10-K 1 DUKE POWER 10-K #80372.1 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 [Fee Required] For the fiscal year ended December 31, 1994 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required] For the transition period from to COMMISSION FILE NUMBER 1-4928 DUKE POWER COMPANY (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) North Carolina 56-0205520 (STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) 422 South Church Street, Charlotte, North Carolina 28242-0001 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
704-594-0887 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED Common Stock, without par value New York Stock Exchange Preferred Stock A, par value $25 7.72%, 1992 Series New York Stock Exchange 6.375% 1993 Series New York Stock Exchange
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 March 27, 1995...................................................................................................... $7,383,853,498 Number of shares of Common Stock, without par value, outstanding at March 27, 1995.......................... 204,859,339
DOCUMENTS INCORPORATED BY REFERENCE: The registrant is incorporating herein by reference certain sections of its proxy statement relating to the 1995 annual meeting of shareholders to provide information required by the following parts of this annual report: Part III -- Item 10., Directors and Executive Officers of the Registrant -- Item 11., Executive Compensation -- Item 12., Security Ownership of Certain Beneficial Owners and Management -- Item 13., Certain Relationships and Related Transactions
DUKE POWER COMPANY FORM 10-K ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION FOR THE YEAR ENDED DECEMBER 31, 1994 TABLE OF CONTENTS
ITEM PAGE PART I. 1. Business.......................................................................................................... 1 Executive Officers of the Company................................................................................. 13 2. Properties........................................................................................................ 13 3. Legal Proceedings................................................................................................. 14 4. Submission of Matters to a Vote of Security Holders............................................................... 14 PART II. 5. Market for the Registrant's Common Equity and Related Stockholder Matters......................................... 15 6. Selected Financial Data........................................................................................... 16 7. Management's Discussion and Analysis of Results of Operations and Financial Condition............................. 17 8. Financial Statements and Supplementary Data....................................................................... 23 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............................. 51 PART III. 10. Directors and Executive Officers of the Registrant................................................................ 51 11. Executive Compensation............................................................................................ 51 12. Security Ownership of Certain Beneficial Owners and Management.................................................... 51 13. Certain Relationships and Related Transactions.................................................................... 51 PART IV. 14. Exhibits, Consolidated Financial Statement Schedules, and Reports on Form 8-K..................................... 52 Signatures........................................................................................................ 53 Exhibit Index..................................................................................................... 54
DUKE POWER COMPANY PART I. ITEM 1. BUSINESS. Duke Power Company (the Company) is primarily engaged in the generation, transmission, distribution and sale of electric energy in the central portion of North Carolina and the western portion of South Carolina, comprising the area in both states known as the Piedmont Carolinas. It is one of the nation's largest investor-owned electric utilities. The Company is also engaged in a variety of diversified operations, most of which are organized in separate subsidiaries. During 1994, the Company reorganized, placing all its subsidiaries and diversified activities except for the core electric utility business into the Associated Enterprises Group (AEG). AEG includes Church Street Capital Corp.; Crescent Resources, Inc.; Duke Energy Group, Inc.; Duke Engineering & Services, Inc.; Duke/Fluor Daniel; Duke Merchandising; DukeNet Communications, Inc.; Duke Water Operations; and Nantahala Power and Light Company (NP&L). For additional information on subsidiaries and diversified activities, see "Subsidiaries and Diversified Activities" on page 9, "Management's Discussion and Analysis of Results of Operations and Financial Condition, Current Issues -- Subsidiaries and Diversified Activities" on page 22 and "Subsidiaries and Diversified Activities Highlights" on page 46. During 1994, the Company's operating revenues, including AEG, were $4.5 billion. The Company's executive offices are located in the Power Building, 422 South Church Street, Charlotte, North Carolina 28242-0001 (Telephone No. 704-594-0887). SERVICE AREA The Company's service area (excluding NP&L), approximately two-thirds of which lies in North Carolina, covers about 20,000 square miles with an estimated population of 4.9 million and includes a number of cities, of which the largest are Charlotte, Greensboro, Winston-Salem and Durham in North Carolina and Greenville and Spartanburg in South Carolina. The Company supplies electric service directly to approximately 1.7 million residential, commercial and industrial customers in more than 200 cities, towns and unincorporated communities. Electricity is sold at wholesale to incorporated municipalities and to several public and private utilities. In addition, in 1994 approximately 8% of total sales were made through contractual agreements to former wholesale municipal or cooperative customers of the Company who had purchased portions of the Catawba Nuclear Station (collectively, the "Other Catawba Joint Owners") (See "Joint Ownership of Generating Facilities.") NP&L services an additional 53,000 mostly residential customers in five counties in western North Carolina. The Company's service area is undergoing increasingly diversified industrial development. The textile, manufacture of machinery and equipment, and chemical and chemical related industries are of major significance to the economy of the area. Other industrial activity includes the 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 $498 million of the Company's revenues for 1994, representing 12 percent of electric revenues and 40 percent of industrial revenues. ENERGY REQUIREMENTS AND CAPABILITY The following table sets forth the Company's generating capability at December 31, 1994, its sources of electric energy for 1994, and certain information presently projected for 1995:
GENERATING CAPABILITY -- GENERATION -- KWH KW(A)(B)(C) (MILLIONS)(C) ACTUAL PROJECTED ACTUAL SOURCE DECEMBER 31, 1994 DECEMBER 31, 1995 1994 Coal............................................................ 7,661,000 7,699,000(d) 32,714 Nuclear (e)..................................................... 7,054,000 7,054,000 50,887 Hydro and other................................................. 3,266,000 4,154,000(f) 1,495 Total...................................................... 17,981,000 18,907,000 85,096 Less: Other Catawba Joint Owners' share......................... 15,300 Plus: Purchases from Other Catawba Joint Owners.......................................................... 9,046 Purchased power and net interchange............................. 1,276 Total...................................................... 80,118
1 (a) The data relating to capability does not reflect the possible unavailability or reduction of capability of facilities at any given time because of scheduled maintenance, repair requirements or regulatory restrictions. (b) Excludes firm purchases. (See "Energy Management and Future Power Needs.") (c) Excludes NP&L. (d) Includes the 38,000 KW fossil unit returned to service from the Plant Modernization Program on January 1, 1995. (e) Nuclear capability and related generation for 1994 and projected for 1995 give no effect to the joint ownership of the Catawba Nuclear Station. (See "Joint Ownership of Generating Facilities.") (f) Includes 12 units of the Lincoln Combustion Turbine Station with generating capacity of 888,000 KW scheduled to begin commercial operation in 1995. Four additional units with generating capacity of 296,000 KW are scheduled to begin commercial operation in 1996. (See "Capital Requirements.") NP&L operates 11 hydroelectric stations with a total capacity of 100,000 kilowatts, and also buys supplemental power. The Company supplies supplemental power to NP&L under the terms of an interconnection agreement approved by the Federal Energy Regulatory Commission (FERC). The Company has a bulk power sales agreement with Carolina Power & Light Company (CP&L) to provide CP&L 400 megawatts of capacity as well as associated energy when needed for a six-year period which began July 1, 1993. Electric rates in all regulatory jurisdictions were reduced by adjustment riders to reflect capacity revenues received from this CP&L bulk power agreement. According to 1993 industry statistics published in 1994, the Company ranked first in the nation in terms of efficiency of its steam-fossil generating system as measured by the conversion of fuel energy to electric energy. Published rankings indicate that individual units at Marshall Steam Station and Belews Creek Steam Station ranked first, third, fifth, eighth and tenth most efficient in the nation in 1993. The Company's nuclear system continued its tradition of operating efficiency, operating at 82 percent of capacity for 1994, in comparison with the industry's most current average capacity factor of 71 percent for 1993. The Company normally experiences seasonal peak loads in summer and winter which are relatively in balance. The Company currently forecasts a 2.1 percent compound annual growth in peak load through 2009. An all-time peak load of 16,070,000 KW occurred on January 19, 1994 during extremely cold winter weather. RATE MATTERS The North Carolina Utilities Commission (NCUC) and the Public Service Commission of South Carolina (PSCSC) must approve the Company's rates for retail sales within their respective states. FERC must approve the Company's rates for sales to wholesale customers, including the contractual arrangements between the Company and the Other Catawba Joint Owners. Rate requests filed by the Company in its most recent general rate case in 1991 with the NCUC, PSCSC and FERC were principally designed to reflect the Company's investment in the Bad Creek Hydroelectric Station. Rate orders issued by the NCUC and PSCSC in November 1991 recognized costs of the Bad Creek Hydroelectric Station, including an amortization of costs deferred between commercial operation and the rate order, which the Company had requested. The Company's wholesale customers challenged its proposed rate increase and in 1991 FERC issued an order that accepted the Company's proposed rates for filing. A negotiated settlement with these customers, which provided for an increase in wholesale rates consistent with the increase in retail rates, was approved by FERC and became effective in April 1992. (See Note 2, "Notes to Consolidated Financial Statements.") In its most recent general rate case, the NCUC authorized a jurisdictional rate of return on common equity of 12.50 percent and the PSCSC authorized a jurisdictional rate of return on common equity of 12.25 percent. In 1992, the North Carolina Supreme Court remanded to the NCUC the Company's 1986 rate order for the second time. In this ruling, the Court held that the record from the 1986 proceedings failed to support the rate of return on common equity authorized by the NCUC after the initial decision of the Court remanding the 1986 rate order. The NCUC issued a final order in 1992 which resulted in a 1992 refund to North Carolina retail customers of approximately $95 million, including interest. During 1992, NP&L filed an application for a general rate increase with the NCUC. A general rate increase was approved in June 1993. 2 FUEL AND PURCHASED POWER COST ADJUSTMENT PROCEDURES. Duke Power has procedures in all three of its regulatory jurisdictions to adjust rates for fluctuations in fuel expense. The NCUC ordered Duke Power to follow these procedures in its August 1986 order, which was effective for periods beginning January 1, 1986. The prospective adjustment in rates of past over- or under-recovery of fuel costs was challenged in the North Carolina courts. The North Carolina legislature ratified a bill in July 1987 assuring the legality of such adjustments in rates. In 1991, the statute was extended through June 30, 1997. In the North Carolina retail jurisdiction, a review of fuel costs in rates is required annually and during general rate case proceedings. Fuel costs are reviewed semiannually in the wholesale and South Carolina retail jurisdictions. All jurisdictions allow Duke Power to adjust rates for over- or under-recovery of fuel costs. Therefore, Duke Power reflects in revenues the difference between actual fuel costs incurred and fuel costs recovered through rates. Purchased power costs of NP&L are reviewed annually and during general rate case proceedings by the NCUC. NP&L is allowed to adjust rates for past over- or under-recovery of purchased power costs. Therefore, NP&L defers the difference between actual purchased power costs incurred and those recovered through rates. CONSTRUCTION WORK IN PROGRESS (CWIP). The NCUC is permitted in its discretion to include CWIP in rate base after giving consideration to the public interest and the Company's financial stability. The PSCSC may include CWIP in rate base in its discretion. ENERGY MANAGEMENT AND FUTURE POWER NEEDS The Company's strategy for meeting customers' present and future energy needs is composed of three components: demand-side resources, purchased power resources and supply-side resources. By utilizing these resources, the Company expects to maintain a reserve margin of approximately 17 to 23 percent of its anticipated peak load requirements through 1999. Demand-side management programs benefit the Company and its customers by promoting energy efficiency, providing for load control through interruptible control features, shifting usage to off-peak periods and increasing strategic sales of electricity. In return for participation in demand-side management programs, customers may be eligible to receive various incentives which help reduce their net investment in high-efficiency equipment or their electric bills. The November 1991 rate orders of the NCUC and the PSCSC provided for recovery in rates of a designated level of costs for demand-side management programs and allowed the deferral for later recovery of certain demand-side management costs that exceed the level reflected in rates, including a return on the deferred costs. The Company ultimately expects recovery through rates of associated deferred costs. The annual costs deferred, including the return, were approximately $25 million in 1994 and $26 million in 1993. The Company continues to engage in a comprehensive energy management program as part of its Integrated Resource Plan. Integrated Resource Planning is the process used by utilities to evaluate a variety of resources. The goal is to provide adequate and reliable electricity in an environmentally responsible manner through cost-effective power management. In January 1993, the PSCSC issued an order approving the Company's 1992 Integrated Resource Plan as reasonable, and approving a "shared savings" proposal for accomplishments made in the Company's demand-side management programs. In June 1993, the NCUC approved the 1992 plan, including the shared savings mechanism. The Integrated Resource Plan is filed every three years. Each of the other years, the Company files a Short Term Action Plan which updates the Integrated Resource Plan for any changes in projections for the next three years. The purchase of capacity and energy is also an integral part of meeting future power needs. As of January 1, 1995, the Company has under contract 300 megawatts of capacity from other generators of electricity, including 62 megawatts from qualifying facilities. The Company expects to use a competitive bidding process to provide for the next increment of generating capacity beyond the Lincoln Combustion Turbine Station. 3 CAPITAL REQUIREMENTS Projected capital expenditures, excluding costs related to portions of the Catawba Nuclear Station owned by the Other Catawba Joint Owners, for each of 1995, 1996, 1997, 1998 and 1999 and for the five-year period 1995-1999, as now scheduled, are as follows (in millions of dollars):
1995 1996 1997 1998 1999 TOTAL Duke Power -- Electric Generation................................................................. $332 $205 $261 $228 $322 $1,348 Transmission............................................................... 42 44 45 47 48 226 Distribution............................................................... 202 210 218 221 223 1,074 Other...................................................................... 93 77 67 72 73 382 Nuclear Fuel............................................................... 104 103 158 123 132 620 Total................................................................. $773 $639 $749 $691 $798 $3,650 Associated Enterprises Group................................................. $166 $137 $112 $101 $145 $ 661 Total Company................................................................ $939 $776 $861 $792 $943 $4,311
The Company's procedures for estimating capital expenditures (which include allowance for funds used during construction) utilize, among other things, past construction experience, current construction costs, allowances for inflation and the Company's business plan, which includes the expansion of the business activities of AEG. These projections are subject to periodic review and revisions. Actual construction and nuclear fuel costs and capital expenditures incurred may vary from such estimates. Cost variances are due to various factors, including revised load estimates, environmental matters and cost and availability of capital. The Company is building a combustion turbine facility in Lincoln County, North Carolina to provide capacity at periods of peak demand. The Lincoln Combustion Turbine Station will consist of 16 combustion turbines with a total generating capacity of 1,184 megawatts. The estimated total cost of the project is approximately $500 million. Current plans are for 12 units to begin commercial operation by the end of 1995 and the remaining four to begin commercial operation in 1996. During 1991, the NCUC granted the Certificate of Public Convenience and Necessity and the North Carolina Division of Environmental Management issued a final air permit for the facility. The issuance of the final air permit for the facility was appealed, and one of the two appeals was settled and dismissed in March 1995. The other appeal has not been pursued by the appellant and is expected to be dismissed during the second quarter of 1995. JOINT OWNERSHIP OF GENERATING FACILITIES In order to reduce its need for external financing, the Company, through several transactions beginning in 1978, sold an 87 1/2 percent undivided interest in the Catawba Nuclear Station to the Other Catawba Joint Owners. These transactions contemplate that the Company will operate the facility, interconnect its transmission system, wheel a certain portion of the capacity and energy of such facility to the respective participants, provide back-up services for such capacity, buy for its own use (whether or not the facility is generating electricity) that portion of the capacity not then contractually required by the respective participants, and provide supplemental power as required by the purchasers to enable them to provide service on a firm basis. The transactions also include a reliability exchange between the Catawba Nuclear Station and the McGuire Nuclear Station of the Company, which provides for an exchange of 50 percent of each Other Catawba Joint Owner's retained capacity from its ownership interest in the Catawba units for like amounts of capability and output from units of the McGuire Nuclear Station. The implementation of the reliability exchange has not had nor does the Company anticipate that such implementation will have a material effect on earnings. (See Note 3, "Notes to Consolidated Financial Statements.") The Other Catawba Joint Owners and the Company were involved in arbitration proceedings related to the Catawba joint ownership contractual agreements. The basic contention in each proceeding was that certain calculations affecting bills under these agreements should be performed differently. These items are covered by the agreements between the Company and the Other Catawba Joint Owners which have been previously approved by the Company's retail regulatory commissions. (For additional information on Catawba joint ownership, see Note 3, "Notes to Consolidated Financial Statements.") The Company and the Other Catawba Joint Owners entered into settlement agreements in 1994 which resolved all issues in contention in the proceedings. The Company has settled its cumulative net obligation through 1993 of approximately $205 million with the Other Catawba Joint Owners. Billings for 1994 and later years will conform to the settlement agreements, 4 which have been approved by the Company's retail regulatory commissions. Because it expects the costs associated with these settlements to be recovered as part of the purchased capacity levelization, the Company has included approximately $205 million as an increase to Purchased capacity costs on its Consolidated Balance Sheets. Therefore, the Company believes these matters should not have a material adverse effect on the results of operations or financial position of the Company. FUEL SUPPLY The Company presently relies principally on nuclear fuel and coal for the generation of electric energy. The Company's reliance on oil and gas is minimal and will remain minimal even with the addition of the Lincoln Combustion Turbine Station. Information regarding the utilization of sources of power and cost of fuels is set forth in the following table:
COST OF FUEL PER NET GENERATION BY SOURCE KWH GENERATED (CENTS) YEAR ENDED DECEMBER 31 YEAR ENDED DECEMBER 31 1994 1993 1992 1994 1993 1992 Coal....................................................................... 38.5% 40.6% 36.7% 1.54 1.61 1.65 Nuclear.................................................................... 59.8 57.5 61.0 .56 .54 .54 Oil and Gas................................................................ -- -- -- -- -- -- All Fuels (cost based on weighted average)................................. 98.3 98.1 97.7 .95 .99 .96 Hydroelectric(1)........................................................... 1.7 1.9 2.3 100.0% 100.0% 100.0%
(1) Generating figures are net of that output required to replenish pumped storage units during off-peak periods. Does not include NP&L. COAL. The Company obtains a large amount of its coal under long-term supply contracts with mining operators utilizing both underground and surface mining. The Company has on hand an adequate supply of coal. The Company's long-term supply contracts, all of which have price adjustment provisions, have expiration dates ranging from 1995 to 2003. The Company 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 quantities and qualities of coal required. However, due to the Clean Air Act Amendments of 1990, fuel premiums may be required as contracts are renewed. The coal covered by the Company's long-term supply contracts is produced from mines located in eastern Kentucky, southern West Virginia and southwestern Virginia. The Company's short-term requirements have been and will be fulfilled with spot market purchases. The average sulfur content of coal being purchased by the Company is approximately 1 percent. Such coal satisfies the current emission limitation for sulfur dioxide for existing facilities. (See "Management's Discussion and Analysis of Results of Operations and Financial Condition, Current Issues -- The Clean Air Act Amendments of 1990.") NUCLEAR. Generally, the supply of fuel for nuclear generating units involves the mining and milling of uranium ore to produce uranium concentrates, the conversion of uranium concentrates to uranium hexafluoride, enrichment of that gas and fabrication of the enriched uranium hexafluoride into usable fuel assemblies. After a region (approximately one-third of the nuclear fuel assemblies in the reactor at any time) of spent fuel is removed from a nuclear reactor, it is placed in temporary storage for cooling in a spent fuel pool at the nuclear station site. The Company has contracted for uranium materials and services required to fuel the Oconee, McGuire and Catawba Nuclear Stations. Based upon current projections, these contracts will meet the Company's requirements through the following years:
URANIUM CONVERSION ENRICHMENT FABRICATION NUCLEAR STATION MATERIAL SERVICE SERVICE SERVICE Oconee............................................ 1997 1998 2000 2006 McGuire........................................... 1997 1998 2000 2009 Catawba........................................... 1997 1998 2000 2009
Uranium material requirements will be met through various supplier contracts, with uranium material produced primarily in the U.S., Canada and Australia. The Company believes that it will be able to renew contracts as they expire or to enter into similar contractual arrangements with other nuclear fuel materials and services suppliers. Short-term requirements have been and will be fulfilled with uranium spot market purchases. 5 The Nuclear Waste Policy Act of 1982 requires that the Department of Energy (DOE) begin disposing of spent fuel no later than January 31, 1998. The Company has entered into the required contracts with the DOE for the disposal of nuclear fuel and began making payments in July 1983 for disposal costs of fuel currently being utilized. These payments, combined with a one-time payment for disposal costs of fuel consumed prior to April 7, 1983, have totaled about $563 million through 1994. In November 1989, the DOE released a report which indicated that it expects that a facility for spent fuel disposal will not be available until the year 2010. The DOE continues to pursue a centralized interim storage facility, with a target operation date of 1998, for earlier acceptance of spent fuel from utilities. The Company believes that it will be able to provide adequate on-system storage capacity until such time as the DOE begins receiving spent fuel. REGULATION The Company is subject to the jurisdiction of the NCUC and the PSCSC which, among other things, must approve the issuance of securities. The Company also is subject, as to some phases of its business, to the jurisdiction of FERC, the Environmental Protection Agency (EPA) and state environmental agencies and to the jurisdiction of the Nuclear Regulatory Commission (NRC) as to design, construction and operation of its nuclear power facilities. The Company is exempt from regulation as a holding company under the Public Utility Holding Company Act of 1935, except with respect to the acquisition of the securities of other public utilities. ENVIRONMENTAL MATTERS. The Company is subject to federal, state, and local regulations with regard to air and water quality, hazardous and solid waste disposal, and other environmental matters. North Carolina has enacted a declaration of environmental policy requiring all state agencies to administer their responsibilities in accordance with such policy. The NCUC has adopted rules requiring consideration of environmental effects in determining whether certificates of public convenience and necessity will be granted for proposed generation facilities. South Carolina law also requires consideration by the PSCSC of environmental effects in determining whether certificates of public convenience and necessity will be granted for proposed major utility facilities, which include certain generation and transmission facilities. All of the Company's facilities which are currently under construction have been designed to comply with presently applicable environmental regulations. Such compliance has, however, increased the cost of electric service by requiring changes in the design and operation of existing facilities, as well as changes or delays in the design, construction and operation of new facilities. In 1994, the Company's construction costs for environmental protection totaled approximately $22 million, while the on-going environmental operation costs were approximately $25 million. The Company's 1995-1999 construction program includes costs for environmental protection which are estimated to be approximately $50 million, including $18.1 million in 1995, $8.5 million in 1996, $6.6 million in 1997, $8.6 million in 1998 and $8.5 million in 1999. These costs include expenditures associated with the Clean Air Act Amendments of 1990. However, governmental regulations establishing environmental protection standards are continually evolving and have not, in some cases, been fully established. These projections are subject to periodic review and revisions. Actual construction costs and capital expenditures incurred may vary from such estimates. Cost variances are due to various factors, including cost and availability of capital. AIR QUALITY. See "Management's Discussion and Analysis of Results of Operations and Financial Condition, Current Issues -- The Clean Air Act Amendments of 1990" for a discussion of the Company's plans for compliance with federal clean air standards. WATER QUALITY. The Federal Water Pollution Control Act Amendments of 1987 (otherwise known as the "Clean Water Act") require permits for facilities that discharge into waters, to ensure compliance with its provisions. The Company holds numerous such permits and such permits are reissued periodically. The Clean Water Act was scheduled for reauthorization by Congress in 1994. Congress did not act to reauthorize the Clean Water Act in 1994, but it is likely that action will be taken on such reauthorization in 1995. Until Congress acts upon the reauthorization, management will be unable to assess what effect, if any, such reauthorization will have on the Company's operations. OTHER ENVIRONMENTAL REGULATIONS. Contingencies associated with environmental matters are principally related to possible obligations to remove or mitigate the effects on the environment resulting from the disposal of certain substances at contamination sites. The Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), commonly known as "Superfund", requires any individual or entity which may have owned or operated a contaminated site, as well as transporters or generators of hazardous wastes which were sent to such site, to assume joint and several responsibility for remediation of the site. Such parties are known as "potentially responsible parties" (PRPs). The Company is currently participating in PRP groups with regard to Superfund sites in Concord, North Carolina, and two sites in Pennsylvania. The Company is a PRP at a contamination site in Charlotte, North Carolina which is being remediated in accordance with a state act similar to CERCLA. 6 The Company is also a PRP at a site in Lenoir, North Carolina which will likely be remediated in accordance with federal or state law. In addition, the Company has agreed to remediate a small volume of PCB-contaminated soil at a site in Chester, South Carolina. While the total cost of remediation at these federal and state contamination sites may be substantial, the Company shares probable liability with other PRPs, many of which have substantial assets. Other contamination sites arise from the Company's operation of manufactured gas plant (MGP) sites until the early 1950's, some of which are still owned by the Company and some of which are now owned by third parties. In North Carolina, the Company is participating in a state-sponsored program to investigate and, where appropriate, remediate MGP sites. The State of South Carolina has expressed interest in entering into a similar arrangement. Management is of the opinion that resolution of these matters will not have a material adverse effect on the results of operations or financial position of the Company. CERCLA was scheduled for reauthorization by Congress in 1994. An administration bill to reform CERCLA was acted upon by several Senate and House committees, but was never voted upon by either body. While CERCLA reform is likely to be acted upon by Congress in 1995, until such action occurs, management will be unable to assess what effect, if any, such reauthorization will have on the Company's operations. GENERAL. Over the past few decades, the issue of the possible health effects of electric and magnetic fields has generated a number of generally inconclusive studies, some public concern and litigation as well as legislative action in some states regarding high voltage transmission lines. The impact of this issue on the Company cannot presently be determined. NUCLEAR FACILITIES. The Company's nuclear facilities are subject to continuing regulation by the NRC. Stress corrosion cracking (SCC) has occurred in the steam generators of Units 1 and 2 at the McGuire Nuclear Station and Unit 1 at the Catawba Nuclear Station. Catawba Unit 2, which has certain design differences and came into service at a later date, has not yet shown the degree of SCC which has occurred in McGuire Units 1 and 2 and Catawba Unit 1. It is, however, too early in the life of Catawba Unit 2 to determine the extent to which SCC may be a problem. Although the Company has taken steps to mitigate the effects of SCC, the inherent potential for future SCC in the McGuire and Catawba steam generators still exists. The Company is planning for the replacement of steam generators at three units that have experienced SCC and has signed an agreement with Babcock & Wilcox International to purchase replacement steam generators. The current schedule for completion of the effort is as follows: Catawba Unit 1 -- 1996, McGuire Unit 1 -- 1997 and McGuire Unit 2 -- 1997. The order of replacement is subject to change based on operational and project circumstances. Steam generator replacement at each unit is expected to take approximately four months and cost approximately $170 million per unit, excluding the cost of replacement power and the reimbursement of applicable costs by the Other Catawba Joint Owners for Catawba Unit 1. Stress corrosion problems are excluded under the Company's nuclear insurance policies. The Company, in connection with its McGuire and Catawba stations and on behalf of the Other Catawba Joint Owners, began a legal action on March 22, 1990, alleging that Westinghouse Electric Corporation knowingly supplied to the McGuire and Catawba Stations steam generators that were defective in design, workmanship and materials, requiring replacement well short of their stated design life. On March 17, 1994, the Company together with the Other Catawba Joint Owners, settled the lawsuit. While the court order does not allow disclosure of the terms of the settlement, the Company believes the litigation was settled on terms that provided satisfactory consideration to the Company and will not have a material effect on the results of operations or financial position of the Company. NUCLEAR DECOMMISSIONING COSTS. Estimated site-specific nuclear decommissioning costs, including the cost of decommissioning plant components not subject to radioactive contamination, total approximately $1.3 billion stated in 1994 dollars based on decommissioning studies completed in 1994. This amount includes the Company's 12.5 percent ownership in the Catawba Nuclear Station. The Other Catawba Joint Owners are responsible for decommissioning costs related to their ownership interest in the station. Both the NCUC and the PSCSC have granted the Company recovery of the estimated decommissioning costs through retail rates over the expected remaining service periods of the Company's nuclear plants. Such estimates presume that units will be decommissioned as soon as possible following the end of their license life. Although subject to extension, the current operating licenses for the Company's nuclear units expire as follows: Oconee 1 and 2 -- 2013, Oconee 3 -- 2014; McGuire 1 -- 2021, McGuire 2 -- 2023; and Catawba 1 -- 2024, Catawba 2 -- 2026. The NRC issued a rulemaking in 1988 which requires an external mechanism to fund the estimated cost to decommission certain components of a nuclear unit subject to radioactive contamination. In addition to the required external funding, the Company maintains an internal reserve to provide for decommissioning costs of plant components not subject to radioactive contamination. During 1994, the Company expensed approximately $52.5 million which was contributed to the external funds and accrued an additional $4.8 million to the internal reserve. The balance of the external funds as of December 31, 1994, was $172.4 million. The balance of the internal reserve as of December 31, 1994, was $204.8 million and is reflected 7 in Accumulated depreciation and amortization on the Consolidated Balance Sheets. Management's opinion is that the decommissioning costs being recovered through rates, when coupled with assumed after-tax fund earnings of 5.5 percent to 5.9 percent, are currently sufficient to provide for the cost of decommissioning. A provision in the Energy Policy Act of 1992 established a fund for the decontamination and decommissioning of the DOE's uranium enrichment plants. Licensees are subject to an annual assessment for 15 years based on their pro rata share of past enrichment services. The annual assessment is recorded as fuel expense. The Company paid approximately $18 million during 1994 and $26.3 million cumulatively related to its ownership interest in nuclear plants. The Company has reflected the remaining liability and regulatory asset of approximately $102 million in the Consolidated Balance Sheets at December 31, 1994. NUCLEAR INSURANCE. For a discussion of the Company's nuclear insurance coverage, see "Note 13, Notes to Consolidated Financial Statements, Commitments and Contingencies -- Nuclear Insurance." HYDROELECTRIC LICENSES. The principal hydroelectric projects of the Company are licensed by FERC under Part I of the Federal Power Act. Eleven developments on the Catawba-Wateree River in North Carolina and South Carolina, with a nameplate rating of 804,940 KW, are licensed for a term expiring in 2008. The Company also holds a license for the Keowee-Toxaway Project for a term expiring in 2016, covering the Keowee Hydro Station and the Jocassee Pumped Storage Station for a combined total of 769,500 KW, on the upper tributaries of the Savannah River in northwestern South Carolina. Additionally, the Company is the licensee through 2027 for the Bad Creek Hydroelectric Station which uses Lake Jocassee as its lower reservoir and has a nameplate rating of 1,065,000 KW. NP&L holds licenses for 11 hydroelectric projects with a nameplate rating of 100,000 KW with license terms expiring 2001-2006. The Federal Power Act provides, among other things, that, upon the expiration of any license issued thereunder, the United States may (a) grant a new license to the licensee for the project, (b) take over the project upon payment to the licensee of its "net investment" in the project (but not in excess of the fair value thereof) plus severance damages, or (c) grant a license for the project to a new licensee subject to payment to the former licensee of the amount specified in (b) above. INTERCONNECTIONS The Company has major interconnections and arrangements with its neighboring utilities which it currently considers adequate for coordinated planning, emergency assistance, exchange of capacity and energy, and reliability of power supply. COMPETITION The Company currently is subject to competition in some areas from government-owned power systems, municipally-owned electric systems, rural electric cooperatives and, in certain instances, from other private utilities. 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 power companies and rural electric cooperatives. Substantially all of the territory comprising the Company's service area has been so assigned. The remaining areas have been designated as unassigned and in such areas the Company 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, the Company is engaged in continuing competition with various natural gas providers. The Energy Policy Act of 1992 (EPACT) is moving utilities toward a more competitive environment. The EPACT reformed certain provisions of the Public Utility Holding Company Act of 1935 (PUHCA) and Part II of the Federal Power Act to remove certain regulatory barriers. For example, the EPACT allows utilities to develop independent electric generating plants in the United States for sales to wholesale customers, as well as to contract for utility projects internationally, without becoming subject to regulation under PUHCA as an electric utility holding company. The EPACT requires transmission of power for third parties to wholesale customers on issuance of an order by the FERC, provided the reliability of service to the utility's local customer base is protected and the local customer base does not subsidize the third-party service. The EPACT does not permit the FERC to issue an order requiring transmission access to retail customers. The electric utility industry currently is predominantly regulated on a basis designed to recover the cost of providing electric power to its retail and wholesale customers. If cost-based regulation were to be discontinued in the industry for any reason, including competitive pressure on the cost-based price of electricity, profits could be reduced and utilities might be 8 required to reduce their recorded asset balances to reflect a market basis less than cost. Discontinuance of cost-based regulation could also require some utilities to write off their regulatory assets. Management cannot predict the potential impact, if any, of these competitive forces on the Company's future financial position and results of operations. However, the Company continues to position itself to effectively meet these challenges by maintaining prices that are regionally and nationally competitive. The Company filed an open access transmission tariff with the FERC in early 1995 (See "Subsequent Events"). SUBSIDIARIES AND DIVERSIFIED ACTIVITIES The Company continues to pursue both domestic and international diversified business opportunities that are synergistic with the Company's core business to provide additional value to the Company's shareholders. Although these opportunities are concentrated in areas that utilize the Company's expertise, they present different and potentially greater risks than does the Company's core business. The Company only pursues opportunities in which the expected returns are commensurate with the risks and makes efforts to mitigate such risks. (See "Subsidiaries and Diversified Activities Highlights" on page 46.) CRESCENT RESOURCES, INC. (Crescent) pursues both residential and commercial real estate development, in addition to providing forest management activities focused on growing trees suitable for use in the construction, furniture and paper industries. At December 31, 1994, Crescent owned approximately 2,223,000 square feet of office, retail and warehouse space and had approximately 818,000 square feet of commercial properties under construction. Additionally, Crescent had approximately 266,000 acres of land under its management at year end. DUKE ENERGY GROUP, INC. (Duke Energy) develops, owns and operates electric power-related facilities in the United States and abroad. Domestically, Duke Energy concentrates on advanced fossil-fueled generation including pulverized coal, circulating fluidized bed, coal gasification and natural gas technologies. Internationally, Duke Energy pursues advanced coal-fueled, hydroelectric and gas-fueled generation as well as transmission projects. Duke Energy has equity interests in two U.S. electric generation facilities and four international projects. In 1994, Duke Energy announced plans to participate in power marketing activities in North America with Louis Dreyfus Electric Power (LDEP), following regulatory approvals. LDEP is currently the largest power marketer in the United States. (See "Subsequent Events.") NANTAHALA POWER AND LIGHT COMPANY (NP&L) is a franchised electric utility which operates 11 hydroelectric plants with a total capacity of 100,000 kilowatts. NP&L has approximately 53,000 customers in western North Carolina. NP&L sold 907 million KWH in 1994 compared to 889 million KWH in 1993, excluding sales to Duke Power. OTHER BUSINESS UNITS include Church Street Capital Corp., which is engaged in investment management for its subsidiaries; Duke Engineering & Services, Inc., which markets engineering, construction, quality assurance, consulting and other engineering-related services for facilities other than coal-fired generating plants, both nationally and internationally; Duke/Flour Daniel, a joint venture with Fluor Daniel, Inc., which provides engineering, construction, and support of operating and maintenance activities, primarily for coal-fired generating plants, both nationally and internationally; Duke Merchandising, which sells and services quality electric merchandise and electronics; DukeNet Communications, Inc. (DukeNet), which was formed in 1994 to develop and manage communications systems (See "Subsequent Events"); and Duke Water Operations, which provides franchised water services for Anderson, South Carolina and Rutherfordton, North Carolina. EMPLOYEES At December 31, 1994, the Company had 17,052 full-time employees, which included 1,011 full-time employees of subsidiaries and diversified activities. About 2,000 electrical operating employees are represented by the International Brotherhood of Electrical Workers (IBEW). During the last quarter of 1994, the Company reached new labor agreements with the IBEW for one year terms. The Company has been engaged in a concentrated effort to more efficiently and effectively utilize its resources through better work practices. During 1994, the Company offered a voluntary separation program which gave most employees the option of leaving the Company for a lump-sum payment and severance pay based on years of service. This voluntary separation program resulted in the departure of approximately 1,300 employees in 1994. Implementing programs such as the voluntary separation program and other efficiency practices has resulted in continued work-force reduction and in streamlined work flows. The number of full-time employees has decreased to the present level from 19,945 at year-end 1990. 9 SUBSEQUENT EVENTS DukeNet entered into an agreement on December 8, 1994, as part of a consortium which includes BellSouth Personal Communications, Inc. and other companies, to bid for a personal communication services (PCS) license auctioned by the Federal Communications Commission (FCC). On March 13, 1995 the consortium won the bid and has agreed to pay for the license and, in compliance with FCC requirements, construct a substantial portion of the communication system. DukeNet has a 19.98% equity commitment to the consortium. Projected DukeNet capital commitments through 1999 are included in the Company's projected capital expenditures (See "Capital Requirements" on page 4). On March 17, 1995, the Company filed for permission to sell wholesale electricity at market-driven prices with FERC. To date, the Company has sold wholesale power based on its bundled transmission, generation and distribution costs with an allowed return. The Company believes that this filing will strategically position the Company to become involved in the developing wholesale power market. The filing also included an open-access wholesale transmission tariff. This tariff sets the rates, terms and conditions under which the Company will transmit or wheel electricity from a third party through its system to a wholesale customer. Open access will provide the Company with increased opportunities to sell and deliver energy and capacity at market-based prices, thereby improving the utilization of existing assets. In addition, such access will provide an opportunity to buy energy and capacity at attractive rates, serving to further enhance the Company's competitive price position. In addition, Duke Energy Marketing Corp. (DEMC), an affiliate of Duke Energy, filed a request for power marketer status with FERC. Louis Dreyfus Electric Power and DEMC, in a joint venture, also filed an application with FERC for power marketer status. A power marketer buys blocks of electricity for immediate or eventual resale. Conditional approval is expected from FERC within six to eight months after filing. Final FERC approval for the filings is not expected for at least one year. Recent liquidity problems in Argentina have caused a significant increase in Argentine interest rates and a severe limitation on local funds. Until such liquidity problems are resolved, Duke Energy is arranging financing alternatives which include additional equity infusions in its Argentine projects. Such infusions would not be material to the Company. 10 (A Map of North Carolina and South Carolina appears here showing Duke Power's service area. The legend is as follows:) LEGEND (star) REGION OFFICE (circle) FOSSIL-FUELED STATION (triangle) HYDROELECTRIC STATION (square) NUCLEAR ELECTRIC STATION (open box) NANTAHALA POWER AND LIGHT 11 DUKE POWER COMPANY OPERATING STATISTICS
YEAR ENDED DECEMBER 31 1994 1993 1992 1991 1990 Sources of Electric Energy (d) Millions of kilowatt-hours: Generated -- net output: Coal............................................ 32,714 34,097 28,999 26,455 27,262 Nuclear (a)..................................... 50,887 48,211 48,238 49,328 44,649 Hydro (b)....................................... 1,460 1,582 1,834 1,545 1,879 Oil and gas..................................... 35 43 5 7 53 Total generation............................. 85,096 83,933 79,076 77,335 73,843 Purchased power and net interchange (c)........... 1,276 1,750 1,403 587 1,531 Total output................................. 86,372 85,683 80,479 77,922 75,374 Less: Other Catawba Joint Owners' share........... 15,300 13,821 14,313 12,280 11,735 Plus: Purchases from Other Catawba Joint Owners... 9,046 8,810 9,466 8,525 8,658 Total sources of energy...................... 80,118 80,672 75,632 74,167 72,297 Line loss and company usage....................... (4,555) (4,614) (4,590) (4,280) (4,222) Total kilowatt-hour sales.................... 75,563 76,058 71,042 69,887 68,075 Average Cost Per Ton of Coal Burned.................... $ 40.68 $ 42.21 $ 43.47 $ 45.21 $ 45.49 Electric Energy Sales (d) Millions of kilowatt-hours: Residential....................................... 18,870 19,465 17,789 17,918 17,221 General service................................... 17,289 16,904 15,818 15,586 15,032 Industrial Textile......................................... 12,285 11,954 11,685 11,315 11,130 Other........................................... 17,005 16,244 15,356 14,955 14,764 Other energy and wholesale (c)(e)................. 10,274 11,337 10,360 10,132 10,468 Total kilowatt-hour sales billed.................. 75,723 75,904 71,008 69,906 68,615 Unbilled kilowatt-hour sales.................... (160) 154 34 (19) (540) Total kilowatt-hour sales....................... 75,563 76,058 71,042 69,887 68,075 Electric Revenue (d) Thousands of Dollars: Residential....................................... 1,379,740 1,424,173 1,312,227 1,272,322 1,216,945 General service................................... 1,031,061 1,014,124 964,853 921,337 886,480 Industrial Textile......................................... 498,190 487,576 482,172 475,191 476,493 Other........................................... 745,154 726,399 696,413 668,765 654,551 Other energy and wholesale (c)(e)................. 540,256 476,862 460,849 441,777 391,803 Other electric revenue............................ 84,928 152,742 44,970 37,568 78,859 Total electric revenues......................... $4,279,329 $4,281,876 $3,961,484 $3,816,960 $3,705,131 Number of Customers -- End of Year (d) Residential....................................... 1,493,166 1,460,876 1,439,845 1,415,605 1,391,336 General service (f)............................... 239,355 232,272 227,675 222,917 224,642 Industrial Textile......................................... 1,422 1,396 1,390 1,385 1,398 Other........................................... 7,320 7,338 7,314 7,255 7,325 Other energy and wholesale (c).................... 8,187 7,957 7,773 7,605 7,405 Total customers................................. 1,749,450 1,709,839 1,683,997 1,654,767 1,632,106 Residential Customer Statistics (d) Average number for the year....................... 1,483,497 1,455,609 1,431,403 1,409,775 1,383,799 Average annual use -- KWH......................... 12,720 13,372 12,427 12,710 12,444 Average annual billing............................ $ 930.06 $ 978.40 $ 916.74 $ 902.50 $ 879.42 Average Annual Billed Revenue Per KWH (d) Cents: Residential....................................... 7.31 7.32 7.38 7.10 7.07 General service................................... 5.96 6.00 6.10 5.91 5.90 Industrial........................................ 4.24 4.31 4.36 4.35 4.37 Other energy and wholesale (c)(e)................. 5.26 4.21 4.45 4.36 3.74
(a) Includes 100% of Catawba generation. 12 (b) 1991 includes KWH of the Bad Creek Hydroelectric Station prior to commercial operation. (c) Kilowatt-hour sales, electric revenues, and Net interchange and purchased power for the year 1990 include a reclassification for certain power transactions previously classified as Net interchange and purchased power prior to a 1990 FERC order. (d) Does not include operating statistics of NP&L. (e) Includes sales to NP&L. (f) 1991 restated to eliminate certain duplicate customers. EXECUTIVE OFFICERS OF THE COMPANY WILLIAM H. GRIGG, 62, Chairman of the Board and Chief Executive Officer. Mr. Grigg served as Chairman of the Board, President and Chief Executive Officer, effective April 28, 1994, until July 27, 1994 when he assumed his present position. He served as Vice Chairman of the Board beginning in 1991, and Executive Vice President, Customer Group, beginning in 1988. STEVE C. GRIFFITH, JR., 61, Vice Chairman of the Board and General Counsel. Mr. Griffith served as Executive Vice President and General Counsel from 1991 until he assumed his present position in July 1994. He served as Senior Vice President and General Counsel from 1982 until 1991. RICHARD B. PRIORY, 48, President and Chief Operating Officer. Mr. Priory served as Executive Vice President, Power Generation Group, from 1991 until he assumed his present position in July 1994. He was Senior Vice President, Generation and Information Services, from 1988 to 1991. WILLIAM A. COLEY, 51, President, Associated Enterprises Group. Mr. Coley was named Senior Vice President, Power Delivery, in 1988; Senior Vice President, Customer Group, in 1990; and Executive Vice President, Customer Group, in 1991. He was named to his present position in July 1994. RICHARD J. OSBORNE, 43, Senior Vice President and Chief Financial Officer. Prior to assuming his current position in July 1994, Mr. Osborne served as Vice President and Chief Financial Officer beginning in 1991 and Vice President, Finance, from 1988 to 1991. JEFFREY L. BOYER, 38, Controller. Mr. Boyer served as Director of Corporate Accounting for more than five years prior to assuming his present position in July 1994. Executive officers are elected annually by the Board of Directors and serve until the first meeting of the Board of Directors following the next 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. There have been no events under any bankruptcy act, no criminal proceedings and no judgments or injunctions material to the evaluation of the ability and integrity of any executive officer during the past five years. ITEM 2. PROPERTIES. At December 31, 1994, the Company operated three nuclear generating stations, eight coal-fired stations and twenty-seven hydroelectric stations, all of which are located in North Carolina or South Carolina. 13 The following is a list of the major generating stations owned by the Company at December 31, 1994:
FACILITY ENERGY SOURCE NET MW Oconee Nuclear 2,538 McGuire Nuclear 2,258 Catawba (a) Nuclear 2,258 Belews Creek Coal 2,240 Marshall Coal 2,090 Allen Coal 1,140 Cliffside Coal 760 Others Coal 1,431 Bad Creek Hydroelectric 1,065 Jocassee Hydroelectric 610 Others Hydroelectric 1,007 Combustion turbines Oil and gas 584
(a) The Catawba Nuclear Station is a jointly-owned facility, of which the Company's ownership share is 12 1/2 percent. The Company is currently constructing the Lincoln Combustion Turbine Station, a 16-turbine facility designed to provide capacity at periods of peak demand. The station will have a total generating capacity of 1,184 megawatts. The facility is designed to operate on either natural gas or oil. In addition to the electric generating plants described above, the Company owned, as of December 31, 1994, approximately 8,300 conductor miles of transmission lines and approximately 72,500 conductor miles of distribution lines. As of such date, the Company's transmission and distribution systems comprised approximately 1,700 substations with an installed transformer capacity of approximately 83,100,000 kVA. NP&L's generation facilities consist of eleven hydroelectric plants with an aggregate nameplate capacity of approximately 100 MW. The transmission backbone of the system is a 161 kV line from Santeetlah to substations at Robbinsville, Nantahala Plant, Oak Grove, Webster and Thorpe Plant. The map on page 11 shows the location of the Company's and NP&L's service area and generating stations. Substantially all electric plant is mortgaged under the Indenture relating to the First and Refunding Mortgage Bonds of the Company. For additional information concerning the properties of the Company, see "Business -- Energy Requirements and Capability" and "Capital Requirements". ITEM 3. LEGAL PROCEEDINGS. Reference is made to "Business -- Regulation", "Management Discussion and Analysis of Results of Operations and Financial Condition, Current Issues -- Commitment and Contingencies" and "Note 13, Notes to Consolidated Financial Statements, Commitments and Contingencies -- Other". ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of the Company's security holders during the last quarter of 1994. 14 PART II. ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Common Stock of the Company is traded on the New York Stock Exchange. At December 31, 1994, there were approximately 129,637 holders of shares of such Common Stock. The following table sets forth for the periods indicated the dividends paid per share of Common Stock and the high and low sales prices of such shares reported by the New York Stock Exchange Composite Transactions:
STOCK PRICE DIVIDENDS RANGE COMMON STOCK PER SHARE HIGH LOW 1994 By Quarter Fourth..................................... $0.49 $ 42 1/8 $ 38 Third...................................... 0.49 39 7/8 35 1/2 Second..................................... 0.47 37 32 7/8 First...................................... 0.47 43 35 3/4 1993 By Quarter Fourth..................................... $0.47 $ 44 $ 39 Third...................................... 0.47 44 7/8 39 7/8 Second..................................... 0.45 41 3/8 37 1/8 First...................................... 0.45 39 7/8 35 3/8
15 ITEM 6. SELECTED FINANCIAL DATA
1994 1993 1992 1991 1990 Condensed consolidated statements of income (thousands) Operating revenues (a)......................... $ 4,488,913 $ 4,466,233 $ 4,122,503 $ 3,962,605 $ 3,862,395 Operating expenses (a)......................... 3,309,087 3,258,422 3,087,422 2,968,239 2,949,387 Operating income............................... 1,179,826 1,207,811 1,035,081 994,366 913,008 Interest expense and other income.............. (143,931) (171,419) (223,028) (117,725) (124,826) Income before income taxes..................... 1,035,895 1,036,392 812,053 876,641 788,182 Income taxes................................... 397,019 409,977 303,970 293,018 249,994 Net income..................................... 638,876 626,415 508,083 583,623 538,188 Dividends on preferred and preference stock....................................... 49,724 52,429 56,407 54,683 52,616 Earnings for common stock...................... $ 589,152 $ 573,986 $ 451,676 $ 528,940 $ 485,572 Common stock data (b) Shares of common stock year-end (thousands)........................ 204,859 204,859 204,859 204,699 202,584 average (thousands)......................... 204,859 204,859 204,819 203,431 202,570 Per share of common stock Earnings.................................... $ 2.88 $ 2.80 $ 2.21 $ 2.60 $ 2.40 Dividends................................... $ 1.92 $ 1.84 $ 1.76 $ 1.68 $ 1.60 Book value -- year-end...................... $ 22.13 $ 21.17 $ 20.26 $ 19.86 $ 18.84 Market price -- high-low.................... $ 43-32 7/8 $44 7/8-35 3/8 $37 1/2-31 3/8 $ 35-26 3/4 $32 3/8-25 1/2 -- year-end................... $ 38 1/8 $ 42 3/8 $ 36 1/8 $ 35 $ 30 5/8 Balance sheet data (thousands) Total assets................................... $12,862,228 $12,293,605 $11,012,795 $10,617,552 $10,083,507 Long-term debt................................. $ 3,567,122 $ 3,285,397 $ 3,288,111 $ 3,235,492 $ 3,102,746 Preferred stock with sinking fund requirements................................ $ 279,500 $ 281,000 $ 279,519 $ 228,650 $ 239,800
(a) Operating revenues and operating expenses for the year 1990 include a reclassification for certain power transactions previously classified as Net interchange and purchased power prior to 1990 FERC order. (b) All common stock data reflects the two-for-one split of common stock on September 28, 1990. 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS EARNINGS AND DIVIDENDS. Earnings per share increased 3 percent from $2.80 in 1993 to $2.88 in 1994. The increase was primarily due to increased earnings of subsidiaries and diversified activities, increased allowance for funds used during construction and other deferred returns, and pre-funding of charitable contributions to the Duke Power Foundation in 1993. These items were offset by higher operating and maintenance expenses including recognition of certain non-recurring costs. Excluding $.32 for the effect of a one-time refund to North Carolina retail customers in 1992, earnings per share increased from $2.53 in 1992 to $2.88 in 1994, indicating an average annual growth rate of 7 percent. Total Company earned return on average common equity was 13.3 percent in 1994 compared with 13.6 percent in 1993 and 12.8 percent in 1992, excluding the effects of the 1992 refund. The Company continued its practice of annually increasing the common stock dividend. Common dividends per share increased at an average annual rate of 4 percent from $1.76 in 1992 to $1.92 in 1994. Indicated annual dividends per share increased to $1.96. REVENUES AND SALES. Operating revenues increased at an average annual rate of 4 percent from 1992 to 1994, primarily because of increased overall kilowatt-hour sales to all retail customer classes. Revenues from subsidiaries and diversified activities contributed $49 million to the increase in Operating revenues over the three-year period, primarily from increased developed lot sales, land sales and equity earnings from investments in domestic and international joint ventures. The Company does not expect the trend of annually increasing electric revenues to continue for 1995 and 1996 if normal weather conditions occur. Total electric revenues in 1995 and 1996 are expected to remain approximately the same as 1994 and increase thereafter. Revenues from retail customers are expected to increase because of continued growth in the service area. However, wholesale revenues are expected to decline as the other joint owners of the Catawba Nuclear Station retain a significantly larger portion of their ownership entitlement in 1995 and 1996, thereby reducing supplemental requirements supplied by the Company. The effect on earnings of such wholesale revenue decline will be partially offset by a decline in purchased power costs from the other joint owners which are not subject to levelization. (For additional information on Catawba joint ownership, see Note 3 to the Consolidated Financial Statements.) Kilowatt-hour sales from Duke Power electric operations decreased 1 percent in 1994 compared with 1993. Sales to general service, textile and other-industrial customers increased by 2 percent, 3 percent and 5 percent, respectively, as a result of continued economic growth in Duke Power's service area. A new record peak demand of 16,070 megawatts was set in January 1994 for Duke Power's electric operations during a period of extremely cold temperatures. However, weather for most of the year was milder than normal and milder than 1993. As a result, sales to residential customers decreased by 3 percent. Kilowatt-hour sales to the other joint owners of the Catawba Nuclear Station decreased 18 percent primarily because of improved output of the Catawba and McGuire Nuclear Stations from which they receive their energy entitlements. OPERATING EXPENSES. From 1993 to 1994, Other operation and maintenance expenses rose 7 percent. Nuclear plant maintenance expenses increased primarily as a result of increased refueling outages, while fossil plant maintenance expenses increased primarily as a result of turbine and boiler outages. Administrative and general expenses increased primarily because of costs associated with a voluntary separation program offered during 1994 and non-recurring claims. (For additional information on the voluntary separation program, see Current Issues "Resource Optimization," page 20.) Other operation and maintenance expenses increased at an average annual rate of 7 percent from 1992 to 1994. Administrative and general expenses increased over the period principally because of the voluntary separation program offered in 1994 and non-recurring claims. Fossil operating and maintenance expenses increased as a result of bringing refurbished units back on-line and increased boiler and turbine outages. Fuel expense increased at an average annual rate of 3 percent from 1992 to 1994. The increase was due primarily to higher system production requirements satisfied by increased fossil generation. A continued decline of fuel prices over this period partially offset the overall increase in fuel expenses. Net interchange and purchased power increased from $539 million in 1992 to $553 million in 1994, an average annual increase of 1 percent. 17 From 1992 to 1994, Depreciation and amortization expense decreased at an average annual rate of 4 percent primarily because the reduction in the amortization of property losses more than offset depreciation associated with additional investments. These investments are primarily associated with distribution plant including investment to support customer growth, and fossil plant resulting from bringing refurbished units back on-line. INTEREST EXPENSE AND OTHER INCOME. Interest expense decreased at an average annual rate of 7 percent from 1992 to 1994. Interest on long-term debt decreased because of the Company's refinancing of higher-cost debt beginning in late 1991 and continuing throughout 1993. Interest expense also decreased as a result of the one-time impact in 1992 of approximately $27 million in interest paid to North Carolina retail customers because of a rate refund. Allowance for funds used during construction (AFUDC) and other deferred returns, net of associated taxes, represented 13 percent of earnings for common stock in 1994 compared with 11 percent in 1992. AFUDC and other deferred returns are expected to be less than 14 percent of total earnings during the next three years. AFUDC, net of associated taxes, represented 6 percent of earnings for common stock in 1994 compared with 5 percent in 1992. The increase was primarily the result of increased investment in the Lincoln Combustion Turbine Station. (For additional information on the Lincoln Combustion Turbine Station, see Capital Needs "Meeting Future Power Needs," page 20.) The accrued return, net of associated taxes, on the purchased capacity levelization deferral related to the joint ownership of the Catawba Nuclear Station represented 7 percent of earnings for common stock in 1994 compared with 6 percent in 1993 and 1992. The growth in this return is due to the increasing cumulative impact of the Company's funding of purchased power costs, which the Company expects to collect through current rates in future periods. (For additional information on purchased capacity levelization, see Capital Needs "Purchased Capacity Levelization," page 19.) LIQUIDITY AND RESOURCES SIGNIFICANT RATE MATTERS. During 1991, Duke Power filed in both the North Carolina and South Carolina retail jurisdictions its only requests for general rate increases since 1986. General rate increases approved in November 1991 resulted in additional annual revenues of $100.1 million and $30.2 million in North Carolina and South Carolina, respectively. The increases were needed primarily to recover costs associated with the commercial operation of the Bad Creek Hydroelectric Station. In 1992, the North Carolina Supreme Court remanded to the North Carolina Utilities Commission (NCUC) Duke Power's 1986 rate order for the second time. In this ruling, the Court held that the record from the 1986 proceedings failed to support the rate of return on common equity authorized by the NCUC after the initial decision of the Court remanding the 1986 rate order. The NCUC issued a final order in 1992 which resulted in a 1992 refund to North Carolina retail customers of approximately $95 million, including interest. Duke Power has a bulk power sales agreement with Carolina Power & Light Company (CP&L) to provide CP&L 400 megawatts of capacity as well as associated energy when needed for a six-year period which began July 1, 1993. Electric rates in all of Duke Power's regulatory jurisdictions were reduced by adjustment riders to reflect capacity revenues received from this CP&L bulk power sales agreement. CATAWBA SETTLEMENTS. The other joint owners of the Catawba Nuclear Station and the Company were involved in arbitration proceedings related to the Catawba joint ownership contractual agreements. The basic contention in each proceeding was that certain calculations affecting bills under these agreements should be performed differently. These items are covered by the agreements between the Company and the other Catawba joint owners which previously have been approved by the Company's retail regulatory commissions. (For additional information on Catawba joint ownership, see Note 3 to the Consolidated Financial Statements.) The Company and the other joint owners entered into settlement agreements in 1994 which resolved all issues in contention in the proceedings. The Company has settled its cumulative net obligation through 1993 of approximately $205 million with the other joint owners. Billings for 1994 and later years will conform to the settlement agreements, which have been approved by the Company's retail regulatory commissions. Because it expects the costs associated with these settlements to be recovered as part of the purchased capacity levelization, the Company has included approximately $205 million as an increase to Purchased capacity costs on its Consolidated Balance Sheets. Therefore, the Company believes these matters should not have a material adverse effect on the results of operations or financial position of the Company. 18 CASH FROM OPERATIONS. Consolidated net cash provided by operating activities in 1994 accounted for 67 percent of total cash from operating, financing and investing activities compared with 46 percent in 1993 and 51 percent in 1992. Substantially all of the Company's capital needs were met by cash generated from operating activities for 1993 and 1992 when refinancing activities are excluded. Refinancing activities were insignificant in 1994. FINANCING AND INVESTING ACTIVITIES. The Company's consolidated capital structure at year-end 1994, including subsidiary long-term debt, was 51 percent common equity, 40 percent long-term debt and 9 percent preferred stock. This structure is consistent with the Company's target to maintain a double-A credit rating. As of December 31, 1994, Duke Power's bonds were rated "AA" by Fitch Investors Service, "Aa2" by Moody's Investors Service, and "AA-" by Standard & Poor's Group and Duff & Phelps. In response to favorable market conditions in 1992 and 1993, the Company refinanced $2.3 billion of long-term debt and $445 million of preferred stock. While there were no significant refinancings in 1994, the Company issued $407 million in debt, primarily First and Refunding Mortgage Bonds. Duke Power's embedded cost of long-term debt, excluding debt of subsidiaries, was 7.98 percent for 1994 compared with 8.01 percent in 1993 and 8.39 percent in 1992. The embedded cost of preferred stock was 6.99 percent in 1994 compared with 6.76 percent in 1993 and 7.05 percent in 1992. The decreases are primarily the result of the Company's refinancing activities. The increase in the embedded cost of preferred stock from 1993 to 1994 reflects the impact of increasing dividend rates on variable rate preferred stocks. FIXED CHARGES COVERAGE. Consolidated fixed charges coverage using the SEC method increased to 4.72 times for 1994 compared with 4.68 and 3.49 times in 1993 and 1992, respectively. Coverage increased primarily because of lower interest as a result of refinancing activities. Consolidated fixed charges coverage, excluding AFUDC and other deferred returns, was 4.32 for 1994 compared with 4.39 in 1993 and 3.27 in 1992 and the Company goal of 3.5 times. Coverage was somewhat lower in 1994 than 1993 as a result of a decrease in earnings excluding AFUDC and other deferred returns and higher in 1994 than 1992 because of higher earnings and lower interest expense. CAPITAL NEEDS PROPERTY ADDITIONS AND RETIREMENTS. Additions to property and nuclear fuel of $883 million and retirements of $238 million resulted in an increase in gross plant of $645 million in 1994. Since January 1, 1992, additions to property and nuclear fuel of $2.2 billion and retirements of $839 million have resulted in an increase in gross plant of $1.4 billion. CONSTRUCTION EXPENDITURES. Plant construction costs for generating facilities supporting Duke Power electric operations, including AFUDC, increased from $145 million in 1992 to $309 million in 1994, primarily because of construction of the Lincoln Combustion Turbine Station. (For more information, see Capital Needs "Meeting Future Power Needs," page 20.) Construction costs for distribution plant, including AFUDC, decreased from $224 million in 1992 to $203 million in 1994. Projected construction and nuclear fuel costs for Duke Power's electric operations, both including AFUDC, are $3.0 billion and $620 million, respectively, for 1995 through 1999. Total projected construction costs include expenditures for the construction of the Lincoln Combustion Turbine Station and the replacement of certain steam generators at the McGuire and Catawba Nuclear Stations. (For additional information on steam generator replacement, see Current Issues "Stress Corrosion Cracking," page 21.) Projected capital expenditures of subsidiaries and diversified activities are $661 million for 1995 through 1999. These projections are subject to periodic review and revisions. Actual construction and nuclear fuel costs and capital expenditures incurred may vary from such estimates. Cost variances are due to various factors, including revised load estimates, environmental matters and cost and availability of capital. For 1995 through 1999, the Company anticipates funding its projected construction expenditures through the internal generation of funds and, to a lesser extent, through the issuance of debt securities. PURCHASED CAPACITY LEVELIZATION. The rates established in Duke Power's electric retail jurisdictions permit recovery of its investment in both units of the Catawba Nuclear Station and the costs associated with contractual purchases of capacity from the other Catawba joint owners. The contracts relating to the sales of portions of the station obligate the Company to purchase a declining amount of capacity from the other joint owners. In the North Carolina retail jurisdiction, regulatory treatment of these contracts provides revenue for recovery of the capital costs and the fixed operating and maintenance costs of purchased capacity on a levelized basis. In the South Carolina retail jurisdiction, revenues are provided for the recovery of 19 the capital costs of purchased capacity on a levelized basis, while current rates include recovery of fixed operating and maintenance expenses. Such rate treatments require the Company to fund portions of the purchased capacity payments until these costs, including accrued returns, are recovered at a later date. The Company recovers the accumulated costs and returns when the sum of the declining purchased capacity payments and accrual of returns for the current period drop below the levelized revenues. In the North Carolina retail jurisdiction, and wholesale jurisdiction regulated by the Federal Energy Regulatory Commission (FERC), purchased capacity payments continue to exceed levelized revenues. In the South Carolina retail jurisdiction, cumulative levelized revenues have exceeded purchased capacity payments. Jurisdictional levelizations are intended to recover total costs, including returns, and are subject to adjustments, including final true-ups. MEETING FUTURE POWER NEEDS. The Company's strategy for meeting customers' present and future energy needs consists of three components: supply-side resources, demand-side resources and purchased power resources. To assist in determining the optimal combination of these three resources, the Company uses an integrated resource planning process. The goal is to provide adequate and reliable electricity in an environmentally responsible, cost-effective manner. The Company is building a combustion turbine facility in Lincoln County, North Carolina. The Lincoln Combustion Turbine Station, designed to provide capacity at periods of peak demand, will consist of 16 combustion turbines with a total generating capacity of 1,184 megawatts. The estimated total cost of the project is approximately $500 million. Current plans are for 12 units to begin commercial operation by the end of 1995 and the remaining four to begin commercial operation in 1996. Demand-side management programs benefit the Company and its customers by promoting energy efficiency, providing for load control through interruptible control features, shifting usage to off-peak periods and increasing strategic sales of electricity. In return for participation in demand-side management programs, customers may be eligible to receive various incentives which help reduce their net investment in high-efficiency equipment or their electric bills. The November 1991 rate orders of the NCUC and the Public Service Commission of South Carolina (PSCSC) provided for recovery in rates of a designated level of costs for demand-side management programs and allowed the deferral for later recovery of certain demand-side management costs that exceed the level reflected in rates, including a return on the deferred costs. The Company ultimately expects recovery through rates of associated deferred costs. The annual costs deferred, including the return, were approximately $25 million in 1994 and $26 million in 1993. As of January 1, 1995, the Company has under contract 300 megawatts of firm purchased capacity from other generators of electricity, including 62 megawatts from qualifying facilities. The purchase of capacity and energy is also an integral part of meeting future power needs. The Company expects to use a competitive bidding process to provide for the next increment of generating capacity beyond the Lincoln Combustion Turbine Station. CURRENT ISSUES While the Company improved its financial performance in 1994 compared with 1993, the ability to maintain and improve its current level of earnings will depend on several factors. As the industry becomes increasingly competitive, the Company's ability to control costs will be an important factor in maintaining a pricing structure that is both attractive to customers and profitable to the Company. While retail wheeling is presently not allowed in any form in the Company's service territory, the Company is focusing on providing competitive cost-based prices to its industrial customers, as well as to wholesale customers who already have access to alternative sources of energy. Other significant factors impacting the Company's future earnings levels include continued economic growth in the Piedmont Carolinas, the success of the Company's subsidiaries and diversified activities, and the outcome of various legislative and regulatory actions. RESOURCE OPTIMIZATION. The Company has been engaged in a concentrated effort to more efficiently and effectively use its resources through better work practices. During 1994, the Company offered a voluntary separation program which gave most employees the option of leaving the Company for a lump-sum payment and severance pay based on years of service. This voluntary separation program resulted in the departure of approximately 1,300 employees in 1994. Implementing programs such as the voluntary separation program and other efficiency practices has resulted in continued work-force reduction and in streamlined work flows. The number of full-time employees has decreased from 19,945 at year-end 1990 to 17,052 at year-end 1994. NUCLEAR DECOMMISSIONING COSTS. Estimated site-specific nuclear decommissioning costs, including the cost of decommissioning plant components not subject to radioactive contamination, total approximately $1.3 billion stated in 1994 dollars based on decommissioning studies completed in 1994. This amount includes the Company's 12.5 percent ownership in the 20 Catawba Nuclear Station. The other joint owners of the Catawba Nuclear Station are responsible for decommissioning costs related to their ownership interests in the station. Such estimates presume each unit will be decommissioned as soon as possible following the end of its license life. Although subject to extension, the current operating licenses for the Company's nuclear units expire as follows: Oconee 1 and 2 -- 2013, Oconee 3 -- 2014; McGuire 1 -- 2021, McGuire 2 -- 2023; and Catawba 1 -- 2024, Catawba 2 -- 2026. The Nuclear Regulatory Commission (NRC) issued a rule-making in 1988 which requires an external mechanism to fund the estimated cost to decommission certain components of a nuclear unit subject to radioactive contamination. In addition to the required external funding, the Company maintains an internal reserve to provide for decommissioning costs of plant components not subject to radioactive contamination. During 1994, the Company expensed approximately $52.5 million which was contributed to the external funds and accrued an additional $4.8 million to the internal reserve. The balance of the external funds as of December 31, 1994, was $172.4 million. The balance of the internal reserve as of December 31, 1994, was $204.8 million and is reflected in accumulated depreciation and amortization on the Consolidated Balance Sheets. Both the NCUC and the PSCSC have granted the Company recovery of estimated decommissioning costs through retail rates over the expected remaining service periods of the Company's nuclear plants. Management's opinion is that the decommissioning costs being recovered through rates, when coupled with assumed after-tax fund earnings of 5.5 percent to 5.9 percent, are currently sufficient to provide for the cost of decommissioning. ENVIRONMENTAL ISSUES. The Company is subject to federal, state and local regulations regarding air and water quality, hazardous and solid waste disposal, and other environmental matters. The Company was an operator of manufactured gas plants until the early 1950s. The Company has entered into a cooperative effort with the state of North Carolina and other owners of certain former manufactured gas plant sites to investigate and, where necessary, remediate these contaminated sites. The state of South Carolina has expressed interest in entering into a similar arrangement. The Company is considered by regulators to be a potentially responsible party and may be subject to liability at three federal Superfund sites and three comparable state sites. While the cost of remediation of these sites may be substantial, the Company will share in any liability associated with remediation of contamination at such sites with other potentially responsible parties. Management is of the opinion that resolution of these matters will not have a material adverse effect on the results of operations or financial position of the Company. THE CLEAN AIR ACT AMENDMENTS OF 1990. The Clean Air Act Amendments of 1990 require a two-phase reduction by electric utilities in the aggregate annual emissions of sulfur dioxide and nitrogen oxide by the year 2000. The Company currently meets all requirements of Phase I. The Company supports the national objective of clean air in the most cost-effective manner and has already reduced emissions through the use of low-sulfur coal in its fossil plants, efficient plant operations and by using nuclear generation. The sulfur dioxide provisions of the Act allow utilities to choose among various alternatives for compliance. The Company is currently developing a detailed compliance plan for Phase II requirements which must be filed with the Environmental Protection Agency (EPA) by 1996. A preliminary strategy, which allows for varying options, indicates one-time costs associated with bringing the Company into compliance with the Act could range from $260 million to $750 million, depending on the compliance options the Company selects. The final strategy is contingent upon developments in the emissions allowance market, future regulatory and legislative actions, and advances in clean air technology. Additional annual operating and maintenance expenses will be incurred as well. All options within the preliminary strategy provide for full compliance with Phase II requirements by the year 2000. STRESS CORROSION CRACKING. Stress corrosion cracking (SCC) has occurred in the steam generators of Units 1 and 2 at the McGuire Nuclear Station and Unit 1 at the Catawba Nuclear Station. Catawba Unit 2, which has certain design differences and came into service at a later date, has not yet shown the degree of SCC which has occurred in McGuire Units 1 and 2 and Catawba Unit 1. It is, however, too early in the life of Catawba Unit 2 to determine the extent to which SCC may be a problem. Although the Company has taken steps to mitigate the effects of SCC, the inherent potential for future SCC in the McGuire and Catawba steam generators still exists. The Company is planning for the replacement of steam generators at three units that have experienced SCC and has signed an agreement with Babcock & Wilcox International to purchase replacement steam generators. The current schedule for completion of the effort is as follows: Catawba Unit 1 -- 1996, McGuire Unit 1 -- 1997 and McGuire Unit 2 -- 1997. The order of replacement is subject to change based on operational and project circumstances. Steam generator replacement at each unit is expected to take approximately four months and cost approximately $170 million, excluding the cost of replacement power and the reimbursement of applicable costs by the other joint owners for Catawba Unit 1. Stress corrosion problems are excluded under the Company's nuclear insurance policies. 21 The Company, in connection with its McGuire and Catawba stations and on behalf of the other joint owners of the Catawba Nuclear Station, began a legal action on March 22, 1990, alleging that Westinghouse Electric Corporation knowingly supplied to the McGuire and Catawba stations steam generators that were defective in design, workmanship and materials, requiring replacement well short of their stated design life. On March 17, 1994, the Company, together with the other joint owners of the Catawba Station, settled the lawsuit. While the court order does not allow disclosure of the terms of the settlement, the Company believes the litigation was settled on terms that provided satisfactory consideration to the Company and will not have a material effect on the results of operation or financial position of the Company. COMPETITION. The Energy Policy Act of 1992 (EPACT) is moving utilities toward a more competitive environment. The EPACT reformed certain provisions of the Public Utility Holding Company Act of 1935 (PUHCA) and Part II of the Federal Power Act to remove certain regulatory barriers. For example, the EPACT allows utilities to develop independent electric generating plants in the United States for sales to wholesale customers, as well as to contract for utility projects internationally, without becoming subject to regulation under PUHCA as an electric utility holding company. The EPACT requires transmission of power for third parties to wholesale customers on issuance of an order by the FERC, provided the reliability of service to the utility's local customer base is protected and the local customer base does not subsidize the third-party service. The EPACT does not permit the FERC to issue an order requiring transmission access to retail customers. The electric utility industry currently is predominantly regulated on a basis designed to recover the cost of providing electric power to its retail and wholesale 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 utilities might be required to reduce their recorded asset balances to reflect a market basis less than cost. Discontinuance of cost-based regulation could also require some utilities to write off their regulatory assets. Management cannot predict the potential impact, if any, of these competitive forces on the Company's future financial position and results of operations. However, the Company continues to position itself to effectively meet these challenges by maintaining prices that are regionally and nationally competitive. The Company anticipates filing an open access transmission tariff with the FERC in early 1995. Open access would provide the Company with increased opportunities to sell and deliver energy and capacity at market-based prices, thereby improving the utilization of existing assets. In addition, such access would provide an opportunity to buy energy and capacity at attractive rates, serving to further enhance the Company's competitive price position. COMMITMENTS AND CONTINGENCIES. The Company is involved in legal, tax and regulatory proceedings before various courts, regulatory commissions and governmental agencies regarding matters arising in the ordinary course of business, some of which may involve substantial amounts. Where appropriate, the Company has made accruals in accordance with Statement of Financial Accounting Standards No. 5, "Accounting for Contingencies," in order to provide for such matters. Management is of the opinion that the final disposition of these proceedings will not have a material adverse effect on the results of operations or the financial position of the Company. SUBSIDIARIES AND DIVERSIFIED ACTIVITIES. The Company continues to aggressively pursue both domestic and international diversified business opportunities that are synergistic with the Company's core business to provide additional value to the Company's shareholders. Although these opportunities are concentrated in areas that utilize the Company's expertise, they present different and potentially greater risks than does the Company's core business. The Company only pursues opportunities in which the expected returns are commensurate with the risks and makes efforts to mitigate such risks. The Company's subsidiaries and diversified activities contributed $52 million to net income in 1994 compared with $22 million in 1993 and $25 million in 1992. Increased developed lot and land sales, the sale of commercial rental property and the operation of generation and transmission facilities outside Duke Power's regulated service area generated additional income in 1994. A one-time gain on the sale of an investment in the preferred stock of an independent power development company also contributed to diversified income. Earnings of subsidiaries and diversified activities also include income from passive financial investments, engineering services fees, water operations and merchandising. Domestically, the Company is seeking opportunities to: provide communications, water and engineering consulting services; construct, operate and maintain generation and transmission facilities; own generation facilities outside Duke Power's regulated service area; develop real estate; sell and service appliances and electronics; and participate in power marketing activities. The Company had equity investments in joint ventures, which own assets within the United States, of $14 million and $17 million at December 31, 1994 and 1993, respectively. Non-electric property of the Company's subsidiaries and diversified activities was $286 million and $216 million at December 31, 1994 and 1993, respectively. Internationally, the Company is seeking opportunities to construct, own, operate and maintain generation and transmission facilities and to provide engineering consulting services. The Company had equity investments in international joint ventures, which own generation and transmission facilities, of $94 million and $85 million at December 31, 1994 and 1993, respectively. 22 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. DUKE POWER COMPANY INDEX
PAGE Consolidated Financial Statements: Consolidated Statements of Income for the Three Years Ended December 31, 1994..................................... 24 Consolidated Statements of Retained Earnings for the Three Years Ended December 31, 1994.......................... 25 Consolidated Statements of Cash Flows for the Three Years Ended December 31, 1994................................. 26 Consolidated Balance Sheets -- December 31, 1994 and 1993......................................................... 27 Notes to Consolidated Financial Statements............................................................................. 28 Independent Auditors' Report........................................................................................... 44 Responsibility for Financial Statements................................................................................ 45 Selected Quarterly Financial Data (Unaudited).......................................................................... 46 Subsidiaries and Diversified Activities Highlights..................................................................... 46 Consolidated Financial Statement Schedule: Schedule II -- Valuation and Qualifying Accounts and Reserves for the Three Years Ended December 31, 1994............................................................................................... 50
23 DUKE POWER COMPANY CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1994 1993 1992 DOLLARS IN THOUSANDS Operating revenues (Notes 1, 2 and 11).............................................. $4,488,913 $4,466,233 $4,122,503 Operating expenses Fuel used in electric generation (Note 1)......................................... 705,019 732,246 659,593 Net interchange and purchased power (Notes 2 and 3)............................... 553,355 535,125 538,841 Other operation and maintenance................................................... 1,341,659 1,254,028 1,166,940 Depreciation and amortization (Note 1)............................................ 459,781 496,971 499,048 General taxes..................................................................... 249,273 240,052 223,000 Total operating expenses....................................................... 3,309,087 3,258,422 3,087,422 Operating income.................................................................... 1,179,826 1,207,811 1,035,081 Interest expense and other income (Note 1) Interest expense.................................................................. (270,217) (274,051) (312,885) Allowance for funds used during construction and other deferred returns........... 111,872 82,600 70,172 Other, net........................................................................ 14,414 20,032 19,685 Total interest expense and other income...................................... (143,931) (171,419) (223,028) Income before income taxes.......................................................... 1,035,895 1,036,392 812,053 Income taxes (Notes 1 and 4)........................................................ 397,019 409,977 303,970 Net income.......................................................................... 638,876 626,415 508,083 Dividends on preferred and preference stock....................................... 49,724 52,429 56,407 Earnings for common stock........................................................... $ 589,152 $ 573,986 $ 451,676 Common stock data (Note 6) Average shares outstanding (thousands)............................................ 204,859 204,859 204,819 Earnings per share................................................................ $ 2.88 $ 2.80 $ 2.21 Dividends per share............................................................... $ 1.92 $ 1.84 $ 1.76
See Notes to Consolidated Financial Statements. 24 DUKE POWER COMPANY CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
YEAR ENDED DECEMBER 31, 1994 1993 1992 DOLLARS IN THOUSANDS Balance -- Beginning of year........................................................ $2,410,825 $2,223,718 $2,141,259 Add -- Net income................................................................... 638,876 626,415 508,083 Total........................................................................ 3,049,701 2,850,133 2,649,342 Deduct Dividends Common stock................................................................... 393,370 376,937 360,475 Preferred and preference stock................................................. 49,724 52,429 56,407 Capital stock transactions, net................................................... 687 9,942 8,742 Total deductions............................................................. 443,781 439,308 425,624 Balance -- End of year.............................................................. $2,605,920 $2,410,825 $2,223,718
See Notes to Consolidated Financial Statements. 25 DUKE POWER COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1994 1993 1992 DOLLARS IN THOUSANDS Cash flows from operating activities Net Income........................................................................ $ 638,876 $ 626,415 $ 508,083 Adjustments to reconcile net income to net cash provided by operating activities: Non-cash items Depreciation and amortization (Note 1)....................................... 647,515 664,355 668,497 Deferred income taxes and investment tax credit amortization (Note 4)........ 94,261 62,897 49,490 Allowance for equity funds used during construction.......................... (27,411) (17,221) (15,476) Purchased capacity levelization (Note 3)..................................... (268,925) (20,049) (66,511) Other, net................................................................... 22,460 73,607 37,978 (Increase) Decrease in Accounts receivable................................... 47,586 (37,131) 8,166 Inventory................................................................. (28,568) 24,904 (11,131) Prepayments............................................................... (435) (2,396) (1,084) Increase (Decrease) in Accounts payable...................................... (52,506) (28,184) 75,976 Taxes accrued (Notes 1 and 4)............................................. (51,641) 25,797 1,758 Interest accrued and other liabilities (Notes 1, 9 and 13)................ 14,523 30,508 (22,731) Total adjustments............................................................ 396,859 777,087 724,932 Net cash provided by operating activities............................ 1,035,735 1,403,502 1,233,015 Cash flows from investing activities Construction expenditures and other property additions............................ (772,452) (599,759) (504,667) Investment in nuclear fuel........................................................ (108,711) (111,731) (122,565) External funding for decommissioning (Note 14).................................... (52,524) (52,524) (61,246) Pre-funded pension cost (Note 12)................................................. (30,000) (50,000) -- Investment in joint ventures (Note 11)............................................ (6,718) (70,345) (18,565) Net change in investment securities (Note 1)...................................... 17,922 46,489 (81,588) Net cash used in investing activities................................ (952,483) (837,870) (788,631) Cash flows from financing activities Proceeds from the issuance of First and refunding mortgage bonds............................................. 343,824 1,395,682 926,650 Preferred stock................................................................ -- 215,633 281,089 Pollution-control bonds........................................................ -- 76,265 -- Short-term notes payable, net (Note 5)......................................... 86,300 (105,200) 28,300 Construction loans and other................................................... 57,032 13,280 23,435 Payments for the redemption of First and refunding mortgage bonds............................................. (81,781) (1,399,336) (1,013,218) Preferred stock................................................................ (1,500) (224,295) (246,414) Pollution-control bonds........................................................ -- (79,310) -- Construction loans and other................................................... (18,885) (12,454) (13,939) Dividends paid.................................................................... (443,633) (427,868) (417,443) Other............................................................................. (20,991) (6,752) (6,183) Net cash used in financing activities................................... (79,634) (554,355) (437,723) Net increase in cash................................................................ 3,618 11,277 6,661 Cash at beginning of year........................................................... 33,812 22,535 15,874 Cash at end of year................................................................. $ 37,430 $ 33,812 $ 22,535
See Notes to Consolidated Financial Statements. 26 DUKE POWER COMPANY CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 1993 DOLLARS IN THOUSANDS ASSETS Current assets Cash (Notes 5 and 10)............................................................................. $ 37,430 $ 33,812 Short-term investments (Note 10).................................................................. 132,692 120,632 Receivables (less allowance for losses: 1994 -- $6,637; 1993 -- $6,404) (Note 1).................. 552,865 553,509 Inventory -- at average cost...................................................................... 319,385 282,909 Prepayments and other............................................................................. 15,722 15,286 Total current assets............................................................................ 1,058,094 1,006,148 Investments and other Investments in joint ventures (Note 11)........................................................... 108,330 101,612 Other investments, at cost or less (Note 10)...................................................... 83,226 113,208 Nuclear decommissioning trust funds (Notes 10 and 14)............................................. 172,390 118,456 Pre-funded pension cost (Note 12)................................................................. 80,000 50,000 Total investments and other assets.............................................................. 443,946 383,276 Property, plant and equipment Electric plant in service (at original cost -- Notes 1, 3, 9, 13 and 14) Production...................................................................................... 6,747,397 6,549,807 Transmission.................................................................................... 1,439,435 1,400,790 Distribution.................................................................................... 3,965,393 3,786,389 Other........................................................................................... 1,020,192 974,123 Electric plant in service..................................................................... 13,172,417 12,711,109 Less accumulated depreciation and amortization.................................................. 4,810,004 4,501,481 Electric plant in service, net................................................................ 8,362,413 8,209,628 Nuclear fuel...................................................................................... 757,983 705,994 Less accumulated amortization..................................................................... 415,560 405,910 Nuclear fuel, net............................................................................... 342,423 300,084 Construction work in progress (including nuclear fuel in process: 1994 -- $52,273; 1993 -- $113,904).............................................................. 558,730 496,833 Total electric plant, net..................................................................... 9,263,566 9,006,545 Other property -- at cost (less accumulated depreciation: 1994 -- $24,137; 1993 -- $20,314................................................................ 302,383 236,634 Total property, plant and equipment, net...................................................... 9,565,949 9,243,179 Deferred debits (Notes 1, 3, 4 and 13) Purchased capacity costs.......................................................................... 932,324 768,099 Debt expense...................................................................................... 186,306 197,963 Regulatory asset related to income taxes.......................................................... 489,292 486,440 Regulatory asset related to DOE assessment fee.................................................... 102,467 116,731 Other............................................................................................. 83,850 91,769 Total deferred debits........................................................................... 1,794,239 1,661,002 Total assets........................................................................................ $12,862,228 $12,293,605 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable.................................................................................. $ 343,688 $ 373,202 Notes payable (Notes 5 and 10).................................................................... 107,100 20,800 Taxes accrued (Note 1)............................................................................ 29,999 82,500 Interest accrued.................................................................................. 72,157 68,868 Current maturities of long-term debt and preferred stock (Notes 8 and 9).......................... 93,759 91,898 Other (Note 13)................................................................................... 121,539 215,543 Total current liabilities....................................................................... 768,242 852,811 Long-term debt (Notes 9 and 10)..................................................................... 3,567,122 3,285,397 Accumulated deferred income taxes (Notes 1 and 4)................................................... 2,348,631 2,243,366 Deferred credits and other liabilities Investment tax credit (Notes 1 and 4)............................................................. 272,594 283,964 DOE assessment fee (Note 1)....................................................................... 102,467 116,731 Nuclear decommissioning costs externally funded (Note 14)......................................... 172,390 118,456 Other............................................................................................. 318,453 274,146 Total deferred credits and other liabilities.................................................... 865,904 793,297 Preferred and preference stock with sinking fund requirements (Notes 8 and 10)...................... 279,500 281,000 Preferred and preference stock without sinking fund requirements (Notes 7 and 10)................... 500,000 500,000 Commitments and contingencies (Note 13)............................................................. Common stockholders' equity (Notes 6 and 7) Common stock, no par, 300,000,000 shares authorized; 204,859,339 shares outstanding for 1994 and 1993............................................................................................ 1,926,909 1,926,909 Retained earnings................................................................................. 2,605,920 2,410,825 Total common stockholders' equity............................................................... 4,532,829 4,337,734 Total liabilities and stockholders' equity.......................................................... $12,862,228 $12,293,605
See Notes to Consolidated Financial Statements. 27 DUKE POWER COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. REVENUES Electric revenues are recorded as service is rendered to customers. "Receivables" on the Consolidated Balance Sheets include $163,270,000 and $175,726,000 as of December 31, 1994 and 1993, respectively, for electric service that has been rendered but not yet billed to customers. B. ADDITIONS TO ELECTRIC PLANT The Company capitalizes all construction-related direct labor and materials as well as indirect construction costs. Indirect costs include general engineering, taxes and the cost of money (allowance for funds used during construction). The cost of renewals and betterments of units of property is capitalized. The cost of repairs and replacements representing less than a unit of property is charged to electric expenses. The original cost of property retired, together with removal costs less salvage value, is charged to accumulated depreciation. C. ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION (AFUDC) AFUDC represents the estimated debt and equity costs of capital funds necessary to finance the construction of new regulated facilities. AFUDC, a non-cash item, is recognized as a cost of "Construction work in progress" (CWIP), with an offsetting credit to "Interest expense and other income." After construction is completed, the Company is permitted to recover these construction costs, including a fair return, through their inclusion in rate base and in the provision for depreciation. The 1994 and 1993 AFUDC rates of 9.64 and 9.29 percent for Duke Power include a component for debt cost on a pre-tax basis. The 1992 rate of 8.07 percent includes a component for debt cost on a net of tax basis. The change in calculation from a net of income tax basis to a pre-tax basis is a result of the adoption of Statement of Financial Accounting Standards No. 109 (SFAS 109). (See Note 4.) Rates for all periods are compounded semiannually. D. OTHER DEFERRED RETURNS Other deferred returns represent the estimated financing costs associated with funding certain regulatory assets. These regulatory assets primarily arise from the Company's funding of purchased capacity cost above levels collected in rates. Other deferred returns are non-cash items. They are primarily recognized as an addition to "Purchased capacity costs" and as an offsetting credit to "Interest expense and other income." E. DEPRECIATION AND AMORTIZATION OF ELECTRIC PLANT Provisions for electric plant depreciation are recorded using the straight-line method. The year-end composite weighted-average depreciation rates were 3.46 percent for 1994, 3.47 percent for 1993 and 3.48 percent for 1992. Amortization of nuclear fuel is included in "Fuel used in electric generation" in the Consolidated Statements of Income. The amortization is recorded using the units-of-production method. Under provisions of the Nuclear Waste Policy Act of 1982, the Company has entered into contracts with the Department of Energy (DOE) for the disposal of spent nuclear fuel. Payments made to the DOE for disposal costs are based on nuclear output and are included in "Fuel used in electric generation" in the Consolidated Statements of Income. A provision in the Energy Policy Act of 1992 established a fund for the decontamination and decommissioning of the DOE's uranium enrichment plants. Licensees are subject to an annual assessment for 15 years based on their pro rata share of past enrichment services. The annual assessment is recorded as fuel expense. The Company paid $18,008,000 during 1994 and has paid $26,346,000 cumulatively related to its ownership interest in nuclear plants. The Company has reflected the remaining liability and regulatory asset of $102,467,000 in the Consolidated Balance Sheets at December 31, 1994. F. SUBSIDIARIES The Company's consolidated financial statements reflect consolidation of all of its majority-owned subsidiaries. Intercompany transactions have been eliminated in consolidation. 28 DUKE POWER COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued G. INCOME TAXES The Company 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 future periods. Investment tax credits have been deferred and are being amortized over the estimated useful lives of the related properties. H. UNAMORTIZED DEBT PREMIUM, DISCOUNT AND EXPENSE Expenses incurred in connection with the issuance of presently outstanding long-term debt issued for regulated operations, and premiums and discounts relating to such debt, are being amortized over the terms of the respective issues. Also, any call premiums or unamortized expenses associated with refinancing higher-cost debt obligations used to finance regulated assets and operations are being amortized over the lives of the new issues of long-term debt. I. CONSOLIDATED STATEMENTS OF CASH FLOWS For purposes of the Consolidated Statements of Cash Flows, the Company's short-term investments in highly liquid debt instruments, with an original maturity of three months or less, are included in cash flows from investing activities and thus are not considered cash equivalents. Total income taxes paid were $372,416,000, $354,981,000 and $217,144,000 for the years ended December 31, 1994, 1993 and 1992, respectively. Interest paid, net of amounts capitalized, was $236,696,000, $249,659,000 and $303,222,000 for the years ended December 31, 1994, 1993 and 1992, respectively. NOTE 2. RATE MATTERS DUKE POWER COMPANY The North Carolina Utilities Commission (NCUC) and the Public Service Commission of South Carolina (PSCSC) must approve rates for retail sales within their respective states. The Federal Energy Regulatory Commission (FERC) must approve Duke Power's rates for sales to wholesale customers. Sales to the other joint owners of the Catawba Nuclear Station, which represent a substantial majority of Duke Power's wholesale revenues, are set through contractual agreements. (See Note 3.) During 1991, Duke Power filed in both the North Carolina and South Carolina retail jurisdictions its only requests for general rate increases since 1986. General rate increases approved in November 1991 resulted in additional annual revenues of $100.1 million and $30.2 million in North Carolina and South Carolina, respectively. The increases were primarily needed to recover costs associated with the construction of the Bad Creek Hydroelectric Station. Also in 1991, Duke Power filed a request for a wholesale rate increase with the FERC. A negotiated settlement between Duke Power and the wholesale customers was approved by the FERC in 1992 and resulted in an increase in annual revenues of $2.1 million. In 1992, the North Carolina Supreme Court remanded to the NCUC Duke Power's 1986 rate order for the second time. In this ruling, the Court held that the record from the 1986 proceedings failed to support the rate of return on common equity authorized by the NCUC after the initial decision of the Court remanding the 1986 rate order. The NCUC issued a final order in 1992 which resulted in a 1992 refund to North Carolina retail customers of approximately $95 million, including interest. Fuel costs are reviewed semiannually in the wholesale and South Carolina retail jurisdictions, with provisions for changing such costs in base rates. In the North Carolina retail jurisdiction, a review of fuel costs in rates is required annually and during general rate case proceedings. All jurisdictions allow Duke Power to adjust rates for past over- or under-recovery of fuel costs. Therefore, Duke Power reflects in revenues the difference between actual fuel costs incurred and fuel costs recovered through rates. 29 DUKE POWER COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 2. RATE MATTERS -- Continued The North Carolina legislature ratified a bill in July 1987 assuring the legality of such adjustments in rates. In 1991, the statute was extended through June 30, 1997. Duke Power has a bulk power sales agreement with Carolina Power & Light Company (CP&L) to provide CP&L 400 megawatts of capacity as well as associated energy when needed for a six-year period which began July 1, 1993. Electric rates in all regulatory jurisdictions were reduced by adjustment riders to reflect capacity revenues received from this CP&L bulk power sales agreement. NANTAHALA POWER AND LIGHT COMPANY During 1992, Nantahala Power and Light Company (NP&L) filed an application for a general rate increase with the NCUC. A general rate increase was approved in June 1993 which resulted in additional annual revenues of $4.3 million. Purchased power costs of NP&L are reviewed annually and during general rate case proceedings by the NCUC. NP&L is allowed to adjust rates for past over- or under-recovery of purchased power costs. Therefore, NP&L defers the difference between actual purchased power costs incurred and those recovered through rates. NOTE 3. JOINT OWNERSHIP OF GENERATING FACILITIES The Company previously sold interests in both units of the Catawba Nuclear Station. The other owners of portions of the Catawba Nuclear Station and supplemental information regarding their ownership are as follows:
OWNERSHIP INTEREST OWNER IN THE STATION North Carolina Municipal Power Agency Number 1 (NCMPA)......................................................................................... 37.5% North Carolina Electric Membership Corporation (NCEMC)...................................................................................... 28.125% Piedmont Municipal Power Agency (PMPA)................................................................................................... 12.5% Saluda River Electric Cooperative, Inc. (Saluda River)........................................................................................... 9.375%
Each owner has provided its own financing for its ownership interest in the station. The Company retains a 12.5 percent ownership interest in the Catawba Nuclear Station. As of December 31, 1994, $492,429,000 of "Electric plant in service" and "Nuclear fuel" represents the Company's investment in Units 1 and 2. Accumulated depreciation and amortization of $165,568,000 associated with Catawba has been recorded as of year-end. The Company's share of operating costs of Catawba are included in the Consolidated Statements of Income. In connection with the joint ownership, the Company has entered into contractual agreements with the other joint owners to purchase declining percentages of the generating capacity and energy from the plant. These purchased power agreements were effective beginning with the commercial operation of each unit. Unit 1 and Unit 2 began commercial operation in June 1985 and August 1986, respectively. The purchased power agreements were established for 15 years for NCMPA and PMPA and 10 years for NCEMC and Saluda River. While the purchased power agreements with NCMPA and PMPA extend for 15 years, a significant decrease in the percentage of capacity and energy the Company is obligated to purchase occurs in the 11th calendar year of operation for each unit. This significant decrease occurs in 1995 for Unit 1 and 1996 for Unit 2. Certain provisions in the agreements with NCEMC and Saluda River have moderated the rate of decrease in the percentage of capacity and energy that the Company is obligated to purchase until 1996 when the Company has no further obligation to purchase capacity and related energy. The agreements also provide for supplemental power sales by the Company to the other joint owners. Such power sales are to satisfy capacity and energy needs of the other joint owners beyond the capacity and energy which they retain from Catawba or potentially acquire in the form of other resources. As the joint owners retain more capacity and energy from Catawba, or a third party, supplemental power sales are expected to decline. 30 DUKE POWER COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 3. JOINT OWNERSHIP OF GENERATING FACILITIES -- Continued The agreements with each of the other joint owners include provisions that the Company will provide generating reserves to backstand the other joint owners' retained capacity in the Catawba plant at the system average cost of installed capacity. Additionally, the agreements include certain reliability exchanges designed to manage outage-related risks by exchanging energy entitlements between the Catawba Nuclear Station and the McGuire Nuclear Station, impacting the Company as well as all the other joint owners. Energy cost payments are based on variable operating costs and are a function of the generation output of Catawba. Capacity payments are based on the fixed costs of the plant and include the capital costs and fixed operating and maintenance costs. Actual purchased capacity costs for 1994 and projected obligations for 1995 through 1999 are as follows (dollars in thousands):
PURCHASED CAPACITY PURCHASED TOTAL CAPITAL CAPACITY PURCHASED YEAR COST FIXED O&M CAPACITY 1994 Actual.............................................................................. $ 381,419 $ 126,774 $ 508,193 1995 Projected........................................................................... $ 207,046 $ 91,465 $ 298,511 1996 Projected........................................................................... $ 37,376 $ 18,698 $ 56,074 1997 Projected........................................................................... $ 29,576 $ 15,006 $ 44,582 1998 Projected........................................................................... $ 21,160 $ 11,459 $ 32,619 1999 Projected........................................................................... $ 12,693 $ 7,009 $ 19,702
Effective in its November 1991 rate order, the North Carolina Utilities Commission (NCUC) reaffirmed the Company's recovery, on a levelized basis, of the capital costs and fixed operating and maintenance costs of capacity purchased from the other joint owners. The Public Service Commission of South Carolina (PSCSC) in its November 1991 rate order reaffirmed the Company's recovery on a levelized basis of the capital costs of capacity purchased from the other joint owners. Levelization was reaffirmed through inclusion in rates approved in March 1992 by the Federal Energy Regulatory Commission (FERC). The portion of purchased capacity subject to levelization not currently recovered in rates is being deferred, and the Company is recording a return on the accumulated balance. The Company recovers the accumulated balance, including the return, when the sum of the declining purchased capacity payments and accrual of returns for the current period drop below the levelized revenues. Jurisdictional levelizations are intended to recover total costs, including returns, and are subject to adjustments, including final true-ups. The Company recovers the costs of purchased energy and the non-levelized portion of purchased capacity on a current basis. The current levelized revenues approved in the Company's last general rate proceedings are $211,423,000, $94,137,000 and $6,815,000 for North Carolina retail, South Carolina retail and other wholesale (FERC), respectively. Purchased power costs, subject to levelization, are deferred based on allocation factors of approximately 62 percent, 26 percent and 2 percent for North Carolina retail, South Carolina retail and other wholesale (FERC), respectively. The Company also recovers an allocated amount of purchased power costs in the pricing of supplemental sales made to the other joint owners on a current basis. In the North Carolina retail and FERC wholesale jurisdictions, purchased capacity payments continue to exceed levelized revenues. In the South Carolina retail jurisdiction, cumulative levelized revenues have exceeded purchased capacity payments. For the years ended December 31, 1994, 1993 and 1992, the Company recorded purchased capacity and energy costs from the other joint owners of $604,505,000, $547,899,000 and $514,327,000, respectively. These amounts, after adjustments for the costs of capacity purchased not reflected in current rates, are included in "Net interchange and purchased power" in the Consolidated Statements of Income. As of December 31, 1994 and 1993, $932,324,000 and $768,099,000, 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." The cumulative impact of settlement agreements reflected in 1994 resulted in additional purchased capacity costs. (See Note 13.) 31 DUKE POWER COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 4. INCOME TAX EXPENSE The Company implemented Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes," effective January 1, 1993. SFAS 109 requires a liability approach for financial accounting and reporting of income taxes. No prior periods were restated because of the implementation of SFAS 109. Accumulated deferred income taxes consist primarily of the following temporary differences (dollars in thousands):
DECEMBER 31, 1994 DECEMBER 31, 1993 Excess tax over book depreciation at historical tax rates............ $1,343,605 $1,289,205 Regulatory liability related to adjusting deferred taxes to the current statutory tax rate......................................... (120,422)* (124,952)* Net excess tax over book depreciation........................... $1,223,183 $1,164,253 Regulatory asset related to restating to a pre-tax basis............. 609,714* 611,392* Deferred Catawba purchased capacity costs............................ 361,018 254,789 Book versus tax basis difference..................................... 89,058 110,594 Loss on bond redemptions............................................. 70,067 74,438 Other................................................................ (4,409) 27,900 Total deferred income taxes........................................ $2,348,631 $2,243,366
* The net regulatory asset related to income taxes is $489,292,000 for 1994 and $486,440,000 for 1993. Total deferred income tax liability was $2,873,373,000 as of December 31, 1994, and $2,745,431,000 as of December 31, 1993. Total deferred income tax asset was $524,742,000 as of December 31, 1994, and $502,065,000 as of December 31, 1993. Income tax expense for the years ended December 31, 1994, 1993 and 1992 consisted of the following (dollars in thousands):
1994 1993 1992 Current income taxes Federal................................................................................ $249,968 $283,930 $209,121 State.................................................................................. 52,790 63,150 45,359 Total current income taxes.......................................................... 302,758 347,080 254,480 Deferred taxes, net Federal................................................................................ 83,359 59,267 45,820 State.................................................................................. 22,153 14,887 14,932 Total deferred taxes, net........................................................... 105,512 74,154 60,752 Investment tax credit amortization....................................................... (11,251) (11,257) (11,262) Total income tax expense............................................................ $397,019 $409,977 $303,970
32 DUKE POWER COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 4. INCOME TAX EXPENSE -- Continued Income taxes differ from amounts computed by applying the statutory tax rate to pre-tax income for the years ended December 31, 1994, 1993 and 1992 as follows (dollars in thousands):
1994 1993 1992 Income taxes on pre-tax income at the statutory federal rate of 35% -- 1994 and 1993; 34% -- 1992............................................................................ $362,563 $362,737 $276,098 Increase (reduction) in tax resulting from: Allowance for funds used during construction (AFUDC)................................... (9,594) (6,027) (7,221) Amortization of investment tax credit deferrals........................................ (11,251) (11,257) (11,262) AFUDC in book depreciation/amortization................................................ 19,027 25,694 25,114 Deferred income tax flowback at rates higher than statutory............................ (5,530) (9,091) (21,685) State income taxes, net of federal income tax benefits................................. 47,872 51,289 39,407 Other items, net....................................................................... (6,068) (3,368) 3,519 Total income tax expense (see above)................................................ $397,019 $409,977 $303,970
NOTE 5. SHORT-TERM BORROWINGS AND COMPENSATING-BALANCE ARRANGEMENTS At December 31, 1994, the Company had a three-year revolving credit facility of $355,000,000 with 15 commercial banks. At December 31, 1993, the Company had two three-year revolving credit facilities of $300,000,000 and $130,000,000, with 17 and 5 commercial banks, respectively. The Company had $130,000,000 in commercial paper outstanding throughout 1994 and 1993 backed by the unused portion of the above three-year revolving credit facilities. The $130,000,000 in commercial paper is included in long-term debt. In addition, the Company had $44,980,000 in annually renewable lines of credit at December 31, 1994 and 1993. All such facilities are on a fee or compensating-balance basis with the exception of $20,000,000 in annually renewable lines of credit. The amount of short-term debt outstanding from these credit facilities as of December 31, 1994 and 1993 was $10,100,000 and $2,800,000, respectively. Additionally, as of December 31, 1994 and 1993, the Company had $40,000,000 in pollution-control bonds backed by an unused, two-year revolving credit facility of $40,000,000. This facility is on a fee basis and the bonds are included in long-term debt. Cash balances maintained at the banks on deposit were $13,214,000 as of December 31, 1994, and $12,988,000 as of December 31, 1993. Cash balances and fees compensate banks for their services, even though the Company has no formal compensating-balance arrangements. To compensate certain banks for credit facilities, the Company maintained balances of $49,000 as of December 31, 1994 and 1993. The Company retains the right of withdrawal with respect to the funds used for compensating-balance arrangements. A summary of short-term borrowings is as follows (dollars in thousands):
TWELVE MONTHS ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1994 1993 1992 Amount outstanding at end of period -- average rate of 6.02% as of December 31, 1994, 3.55% as of December 31, 1993, and 3.57% as of December 31, 1992.......... $107,100 $ 20,800 $126,000 Maximum amount outstanding during the period...................................... $143,400 $180,800 $239,950 Average amount outstanding during the period...................................... $ 24,161 $ 35,366 $ 64,050 Weighted-average interest rate for the period -- computed on a daily basis........ 4.58% 3.19% 4.14%
33 DUKE POWER COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 6. COMMON STOCK AND RETAINED EARNINGS COMMON STOCK The Company issued common stock to satisfy the conversion rights of preference stock through April 6, 1992. (See Note 7.) As of December 31, 1994, a total of 7,004,659 shares was reserved for issuance to stock plans. RETAINED EARNINGS As of December 31, 1994, substantially all of the Company's retained earnings were unrestricted as to the declaration or payment of dividends. NOTE 7. PREFERRED AND PREFERENCE STOCK WITHOUT SINKING FUND REQUIREMENTS The following shares of stock were authorized with or without sinking fund requirements as of December 31, 1994 and 1993:
PAR VALUE SHARES Preferred Stock.............................................................. $ 100 12,500,000 Preferred Stock A............................................................ 25 10,000,000 Preference Stock............................................................. 100 1,500,000
On April 6, 1992, the Company redeemed all outstanding shares of the Cumulative Preference Stock, 6 3/4% Convertible Series AA at its par value of $100 per share. In 1992, 19,060 shares of preference stock were converted into 159,386 shares of common stock. Preferred and preference stock without sinking fund requirements as of December 31, 1994 and 1993, were as follows (dollars in thousands):
YEAR SHARES RATE/SERIES ISSUED OUTSTANDING 1994 1993 4.50% C......................................................................... 1964 350,000 $ 35,000 $ 35,000 5.72% D......................................................................... 1966 350,000 35,000 35,000 6.72% E......................................................................... 1968 350,000 35,000 35,000 7.85% S......................................................................... 1992 600,000 60,000 60,000 7.00% W......................................................................... 1993 500,000 50,000 50,000 7.04% Y......................................................................... 1993 600,000 60,000 60,000 7.72% (Preferred Stock A)....................................................... 1992 1,600,000 40,000 40,000 6.375% (Preferred Stock A)...................................................... 1993 2,400,000 60,000 60,000 Adjustable Rate A............................................................... 1986 500,000 50,000 50,000 Auction Series A................................................................ 1990 750,000 75,000 75,000 Total......................................................................... $500,000 $500,000
NOTE 8. PREFERRED AND PREFERENCE STOCK WITH SINKING FUND REQUIREMENTS The following shares of stock were authorized with or without sinking fund requirements as of December 31, 1994 and 1993:
PAR VALUE SHARES Preferred Stock.............................................................. $ 100 12,500,000 Preferred Stock A............................................................ 25 10,000,000 Preference Stock............................................................. 100 1,500,000
34 DUKE POWER COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 8. PREFERRED AND PREFERENCE STOCK WITH SINKING FUND REQUIREMENTS -- Continued Preferred and preference stock with sinking fund requirements as of December 31, 1994 and 1993, were as follows (dollars in thousands):
YEAR SHARES RATE/SERIES ISSUED OUTSTANDING 1994 1993 5.95% B (Preferred Stock A)..................................................... 1992 800,000 $ 20,000 $ 20,000 6.10% C (Preferred Stock A)..................................................... 1992 800,000 20,000 20,000 6.20% D (Preferred Stock A)..................................................... 1992 800,000 20,000 20,000 7.12% Q......................................................................... 1987 470,000 47,000 -- 485,000 -- 48,500 7.50% R......................................................................... 1992 850,000 85,000 85,000 6.20% T......................................................................... 1992 130,000 13,000 13,000 6.30% U......................................................................... 1992 130,000 13,000 13,000 6.40% V......................................................................... 1992 130,000 13,000 13,000 6.75% X......................................................................... 1993 500,000 50,000 50,000 Less: Current sinking fund requirements 7.12% Q......................................................................... (1,500) (1,500) Total......................................................................... $279,500 $281,000
The annual sinking fund requirements through 1999 are $1,500,000 in 1995, 1996 and 1997, $5,750,000 in 1998 and $25,750,000 in 1999. Some additional redemptions are permitted at the Company's option. The call provisions for the outstanding preferred stock specify various redemption prices not exceeding 105 percent of par value, plus accumulated dividends to the redemption date. 35 DUKE POWER COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 9. LONG-TERM DEBT Long-term debt outstanding as of December 31, 1994 and 1993, was as follows (dollars in thousands):
SERIES YEAR DUE 1994 1993 FIRST AND REFUNDING MORTGAGE BONDS: 6.06%-6.23% 1994 $ -- $ 81,700 6.47%-6.60% 1995 40,300 40,300 4 1/2% 1995 40,000 40,000 6.59% 1996 3,000 3,000 5 3/8% 1997 72,600 72,600 5 5/8% 1997 100,000 100,000 5.17% 1998 50,000 50,000 7.5% 1999 100,000 100,000 6 1/4% 1999 65,000 65,000 5.76% 1999 5,000 5,000 5.78% 1999 25,000 25,000 5.79% 1999 30,000 30,000 8% B 1999 200,000 -- 7% 2000 100,000 100,000 7% B 2000 100,000 100,000 5 7/8% 2001 150,000 150,000 6 5/8% B 2003 100,000 100,000 5 7/8% C 2003 75,000 75,000 6.125% 2003 75,000 75,000 8% 2004 75,000 75,000 6 1/4% B 2004 100,000 100,000 7.37%-7.41% 2004 100,000 100,000 7% 2005 200,000 200,000 6 3/8% 2008 125,000 125,000 9 5/8% 2020 46,982 46,982 10 1/8% B 2020 24,854 24,854 8 3/4% 2021 150,000 150,000 8 3/8% B 2021 150,000 150,000 8 5/8% 2022 100,000 100,000 7 3/8% 2023 200,000 200,000 6 7/8% B 2023 200,000 200,000 7 7/8% 2024 $ 150,000 $ -- 6 3/4% 2025 150,000 150,000 8.95% 2027 15,769 15,851 7% 2033 150,000 150,000 POLLUTION-CONTROL BONDS: 7.70% 2012 20,000 20,000 7.75% B 2017 10,000 10,000 7.50% 2017 25,000 25,000 3.69% 2014 40,000 40,000 5.80% 2014 77,000 77,000 Subtotal 3,440,505 3,172,287 OTHER LONG-TERM DEBT: Capitalized leases 26,039 47,029 Other long-term debt 130,000 130,000 Unamortized debt discount and premium, net (62,918) (61,128) Current maturities of long-term debt (81,926) (89,156) Subtotal (a) 3,451,700 3,199,032 SUBSIDIARY LONG-TERM DEBT: Crescent Resources, Inc. (b) 92,102 54,149 Nantahala Power and Light (c) 33,653 33,458 Current maturities of long-term debt (10,333) (1,242) Subtotal 115,422 86,365 Total long-term debt $3,567,122 $3,285,397
(a) Substantially all of Duke Power's electric plant was mortgaged as of December 31, 1994. (b) Substantial amounts of Crescent Resources, Inc.'s real estate development projects, land and buildings are pledged as collateral. (c) Nantahala Power and Light's loan agreements impose net worth restrictions and limitations on disposal of assets and payment of cash dividends. As of December 31, 1994 and 1993, the Company had $40,000,000 in pollution-control revenue bonds backed by an unused, two-year revolving credit facility of $40,000,000. In addition, the Company had $130,000,000 in commercial paper outstanding throughout 1994 and 1993 backed by unused three-year revolving credit facilities. These facilities are on a fee basis. Both the $40,000,000 in pollution-control bonds and the $130,000,000 in commercial paper are included in long-term debt. 36 DUKE POWER COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 9. LONG-TERM DEBT -- Continued As of December 31, 1994, Crescent Resources, Inc. had $68,142,000 in mortgage loans which mature through 1999 and $23,960,000 in mortgage loans maturing in 2000 or thereafter, most requiring monthly payments of principal. Interest rates are variable and at December 31, 1994 ranged from 4.50 percent to 7.22 percent. As of December 31, 1994, Nantahala Power and Light Company had $33,000,000 in senior notes maturing in 2011 and 2012. The two notes carry fixed interest rates of 9.21 percent and 7.45 percent and require monthly payments of principal beginning in 1997 and 1998, respectively. The annual maturities of consolidated long-term debt, including capitalized lease principal payments through 1999, are $92,259,000 in 1995; $12,540,000 in 1996; $212,708,000 in 1997; $62,559,000 in 1998; and $438,490,000 in 1999. NOTE 10. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of Cash, Short-term investments, Other investments, at cost or less, and Notes payable approximate fair value primarily because of the short maturities of these instruments. The majority of estimated fair value amounts were obtained from independent parties. Judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates determined as of December 31, 1994 and 1993, are not necessarily indicative of the amounts the Company could have realized in current market exchanges. External funds have been established, as required by the Nuclear Regulatory Commission, as a mechanism to fund certain costs of nuclear decommissioning. (See Note 14.) Currently, these nuclear decommissioning trust funds are primarily invested in municipal and U.S. government bonds. "Nuclear decommissioning trust funds" are presented on the Consolidated Balance Sheets at amounts that approximate fair value. The carrying amounts and estimated fair values of long-term debt and preferred stocks are as follows (dollars in thousands):
DECEMBER 31, 1994 DECEMBER 31,1993 CARRYING AMOUNT FAIR VALUE CARRYING AMOUNT FAIR VALUE Long-term debt............................................... $ 3,696,260 $3,392,000 $ 3,389,894 $3,460,000 Preferred stock.............................................. $ 781,000 $ 697,000 $ 782,500 $ 801,000
In order to obtain variable rate financing at an attractive cost, the Company has entered into an interest rate swap agreement associated with the issuance on November 29, 1994, of $200,000,000 aggregate principal amount of its First and Refunding Mortgage Bonds, 8% Series B due 1999. The five-year interest rate swap is tied to the London Interbank Offered Rate (LIBOR), which is reset quarterly, and initially was set at 5.95%. As a result of the interest rate swap contract, interest expense on the Consolidated Statements of Income is recognized at the weighted average rate for the year tied to the LIBOR rate. The Company has also entered into a hedge transaction to offset currency fluctuations between the U.S. dollar and the Japanese yen associated with various steam generator contracts. The Company records any gains or losses associated with the hedge as an adjustment to the capitalized cost of the steam generators. 37 DUKE POWER COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 11. INVESTMENT IN JOINT VENTURES Certain investments in joint ventures are accounted for by the equity method. The Company's ownership in domestic and international joint ventures is 50 percent or less. The Company's proportionate share of net income in joint ventures for the years ended December 31, 1994, 1993 and 1992 was $7,049,000, $2,601,000 and ($1,179,000), respectively. These amounts are reflected in Operating revenues on the Consolidated Statements of Income. A summary of assets and liabilities of joint ventures follows (dollars in thousands):
DECEMBER 31, 1994 DECEMBER 31, 1993 COMPANY'S COMPANY'S PROPORTIONATE PROPORTIONATE TOTAL SHARE TOTAL SHARE Assets of joint ventures.............................................. $1,117,449 $ 272,836 $972,315 $ 241,460 Liabilities of joint ventures......................................... $ 504,029 $ 164,506 $413,453 $ 139,848
Of the $504,029,000 and $413,453,000 of total liabilities outstanding at December 31, 1994 and 1993, respectively, $407,605,000 and $290,178,000 represent non-recourse debt at December 31, 1994 and 1993, respectively, for which the Company bears no responsibility beyond the loss of its investment in the event the joint venture defaults on the debt. NOTE 12. RETIREMENT BENEFITS A. RETIREMENT PLAN The Company and its operating subsidiaries, with the exception of Nantahala Power and Light Company, which maintains its own retirement plans, have a non-contributory, defined benefit retirement plan covering substantially all their employees. The benefit is based upon an age-related formula which takes into account years of creditable service and the employee's average compensation based upon the highest compensation during a consecutive sixty-month period. The benefit is reduced by an adjustment which is based upon the employee's social security wages. Normal retirement age under the Plan is age 65; however, early retirement benefits are payable as early as age 55 with 10 years of creditable service or age 51 if the employee has at least 30 years of creditable service. The Company's policy is to fund pension costs as accrued. During 1994 and 1993, the Company made additional contributions of $30,000,000 and $50,000,000, respectively, to enhance the funded position of the plan. Net periodic pension cost for the years ended December 31, 1994, 1993 and 1992, include the following components (dollars in thousands):
1994 1993 1992 Service cost benefit earned during the year........... $ 43,098 $ 39,514 $ 35,701 Interest cost on projected benefit obligation......... 96,521 93,347 85,613 Actual return on plan assets.......................... (6,138) (117,898) (50,897) Amount deferred for recognition....................... (86,995) 35,652 (32,277) Expected return on plan assets........................ (93,133) (82,246) (83,174) Net amortization...................................... 7,657 4,137 3,812 Net periodic pension cost........................ $ 54,143 $ 54,752 $ 41,952
38 DUKE POWER COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 12. RETIREMENT BENEFITS -- Continued A reconciliation of the funded status of the plan to the amounts recognized in the Consolidated Balance Sheets as of December 31, 1994 and 1993, is as follows (dollars in thousands):
1994 1993 Accumulated benefit obligation: Vested benefits............................................................................... $(1,070,355) $(1,087,705) Nonvested benefits............................................................................ (4,420) (3,946) Accumulated benefit obligation............................................................. $(1,074,775) $(1,091,651) Fair market value of plan assets, consisting primarily of short-term investments and cash equivalents, common stocks, real estate investments and government and industrial bonds....... $ 1,167,158 $ 1,137,992 Projected benefit obligation.................................................................... (1,368,740) (1,311,921) Unrecognized net experience loss................................................................ 319,519 265,566 Unrecognized prior service cost reduction....................................................... (38,872) (42,705) Remaining unrecognized transitional obligation.................................................. 935 1,068 Pre-funded pension cost....................................................................... $ 80,000 $ 50,000
In determining the projected benefit obligation, the weighted-average assumed discount rate used was 8.25 percent in 1994, 7.50 percent in 1993 and 8.25 percent in 1992. The assumed increase in future compensation level is determined on an age-related basis. The weighted-average salary increase was 5.40 percent in 1994, 4.50 percent in 1993 and 5.40 percent in 1992. The expected long-term rate of return on plan assets used in determining pension cost was 9.00 percent in 1994, 8.40 percent in 1993 and 9.25 percent in 1992. During 1993, the Company offered an enhanced early retirement option, Limited Period Separation Opportunity (LPSO), for eligible employees. The Company recorded an additional one-time expense for special termination benefits associated with LPSO of approximately $7,611,000. B. POSTRETIREMENT BENEFITS The Company and its operating subsidiaries, with the exception of Nantahala Power and Light Company, which maintains its own postretirement benefit plans, currently provides certain health care and life insurance benefits for retired employees. Employees become eligible for these benefits if they retire at age 55 or greater with 10 years of service or if they retire as early as age 51 with 30 years or more of service. Employees retiring after January 1, 1992, receive a fixed Company allowance, based on years of service, to be used to pay medical insurance premiums. The Company reserves the right to terminate, suspend, withdraw, amend or modify the plans in whole or in part at any time. In 1992, the Company commenced funding the maximum amount allowable under section 401(h) of the Internal Revenue Code, which provides for tax deductions for contributions and tax-free accumulation of investment income. Such amounts partially fund the Company's medical and dental postretirement benefits. The Company has also established a Retired Lives Reserve, which has tax attributes similar to 401(h) funding, to partially fund its postretirement life insurance obligation. The Company contributed $12,269,000 into these funding mechanisms in 1994 and $14,648,000 in 1993. 39 DUKE POWER COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 12. RETIREMENT BENEFITS -- Continued Net periodic postretirement benefit cost for the years ended December 31, 1994, 1993 and 1992 include the following components (dollars in thousands):
1994 1993 1992 Service cost benefit earned during the year.................. $ 5,415 $ 4,974 $ 4,644 Interest cost on accumulated postretirement benefit obligation................................................. 25,321 25,482 23,347 Actual return on plan assets................................. (1,451) (4,143) (2,953) Amount deferred for recognition.............................. (3,469) 334 1,061 Expected return on plan assets............................... (4,920) (3,809) (1,892) Straight-line -- 20 year amortization of transitional obligation................................................. 13,293 13,479 13,479 Other amortization........................................... 366 278 160 Net periodic postretirement benefit cost................ $39,475 $40,404 $39,738
A reconciliation of the funded status of the plan to the amounts recognized in the Consolidated Balance Sheets as of December 31, 1994 and 1993, is as follows (dollars in thousands):
1994 1993 Fair market value of plan assets, consisting primarily of short-term investments and cash equivalents, common stocks, real estate investments and government and industrial bonds..................................... $ 69,987 $ 57,840 Actives eligible to retire................................................ (11,902) (21,810) Actives not eligible to retire............................................ (90,499) (90,621) Retirees and surviving spouses............................................ (239,978) (238,522) Accumulated postretirement benefit obligation............................. (342,379) (350,953) Unrecognized prior service cost........................................... 783 1,923 Unrecognized net experience (gain)/loss................................... 14,448 29,127 Unrecognized transitional obligation...................................... 225,988 242,629 (Accrued) postretirement benefit cost................................ $ (31,173) $ (19,434)
In determining the accumulated postretirement benefit obligation (APBO), the weighted-average assumed discount rate used was 8.25 percent in 1994, 7.50 percent in 1993 and 8.25 percent in 1992. The assumed increase in future compensation level is determined on an age-related basis. The weighted-average salary increase was 5.40 percent in 1994, 4.50 percent in 1993 and 5.40 percent in 1992. The expected long-term rate of return on 401(h) assets used in determining postretirement benefits cost was 9.00 percent in 1994, 8.40 percent in 1993 and 9.25 percent in 1992. For Retired Lives Reserve assets, 6.50 percent was used in 1994 and 7.125 percent was used in 1993 and 1992. The assumed medical inflation rate was approximately 12.50 percent in 1994. This rate decreases by 0.5 percent to 1.0 percent per year until a rate of 5.5 percent is achieved in the year 2002, which remains fixed thereafter. A 1.0 percent increase in the medical and dental trend rates produces a 5.05 percent ($1,552,000) increase in the aggregate service and interest cost. The increase in the APBO attributable to a 1.0 percent increase in the medical and dental trend rates is 4.10 percent ($14,029,000) as of December 31, 1994. NOTE 13. COMMITMENTS AND CONTINGENCIES A. CONSTRUCTION PROGRAM Projected construction and nuclear fuel costs for Duke Power's electric operations, both including allowance for funds used during construction, are $3.0 billion and $620 million, respectively, for 1995 through 1999. Projected capital expenditures of subsidiaries and diversified activities are $661 million for 1995 through 1999. These projections are subject to 40 DUKE POWER COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 13. COMMITMENTS AND CONTINGENCIES -- Continued periodic review and revisions. Actual construction and nuclear fuel costs and capital expenditures incurred may vary from such estimates. Cost variances are due to various factors, including revised load estimates, environmental matters and cost and availability of capital. B. NUCLEAR INSURANCE The Company maintains nuclear insurance coverage in three areas: liability coverage, property, decontamination and decommissioning coverage, and extended accidental outage coverage to cover increased generating costs and/or replacement power purchases. The Company is being reimbursed by the other joint owners of the Catawba Nuclear Station for certain expenses associated with nuclear insurance premiums paid by the Company. Pursuant to the Price-Anderson Act, the Company is required to insure against public liability claims resulting from nuclear incidents to the full limit of liability of approximately $8.9 billion. The maximum required private primary insurance of $200 million has been purchased along with a like amount to cover certain worker tort claims. The remaining amount, currently $8.7 billion, which will be increased by $79.3 million as each additional commercial nuclear reactor is licensed, has been provided through a mandatory industry-wide excess secondary insurance program of risk pooling. The $8.7 billion could also be reduced by $79.3 million for certain nuclear reactors that are no longer operational and may be exempted from the risk pooling insurance program. Under this program, licensees could be assessed retrospective premiums to compensate for damages in the event of a nuclear incident at any licensed facility in the nation. If such an incident occurs and public liability damages exceed primary insurances, licensees may be assessed up to $79.3 million for each of their licensed reactors, payable at a rate not to exceed $10 million a year per licensed reactor for each incident. The $79.3 million amount is subject to indexing for inflation and may be subject to state premium taxes. This amount is further subject to a surcharge of 5 percent (which is included in the above $8.7 billion figure) if funds are insufficient to pay claims and associated costs. If retrospective premiums were to be assessed, the other joint owners of the Catawba Nuclear Station are obligated to assume their pro rata share of such assessment. The Company is a member of Nuclear Mutual Limited (NML), which provides $500 million in primary property damage coverage for each of the Company's nuclear facilities. If NML's losses ever exceed its reserves, the Company will be liable, on a pro rata basis, for additional assessments of up to $36 million. This amount represents 5 times the Company's annual premium to NML. The other joint owners of Catawba are obligated to assume their pro rata share of any liability for retrospective premiums and other premium assessments resulting from the NML policies applicable to Catawba. The Company is also a member of Nuclear Electric Insurance Limited (NEIL) and purchases insurance through NEIL's excess property, decontamination and decommissioning liability insurance program. NEIL provides excess insurance coverage of $2.25 billion for the Catawba Nuclear Station and $1.5 billion for each of the Oconee and McGuire Nuclear Stations. If losses ever exceed the accumulated funds available to NEIL for the excess property, decontamination and decommissioning liability program, the Company will be liable, on a pro rata basis, for additional assessments of up to $62 million. This amount is limited to 7.5 times the Company's annual premium to NEIL for excess property, decontamination and decommissioning liability insurance. The other joint owners of Catawba are obligated to assume their pro rata share of any liability for retrospective premiums and other premium assessments resulting from the NEIL policies applicable to Catawba. The Company has also purchased an additional $850 million of excess property damage insurance for its Catawba plant through a pool of stock and mutual insurance companies. The Company participates in a NEIL program that provides insurance for the increased cost of generation and/or purchased power resulting from an accidental outage of a nuclear unit. Each unit of the Oconee, McGuire and Catawba Nuclear Stations is insured for up to approximately $3.5 million per week, after a 21-week deductible period, with declining amounts per unit where more than one unit is involved in an accidental outage. Coverages continue at 100 percent for 52 weeks and 80 percent for the next 104 weeks. If NEIL's losses for this program ever exceed its reserves, the Company will be liable, on a pro rata basis, for additional assessments of up to $30 million. This amount represents 5 times the Company's annual premium to NEIL for insurance for the increased cost of generation and/or purchased power resulting from an accidental outage 41 DUKE POWER COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 13. COMMITMENTS AND CONTINGENCIES -- Continued of a nuclear unit. The other joint owners of Catawba are obligated to assume their pro rata share of any liability for retrospective premiums and other premium assessments resulting from the NEIL policies applicable to the joint ownership agreements. C. OTHER The other joint owners of the Catawba Nuclear Station and the Company were involved in arbitration proceedings related to the Catawba joint ownership contractual agreements. The basic contention in each proceeding was that certain calculations affecting bills under these agreements should be performed differently. These items are covered by the agreements between the Company and the other Catawba joint owners which have been previously approved by the Company's retail regulatory commissions. (For additional information, see Note 3.) The Company and the other joint owners entered into settlement agreements in 1994 which resolved all issues in contention in the proceedings. The Company has settled its cumulative net obligation through 1993 of approximately $205 million with the other joint owners. Billings for 1994 and later years will conform to the settlement agreements, which have been approved by the Company's retail regulatory commissions. Because it expects the costs associated with these settlements to be recovered as part of the purchased capacity levelization, the Company has included approximately $205 million as an increase to Purchased capacity costs on its Consolidated Balance Sheets. Therefore, the Company believes these matters should not have a material adverse effect on the results of operations or financial position of the Company. The Company is also involved in legal, tax and regulatory proceedings before various courts, regulatory commissions and governmental agencies regarding matters arising in the ordinary course of business, some of which involve substantial amounts. Where appropriate, the Company has made accruals in accordance with Statement of Financial Accounting Standards No. 5 "Accounting for Contingencies," in order to provide for such matters. Management is of the opinion that the final disposition of these proceedings will not have a material adverse effect on the results of operations or financial position of the Company. NOTE 14. NUCLEAR DECOMMISSIONING COSTS Estimated site-specific nuclear decommissioning costs, including the cost of decommissioning plant components not subject to radioactive contamination, total approximately $1.3 billion stated in 1994 dollars based on decommissioning studies completed in 1994. This amount includes the Company's 12.5 percent ownership in the Catawba Nuclear Station. The other joint owners of the Catawba Nuclear Station are responsible for decommissioning costs related to their ownership interests in the station. Both the North Carolina Utilities Commission and the Public Service Commission of South Carolina have granted the Company recovery of estimated decommissioning costs through retail rates over the expected remaining service periods of the Company's nuclear plants. Such estimates presume each unit will be decommissioned as soon as possible following the end of their license life. Although subject to extension, the current operating licenses for the Company's nuclear units expire as follows: Oconee 1 and 2 -- 2013, Oconee 3 -- 2014; McGuire 1 -- 2021, McGuire 2 -- 2023; and Catawba 1 -- 2024, Catawba 2 -- 2026. The Nuclear Regulatory Commission issued a rule-making in 1988 which requires an external mechanism to fund the estimated cost to decommission certain components of a nuclear unit subject to radioactive contamination. In addition to the required external funding, the Company maintains an internal reserve to provide for decommissioning costs of plant components not subject to radioactive contamination. During 1994, the Company expensed approximately $52,524,000 which was contributed to the external funds and accrued an additional $4,841,000 to the internal reserve. Nuclear units are depreciated at a rate of 4.70 percent, of which 1.61 percent is for decommissioning. The balance of the external funds as of December 31, 1994, was $172,390,000. The balance of the internal reserve as of December 31, 1994, was $204,837,000 and is reflected in accumulated depreciation and amortization on the Consolidated Balance Sheets. Management's opinion is that the decommissioning costs being recovered through rates, when coupled with assumed after-tax fund earnings of 5.5 percent to 5.9 percent, are currently sufficient to provide for the cost of decommissioning. 42 DUKE POWER COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 15. RECLASSIFICATION In the Consolidated Statements of Income, Consolidated Balance Sheets and Consolidated Statements of Cash Flows, certain prior-year information has been reclassified to conform with 1994 classifications. 43 INDEPENDENT AUDITORS' REPORT Duke Power Company: We have audited the consolidated financial statements of Duke Power Company and subsidiaries (the Company) listed in the accompanying index on page 23. Our audits also included the consolidated financial statement schedule listed in the accompanying index on page 23. These financial statements and consolidated financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and consolidated financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 1994 and 1993, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1994 in conformity with generally accepted accounting principles. Also, in our opinion, such consolidated financial statement schedule when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP Charlotte, North Carolina February 10, 1995 44 RESPONSIBILITY FOR FINANCIAL STATEMENTS The financial statements of Duke Power Company are prepared by management, which is responsible for their integrity and objectivity. The statements are prepared in conformity with generally accepted accounting principles appropriate in the circumstances to reflect in all material respects the substance of events and transactions which should be included. The other information in the annual report is consistent with the financial statements. In preparing these statements, management makes informed judgments and estimates of the expected effects of events and transactions that are currently being reported. The Company's system of internal accounting control is designed to provide reasonable assurance that assets are safeguarded and transactions are executed according to management's authorization. Internal accounting controls also provide reasonable assurance that transactions are recorded properly, so that financial statements can be prepared according to generally accepted accounting principles. In addition, the Company's accounting controls provide reasonable assurance that errors or irregularities which could be material to the financial statements are prevented or are detected by employees within a timely period as they perform their assigned functions. The Company's accounting controls are continually reviewed for effectiveness. In addition, written policies, standards and procedures, and a strong internal audit program augment the Company's accounting controls. The Board of Directors pursues its oversight role for the financial statements through the Audit Committee, which is composed entirely of directors who are not employees of the Company. The Audit Committee meets with management and internal auditors periodically to review the work of each group and to monitor each group's discharge of its responsibilities. The Audit Committee also meets periodically with the Company's independent auditors, Deloitte & Touche LLP. The independent auditors have free access to the Audit Committee and the Board of Directors to discuss internal accounting control, auditing and financial reporting matters without the presence of management. JEFFREY L. BOYER CONTROLLER 45 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER TOTAL DOLLARS IN THOUSANDS (EXCEPT PER-SHARE DATA) 1994 by quarter Operating revenues................................... $1,099,002 $1,083,310 $1,272,525 $1,034,076 $4,488,913 Operating income..................................... $ 326,584 $ 242,419 $ 430,861 $ 179,962 $1,179,826 Net income........................................... $ 173,617 $ 128,002 $ 243,741 $ 93,516 $ 638,876 Earnings per share................................... $ 0.79 $ 0.56 $ 1.13 $ 0.40 $ 2.88 1993 by quarter Operating revenues................................... $1,048,365 $1,034,371 $1,340,657 $1,042,840 $4,466,233 Operating income..................................... $ 276,637 $ 246,748 $ 451,028 $ 233,398 $1,207,811 Net income........................................... $ 141,684 $ 122,470 $ 241,409 $ 120,852 $ 626,415 Earnings per share................................... $ 0.63 $ 0.53 $ 1.12 $ 0.52 $ 2.80
Generally, quarterly earnings fluctuate with seasonal weather conditions and maintenance of electric generating units, especially nuclear units. SUBSIDIARIES AND DIVERSIFIED ACTIVITIES HIGHLIGHTS During 1994, the Company reorganized, placing all its subsidiaries and diversified activities into the Associated Enterprises Group (AEG). AEG includes the following: (Bullet) CHURCH STREET CAPITAL CORP. (CSCC) manages investment funds and serves as the parent company for the non-electric operating subsidiaries. CSCC investment highlights are as follows (dollars in thousands): SHORT-TERM INVESTMENTS AND MARKETABLE SECURITIES
1994 1993 1992 $170,642 $155,871 $173,347
INVESTMENT INCOME (AFTER TAX) (A)
1994 1993 1992 $7,562 $3,548 $5,404
(Bullet) CRESCENT RESOURCES, INC. is engaged in real estate development and forest management. (Bullet) DUKE ENERGY GROUP, INC., parent of Duke Energy Corp., structures, finances and manages investments in electric generation and transmission facilities, both nationally and internationally. (Bullet) DUKE ENGINEERING & SERVICES, INC. markets engineering, construction, quality assurance, consulting and other engineering-related services for facilities other than coal-fired generating plants, both nationally and internationally. (Bullet) DUKE/FLUOR DANIEL, a joint venture with Fluor Daniel, Inc., provides engineering, construction, and support of operating and maintenance activities, primarily for coal-fired generating plants, both nationally and internationally. (Bullet) DUKE MERCHANDISING sells and services quality electric merchandise and electronics primarily to Duke Power customers. (Bullet) DUKENET COMMUNICATIONS, INC. develops and manages communication systems. (Bullet) DUKE WATER OPERATIONS serves areas of Anderson, South Carolina, and Rutherfordton, North Carolina. (Bullet) NANTAHALA POWER AND LIGHT COMPANY provides electric service to a five-county area in western North Carolina by its operation of eleven hydroelectric stations and purchase of supplemental power. 46 OPERATING RESULTS
YEAR ENDED DECEMBER 31, 1994 1993 1992 DOLLARS IN THOUSANDS OPERATING REVENUES Crescent Resources, Inc................................................................ $ 64,724 $ 46,784 $ 44,788 Duke Energy Group, Inc. (b)............................................................ 9,478 6,033 1,805 Nantahala Power and Light Company (c).................................................. 68,595 67,142 60,183 All Other Business Units (d)........................................................... 109,932 106,340 92,613 Total Associated Enterprises Group................................................ $252,729 $226,299 $199,389 OPERATING INCOME Crescent Resources, Inc................................................................ $ 46,236 $ 30,004 $ 30,602 Duke Energy Group, Inc................................................................. (1,035) (2,929) (3,474) Nantahala Power and Light Company...................................................... 12,224 8,844 6,937 All Other Business Units (d)........................................................... 15,506 1,939 8,743 Total Associated Enterprises Group................................................ $ 72,931 $ 37,858 $ 42,808 NET INCOME Crescent Resources, Inc................................................................ $ 26,525 $ 16,327 $ 16,613 Duke Energy Group, Inc. (e)............................................................ 5,749 (1,949) (2,239) Nantahala Power and Light Company...................................................... 6,169 4,261 3,526 All Other Business Units (d)........................................................... 13,593 2,876 7,458 Total Associated Enterprises Group................................................ $ 52,036 $ 21,515 $ 25,358
FINANCIAL POSITION
YEAR ENDED DECEMBER 31, 1994 1993 1992 DOLLARS IN THOUSANDS TOTAL ASSETS Crescent Resources, Inc................................................................ $294,175 $219,206 $195,476 Duke Energy Group, Inc. (f)............................................................ 110,656 144,499 25,876 Nantahala Power and Light Company...................................................... 125,883 107,872 94,531 All Other Business Units (d)........................................................... 279,430 265,977 314,783 Total Associated Enterprises Group................................................ $810,144 $737,554 $630,666 TOTAL LIABILITIES Crescent Resources, Inc................................................................ $134,574 $ 86,172 $ 84,526 Duke Energy Group, Inc................................................................. 4,672 31,816 3,108 Nantahala Power and Light Company...................................................... 72,542 60,700 51,620 All Other Business Units (d)........................................................... 22,312 30,902 29,495 Total Associated Enterprises Group................................................ $234,100 $209,590 $168,749
47 CASH FLOWS
YEAR ENDED DECEMBER 31, 1994 1993 1992 DOLLARS IN THOUSANDS CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES Crescent Resources, Inc................................................................ $ 37,691 $ 36,254 $ 25,926 Duke Energy Group, Inc................................................................. (6,614) (1,438) (1,936) Nantahala Power and Light Company...................................................... 12,817 14,869 7,039 All Other Business Units (d)........................................................... 10,589 8,795 32,719 Total Associated Enterprises Group................................................ $ 54,483 $ 58,480 $ 63,748 CASH PROVIDED BY INVESTING ACTIVITIES Crescent Resources, Inc................................................................ $ 2,524 $ 1,310 $ 122 Duke Energy Group, Inc. (g)............................................................ 40,740 28,785 -- Nantahala Power and Light Company...................................................... -- -- -- All Other Business Units (h)........................................................... 5,100 21,377 3,168 Total Associated Enterprises Group................................................ $ 48,364 $ 51,472 $ 3,290 CASH USED IN INVESTING ACTIVITIES Crescent Resources, Inc................................................................ $ 78,689 $ 43,444 $ 21,910 Duke Energy Group, Inc................................................................. 19,575 116,498 22,147 Nantahala Power and Light Company...................................................... 23,989 19,254 12,746 All Other Business Units (i)........................................................... 18,500 1,450 55,756 Total Associated Enterprises Group................................................ $140,753 $180,646 $112,559 CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (J) Crescent Resources, Inc. (k)........................................................... $ 37,589 $ 945 $ (8,993) Duke Energy Group, Inc. (l)............................................................ -- -- -- Nantahala Power and Light Company...................................................... 10,896 3,206 7,184 All Other Business Units (m)........................................................... (6,993) 71,537 54,979 Total Associated Enterprises Group................................................ $ 41,492 $ 75,688 $ 53,170
OTHER INFORMATION
DECEMBER 31, 1994 1993 1992 FULL-TIME EMPLOYEES AT YEAR-END Crescent Resources, Inc........................................................................ 89 77 73 Duke Energy Corp............................................................................... 35 24 18 Nantahala Power and Light Company.............................................................. 184 194 191 All Other Business Units....................................................................... 703 755 777 Total Associated Enterprises Group........................................................ 1,011 1,050 1,059
(a) Earnings for 1994, 1993 and 1992 exclude elimination of intercompany profits of $49,000, $509,000 and $1,211,000, respectively. (b) Includes Duke Energy Group, Inc.'s allocable share of net income from joint ventures. (See "Note 11, Notes to Consolidated Financial Statements.") (c) Nantahala Power and Light Company's Operating revenues include revenues from the sale of electricity to Duke Power of $12,131,000, $13,683,000 and $12,640,000 for 1994, 1993 and 1992, respectively. (d) All Other Business Units amounts include Associated Enterprises Group intercompany eliminations. (e) 1994 includes a gain of $4,800,000, after tax, from the sale of preferred stock. (f) Includes Duke Energy Group, Inc.'s investments in joint ventures. (See "Note 11, Notes to Consolidated Financial Statements.") 48 (g) 1994 includes proceeds from the sale of preferred stock of $32,468,000 and Debt Securities of $3,360,000. 1993 includes proceeds from the sale of debt securities of $19,654,000. (h) 1993 includes the net change in short-term investments for the period of $20,653,000. (i) 1994 and 1992 include the net change in short-term investments for the period of $12,060,000 and $49,282,000, respectively. (j) Excludes capital infusion and return of capital transactions between Church Street Capital Corp. and its subsidiaries. (k) 1993 and 1992 exclude capital infusions from parent, Church Street Capital Corp., of $6,000,000 and $5,000,000, respectively. (l) 1994 excludes net return of capital to parent, Church Street Capital Corp., of $12,100,000. 1993 and 1992 exclude net capital infusions from Church Street Capital Corp. of $91,864,000 and $24,360,000, respectively. (m) 1993 and 1992 each include capital infusions from Duke Power to Church Street Capital Corp. of $75,000,000. 49 SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
BALANCE BALANCE BEGINNING END OF DESCRIPTION OF YEAR YEAR DOLLARS IN THOUSANDS FOR THE YEAR ENDED DECEMBER 31, 1994 Reserves Related to Assets on Balance Sheet........................................................... $ 10,353 $ 8,059 Other Reserves Operating Reserves (1).............................................................................. 107,477 154,722 FOR THE YEAR ENDED DECEMBER 31, 1993 Reserves Related to Assets on Balance Sheet........................................................... 10,730 10,353 Other Reserves Operating Reserves (1).............................................................................. 78,103 107,477 FOR THE YEAR ENDED DECEMBER 31, 1992 Reserves Related to Assets on Balance Sheet........................................................... 25,592 10,730 Other Reserves Operating Reserves (1).............................................................................. 67,577 78,103
(1) Principally consists of Injuries and Damages reserves and Property Insurance reserve which are included in "Deferred Credits and Other Liabilities" in the Consolidated Balance Sheets. 50 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. No events necessary to be disclosed by the Company under this item have occurred. PART III. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Information for this item concerning directors of the Company is set forth in the sections entitled "Election of Directors", "Information Regarding the Board of Directors" and "Common Stock Ownership of Certain Beneficial Owners and Management" in the proxy statement of the Company relating to its 1995 annual meeting of shareholders, which are being incorporated herein by reference. Information concerning the executive officers of the Company is set forth in the section entitled "Executive Officers of the Company" in this annual report. ITEM 11. EXECUTIVE COMPENSATION. Information for this item is set forth in the section entitled "Executive Compensation" in the proxy statement of the Company relating to its 1995 annual meeting of shareholders, which is being incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Information for this item is set forth in the section entitled "Common Stock Ownership of Certain Beneficial Owners and Management" in the proxy statement of the Company relating to its 1995 annual meeting of shareholders, which is being incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Information for this item is set forth in the sections entitled "Information Regarding the Board of Directors" and "Common Stock Ownership of Certain Beneficial Owners and Management" in the proxy statement of the Company relating to its 1995 annual meeting of shareholders, which are being incorporated herein by reference. 51 PART IV. ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) Consolidated Financial Statements, Supplemental Financial Data and Supplemental Schedules included in Part II of this annual report are as follows: Consolidated Financial Statements Consolidated Statements of Income for the Three Years Ended December 31, 1994 Consolidated Statements of Retained Earnings for the Three Years Ended December 31, 1994 Consolidated Statements of Cash Flows for the Three Years Ended December 31, 1994 Consolidated Balance Sheets -- December 31, 1994 and 1993 Notes to Consolidated Financial Statements Selected Quarterly Financial Data (Unaudited) Consolidated Financial Statement Schedule Schedule II -- Valuation and Qualifying Accounts and Reserves for the Three Years Ended December 31, 1994 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 No reports on Form 8-K were filed during the last quarter of 1994. (c) Exhibits -- See Exhibit Index on page 54. 52 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, in the City of Charlotte and State of North Carolina on the 29th day of March, 1995. DUKE POWER COMPANY (Registrant) By: W. H. GRIGG CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
SIGNATURE TITLE DATE W. H. GRIGG Chairman of the Board and Chief Executive March 29, 1995 Officer (Principal Executive Officer) RICHARD J. OSBORNE Senior Vice President and Chief Financial March 29, 1995 Officer (Principal Financial Officer) JEFFREY L. BOYER Controller (Principal Accounting Officer) March 29, 1995 G. ALEX BERNHARDT CRANDALL C. BOWLES W. A. COLEY STEVE C. GRIFFITH, JR. W. H. GRIGG PAUL H. HENSON JAMES V. JOHNSON A Majority of the Directors March 29, 1995 GEORGE DEAN JOHNSON, JR. W. W. JOHNSON MAX LENNON JAMES G. MARTIN BUCK MICKEL R. B. PRIORY RUSSELL M. ROBINSON, II
ELLEN T. RUFF, by signing her 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/ ELLEN T. RUFF ELLEN T. RUFF, ATTORNEY-IN-FACT 53 EXHIBIT INDEX The following exhibits indicated by an asterisk preceding the exhibit number are filed herewith. The balance of the exhibits have heretofore been filed with the Securities and Exchange Commission and pursuant to Rule 12b-32 are incorporated herein by reference.
EXHIBIT NUMBER 3-A -- Restated Articles of Incorporation of registrant, dated as of October 6, 1993 (filed with Form S-3, File No. 33-50617, effective October 20, 1993, as Exhibit 4(A)). 3-B -- Articles of Amendment of registrant dated November 1, 1993, relating to the 6.375% Cumulative Preferred Stock A, 1993 Series (filed with Form S-3, No. 33-52479, effective March 29, 1994, as Exhibit 4(B)). 3-C -- By-Laws of registrant, as amended (filed with Form S-3, No. 33-50584, effective August 11, 1992, as Exhibit 3(g)). 4-B-1 -- First and Refunding Mortgage from registrant to Guaranty Trust Company of New York, Trustee, dated as of December 1, 1927 (filed with Form S-1, File No. 2-7224, effective October 15, 1947, as Exhibit 7(a)). 4-B-2 -- Supplemental Indenture, dated as of March 12, 1930, supplementing said Mortgage (filed with Form S-1, File No. 2-7224, effective October 15, 1947, as Exhibit 7(b)). 4-B-3 -- Supplemental Indenture, dated as of July 1, 1935, supplementing said Mortgage (filed with Form S-1, File No. 2-7224, effective October 15, 1947, as Exhibit 7(c)). 4-B-4 -- Supplemental Indenture, dated as of December 1, 1935, supplementing said Mortgage (filed with Form S-1, File No. 2-7224, effective October 15, 1947, as Exhibit 7(d)). 4-B-5 -- Supplemental Indenture, dated as of September 1, 1936, supplementing said Mortgage (filed with Form S-1, File No. 2-7224, effective October 15, 1947, as Exhibit 7(e)). 4-B-6 -- Supplemental Indenture, dated as of January 1, 1941, supplementing said Mortgage (filed with Form S-1, File No. 2-7224, effective October 15, 1947, as Exhibit 7(f)). 4-B-7 -- Supplemental Indenture, dated as of April 1, 1944 supplementing said Mortgage (filed with Form S-1, File No. 2-7224, effective October 15, 1947, as Exhibit 7(g)). 4-B-8 -- Supplemental Indenture, dated as of September 1, 1947 supplementing said Mortgage (filed with Form S-1, File No. 2-7224, effective October 15, 1947, as Exhibit 7(h)). 4-B-9 -- Supplemental Indenture, dated as of September 8, 1947 supplementing said Mortgage (filed with Form S-1, File No. 2-10401, effective August 21, 1953, as Exhibit 4-B-9). 4-B-10 -- Supplemental Indenture, dated as of February 1, 1949 supplementing said Mortgage (filed with Form S-1, File No. 2-7808, effective February 3, 1949, as Exhibit 7(j)). 4-B-11 -- Supplemental Indenture, dated as of March 1, 1949 supplementing said Mortgage (filed with Form S-1, File No. 2-8877, effective April 6, 1951, as Exhibit 7(k)). 4-B-12 -- Supplemental Indenture, dated as of April 1, 1951 supplementing said Mortgage (filed with Form S-1, File No. 2-8877, effective April 6, 1951, as Exhibit 7(l)). 4-B-13 -- Supplemental Indenture, dated as of September 1, 1953 supplementing said Mortgage (filed with Form S-1, File No. 2-10401, effective August 21, 1953, as Exhibit 4-B-13). 4-B-14 -- Supplemental Indenture, dated as of October 1, 1954 supplementing said Mortgage (filed with Form S-9, File No. 2-11297, effective December 30, 1954, as Exhibit 2-B-14). 4-B-15 -- Supplemental Indenture, dated as of January 1, 1955 supplementing said Mortgage (filed with Form S-9, File No. 2-11297, effective December 30, 1954, as Exhibit 2-B-15). 4-B-16 -- Supplemental Indenture, dated as of May 1, 1956 supplementing said Mortgage (filed with Form S-9, File No. 2-12402 effective April 26, 1956, as Exhibit 2-B-16). 4-B-17 -- Supplemental Indenture, dated as of January 1, 1960 supplementing said Mortgage (filed with Form 10, effective June 29, 1961, as Exhibit 3-B-18). 4-B-18 -- Supplemental Indenture, dated as of February 1, 1960 supplementing said Mortgage (filed with Form 10, effective June 29, 1961, as Exhibit 3-B-19). 4-B-19 -- Supplemental Indenture, dated as of February 1, 1962 supplementing said Mortgage (filed with Form S-9, File No. 2-20577, effective August 16, 1962, as Exhibit 2-B-20). 4-B-20 -- Supplemental Indenture, dated as of August 1, 1962 supplementing said Mortgage (filed with Form S-1, File No. 2-25367, effective August 23, 1966, as Exhibit 4-B-19). 4-B-21 -- Supplemental Indenture, dated as of June 15, 1964, supplementing said Mortgage (filed with Form S-1, File No. 2-25367, effective August 3, 1966, as Exhibit 4-B-20).
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EXHIBIT NUMBER 4-B-22 -- Supplemental Indenture, dated as of February 1, 1965, supplementing said Mortgage (filed with Form S-1, File No. 2-25367, effective August 23, 1966, as Exhibit 4-B-21). 4-B-23 -- Supplemental Indenture, dated as of April 1, 1967, supplementing said Mortgage (filed with Form S-9, File No. 2-28023, effective February 15, 1968, as Exhibit 2-B-25). 4-B-24 -- Supplemental Indenture, dated as of February 1, 1968, supplementing said Mortgage (filed with Form S-9, File No. 2-31304, effective January 21, 1969, as Exhibit 2-B-26). 4-B-25 -- Supplemental Indenture, dated as of February 1, 1969, supplementing said Mortgage (filed with Form S-7, File No. 2-34289, effective August 27, 1969, as Exhibit 2-B-27). 4-B-26 -- Supplemental Indenture, dated as of September 1, 1969, supplementing said Mortgage (filed with Form S-7, File No. 2-36095, effective February 16, 1970, as Exhibit 2-B-39). 4-B-27 -- Supplemental Indenture, dated as of March 1, 1970, supplementing said Mortgage (filed with Form S-7, File No. 2-37953, effective July 28, 1970, as Exhibit 2-B-42). 4-B-28 -- Supplemental Indenture, dated as of August 1, 1970, supplementing said Mortgage (filed with Form S-7, File No. 2-39451, effective March 4, 1971, as Exhibit 2-B-28). 4-B-29 -- Supplemental Indenture, dated as of March 1, 1971, supplementing said Mortgage (filed with Form S-7, File No. 2-42404, effective December 7, 1971, as Exhibit 2-B-29). 4-B-30 -- Supplemental Indenture, dated as of December 1, 1971, supplementing said Mortgage (filed with Form S-7, File No. 2-43122, effective March 7, 1972, as Exhibit 2-B-30). 4-B-31 -- Supplemental Indenture, dated as of April 1, 1972, supplementing said Mortgage (filed with Form S-7 File No. 2-46208, effective November 20, 1972, as Exhibit 2-B-31). 4-B-32 -- Supplemental Indenture, dated as of December 1, 1972, supplementing said Mortgage (filed with Form S-7, File No. 2-48058, effective June 5, 1973, as Exhibit 2-B-32). 4-B-33 -- Supplemental Indenture, dated as of June 1, 1973, supplementing said Mortgage (filed with Form S-7, File No. 2-49333, effective November 5, 1973, as Exhibit 2-B-33). 4-B-34 -- Supplemental Indenture, dated as of November 1, 1973, supplementing said Mortgage (filed with Form S-7, File No. 2-50493, effective April 25, 1974, as Exhibit 2-B-34). 4-B-35 -- Supplemental Indenture, dated as of May 1, 1974, supplementing said Mortgage (filed with Form S-7, File No. 2-52669, effective February 11, 1975, as Exhibit 2-B-35). 4-B-36 -- Supplemental Indenture, dated as of February 1, 1975, supplementing said Mortgage (filed with Form S-7, File No. 2-57118, effective October 5, 1976, as Exhibit 2-B-36). 4-B-37 -- Supplemental Indenture, dated as of July 1, 1975, supplementing said Mortgage (filed with Form S-7, File No. 2-57118, effective October 5, 1976, as Exhibit 2-B-37). 4-B-38 -- Supplemental Indenture, dated as of October 1, 1976, supplementing said Mortgage (filed with Form S-7, File No. 2-59494, effective August 10, 1977, as Exhibit 2-B-38). 4-B-39 -- Supplemental Indenture, dated as of September 1, 1977, supplementing said Mortgage (filed with Form S-7, File No. 2-61995, effective July 26, 1978, as Exhibit 2-B-39). 4-B-40 -- Supplemental Indenture, dated as of August 1, 1978, supplementing said Mortgage (filed with Form S-7, File No. 2-64541, effective June 7, 1979, as Exhibit 2-B-40). 4-B-41 -- Supplemental Indenture, dated as of June 1, 1979, supplementing said Mortgage (filed with Form S-7, File No. 2-65371, effective October 2, 1979, as Exhibit 2-B-41). 4-B-42 -- Supplemental Indenture, dated as of October 1, 1979, supplementing said Mortgage (filed with Form S-7, File No. 2-66659, effective March 12, 1980, as Exhibit 2-B-42). 4-B-43 -- Supplemental Indenture, dated as of March 1, 1980, supplementing said Mortgage (filed with Form S-16, File No.2-68571, effective August 19, 1980, as Exhibit 2-B-43). 4-B-44 -- Supplemental Indenture, dated as of August 1, 1980, supplementing said Mortgage (filed with Form S-16, File No. 2-75951, effective February 23, 1982, as Exhibit 2-B-44). 4-B-45 -- Supplemental Indenture, dated as of March 1, 1982, supplementing said Mortgage (filed with Form S-16, File No. 2-75951, effective February 23, 1982, as Exhibit 2-B-45). 4-B-46 -- Supplemental Indenture, dated as of September 1, 1982, supplementing said Mortgage (filed with Form S-3, File No. 2-78882, effective August 30, 1982, as Exhibit 4-B-46). 4-B-47 -- Supplemental Indenture, dated as of May 1, 1983, supplementing said Mortgage (filed with Form S-3, File No. 2-95931, effective April 1, 1985, as Exhibit 4-B-47). 4-B-48 -- Supplemental Indenture, dated as of September 1, 1983, supplementing said Mortgage (filed with Form S-3, File No. 2-95931, effective April 1, 1985, as Exhibit 4-B-48). 4-B-49 -- Supplemental Indenture, dated as of September 1, 1984, supplementing said Mortgage (filed with Form S-3, File No. 2-95931, effective April 1, 1985, as Exhibit 4-B-49). 4-B-50 -- Supplemental Indenture, dated as of March 1, 1985, supplementing said Mortgage (filed with Form S-3, File No. 2-95931, effective April 1, 1985, as Exhibit 4-B-50).
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EXHIBIT NUMBER 4-B-51 -- Supplemental Indenture, dated as of December 1, 1985, supplementing said Mortgage (filed with Form S-3, File No. 33-5163, effective May 2, 1986, as Exhibit 4-B-51). 4-B-52 -- Supplemental Indenture, dated as of April 1, 1986, supplementing said Mortgage (filed with Form S-3, File No. 33-5163, effective May 2, 1986, as Exhibit 4-B-52). 4-B-53 -- Supplemental Indenture, dated as of May 1, 1986, supplementing said Mortgage (filed with Form 10-K for the year ended December 31, 1986, File No. 1-4928, as Exhibit 4-B-53). 4-B-54 -- Supplemental Indenture, dated as of June 1, 1986, supplementing said Mortgage (filed with Form 10-K for the year ended December 31, 1986, File No. 1-4928, as Exhibit 4-B-54). 4-B-55 -- Supplemental Indenture, dated as of February 1, 1987, supplementing said Mortgage (filed with Form 10-K for the year ended December 31, 1986, File No. 1-4928, as Exhibit 4-B-55). 4-B-56 -- Supplemental Indenture, dated as of February 15, 1987, supplementing said Mortgage (filed with Form 10-K for the year ended December 31, 1986, File No. 1-4928, as Exhibit 4-B-56). 4-B-57 -- Supplemental Indenture, dated as of March 1, 1987, supplementing said Mortgage (filed with Form 10-K for the year ended December 31, 1986, File No. 1-4928, as Exhibit 4-B-57). 4-B-58 -- Supplemental Indenture, dated as of October 1, 1987, supplementing said Mortgage (filed with Form 10-K for the year ended December 31, 1987, File No. 1-4928, as Exhibit 4-B-58). 4-B-59 -- Supplemental Indenture, dated as of February 1, 1990, supplementing said Mortgage (filed with Form 10-K for the year ended December 31, 1989, File No. 1-4928, as Exhibit 4-B-59). 4-B-60 -- Supplemental Indenture, dated as of March 1, 1990, supplementing said Mortgage (filed with Form 10-K for the year ended December 31, 1990, File No. 1-4928, as Exhibit 4-B-60). 4-B-61 -- Supplemental Indenture, dated as of May 1, 1990, supplementing said Mortgage (filed with Form 10-K for the year ended December 31, 1990, File No. 1-4928, as Exhibit 4-B-61). 4-B-62 -- Supplemental Indenture, dated as of May 15, 1990, supplementing said Mortgage (filed with Form 10-K for the year ended December 31, 1990, File No. 1-4928, as Exhibit 4-B-62). 4-B-63 -- Supplemental Indenture, dated as of March 1, 1991, supplementing said Mortgage (filed with Form 10-K for the year ended December 31, 1990, File No. 1-4928, as Exhibit 4-B-63). 4-B-64 -- Supplemental Indenture, dated as of July 1, 1991, supplementing said Mortgage (filed with Form S-3, File No. 33-45501, effective February 13, 1992, as Exhibit 4-B-64). 4-B-65 -- Supplemental Indenture, dated as of December 1, 1991, supplementing said Mortgage (filed with Form S-3, File No. 33-45501, effective February 13, 1992, as Exhibit 4-B-65). 4-B-66 -- Supplemental Indenture, dated as of March 1, 1992, supplementing said Mortgage (filed with Form 10-K for the year ended December 31, 1991, File No. 1-4928, as Exhibit 4-B-66). 4-B-67 -- Supplemental Indenture, dated as of June 1, 1992, supplementing said Mortgage (filed with Form S-3, File No. 33-50592, effective August 11, 1992, as Exhibit 4-B-67). 4-B-68 -- Supplemental Indenture, dated as of July 1, 1992, supplementing said Mortgage (filed with Form S-3, File No. 33-50592, effective August 11, 1992, as Exhibit 4-B-68). 4-B-69 -- Supplemental Indenture, dated as of September 1, 1992, supplementing said Mortgage (filed with Form S-3, File No. 33-53308, effective November 24, 1992, as Exhibit 4-B-69). 4-B-70 -- Supplemental Indenture, dated as of February 1, 1993, supplementing said Mortgage (filed with Form 10-K for the year ended December 31, 1992, File No. 1-4928, as Exhibit 4-B-70). 4-B-71 -- Supplemental Indenture, dated as of March 1, 1993, supplementing said Mortgage (filed with Form S-3, File No. 33-59448, effective March 17, 1993, as Exhibit 4-B-71). 4-B-72 -- Supplemental Indenture, dated as of April 1, 1993, supplementing said Mortgage (filed with Form S-3, File No. 33-50543, effective October 20, 1993, as Exhibit 4-B-72). 4-B-73 -- Supplemental Indenture, dated as of May 1, 1993, supplementing said Mortgage (filed with Form S-3, File No. 33-50543, effective October 20, 1993, as Exhibit 4-B-73). 4-B-74 -- Supplemental Indenture, dated as of June 1, 1993, supplementing said Mortgage (filed with Form S-3, File No. 33-50543, effective October 20, 1993, as Exhibit 4-B-74). 4-B-75 -- Supplemental Indenture, dated as of July 1, 1993, supplementing said Mortgage (filed with Form S-3, File No. 33-50543, effective October 20, 1993, as Exhibit 4-B-75). 4-B-76 -- Supplemental Indenture, dated as of August 1, 1993, supplementing said Mortgage (filed with Form S-3, File No. 33-50543, effective October 20, 1993, as Exhibit 4-B-76). 4-B-77 -- Supplemental Indenture, dated as of August 20, 1993, supplementing said Mortgage (filed with Form S-3, File No. 33-50543, effective October 20, 1993, as Exhibit 4-B-77). *4-B-78 -- Supplemental Indenture, dated as of May 1, 1994, supplementing said Mortgage. *4-B-79 -- Supplemental Indenture, dated as of November 1, 1994, supplementing said Mortgage.
56
EXHIBIT NUMBER *4-C -- Instrument of Resignation, Appointment and Acceptance among Duke Power Company, Morgan Guaranty Trust Company of New York, as Trustee, and Chemical Bank, as Successor Trustee, dated as of August 30, 1994. 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(|) -- Employees' Stock Ownership Plan. 10-F(|)(|) -- Employee Incentive Plan. 10-G(|)(|) -- 1993 Executive Long-Term Incentive Plan. 10-H(|) -- Supplemental Security Plan. 10-I(|) -- Stock Purchase-Savings Program for Employees. 10-J(|) -- Employees' Retirement Plan. 10-K(|) -- Supplemental Retirement Plan. 10-L(|) -- Compensation Deferral Plan. 10-M(|) -- Compensation Deferral Plan for Outside Directors. 10-N(|) -- Retirement Plan for Outside Directors. 10-O(|) -- Supplementary Defined Contribution Plan for Employees. 10-P(|) -- Directors' Charitable Giving Program. 10-Q(|) -- Vacation Banking Plan. 10-R(|) -- Estate Conservation Plan. 10-S(|) -- Supplemental Insurance Plan. 10-T(|) -- Group Life Insurance Plan. 10-U(|) -- Stock Ownership Plan for Nonemployee Directors. *10-V -- Executive Short-Term Incentive Plan. *10-W -- Executive Long-Term Incentive Plan. *12 -- Computation of Ratio of Earnings to Fixed Charges. *23 -- Consent of Independent Auditors. *24(a) -- Power of attorney authorizing Ellen T. Ruff and others to sign the annual report on behalf of the registrant and certain of its directors and officers. *24(b) -- Certified copy of resolution of the Board of Directors of the registrant authorizing power of attorney. *27 -- Financial Data Schedule.
(|) Compensatory plan or arrangement filed with Form 10-K for the year ended December 31, 1992, File No. 1-4928, under the same exhibit number as listed herein. (|)(|) Compensatory plan or arrangement filed with Form 10-K for the year ended December 31, 1993, File No. 1-4928, under the same exhibit number as listed herein. 57
EX-4 2 EXHIBIT 4-B-78 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- DUKE POWER COMPANY TO MORGAN GUARANTY TRUST COMPANY OF NEW YORK, TRUSTEE ------------------ SEVENTY-EIGHTH SUPPLEMENTAL INDENTURE DATED AS OF MAY 1, 1994 ------------------ CREATING AN ISSUE OF FIRST AND REFUNDING MORTGAGE BONDS, 7 7/8% SERIES DUE 2024 ------------------ SUPPLEMENTAL TO FIRST AND REFUNDING MORTGAGE DATED AS OF DECEMBER 1, 1927 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SUPPLEMENTAL INDENTURE, bearing date as of the first day of May , 1994, made and entered into by and between DUKE POWER COMPANY, a corporation duly organized and existing under the laws of the State of North Carolina, hereinafter called the "Company", party of the first part, and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, a corporation duly organized and existing under the laws of the State of New York, having its principal place of business in the Borough of Manhattan, City and State of New York, hereinafter called the "Trustee", as Trustee, party of the second part. WHEREAS Duke Power Company, a New Jersey corporation, hereinafter called the "New Jersey Company", duly executed and delivered its First and Refunding Mortgage, dated as of December 1, 1927, to Guaranty Trust Company of New York, as Trustee, to secure its First and Refunding Mortgage Gold Bonds, to be issued from time to time in series as provided in said Mortgage, and has from time to time duly executed and delivered supplemental indentures, including supplemental indentures dated as of September 1, 1947 and February 1, 1949, to Guaranty Trust Company of New York (the corporate name of which has been changed to Morgan Guaranty Trust Company of New York), as Trustee, and a supplemental indenture dated as of February 1, 1960 to Morgan Guaranty Trust Company of New York, as Trustee, supplementing and modifying said Mortgage (said Mortgage, as so supplemented and modified, being hereinafter referred to as the "original indenture"); and WHEREAS bonds of a series known as the "First and Refunding Mortgage Bonds, 2.65% Series Due 1977" (herein called "bonds of the 2.65% Series"), bonds of a series known as the "First and Refunding Mortgage Bonds, 2 7/8% Series Due 1979" (herein called "bonds of the 1979 Series"), bonds of a series known as the "First and Refunding Mortgage Bonds, 4 1/2% Series Due 1995" (herein called "bonds of the 1995 Series"), bonds of a series known as the "First and Refunding Mortgage Bonds, 5 3/8% Series Due 1997" (herein called "bonds of the 1997 Series"), bonds of a series known as the "First and Refunding Mortgage Bonds, 6 3/8% Series Due 1998" (herein called "bonds of the 1998 Series"), bonds of a series known as the "First and Refunding Mortgage Bonds, Annual Tender Pollution Control Series 1987 A" (herein called "bonds of the 1987 Pollution Control Series A"), bonds of a series known as the "First and Refunding Mortgage Bonds, Annual Tender Pollution Control Series 1987 B" (herein called "bonds of the 1987 Pollution Control Series B"), bonds of a series known as the "First and Refunding Mortgage Bonds, Annual Tender Pollution Control Series 1987 C" (herein called "bonds of the 1987 Pollution Control Series C"), bonds of a series known as the "First and 2 Refunding Mortgage Bonds, 9 5/8% Series Due 2020" (herein called "bonds of the 2020 Series"), bonds of a series known as the "First and Refunding Mortgage Bonds, 10 1/8% Series B Due 2020" (herein called "bonds of the 2020 Series B"), bonds of a series known as the "First and Refunding Mortgage Bonds, Pollution Control Facilities Revenue Refunding Series Due 2014" (herein called "bonds of the 1990 Pollution Control Series"), bonds of a series known as the "First and Refunding Mortgage Bonds, 8 3/4% Series Due 2021" (herein called "bonds of the 2021 Series"), bonds of a series known as the "First and Refunding Mortgage Bonds, City of Greensboro Series Due 2027" (herein called "bonds of the 2027 City of Greensboro Series"), bonds of a series known as the "First and Refunding Mortgage Bonds, Medium-Term Notes Series" (herein called "bonds of the Medium-Term Notes Series"), bonds of a series known as the "First and Refunding Mortgage Bonds, 8 3/8% Series B Due 2021" (herein called "bonds of the 2021 Series B"), bonds of a series known as the "First and Refunding Mortgage Bonds, 8% Series Due 2004" (herein called "bonds of the 2004 Series"), bonds of a series known as the "First and Refunding Mortgage Bonds, 8 5/8% Series Due 2022" (herein called "bonds of the 2022 Series"), bonds of a series known as the "First and Refunding Mortgage Bonds, 7% Series Due 2000" (herein called "bonds of the 2000 Series"), bonds of a series known as the "First and Refunding Mortgage Bonds, 7% Series B Due 2000" (herein called "bonds of the 2000 Series B"), bonds of a series known as the "First and Refunding Mortgage Bonds, 7% Series Due 2005" (herein called "bonds of the 2005 Series"), bonds of a series known as the "First and Refunding Mortgage Bonds, 6 5/8% Series B Due 2003" (herein called "bonds of the 2003 Series B"), bonds of a series known as the "First and Refunding Mortgage Bonds, 7 3/8% Series Due 2023" (herein called "bonds of the 2023 Series"), bonds of a series known as the "First and Refunding Mortgage Bonds, 6 3/8% Series Due 2008" (herein called "bonds of the 2008 Series"), bonds of a series known as the "First and Refunding Mortgage Bonds, 5 7/8% Series C Due 2003" (herein called "bonds of the 2003 Series C"), bonds of a series known as the "First and Refunding Mortgage Bonds, Pollution Control Facilities Revenue Refunding Series Due 2014" (herein called "bonds of the 1993 Pollution Control Series"), bonds of a series known as the "First and Refunding Mortgage Bonds, 6 1/4% Series B 2004" (herein called "bonds of the 2004 Series B"), bonds of a series known as the "First and Refunding Mortgage Bonds, 5 7/8% Series Due 2001" (herein called "bonds of the 2001 Series"), bonds of a series known as the "First and Refunding Mortgage Bonds, 7% Series Due 2033" (herein called "bonds of the 2033 Series"), bonds of a series known as the "First and Refunding Mortgage Bonds, 6 7/8% Series B 3 Due 2023" (herein called "bonds of the 2023 Series B") and bonds of a series known as the "First and Refunding Mortgage Bonds, 6 3/4% Series Due 2025" (herein called "bonds of the 2025 Series") have heretofore been issued and (except for bonds of the 2.65% Series, bonds of the 1979 Series and bonds of the 1998 Series which have been retired in their entirety) are the only bonds now outstanding under the original indenture as heretofore supplemented; and WHEREAS the Company has duly executed and delivered a supplemental indenture, dated as of June 15, 1964, to Morgan Guaranty Trust Company of New York, as Trustee, for the purpose of evidencing the succession by merger of the Company to the New Jersey Company and the assumption by the Company of the covenants and conditions of the New Jersey Company in the original indenture and to enable the Company to have and exercise the powers and rights of the New Jersey Company under the original indenture in accordance with the terms thereof and whereby the Company assumed and agreed to pay duly and punctually the principal of and interest on the bonds issued under the original indenture in accordance with the provisions of said bonds and the coupons thereto appertaining and the original indenture, and agreed to perform and fulfill all the terms, covenants and conditions of the original indenture binding upon the New Jersey Company; and WHEREAS the Company desires to create under the original indenture, as heretofore supplemented and as to be supplemented by this supplemental indenture, a new series of bonds, to be known as its "First and Refunding Mortgage Bonds, 7 7/8% Series Due 2024", and to determine the terms and provisions and the form of the bonds of such series; and WHEREAS for the purposes hereinabove recited, and pursuant to due corporate action, the Company has duly determined to execute and deliver to the Trustee a supplemental indenture in the form hereof supplementing the original indenture (the original indenture, as supplemented by the aforesaid supplemental indenture dated as of June 15, 1964, by supplemental indentures dated as of February 1, 1965, April 1, 1967, February 1, 1968, February 15, 1987, October 1, 1987, February 1, 1990, March 1, 1990, May 1, 1990, May 15, 1990, March 1, 1991, July 1, 1991, December 1, 1991, March 1, 1992, June 1, 1992, July 1, 1992, September 1, 1992, February 1, 1993, March 1, 1993, April 1, 1993, May 1, 1993, June 1, 1993, July 1, 1993, August 1, 1993, August 20, 1993 and as hereby supplemented, being sometimes hereinafter referred to as the "Indenture"); and WHEREAS all conditions and requirements necessary to make this supplemental indenture a valid, legal and binding instrument in accordance 4 with its terms have been done and performed, and the execution and delivery hereof have been in all respects duly authorized: NOW, THEREFORE, THIS INDENTURE WITNESSETH: That in consideration of the premises and of the sum of one dollar duly paid by the Company to the Trustee at or before the execution and delivery of these presents, the receipt whereof is hereby acknowledged, the Company hereby covenants and agrees with the Trustee and its successors in the trust under the Indenture as follows: PART ONE. BONDS OF THE 7 7/8% SERIES DUE 2024. SECTION 1. The Company hereby creates a new series of bonds to be issued under and secured by the Indenture and known as its First and Refunding Mortgage Bonds, 7 7/8% Series Due 2024 (herein called "bonds of the 2024 Series"), and the Company hereby establishes, determines and fixes the terms and provisions of the bonds of the 2024 Series as hereinafter in this Part One set forth. Each bond of the 2024 Series shall be dated the date of its authentication (except that if any such bond shall be authenticated on any interest payment date, it shall be dated the following day) and interest shall be payable on the principal represented thereby commencing November 1, 1994, from the May 1 or November 1, as the case may be, next preceding the date thereof to which interest has been paid, unless such date of authentication is prior to November 1, 1994, in which case interest shall be payable from May 1, 1994; provided, however, that interest shall be payable on each bond of the 2024 Series authenticated after the record date (as defined in the next succeeding paragraph of this Section 1) with respect to any interest payment date and prior to such interest payment date, only from such interest payment date. Interest on any bond of the 2024 Series shall be paid to the person who, according to the bond register of the Company, is the registered holder of such bond of the 2024 Series at the close of business on the applicable record date, and such interest payments shall be made by check mailed to such registered holder at his last address shown on such bond register; provided, however, that, if the Company shall default in the payment of the interest due on any interest payment date on any bond of the 2024 Series, such defaulted interest shall be paid to the registered holder of such bond (or any bond or bonds of the 2024 Series issued upon transfer, exchange or substitution thereof) on the date of subsequent payment of such defaulted interest or, at the election of the Company, to the person in whose name 5 such bond (or any bond or bonds of the 2024 Series issued upon transfer, exchange or substitution thereof) is registered on a subsequent record date established by notice given by mail by or on behalf of the Company to the holders of all bonds of the 2024 Series not less than ten (10) days preceding such subsequent record date. The term "record date" as used in this Section 1 shall mean, with respect to any semi-annual interest payment date, the close of business on the April 15 or October 15, as the case may be, next preceding such interest payment date or, in the case of a payment of defaulted interest, the close of business on any subsequent record date established as provided above. SECTION 2. All bonds of the 2024 Series shall mature as to principal on May 1, 2024, and shall bear interest at the rate of 7 7/8% per annum, payable semi-annually on the first day of May and November in each year. SECTION 3. The bonds of the 2024 Series shall be fully registered bonds, without coupons, in denominations of one thousand dollars ($1,000) and any integral multiple of one thousand dollars ($1,000), all such bonds to be numbered, and shall be transferable and exchangeable as provided in the form of bond set forth in this supplemental indenture. The provisions of sec. 1.19 and any other provision in the Indenture in respect of coupon bonds or reservation of coupon bond numbers shall be inapplicable to the bonds of the 2024 Series. SECTION 4. The bonds of the 2024 Series are not subject to redemption (otherwise than through the operation of the Replacement Fund provided in Part Two of this supplemental indenture or through the application of moneys paid to the Trustee pursuant to the provisions of sec. 5.05 of the Indenture) prior to May 1, 1999. On and after May 1, 1999, the bonds of the 2024 Series are subject to redemption (otherwise than through the operation of the Replacement Fund provided in Part Two of this supplemental indenture or through the application of moneys paid to the Trustee pursuant to the provisions of sec. 5.05 of the Indenture) prior to maturity, at the option of the Company, as a whole at any time or in part from time to time, in principal amounts equal to $1,000 or any multiple thereof, upon prior notice as hereinafter provided, at the redemption prices specified in the third paragraph of the reverse side of the form of bond set forth in this supplemental indenture, together with interest accrued thereon to the date fixed for redemption thereof. The bonds of the 2024 Series are also subject to redemption through the operation of the Replacement Fund provided in Part Two of this supplemental indenture or through the application of moneys paid to the Trustee pursuant to the provisions of sec. 5.05 of the Indenture, at any time or 6 from time to time prior to maturity, upon prior notice as hereinafter provided, at the redemption prices specified in the fourth paragraph of the reverse side of the form of bond set forth in this supplemental indenture, together with interest accrued thereon to the date fixed for redemption thereof. All such redemption of bonds of the 2024 Series shall be effected as provided in Article 3 of the Indenture except that, in case a part only of the bonds of the 2024 Series is to be paid and redeemed, the particular bonds or part thereof shall be selected by the Trustee in such manner as the Trustee in its uncontrolled discretion shall determine to be fair and in any case where several bonds are registered in the same name, the Trustee may treat the aggregate principal amount so registered as if it were represented by one bond and except that when bonds are redeemed in part only the notice given to any particular holder need state only the principal amount of the bonds of that holder which are to be redeemed and except that notice to the holders of bonds to be redeemed shall be given by mailing to such holders a notice of such redemption, first class mail postage prepaid, not later than the thirtieth day, and not earlier than the sixtieth day, before the date fixed for redemption, at their last addresses as they shall appear upon the bond register of the Company. Any notice which is mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the holder receives such notice; and failure duly to give such notice by mail, or any defect in such notice, to the holder of any bond designated for redemption as a whole or in part shall not affect the validity of the proceedings for the redemption of any other bond. No publication of notice of such redemption shall be required. SECTION 5. The aggregate principal amount of the bonds of the 2024 Series shall be unlimited. SECTION 6. The place or places of payment (as to principal and premium, if any, and interest), redemption, transfer, exchange and registration of the bonds of the 2024 Series shall be the office or offices or the agency or agencies of the Company in the Borough of Manhattan, The City of New York, designated from time to time by the Board of Directors of the Company. SECTION 7. The form of the bonds of the 2024 Series and the certificate of the Trustee to be endorsed on the bonds, respectively, shall be substantially as follows: 7 [FORM OF BOND OF THE 2024 SERIES] [FACE SIDE OF BOND] DUKE POWER COMPANY FIRST AND REFUNDING MORTGAGE BOND, 7 7/8% Series Due 2024 No. $ DUKE POWER COMPANY, a North Carolina corporation (hereinafter called the "Company"), for value received, hereby promises to pay to or registered assigns, the principal sum of Dollars on May 1, 2024, in any coin or currency of the United States of America which at the time of payment shall be legal tender for the payment of public and private debts, at the office or agency of the Company in the Borough of Manhattan, The City of New York, and to pay interest thereon at said office or agency from the interest payment date next preceding the date hereof to which interest on outstanding bonds of this series has been paid (unless the date hereof is prior to November 1, 1994, in which case from May 1, 1994, and unless the date hereof is an April date subsequent to April 15, or an October date subsequent to October 15, in which case from the next succeeding May 1 or November 1, as the case may be), at the rate of seven and seven-eighths per cent per annum, in like coin or currency, semi-annually on May 1 and November 1 in each year until the principal hereof shall become due and payable. Such interest payments shall be made by check mailed to the person in whose name this bond is registered at the close of business on the 15th day of April or October preceding each semi-annual interest payment date, as the case may be (subject to certain exceptions provided in the Indenture hereinafter mentioned), at his last address as it shall appear upon the bond register of the Company. The provisions of this bond are continued on the reverse hereof and such continued provisions shall for all purposes have the same effect as though fully set forth in this place. This bond shall not become or be valid or obligatory for any purpose until the Trustee shall have signed the form of certificate endorsed hereon. IN WITNESS WHEREOF, the Company has caused this instrument to be signed in its name by its President or one of its Vice Presidents, manually or by facsimile signature, and its corporate seal to be hereto affixed, or a facsimile thereof to be hereon engraved, lithographed or printed, and to be 8 attested by the manual or facsimile signature of its Secretary or one of its Assistant Secretaries. Dated: DUKE POWER COMPANY By: ................................. President Attest: .................................... Secretary [FORM OF TRUSTEE'S CERTIFICATE FOR BOND OF THE 2024 SERIES] This bond is one of the bonds, of the series designated therein, described in the within-mentioned Indenture. MORGAN GUARANTY TRUST COMPANY OF NEW YORK, Trustee By: ................................. Authorized Officer 9 [REVERSE SIDE OF BOND] This bond is one of the bonds of a series, designated specially as First and Refunding Mortgage Bonds, 7 7/8% Series Due 2024, of an authorized issue of bonds of the Company, without limit as to aggregate principal amount, designated generally as First and Refunding Mortgage Bonds, all issued and to be issued under and equally and ratably secured by an indenture dated as of December 1, 1927, duly executed by Duke Power Company, a New Jersey corporation (hereinafter called the "New Jersey Company"), to Guaranty Trust Company of New York (now Morgan Guaranty Trust Company of New York), as Trustee, as supplemented and modified by indentures supplemental thereto, including supplemental indentures dated as of September 1, 1947, February 1, 1949, February 1, 1960, June 15, 1964 (under which the Company succeeded to and was substituted for the New Jersey Company), February 1, 1965, April 1, 1967, February 1, 1968, February 15, 1987, October 1, 1987, February 1, 1990, March 1, 1990, May 1, 1990, May 15, 1990, March 1, 1991, July 1, 1991, December 1, 1991, March 1, 1992, June 1, 1992, July 1, 1992, September 1, 1992, February 1, 1993, March 1, 1993, April 1, 1993, May 1, 1993, June 1, 1993, July 1, 1993, August 1, 1993, August 20, 1993 and May 1, 1994, the latter providing for said series (said indenture as so supplemented and modified being hereinafter referred to as the "Indenture"), to which Indenture reference is made for a description of the property mortgaged, the nature and extent of the security, the rights of the holders of the bonds in respect thereof, the terms and conditions upon which the bonds are secured and the restrictions subject to which additional bonds secured thereby may be issued. To the extent permitted by, and as provided in, the Indenture, modifications or alterations of the Indenture, or of any indenture supplemental thereto, and of the rights and obligations of the Company and of the holders of the bonds, may be made with the consent of the Company by the affirmative vote, or with the written consent, of the holders of not less than 66 2/3% in principal amount of the bonds then outstanding, and by the affirmative vote, or with the written consent, of the holders of not less than 66 2/3% in principal amount of the bonds of any series then outstanding and affected by such modification or alteration, in case one or more but less than all of the series of bonds then outstanding under the Indenture are so affected, evidenced, in each case, as provided in the Indenture; provided that any supplemental indenture may be modified in accordance with the provisions contained therein for its modification; and provided, further, that no such modification or alteration shall be made 10 which will affect the terms of payment of the principal of, or interest or premium on, this bond, or the right of any bondholder to institute suit for the enforcement of any such payment on or after the respective due dates expressed in this bond, or reduce the percentage required for the taking of any such action. Any such affirmative vote of, or written consent given by, any holder of this bond is binding upon all subsequent holders hereof as provided in the Indenture. In case an event of default as defined in the Indenture shall occur, the principal of all the bonds outstanding thereunder may become or be declared due and payable, at the time, in the manner and with the effect provided in the Indenture. The bonds of this series are not subject to redemption (otherwise than for the Replacement Fund hereinafter mentioned or upon application of certain moneys included in the trust estate) prior to May 1, 1999. On and after May 1, 1999, the bonds of this series are subject to redemption (otherwise than for the Replacement Fund hereinafter mentioned or upon application of certain moneys included in the trust estate) prior to maturity, at the option of the Company, as a whole at any time or in part from time to time, at the following redemption prices (expressed as percentages of their principal amounts), in each case together with accrued interest to the date fixed for redemption: If redeemed during the twelve-month period beginning May 1:
REDEMPTION YEAR PRICE --------------------- ---------- REDEMPTION YEAR PRICE --------------------- ---------- 1999................. 103.592% 2000................. 103.352 2001................. 103.113 2002................. 102.873 2003................. 102.634 2004................. 102.395 2005................. 102.155 2006................. 101.916 2007................. 101.676 2008................. 101.437 2009................. 101.197 2010................. 100.958 2011................. 100.718 2012................. 100.479% 2013................. 100.239 2014................. 100.000 2015................. 100.000 2016................. 100.000 2017................. 100.000 2018................. 100.000 2019................. 100.000 2020................. 100.000 2021................. 100.000 2022................. 100.000 2023................. 100.000
11 The bonds of this series are also subject to redemption for the Replacement Fund for bonds of this series provided for in the supplemental indenture dated as of May 1, 1994, providing for this series, or upon application of certain moneys included in the trust estate, at any time or from time to time prior to maturity, at the following redemption prices (expressed as percentages of their principal amounts), in each case together with accrued interest to the date fixed for redemption: If redeemed during the twelve-month period beginning May 1:
REDEMPTION YEAR PRICE --------------------- ---------- REDEMPTION YEAR PRICE --------------------- ---------- 1994................. 100.00% 1995................. 100.00 1996................. 100.00 1997................. 100.00 1998................. 100.00 1999................. 100.00 2000................. 100.00 2001................. 100.00 2002................. 100.00 2003................. 100.00 2004................. 100.00 2005................. 100.00 2006................. 100.00 2007................. 100.00 2008................. 100.00 2009................. 100.00% 2010................. 100.00 2011................. 100.00 2012................. 100.00 2013................. 100.00 2014................. 100.00 2015................. 100.00 2016................. 100.00 2017................. 100.00 2018................. 100.00 2019................. 100.00 2020................. 100.00 2021................. 100.00 2022................. 100.00 2023................. 100.00
Redemption is in every case to be effected at the office or agency of the Company in the Borough of Manhattan, The City of New York, upon at least thirty days' prior notice, given by mail as more fully provided in the Indenture. If this bond or any portion hereof ($1,000 or a multiple thereof) is called for redemption and payment is duly provided, this bond or such portion thereof shall cease to bear interest from and after the date fixed for such redemption. This bond is transferable, as provided in the Indenture, by the registered owner hereof in person or by duly authorized attorney, at the office or agency of the Company in the Borough of Manhattan, The City of New York, upon surrender and cancellation of this bond, and thereupon a new 12 bond of the same series and of like aggregate principal amount will be issued to the transferee in exchange herefor as provided in the Indenture; or the registered owner of this bond, at his option, may surrender the same for cancellation at said office or agency of the Company and receive in exchange herefor the same aggregate principal amount of bonds of the same series of authorized denominations; all subject to the terms of the Indenture but without payment of any charges other than a sum sufficient to reimburse the Company for any stamp taxes or other governmental charges incident thereto. This bond is a corporate obligation only and no recourse whatsoever, either directly or through the Company or any trustee, receiver, assignee or any other person, shall be had for the payment of the principal of or premium, if any, or interest on this bond, or for the enforcement of any claim based hereon, or otherwise in respect hereof or of the Indenture, against any promoter, subscriber to the capital stock, incorporator, or any past, present or future stockholder, officer or director of the Company as such, or of any successor or predecessor corporation, whether by virtue of any constitutional provision, statute or rule of law, or by the enforcement of any assessment, penalty, subscription or otherwise, any and all such liability of promoters, subscribers, incorporators, stockholders, officers and directors being waived and released by each successive holder hereof by the acceptance of this bond, and as a part of the consideration for the issue hereof, and being likewise waived and released by the terms of the Indenture. [END OF BOND FORM] PART TWO. REPLACEMENT FUND. SECTION 1. So long as any of the bonds of the 2024 Series are outstanding, the Company will continue to maintain the Replacement Fund set forth in, and in accordance with the applicable terms and conditions now contained in, Part Two of the supplemental indenture dated as of February 1, 1949, and the covenants on the part of the Company contained in such Part Two shall continue and remain in full force and effect, whether or not bonds of the 1979 Series are outstanding and to the same extent as though the words "or any bonds of the 2024 Series" were inserted after the word "Series" appearing in the second line of Section 1 and the second line of Section 4 of said Part Two of said supplemental indenture dated as of February 1, 1949. 13 SECTION 2. If at any time (a) bonds of the 2024 Series are outstanding and (b) no bonds of the 1995 Series, of the 1997 Series, of the 2020 Series, of the 2020 Series B, of the 2021 Series, of the Medium-Term Notes Series, of the 2021 Series B, of the 2004 Series, of the 2022 Series, of the 2000 Series, of the 2000 Series B, of the 2005 Series, of the 2003 Series B, of the 2023 Series, of the 2008 Series, of the 2003 Series C, of the 2004 Series B, of the 2001 Series, of the 2033 Series, of the 2023 Series B or of the 2025 Series are outstanding and (c) cash which shall have been deposited with the Trustee pursuant to such Replacement Fund shall not within five years from the date of deposit thereof have been paid out, or used or set aside by the Trustee for the payment, purchase or redemption of bonds, pursuant to such Replacement Fund, such cash shall, if in excess of fifty thousand dollars ($50,000), be applied to the redemption of bonds of the 2024 Series in an aggregate principal amount sufficient to exhaust as nearly as possible the full amount of such cash. Anything in Section 5 of Part Two of the aforesaid supplemental indenture dated as of February 1, 1949, in Section 3 of Part Two of the supplemental indentures dated as of February 1, 1965, April 1, 1967, February 1, 1990, May 1, 1990, March 1, 1991, December 1, 1991, June 1, 1992, July 1, 1992, September 1, 1992, February 1, 1993, May 1, 1993, June 1, 1993, July 1, 1993, August 1, 1993 and August 20, 1993, in Section 3 of Part Three of the supplemental indenture dated as of March 1, 1990, in Section 4 of Part Three of the supplemental indenture dated as of March 1, 1992 and in Section 5 of Part Four of the supplemental indenture dated as of March 1, 1993 to the contrary notwithstanding, no cash shall be paid over to the Company thereunder if at the time any bonds of the 2024 Series are then outstanding, and such cash shall in such event be applied as in this Part Two set forth. SECTION 3. Whenever all of the bonds of the 2024 Series, the 1995 Series, the 1997 Series, the 2020 Series, the 2020 Series B, the 2021 Series, the Medium-Term Notes Series, the 2021 Series B, the 2004 Series, the 2022 Series, the 2000 Series, the 2000 Series B, the 2005 Series, the 2003 Series B, the 2023 Series, the 2008 Series, the 2003 Series C, the 2004 Series B, the 2001 Series, the 2033 Series, the 2023 Series B and the 2025 Series shall have been paid, purchased or redeemed, the Trustee shall, upon application of the Company, pay to or upon the order of the Company all cash theretofore deposited with the Trustee pursuant to the provisions of the Replacement Fund and not previously disposed of pursuant to the provisions of the Replacement Fund, and shall deliver to the Company any bonds which shall theretofore have been deposited with the Trustee pursuant to 14 the provisions of the Replacement Fund or paid, purchased or redeemed pursuant to the provisions of the Replacement Fund. PART THREE. ADDITIONAL COVENANTS OF THE COMPANY. SECTION 1. Whether or not the covenants on the part of the Company contained in Part Three of the supplemental indenture dated as of February 1, 1949 are modified with the consent of the holders of bonds of the 1995 Series, the 1997 Series, the 1987 Pollution Control Series A, the 1987 Pollution Control Series B, the 1987 Pollution Control Series C, the 2020 Series, the 2020 Series B, the 1990 Pollution Control Series, the 2021 Series, the 2027 City of Greensboro Series, the Medium-Term Notes Series, the 2021 Series B, the 2004 Series, the 2022 Series, the 2000 Series, the 2000 Series B, the 2005 Series, the 2003 Series B, the 2023 Series, the 2008 Series, the 2003 Series C, the 1993 Pollution Control Series, the 2004 Series B, the 2001 Series, the 2033 Series, the 2023 Series B or the 2025 Series and whether or not the bonds of the 1995 Series, the 1997 Series, the 1987 Pollution Control Series A, the 1987 Pollution Control Series B, the 1987 Pollution Control Series C, the 2020 Series, the 2020 Series B, the 1990 Pollution Control Series, the 2021 Series, the 2027 City of Greensboro Series, the Medium-Term Notes Series, the 2021 Series B, the 2004 Series, the 2022 Series, the 2000 Series, the 2000 Series B, the 2005 Series, the 2003 Series B, the 2023 Series, the 2008 Series, the 2003 Series C, the 1993 Pollution Control Series, the 2004 Series B, the 2001 Series, the 2033 Series, the 2023 Series B or the 2025 Series are outstanding, such covenants on the part of the Company contained in said Part Three shall continue and remain in full force and effect so long as any of the bonds of the 2024 Series are outstanding and to the same extent as though the words "or so long as any bonds of the 2024 Series are outstanding" were inserted after the words "so long as any of the bonds of the 1979 Series or any bonds of the 2.65% Series are outstanding" wherever such words appear in said Part Three of the supplemental indenture dated as of February 1, 1949. SECTION 2. Whether or not the second sentence of paragraph (a) of sec. 2.08 of the original indenture (making certain provisions for the definition of the term "net amount" applicable while bonds of the 2.65% Series were outstanding and which was originally set forth in Section 4 of Article One of the supplemental indenture dated as of September 1, 1947 and which is corrected and clarified by Section 2 of Part Four of the supplemental 15 indenture dated as of February 1, 1968) is modified with the consent of the holders of bonds of the 1995 Series, the 1997 Series, the 1987 Pollution Control Series A, the 1987 Pollution Control Series B, the 1987 Pollution Control Series C, the 2020 Series, the 2020 Series B, the 1990 Pollution Control Series, the 2021 Series, the 2027 City of Greensboro Series, the Medium-Term Notes Series, the 2021 Series B, the 2004 Series, the 2022 Series, the 2000 Series, the 2000 Series B, the 2005 Series, the 2003 Series B, the 2023 Series, the 2008 Series, the 2003 Series C, the 1993 Pollution Control Series, the 2004 Series B, the 2001 Series, the 2033 Series, the 2023 Series B or the 2025 Series and whether or not bonds of the 1995 Series, the 1997 Series, the 1987 Pollution Control Series A, the 1987 Pollution Control Series B, the 1987 Pollution Control Series C, the 2020 Series, the 2020 Series B, the 1990 Pollution Control Series, the 2021 Series, the 2027 City of Greensboro Series, the Medium-Term Notes Series, the 2021 Series B, the 2004 Series, the 2022 Series, the 2000 Series, the 2000 Series B, the 2005 Series, the 2003 Series B, the 2023 Series, the 2008 Series, the 2003 Series C, the 1993 Pollution Control Series, the 2004 Series B, the 2001 Series, the 2033 Series, the 2023 Series B or the 2025 Series are outstanding, said sentence shall continue and remain in full force and effect so long as any bonds of the 2024 Series are outstanding, and with the same force and effect as though said sentence had stated that such provisions were to be applicable so long as any of the bonds of the 2024 Series are outstanding. PART FOUR. MISCELLANEOUS. SECTION 1. (a) For the purposes of sec. 2.10 of the Indenture and for the purposes of any modification of the provisions of the Replacement Fund referred to in Part Two of this supplemental indenture, the covenants and provisions on the part of the Company which are set forth or incorporated in Part Two of this supplemental indenture shall be for the benefit only of the holders of the bonds of the 2024 Series. Such covenants and provisions shall remain in force and be applicable only so long as any bonds of the 2024 Series shall be outstanding, and, subject to the provisions of paragraph (2) of subdivision (c) of sec. 10.01 of the Indenture, any such covenants and provisions may be modified with the consent, in writing or by vote at a bondholders' meeting, of the holders of sixty-six and two-thirds per cent (66 2/3%) of the principal amount of the bonds of the 2024 Series at the time outstanding and without the consent of the holders of any other bonds then 16 outstanding under the Indenture; provided that no such consent shall be effective to waive any past default under such covenants and provisions, and its consequences, unless the consent of the holders of at least a majority in principal amount of all bonds then outstanding under the Indenture is obtained. Such covenants shall be deemed to be additional covenants and none of them shall affect or derogate from, or relieve the Company from, its obligation to comply with any of the other covenants, conditions, requirements or provisions of the Indenture or any other supplemental indenture. (b) For the purposes of sec. 2.10 of the Indenture and for the purposes of any modification of the provisions of Part Three of this supplemental indenture, the covenants and provisions on the part of the Company which are set forth or incorporated in said Part Three shall be for the benefit only of the holders of the bonds of the 2024 Series. Such covenants and provisions shall remain in force and be applicable only so long as any bonds of the 2024 Series shall be outstanding, and, subject to the provisions of paragraph (2) of subdivision (c) of sec. 10.01 of the Indenture, any such covenants and provisions may be modified with the consent, in writing or by vote at a bondholders' meeting, of the holders of sixty-six and two-thirds per cent (66 2/3%) of the principal amount of the bonds of the 2024 Series at the time outstanding and without the consent of the holders of any other bonds then outstanding under the Indenture; provided that no such consent shall be effective to waive any past default under such covenants and provisions, and its consequences, unless the consent of the holders of at least a majority in principal amount of all bonds then outstanding under the Indenture is obtained. Such covenants shall be deemed to be additional covenants and none of them shall affect or derogate from, or relieve the Company from, its obligation to comply with any of the other covenants, conditions, requirements or provisions of the Indenture or any other supplemental indenture. SECTION 2. All terms contained in this supplemental indenture shall, except as specifically provided herein or except as the context may otherwise require, have the meanings given to such terms in the Indenture. SECTION 3. In case any one or more of the provisions contained in this supplemental indenture should be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision contained in this supplemental indenture, and, to the extent, but only to the extent, that such provision is invalid, illegal or 17 unenforceable, this supplemental indenture shall be construed as if such provision had never been contained herein. SECTION 4. The Trustee hereby accepts the trusts herein declared and provided upon the terms and conditions in the Indenture set forth. SECTION 5. This supplemental indenture may be executed in several counterparts, each of which shall be an original, and all collectively but one instrument. 18 IN WITNESS WHEREOF, Duke Power Company, the party of the first part hereto, has caused this supplemental indenture to be signed in its name by one of its Vice Presidents and its corporate seal to be hereunto affixed, and the same to be attested by one of its Assistant Secretaries, and Morgan Guaranty Trust Company of New York, the party of the second part hereto, in token of its acceptance of the trust hereby created, has caused this supplemental indenture to be signed in its name by one of its Vice Presidents and its corporate seal to be hereunto affixed, and the same to be attested by one of its Assistant Secretaries, all as of the day and year first above written. DUKE POWER COMPANY By:............................. RICHARD J. OSBORNE Senior Vice President ATTEST: .................................... CAROLYN R. DUNCAN Assistant Secretary Signed, sealed, executed, acknowledged and delivered by DUKE POWER COMPANY, in the presence of: .................................... SANDRA J. RACE .................................... SUE C. HARRINGTON MORGAN GUARANTY TRUST COMPANY OF NEW YORK By:............................. M. CULHANE Vice President ATTEST: .................................... MARY ELLEN MCNULTY Assistant Secretary Signed, sealed, executed, acknowledged and delivered by MORGAN GUARANTY TRUST COMPANY OF NEW YORK, in the presence of: .................................... THOMAS J. COURTNEY .................................... EVELYN VISLOCKY 19 STATE OF NEW YORK COUNTY OF NEW YORK SS.:
Personally appeared before me THOMAS J. COURTNEY, and made oath that he saw M. CULHANE, a Vice President, and MARY ELLEN MCNULTY, an Assistant Secretary, respectively, of MORGAN GUARANTY TRUST COMPANY OF NEW YORK, sign, attest and affix hereto the corporate seal of said Morgan Guaranty Trust Company of New York, and, as the act and deed of said corporation, deliver the within written and foregoing deed, and that he, with EVELYN VISLOCKY, witnessed the execution thereof. .................................... THOMAS J. COURTNEY Sworn and subscribed before me this 24th day of May, 1994. ..................................... JOANNE E. ILSE Notary Public, State of New York No. 01IL5018680 Qualified in Queens County Commission Expires October 4, 1995. STATE OF NEW YORK COUNTY OF NEW YORK SS.:
I, JOANNE E. ILSE, a Notary Public in and for the State and County aforesaid, certify that MARY ELLEN MCNULTY personally came before me this day and acknowledged that she is an Assistant Secretary of MORGAN GUARANTY TRUST COMPANY OF NEW YORK, a New York corporation, and that, by authority duly given and as the act of the corporation, the foregoing instrument was signed in its name by one of its Vice Presidents, sealed with its corporate seal, and attested by herself as one of its Assistant Secretaries. Witness my hand and official seal, this 24th day of May, 1994. .................................... JOANNE E. ILSE Notary Public, State of New York No. 01IL5018680 Qualified in Queens County Commission Expires October 4, 1995. 20 STATE OF NORTH CAROLINA COUNTY OF MECKLENBURG SS.:
Personally appeared before me SANDRA J. RACE and made oath that she saw RICHARD J. OSBORNE, a Senior Vice President, and CAROLYN R. DUNCAN, an Assistant Secretary, respectively, of DUKE POWER COMPANY, sign, attest and affix hereto the corporate seal of said Duke Power Company, and, as the act and deed of said corporation, deliver the within written and foregoing deed, and that she, with SUE C. HARRINGTON, witnessed the execution thereof. .................................... SANDRA J. RACE Sworn and subscribed before me this 25th day of May, 1994. .................................... BRENDA M. ATCHLEY Notary Public Union County, N.C. My Commission expires December 4, 1994. STATE OF NORTH CAROLINA COUNTY OF MECKLENBURG SS.:
I, BRENDA M. ATCHLEY, a Notary Public in and for the State and County aforesaid, certify that CAROLYN R. DUNCAN personally came before me this day and acknowledged that she is an Assistant Secretary of DUKE POWER COMPANY, a North Carolina corporation, and that, by authority duly given and as the act of the corporation, the foregoing instrument was signed in its name by one of its Senior Vice Presidents, sealed with its corporate seal, and attested by herself as one of its Assistant Secretaries. My commission expires December 4, 1994. Witness my hand and official seal, this 25th day of May, 1994. .................................... BRENDA M. ATCHLEY Notary Public Union County, N.C.
EX-4 3 EXHIBIT 4-B-79 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- DUKE POWER COMPANY TO CHEMICAL BANK, TRUSTEE ------------------ SEVENTY-NINTH SUPPLEMENTAL INDENTURE DATED AS OF NOVEMBER 1, 1994 ------------------ CREATING AN ISSUE OF FIRST AND REFUNDING MORTGAGE BONDS, 8% SERIES B DUE 1999 ------------------ SUPPLEMENTAL TO FIRST AND REFUNDING MORTGAGE DATED AS OF DECEMBER 1, 1927 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SUPPLEMENTAL INDENTURE, bearing date as of the first day of November, 1994, made and entered into by and between DUKE POWER COMPANY, a corporation duly organized and existing under the laws of the State of North Carolina, hereinafter called the "Company", party of the first part, and CHEMICAL BANK (successor to Morgan Guaranty Trust Company of New York as Trustee), a corporation duly organized and existing under the laws of the State of New York, having its principal place of business in the Borough of Manhattan, City and State of New York, hereinafter called the "Trustee", as Trustee, party of the second part. WHEREAS Duke Power Company, a New Jersey corporation, hereinafter called the "New Jersey Company", duly executed and delivered its First and Refunding Mortgage, dated as of December 1, 1927, to Guaranty Trust Company of New York, as Trustee, to secure its First and Refunding Mortgage Gold Bonds, to be issued from time to time in series as provided in said Mortgage, and has from time to time duly executed and delivered supplemental indentures, including supplemental indentures dated as of September 1, 1947 and February 1, 1949, to Guaranty Trust Company of New York (the corporate name of which has been changed to Morgan Guaranty Trust Company of New York), as Trustee, and a supplemental indenture dated as of February 1, 1960 to Morgan Guaranty Trust Company of New York, as Trustee, supplementing and modifying said Mortgage (said Mortgage, as so supplemented and modified, being hereinafter referred to as the "original indenture"); and WHEREAS bonds of a series known as the "First and Refunding Mortgage Bonds, 2.65% Series Due 1977" (herein called "bonds of the 2.65% Series"), bonds of a series known as the "First and Refunding Mortgage Bonds, 2 7/8% Series Due 1979" (herein called "bonds of the 1979 Series"), bonds of a series known as the "First and Refunding Mortgage Bonds, 4 1/2% Series Due 1995" (herein called "bonds of the 1995 Series"), bonds of a series known as the "First and Refunding Mortgage Bonds, 5 3/8% Series Due 1997" (herein called "bonds of the 1997 Series"), bonds of a series known as the "First and Refunding Mortgage Bonds, 6 3/8% Series Due 1998" (herein called "bonds of the 1998 Series"), bonds of a series known as the "First and Refunding Mortgage Bonds, Annual Tender Pollution Control Series 1987 A" (herein called "bonds of the 1987 Pollution Control Series A"), bonds of a series known as the "First and Refunding Mortgage Bonds, Annual Tender Pollution Control Series 1987 B" (herein called "bonds of the 1987 Pollution Control Series B"), bonds of a series known as the "First and Refunding Mortgage Bonds, Annual Tender Pollution Control Series 1987 C" (herein called "bonds of the 1987 2 Pollution Control Series C"), bonds of a series known as the "First and Refunding Mortgage Bonds, 9 5/8% Series Due 2020" (herein called "bonds of the 2020 Series"), bonds of a series known as the "First and Refunding Mortgage Bonds, 10 1/8% Series B Due 2020" (herein called "bonds of the 2020 Series B"), bonds of a series known as the "First and Refunding Mortgage Bonds, Pollution Control Facilities Revenue Refunding Series Due 2014" (herein called "bonds of the 1990 Pollution Control Series"), bonds of a series known as the "First and Refunding Mortgage Bonds, 8 3/4% Series Due 2021" (herein called "bonds of the 2021 Series"), bonds of a series known as the "First and Refunding Mortgage Bonds, City of Greensboro Series Due 2027" (herein called "bonds of the 2027 City of Greensboro Series"), bonds of a series known as the "First and Refunding Mortgage Bonds, Medium-Term Notes Series" (herein called "bonds of the Medium-Term Notes Series"), bonds of a series known as the "First and Refunding Mortgage Bonds, 8 3/8% Series B Due 2021" (herein called "bonds of the 2021 Series B"), bonds of a series known as the "First and Refunding Mortgage Bonds, 8% Series Due 2004" (herein called "bonds of the 2004 Series"), bonds of a series known as the "First and Refunding Mortgage Bonds, 8 5/8% Series Due 2022" (herein called "bonds of the 2022 Series"), bonds of a series known as the "First and Refunding Mortgage Bonds, 7% Series Due 2000" (herein called "bonds of the 2000 Series"), bonds of a series known as the "First and Refunding Mortgage Bonds, 7% Series B Due 2000" (herein called "bonds of the 2000 Series B"), bonds of a series known as the "First and Refunding Mortgage Bonds, 7% Series Due 2005" (herein called "bonds of the 2005 Series"), bonds of a series known as the "First and Refunding Mortgage Bonds, 6 5/8% Series B Due 2003" (herein called "bonds of the 2003 Series B"), bonds of a series known as the "First and Refunding Mortgage Bonds, 7 3/8% Series Due 2023" (herein called "bonds of the 2023 Series"), bonds of a series known as the "First and Refunding Mortgage Bonds, 6 3/8% Series Due 2008" (herein called "bonds of the 2008 Series"), bonds of a series known as the "First and Refunding Mortgage Bonds, 5 7/8% Series C Due 2003" (herein called "bonds of the 2003 Series C"), bonds of a series known as the "First and Refunding Mortgage Bonds, Pollution Control Facilities Revenue Refunding Series Due 2014" (herein called "bonds of the 1993 Pollution Control Series"), bonds of a series known as the "First and Refunding Mortgage Bonds, 6 1/4% Series B 2004" (herein called "bonds of the 2004 Series B"), bonds of a series known as the "First and Refunding Mortgage Bonds, 5 7/8% Series Due 2001" (herein called "bonds of the 2001 Series"), bonds of a series known as the "First and Refunding Mortgage Bonds, 7% Series Due 2033" (herein called "bonds of the 2033 Series"), bonds of a 3 series known as the "First and Refunding Mortgage Bonds, 6 7/8% Series B Due 2023" (herein called "bonds of the 2023 Series B"), bonds of a series known as the "First and Refunding Mortgage Bonds, 6 3/4% Series Due 2025" (herein called "bonds of the 2025 Series") and bonds of a series known as the "First and Refunding Mortgage Bonds, 7 7/8% Series Due 2024" (herein called "bonds of the 2024 Series") have heretofore been issued and (except for bonds of the 2.65% Series, bonds of the 1979 Series and bonds of the 1998 Series which have been retired in their entirety) are the only bonds now outstanding under the original indenture as heretofore supplemented; and WHEREAS the Company has duly executed and delivered a supplemental indenture, dated as of June 15, 1964, to Morgan Guaranty Trust Company of New York, as Trustee, for the purpose of evidencing the succession by merger of the Company to the New Jersey Company and the assumption by the Company of the covenants and conditions of the New Jersey Company in the original indenture and to enable the Company to have and exercise the powers and rights of the New Jersey Company under the original indenture in accordance with the terms thereof and whereby the Company assumed and agreed to pay duly and punctually the principal of and interest on the bonds issued under the original indenture in accordance with the provisions of said bonds and the coupons thereto appertaining and the original indenture, and agreed to perform and fulfill all the terms, covenants and conditions of the original indenture binding upon the New Jersey Company; and WHEREAS Morgan Guaranty Trust Company of New York resigned as Trustee under the original indenture as heretofore supplemented and Chemical Bank was appointed successor Trustee, said resignation and appointment having taken effect on August 30, 1994 pursuant to an Instrument of Resignation, Appointment and Acceptance dated as of August 30, 1994 among the Company, Morgan Guaranty Trust Company of New York, as Trustee, and Chemical Bank, as successor Trustee; and WHEREAS the Company desires to create under the original indenture, as heretofore supplemented and as to be supplemented by this supplemental indenture, a new series of bonds, to be known as its "First and Refunding Mortgage Bonds, 8% Series B Due 1999", and to determine the terms and provisions and the form of the bonds of such series; and WHEREAS for the purposes hereinabove recited, and pursuant to due corporate action, the Company has duly determined to execute and deliver to the Trustee a supplemental indenture in the form hereof supplementing the original indenture (the original indenture, as supplemented by the 4 aforesaid supplemental indenture dated as of June 15, 1964, by supplemental indentures dated as of February 1, 1965, April 1, 1967, February 1, 1968, February 15, 1987, October 1, 1987, February 1, 1990, March 1, 1990, May 1, 1990, May 15, 1990, March 1, 1991, July 1, 1991, December 1, 1991, March 1, 1992, June 1, 1992, July 1, 1992, September 1, 1992, February 1, 1993, March 1, 1993, April 1, 1993, May 1, 1993, June 1, 1993, July 1, 1993, August 1, 1993, August 20, 1993, May 1, 1994 and as hereby supplemented, being sometimes hereinafter referred to as the "Indenture"); and WHEREAS all conditions and requirements necessary to make this supplemental indenture a valid, legal and binding instrument in accordance with its terms have been done and performed, and the execution and delivery hereof have been in all respects duly authorized: NOW, THEREFORE, THIS INDENTURE WITNESSETH: That in consideration of the premises and of the sum of one dollar duly paid by the Company to the Trustee at or before the execution and delivery of these presents, the receipt whereof is hereby acknowledged, the Company hereby covenants and agrees with the Trustee and its successors in the trust under the Indenture as follows: PART ONE. BONDS OF THE 8% SERIES B DUE 1999. SECTION 1. The Company hereby creates a new series of bonds to be issued under and secured by the Indenture and known as its First and Refunding Mortgage Bonds, 8% Series B Due 1999 (herein called "bonds of the 1999 Series B"), and the Company hereby establishes, determines and fixes the terms and provisions of the bonds of the 1999 Series B as hereinafter in this Part One set forth. Each bond of the 1999 Series B shall be dated the date of its authentication (except that if any such bond shall be authenticated on any interest payment date, it shall be dated the following day) and interest shall be payable on the principal represented thereby commencing May 1, 1995, from the May 1 or November 1, as the case may be, next preceding the date thereof to which interest has been paid, unless such date of authentication is prior to May 1, 1995, in which case interest shall be payable from November 1, 1994; provided, however, that interest shall be payable on each bond of the 1999 Series B authenticated after the record date (as defined in the next succeeding paragraph of this Section 1) with respect to any interest payment date and prior to such interest payment date, only from such interest payment date. 5 Interest on any bond of the 1999 Series B shall be paid to the person who, according to the bond register of the Company, is the registered holder of such bond of the 1999 Series B at the close of business on the applicable record date, and such interest payments shall be made by check mailed to such registered holder at his last address shown on such bond register; provided, however, that, if the Company shall default in the payment of the interest due on any interest payment date on any bond of the 1999 Series B, such defaulted interest shall be paid to the registered holder of such bond (or any bond or bonds of the 1999 Series B issued upon transfer, exchange or substitution thereof) on the date of subsequent payment of such defaulted interest or, at the election of the Company, to the person in whose name such bond (or any bond or bonds of the 1999 Series B issued upon transfer, exchange or substitution thereof) is registered on a subsequent record date established by notice given by mail by or on behalf of the Company to the holders of all bonds of the 1999 Series B not less than ten (10) days preceding such subsequent record date. The term "record date" as used in this Section 1 shall mean, with respect to any semi-annual interest payment date, the close of business on the April 15 or October 15, as the case may be, next preceding such interest payment date or, in the case of a payment of defaulted interest, the close of business on any subsequent record date established as provided above. SECTION 2. All bonds of the 1999 Series B shall mature as to principal on November 1, 1999, and shall bear interest at the rate of 8% per annum, payable semi-annually on the first day of May and November in each year. SECTION 3. The bonds of the 1999 Series B shall be fully registered bonds, without coupons, in denominations of one thousand dollars ($1,000) and any integral multiple of one thousand dollars ($1,000), all such bonds to be numbered, and shall be transferable and exchangeable as provided in the form of bond set forth in this supplemental indenture. The provisions of sec. 1.19 and any other provision in the Indenture in respect of coupon bonds or reservation of coupon bond numbers shall be inapplicable to the bonds of the 1999 Series B. SECTION 4. The bonds of the 1999 Series B are not subject to redemption otherwise than through the operation of the Replacement Fund provided in Part Two of this supplemental indenture or through the application of moneys paid to the Trustee pursuant to the provisions of sec. 5.05 of the Indenture. The bonds of the 1999 Series B are subject to redemption through the operation of the Replacement Fund provided in Part Two of this supple- 6 mental indenture or through the application of moneys paid to the Trustee pursuant to the provisions of sec. 5.05 of the Indenture, at any time or from time to time prior to maturity, upon prior notice as hereinafter provided, at the redemption prices specified in the fourth paragraph of the reverse side of the form of bond set forth in this supplemental indenture, together with interest accrued thereon to the date fixed for redemption thereof. All such redemption of bonds of the 1999 Series B shall be effected as provided in Article 3 of the Indenture except that, in case a part only of the bonds of the 1999 Series B is to be paid and redeemed, the particular bonds or part thereof shall be selected by the Trustee in such manner as the Trustee in its uncontrolled discretion shall determine to be fair and in any case where several bonds are registered in the same name, the Trustee may treat the aggregate principal amount so registered as if it were represented by one bond and except that when bonds are redeemed in part only the notice given to any particular holder need state only the principal amount of the bonds of that holder which are to be redeemed and except that notice to the holders of bonds to be redeemed shall be given by mailing to such holders a notice of such redemption, first class mail postage prepaid, not later than the thirtieth day, and not earlier than the sixtieth day, before the date fixed for redemption, at their last addresses as they shall appear upon the bond register of the Company. Any notice which is mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the holder receives such notice; and failure duly to give such notice by mail, or any defect in such notice, to the holder of any bond designated for redemption as a whole or in part shall not affect the validity of the proceedings for the redemption of any other bond. No publication of notice of such redemption shall be required. SECTION 5. The aggregate principal amount of the bonds of the 1999 Series B shall be unlimited. SECTION 6. The place or places of payment (as to principal and premium, if any, and interest), redemption, transfer, exchange and registration of the bonds of the 1999 Series B shall be the office or offices or the agency or agencies of the Company in the Borough of Manhattan, The City of New York, designated from time to time by the Board of Directors of the Company. SECTION 7. The form of the bonds of the 1999 Series B and the certificate of the Trustee to be endorsed on the bonds, respectively, shall be substantially as follows: 7 [FORM OF BOND OF THE 1999 SERIES B] [FACE SIDE OF BOND] DUKE POWER COMPANY FIRST AND REFUNDING MORTGAGE BOND, 8% Series B Due 1999 No. $ DUKE POWER COMPANY, a North Carolina corporation (hereinafter called the "Company"), for value received, hereby promises to pay to or registered assigns, the principal sum of Dollars on November 1, 1999, in any coin or currency of the United States of America which at the time of payment shall be legal tender for the payment of public and private debts, at the office or agency of the Company in the Borough of Manhattan, The City of New York, and to pay interest thereon at said office or agency from the interest payment date next preceding the date hereof to which interest on outstanding bonds of this series has been paid (unless the date hereof is prior to May 1, 1995, in which case from November 1, 1994, and unless the date hereof is an April date subsequent to April 15, or an October date subsequent to October 15, in which case from the next succeeding May 1 or November 1, as the case may be), at the rate of eight per cent per annum, in like coin or currency, semi-annually on May 1 and November 1 in each year until the principal hereof shall become due and payable. Such interest payments shall be made by check mailed to the person in whose name this bond is registered at the close of business on the 15th day of April or October preceding each semi-annual interest payment date, as the case may be (subject to certain exceptions provided in the Indenture hereinafter mentioned), at his last address as it shall appear upon the bond register of the Company. The provisions of this bond are continued on the reverse hereof and such continued provisions shall for all purposes have the same effect as though fully set forth in this place. This bond shall not become or be valid or obligatory for any purpose until the Trustee shall have signed the form of certificate endorsed hereon. IN WITNESS WHEREOF, the Company has caused this instrument to be signed in its name by its President or one of its Vice Presidents, manually or by facsimile signature, and its corporate seal to be hereto affixed, or a facsimile thereof to be hereon engraved, lithographed or printed, and to be 8 attested by the manual or facsimile signature of its Secretary or one of its Assistant Secretaries. Dated: DUKE POWER COMPANY By: ................................. President Attest: .................................... Secretary [FORM OF TRUSTEE'S CERTIFICATE FOR BOND OF THE 1999 SERIES B] This bond is one of the bonds, of the series designated therein, described in the within-mentioned Indenture. CHEMICAL BANK, Trustee By: ................................. Authorized Officer 9 [REVERSE SIDE OF BOND] This bond is one of the bonds of a series, designated specially as First and Refunding Mortgage Bonds, 8% Series B Due 1999, of an authorized issue of bonds of the Company, without limit as to aggregate principal amount, designated generally as First and Refunding Mortgage Bonds, all issued and to be issued under and equally and ratably secured by an indenture dated as of December 1, 1927, duly executed by Duke Power Company, a New Jersey corporation (hereinafter called the "New Jersey Company"), to Guaranty Trust Company of New York (now Morgan Guaranty Trust Company of New York), as Trustee (Chemical Bank, successor Trustee), as supplemented and modified by indentures supplemental thereto, including supplemental indentures dated as of September 1, 1947, February 1, 1949, February 1, 1960, June 15, 1964 (under which the Company succeeded to and was substituted for the New Jersey Company), February 1, 1965, April 1, 1967, February 1, 1968, February 15, 1987, October 1, 1987, February 1, 1990, March 1, 1990, May 1, 1990, May 15, 1990, March 1, 1991, July 1, 1991, December 1, 1991, March 1, 1992, June 1, 1992, July 1, 1992, September 1, 1992, February 1, 1993, March 1, 1993, April 1, 1993, May 1, 1993, June 1, 1993, July 1, 1993, August 1, 1993, August 20, 1993, May 1, 1994 and November 1, 1994, the latter providing for said series (said indenture as so supplemented and modified being hereinafter referred to as the "Indenture"), to which Indenture reference is made for a description of the property mortgaged, the nature and extent of the security, the rights of the holders of the bonds in respect thereof, the terms and conditions upon which the bonds are secured and the restrictions subject to which additional bonds secured thereby may be issued. To the extent permitted by, and as provided in, the Indenture, modifications or alterations of the Indenture, or of any indenture supplemental thereto, and of the rights and obligations of the Company and of the holders of the bonds, may be made with the consent of the Company by the affirmative vote, or with the written consent, of the holders of not less than 66 2/3% in principal amount of the bonds then outstanding, and by the affirmative vote, or with the written consent, of the holders of not less than 66 2/3% in principal amount of the bonds of any series then outstanding and affected by such modification or alteration, in case one or more but less than all of the series of bonds then outstanding under the Indenture are so affected, evidenced, in each case, as provided in the Indenture; provided that any supplemental indenture may be modified in accordance with the provisions contained therein for its modification; and provided, further, that no such 10 modification or alteration shall be made which will affect the terms of payment of the principal of, or interest or premium on, this bond, or the right of any bondholder to institute suit for the enforcement of any such payment on or after the respective due dates expressed in this bond, or reduce the percentage required for the taking of any such action. Any such affirmative vote of, or written consent given by, any holder of this bond is binding upon all subsequent holders hereof as provided in the Indenture. In case an event of default as defined in the Indenture shall occur, the principal of all the bonds outstanding thereunder may become or be declared due and payable, at the time, in the manner and with the effect provided in the Indenture. The bonds of this series are not subject to redemption otherwise than for the Replacement Fund hereinafter mentioned or upon application of certain moneys included in the trust estate. The bonds of this series are subject to redemption for the Replacement Fund for bonds of this series provided for in the supplemental indenture dated as of November 1, 1994, providing for this series, or upon application of certain moneys included in the trust estate, at any time or from time to time prior to maturity, at the following redemption prices (expressed as percentages of their principal amounts), in each case together with accrued interest to the date fixed for redemption: If redeemed during the twelve-month period beginning November 1:
REDEMPTION YEAR PRICE --------------------- ---------- REDEMPTION YEAR PRICE --------------------- ---------- 1994................. 100.00 % 1995................. 100.00 1996................. 100.00 1997................. 100.00 % 1998................. 100.00
Redemption is in every case to be effected at the office or agency of the Company in the Borough of Manhattan, The City of New York, upon at least thirty days' prior notice, given by mail as more fully provided in the Indenture. If this bond or any portion hereof ($1,000 or a multiple thereof) is called for redemption and payment is duly provided, this bond or such portion thereof shall cease to bear interest from and after the date fixed for such redemption. 11 This bond is transferable, as provided in the Indenture, by the registered owner hereof in person or by duly authorized attorney, at the office or agency of the Company in the Borough of Manhattan, The City of New York, upon surrender and cancellation of this bond, and thereupon a new bond of the same series and of like aggregate principal amount will be issued to the transferee in exchange herefor as provided in the Indenture; or the registered owner of this bond, at his option, may surrender the same for cancellation at said office or agency of the Company and receive in exchange herefor the same aggregate principal amount of bonds of the same series of authorized denominations; all subject to the terms of the Indenture but without payment of any charges other than a sum sufficient to reimburse the Company for any stamp taxes or other governmental charges incident thereto. This bond is a corporate obligation only and no recourse whatsoever, either directly or through the Company or any trustee, receiver, assignee or any other person, shall be had for the payment of the principal of or premium, if any, or interest on this bond, or for the enforcement of any claim based hereon, or otherwise in respect hereof or of the Indenture, against any promoter, subscriber to the capital stock, incorporator, or any past, present or future stockholder, officer or director of the Company as such, or of any successor or predecessor corporation, whether by virtue of any constitutional provision, statute or rule of law, or by the enforcement of any assessment, penalty, subscription or otherwise, any and all such liability of promoters, subscribers, incorporators, stockholders, officers and directors being waived and released by each successive holder hereof by the acceptance of this bond, and as a part of the consideration for the issue hereof, and being likewise waived and released by the terms of the Indenture. [END OF BOND FORM] PART TWO. REPLACEMENT FUND. SECTION 1. So long as any of the bonds of the 1999 Series B are outstanding, the Company will continue to maintain the Replacement Fund set forth in, and in accordance with the applicable terms and conditions now contained in, Part Two of the supplemental indenture dated as of February 1, 1949, and the covenants on the part of the Company contained in such Part Two shall continue and remain in full force and effect, whether or not 12 bonds of the 1979 Series are outstanding and to the same extent as though the words "or any bonds of the 1999 Series B" were inserted after the word "Series" appearing in the second line of Section 1 and the second line of Section 4 of said Part Two of said supplemental indenture dated as of February 1, 1949. SECTION 2. If at any time (a) bonds of the 1999 Series B are outstanding and (b) no bonds of the 1995 Series, of the 1997 Series, of the 2020 Series, of the 2020 Series B, of the 2021 Series, of the Medium-Term Notes Series, of the 2021 Series B, of the 2004 Series, of the 2022 Series, of the 2000 Series, of the 2000 Series B, of the 2005 Series, of the 2003 Series B, of the 2023 Series, of the 2008 Series, of the 2003 Series C, of the 2004 Series B, of the 2001 Series, of the 2033 Series, of the 2023 Series B, of the 2025 Series or of the 2024 Series are outstanding and (c) cash which shall have been deposited with the Trustee pursuant to such Replacement Fund shall not within five years from the date of deposit thereof have been paid out, or used or set aside by the Trustee for the payment, purchase or redemption of bonds, pursuant to such Replacement Fund, such cash shall, if in excess of fifty thousand dollars ($50,000), be applied to the redemption of bonds of the 1999 Series B in an aggregate principal amount sufficient to exhaust as nearly as possible the full amount of such cash. Anything in Section 5 of Part Two of the aforesaid supplemental indenture dated as of February 1, 1949, in Section 3 of Part Two of the supplemental indentures dated as of February 1, 1965, April 1, 1967, February 1, 1990, May 1, 1990, March 1, 1991, December 1, 1991, June 1, 1992, July 1, 1992, September 1, 1992, February 1, 1993, May 1, 1993, June 1, 1993, July 1, 1993, August 1, 1993, August 20, 1993 and May 1, 1994, in Section 3 of Part Three of the supplemental indenture dated as of March 1, 1990, in Section 4 of Part Three of the supplemental indenture dated as of March 1, 1992 and in Section 5 of Part Four of the supplemental indenture dated as of March 1, 1993 to the contrary notwithstanding, no cash shall be paid over to the Company thereunder if at the time any bonds of the 1999 Series B are then outstanding, and such cash shall in such event be applied as in this Part Two set forth. SECTION 3. Whenever all of the bonds of the 1999 Series B, the 1995 Series, the 1997 Series, the 2020 Series, the 2020 Series B, the 2021 Series, the Medium-Term Notes Series, the 2021 Series B, the 2004 Series, the 2022 Series, the 2000 Series, the 2000 Series B, the 2005 Series, the 2003 Series B, the 2023 Series, the 2008 Series, the 2003 Series C, the 2004 Series B, the 2001 Series, the 2033 Series, the 2023 Series B, the 2025 Series and the 13 2024 Series shall have been paid, purchased or redeemed, the Trustee shall, upon application of the Company, pay to or upon the order of the Company all cash theretofore deposited with the Trustee pursuant to the provisions of the Replacement Fund and not previously disposed of pursuant to the provisions of the Replacement Fund, and shall deliver to the Company any bonds which shall theretofore have been deposited with the Trustee pursuant to the provisions of the Replacement Fund or paid, purchased or redeemed pursuant to the provisions of the Replacement Fund. PART THREE. ADDITIONAL COVENANTS OF THE COMPANY. SECTION 1. Whether or not the covenants on the part of the Company contained in Part Three of the supplemental indenture dated as of February 1, 1949 are modified with the consent of the holders of bonds of the 1995 Series, the 1997 Series, the 1987 Pollution Control Series A, the 1987 Pollution Control Series B, the 1987 Pollution Control Series C, the 2020 Series, the 2020 Series B, the 1990 Pollution Control Series, the 2021 Series, the 2027 City of Greensboro Series, the Medium-Term Notes Series, the 2021 Series B, the 2004 Series, the 2022 Series, the 2000 Series, the 2000 Series B, the 2005 Series, the 2003 Series B, the 2023 Series, the 2008 Series, the 2003 Series C, the 1993 Pollution Control Series, the 2004 Series B, the 2001 Series, the 2033 Series, the 2023 Series B, the 2025 Series or the 2024 Series and whether or not the bonds of the 1995 Series, the 1997 Series, the 1987 Pollution Control Series A, the 1987 Pollution Control Series B, the 1987 Pollution Control Series C, the 2020 Series, the 2020 Series B, the 1990 Pollution Control Series, the 2021 Series, the 2027 City of Greensboro Series, the Medium-Term Notes Series, the 2021 Series B, the 2004 Series, the 2022 Series, the 2000 Series, the 2000 Series B, the 2005 Series, the 2003 Series B, the 2023 Series, the 2008 Series, the 2003 Series C, the 1993 Pollution Control Series, the 2004 Series B, the 2001 Series, the 2033 Series, the 2023 Series B, the 2025 Series or the 2024 Series are outstanding, such covenants on the part of the Company contained in said Part Three shall continue and remain in full force and effect so long as any of the bonds of the 1999 Series B are outstanding and to the same extent as though the words "or so long as any bonds of the 1999 Series B are outstanding" were inserted after the words "so long as any of the bonds of the 1979 Series or any bonds of the 2.65% Series are outstanding" wherever such words appear in said Part Three of the supplemental indenture dated as of February 1, 1949. 14 SECTION 2. Whether or not the second sentence of paragraph (a) of sec. 2.08 of the original indenture (making certain provisions for the definition of the term "net amount" applicable while bonds of the 2.65% Series were outstanding and which was originally set forth in Section 4 of Article One of the supplemental indenture dated as of September 1, 1947 and which is corrected and clarified by Section 2 of Part Four of the supplemental indenture dated as of February 1, 1968) is modified with the consent of the holders of bonds of the 1995 Series, the 1997 Series, the 1987 Pollution Control Series A, the 1987 Pollution Control Series B, the 1987 Pollution Control Series C, the 2020 Series, the 2020 Series B, the 1990 Pollution Control Series, the 2021 Series, the 2027 City of Greensboro Series, the Medium-Term Notes Series, the 2021 Series B, the 2004 Series, the 2022 Series, the 2000 Series, the 2000 Series B, the 2005 Series, the 2003 Series B, the 2023 Series, the 2008 Series, the 2003 Series C, the 1993 Pollution Control Series, the 2004 Series B, the 2001 Series, the 2033 Series, the 2023 Series B, the 2025 Series or the 2024 Series and whether or not bonds of the 1995 Series, the 1997 Series, the 1987 Pollution Control Series A, the 1987 Pollution Control Series B, the 1987 Pollution Control Series C, the 2020 Series, the 2020 Series B, the 1990 Pollution Control Series, the 2021 Series, the 2027 City of Greensboro Series, the Medium-Term Notes Series, the 2021 Series B, the 2004 Series, the 2022 Series, the 2000 Series, the 2000 Series B, the 2005 Series, the 2003 Series B, the 2023 Series, the 2008 Series, the 2003 Series C, the 1993 Pollution Control Series, the 2004 Series B, the 2001 Series, the 2033 Series, the 2023 Series B, the 2025 Series or the 2024 Series are outstanding, said sentence shall continue and remain in full force and effect so long as any bonds of the 1999 Series B are outstanding, and with the same force and effect as though said sentence had stated that such provisions were to be applicable so long as any of the bonds of the 1999 Series B are outstanding. PART FOUR. MISCELLANEOUS. SECTION 1. (a) For the purposes of sec. 2.10 of the Indenture and for the purposes of any modification of the provisions of the Replacement Fund referred to in Part Two of this supplemental indenture, the covenants and provisions on the part of the Company which are set forth or incorporated in Part Two of this supplemental indenture shall be for the benefit only of the holders of the bonds of the 1999 Series B. Such covenants and provisions 15 shall remain in force and be applicable only so long as any bonds of the 1999 Series B shall be outstanding, and, subject to the provisions of paragraph (2) of subdivision (c) of sec. 10.01 of the Indenture, any such covenants and provisions may be modified with the consent, in writing or by vote at a bondholders' meeting, of the holders of sixty-six and two-thirds per cent (66 2/3%) of the principal amount of the bonds of the 1999 Series B at the time outstanding and without the consent of the holders of any other bonds then outstanding under the Indenture; provided that no such consent shall be effective to waive any past default under such covenants and provisions, and its consequences, unless the consent of the holders of at least a majority in principal amount of all bonds then outstanding under the Indenture is obtained. Such covenants shall be deemed to be additional covenants and none of them shall affect or derogate from, or relieve the Company from, its obligation to comply with any of the other covenants, conditions, requirements or provisions of the Indenture or any other supplemental indenture. (b) For the purposes of sec. 2.10 of the Indenture and for the purposes of any modification of the provisions of Part Three of this supplemental indenture, the covenants and provisions on the part of the Company which are set forth or incorporated in said Part Three shall be for the benefit only of the holders of the bonds of the 1999 Series B. Such covenants and provisions shall remain in force and be applicable only so long as any bonds of the 1999 Series B shall be outstanding, and, subject to the provisions of paragraph (2) of subdivision (c) of sec. 10.01 of the Indenture, any such covenants and provisions may be modified with the consent, in writing or by vote at a bondholders' meeting, of the holders of sixty-six and two-thirds per cent (66 2/3%) of the principal amount of the bonds of the 1999 Series B at the time outstanding and without the consent of the holders of any other bonds then outstanding under the Indenture; provided that no such consent shall be effective to waive any past default under such covenants and provisions, and its consequences, unless the consent of the holders of at least a majority in principal amount of all bonds then outstanding under the Indenture is obtained. Such covenants shall be deemed to be additional covenants and none of them shall affect or derogate from, or relieve the Company from, its obligation to comply with any of the other covenants, conditions, requirements or provisions of the Indenture or any other supplemental indenture. 16 SECTION 2. All terms contained in this supplemental indenture shall, except as specifically provided herein or except as the context may otherwise require, have the meanings given to such terms in the Indenture. SECTION 3. In case any one or more of the provisions contained in this supplemental indenture should be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision contained in this supplemental indenture, and, to the extent, but only to the extent, that such provision is invalid, illegal or unenforceable, this supplemental indenture shall be construed as if such provision had never been contained herein. SECTION 4. The Trustee hereby accepts the trusts herein declared and provided upon the terms and conditions in the Indenture set forth. SECTION 5. This supplemental indenture may be executed in several counterparts, each of which shall be an original, and all collectively but one instrument. 17 IN WITNESS WHEREOF, Duke Power Company, the party of the first part hereto, has caused this supplemental indenture to be signed in its name by one of its Vice Presidents and its corporate seal to be hereunto affixed, and the same to be attested by one of its Assistant Secretaries, and Chemical Bank, the party of the second part hereto, in token of its acceptance of the trust hereby created, has caused this supplemental indenture to be signed in its name by one of its Vice Presidents and its corporate seal to be hereunto affixed, and the same to be attested by one of its Assistant Secretaries, all as of the day and year first above written. DUKE POWER COMPANY By:............................. RICHARD J. OSBORNE Senior Vice President ATTEST: .................................... ROBERT T. LUCAS III Assistant Secretary Signed, sealed, executed, acknowledged and delivered by DUKE POWER COMPANY, in the presence of: .................................... CHERYL A. BEADNELL .................................... SUE C. HARRINGTON CHEMICAL BANK By:............................. P. J. GILKESON Vice President ATTEST: .................................... L. O'BRIEN Assistant Secretary Signed, sealed, executed, acknowledged and delivered by CHEMICAL BANK, in the presence of: .................................... P. KELLY .................................... A. HAROBIN 18 STATE OF NEW YORK COUNTY OF NEW YORK SS.:
Personally appeared before me P. KELLY, and made oath that she saw P. J. GILKESON, a Vice President, and L. O'BRIEN, an Assistant Secretary, respectively, of CHEMICAL BANK, sign, attest and affix hereto the corporate seal of said Chemical Bank, and, as the act and deed of said corporation, deliver the within written and foregoing deed, and that she, with A. HAROBIN, witnessed the execution thereof. .................................... P. KELLY Sworn and subscribed before me this 22nd day of November, 1994. ..................................... YVONNE D. BENN Notary Public, State of New York No. 4909098 Qualified in Bronx County Commission Expires October 19, 1995. STATE OF NEW YORK COUNTY OF NEW YORK SS.:
I, YVONNE D. BENN, a Notary Public in and for the State and County aforesaid, certify that L. O'BRIEN personally came before me this day and acknowledged that he is an Assistant Secretary of CHEMICAL BANK, a New York corporation, and that, by authority duly given and as the act of the corporation, the foregoing instrument was signed in its name by one of its Vice Presidents, sealed with its corporate seal, and attested by himself as one of its Assistant Secretaries. Witness my hand and official seal, this 22nd day of November, 1994. .................................... YVONNE D. BENN Notary Public, State of New York No. 4909098 Qualified in Bronx County Commission Expires October 19, 1995. 19 STATE OF NORTH CAROLINA COUNTY OF MECKLENBURG SS.:
Personally appeared before me CHERYL A. BEADNELL and made oath that she saw RICHARD J. OSBORNE, a Senior Vice President, and ROBERT T. LUCAS III, an Assistant Secretary, respectively, of DUKE POWER COMPANY, sign, attest and affix hereto the corporate seal of said Duke Power Company, and, as the act and deed of said corporation, deliver the within written and foregoing deed, and that she, with SUE C. HARRINGTON, witnessed the execution thereof. .................................... CHERYL A. BEADNELL Sworn and subscribed before me this 23rd day of November, 1994. .................................... BRENDA M. ATCHLEY Notary Public Union County, N.C. My Commission expires December 4, 1994. STATE OF NORTH CAROLINA COUNTY OF MECKLENBURG SS.:
I, BRENDA M. ATCHLEY, a Notary Public in and for the State and County aforesaid, certify that ROBERT T. LUCAS III personally came before me this day and acknowledged that he is an Assistant Secretary of DUKE POWER COMPANY, a North Carolina corporation, and that, by authority duly given and as the act of the corporation, the foregoing instrument was signed in its name by one of its Senior Vice Presidents, sealed with its corporate seal, and attested by himself as one of its Assistant Secretaries. My commission expires December 4, 1994. Witness my hand and official seal, this 23rd day of November, 1994. .................................... BRENDA M. ATCHLEY Notary Public Union County, N.C.
EX-4 4 EXHIBIT 4-C EXHIBIT 4-C INSTRUMENT OF RESIGNATION, APPOINTMENT AND ACCEPTANCE among DUKE POWER COMPANY, MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Trustee, and CHEMICAL BANK, as Successor Trustee _________________________ Dated as of August 30, 1994 2 INSTRUMENT OF RESIGNATION, APPOINTMENT AND ACCEPTANCE INSTRUMENT OF RESIGNATION, APPOINTMENT AND ACCEPTANCE entered into as of the 30th day of August, 1994 among DUKE POWER COMPANY, a corporation organized and existing under the laws of the State of North Carolina (the "Company"), having its principal office at 422 South Church Street, Charlotte, North Carolina 28201, MORGAN GUARANTY TRUST COMPANY OF NEW YORK, a corporation organized and existing under the laws of the State of New York ("Morgan"), having its corporate trust office at 60 Wall Street, New York, New York 10260, as Trustee, and CHEMICAL BANK, a corporation organized and existing under the laws of the State of New York ("Chemical"), having its corporate trust office at 450 West 33rd Street , New York, New York 10001, as successor Trustee. W I T N E S S E T H: WHEREAS, Duke Power Company, a corporation organized and existing under the laws of the State of New Jersey, to which the Company is the successor by merger, 3 heretofore executed and delivered to GUARANTY TRUST COMPANY OF NEW YORK (now Morgan), as Trustee, its First and Refunding Mortgage dated as of December 1, 1927 (hereinafter the "Original Indenture"), to secure the payment of bonds issued and to be issued in accordance with the provisions of the Original Indenture, as supplemented and amended from time to time (the "Indenture"); and WHEREAS, bonds in the amount of $3,322,287,000 are outstanding under the Indenture as of the date hereof; and WHEREAS, (Section Mark) 7.01(f) of the Indenture provides that the Trustee under the Indenture may at any time resign and be discharged of the trusts created by the Indenture by giving written notice to the Company, addressed and mailed to the Company at Charlotte, North Carolina, and by publishing notice of such resignation as provided in said (Section Mark) 7.01(f); and WHEREAS, (Section Mark) 7.03 of the Indenture provides that a successor Trustee may be appointed, in the manner provided in said (Section Mark) 7.03, in case the Trustee under the Indenture shall resign, by the holders of a majority in principal amount of the bonds secured by the Indenture and then outstanding (the "bondholders"); and 4 WHEREAS (Section Mark) 7.03 of the Indenture further provides that, until a successor Trustee shall be appointed by the bondholders as therein provided, the Company may appoint successor Trustee to fill the vacancy in the office of Trustee under the Indenture by instrument executed by order of the Board of Directors of the Company; and WHEREAS, (Section Mark) 7.03 of the Indenture further provides that the Company shall publish notice of any appointment of a successor Trustee made by it pursuant to said (Section Mark) 7.03 in the manner provided in (Section Mark) 7.03; and WHEREAS, (Section Mark) 10.06 of the Indenture provides that any Trustee under the Indenture shall at all times satisfy the requirements set forth in said Section; and WHEREAS, (Section Mark) 7.03 of the Indenture provides that any successor Trustee shall execute, acknowledge and deliver to its predecessor Trustee, and also to the Company, an instrument accepting such appointment under the Indenture; and WHEREAS, Morgan desires to resign as Trustee under the Indenture; and WHEREAS, the Company desires to appoint Chemical as successor Trustee under the Indenture; and 5 WHEREAS, Chemical is willing to accept such appointment as successor Trustee under the Indenture; and WHEREAS, as of the date of these presents, no successor Trustee under the Indenture has been appointed by the bondholders; and WHEREAS, by resolution of the Management Committee of the Board of Directors of the Company adopted on June 20, 1994, the undersigned officers of the Company were authorized, directed and ordered to execute and deliver this instrument; NOW, THEREFORE, THIS INSTRUMENT OF RESIGNATION, APPOINTMENT AND ACCEPTANCE, WITNESSETH: That for and in consideration of the premises, and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, it is hereby covenanted, declared and decreed by the Company, Morgan and Chemical as follows: FIRST: Morgan and the Company, simultaneously with the execution and delivery of these presents, have caused the notices required pursuant to the provisions of (2 Section Marks) 7.01(f) and 7.03, respectively, of the Indenture to commence being published as therein required; 6 SECOND: Chemical hereby represents that it is a bank eligible under the provisions of (Section Mark) 10.06 of the Indenture and Section 310(a) of the Trust Indenture Act of 1939 to be appointed successor Trustee under the Indenture; and THIRD: Effective at the close of business on the date hereof, Morgan hereby resigns and, by its execution and delivery of these presents to the Company and by the simultaneous mailing of this instrument to the Company, as required by (Section Mark) 7.01(f), hereby gives notice of its resignation as Trustee under the Indenture, as agent of the Company for payment of principal and interest, and as the office or agency of the Company in the Borough of Manhattan, City and State of New York, where the bonds and any coupons issued in accordance with the Indenture may be presented for payment, exchange, transfer or registration and where notices and demands to or upon the Company in respect of the bonds and coupons issued in accordance with the Indenture or in respect of the Indenture may be served. FOURTH: The Company hereby accepts the foregoing resignations and appoints Chemical as successor Trustee under the Indenture, as agent of the Company for payment of 7 principal and interest, and as the office or agency of the Company in the Borough of Manhattan, City and State of New York, where the bonds and any coupons issued in accordance with the Indenture may be presented for payment, exchange, transfer, or registration and where notices and demands to or upon the Company in respect of the bonds and coupons issued in accordance with the Indenture or in respect of the Indenture may be served, with all the estates, properties, rights, powers, trusts, duties and obligations of Morgan under the Indenture as provided in the Indenture, such appointment to be effective at the close of business on the date hereof. FIFTH: Chemical hereby accepts its appointment as successor Trustee under the Indenture, effective at the close of business on the date hereof, and assumes all the estates, properties, rights, powers, trusts, duties and obligations of the Trustee thereunder as provided in the Indenture, and Chemical also accepts, effective at the close of business on the date hereof, its appointment as agent of the Company for payment of principal and interest, and as the office or agency of the Company in the Borough of Manhattan, City and State of New York, where the bonds and 8 any coupons issued in accordance with the Indenture may be presented for payment, exchange, transfer or registration and where notices and demands to or upon the Company in respect of the bonds and coupons issued in accordance with the Indenture or in respect of the Indenture may be served, subject to all the terms and provisions therein contained. SIXTH: The Company and Chemical hereby request Morgan to confirm, assign, transfer and set over to Chemical, as its successor in trust under the Indenture, all the right, title, and interest of Morgan, as Trustee, in and to the mortgaged property and such rights, powers, trusts, duties and obligations of Morgan, as Trustee, and to assign, transfer and deliver to Chemical, as successor Trustee, any and all money and other property subject to the lien of the Indenture held by Morgan as Trustee under the Indenture. SEVENTH: Pursuant to the request of Chemical and the Company hereby made, Morgan hereby confirms, assigns, transfers and sets over to Chemical, as its successor in trust under the Indenture, all the right, title and interest of Morgan, as Trustee, in and to the mortgaged property and such rights, powers, trusts, duties and obligations and hereby does assign, transfer and deliver to Chemical as such 9 successor Trustee any and all money and other property subject to the lien of the Indenture held by Morgan as Trustee under the Indenture. EIGHTH: The Company, for the purpose of more fully and certainly vesting in and confirming to Chemical as successor Trustee under the Indenture said mortgaged property, rights, powers, trusts, duties and obligations, at the request of Chemical, joins in the execution hereof. NINTH: The Company, Morgan and Chemical hereby agree, upon reasonable request of any of them, to execute, acknowledge and deliver such further instruments of conveyance and further assurance and to do such other things as may reasonably be required for more fully and certainly vesting in and confirming to Chemical all the right, title and interest of Morgan, as Trustee, in and to the estates held in trust under the Indenture, and to such rights, powers, trusts, duties and obligations of Morgan, as Trustee. Morgan agrees to provide whatever reasonable assistance Chemical may require for the orderly transfer of this trusteeship and the foregoing agency appointments, including furnishing Chemical with a list of Bondholders and such other documentation from Morgan's files as Chemical may 10 require and providing Chemical with any explanation of Morgan's services under the Indenture that Chemical may consider necessary or advisable in connection with its administration as successor Trustee and of such agency appointments. TENTH: This instrument may be executed in any number of counterparts, each of which, when so executed and delivered, shall be an original, but all such counterparts shall together constitute but one and the same instrument. ELEVENTH: Terms not otherwise defined in this Instrument of Resignation, Appointment and Acceptance shall have the definitions given thereto in the Indenture. 11 TWELFTH: This Instrument of Resignation, Appointment and Acceptance shall be construed in accordance with and governed by the laws of the State of New York. IN WITNESS WHEREOF, DUKE POWER COMPANY has caused this Instrument to be signed and acknowledged by one of its Vice Presidents, its corporate seal to be affixed hereunto, and the same to be attested by its Secretary or one of its Assistant Secretaries; MORGAN GUARANTY TRUST COMPANY OF NEW YORK has caused this Instrument to be executed and acknowledged by one of its Vice Presidents, its corporate seal to be affixed hereunto, and the same to be attested by one of its Assistant Secretaries, and CHEMICAL BANK has caused this Instrument to be executed and acknowledged by 12 one of its Vice Presidents, it corporate seal to be affixed hereunto, and the same to be attested by one of its Trust Officers, as of the date first set forth above. DUKE POWER COMPANY, By: Richard J. Osborne Senior Vice President [Seal] Attest: Carolyn R. Duncan Assistant Secretary Signed, sealed, executed, acknowledged and delivered by Duke Power Company, in the presence of: Sue C. Harrington Cheryl Ann Beadnell 13 MORGAN GUARANTY TRUST COMPANY OF NEW YORK, By: Michael Culhane Vice President [Seal] Attest: Mary Ellen McNulty Assistant Secretary Signed, sealed, executed, acknowledged and delivered by Morgan Guaranty Trust Company of New York, in the presence of: E. Seriano Teresita Glasgow 14 CHEMICAL BANK, By: Paul J. Gilkeson Vice President [Seal] Attest: Yvonne D. Benn Trust Officer Signed, sealed, executed, acknowledged and delivered by Chemical Bank, in the presence of: R. Richards B. Marchese STATE OF NEW YORK } COUNTY OF NEW YORK } ss.: Personally appeared before me R. Richards, and made oath that she saw Paul J. Gilkeson, a Vice President, and Yvonne D. Benn a Trust Officer, respectively, of CHEMICAL BANK, sign, attest and affix hereto the corporate seal of said Chemical Bank, and, as the act and deed of said corporation, deliver the within written and foregoing instrument, and that she, with B. Marchese, witnessed the execution thereof. ___________________________ Sworn and subscribed before me this day of August, 1994. 15 _______________________________ STATE OF NEW YORK } COUNTY OF NEW YORK } ss.: I, Annabelle DeLuca, a Notary Public in and for the State and County aforesaid, certify that Yvonne D. Benn personally came before me this day and acknowledged that she is a Trust Officer of CHEMICAL BANK, a New York corporation, and that, by authority duly given and as the act of the corporation, the foregoing instrument was signed in its name by one of its Vice Presidents, sealed with its corporate seal, and attested by herself as one of its Trust Officer. Witness my hand and official seal, this day of August, 1994. __________________________ 16 STATE OF NEW YORK } COUNTY OF NEW YORK } ss.: Personally appeared before me Teresita Glasgow, and made oath that she saw Michael Culhane, a Vice President, and Mary Ellen McNulty, an Assistant Secretary, respectively, of MORGAN GUARANTY TRUST COMPANY OF NEW YORK, sign, attest and affix hereto the corporate seal of said Morgan Guaranty Trust Company of New York, and, as the act and deed of said corporation, deliver the within written and foregoing instrument, and that she, with E. Seriano, witnessed the execution thereof. ____________________________ Sworn and subscribed before me this day of August, 1994 ______________________________ STATE OF NEW YORK } COUNTY OF NEW YORK } ss.: I, Thomas J. Courtney, a Notary Public in and for the State and County aforesaid, certify that Mary Ellen McNulty personally came before me this day and acknowledged that she is an Assistant Secretary of MORGAN GUARANTY TRUST COMPANY OF NEW YORK, a New York corporation, and that, by authority duly given and as the act of the corporation, the foregoing instrument was signed in its name by one of its Vice Presidents, sealed with its corporate seal, and attested by herself as one of its Assistant Secretaries. Witness my hand and official seal, this day of August, 1994. ___________________________ 17 STATE OF NORTH CAROLINA } COUNTY OF MECKLENBURG } ss.: Personally appeared before me Sue C. Harrington and made oath that she saw Richard J. Osborne, a Senior Vice President, and Carolyn R. Duncan, an Assistant Secretary, respectively, of DUKE POWER COMPANY, sign, attest and affix hereto the corporate seal of said Duke Power Company, and, as the act and deed of said corporation, deliver the within written and foregoing instrument, and that she, with Cheryl Ann Beadnell, witnessed the execution thereof. _____________________________ Sworn and subscribed before me this day of August, 1994 _______________________________ BRENDA M. ATCHLEY Notary Public Union County, N.C. My Commission expires December 4, 1994 STATE OF NORTH CAROLINA } COUNTY OF MECKLENBURG } SS.: I, Brenda M. Atchley, a Notary Public in and for the State and County aforesaid, certify that Carolyn R. Duncan, personally came before me this day and acknowledged that she is an Assistant Secretary of DUKE POWER COMPANY, a North Carolina corporation, and that, by authority duly given and as the act of the corporation, the foregoing instrument was signed in its name by one of its Senior Vice Presidents, sealed with its corporate seal, and 18 attested by herself as one of its Assistant Secretaries. My commission expires December 4, 1994. Witness my hand and official seal, this day of August, 1994. ____________________________ BRENDA M. ATCHLEY Notary Public Union County, N.C. EX-10 5 EXHIBIT 10-V Exhibit 10-V EXECUTIVE SHORT-TERM INCENTIVE PLAN The following is a description of the 1994 Executive Short-Term Incentive Plan, which is not otherwise set forth in a formal plan document. (bullet) Annual incentive plan (bullet) Financial threshold must be achieved for any awards to be paid (bullet) Return on Equity of 12.65% (bullet) For CEO and Management Committee, results are based on reaching corporate measures at minimum, target and maximum performance levels (bullet) Return on Equity (bullet) Total Electric Cost per KWH Delivered (bullet) Safety (bullet) For members of Officer Team and other participants (bullet) Corporate measures noted above weighted 50% (bullet) Business unit measures weighted 50%; unit measures correspond with those in the Employee Incentive Plan (bullet) Award opportunity based on percentage of salary at target performance level (bullet) CEO: 20% (bullet) Management Committee: 15% (bullet) Officer Team: 12% (bullet) Senior Managers: 10% (bullet) Payouts made in cash only (bullet) Includes approximately 100 executive and senior managers (bullet) Deferrals in phantom stock (bullet) Deferral periods (bullet) Irrevocable elections are made prior to beginning of performance periods (bullet) Incentive awards are not included in benefits calculations EX-10 6 EXHIBIT 10-W Exhibit 10-W EXECUTIVE LONG-TERM INCENTIVE PLAN The following is a description of the 1994 Executive Long-Term Incentive Plan, which is not otherwise set forth in a formal plan document. (bullet) Three-year performance plan (bullet) One measure: Total Shareholder Return as compared to peer group composed of the S&P Electric Utility Index (bullet) Threshold level of Total Shareholder Return measure (33rd percentile as compared to S&P Electric Utility Index) must be reached for awards to be made (bullet) Results based on reaching minimum, target and maximum performance levels of comparative Total Shareholder Return measure (bullet) Award opportunity based on percentage of salary at target performance level (bullet) CEO: 35% (bullet) Management Committee: 30% (bullet) Officer Team: 25% (bullet) Senior Managers: 10% (bullet) Pay outs and deferrals (bullet) 50% of award for distribution in cash (bullet) Can receive as cash at end of performance period (bullet) Can defer as phantom stock and specify the end of deferral period (bullet) Can defer as phantom stock until or beyond retirement (bullet) 50% of award subject to mandatory deferral as phantom stock (bullet) Can receive as cash at end of three-year mandatory deferral period (bullet) Can defer as phantom stock until or beyond retirement (bullet) Payouts made in cash only (bullet) Includes approximately 100 executive and senior managers (bullet) Deferrals in phantom stock (bullet) Deferral periods (bullet) Irrevocable elections are made prior to beginning of performance periods (bullet) Incentive awards are not included in benefits calculations EX-12 7 EXHIBIT 12 EXHIBIT 12 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Dollars in Thousands)
Year Ended December 31 1994 1993 1992 1991 1990 Earnings Before Income Tax...................................$1,035,895 $1,036,392 $812,053 $876,641 $788,182 Fixed Charges................................................ 278,117 281,428 326,575 310,030 296,874 Total..................................................$1,314,012 $1,317,820 $1,138,628 $1,186,671 $1,085,056 Fixed Charges Interest on long-term debt................................ 237,063 243,047 257,149 269,419 255,335 Other interest............................................ 16,814 17,704 47,239 23,947 24,063 Amortization of debt discount, premium and expense....... 16,340 13,300 8,497 5,243 4,998 Interest component of rentals............................. 7,900 7,377 13,690 11,421 12,478 Fixed Charges $278,117 $281,428 $326,575 $310,030 $296,874 Ratio of Earnings to Fixed Charges........................ 4.72 4.68 3.49 3.83 3.65
EX-23 8 EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in Registration Statement Nos. 33-59926, 33-60314, 33-19274, 33-50543, 33-50715, 33-50617 and 33-52479 of Duke Power Company on Form S-3 and Registration Statement No. 2-72172 of Duke Power Company on Form S-8 of our report dated February 10, 1995, appearing in this Form 10-K of Duke Power Company filed with the Securities and Exchange Commission on March 31, 1995. DELOITTE & TOUCHE LLP Charlotte, North Carolina March 31, 1995 EX-24 9 EXHIBIT 24(A) DUKE POWER COMPANY POWER OF ATTORNEY FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 For the fiscal year ended December 31, 1994 (ANNUAL REPORT) The undersigned DUKE POWER COMPANY, a North Carolina corporation and certain of its officers and/or directors, do each hereby constitute and appoint W.H. Grigg, Richard J. Osborne, Ellen T. Ruff, Jeffrey L. Boyer, and each of them, to act as attorneys-in-fact for and in the respective names, places, and stead of the undersigned, to execute, seal, sign, and file with the Securities and Exchange Commission the Annual Report of said Duke Power Company on Form 10-K and any and all amendments thereto, hereby granting to said attorneys-in-fact, and each of them, full power and authority to do and perform all and every act and thing whatsoever requisite, necessary, or proper to be done in and about the premises, as fully to all intents and purposes as the undersigned, or any of them, might or could do if personally present, hereby ratifying and approving the acts of said attorneys-in-fact. Executed the 28th day of February, 1995. DUKE POWER COMPANY W.H. Grigg By ________________________________ Chairman and Chief Executive Officer (Corporate Seal) Robert T. Lucas III ATTEST:___________________ Robert T. Lucas III Assistant Secretary -2- W.H. Grigg Chairman and Chief Executive Officer ______________ (Principal Executive Officer and Director) W.H. Grigg Richard J. Osborne Senior Vice President and Chief Financial _________________ Officer (Principal Financial Officer) Richard J. Osborne Jeffrey L. Boyer ________________ Controller (Principal Accounting Officer) Jeffrey L. Boyer G. Alex Bernhardt _________________ (Director) G. Alex Bernhardt Crandall C. Bowles _________________ (Director) Crandall C. Bowles ________________ (Director) Robert J. Brown William A. Coley ________________ (Director) William A. Coley Steve C. Griffith, Jr. ____________________ (Director) Steve C. Griffith, Jr. Paul H. Henson ______________ (Director) Paul H. Henson George Dean Johnson, Jr. ______________________ (Director) George Dean Johnson, Jr. -3- James V. Johnson _______________ (Director) James V. Johnson W.W. Johnson ___________ (Director) W.W. Johnson Max Lennon __________ (Director) Max Lennon James G. Martin _______________ (Director) James G. Martin Buck Mickel __________ (Director) Buck Mickel Richard B. Priory _________________ (Director) Richard B. Priory Russell M. Robinson II _____________________ (Director) Russell M. Robinson II EX-24 10 EXHIBIT 24(B) CERTIFIED COPY OF A RESOLUTION FROM THE MINUTES OF A REGULAR MEETING OF THE BOARD OF DIRECTORS OF DUKE POWER COMPANY HELD ON FEBRUARY 28, 1995 RESOLVED, That the Form 10-K Annual Report, as presented to the meeting, with such changes therein as may be deemed necessary or advisable by the officers of the Company be and hereby is in all respects approved; and 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, Assistant Secretary of Duke Power Company, do hereby certify that the above is a full, true and complete extract from the Minutes of the regular meeting of the Board of Directors of Duke Power Company held on February 28, 1995, at which meeting a quorum was present; as taken from and compared with the original Minutes of said meeting. IN WITNESS WHEREOF, I have hereunto set my hand and affixed the Corporate Seal of said Duke Power Company this 22nd day of March, 1995. Robert T. Lucas III ------------------- Assistant Secretary [SEAL] EX-27 11 EXHIBIT 27--FDS
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED STATEMENTS OF INCOME, CONSOLIDATED STATEMENTS OF CASH FLOWS, CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF RETAINED EARNINGS FOR THE 12 MONTHS ENDED 12/31/94 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000030371 DUKE POWER COMPANY 1000 YEAR DEC-31-1994 JAN-01-1994 DEC-31-1994 PER-BOOK 9263566 746329 1058094 1794239 0 12862228 1926909 0 2605920 4532829 279500 500000 3567122 107100 0 0 92259 1500 24413 1626 1433287 12862228 4488913 397019 3309087 3706106 1179826 126286 909093 270217 638876 49724 589152 393370 217054 1035735 2.88 0