it, in each case as such amount may from time to time be reduced pursuant to Section 2.09, 2.11 or 9.06(c) or increased pursuant to Section 2.17(a), 8.06 or 9.06(c). "Commitment Termination Date" means, for each Bank, August 20, 2001, as such date may be extended from time to time with respect to such Bank pursuant to Section 2.01(c) or, if any such day is not a Euro-Dollar Business Day, the next preceding Euro-Dollar Business Day. "Committed Loan" means a Revolving Credit Loan or a Term Loan made by a Bank pursuant to Section 2.01. "Consolidated Capitalization" means the sum of (i) Consolidated Indebtedness, (ii) consolidated common stockholders' equity as would appear on a consolidated balance sheet of the Borrower and its Consolidated Subsidiaries prepared in accordance with generally accepted accounting principles, and (iii) the aggregate liquidation preference of preferred stocks (other than preferred stocks subject to mandatory redemption or repurchase) of the Borrower and its Consolidated Subsidiaries upon involuntary liquidation. "Consolidated Indebtedness" means, at any date, all Indebtedness of Borrower and its Consolidated Subsidiaries determined on a consolidated basis in accordance with generally accepted accounting principles. 3 "Consolidated Subsidiary" means, for any Person, at any date any Subsidiary or other entity the accounts of which would be consolidated with those of such Person in its consolidated financial statements if such statements were prepared as of such date; unless otherwise specified "Consolidated Subsidiary" means a Consolidated Subsidiary of the Borrower. "Default" means any condition or event which constitutes an Event of Default or which with the giving of notice or lapse of time or both would, unless cured or waived, become an Event of Default. "Domestic Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in New York City are authorized by law to close. "Domestic Lending Office" means, as to each Bank, its office located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Domestic Lending Office) or such other office as such Bank may hereafter designate as its Domestic Lending Office by notice to the Borrower and the Administrative Agent. "Effective Date" means the date this Agreement becomes effective in accordance with Section 3.01. "Environmental Laws" means any and all federal, state, local and foreign statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements or other governmental restrictions relating to the environment or to emissions, discharges, releases of pollutants, contaminants, chemicals, or industrial, toxic or hazardous substances or wastes into the environment including, without limitation, ambient air, surface water, ground water, or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, or handling of pollutants, contaminants, chemicals, or industrial, toxic or hazardous substances or wastes. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "ERISA Group" means all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Borrower, are treated as a single employer under Section 414 of the Internal Revenue Code. "Euro-Dollar Business Day" means any Domestic Business Day on which commercial banks are open for international business (including dealings in dollar deposits) in London. 4 "Euro-Dollar Lending Office" means, as to each Bank, its office, branch or affiliate located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Euro-Dollar Lending Office) or such other office, branch or affiliate of such Bank as it may hereafter designate as its Euro-Dollar Lending Office by notice to the Borrower and the Administrative Agent. "Euro-Dollar Loan" means (i) a Committed Loan which bears interest at a Euro-Dollar Rate pursuant to the applicable Notice of Committed Borrowing or Notice of Interest Rate Election or (ii) an overdue amount which was a Euro- Dollar Loan immediately before it became overdue. "Euro-Dollar Margin" means a rate per annum determined in accordance with the Pricing Schedule. "Euro-Dollar Rate" means a rate of interest determined pursuant to Section 2.07(b) on the basis of a London Interbank Offered Rate. "Euro-Dollar Reference Banks" means the principal London offices of The Chase Manhattan Bank and Morgan Guaranty Trust Company of New York. "Euro-Dollar Reserve Percentage" has the meaning set forth in Section 2.16. "Event of Default" has the meaning set forth in Section 6.01. "Existing Credit Agreement" means the $600,000,000 364-Day Credit Agreement dated as of August 23, 1999 among the Borrower, the lenders party thereto and The Chase Manhattan Bank, as administrative agent. "Federal Funds Rate" means, for any day, the rate per annum (rounded upwards, if necessary, to the nearest 1/100th of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Domestic Business Day next succeeding such day, provided that (i) if such day is not a Domestic Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Domestic Business Day as so published on the next succeeding Domestic Business Day, and (ii) if no such rate is so published on such next succeeding Domestic Business Day, the Federal Funds Rate for such day shall be the average rate quoted to The Chase Manhattan Bank (or its successor as Administrative Agent) on such day on such transactions as determined by the Administrative Agent. 5 "Final Maturity Date" means, for each Bank, the first anniversary of its Commitment Termination Date or, if such day is not a Euro-Dollar Business Day, the next preceding Euro-Dollar Business Day; provided that the Final Maturity Date for all Banks shall be no later than August 16, 2004. "Fixed Rate Loans" means Euro-Dollar Loans or Bid Rate Loans (excluding Bid Rate (Indexed) Loans bearing interest at the Base Rate) or any combination of the foregoing. "Group of Loans" means at any time a group of Committed Loans of the same Class consisting of (i) all Base Rate Loans of such Class outstanding at such time or (ii) all Euro-Dollar Loans of such Class having the same Interest Period at such time, provided that, if a Committed Loan of any particular Bank is converted to or made as a Base Rate Loan pursuant to Article 8, such Loan shall be included in the same Group or Groups of Loans from time to time as it would have been if it had not been so converted or made. "Indebtedness" of any Person means at any date, without duplication, (i) all obligations of such Person for borrowed money, (ii) all indebtedness of such Person for the deferred purchase price of property or services purchased, (iii) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired, (iv) all indebtedness under leases which shall have been or should be, in accordance with generally accepted accounting principles, recorded as capital leases in respect of which such Person is liable as lessee, (v) the face amount of letter of credit indebtedness available or to be available to be drawn (other than letter of credit obligations relating to indebtedness included in Indebtedness pursuant to another clause of this definition) and, without duplication, the unreimbursed amount of all drafts drawn thereunder, (vi) indebtedness secured by any Lien on property or assets of such Person, whether or not assumed (but in any event not exceeding the fair market value of the property or asset), (vii) all direct guarantees of Indebtedness referred to above of another Person, (viii) all amounts payable in connection with mandatory redemptions or repurchases of preferred stock and (ix) any obligations of such Person (in the nature of principal or interest) in respect of acceptances or similar obligations issued or created for the account of such Person. "Interest Period" means: (1) with respect to each Euro-Dollar Loan, the period commencing on the date of borrowing specified in the applicable Notice of Borrowing or on the date specified in an applicable Notice of Interest Rate Election and ending one, two, three or six, or, if deposits of a corresponding maturity are generally available in the London interbank market, nine or twelve, months thereafter, as the Borrower may elect in such notice; provided that: 6 (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Euro-Dollar Business Day; and (b) any Interest Period which begins on the last Euro-Dollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Euro-Dollar Business Day of a calendar month; (2) with respect to each Bid Rate (Index) Loan, the period commencing on the date of borrowing specified in the applicable Notice of Borrowing and ending such number of months thereafter (but not less than one month) as the Borrower may elect in accordance with Section 2.03; provided that: (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Euro-Dollar Business Day; and (b) any Interest Period which begins on the last Euro-Dollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Euro-Dollar Business Day of a calendar month; and (3) with respect to each Bid Rate (General) Loan, the period commencing on the date of borrowing specified in the applicable Notice of Borrowing and ending such number of days thereafter (but not less than 7 days) as the Borrower may elect in accordance with Section 2.03; provided that any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day; and provided further that: (x) any Interest Period applicable to any Loan of any Bank which begins before such Bank's Commitment Termination Date and would otherwise end after such Bank's Commitment Termination Date shall end on such Bank's Commitment Termination Date; and (y) any Interest Period applicable to any Loan of any Bank which would otherwise end after such Bank's Final Maturity Date shall end on such Bank's Final Maturity Date. 7 "Internal Revenue Code" means the Internal Revenue Code of 1986, as amended, or any successor statute. "Investment Grade Status" exists as to any Person at any date if all senior debt securities of such Person outstanding at such date which had been rated by S&P or Moody's are rated BBB- or higher by S&P or Baa3 or higher by Moody's, as the case may be. "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset. For the purposes of this Agreement, the Borrower or any Subsidiary shall be deemed to own subject to a Lien any asset which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset. "Loan" means a Base Rate Loan or a Euro-Dollar Loan or a Bid Rate Loan and "Loans" means Base Rate Loans or Euro-Dollar Loans or Bid Rate Loans or any combination of the foregoing. "London Interbank Offered Rate" has the meaning set forth in Section 2.07(b). "Material Adverse Effect" means a material adverse effect on the business, financial position, results of operations or prospects of the Borrower. "Material Debt" means Indebtedness of the Borrower or any of its Subsidiaries in an aggregate principal amount exceeding $100,000,000. "Material Plan" has the meaning set forth in Section 6.01(i). "Material Subsidiary" means at any time any Subsidiary of the Borrower having, together with its Subsidiaries, consolidated assets in excess of 10% of the total assets of the Borrower and its Consolidated Subsidiaries, determined on a consolidated basis as of such time. "Moody's" means Moody's Investor Service, Inc. "Notes" means promissory notes of the Borrower, in the form required by Section 2.05, evidencing the obligation of the Borrower to repay the Loans, and "Note" means any one of such promissory notes issued hereunder. "Notice of Borrowing" means a Notice of Committed Borrowing (as defined in Section 2.02) or a Notice of Bid Rate Borrowing (as defined in Section 2.03(f)). 8 "Notice of Interest Rate Election" has the meaning set forth in Section 2.10(b). "Parent" means, with respect to any Bank, any Person controlling such Bank. "Participant" has the meaning set forth in Section 9.06(b). "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "Person" means an individual, a corporation, a partnership, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Plan" means at any time an employee pension benefit plan which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Internal Revenue Code and is either (i) maintained by a member of the ERISA Group for employees of a member of the ERISA Group or (ii) maintained pursuant to a collective bargaining agreement or any other arrangement under which more than one employer makes contributions and to which a member of the ERISA Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions. "Prime Rate" means the rate of interest publicly announced by The Chase Manhattan Bank in New York City from time to time as its Prime Rate. Each change in the Prime Rate shall be effective from and including the day such change is publicly announced. "Principal Subsidiary" means each of Texas Eastern Transmission Corporation, Algonquin Gas Transmission Company, PanEnergy Corp, and their respective successors. "Quarterly Payment Date" means the first Domestic Business Day of each January, April, July and October. "Regulation U" means Regulation U of the Board of Governors of the Federal Reserve System, as in effect from time to time. "Required Banks" means at any time Banks (i) having at least 51% of the sum of the aggregate amount of the Commitments and the aggregate outstanding principal amount of the Term Loans or (ii) if the Commitments shall have been terminated, having at least 51% of the aggregate unpaid principal amount of the Loans. 9 "Revolving Credit Loan" means a loan made or to be made by a Bank pursuant to Section 2.01(a); provided that, if any such loan or loans (or portions thereof) are combined or subdivided pursuant to a Notice of Interest Rate Election, the term "Revolving Credit Loan" shall refer to the combined principal amount resulting from such combination or to each of the separate principal amounts resulting from such subdivision, as the case may be. "Revolving Credit Period" means, with respect to any Bank, the period from and including the Effective Date to but not including its Commitment Termination Date. "S&P" means Standard & Poor's Rating Services, a division of The McGraw-Hill Companies, Inc. "Subsidiary" means, as to any Person, any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by such Person; unless otherwise specified, "Subsidiary" means a Subsidiary of the Borrower. "Substantial Assets" means assets sold or otherwise disposed of in a single transaction or a series of related transactions representing 25% or more of the consolidated assets of the Borrower and its Consolidated Subsidiaries, taken as a whole. "Term Loan" means a loan made or to be made by a Bank pursuant to Section 2.01(b); provided that, if any such loan or loans (or portions thereof) are combined or subdivided pursuant to a Notice of Interest Rate Election, the term "Term Loan" shall refer to the combined principal amount resulting from such combination or to each of the separate principal amounts resulting from such subdivision, as the case may be. "United States" means the United States of America, including the States and the District of Columbia, but excluding its territories and possessions. "Unfunded Vested Liabilities" means, with respect to any Plan at any time, the amount (if any) by which (i) the present value of all benefits under such Plan exceeds (ii) the fair market value of all Plan assets allocable to such benefits, all determined as of the then most recent valuation date for such Plan, but only to the extent that such excess represents a potential liability of a member of the ERISA Group to the PBGC or the Plan under Title IV of ERISA. SECTION 1.02. Accounting Terms and Determinations. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements 10 required to be delivered hereunder shall be prepared in accordance with generally accepted accounting principles as in effect from time to time, applied on a basis consistent (except for changes concurred in by the Borrower's independent public accountants) with the most recent audited consolidated financial statements of the Borrower and its Consolidated Subsidiaries delivered to the Banks. SECTION 1.03. Types and Classes of Borrowings. The term "Borrowing" denotes the aggregation of Loans of one or more Banks to be made to the Borrower pursuant to Article 2 on a single date and for a single Interest Period. Borrowings are classified for purposes of this Agreement either by reference to the pricing of Loans comprising such Borrowing (e.g., a "Fixed Rate Borrowing" is a Euro-Dollar Borrowing or a Bid Rate Borrowing (excluding any such Borrowing consisting of Bid Rate (Indexed) Loans bearing interest at the Base Rate), and a "Euro-Dollar Borrowing" is a Borrowing comprised of Euro- Dollar Loans) or by reference to the provisions of Article 2 under which participation therein is determined (i.e., a "Committed Borrowing" is a Borrowing under Section 2.01 in which all Banks participate in proportion to their Commitments, while a "Bid Rate Borrowing" is a Borrowing under Section 2.03 in which the Bank participants are determined on the basis of their bids in accordance therewith) or by reference to the Class of Loans comprising such Borrowing (e.g. a "Term Borrowing" is a Borrowing comprised of Term Loans). ARTICLE 2 The Credits SECTION 2.01. Commitments to Lend. (a) Revolving Credit Loans. During its Revolving Credit Period, each Bank severally agrees, on the terms and conditions set forth in this Agreement, to make loans to the Borrower pursuant to this subsection from time to time in amounts such that the aggregate principal amount of Revolving Credit Loans by such Bank at any one time outstanding shall not exceed the amount of its Commitment. Each Borrowing under this subsection shall be in an aggregate principal amount of $10,000,000 or any larger multiple of $1,000,000 (except that any such Borrowing may be in the aggregate amount available in accordance with Section 3.02(b)) and shall be made from the several Banks ratably in proportion to their respective Commitments in effect on the date of Borrowing; provided that, if the Interest Period selected by the Borrower for a Borrowing would otherwise end after the Commitment Termination Dates of some but not all Banks, the Borrower may in its Notice of Committed Borrowing elect not to borrow from those Banks whose Commitment Termination Dates fall prior to the end of such Interest Period. Within the foregoing limits, the Borrower may borrow under this subsection (a), or to the 11 extent permitted by Section 2.12, prepay Loans and reborrow at any time during the Revolving Credit Periods under this subsection (a). (b) Term Loans. Each Bank severally agrees, on the terms and conditions set forth in this Agreement, to make a loan to the Borrower on its Commitment Termination Date in an amount up to but not exceeding the amount of its Commitment. Each Borrowing under this subsection (b) shall be made from the several Banks having the same Commitment Termination Date ratably in proportion to their respective Commitments. (c) Extension of Commitments. On no more than two separate occasions, the Borrower may, upon not less than 45 days but no earlier than 60 days notice prior to the then current Commitment Termination Dates to the Administrative Agent (which shall notify each Bank of receipt of such request), propose to extend the Revolving Credit Periods for an additional 364 days measured from the Commitment Termination Dates then in effect. Each Bank shall endeavor to respond to such request, whether affirmatively or negatively (such determination in the sole discretion of such Bank), by notice to the Borrower and the Administrative Agent not more than 45 days nor less than 30 days prior to such Bank's Commitment Termination Date. Subject to the execution by the Borrower, the Administrative Agent and such Banks of a duly completed Extension Agreement in substantially the form of Exhibit H, the Commitment Termination Date applicable to the Commitment of each Bank so affirmatively notifying the Borrower and the Administrative Agent shall be extended for the period specified above; provided that no Commitment Termination Date of any Bank shall be extended unless Banks having at least 662/3% 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: 12 (a) the date of such Borrowing, which shall be a Domestic Business Day in the case of a Domestic Borrowing or a Euro-Dollar Business Day in the case of a Euro-Dollar Borrowing, (b) the aggregate amount of such Borrowing, (c) whether the Loans comprising such Borrowing are to bear interest initially at the Base Rate or a Euro-Dollar Rate, (d) the Class of Loans comprising such Borrowing, and (e) in the case of a Euro-Dollar Borrowing, the duration of the initial Interest Period applicable thereto, subject to the provisions of the definition of Interest Period. SECTION 2.03. Bid Rate Borrowings. (a) The Bid Rate Option. In addition to Committed Borrowings pursuant to Section 2.01, the Borrower may, as set forth in this Section, request the Banks at any time prior to their respective Commitment Termination Dates to make offers to make Bid Rate Loans to the Borrower. The Banks may, but shall have no obligation to, make such offers and the Borrower may, but shall have no obligation to, accept any such offers in the manner set forth in this Section. (b) Bid Rate Quote Request. When the Borrower wishes to request offers to make Bid Rate Loans under this Section, it shall transmit to the Administrative Agent by telex or facsimile transmission a Bid Rate Quote Request substantially in the form of Exhibit B hereto so as to be received no later than 10:00 A.M. (New York City time) on (x) the fourth Euro-Dollar Business Day prior to the date of Borrowing proposed therein, in the case of a Bid Rate (Indexed) Auction or (y) the Domestic Business Day next preceding the date of Borrowing proposed therein, in the case of a Bid Rate (General) Auction (or, in either case, such other time or date as the Borrower and the Administrative Agent shall have mutually agreed and shall have notified to the Banks not later than the date of the Bid Rate Quote Request for the first Bid Rate (Indexed) Auction or Bid Rate (General) Auction for which such change is to be effective) specifying: (i) the proposed date of Borrowing, which shall be a Euro-Dollar Business Day, (ii) the aggregate amount of such Borrowing, which shall be $10,000,000 or a larger multiple of $1,000,000, (iii) the duration of the Interest Period applicable thereto, subject to the provisions of the definition of Interest Period, and 13 (iv) whether the Bid Rate Quotes requested are to set forth a Bid Rate (Indexed) or a Bid Rate (General) Rate. The Borrower may request offers to make Bid Rate Loans for more than one Interest Period in a single Bid Rate Quote Request. (c) Invitation for Bid Rate Quotes. Promptly upon receipt of a Bid Rate Quote Request, the Administrative Agent shall send to the Banks by telex or facsimile transmission an Invitation for Bid Rate Quotes substantially in the form of Exhibit C hereto, which shall constitute an invitation by the Borrower to each Bank to submit Bid Rate Quotes offering to make the Bid Rate Loans to which such Bid Rate Quote Request relates in accordance with this Section. (d) Submission and Contents of Bid Rate Quotes. (i) Each Bank may submit a Bid Rate Quote containing an offer or offers to make Bid Rate Loans in response to any Invitation for Bid Rate Quotes. Each Bid Rate Quote must comply with the requirements of this subsection (d) and must be submitted to the Administrative Agent by telex or facsimile transmission at its offices specified in or pursuant to Section 9.01 not later than (x) 2:00 P.M. (New York City time) on the fourth Euro-Dollar Business Day prior to the proposed date of Borrowing, in the case of a Bid Rate (Indexed) Auction or (y) 9:30 A.M. (New York City time) on the proposed date of Borrowing, in the case of 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); provided that Bid Rate Quotes submitted by the Administrative Agent (or any affiliate of the Administrative Agent) in the capacity of a Bank may be submitted, and may only be submitted, if the Administrative Agent or such affiliate notifies the Borrower of the terms of the offer or offers contained therein not later than (x) 1:00 P.M. (New York City time) on the fourth Euro-Dollar Business Day prior to the proposed date of Borrowing, in the case of a Bid Rate (Indexed) Auction or (y) 9:15 A.M. (New York City time) on the proposed date of Borrowing, in the case of an Bid Rate (General) Auctions. Subject to Articles 3 and 6, any Bid Rate Quote so made shall be irrevocable except with the written consent of the Administrative Agent given on the instructions of the Borrower. (ii) Each Bid Rate Quote shall be in substantially the form of Exhibit D hereto and shall in any case specify: (A) the proposed date of Borrowing, 14 (B) the principal amount of the Bid Rate Loan for which each such offer is being made, which principal amount (w) may be greater than or less than the Commitment of the quoting Bank, (x) must be $5,000,000 or a larger multiple of $1,000,000 and (y) may not exceed the principal amount of Bid Rate Loans for each Interest Period for which offers were requested and (z) may be subject to an aggregate limitation as to the principal amount of Bid Rate Loans for which offers being made by such quoting Bank may be accepted, (C) in the case of a Bid Rate (Indexed) Auction, the margin above or below the applicable London Interbank Offered Rate (the "Bid Rate (Indexed) Margin") offered for each such Bid Rate Loan, expressed as a percentage (specified to the nearest 1/10,000th of 1%) to be added to or subtracted from such base rate, (D) in the case of a Bid Rate (General)Auction, the rate of interest per annum (specified to the nearest 1/10,000th of 1%) (the "Bid Rate (General)") offered for each such Bid Rate Loan, and (E) the identity of the quoting Bank. A Bid Rate Quote may set forth up to five separate offers by the quoting Bank with respect to each Interest Period specified in the related Invitation for Bid Rate Quotes. (iii) Any Bid Rate Quote shall be disregarded if: (A) it is not substantially in conformity with Exhibit D hereto or does not specify all of the information required by subsection 2.03(d)(ii); (B) it contains qualifying, conditional or similar language beyond that contemplated by Exhibit D; (C) it proposes terms other than or in addition to those set forth in the applicable Invitation for Bid Rate Quotes; (D) it arrives after the time set forth in subsection 2.03(d)(i); or (E) the Commitment Termination Date of the Bank submitting such Bid Rate Quote falls prior to the last day of the requested Interest Period for which such Bank offers to make a Bid Rate Loan. 15 (e) Notice to Borrower. The Administrative Agent shall promptly but in no event later than 10:00 A.M. (New York City time) 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 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), 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 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), 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 16 (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 subsection (b) of this Section 2.04 and the Administrative Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Bank shall not have so made such share available to the Administrative Agent, such Bank and, if such Bank shall not have made such payment within two Domestic Business Days of demand therefor, the Borrower severally agree to repay to the Administrative Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Administrative Agent, at (i) in the case of the 17 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. 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. 18 (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 day plus the London Interbank Offered Rate applicable to such Interest Period. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than three months, at intervals of three months after the first day thereof. The "London Interbank Offered Rate" applicable to any Interest Period means the rate appearing on Page 3750 of the Telerate Service (or on any successor or substitute page of such service, or any successor to or substitute for such service, providing rate quotations comparable to those currently provided on such page of the Telerate Service, as may be nominated by the British Bankers' Association for purposes of providing quotations of interest rates applicable to dollar deposits in the London interbank market) as of 11:00 A.M. (London time) two Euro-Dollar Business Days prior to the commencement of such Interest Period, as the rate for dollar deposits with a maturity comparable to such Interest Period. In the event that such rate is not so available at such time for any reason, then the "London Interbank Offered Rate" for such Interest Period shall be the average (rounded upward, if necessary, to the next higher 1/16 of 1%) of the respective rates per annum at which deposits in dollars are offered to each of the Euro-Dollar Reference Banks in the London interbank market at approximately 11:00 A.M. (London time) two Euro-Dollar Business Days before the first day of such Interest Period in an amount approximately equal to the principal amount of the Loan of such Euro-Dollar Reference Bank to which such Interest Period is to apply and for a period of time comparable to such Interest Period. If any Euro- 19 Dollar Reference Bank does not furnish a timely quotation, the Administrative Agent shall determine the relevant interest rate on the basis of the quotation furnished by the remaining Euro-Dollar Reference Bank or, if none of such quotations is available on a timely basis, the provisions of Section 8.01 shall apply. (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 higher of (i) the sum of the Euro-Dollar Margin for such day plus the London Interbank Offerred Rate applicable to such Loan at the date such payment was due and (ii) the Base Rate for such day. (d) Subject to Section 8.01(a), each Bid Rate (Indexed) Loan shall bear interest on the outstanding principal amount thereof, for the Interest Period applicable thereto, at a rate per annum equal to the sum of the London Interbank Offered Rate for such Interest Period (determined in accordance with Section 2.07(b) as if each Euro-Dollar Reference Bank were to participate in the related Bid Rate (Indexed) Borrowing ratably in proportion to its Commitment) plus (or minus) the Bid Rate (Indexed) Margin quoted by the Bank making such Loan in accordance with Section 2.03. Each Bid Rate (General) Loan shall bear interest on the outstanding principal amount thereof, for the Interest Period applicable thereto, at a rate per annum equal to the Bid Rate (General) quoted by the Bank making such Loan in accordance with Section 2.03. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than three months, at intervals of three months after the first day thereof. Any overdue principal of or overdue interest on any Bid Rate Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 1% plus the Base Rate for such day. (e) The Administrative Agent shall determine each interest rate applicable to the Loans hereunder. The Administrative Agent shall give prompt notice to the Borrower and the participating Banks by telecopy, telex or cable of each rate of interest so determined, and its determination thereof shall be conclusive in the absence of manifest error unless the Borrower raises an objection thereto within five Domestic Business Days after receipt of such notice. SECTION 2.08. Fees. (a) Facility Fee. The Borrower shall pay to the Administrative Agent for the account of each Bank a facility fee at the Facility Fee Rate (determined daily in accordance with the Pricing Schedule). Such facility fee shall accrue (i) from and including the Effective Date to but excluding such Bank's Commitment Termination Date, on the daily average aggregate amount of such Bank's Commitment (whether used or unused) and (ii) from and 20 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. 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 21 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. (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 22 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. (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. 23 (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 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, 24 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 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 25 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 the Borrower with respect to the Increased Commitments and such opinions of counsel for the Borrower with respect to the Increased Commitments as the Administrative Agent may reasonably request. (d) Upon any increase in the aggregate amount of the Commitments pursuant to this Section 2.17, within five Domestic Business Days, in the case of Base Rate Loans then outstanding, and at the end of the then current Interest Period with respect thereto, in the case of Euro-Dollar Loans then outstanding, the Borrower shall prepay or repay such Loans in their entirety and, to the extent the Borrower elects to do so and subject to the conditions specified in Article 3, the Borrower shall reborrow Committed Loans from the Banks in proportion to their respective Commitments after giving effect to such increase, until such time as all outstanding Committed Loans are held by the Banks in such proportion. ARTICLE 3 CONDITIONS SECTION 3.01. Effectiveness. This Agreement shall become effective on the date that each of the following conditions shall have been satisfied (or waived in accordance with Section 9.05): (a) receipt by the Administrative Agent of counterparts hereof signed by each of the parties hereto (or, in the case of any party as to which an executed counterpart shall not have been received, receipt by the Administrative Agent in form satisfactory to it of telegraphic, telecopy, telex or other written confirmation from such party of execution of a counterpart hereof by such party); (b) receipt by the Administrative Agent of an opinion of the General Counsel of the Borrower substantially in the form of Exhibit E hereto and 26 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 Agreement and the cancellation or the expiration of any letter of credit issued thereunder; provided that this Agreement shall not become effective or be binding on any party hereto unless all of the foregoing conditions are satisfied not later than August 21, 2000. The Administrative Agent shall promptly notify the Borrower and the Banks of the Effective Date, and such notice shall be conclusive and binding on all parties hereto. The Borrower and the Banks party to the Existing Credit Agreement, comprising the "Required Banks" as defined therein, hereby agree that (i) the commitments of the lenders under the Existing Credit Agreement shall terminate in their entirety immediately and automatically upon the effectiveness of this Agreement, without further action by any party to the Existing Credit Agreement, (ii) all accrued fees under the Existing Credit Agreement shall be due and payable at such time and (iii) subject to the funding loss indemnities in the Existing Credit Agreement, the Borrower may prepay any and all loans outstanding thereunder on the date of effectiveness of this Agreement. SECTION 3.02. Borrowings. The obligation of any Bank to make a Loan on the occasion of any Borrowing is subject to the satisfaction of the following conditions: (a) receipt by the Administrative Agent of a Notice of Borrowing as required by Section 2.02 or 2.03; 27 (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 (d) the fact that the representations and warranties of the Borrower contained in this Agreement (except the representations and warranties set forth in Sections 4.04(c) and 4.05) shall be true on and as of the date of such Borrowing. Each Borrowing hereunder shall be deemed to be a representation and warranty by the Borrower on the date of such Borrowing as to the facts specified in clauses (b), (c) and (d) of this Section. ARTICLE 4 REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants that: SECTION 4.01. Corporate Existence and Power. The Borrower is a corporation duly incorporated, validly existing and in good standing under the laws of Delaware, and has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted and is duly qualified to do business as a foreign corporation in each jurisdiction where such qualification is required, except where the failure so to qualify would not have a material adverse effect on the business, financial position or results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole. SECTION 4.02. Corporate and Governmental Authorization; No Contravention. The execution, delivery and performance by the Borrower of this Agreement and the Notes are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action, require no action by or in respect of, or filing with, any governmental body, agency or official and do not contravene, or constitute a default under, any provision of applicable law or regulation or of the articles of incorporation or by-laws of the Borrower or of any agreement, judgment, injunction, order, decree or other instrument binding upon the Borrower or result in the creation or imposition of any Lien on any asset of the Borrower or any of its Material Subsidiaries. 28 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, 1999 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, 2000 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. SECTION 4.05. Litigation. (a) Except as disclosed in the reports referred to in Section 4.04, or in reports hereafter filed by the Borrower with the Securities and Exchange Commission, copies of which have been made available to each of the Banks, there is no action, suit or proceeding pending against, or to the knowledge of the Borrower threatened against or affecting, the Borrower or any of its Subsidiaries before any court or arbitrator or any governmental body, agency or official which would be likely to be decided adversely to Borrower and, as a result, have a material adverse effect upon the business, consolidated financial position or results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole, or which in any manner draws into question the validity of this Agreement or any Note. 29 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. 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 30 requirements of the Securities and Exchange Commission by Deloitte & Touche or other independent public accountants of nationally recognized standing; (b) as soon as available and in any event within 60 days after the end of each of the first three quarters of each fiscal year of the Borrower, a consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of the end of such quarter and the related consolidated statements of income and cash flows for such quarter and for the portion of the Borrower's fiscal year ended at the end of such quarter, setting forth in each case in comparative form the figures for the corresponding quarter and the corresponding portion of the Borrower's previous fiscal year, all certified (subject to normal year-end adjustments) as to fairness of presentation, generally accepted accounting principles and consistency by an Approved Officer of the Borrower; (c) simultaneously with the delivery of each set of financial statements referred to in clauses (a) and (b) above, a certificate of an Approved Officer of the Borrower stating whether any Default exists on the date of such certificate and, if any Default then exists, setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto; (d) within five days after any officer of the Borrower with responsibility relating thereto obtains knowledge of any Default, if such Default is then continuing, a certificate of an Approved Officer of the Borrower setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto; (e) promptly upon the filing thereof, copies of all registration statements (other than the exhibits thereto and any registration statements on Form S-8 or its equivalent) and reports on Forms 10-K, 10-Q and 8-K (or their equivalents) which the Borrower shall have filed with the Securities and Exchange Commission; (f) if and when any member of the ERISA Group (i) gives or is required to give notice to the PBGC of any "reportable event" (as defined in Section 4043 of ERISA) with respect to any Material Plan which might constitute grounds for a termination of such Plan under Title IV of ERISA, or knows that the plan administrator of any Material Plan has given or is required to give notice of any such reportable event, a copy of the notice of such reportable event given or required to be given to the PBGC; (ii) receives notice of complete or partial 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 31 the Internal Revenue Code, a copy of such application; (v) gives notice of intent to terminate any Material Plan under Section 4041(c) of ERISA, a copy of such notice and other information filed with the PBGC; (vi) gives notice of withdrawal from any Material Plan pursuant to Section 4063 of ERISA, a copy of such notice; or (vii) fails to make any payment or contribution to any Material Plan or makes any amendment to any Material Plan which has resulted or could result in the imposition of a Lien or the posting of a bond or other security, a certificate of the chief financial officer or the chief accounting officer of the Borrower setting forth details as to such occurrence and action, if any, which the Borrower or applicable member of the ERISA Group is required or proposes to take; and (g) from time to time such additional information regarding the financial position or business of the Borrower and its Subsidiaries as the Administrative Agent, at the request of any Bank, may reasonably request. Information required to be delivered pursuant to this Sections 5.01(a), 5.01(b) and 5.01(e) shall be deemed to have been delivered on the date on which the Borrower provides notice to the Banks that such information has been posted on the Securities and Exchange Commission website on the Internet at sec.gov/edaux/searches.htm or at another website identified in such notice and accessible by the Banks without charge; provided that (i) such notice may be included in a certificate delivered pursuant to Section 5.01(c) and (ii) the Borrower shall deliver paper copies of the information referred to in Sections 5.01(a), 5.01(b) and 5.01(e) to any Bank which requests such delivery. SECTION 5.02. Payment of Taxes. The Borrower will pay and discharge, and will cause each Material Subsidiary to pay and discharge, at or before maturity, all their tax liabilities, except where (i) nonpayment would not have a material adverse effect on the business, financial position or results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole, or (ii) the same may be contested in good faith by appropriate proceedings, and will maintain, and will cause each Material Subsidiary to maintain, in accordance with generally accepted accounting principles, appropriate reserves for the accrual of any of the same. SECTION 5.03. Maintenance of Property; Insurance. (a) The Borrower will keep, and will cause each Material Subsidiary to keep, all property useful and 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 32 risks (and with such risk retention) as are usually insured against in the same general area by companies of established repute engaged in the same or a similar business; provided that self-insurance by the Borrower or any such Material Subsidiary shall not be deemed a violation of this covenant to the extent that companies engaged in similar businesses and owning similar properties in the same general areas in which the Borrower or such Material Subsidiary operates self-insure; and will furnish to the Banks, upon request from the Administrative Agent, information presented in reasonable detail as to the insurance so carried. SECTION 5.04. Maintenance of Existence. The Borrower will preserve, renew and keep in full force and effect, and will cause each Material Subsidiary to preserve, renew and keep in full force and effect their respective corporate existence and their respective rights, privileges and franchises material to the normal conduct of their respective businesses; provided that nothing in this Section 5.04 shall prohibit the termination of any right, privilege or franchise of the Borrower or any Material Subsidiary or of the corporate existence of any Material Subsidiary if the Borrower in good faith determines that such termination is in the best interest of the Borrower and is not materially disadvantageous to the Banks. SECTION 5.05. Compliance with Laws. The Borrower will comply, and cause each Material Subsidiary to comply, in all material respects with all applicable laws, ordinances, rules, regulations, and requirements of governmental authorities (including, without limitation, ERISA and Environmental Laws) except where (i) noncompliance would not have a material adverse effect on the business, financial position or results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole, or (ii) the necessity of compliance therewith is contested in good faith by appropriate proceedings. SECTION 5.06. Books and Records. The Borrower will keep, and will cause each Material Subsidiary to keep, proper books of record and account in which full, true and correct entries shall be made of all financial transactions in relation to its business and activities in accordance with its customary practices; and will permit, and will cause each Material Subsidiary to permit, representatives of any Bank at such Bank's expense (accompanied by a representative of the Borrower, if the Borrower so desires) to visit any of their respective properties, to examine any of their respective books and records and to discuss their respective affairs, 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 33 all Liens, provided that any Principal Subsidiary may merge with and into the Borrower or another Subsidiary. SECTION 5.08. Negative Pledge. The Borrower will not create, assume or suffer to exist any Lien on any asset now owned or hereafter acquired by it, except: (a) Liens granted by the Borrower existing on the date of this Agreement securing Indebtedness outstanding on the date of this Agreement in an aggregate principal amount not exceeding $100,000,000; (b) any Lien on any asset of any corporation existing at the time such corporation is merged or consolidated with or into the Borrower and not created in contemplation of such event; (c) any Lien existing on any asset prior to the acquisition thereof by the Borrower and not created in contemplation of such acquisition; (d) any Lien on any asset securing Indebtedness incurred or assumed for the purpose of financing all or any part of the cost of acquiring such asset, provided that such Lien attaches to such asset concurrently with or within 180 days after the acquisition thereof; (e) any Lien arising out of the refinancing, extension, renewal or refunding of any Indebtedness secured by any Lien permitted by any of the foregoing clauses of this Section, provided that such Indebtedness is not increased and is not secured by any additional assets; (f) Liens for taxes, assessments or other governmental charges or levies not yet due or which are being contested in good faith by appropriate proceedings and with respect to which adequate reserves or other appropriate provisions are being maintained in accordance with generally accepted accounting principles; (g) statutory Liens of landlords and Liens of carriers, warehousemen, mechanics, materialmen and other Liens imposed by law, created in the ordinary course of business and for amounts not past due for more than 60 days or which are being contested in good faith by appropriate proceedings which are sufficient 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 34 workers' compensation, unemployment insurance and other types of social security benefits or to secure the performance of tenders, bids, leases, contracts (other than for the repayment of Indebtedness), statutory obligations and other similar obligations or arising as a result of progress payments under government contracts; (i) easements (including, without limitation, reciprocal easement agreements and utility agreements), rights-of-way, covenants, consents, reservations, encroachments, variations and other restrictions, charges or encumbrances (whether or not recorded) affecting the use of real property; (j) Liens with respect to judgments and attachments which do not result in an Event of Default; (k) Liens, deposits or pledges to secure the performance of bids, tenders, contracts (other than contracts for the payment of money), leases (permitted under the terms of this Agreement), public or statutory obligations, surety, stay, appeal, indemnity, performance or other obligations arising in the ordinary course of business; and (l) other Liens including Liens imposed by Environmental Laws arising in the ordinary course of its business which (i) do not secure Indebtedness, (ii) do not secure any obligation in an amount exceeding $100,000,000 at any time at which Investment Grade Status does not exist as to the Borrower and (iii) do not in the aggregate materially detract from the value of its assets or materially impair the use thereof in the operation of its business. SECTION 5.09. Consolidations, Mergers and Sales of Assets. The Borrower will not (i) consolidate or merge with or into any other Person or (ii) sell, lease or otherwise transfer, directly or indirectly, Substantial Assets to any Person (other than a Subsidiary); provided that the Borrower may merge with another Person if the Borrower is the corporation surviving such merger and, after giving effect thereto, no Default shall have occurred and be continuing. SECTION 5.10. Use of Proceeds. The proceeds of the Loans made under this Agreement will be used by the Borrower for its general corporate purposes, including liquidity support for outstanding commercial paper. None of such 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 35 any assets, tangible or intangible, to, or participate in, or effect, any transaction with, any Affiliate unless all such transactions between the Borrower and its Subsidiaries on the one hand and any Affiliate on the other, taken in the aggregate and not individually, shall be on an arms-length basis on terms no less favorable to the Borrower or such Subsidiary than could have been obtained from a third party who was not an Affiliate; provided that the foregoing provisions of this Section shall not prohibit the Borrower and each Subsidiary from declaring or paying any lawful dividend so long as, after giving effect thereto, no Default shall have occurred and be continuing. SECTION 5.12. Indebtedness/Capitalization Ratio. The ratio of Consolidated Indebtedness to Consolidated Capitalization will at no time exceed 65%. ARTICLE 6 DEFAULTS SECTION 6.01. Events of Default. If one or more of the following events ("Events of Default") shall have occurred and be continuing: (a) the Borrower shall fail to pay when due any principal of any Loan or shall fail to pay, within five days of the due date thereof, any interest, fees or any other amount payable hereunder; (b) the Borrower shall fail to observe or perform any covenant contained in Sections 5.08, 5.09, 5.12 or the second sentence of 5.10, inclusive; (c) the Borrower shall fail to observe or perform any covenant or agreement contained in this Agreement (other than those covered by clause (a) or (b) above) for 30 days after notice thereof has been given to the Borrower by the Administrative Agent at the request of any Bank; (d) any representation, warranty, certification or statement made by the Borrower in this Agreement or in any certificate, financial statement or other 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; 36 (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 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 37 (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. 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. 38 SECTION 7.03. Action by Administrative Agent. The obligations of the Administrative Agent hereunder are only those expressly set forth herein. Without limiting the generality of the foregoing, the Administrative Agent shall not be required to take any action with respect to any Default, except as expressly provided in Article 6. SECTION 7.04. Consultation with Experts. The Administrative Agent may consult with legal counsel (who may be counsel for the Borrower), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts. SECTION 7.05. Liability of Administrative Agent. Neither the Administrative Agent nor any of its affiliates nor any of their respective directors, officers, agents or employees shall be liable to any Bank for any action taken or not taken by it in connection herewith (i) with the consent or at the request of the Required Banks or (ii) in the absence of its own gross negligence or willful misconduct. Neither the Administrative Agent nor any of its affiliates nor any of their respective directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into or verify (i) any statement, warranty or representation made in connection with this Agreement or any borrowing hereunder; (ii) the performance or observance of any of the covenants or agreements of the Borrower; (iii) the satisfaction of any condition specified in Article 3, except receipt of items required to be delivered to the Administrative Agent; or (iv) the validity, effectiveness or genuineness of this Agreement, the Notes or any other instrument or writing furnished in connection herewith. The Administrative Agent shall not incur any liability by acting in reliance upon any notice, consent, certificate, statement, or other writing (which may be a bank wire, telex or similar writing) believed by it in good faith to be genuine or to be signed by the proper party or parties. Without limiting the generality of the foregoing, the use of the term "agent" in this Agreement with reference to the Administrative Agent is not intended to connote any fiduciary or other implied (or express) obligations arising under agency doctrine of any applicable law. Instead, such term is used merely as a matter of market custom and is intended to create or reflect only an administrative relationship between independent contracting parties. 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 39 indemnitees may suffer or incur in connection with this Agreement or any action taken or omitted by such indemnitees thereunder. SECTION 7.07. Credit Decision. Each Bank acknowledges that it has, independently and without reliance upon the Administrative Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Bank also acknowledges that it will, independently and without reliance upon the Administrative Agent or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking any action under this Agreement. SECTION 7.08. Successor Administrative Agent. The Administrative Agent may resign at any time by giving notice thereof to the Banks and the Borrower. Upon any such resignation, the Borrower, with the consent of the Required Banks, (such consent not to be unreasonably withheld or delayed), shall have the right to appoint a successor Administrative Agent. If no successor Administrative Agent shall have been so appointed, and shall have accepted such appointment, within 30 days after the retiring Administrative Agent gives notice of resignation, then the retiring Administrative Agent may, on behalf of the Banks, appoint a successor Administrative Agent, which shall be a commercial bank organized or licensed under the laws of the United States of America or of any State thereof and having a combined capital and surplus of at least $250,000,000. Upon the acceptance of its appointment as Administrative Agent hereunder by a successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder; provided that if such successor Administrative Agent is appointed without the consent of the Borrower, such successor Administrative Agent may be replaced by the Borrower with the consent of the Required Banks. After any retiring Administrative Agent's resignation hereunder as Administrative Agent, the provisions of this Article shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent. SECTION 7.09. Administrative Agent's Fee. The Borrower shall pay to the Administrative Agent for its own account fees in the amounts and at the times previously agreed upon between the Borrower and the Administrative Agent. 40 ARTICLE 8 CHANGE IN CIRCUMSTANCES SECTION 8.01. Basis for Determining Interest Rate Inadequate or Unfair. If on or prior to the first day of any Interest Period for any Euro- Dollar Borrowing or Bid Rate (Indexed) Borrowing: (a) the Administrative Agent is advised by the Euro-Dollar Reference Banks that deposits in dollars (in the applicable amounts) are not being offered to the Euro-Dollar Reference Banks in the relevant market for such Interest Period, or (b) in the case of a Euro-Dollar Borrowing, Banks having 66 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 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 41 such Bank to make Euro-Dollar Loans, or to continue or convert outstanding Loans as or into Euro-Dollar Loans, shall be suspended. Before giving any notice to the Administrative Agent pursuant to this Section, such Bank shall designate a different Euro-Dollar Lending Office if such designation will avoid the need for giving such notice and will not be otherwise disadvantageous to such Bank in the good faith exercise of its discretion. If such notice is given, each Euro-Dollar Loan of such Bank then outstanding shall be converted to a Base Rate Loan either (a) on the last day of the then current Interest Period applicable to such Euro- Dollar Loan if such Bank may lawfully continue to maintain and fund such Loan to such day or (b) immediately if such Bank shall determine that it may not lawfully continue to maintain and fund such Loan to such day. SECTION 8.03. Increased Cost and Reduced Return. (a) If on or after (x) the date of this Agreement, in the case of any Committed Loan or any obligation to make Committed Loans or (y) the date of any related Bid Rate Quote, in the case of any Bid Rate Loan, the adoption of any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Applicable Lending Office) with any request or directive (whether or not having the force of law) issued on or after such date of any such authority, central bank or comparable agency shall impose, modify or deem applicable any reserve, special deposit or similar requirement (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System, but excluding with respect to any Euro- Dollar Loan any such requirement included in an applicable Euro-Dollar Reserve Percentage) against assets of, deposits with or for the account of, or credit extended by, any Bank (or its Applicable Lending Office) or shall impose on any Bank (or its Applicable Lending Office) or on the London interbank market any other condition (other than in respect of Taxes or Other Taxes) affecting its Fixed Rate Loans, its Note or its obligation to make Fixed Rate Loans and the result of any of the foregoing is to increase the cost to such Bank (or its Applicable Lending Office) of making or maintaining any Fixed Rate Loan, or to reduce the amount of any sum received or receivable by such Bank (or its Applicable Lending Office) under this Agreement or under its Note with respect thereto, by an amount deemed by such Bank to be material, then, within 15 days after demand by such Bank (with a copy to the Administrative Agent), the Borrower shall pay to such Bank such additional amount or amounts as will compensate 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). 42 (b) If any Bank shall have determined that, on or after the date of this Agreement, the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change in any such law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency given or made after the date of this Agreement, has or would have the effect of reducing the rate of return on capital of such Bank (or its Parent) as a consequence of such Bank's obligations hereunder to a level below that which such Bank (or its Parent) could have achieved but for such adoption, change, request or directive (taking into consideration its policies with respect to capital adequacy) by an amount deemed by such Bank to be material, then from time to time, within 15 days after demand by such Bank (with a copy to the Administrative Agent), the Borrower shall pay to such Bank such additional amount or amounts as will compensate such Bank (or its Parent) for such reduction; provided that no such amount shall be payable with respect to any period commencing less than 30 days after the date such Bank first notifies the Borrower of its intention to demand compensation under this Section 8.03(b). (c) Each Bank will promptly notify the Borrower and the Administrative Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Bank to compensation pursuant to this Section and will designate a different Applicable Lending Office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. A certificate of any Bank claiming compensation under this Section and setting forth the additional amount or amounts to be paid to it hereunder shall be conclusive in the absence of manifest error. In determining such amount, such Bank may use any reasonable averaging and attribution methods. SECTION 8.04. Taxes. (a) For purposes of this Section 8.04, the following terms have the following meanings: "Taxes" means any and all present or future taxes, duties, levies, 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 43 withholding tax imposed on such payments except to the extent that such Bank is subject to United States withholding tax by reason of a U.S. Tax Law Change. "Other Taxes" means any present or future stamp or documentary taxes and any other excise or property taxes, or similar charges or levies, which arise from any payment made pursuant to this Agreement or under any Note or from the execution or delivery of, or otherwise with respect to, this Agreement or any Note. "U.S. Tax Law Change" means with respect to any Bank or Participant the occurrence (x) in the case of each Bank listed on the signature pages hereof, after the date of its execution and delivery of this Agreement and (y) in the case of any other Bank, after the date such Bank shall have become a Bank hereunder, and (z) in the case of each Participant, after the date such Participant became a Participant hereunder, of the adoption of any applicable U.S. federal law, U.S. federal rule or U.S. federal regulation relating to taxation, or any change therein, or the entry into force, modification or revocation of any income tax convention or treaty to which the United States is a party. (b) Any and all payments by the Borrower to or for the account of any Bank or the Administrative Agent hereunder or under any Note shall be made without deduction for any Taxes or Other Taxes; provided that, if the Borrower shall be required by law to deduct any Taxes or Other Taxes from any such payments, (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 8.04) such Bank or the Administrative Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions, (iii) the Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law and (iv) the Borrower shall furnish to the Administrative Agent, at its address referred to in Section 9.01, the original or a certified copy of a receipt evidencing payment thereof. (c) The Borrower agrees to indemnify each Bank and the Administrative Agent for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed or asserted by any jurisdiction on amounts payable under this Section 8.04) paid by such Bank or the Administrative Agent (as the case may be) and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto. This indemnification shall be paid 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 44 Agreement in the case of each Bank listed on the signature pages hereof and on or prior to the date on which it becomes a Bank in the case of each other Bank, and from time to time thereafter as required by law (but only so long as such Bank remains lawfully able to do so), shall provide the Borrower two completed and duly executed copies of Internal Revenue Service form 1001 or 4224, as appropriate, or any successor form prescribed by the Internal Revenue Service, or other documentation reasonably requested by the Borrower, certifying that such Bank is entitled to benefits under an income tax treaty to which the United States is a party which exempts the Bank from United States withholding tax or reduces the rate of withholding tax on payments of interest for the account of such Bank or certifying that the income receivable pursuant to this Agreement is effectively connected with the conduct of a trade or business in the United States. (e) For any period with respect to which a Bank has failed to provide the Borrower with the appropriate form pursuant to Section 8.04(d) (unless such failure is due to a U.S. Tax Law Change), such Bank shall not be entitled to indemnification under Section 8.04(b) or 8.04(c) with respect to any Taxes or Other Taxes which would not have been payable had such form been so provided, provided that if a Bank, which is otherwise exempt from or subject to a reduced rate of withholding tax, becomes subject to Taxes because of its failure to deliver a form required hereunder, the Borrower shall take such steps as such Bank shall reasonably request to assist such Bank to recover such Taxes (it being understood, however, that the Borrower shall have no liability to such Bank in respect of such Taxes). (f) If the Borrower is required to pay additional amounts to or for the account of any Bank pursuant to this Section 8.04, then such Bank will take such action (including changing the jurisdiction of its Applicable Lending Office) as in the good faith judgment of such Bank (i) will eliminate or reduce any such additional payment which may thereafter accrue and (ii) is not otherwise disadvantageous to such Bank. (g) If any Bank or the Administrative Agent receives a refund (including a refund in the form of a credit against taxes that are otherwise payable by the Bank or the Administrative Agent) of any Taxes or Other Taxes for which the Borrower has made a payment under Section 8.04(b) or (c) and such refund was received from the taxing authority which originally imposed such Taxes or Other Taxes, such Bank or the Administrative Agent agrees to reimburse the Borrower to the extent of such refund, provided that nothing contained in this 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). 45 SECTION 8.05. Base Rate Loans Substituted for Affected Fixed Rate Loans. If (i) the obligation of any Bank to make or to continue or convert outstanding Loans as or into Euro-Dollar Loans has been suspended pursuant to Section 8.02 or (ii) any Bank has demanded compensation under Section 8.03(a) or 8.04 with respect to its Euro-Dollar Loans and the Borrower shall, by at least five Euro- Dollar Business Days' prior notice to such Bank through the Administrative Agent, have elected that the provisions of this Section shall apply to such Bank, then, unless and until such Bank notifies the Borrower that the circumstances giving rise to such suspension or demand for compensation no longer apply: (a) all Loans which would otherwise be made by such Bank as (or continued as or converted to) Euro-Dollar Loans, as the case may be, shall instead be Base Rate Loans (on which interest and principal shall be payable contemporaneously with the related Euro-Dollar Loans of the other Banks), and (b) after each of its Euro-Dollar Loans has been repaid, all payments of principal which would otherwise be applied to repay such Loans shall be applied to repay its Base Rate Loans instead. If such Bank notifies the Borrower that the circumstances giving rise to such suspension or demand for compensation no longer exist, the principal amount of each such Base Rate Loan shall be converted into a Euro-Dollar Loan on the first day of the next succeeding Interest Period applicable to the related Euro-Dollar Loans of the other Banks. SECTION 8.06. Substitution of Bank Termination Option. If (i) the obligation of any Bank to make or to convert or continue outstanding Loans as or into Euro-Dollar Loans has been suspended pursuant to Section 8.02, (ii) any Bank has demanded compensation under Section 8.03 or 8.04, or (iii) any Bank exercises its right not to extend its Commitment Termination Date pursuant to Section 2.01(c) or (iv) Investment Grade Status ceases to exist as to any Bank, then: (a) the Borrower shall have the right, with the assistance of the Administrative Agent, to designate a substitute bank or banks (which may be one or more of the Banks) mutually satisfactory to the Borrower and the Administrative Agent (whose consent shall not be unreasonably withheld or delayed) to purchase for cash, pursuant to an Assignment and Assumption Agreement in substantially the form of Exhibit G hereto, the outstanding Loans of such Bank and assume the Commitment of such Bank, without recourse to or 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 46 Section 2.14 if the outstanding Loans of such Bank were prepaid in their entirety on the date of consummation of such assignment; and (b) if at the time Investment Grade Status exists as to the Borrower, the Borrower may elect to terminate this Agreement as to such Bank, provided that (i) the Borrower notifies such Bank through the Administrative Agent of such election at least three Euro-Dollar Business Days before the effective date of such termination and (ii) the Borrower repays or prepays the principal amount of all outstanding Loans made by such Bank plus any accrued but unpaid interest thereon and the accrued but unpaid fees in respect of such Bank's Commitment hereunder plus all other amounts payable by the Borrower to such Bank hereunder, not later than the effective date of such termination. Upon satisfaction of the foregoing conditions, the Commitment of such Bank shall terminate on the effective date specified in such notice. ARTICLE 9 MISCELLANEOUS SECTION 9.01. Notices. All notices, requests and other communications to any party hereunder shall be in writing (including bank wire, telex, facsimile transmission or similar writing) and shall be given to such party: (x) in the case of the Borrower or the Administrative Agent, at its address or telecopy or telex number set forth on the signature pages hereof, (y) in the case of any Bank, at its address or telecopy or telex number set forth in its Administrative Questionnaire or (z) in the case of any party, such other address or telecopy or telex number as such party may hereafter specify for the purpose by notice to the Administrative Agent and the Borrower. Each such notice, request or other communication shall be effective (i) if given by telecopy or telex, when such telecopy or telex is transmitted to the telecopy or telex number specified in this Section and the appropriate answerback or confirmation slip, as the case may be, is received, (ii) if given by mail, 84 hours after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid or (iii) if given by any other means, when delivered at the address specified in this Section; provided that notices to the Administrative Agent under Article 2 or Article 3 shall not be effective until delivered. 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 47 right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. SECTION 9.03. Expenses; Indemnification. (a) The Borrower shall pay (i) all reasonable out-of-pocket expenses of the Administrative Agent, including reasonable fees and disbursements of special counsel for the Administrative Agent, in connection with the preparation of this Agreement, any waiver or consent hereunder or any amendment hereof or any Default or alleged Default hereunder and (ii) if an Event of Default occurs, all reasonable out-of-pocket expenses incurred by the Administrative Agent or any Bank, including reasonable fees and disbursements of counsel, in connection with such Event of Default and collection and other enforcement proceedings resulting therefrom. (b) The Borrower agrees to indemnify the Administrative Agent and each Bank, their respective affiliates and the respective directors, officers, agents and employees of the foregoing (each an "Indemnitee") and hold each Indemnitee harmless from and against any and all liabilities, losses, damages, costs and expenses of any kind, including, without limitation, the reasonable fees and disbursements of counsel, which may be incurred by such Indemnitee in connection with any investigative, administrative or judicial proceeding (whether or not such Indemnitee shall be designated a party thereto) relating to or arising out of this Agreement or any actual or proposed use of proceeds of Loans hereunder; provided that no Indemnitee shall have the right to be indemnified hereunder for such Indemnitee's own gross negligence or willful misconduct as determined by a court of competent jurisdiction. SECTION 9.04. Sharing of Set-offs. Each Bank agrees that if it shall, by exercising any right of set-off or counterclaim or otherwise, receive payment of a proportion of the aggregate amount then due with respect to the Loans held by it which is greater than the proportion received by any other Bank in respect of the aggregate amount then due with respect to the Loans held by such other Bank, the Bank receiving such proportionately greater payment shall purchase such participations in the Loans held by the other Banks, and such other adjustments shall be made, as may be required so that all such payments with respect to the Loans held by the Banks shall be shared by the Banks pro rata; provided that nothing in this Section shall impair the right of any Bank to exercise any right of set-off or counterclaim it may have and to apply the amount subject to such exercise to the payment of indebtedness of the Borrower other than its indebtedness under this Agreement. 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 48 affected thereby, by the Administrative Agent); provided that no such amendment or waiver shall, unless signed by all the Banks, (i) increase or decrease the Commitment of any Bank (except (x) as contemplated by Section 2.17 or (y) for a ratable decrease in the Commitments of all Banks) or subject any Bank to any additional obligation, (ii) reduce the principal of or rate of interest on any Loan or any fees hereunder, (iii) postpone the date fixed for any payment of principal of or interest on any Loan or interest thereon or any fees hereunder or for termination of any Commitment or (iv) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Loans, or the number of Banks, which shall be required for the Banks or any of them to take any action under this Section or any other provision of this Agreement. SECTION 9.06. Successors and Assigns. (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Borrower may not assign or otherwise transfer any of its rights under this Agreement without the prior written consent of all Banks. (b) Any Bank may, with the consent of the Borrower (such consent not to be unreasonably withheld or delayed), at any time grant to one or more banks or other institutions (each a "Participant") participating interests in its Commitment or any or all of its Loans. In the event of any such grant by a Bank of a participating interest to a Participant, whether or not upon notice to the Administrative Agent, such Bank shall remain responsible for the performance of its obligations hereunder, and the Borrower and the Administrative Agent shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement. Any agreement pursuant to which any Bank may grant such a participating interest shall provide that such Bank shall retain the sole right and responsibility to enforce the obligations of the Borrower hereunder including, without limitation, the right to approve any amendment, modification or waiver of any provision of this Agreement; provided that such participation agreement may provide that such Bank will not agree to any modification, amendment or waiver of this Agreement described in clause (i), (ii) or (iii) of Section 9.05 without the consent of the Participant. The Borrower agrees that each Participant shall, to the extent provided in its participation agreement, be entitled to the benefits of Article 8 with respect to its participating interest, subject to the performance by such Participant of the obligations of a Bank thereunder. An assignment or other transfer which is not permitted by subsection (c) or (d) below shall be given effect for purposes of this Agreement 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 49 to an initial Commitment of not less than $20,000,000 (unless the Borrower and the Administrative Agent shall otherwise agree)) of all, of its rights and obligations under this Agreement and its Note (if any), and such Assignee shall assume such rights and obligations, pursuant to an Assignment and Assumption Agreement in substantially the form of Exhibit G hereto executed by such Assignee and such transferor Bank, with (and only with and subject to) the prior written consent of the Borrower (given in its sole discretion) and the Administrative Agent (which shall not be unreasonably withheld or delayed), provided that unless such assignment is of the entire right, title and interest of the transferor Bank hereunder, after making any such assignment such transferor Bank shall have a Commitment of at least $20,000,000 (unless the Borrower and the Administrative Agent shall otherwise agree). Upon execution and delivery of such instrument of assumption and payment by such Assignee to such transferor Bank of an amount equal to the purchase price agreed between such transferor Bank and such Assignee, such Assignee shall be a Bank party to this Agreement and shall have all the rights and obligations of a Bank with a Commitment as set forth in such instrument of assumption, and the transferor Bank shall be released from its obligations hereunder to a corresponding extent, and no further consent or action by any party shall be required. Upon the consummation of any assignment pursuant to this subsection (c), the transferor Bank, the Administrative Agent and the Borrower shall make appropriate arrangements so that, if required by the Assignee, a Note is issued to the Assignee. If the Assignee is not incorporated under the laws of the United States of America or a state thereof, it shall, prior to the first date on which interest or fees are payable hereunder for its account, deliver to the Borrower and the Administrative Agent certification as to exemption from deduction or withholding of any United States federal income taxes in accordance with Section 8.04. All assignments shall be subject to a transaction fee established by, and payable by the transferor Bank to, the Administrative Agent for its own account (which shall not exceed $5,000). (d) Any Bank may at any time assign all or any portion of its rights under this Agreement and its Note (if any) to a Federal Reserve Bank. No such assignment shall release the transferor Bank from its obligations hereunder or modify any such obligations. (e) No Assignee, Participant or other transferee of any Bank's rights (including any Applicable Lending Office other than such Bank's initial Applicable Lending Office) shall be entitled to receive any greater payment under Section 8.03 or 8.04 than such Bank would have been entitled to receive with 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. 50 SECTION 9.07. Collateral. Each of the Banks represents to the Administrative Agent and each of the other Banks that it in good faith is not relying upon any "margin stock" (as defined in Regulation U) as collateral in the extension or maintenance of the credit provided for in this Agreement. SECTION 9.08. Confidentiality. The Administrative Agent and each Bank agrees to keep any information delivered or made available by the Borrower pursuant to this Agreement confidential from anyone other than persons employed or retained by such Bank and its affiliates who are engaged in evaluating, approving, structuring or administering the credit facility contemplated hereby; provided that nothing herein shall prevent any Bank from disclosing such information (a) to any other Bank or to the Administrative Agent, (b) to any other Person if reasonably incidental to the administration of the credit facility contemplated hereby, (c) upon the order of any court or administrative agency, (d) upon the request or demand of any regulatory agency or authority, (e) which had been publicly disclosed other than as a result of a disclosure by the Administrative Agent or any Bank prohibited by this Agreement, (f) in connection with any litigation to which the Administrative Agent, any Bank or its subsidiaries or Parent may be a party, (g) to the extent necessary in connection with the exercise of any remedy hereunder, (h) to such Bank's or Administrative Agent's legal counsel and independent auditors and (i) subject to provisions substantially similar to those contained in this Section 9.08, to any actual or proposed Participant or Assignee. SECTION 9.09. Governing Law; Submission to Jurisdiction. This Agreement and each Note (if any) shall be construed in accordance with and governed by the law of the State of New York. The Borrower hereby submits to the nonexclusive jurisdiction of the United States District Court for the Southern District of New York and of any New York State court sitting in New York City for purposes of all legal proceedings arising out of or relating to this Agreement or the transactions contemplated hereby. The Borrower irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. SECTION 9.10. Counterparts; Integration. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement constitutes the entire agreement and understanding among the parties hereto and supersedes any and all prior agreements and understandings, oral or 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, 51 HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. __________________________________________________________________________ DUKE CAPITAL CORPORATION By: /s/ David L. Hauser ------------------- Title: Vice President and Treasurer Address: 422 South Church Street Charlotte, NC 28202-1904 Attention: David L. Hauser Telecopy number: (704) 382-1452 - -------------------------------------------------------------------------- __________________________________________________________________________ 52 __________________________________________________________________________ Commitments - ----------- __________________________________________________________________________ __________________________________________________________________________ $35,000,000 THE CHASE MANHATTAN BANK - -------------------------------------------------------------------------- __________________________________________________________________________ By: /s/ Paul V. Farrell ------------------------------ Title: Vice President __________________________________________________________________________ __________________________________________________________________________ $35,000,000 MORGAN GUARANTY TRUST COMPANY OF NEW YORK - -------------------------------------------------------------------------- __________________________________________________________________________ By: /s/ Robert Bottamedi ------------------------------ Title: Vice President - -------------------------------------------------------------------------- __________________________________________________________________________ $30,000,000 ABN AMRO BANK - -------------------------------------------------------------------------- __________________________________________________________________________ By: /s/ Mark R. Lasek ------------------------------ Title: Senior Vice President and Managing Director - -------------------------------------------------------------------------- __________________________________________________________________________ By: /s/ Sonny K. Tran ------------------------------ Title: Assistant Vice President __________________________________________________________________________ __________________________________________________________________________ $30,000,000 BANK OF AMERICA, N.A. - -------------------------------------------------------------------------- __________________________________________________________________________ By: /s/ Gretchen P. Burud ------------------------------ Title: Principal __________________________________________________________________________ $30,000,000 BANK ONE, NA - -------------------------------------------------------------------------- __________________________________________________________________________ By: /s/ Madeleine N. Pember ------------------------------ Title: Vice President - -------------------------------------------------------------------------- __________________________________________________________________________ $30,000,000 BARCLAYS BANK PLC - -------------------------------------------------------------------------- __________________________________________________________________________ __________________________________________________________________________ - -------------------------------------------------------------------------- By: /s/ Sydney G. Dennis ------------------------------ Title: Director - -------------------------------------------------------------------------- __________________________________________________________________________ $30,000,000 CITIBANK, N.A. - -------------------------------------------------------------------------- __________________________________________________________________________ By: /s/ J. Nicholas McKee ------------------------------ Title: Vice President - -------------------------------------------------------------------------- __________________________________________________________________________ $30,000,000 CREDIT SUISSE FIRST BOSTON - -------------------------------------------------------------------------- __________________________________________________________________________ By: /s/ James P. Moran ------------------------------ Title: Director - -------------------------------------------------------------------------- __________________________________________________________________________ By: /s/ Kristin Lepri ------------------------------ Title: Associate - -------------------------------------------------------------------------- __________________________________________________________________________ $30,000,000 FIRST UNION NATIONAL BANK - -------------------------------------------------------------------------- __________________________________________________________________________ By: /s/ Michael J. Kolosowsky ------------------------------ Title: Vice President - -------------------------------------------------------------------------- $30,000,000 WACHOVIA BANK, N.A. - -------------------------------------------------------------------------- __________________________________________________________________________ By: /s/ Christopher L. Fincher ------------------------------ Title: Senior Vice President - -------------------------------------------------------------------------- __________________________________________________________________________ $30,000,000 WESTDEUTSCHE LANDESBANK GIROZENTRALE, NEW YORK BRANCH - -------------------------------------------------------------------------- __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ By: /s/ Felicia La Forgia ------------------------------ Title: Vice President - -------------------------------------------------------------------------- __________________________________________________________________________ By: /s/ Anthony Alessandro ------------------------------ Title: Manager - -------------------------------------------------------------------------- __________________________________________________________________________ $20,000,000 AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - -------------------------------------------------------------------------- - -------------------------------------------------------------------------- By: /s/ Elizabeth M. Waters ------------------------------ Title: Vice President - -------------------------------------------------------------------------- - -------------------------------------------------------------------------- $20,000,000 BANK OF MONTREAL - -------------------------------------------------------------------------- - -------------------------------------------------------------------------- By: /s/ Mary Lee Latta ------------------------------ Title: Director - -------------------------------------------------------------------------- - -------------------------------------------------------------------------- $20,000,000 DRESDNER BANK AG, NEW YORK AND GRAND CAYMAN BRANCHES - -------------------------------------------------------------------------- __________________________________________________________________________ By: /s/ Wendy C.H. Astell ------------------------------ Title: Vice President - -------------------------------------------------------------------------- __________________________________________________________________________ By: /s/ Andrew Cullinan ------------------------------ Title: Assistant Treasurer - -------------------------------------------------------------------------- __________________________________________________________________________ $20,000,000 FLEET NATIONAL BANK - -------------------------------------------------------------------------- __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ By: /s/ Rita M. Cahill ------------------------------ Title: Managing Director - -------------------------------------------------------------------------- __________________________________________________________________________ $20,000,000 THE INDUSTRIAL BANK OF JAPAN, LIMITED - -------------------------------------------------------------------------- __________________________________________________________________________ By: /s/ James Masters ----------------- Title: Senior Vice-President - -------------------------------------------------------------------------- __________________________________________________________________________ $20,000,000 MELLON BANK N.A. - -------------------------------------------------------------------------- __________________________________________________________________________ By: /s/ Roger E. Howard ------------------------------ Title: Vice President - -------------------------------------------------------------------------- __________________________________________________________________________ $20,000,000 NATIONAL AUSTRALIA BANK LTD. A.C.N. 004044937 - -------------------------------------------------------------------------- __________________________________________________________________________ By: /s/ Paul R. Morrison ------------------------------ Title: Vice President - -------------------------------------------------------------------------- __________________________________________________________________________ $20,000,000 THE NORTHERN TRUST COMPANY - -------------------------------------------------------------------------- __________________________________________________________________________ By: /s/ Ashish S. Bhagwat ------------------------------ Title: Second Vice President - -------------------------------------------------------------------------- $20,000,000 SOCIETE GENERALE - -------------------------------------------------------------------------- __________________________________________________________________________ - -------------------------------------------------------------------------- By: /s/ Gordon R. Eadon ------------------------------ Title: Director - -------------------------------------------------------------------------- __________________________________________________________________________ $20,000,000 SUNTRUST BANK, ATLANTA - -------------------------------------------------------------------------- __________________________________________________________________________ By: /s/ Steven J. Newby ------------------------------ Title: Vice President - -------------------------------------------------------------------------- __________________________________________________________________________ $20,000,000 TORONTO DOMINION (TEXAS), INC. - -------------------------------------------------------------------------- __________________________________________________________________________ By: /s/ Carol Brandt ------------------------------ Title: Vice President - -------------------------------------------------------------------------- __________________________________________________________________________ $20,000,000 UBS AG, STAMFORD BRANCH - -------------------------------------------------------------------------- __________________________________________________________________________ By: /s/ Robert H. Riley III ------------------------------ Title: Executive Director - -------------------------------------------------------------------------- __________________________________________________________________________ By: /s/ Dorothy L. McKinley ------------------------------ Title: Director Banking Products Services, US - -------------------------------------------------------------------------- __________________________________________________________________________ $20,000,000 WESTPAC BANKING CORPORATION - -------------------------------------------------------------------------- By: /s/ Kate Perry ------------------------------ Title: Vice President - -------------------------------------------------------------------------- __________________ Total Commitments $600,000,000 ================== THE CHASE MANHATTAN BANK, as Administrative Agent By: /s/ Paul V. Farrell -------------------------------- Title: Vice President Address: 270 Park Avenue New York, NY 10017 Attention: Paul V. Farrell Telecopy number: (212) 270-3089 Pricing Schedule The "Facility Fee Rate" and the "Euro-Dollar Margin" for any day are the respective percentages set forth below in the applicable row under the column corresponding to the Status that exists on such day:
- ----------------------------------------------------------------------------------------------------- LEVEL I LEVEL II LEVEL III LEVEL IV LEVEL V LEVEL VI - ----------------------------------------------------------------------------------------------------- Facility Fee .055% .060% .065% .070% .085% .100% - ----------------------------------------------------------------------------------------------------- Euro-Dollar Margin Utilization less than 25% .145% .165% .185% .205% .215% .250% Utilization greater than or equal to 25% .270% .290% .310% .330% .340% .375% - -----------------------------------------------------------------------------------------------------
For purposes of this Schedule, the following terms have the following meanings: "Level I Status" exists at any date if, at such date, the Borrower is rated "AA-" or higher by S&P or "Aa3" or higher by Moody's. "Level II Status" exists at any date if, at such date, (i) the Borrower is rated "A+" or higher by S&P or "A1" or higher by Moody's and (ii) Level I Status does not exist. "Level III Status" exists at any date if, at such date, (i) the Borrower is rated "A" or higher by S&P or "A2" or higher by Moody's and (ii) neither Level I Status nor Level II Status exists. "Level IV Status" exists at any date if, at such date, (i) the Borrower is rated "A-" by S&P or "A3" by Moody's and (ii) neither Level I Status, Level II Status nor Level III Status exists. "Level V Status" exists at any date if, at such date, (i) the Borrower is rated "BBB+" by S&P or "Baa1" by Moody's and (ii) neither Level I Status, Level II Status, Level III Status nor Level IV Status exists. "Level VI Status" exists at any date if, at such date, no other Status exists. "Status" refers to the determination of which of Level I Status, Level II Status, Level III Status, Level IV Status, Level V Status or Level VI Status exists at any date. "Utilization" means, at any date, the percentage equivalent of a fraction (i) the numerator of which is the aggregate outstanding principal amount of the Loans at such date and (ii) the denominator of which is the aggregate amount of the Commitments at such date. If for any reason any Loans remain outstanding following termination of the Commitments, Utilization shall be deemed to be in excess of 25%. The credit ratings to be utilized for purposes of this Schedule are those indicated for or assigned to the senior unsecured long-term debt securities of the Borrower without third-party credit enhancement, and any rating indicated for or assigned to any other debt security of the Borrower shall be disregarded. The ratings in effect for any day are those in effect at the close of business on such day. A change in credit rating will result in an immediate change in the applicable Status. In the case of split ratings from S&P and Moody's, the rating to be used to determine the applicable Status is the higher of the two. EXHIBIT A NOTE New York, New York August 21, 2000 For value received, Duke Capital Corporation, a Delaware corporation (the "Borrower"), promises to pay to the order of (the "Bank"), for the account of its Applicable Lending Office, the unpaid principal amount of each Loan made by the Bank to the Borrower pursuant to the Credit Agreement referred to below on the date specified in the Credit Agreement. The Borrower promises to pay interest on the unpaid principal amount of each such Loan on the dates and at the rate or rates provided for in the Credit Agreement. All such payments of principal and interest shall be made in lawful money of the United States in Federal or other immediately available funds at the office of The Chase Manhattan Bank, 270 Park Avenue, New York, New York. All Loans made by the Bank, the respective types and maturities thereof and all repayments of the principal thereof shall be recorded by the Bank and, the Bank, if the Bank so elects in connection with any transfer or enforcement of its Note, may endorse on the schedule attached hereto appropriate notations to evidence the foregoing information with respect to the Loans then outstanding; provided that the failure of the Bank to make any such recordation or endorsement shall not affect the obligations of the Borrower hereunder or under the Credit Agreement. This note is one of the Notes referred to in the 364-Day Credit Agreement dated as of August 21, 2000 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 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------
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 21, 2000 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 21, 2000 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 _____________, 200_, we hereby make the following Bid Rate Quote on the following terms: 1. Quoting Bank: ________________________________ 2. Person to contact at Quoting Bank: ---------------------------------- 3. Date of Borrowing: ____________________* 4. We hereby offer to make Bid Rate Loan(s) in the following principal amounts, for the following Interest Periods and at the following rates: Principal Interest Bid Rate Amount** Period*** [(Indexed)****] [(General)*****] - ------ ------ ---------------------------------- _____________________________ *As specified in the related Invitation. **Principal amount bid for each Interest Period may not exceed principal amount requested. Specify aggregate limitation if the sum of the individual offers exceeds the amount the Bank is willing to lend. Bids must be made for $5,000,000 or a larger of multiple of $1,000,000. ***Not less than one month or less than 30 days, as specified in the related Invitation, but no bid may be submitted for an Interest Period extending beyond bidder's Commitment Termination Date. No more than five bids are permitted for each Interest Period. $ $ provided, that the aggregate principal amount of Bid Rate Loans for which the above offers may be accepted shall not exceed $____________.]** We understand and agree that the offer(s) set forth above, subject to the satisfaction of the applicable conditions set forth in the 364-Day Credit Agreement dated as of August 21, 2000 among the Borrower, the Banks listed on the signature pages thereof and yourselves, as Administrative Agent, irrevocably obligates us to make the Bid Rate Loan(s) for which any offer(s) are accepted, in whole or in part. Very truly yours, [NAME OF BANK] Dated: By: _____________________ Authorized Officer - ---------------------- ****Margin over or under the London Interbank Offered Rate determined for the applicable Interest Period. Specify percentage (rounded to the nearest 1/10,000 of 1%) and specify whether "PLUS" or "MINUS". *****Specify rate of interest per annum (rounded to the nearest 1/10,000th of 1%). EXHIBIT E OPINION OF GENERAL COUNSEL FOR THE BORROWER [Effective Date] To the Banks and the Administrative Agent Referred to Below c/o The Chase Manhattan Bank as Administrative Agent 270 Park Avenue New York, New York 10017 Ladies and Gentlemen: I am the General Counsel of Duke Capital Corporation (the "Borrower") and have acted as its counsel in connection with the 364-Day Credit Agreement (the "Credit Agreement") dated as of August 21, 2000 among the Borrower, the banks listed on the signature pages thereof and The Chase Manhattan Bank, as Administrative Agent. Terms defined in the Credit Agreement are used herein as therein defined. In such capacity, I or attorneys under my direct supervision have examined originals or copies, certified or otherwise identified to my satisfaction, of such documents, corporate records, certificates of public officials and other instruments and have conducted such other investigations of fact and law as I have deemed necessary or advisable for purposes of this opinion. Upon the basis of the foregoing, I am of the opinion that: 1. The Borrower is a corporation duly incorporated, validly existing and in good standing under the laws of Delaware and has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. 2. The execution, delivery and performance by the Borrower of the Credit Agreement and any Notes are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action, require no action by or in respect of, or filing with, any governmental body, agency or official and do not contravene, or constitute a default under, any provision of applicable law or regulation or of the certificate of incorporation or by-laws of the Borrower or, to my knowledge, of any agreement, judgment, injunction, order, decree or other instrument binding upon the Borrower or, to my knowledge, result in the creation or imposition of any Lien on any asset of the Borrower or any of its Material Subsidiaries. 3. The Credit Agreement constitutes a valid and binding agreement of the Borrower and the Notes, if and when issued, will constitute valid and binding obligations of the Borrower, enforceable in accordance with their respective terms, except as the same may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and by general principles of equity. 4. Except as disclosed in the reports referred to in Section 4.04 of the Credit Agreement, to my knowledge (but without independent investigation), there is no action, suit or proceeding pending or threatened against or affecting, the Borrower or any of its Subsidiaries before any court or arbitrator or any governmental body, agency or official, which would be likely to be decided adversely to Borrower or such Subsidiary and, as a result, to have a material adverse effect upon the business, consolidated financial position or consolidated results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole or which in any manner draws into question the validity of the Credit Agreement or any Notes. 5. Borrower is not a holding company under the Public Utility Holding Company Act of 1935, as amended. The phrase "to my knowledge", as used in the foregoing opinion, refers to my actual knowledge without any independent investigation as to any such matters. I am a member of the Bar of the State of North Carolina and do not express any opinion herein concerning any law other than the law of the State of North Carolina, the General Corporation Law of the State of Delaware and the federal law of the United States of America. Without limiting the generality of the foregoing, I note that the governing law of the Loan Documents is expressed to be the law of the State of New York; in giving the opinion set forth in paragraph 3 above I have assumed, with your permission, that instead the governing law is the law of the State of North Carolina. This opinion is rendered to you in connection with the above matter and may not be relied upon by you for any other purpose, or relied upon by, or furnished to, any other person, firm or corporation without my prior written consent, except for Additional Banks and Participants. Very truly yours, EXHIBIT F OPINION OF DAVIS POLK & WARDWELL, SPECIAL COUNSEL FOR THE ADMINISTRATIVE AGENT [Effective Date] To the Banks and the Administrative Agent Referred to Below c/o The Chase Manhattan Bank, as Administrative Agent 270 Park Avenue New York, New York 10017 Ladies and Gentlemen: We have participated in the preparation of the 364-Day Credit Agreement (the "Credit Agreement") dated as of August 21, 2000 among Duke Capital Corporation, a Delaware corporation (the "Borrower"), the banks listed on the signature pages thereof (the "Banks") and The Chase Manhattan Bank, as Administrative Agent (the "Administrative Agent"), and have acted as special counsel for the Administrative Agent for the purpose of rendering this opinion pursuant to Section 3.01(d) of the Credit Agreement. Terms defined in the Credit Agreement are used herein as therein defined. We have examined originals or copies, certified or otherwise identified to our satisfaction, of such documents, corporate records, certificates of public officials and other instruments and have conducted such other investigations of fact and law as we have deemed necessary or advisable for purposes of this opinion. Upon the basis of the foregoing, we are of the opinion that: 1. The execution, delivery and performance by the Borrower of the Credit Agreement and the Notes are within the Borrower's corporate powers and have been duly authorized by all necessary corporate action. 2. The Credit Agreement constitutes a valid and binding agreement of the Borrower and the Notes, if and when issued, constitute valid and binding obligations of the Borrower enforceable in accordance with their respective terms, except as the same may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and by general principles of equity. In giving the foregoing opinion, we express no opinion as to the effect (if any) of any law of any jurisdiction (except the State of New York) in which any Bank is located which limits the rate of interest that such Bank may charge or collect. This opinion is rendered solely to you in connection with the above matter. This opinion may not be relied upon by you for any other purpose or relied upon by or furnished to any other person, firm or corporation without our prior written consent, except for Additional Banks and all Participants. Very truly yours, 2 EXHIBIT G ASSIGNMENT AND ASSUMPTION AGREEMENT AGREEMENT dated as of _________, 200_ 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 21, 2000 among the Company, the Assignor and the other Banks party thereto, as Banks, and the Administrative Agent (the "Credit Agreement"); WHEREAS, as provided under the Credit Agreement, the Assignor has a Commitment to make Loans in an aggregate principal amount at any time outstanding not to exceed $__________;* WHEREAS, Committed Loans made to the Borrower by the Assignor under the Credit Agreement in the aggregate principal amount of $__________ are outstanding at the date hereof; and WHEREAS, the Assignor proposes to assign to the Assignee all of the rights of the Assignor under the Credit Agreement in respect of a portion of its Commitment thereunder in an amount equal to $__________ (the "Assigned Amount"), together with a corresponding portion of its outstanding Committed Loans, and the Assignee proposes to accept assignment of such rights and assume the corresponding obligations from the Assignor on such terms;* NOW, THEREFORE, in consideration of the foregoing and the mutual agreements contained herein, the parties hereto agree as follows: SECTION 1. Definitions. All capitalized terms not otherwise defined herein shall have the respective meanings set forth in the Credit Agreement. SECTION 2. Assignment. The Assignor hereby assigns and sells to the Assignee all of the rights of the Assignor under the Credit Agreement to the extent of the Assigned Amount, and the Assignee hereby accepts such assignment - -------- *The asterisked provisions shall be appropriately revised in the event of an assignment after the Commitment Termination Date. from the Assignor and assumes all of the obligations of the Assignor under the Credit Agreement to the extent of the Assigned Amount, including the purchase from the Assignor of the corresponding portion of the principal amount of the Committed Loans made by the Assignor outstanding at the date hereof. Upon the execution and delivery hereof by the Assignor, the Assignee, the Company and the Administrative Agent and the payment of the amounts specified in Section 3 required to be paid on the date hereof (i) the Assignee shall, as of the date hereof, succeed to the rights and be obligated to perform the obligations of a Bank under the Credit Agreement with a Commitment in an amount equal to the Assigned Amount, and (ii) the Commitment of the Assignor shall, as of the date hereof, be reduced by a like amount and the Assignor released from its obligations under the Credit Agreement to the extent such obligations have been assumed by the Assignee. The assignment provided for herein shall be without recourse to the Assignor. SECTION 3. Payments. As consideration for the assignment and sale contemplated in Section 2 hereof, the Assignee shall pay to the Assignor on the date hereof in Federal funds the amount heretofore agreed between them.* It is understood that facility fees accrued to the date hereof in respect of the Assigned Amount are for the account of the Assignor and such fees accruing from and including the date hereof are for the account of the Assignee. Each of the Assignor and the Assignee hereby agrees that if it receives any amount under the Credit Agreement which is for the account of the other party hereto, it shall receive the same for the account of such other party to the extent of such other party's interest therein and shall promptly pay the same to such other party. SECTION 4. Consent of the Borrower and the Administrative Agent. This Agreement is conditioned upon the consent of the Borrower and the Administrative Agent pursuant to Section 9.06(c) of the Credit Agreement. The execution of this Agreement by the Borrower and the Administrative Agent is evidence of this consent. Pursuant to Section 9.06(c) the Borrower agrees to execute and deliver a Note, if required by the Assignee, payable to the order of the Assignee to evidence the assignment and assumption provided for herein. - -------- *Amount should combine principal together with accrued interest and breakage compensation, if any, to be paid by the Assignee. It may be preferable in an appropriate case to specify these amounts generically or by formula rather than as a fixed sum. 2 SECTION 5. Non-reliance on Assignor. The Assignor makes no representation or warranty in connection with, and shall have no responsibility with respect to, the solvency, financial condition, or statements of any Borrower, or the validity and enforceability of the obligations of any Borrower in respect of the Credit Agreement or any Note. The Assignee acknowledges that it has, independently and without reliance on the Assignor, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement and will continue to be responsible for making its own independent appraisal of the business, affairs and financial condition of the Borrowers. SECTION 6. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. SECTION 7. Counterparts. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. SECTION 8. Administrative Questionnaire. Attached is an Administrative Questionnaire duly completed by the Assignee. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered by their duly authorized officers as of the date first above written. ------------------------------------- [ASSIGNOR] By Title: ------------------------------------- [ASSIGNEE] By Title: 3 DUKE CAPITAL CORPORATION By --------------------------------- Title: THE CHASE MANHATTAN BANK, as Administrative Agent By --------------------------------- Title: 4 EXHIBIT H EXTENSION AGREEMENT The Chase Manhattan Bank, as Administrative Agent under the Credit Agreement referred to below 270 Park Avenue New York, New York 10017 Ladies and Gentlemen: Effective as of [date], the undersigned hereby agrees to extend its Commitment and Commitment Termination Date under the 364-Day Credit Agreement dated as of August 21, 2000 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-12 3 0003.txt COMPUTION OF RATIO OF EARNINGS EXHIBIT 12 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
- -------------------------------------------------------------------------------------------------------------- Dollars in Millions Year Ended December 31 - -------------------------------------------------------------------------------------------------------------- 2000 1999 1998 1997 /a/ 1996 /a/ ------------------------------------------------------------------- Earnings before income taxes $2,796 $1,300 $2,037 $1,613 $1,789 Fixed charges 997 670 555 520 540 ----------------------------------------------------------------- Total $3,793 $1,970 $2,592 $2,133 $2,329 ================================================================= Fixed charges: Interest on debt $ 970 $ 644 $ 533 $ 497 $ 514 Interest component of rentals 27 26 22 23 26 ----------------------------------------------------------------- Fixed charges $ 997 $ 670 $ 555 $ 520 $ 540 ================================================================= Ratio of earnings to fixed charges 3.8 2.9 4.7 4.1 4.3 - ------------------------------------------------------------------------------------------------------------
/a/ Financial information reflects accounting for the 1997 merger with PanEnergy Corp as a pooling of interests. As a result, the financial information gives effect to the merger as if it had occurred January 1, 1996. EX-21 4 0004.txt LIST OF SUBSIDIARIES EXHIBIT 21 LIST OF SUBSIDIARIES The following is a list of certain subsidiaries of the registrant and their respective states of incorporation (100% owned unless otherwise indicated): Crescent Resources, Inc. (South Carolina) Duke Capital Corporation (Delaware) Duke Energy Natural Gas Corporation (Delaware) Texas Eastern Transmission Corporation (Delaware) PanEnergy Corp (Delaware) Duke Energy Field Services, LLC (Delaware) - 69.7% owned by Duke Energy Corporation EX-23.A 5 0005.txt AUDITOR'S CONSENT Exhibit 23(a) INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 333- 81573 and 333-52204 of Duke Energy Corporation on Form S-3 and Registration Statement Nos. 333-29563, 333-29585, 333-29587, 333-12093, 333-50317 and 333- 59279 of Duke Energy Corporation on Form S-8 of our report dated January 18, 2001, appearing in this Annual Report on Form 10-K of Duke Energy Corporation for the year ended December 31, 2000. /s/ DELOITTE & TOUCHE LLP Deloitte & Touche LLP Charlotte, North Carolina March 30, 2001 EX-24.A 6 0006.txt POWER OF ATTORNEY Exhibit 24(a) DUKE ENERGY CORPORATION Power of Attorney ----------------- FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2000 (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 Robert P. Brace, Ellen T. Ruff, and Sandra P. Meyer, and each of them, to act as attorneys-in-fact for and in the respective names, places, and stead of the undersigned, to execute, seal, sign, and file with the Securities and Exchange Commission the Annual Report of said Duke Energy Corporation on Form 10-K and any and all amendments thereto, hereby granting to said attorneys-in-fact, and each of them, full power and authority to do and perform all and every act and thing whatsoever requisite, necessary, or proper to be done in and about the premises, as fully to all intents and purposes as the undersigned, or any of them, might or could do if personally present, hereby ratifying and approving the acts of said attorneys-in-fact. Executed as of the 27/th/ day of February, 2001. DUKE ENERGY CORPORATION By /s/ R. B. Priory --------------------------- Chairman, President and Chief Executive Officer (Corporate Seal) ATTEST: /s/ Edward M. Marsh, Jr. - --------------------------- Assistant Secretary Exhibit 24(a) /s/ R. B. Priory Chairman, President and - --------------------------- Chief Executive Officer R. B. Priory (Principal Executive Officer and Director) /s/ Robert P. Brace Executive Vice President and - --------------------------- Chief Financial Officer Robert P. Brace (Principal Financial Officer) /s/ Sandra P. Meyer Senior Vice President and - ---------------------------- Corporate Controller Sandra P. Meyer (Principal Accounting Officer) /s/ G. Alex Bernhardt (Director) - ---------------------------- G. Alex Bernhardt /s/ Robert J. Brown (Director) - ---------------------------- Robert J. Brown /s/ William A. Coley (Director) - ---------------------------- William A. Coley /s/ William T. Esrey (Director) - ---------------------------- William T. Esrey /s/ Ann M. Gray (Director) - ---------------------------- Ann M. Gray /s/ Dennis R. Hendrix (Director) - ---------------------------- Dennis R. Hendrix /s/ Harold S. Hook (Director) - ---------------------------- Harold S. Hook Exhibit 24(a) /s/ George Dean Johnson, Jr. (Director) - ------------------------------ George Dean Johnson, Jr. /s/ Max Lennon (Director) - ------------------------------ Max Lennon /s/ Leo E. Linbeck, Jr. (Director) - ------------------------------ Leo E. Linbeck, Jr. /s/ James G. Martin (Director) - ------------------------------ James G. Martin EX-24.B 7 0007.txt CERTIFIED COPY Exhibit No. 24(B) Certified Copy of Resolutions Adopted by the Board of Directors of Duke Energy Corporation Effective February 27, 2001 FURTHER RESOLVED, That the Power of Attorney as presented to the meeting and executed by all the Directors present be and hereby is approved in form and content for purposes of filing the Form 10-K Annual Report with the Securities and Exchange Commission. * * * * * * * * I, Robert T. Lucas III, Assistant Secretary of Duke Energy Corporation, do hereby certify that the above is a full, true and complete extract from resolutions adopted by the Board of Directors of Duke Energy Corporation on February 27, 2001. IN WITNESS WHEREOF, I have hereunto set my hand and affixed the Corporate Seal of said Duke Energy Corporation this 27/th/ day of March, 2001. /s/ Robert T. Lucas III --------------------------------- Robert T. Lucas III Assistant Secretary -----END PRIVACY-ENHANCED MESSAGE-----