-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NzIh7CtLlaR8pLiQk1jaocLMX/8T5HH9FS+zl3jpDuvGhgTWCR8KJRa6I45s/Cvn EoCUDk23aSSnBx5O/5xylQ== 0001021408-02-007210.txt : 20020515 0001021408-02-007210.hdr.sgml : 20020515 20020515152121 ACCESSION NUMBER: 0001021408-02-007210 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DUKE ENERGY CORP CENTRAL INDEX KEY: 0000030371 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 560205520 STATE OF INCORPORATION: NC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-04928 FILM NUMBER: 02651633 BUSINESS ADDRESS: STREET 1: 526 SOUTH CHURCH STREET CITY: CHARLOTTE STATE: NC ZIP: 28202 BUSINESS PHONE: 7045940887 MAIL ADDRESS: STREET 1: 526 S. CHURCH ST. CITY: CHARLOTTE STATE: NC ZIP: 28202 FORMER COMPANY: FORMER CONFORMED NAME: DUKE POWER CO /NC/ DATE OF NAME CHANGE: 19920703 10-Q 1 d10q.txt DUKE ENERGY CORPORATION ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended March 31, 2002 Commission File Number 1-4928 DUKE ENERGY CORPORATION (Exact name of Registrant as Specified in its Charter) North Carolina 56-0205520 (State or Other Jurisdiction of Incorporation) (IRS Employer Identification No.) 526 South Church Street Charlotte, NC 28202-1904 (Address of Principal Executive Offices) (Zip code) 704-594-6200 (Registrant's telephone number, including area code) 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Number of shares of Common Stock, without par value, outstanding at April 30, 2002......829,808,849 ================================================================================ DUKE ENERGY CORPORATION FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2002 INDEX
Item Page - ---- ---- PART I. FINANCIAL INFORMATION 1. Financial Statements................................................................................................1 Consolidated Statements of Income for the Three Months Ended March 31, 2002 and 2001.............................1 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2002 and 2001.........................2 Consolidated Balance Sheets as of March 31, 2002 and December 31, 2001...........................................3 Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2002 and 2001........5 Notes to Consolidated Financial Statements.......................................................................6 2. Management's Discussion and Analysis of Results of Operations and Financial Condition..............................16 PART II. OTHER INFORMATION 1. Legal Proceedings..................................................................................................32 4. Submission of Matters to a Vote of Security Holders................................................................32 6. Exhibits and Reports on Form 8-K...................................................................................32 Signatures.........................................................................................................33
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Duke Energy's reports, filings and other public announcements may include statements that reflect assumptions, projections, expectations, intentions or beliefs about future events. These statements are intended as "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. Generally, the words "may," "could," "project," "believe," "anticipate," "expect," "estimate," "plan," "forecast," "intend" and similar words identify forward-looking statements, which generally are not historical in nature. All such statements (other than statements of historical facts), including statements regarding operating performance, financial position, business strategy, budgets, projected costs, plans and objectives of management for future operations and events or developments that we expect or anticipate will occur in the future, are forward looking. Forward-looking statements are subject to certain risks and uncertainties that could, and often do, cause actual results to differ from Duke Energy's historical experience and our present expectations or projections. Accordingly, there can be no assurance that actual results will not differ materially from those expressed or implied by the forward-looking statements. Caution should be taken not to place undue reliance on any such forward-looking statements. Factors that could cause actual results to differ materially from the expectations expressed or implied in such forward-looking statements include, but are not limited to: state, federal and foreign legislative and regulatory initiatives that affect cost and investment recovery, have an impact on rate structures and affect the speed and degree at which competition enters the electric and natural gas industries; industrial, commercial and residential growth in the service territories of Duke Energy and its subsidiaries; the weather and other natural phenomena; the timing and extent of changes in commodity prices, interest rates and foreign currency exchange rates; changes in environmental and other laws and regulations to which Duke Energy and its subsidiaries are subject or other external factors over which Duke Energy has no control; the results of financing efforts, including Duke Energy's ability to obtain financing on favorable terms, which can be affected by Duke Energy's credit rating and general economic conditions; level of creditworthiness of counterparties to transactions; growth opportunities for Duke Energy's business units; and the effect of accounting policies issued periodically by accounting standard-setting bodies. i PART I. FINANCIAL INFORMATION Item 1. Financial Statements. CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In millions, except per share amounts)
Three Months Ended March 31, ------------------ 2002 2001 ------- ------- Operating Revenues Sales, trading and marketing of natural gas and petroleum products $ 5,629 $11,451 Trading and marketing of electricity 4,027 3,303 Generation, transmission and distribution of electricity 1,703 1,260 Transportation and storage of natural gas 326 246 Other 200 231 ------- ------- Total operating revenues 11,885 16,491 ------- ------- Operating Expenses Natural gas and petroleum products purchased 5,462 11,080 Net interchange and purchased power 4,194 2,679 Fuel used in electric generation 215 242 Other operation and maintenance 852 877 Depreciation and amortization 344 316 Property and other taxes 127 115 ------- ------- Total operating expenses 11,194 15,309 ------- ------- Operating Income 691 1,182 Other Income and Expenses 70 72 Interest Expense 189 213 Minority Interest Expense 32 160 ------- ------- Earnings Before Income Taxes 540 881 Income Taxes 158 327 ------- ------- Income Before Cumulative Effect of Change in Accounting Principle 382 554 Cumulative Effect of Change in Accounting Principle, net of tax -- (96) ------- ------- Net Income 382 458 Preferred and Preference Stock Dividends 3 4 ------- ------- Earnings Available For Common Stockholders $ 379 $ 454 ======= ======= Common Stock Data Weighted-average shares outstanding 788 745 Earnings per share (before cumulative effect of change in accounting principle) Basic $ 0.48 $ 0.74 Diluted $ 0.48 $ 0.73 Earnings per share Basic $ 0.48 $ 0.61 Diluted $ 0.48 $ 0.60 Dividends per share $ 0.275 $ 0.275
See Notes to Consolidated Financial Statements 1 CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In millions)
Three Months Ended March 31, ------------------ 2002 2001 ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 382 $ 458 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 379 357 Cumulative effect of change in accounting principle -- 96 Deferred income taxes (53) 214 Purchased capacity levelization 67 38 (Increase) decrease in Net unrealized mark-to-market and hedging transactions 179 (609) Receivables 1,021 (112) Inventory 30 103 Other current assets (200) (486) Increase (decrease) in Accounts payable (444) 178 Taxes accrued 176 (27) Interest accrued 1 7 Other current liabilities (647) (161) Other, assets 73 83 Other, liabilities (144) (120) ------- ------- Net cash provided by operating activities 820 19 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures, net of cash acquired (1,274) (723) Investment expenditures (320) (324) Acquisition of Westcoast Energy, Inc., net of cash acquired (1,690) -- Other 8 117 ------- ------- Net cash used in investing activities (3,276) (930) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from the issuance of Long-term debt 2,346 1,339 Common stock and stock options 77 1,193 Payments for the redemption of long-term debt (407) (64) Net change in notes payable and commercial paper 650 (1,415) Distributions to minority interests (84) -- Dividends paid (222) (208) Other (43) (67) ------- ------- Net cash provided by financing activities 2,317 778 ------- ------- Net decrease in cash and cash equivalents (139) (133) Cash and cash equivalents at beginning of period 290 622 ------- ------- Cash and cash equivalents at end of period $ 151 $ 489 ======= ======= Supplemental Disclosures Cash paid for interest, net of amount capitalized $ 135 $ 204 Cash paid for income taxes $ 12 $ 105 Acquisition of Westcoast Energy, Inc. Fair value of assets acquired $ 9,487 Liabilities assumed, including debt and minority interests 8,382 Issuance of common stock 1,797
See Notes to Consolidated Financial Statements 2 CONSOLIDATED BALANCE SHEETS (In millions)
March 31, December 31, 2002 2001 (Unaudited) ----------- ------------ ASSETS Current Assets Cash and cash equivalents $ 151 $ 290 Receivables 5,647 5,301 Inventory 1,149 1,017 Current portion of purchased capacity costs 170 160 Unrealized gains on mark-to-market and hedging transactions 3,918 2,326 Other 659 451 ------- ------- Total current assets 11,694 9,545 ------- ------- Investments and Other Assets Investments in affiliates 2,067 1,480 Nuclear decommissioning trust funds 696 716 Pre-funded pension costs 334 313 Goodwill, net of accumulated amortization 4,085 1,730 Notes receivable 628 576 Unrealized gains on mark-to-market and hedging transactions 4,490 3,117 Other 1,385 1,299 ------- ------- Total investments and other assets 13,685 9,231 ------- ------- Property, Plant and Equipment Cost 46,921 39,464 Less accumulated depreciation and amortization 11,617 11,049 ------- ------- Net property, plant and equipment 35,304 28,415 ------- ------- Regulatory Assets and Deferred Debits Purchased capacity costs 112 189 Deferred debt expense 229 203 Regulatory asset related to income taxes 543 510 Other 979 282 ------- ------- Total regulatory assets and deferred debits 1,863 1,184 ------- ------- Total Assets $62,546 $48,375 ======= =======
See Notes to Consolidated Financial Statements 3 CONSOLIDATED BALANCE SHEETS (In millions)
March 31, December 31, 2002 2001 ----------- ------------ (Unaudited) LIABILITIES AND COMMON STOCKHOLDERS' EQUITY Current Liabilities Accounts payable $ 4,234 $ 4,231 Notes payable and commercial paper 2,615 1,603 Taxes accrued 670 443 Interest accrued 288 239 Current maturities of long-term debt and preferred stock 566 274 Unrealized losses on mark-to-market and hedging transactions 3,186 1,519 Other 1,373 2,118 ------- ------- Total current liabilities 12,932 10,427 ------- ------- Long-term Debt 18,323 12,321 ------- ------- Deferred Credits and Other Liabilities Deferred income taxes 4,544 4,307 Investment tax credit 185 189 Nuclear decommissioning costs externally funded 696 716 Environmental cleanup liabilities 84 85 Unrealized losses on mark-to-market and hedging transactions 3,434 2,212 Other 3,175 1,542 ------- ------- Total deferred credits and other liabilities 12,118 9,051 ------- ------- Commitments and Contingencies Guaranteed Preferred Beneficial Interests in Subordinated Notes of Duke Energy Corporation or Subsidiaries 1,407 1,407 ------- ------- Minority Interests in Financing Subsidiary 1,025 1,025 ------- ------- Minority Interests 1,641 1,221 ------- ------- Preferred and Preference Stock Preferred and preference stock with sinking fund requirements 25 25 Preferred and preference stock without sinking fund requirements 209 209 ------- ------- Total preferred and preference stock 234 234 ------- ------- Common Stockholders' Equity Common stock, no par, 2 billion shares authorized; 829 million and 777 million shares outstanding at March 31, 2002 and December 31, 2001, respectively 8,084 6,217 Retained earnings 6,475 6,292 Accumulated other comprehensive income 307 180 ------- ------- Total common stockholders' equity 14,866 12,689 ------- ------- Total Liabilities and Common Stockholders' Equity $62,546 $48,375 ======= =======
See Notes to Consolidated Financial Statements. 4 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited) (In millions) Three Months Ended March 31, ------------------ 2002 2001 ------ -------- Net Income $ 382 $ 458 Other comprehensive income, net of tax Cumulative effect of change in accounting principle -- (921) Foreign currency translation adjustment (24) (141) Net unrealized gains (losses) on cash flow hedges 263 (356) Reclassification into earnings (112) 178 ----- ------- Total other comprehensive income 127 (1,240) ----- ------- Total Comprehensive Income (Loss) $ 509 $ (782) ===== ======= See Notes to Consolidated Financial Statements. 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. General Duke Energy Corporation (collectively with its subsidiaries, Duke Energy), an integrated provider of energy and energy services, offers physical delivery and management of both electricity and natural gas throughout the U.S. and abroad. Duke Energy provides these and other services through the seven business segments described below. Franchised Electric generates, transmits, distributes and sells electricity in central and western North Carolina and western South Carolina. It conducts operations primarily through Duke Power and Nantahala Power and Light. These electric operations are subject to the rules and regulations of the Federal Energy Regulatory Commission (FERC), the North Carolina Utilities Commission and the Public Service Commission of South Carolina. Natural Gas Transmission provides transportation, storage and distribution of natural gas for customers throughout the east coast and southern portion of the U.S. and Canada. Natural Gas Transmission provides gas gathering, processing and transportation services to customers located in British Columbia, Canada and in the Pacific northwest region of the U.S. Natural Gas Transmission does business primarily through Duke Energy Gas Transmission Corporation. Duke Energy acquired Westcoast Energy, Inc. (Westcoast) on March 14, 2002 (see Note 3). Interstate natural gas transmission and storage operations in the U.S. are subject to the FERC's rules and regulations while natural gas gathering, processing, transmission, distribution and storage operations in Canada are subject to the National Energy Board, Ontario Energy Board and British Columbia Utilities Commission rules and regulations. Field Services gathers, processes, transports, markets and stores natural gas and produces, transports, markets and stores natural gas liquids (NGLs). It conducts operations primarily through Duke Energy Field Services, LLC, which is approximately 30% owned by Phillips Petroleum. Field Services operates gathering systems in western Canada and 11 contiguous states in the U.S. Those systems serve major natural gas-producing regions in the Rocky Mountain, Permian Basin, Mid-Continent, East Texas-Austin Chalk-North Louisiana, and onshore and offshore Gulf Coast areas. North American Wholesale Energy (NAWE) develops, operates and manages merchant generation facilities and engages in commodity sales and services related to natural gas and electric power. NAWE conducts these operations primarily through Duke Energy North America, LLC (DENA) and Duke Energy Trading and Marketing, LLC (DETM). DETM is approximately 40% owned by Exxon Mobil Corporation. NAWE also includes Duke Energy Merchants Holdings, LLC, which develops new business lines in the evolving energy commodity markets other than natural gas and power. NAWE conducts business primarily throughout the U.S. and Canada. International Energy develops, operates and manages natural gas transportation and power generation facilities and engages in energy trading and marketing of natural gas and electric power. It conducts operations primarily through Duke Energy International, LLC and its activities target the Latin American, Asia-Pacific and European regions. Other Energy Services is a combination of businesses that provide engineering, consulting, construction and integrated energy solutions worldwide, primarily through Duke Engineering & Services, Inc. (DE&S), Duke/Fluor Daniel (D/FD) and DukeSolutions, Inc. (DukeSolutions). D/FD is a 50/50 partnership between Duke Energy and Fluor Enterprises, Inc., a wholly owned subsidiary of Fluor Corporation. On April 30, 2002, Duke Energy completed the sale of DE&S to Framatome ANP, Inc. and, on May 1, 2002, Duke Energy completed the sale of DukeSolutions to Ameresco, Inc. (See Note 3). Duke Ventures is composed of other diverse businesses, operating primarily through Crescent Resources, LLC (Crescent), DukeNet Communications, LLC (DukeNet) and Duke Capital Partners, LLC (DCP). 6 Crescent develops high-quality commercial, residential and multi-family real estate projects and manages land holdings primarily in the southeastern and southwestern U.S. DukeNet provides fiber optic networks for industrial, commercial and residential customers. DCP, a wholly owned merchant banking company, provides debt and equity capital and financial advisory services to the energy industry. 2. Summary of Significant Accounting Policies Consolidation. The Consolidated Financial Statements include the accounts of Duke Energy and all majority-owned subsidiaries, after eliminating significant intercompany transactions and balances. These Consolidated Financial Statements reflect all normal recurring adjustments that are, in the opinion of management, necessary to present fairly the financial position and results of operations for the respective periods. Amounts reported in the Consolidated Statements of Income are not necessarily indicative of amounts expected for the respective annual periods due to the effects of seasonal temperature variations on energy consumption and the timing of maintenance on electric generating units. Earnings Per Common Share. Basic earnings per share is based on a simple weighted average of common shares outstanding. Diluted earnings per share reflects the potential dilution that could occur if securities or other agreements to issue common stock, such as stock options and equity units, were exercised or converted into common stock. The numerator for the calculation of both basic and diluted earnings per share is earnings available for common stockholders. The following table shows the denominator for basic and diluted earnings per share. ================================================================================ Denominator for Earnings per Share (in millions) - -------------------------------------------------------------------------------- Three Months Ended March 31, ------------------ 2002 2001 ------------------ Denominator for basic earnings per share (weighted average shares outstanding)/a/ 787.7 745.3 Assumed exercise of dilutive securities or other agreements to issue common stock 3.9 6.7 ------------------ Denominator for diluted earnings per share 791.6 752.0 ================================================================================ /a/ Increase in shares due primarily to Westcoast acquisition (See Note 3) Options, restricted stock awards, performance awards and phantom stock awards to purchase 19 million shares of common stock as of March 31, 2002, and 6 million as of March 31, 2001, were not included in the computation of diluted earnings per share because the option exercise prices were greater than the average market price of the common shares during the periods. Accounting for Hedges and Trading Activities. All derivatives not qualifying for the normal purchases and sales exemption under Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," are recorded on the Consolidated Balance Sheets at their fair value as Unrealized Gains or Unrealized Losses on Mark-to-Market and Hedging Transactions. On the date that swaps, futures, forwards or option contracts are entered into, Duke Energy designates the derivative as either held for trading (trading instrument); as a hedge of a forecasted transaction or future cash flows (cash flow hedge); as a hedge of a recognized asset, liability or firm commitment (fair value hedge); as a normal purchase or sale contract; or leaves the derivative undesignated and marks it to market. For hedge contracts, Duke Energy formally assesses, both at the hedge contract's inception and on an ongoing basis, whether the hedge contract is highly effective in offsetting changes in fair values or cash flows of hedged items. A loss on the time value of options of $2 million was excluded in the assessment and measurement of hedge effectiveness for the three months ended March 31, 2002. When available, quoted market prices or prices obtained through external sources are used to verify a contract's fair value. For contracts with a delivery location or duration for which quoted market prices are 7 not available, fair value is determined based on pricing models developed primarily from historical and expected correlations with quoted market prices. Values are adjusted to reflect the potential impact of liquidating the positions held in an orderly manner over a reasonable time period under current conditions. Changes in market price and management estimates directly affect the estimated fair value of these contracts. Accordingly, it is reasonably possible that such estimates may change in the near term. Trading. Prior to settlement of any energy contract held for trading purposes, a favorable or unfavorable price movement is reported as Natural Gas and Petroleum Products Purchased, or Net Interchange and Purchased Power, in the Consolidated Statements of Income. An offsetting amount is recorded on the Consolidated Balance Sheets as Unrealized Gains or Unrealized Losses on Mark-to-Market and Hedging Transactions. When a contract to sell is physically settled, the fair value entries are reversed and the gross amount invoiced to the customer is included as Sales, Trading and Marketing of Natural Gas and Petroleum Products, or Trading and Marketing of Electricity, in the Consolidated Statements of Income. Similarly, when a contract to purchase is physically settled, the purchase price is included as Natural Gas and Petroleum Products Purchased, or Net Interchange and Purchased Power, in the Consolidated Statements of Income. If a contract is not financially settled, the unrealized gain or loss on the Consolidated Balance Sheets is reversed and reclassified to a receivable or payable account. For income statement purposes, financial settlement has no revenue presentation effect on the Consolidated Statements of Income. Cash Flow Hedges. Changes in the fair value of a derivative designated and qualified as a cash flow hedge are included in the Consolidated Statements of Comprehensive Income as Other Comprehensive Income (OCI) until earnings are affected by the hedged item. Settlement amounts and ineffective portions of cash flow hedges are removed from OCI and recorded in the Consolidated Statements of Income in the same accounts as the item being hedged. Duke Energy discontinues hedge accounting prospectively when it is determined that the derivative no longer qualifies as an effective hedge, or when it is no longer probable that the hedged transaction will occur. When hedge accounting is discontinued because the derivative no longer qualifies as an effective hedge, the derivative continues to be carried on the Consolidated Balance Sheets at its fair value, with subsequent changes in its fair value recognized in current-period earnings. Gains and losses related to discontinued hedges that were previously accumulated in OCI will remain in OCI until earnings are affected by the hedged item, unless it is no longer probable that the hedged transaction will occur. Gains and losses that were accumulated in OCI will be immediately recognized in current-period earnings in those instances. Fair Value Hedges. Duke Energy enters into interest rate swaps to convert some of its fixed-rate long-term debt to floating-rate long-term debt and designates such interest rate swaps as fair value hedges. Duke Energy also enters into electricity derivative instruments such as swaps, futures and forwards to manage the fair value risk associated with some of its unrecognized firm commitments to sell generated power due to changes in the market price of power. Upon designation of such derivatives as fair value hedges, prospective changes in the fair value of the derivative and the hedged item are recognized in current earnings in a manner consistent with the earnings effect of the hedged risk. All components of each derivative gain or loss are included in the assessment of hedge effectiveness, unless otherwise noted. New Accounting Standards. Duke Energy adopted SFAS No. 142, "Goodwill and Other Intangible Assets," as of January 1, 2002. SFAS No. 142 requires that goodwill no longer be amortized over an estimated useful life, as previously required. Instead, goodwill amounts are subject to a fair-value-based annual impairment assessment. Duke Energy did not recognize any material impairment due to the implementation of SFAS No. 142. The standard also requires certain identifiable intangible assets to be recognized separately and amortized as appropriate upon reassessment. No adjustments to intangibles were identified at Duke Energy at transition. The following table shows what net income and earnings per share would have been if amortization (including any related tax effects) related to goodwill that is no longer being amortized had been excluded from prior periods. 8 ================================================================================ Goodwill - Adoption of SFAS No. 142 ================================================================================ Three Months Ended March 31, ------------------ (in millions, except per share amounts) 2002 2001 - -------------------------------------------------------------------------------- Net Income Reported net income $ 382 $ 458 Add back: Goodwill amortization, net of tax -- 14 ----- ----- Adjusted net income $ 382 $ 472 Basic earnings per share Reported earnings per share $0.48 $0.61 Goodwill amortization -- 0.02 Adjusted earnings per share 0.48 0.63 Diluted earnings per share Reported earnings per share $0.48 $0.60 Goodwill amortization -- 0.02 Adjusted earnings per share 0.48 0.62 ================================================================================ The changes in the carrying amount of goodwill for the three months ended March 31, 2002 and March 31, 2001 are as follows: ================================================================================ Goodwill (in millions) - -------------------------------------------------------------------------------- Balance Balance December 31, Acquired March 31, 2001 Goodwill Other 2002 -------------------------------------------- Natural Gas Transmission $ 481 $2,459 $ -- $2,940 Field Services 571 -- (106) 465 North American Wholesale Energy 92 -- 9 101 International Energy 427 -- (4) 423 Other Energy Services 5 -- (3) 2 Other Operations 154 -- -- 154 -------------------------------------------- Total consolidated $1,730 $2,459 $(104) $4,085 ================================================================================ Balance Balance December 31, Acquired March 31, 2000 Goodwill Other 2001 -------------------------------------------- Natural Gas Transmission $ 299 $-- $ 5 $ 304 Field Services 507 -- (15) 492 North American Wholesale Energy 74 -- (2) 72 International Energy 457 6 (37) 426 Other Energy Services 46 -- (1) 45 Other Operations 183 -- (8) 175 -------------------------------------------- Total consolidated $1,566 $ 6 $(58) $1,514 ================================================================================ Duke Energy adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" on January 1, 2002. The new rules supersede SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The new rules retain many of the fundamental recognition and measurement provisions, but significantly change the criteria for classifying an asset as held-for-sale. Adoption of the new standard had no material adverse effect on Duke Energy's consolidated results of operations or financial position. 9 Reclassifications. Certain prior period amounts have been reclassified in the Consolidated Financial Statements and Note 5 to conform to the current presentation. 3. Business Acquisitions and Dispositions Business Acquisitions. Using the purchase method for acquisitions, Duke Energy consolidates assets and liabilities as of the purchase date, and includes earnings from acquisitions in consolidated earnings after the purchase date. Assets acquired and liabilities assumed are recorded at estimated fair values on the date of acquisition. The purchase price minus the estimated fair value of the acquired assets and liabilities is recorded as goodwill. The allocation of the purchase price may be adjusted if additional information on asset and liability valuations becomes available within one year after the acquisition. Acquisition of Westcoast Energy Inc. On March 14, 2002, Duke Energy acquired Westcoast for approximately $8 billion, including the assumption of $4.7 billion of debt. The assumed debt consists of debt of Westcoast, Union Gas Limited (a wholly-owned subsidiary of Westcoast) and various project entities that are wholly-owned or consolidated by Duke Energy. The interest rates on the assumed debt range from 2.53% to 15.0%, with maturity dates ranging from 2002 through 2027. Westcoast, headquartered in Vancouver, British Columbia, is a North American energy company with interests in natural gas gathering, processing, transmission, storage and distribution, as well as power generation and international energy businesses. In the transaction, a Duke Energy subsidiary acquired all of the outstanding common shares of Westcoast in exchange for approximately 49.9 million shares of Duke Energy common stock (including exchangeable shares of a Duke Energy Canadian subsidiary that are substantially equivalent to and exchangeable on a one-for-one basis for Duke Energy common stock), and approximately $1.8 billion in cash. Under prorating provisions that ensured that approximately 50% of the total consideration was paid in cash and 50% in stock, each common share of Westcoast entitled the holder to elect to receive 43.80 in Canadian dollars, 0.7711 of a share of Duke Energy common stock or of an exchangeable share of a Duke Energy Canadian subsidiary, or a combination thereof. The cash portion of the consideration was funded with the proceeds from the issuance of $750 million in mandatory convertible securities in November 2001 along with incremental commercial paper. Duke Energy plans to retire the commercial paper later in 2002 and replace it with permanent capital in the form of mandatory convertible equity. The timing for the mandatory convertible equity financing will be dependent on the market opportunities presented and favorable market conditions. The Westcoast acquisition was accounted for using the purchase method of accounting, and goodwill totaling approximately $2.5 billion was recorded in the transaction. The following unaudited pro forma consolidated financial results for the period ended March 31, 2002 and March 31, 2001 are presented as if the acquisition had taken place at the beginning of the periods presented. - -------------------------------------------------------------------------------- Westcoast Pro Forma Consolidated Results (in millions, except per share amounts) - --------------------------------------------------------------------------------
Three Months Ended March 31, ------------------------ 2002 2001 ------------------------ Income Statement Data Operating revenues $ 13,167 $ 19,871 Income before cumulative effect of change in accounting principle 419 607 Cumulative effect of change in accounting principle, net of tax - (96) Preferred and preference stock dividends 3 4 Earnings available to common stockholders 416 507 Common Stock Data Weighted-average shares outstanding 828 795 Earnings per share (before cumulative effect of change in accounting principle) Basic $ 0.50 $ 0.76 Diluted $ 0.50 $ 0.75 Earnings per share Basic $ 0.50 $ 0.64 Diluted $ 0.50 $ 0.63 - --------------------------------------------------------------------------------
Dispositions. DE&S. On April 30, 2002, Duke Energy completed the sale of portions of its DE&S business unit to Framatome ANP, Inc. (a nuclear supplier). Two components of DE&S are not part of the sale and will remain as components of Other Energy Services. Duke Energy will establish Duke Energy - Energy Delivery Services, formed by the power delivery services component of DE&S, which will continue to supply power delivery solutions to customers. Leadership of the U.S. Department of Energy Mixed Oxide Fuel project will also remain with Duke Energy. DukeSolutions. On May 1, 2002, Duke Energy completed the sale of portions of DukeSolutions to Ameresco. Inc. The remaining portions will remain as a component of Other Energy Services. During the first quarter of 2002, Duke Energy recorded a reserve of $15 million for the expected loss associated with the sale of DukeSolutions. 10 4. Derivative Instruments, Hedging Activities and Credit Risk Commodity Cash Flow Hedges. Some Duke Energy subsidiaries are exposed to market fluctuations in the prices of various commodities related to their ongoing power generating and natural gas gathering, processing and marketing activities. Duke Energy closely monitors the potential impacts of commodity price changes and, where appropriate, enters into contracts to protect margins for a portion of its future sales and generation revenues. Duke Energy uses commodity instruments, consisting of swaps, futures, forwards and collared options, as cash flow hedges for natural gas, electricity and NGL transactions. Duke Energy is hedging exposures to the price variability of these commodities for a maximum of 20 years. For the three months ended March 31, 2002, the ineffective portion of commodity cash flow hedges and the amount recognized for transactions that no longer qualified as cash flow hedges were not material. As of March 31, 2002, $370 million of after-tax deferred net gains on derivative instruments were accumulated on the balance sheet in a separate component of stockholders equity, OCI, and are expected to be recognized in earnings during the next 12 months as the hedged transactions occur. However, due to the volatility of the commodities markets, the corresponding value in OCI will likely change prior to its reclassification into earnings. Commodity Fair Value Hedges. Some Duke Energy subsidiaries are exposed to changes in the fair value of some unrecognized firm commitments to sell generated power or natural gas due to market fluctuations in the underlying commodity prices. Duke Energy actively evaluates changes in the fair value of such unrecognized firm commitments due to commodity price changes and, where appropriate, uses various instruments to hedge its market risk. These commodity instruments, consisting of swaps, futures and forwards, serve as fair value hedges for the firm commitments associated with generated power and natural gas sales. Duke Energy is hedging exposures to the market risk of such items for a maximum of 23 years. For the three months ended March 31, 2002, the ineffective portion of commodity fair value hedges was not material. Trading Contracts. Duke Energy provides energy supply, structured origination, trading and marketing, risk management and commercial optimization services to large energy customers, energy aggregators and other wholesale companies. These services require Duke Energy to use natural gas, electricity, NGL and transportation derivatives and contracts that expose it to a variety of market risks. Duke Energy manages its trading exposure with strict policies that limit its market risk and require daily reporting of potential financial exposure to management. These policies include statistical risk tolerance limits using historical price movements to calculate a daily earnings at risk measurement. Interest Rate (Fair Value or Cash Flow) Hedges. Changes in interest rates expose Duke Energy to risk as a result of its issuance of variable-rate debt, fixed-to-floating interest rate swaps, commercial paper and auction rate preferred stock. Duke Energy manages its interest rate exposure by limiting its variable-rate and fixed-rate exposures to percentages of total capitalization, as set by policy, and by monitoring the effects of market changes in interest rates. Duke Energy also enters into financial derivative instruments, including, but not limited to, interest rate swaps, options, swaptions and lock agreements to manage and mitigate interest rate risk exposure. For the three months ended March 31, 2002 and 2001, Duke Energy's existing interest rate derivative instruments and related ineffectiveness were not material to its consolidated results of operations, cash flows or financial position. Foreign Currency (Fair Value or Cash Flow) Hedges. Duke Energy is exposed to foreign currency risk from investments in international affiliates and businesses owned and operated in foreign countries. To mitigate risks associated with foreign currency fluctuations, when possible, contracts are denominated in or indexed to the U.S. dollar and/or local inflation rates, or investments may be hedged through debt denominated or issued in the foreign currency. Duke Energy also uses foreign currency derivatives, where possible, to manage its risk related to foreign currency fluctuations. For the three months ended March 31, 2002 and 2001, the impact of Duke Energy's foreign currency derivative instruments was not material to its consolidated results of operations, cash flows or financial position. 11 Credit Risk. Duke Energy's principal customers for power and natural gas marketing services are industrial end-users and utilities located throughout the U.S., Canada, Asia Pacific, Europe and Latin America. Duke Energy has concentrations of receivables from natural gas and electric utilities and their affiliates, as well as industrial customers throughout these regions. These concentrations of customers may affect Duke Energy's overall credit risk in that some customers may be similarly affected by changes in economic, regulatory or other factors. Where exposed to credit risk, Duke Energy analyzes the counterparties' financial condition prior to entering into an agreement, establishes credit limits and monitors the appropriateness of those limits on an ongoing basis. Duke Energy frequently uses master collateral agreements to mitigate credit exposure. The collateral agreement provides for a counterparty to post cash or letters of credit for exposure in excess of the established threshold. The threshold amount represents an open credit limit, determined in accordance with the corporate credit policy. The collateral agreement also provides that the inability to post collateral is sufficient cause to terminate a contract and liquidate all positions. The change in market value of New York Mercantile Exchange-traded futures and options contracts requires daily cash settlement in margin accounts with brokers. Financial derivatives are generally cash settled periodically throughout the contract term. However, these transactions are also generally subject to margin agreements with many of Duke Energy's counterparties. As of March 31, 2002, Duke Energy had a pre-tax bad debt provision of $90 million related to receivables for energy sales in California. Following the bankruptcy of Enron Corporation, Duke Energy terminated substantially all contracts with Enron Corporation and its affiliated companies (collectively, Enron). As a result, in 2001 Duke Energy recorded, as a charge, a non-collateralized accounting exposure of $43 million. The $43 million non-collateralized accounting exposure was composed of charges of $36 million at NAWE, $3 million at International Energy, $3 million at Field Services and $1 million at Natural Gas Transmission. These amounts were stated on a pre-tax basis as charges against the reporting segment's earnings in 2001. Duke Energy's determination of its bankruptcy claims against Enron is still under review, and its claims made in the bankruptcy case are likely to exceed $43 million. Any bankruptcy claims that exceed this amount would primarily relate to termination and settlement rights under contracts and transactions with Enron that would have been recognized in future periods, and not in the historical periods covered by the financial statements to which the $43 million charge relates. Substantially all contracts with Enron were completed or terminated prior to December 31, 2001. Duke Energy has continuing contractual relationships with certain Enron affiliates, which are not in bankruptcy. In Brazil, a power purchase agreement between a Duke Energy affiliate, Companhia de Geracao de Energia Electrica Paranapanema (Paranapanema), and Elektro Eletricidade e Servicos S/A (Elektro), a distribution company 40% owned by Enron, will expire December 31, 2005. The contract was executed by Duke Energy's predecessor in interest in Paranapanema, and obligates Paranapanema to provide energy to Elektro on an irrevocable basis for the contract period. In addition, a purchase/sale agreement expiring September 1, 2005 between a Duke Energy affiliate and Citrus Trading Corporation (Citrus), a 50/50 joint venture between Enron and El Paso Corporation, continues to be in effect. The contract requires the Duke Energy affiliate to provide liquefied natural gas to Citrus. Citrus has provided a letter of credit in favor of Duke Energy to cover its exposure. 5. Business Segments Duke Energy's reportable segments offer different products and services and are managed separately as strategic business units. Their accounting policies are the same as those described in Note 2. Management evaluates segment performance based on earnings before interest and taxes (EBIT) after deducting minority interests. The following table shows how EBIT is calculated. 12 ==================================================================== Reconciliation of Operating Income to EBIT (in millions) - -------------------------------------------------------------------- Three Months Ended March 31, ------------------ 2002 2001 ------------------ Operating income $691 $1,182 Plus: Other income and expenses 70 72 ------------------ EBIT $761 $1,254 ==================================================================== EBIT is the main performance measure used by management to evaluate segment performance. As an indicator of Duke Energy's operating performance or liquidity, EBIT should not be considered an alternative to, or more meaningful than, net income or cash flow as determined in accordance with generally accepted accounting principles. Duke Energy's EBIT may not be comparable to a similarly titled measure of another company. In the accompanying table, EBIT includes intersegment sales at prices representative of unaffiliated party transactions. Capital and investment expenditures are gross of cash received from acquisitions.
======================================================================================================== Business Segment Data (in millions) - -------------------------------------------------------------------------------------------------------- Depreciation Capital and Unaffiliated Intersegment Total and Investment Revenues Revenues Revenues EBIT Amortization Expenditures ----------------------------------------------------------------------------- Three Months Ended March 31, 2002 Franchised Electric $ 1,113 $ -- $ 1,113 $ 385 $153 $ 244 Natural Gas Transmission 456 28 484 268 54 2,020 Field Services 1,336 230 1,566 35 74 110 North American Wholesale Energy 7,914 50 7,964 67 32 744 International Energy 984 2 986 67 23 81 Other Energy Services 43 93 136 (2) 1 1 Duke Ventures 39 -- 39 6 4 125 Other Operations /a/ -- (35) (35) (79) 3 36 Eliminations and minority interests -- (368) (368) 14 -- -- ----------------------------------------------------------------------------- Total consolidated $11,885 $ -- $11,885 $ 761 $344 $3,361 - -------------------------------------------------------------------------------------------------------- Three Months Ended March 31, 2001 Franchised Electric $ 1,157 $ -- $ 1,157 $ 460 $146 $ 177 Natural Gas Transmission 245 37 282 175 35 79 Field Services 2,616 782 3,398 123 68 46 North American Wholesale Energy 11,858 157 12,015 348 27 518 International Energy 497 5 502 76 25 23 Other Energy Services 81 37 118 4 3 5 Duke Ventures 37 -- 37 7 4 174 Other Operations /a/ -- 91 91 (70) 8 25 Eliminations and minority interests -- (1,109) (1,109) 131 -- -- ----------------------------------------------------------------------------- Total consolidated $16,491 $ -- $16,491 $1,254 $316 $1,047 ========================================================================================================
/a/ Other operations primarily includes certain unallocated corporate costs. 13 Segment assets in the accompanying table are net of intercompany advances, intercompany notes receivable, intercompany current assets, intercompany derivative assets and investments in subsidiaries. ================================================================================ Segment Assets (in millions) - -------------------------------------------------------------------------------- March 31, December 31, 2002 2001 ------------------------ Franchised Electric $13,238 $12,964 Natural Gas Transmission 15,394 5,027 Field Services 6,636 7,113 North American Wholesale Energy 19,242 14,562 International Energy 5,665 5,115 Other Energy Services 234 145 Duke Ventures 2,062 1,926 Other Operations and eliminations /a/ 75 1,523 ------------------------ Total consolidated $62,546 $48,375 ================================================================================ /a/ Other operations primarily includes certain unallocated corporate costs. 6. Debt In January 2002, Duke Energy issued $750 million of 6.25% senior unsecured bonds due in 2012 and $250 million of floating rate (based on the three-month London Interbank Offered Rate (LIBOR) plus 0.35%) senior unsecured bonds due in 2005. The proceeds from these issuances were used to manage working capital needs. In February 2002, Duke Capital Corporation, a wholly owned subsidiary of Duke Energy issued $500 million of 6.25% senior unsecured bonds due in 2013 and $250 million of 6.75% senior unsecured bonds due in 2032. In addition, Duke Capital Corporation, through a private placement transaction, issued $500 million of floating rate (based on the one-month LIBOR plus 0.65%) senior unsecured bonds due in 2003. The proceeds from these issuances were used to manage working capital needs and to fund a portion of the cash consideration for the Westcoast acquisition. In March 2002, a wholly owned subsidiary of Duke Energy, Duke Australia Pipeline Finance Pty Ltd., closed a syndicated bank debt facility for $450 million with various banks to fund its pipeline business in Australia. The facility is split between a Duke Capital Corporation-guaranteed tranche and a non-recourse project finance tranche that is secured by liens over existing Australian pipeline assets. Proceeds from the project finance tranche were used to repay inter-company loans. In April 2002, Duke Energy issued $250 million of 6.60% retail bonds due in 2022. The senior unsecured bonds were insured to obtain an `AAA' credit rating. Duke Energy subsequently swapped the bonds to a floating rate (based on the three-month LIBOR). The proceeds from this issuance were used for general corporate purposes. In addition, Duke Capital Corporation, through a private placement transaction, issued $100 million of floating rate (based on the one-month LIBOR plus 0.85%) senior unsecured bonds due in 2004. The proceeds from this issuance were used to repay commercial paper. On March 14, 2002, Duke Energy acquired Westcoast for approximately $8 billion, including the assumption of $4.7 billion of debt. The assumed debt consists of debt of Westcoast, Union Gas Limited (a wholly-owned subsidiary of Westcoast) and various project entities that are wholly-owned or consolidated by Duke Energy. The interest rates on the assumed debt range from 2.53% to 15.0%, with maturity dates ranging from 2002 through 2027. (See Note 3.) 7. Commitments and Contingencies Environmental. In 2001, legislation was introduced in the North Carolina General Assembly that would require North Carolina electric utilities, including Duke Energy, to make significant reductions in emissions of sulfur dioxide and nitrogen oxides from its North Carolina coal-fired power plants over the next seven to 11 years. Management estimates the cost to Duke Energy of achieving the specified emission reductions in 14 the proposed legislation to be approximately $1.5 billion. The proposed North Carolina legislation included a provision that allows Duke Energy to recover some or all of these costs from customers through an environmental compliance expenditure-recovery factor that would have been separate from the utility's base rates. In April 2002, Governor Easley of North Carolina announced his Clean Air Initiative which is intended to supersede the proposed legislation introduced in 2001. Through discussions with Duke Energy and other stakeholders, the Governor developed a plan to implement the emission reductions introduced in 2001, but without any increase in costs to consumers. Instead, North Carolina electric utilities would freeze their rates for five years and use the money collected during that period to pay for controls to meet the required emission reductions. This plan has not yet been introduced as legislation, but is expected to be introduced and acted upon quickly in late May 2002 or early June 2002. The final legislation, if passed into law, could differ significantly from the Governor's announced initiative. California Issues. Duke Energy, some of its subsidiaries and three current or former executives have been named as defendants, among other corporate and individual defendants, in one or more of a total of six lawsuits brought by or on behalf of electricity consumers in the State of California. The plaintiffs seek damages as a result of the defendants' alleged unlawful manipulation of the California wholesale electricity markets. DENA and DETM are among 16 defendants in a class-action lawsuit (the Gordon lawsuit) filed against generators and traders of electricity in California markets. DETM was also named as one of numerous defendants in four additional lawsuits, including two class actions (the Hendricks and Pier 23 Restaurant lawsuits), filed against generators, marketers, traders and other unnamed providers of electricity in California markets. A sixth lawsuit (the Bustamante lawsuit) was brought by the Lieutenant Governor of the State of California and a State Assemblywoman, on their own behalf as citizens and on behalf of the general public, and includes Duke Energy, some of its subsidiaries and three current or former executives of Duke Energy among other corporate and individual defendants. The Gordon and Hendricks class-action lawsuits were filed in the Superior Court of the State of California, San Diego County, in November 2000. Three other lawsuits were filed in January 2001, one in Superior Court, San Diego County, and the other two in Superior Court, County of San Francisco. The Bustamante lawsuit was filed in May 2001 in Superior Court, Los Angeles County. These lawsuits generally allege that the defendants manipulated the wholesale electricity markets in violation of state laws against unfair and unlawful business practices and state antitrust laws. The plaintiffs seek aggregate damages of billions of dollars. The lawsuits seek the refund of alleged unlawfully obtained revenues for electricity sales and, in four lawsuits, an award of treble damages. These suits have been consolidated before a state court judge in San Diego. The plaintiffs in the six lawsuits filed a joint Master Amended Complaint on March 8, 2002, which adds additional defendants. The claims against the defendants are similar to those in the original complaints. The court has approved a schedule which calls for class certification motions to be filed by October 1, 2002 in the class action lawsuits. Trial has been scheduled for March 1, 2004. While these matters are in their earliest stages, management believes, based on its analysis of the facts and the asserted claims, that their resolution will have no material adverse effect on Duke Energy's consolidated results of operations, cash flows or financial position. Duke Energy and its subsidiaries are involved in other legal and regulatory proceedings and investigations related to activities in California. These other activities were disclosed in Duke Energy's Form 10-K for the year ended December 31, 2001, and there have been no new material developments in relation to these issues. Regulatory Matters. In November 2001, Nevada Power Company and Sierra Pacific Power Company (collectively, the Companies) filed a complaint with the FERC against DETM. The complaint requests the FERC to mitigate prices in sales contracts between Duke Energy and Nevada Power, and Duke Energy and Sierra Pacific that were entered into between December 7, 2000 and June 20, 2001. The Companies allege that the contract prices are unjust and unreasonable because they were entered into during a period that the FERC determined the California market to be dysfunctional and uncompetitive, and that the California market influenced the contract prices. In April 2002, the FERC issued an order which provides for an evidentiary hearing, establishes refund dates, and requires the parties to participate in settlement negotiations. In the order, the FERC also estimated a final decision by July 2003. While this matter is in its 15 earliest stages, management believes, based on its analysis of facts and the asserted claims, that the resolution will have no material adverse effect on Duke Energy's consolidated results of operations, cash flows or financial position. 8. Subsequent Event On April 17, 2002, Duke Energy completed the sale of the Anderson Water Company to the Anderson County Joint Municipal Water System and the City of Anderson. The agreements for closing are two-fold. The first part represents the sale of the water treatment facility and the related water transmission system to the traditional wholesale customers forming the Anderson County Joint Municipal Water System. The second relates to the sale of the retail water system to the City of Anderson. As a result, the City of Anderson becomes a wholesale customer participant in and a member of the joint system. Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition. Introduction Duke Energy Corporation (collectively with its subsidiaries, Duke Energy), an integrated provider of energy and energy services, offers physical delivery and management of both electricity and natural gas throughout the U.S. and abroad. Duke Energy provides these and other services through seven business segments. See Note 1 to the Consolidated Financial Statements for descriptions of Duke Energy's business segments. Management's Discussion and Analysis should be read in conjunction with the Consolidated Financial Statements. RESULTS OF OPERATIONS For the three months ended March 31, 2002, earnings available for common stockholders were $379 million, or $0.48 per basic share. For the comparable 2001 period, earnings available for common stockholders were $454 million, or $0.61 per basic share. The decrease was due primarily to a 39% decrease in earnings before interest and taxes (EBIT), as described below. The current-year EBIT decrease on a comparative basis was partially offset by the prior year's one-time net-of-tax charge of $96 million, or $0.13 per basic share. This one-time charge was the cumulative effect of change in accounting principle for the January 1, 2001 adoption of Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." Also offsetting the comparative decrease in EBIT was a $128 million decrease in minority interest expense, as discussed in the following sections, and a decrease in the effective tax rate due to tax savings initiatives. Operating income was $691 million and EBIT was $761 million for the three months ended March 31, 2002. This compares to operating income of $1,182 million and EBIT of $1,254 million for the same period in 2001. Operating income and EBIT are affected by the same fluctuations for Duke Energy and each of its business segments. The following table shows the components of EBIT and reconciles EBIT to net income. 16 ============================================================== Reconciliation of Operating Income to Net Income (in millions) - -------------------------------------------------------------- Three Months Ended March 31, ------------------ 2002 2001 ------------------ Operating income $691 $1,182 Other income and expenses 70 72 ------------------ EBIT 761 1,254 Interest expense 189 213 Minority interest expense 32 160 ------------------ Earnings before income taxes 540 881 Income taxes 158 327 ------------------ Income before cumulative effect of change in accounting Principle 382 554 Cumulative effect of change in accounting principle, net of tax -- (96) ------------------ Net income $382 $ 458 ============================================================== EBIT is the main performance measure used by management to evaluate segment performance. As an indicator of Duke Energy's operating performance or liquidity, EBIT should not be considered an alternative to, or more meaningful than, net income or cash flow as determined in accordance with generally accepted accounting principles. Duke Energy's EBIT may not be comparable to a similarly titled measure of another company. Business segment EBIT is summarized in the following table, and detailed discussions follow. ============================================================== EBIT by Business Segment (in millions) - -------------------------------------------------------------- Three Months Ended March 31, ------------------ 2002 2001 ------------------ Franchised Electric $385 $ 460 Natural Gas Transmission 268 175 Field Services 35 123 North American Wholesale Energy 67 348 International Energy 67 76 Other Energy Services (2) 4 Duke Ventures 6 7 Other Operations (79) (70) EBIT attributable to minority interests 14 131 ------------------ Consolidated EBIT $761 $1,254 ============================================================== Other Operations primarily includes certain unallocated corporate costs. The amounts discussed below include intercompany transactions that are eliminated in the Consolidated Financial Statements. 17 Franchised Electric ================================================================ Three Months Ended March 31, ------------------ (in millions, except where noted) 2002 2001 - ---------------------------------------------------------------- Operating revenues $ 1,113 $ 1,157 Operating expenses 746 748 ------------------ Operating income 367 409 Other income, net of expenses 18 51 ------------------ EBIT $ 385 $ 460 ================== Sales, GWh /a/ 19,521 19,362 ================================================================ /a/ Gigawatt-hours Franchised Electric's EBIT decreased $75 million for the three months ended March 31, 2002 as compared to the same period in 2001. The decrease was due primarily to $33 million in mutual insurance distributions recorded as income in the first quarter of 2001 and the favorable settlement of forward power sales contracts used to manage price risk for Franchised Electric's wholesale market-rate sales in first quarter of 2001. Since the third quarter of 2001, the mutual insurance distributions have been reclassified from earnings to a deferred credit account as required by the North Carolina Utilities Commission, pending final outcome of a regulatory audit which will likely determine the treatment of those distributions. Earnings also decreased as a result of lower sales, primarily in the industrial class, due to the slowing economy and warmer weather in the first quarter of 2002, partially offset by continued growth in the average number of customers in Franchised Electric's service territory. The following table shows the changes in GWh sales and average number of customers. ============================================================== Increase (decrease) over prior year Three Months Ended - -------------------------------------------------------------- Residential sales (6.0)% General service sales (0.8)% Industrial sales (9.5)% Total Franchised Electric sales 0.8% Average number of customers 1.3% ============================================================== Natural Gas Transmission ============================================================== Three Months Ended March 31, ------------------ (in millions, except where noted) 2002 2001 - -------------------------------------------------------------- Operating revenues $484 $282 Operating expenses 218 107 ------------------ Operating income 266 175 Other income, net of expenses 5 -- Minority interest expense 3 -- ------------------ EBIT $268 $175 ================== Proportional throughput, TBtu /a/ 759 548 ============================================================== /a/ Trillion British thermal units For the three months ended March 31, 2002, EBIT for Natural Gas Transmission increased $93 million compared to the same period in 2001. This increase primarily resulted from $62 million in earnings from the natural gas transmission and distribution assets acquired as a part of the acquisition of Westcoast 18 Energy, Inc. (Westcoast) in March 2002. (See Note 3 to the Consolidated Financial Statements.) Also contributing to the increase in EBIT was a $14 million gain on the sale of a portion of Natural Gas Transmission's limited partnership interest in Northern Border Partners, LP, which owns a general partnership interest in Northern Border Pipeline Company. Field Services =============================================================================== Three Months Ended March 31, ------------------ (in millions, except where noted) 2002 2001 - ------------------------------------------------------------------------------- Operating revenues $1,566 $3,398 Operating expenses 1,523 3,219 ------------------ Operating income 43 179 Other income, net of expenses -- -- Minority interest expense 8 56 ------------------ EBIT $ 35 $ 123 ================== Natural gas gathered and processed/transported, TBtu/d /a/ 8.4 8.2 Natural gas liquid (NGL) production, MBbl/d /b/ 388.6 371.1 Natural gas marketed, TBtu/d 1.6 1.6 Average natural gas price per MMBtu /c/ $ 2.32 $ 7.09 Average NGL price per gallon /d/ $ 0.31 $ 0.60 =============================================================================== /a/ Trillion British thermal units per day /b/ Thousand barrels per day /c/ Million British thermal units /d/ Does not reflect results of commodity hedges EBIT for Field Services decreased $88 million for the three months ended March 31, 2002 compared to the same period in 2001, due primarily to the decrease in commodity prices. The decrease was driven by a $4.77 per MMBtu decrease in the average natural gas prices and a $0.29 per gallon decrease in the average NGL prices. Partially offsetting the decrease in commodity prices were increased contributions of approximately $15 million from the 2001 acquisitions of Canadian Midstream Services, Ltd., northeast propane terminal and marketing assets, and additional interests in three offshore Gulf of Mexico partnerships. North American Wholesale Energy (NAWE) ================================================================ Three Months Ended March 31, ------------------ (in millions, except where noted) 2002 2001 - ---------------------------------------------------------------- Operating revenues $ 7,964 $12,015 Operating expenses 7,897 11,589 ------------------ Operating income 67 426 Other income (loss), net of expenses (1) (10) Minority interest (benefit) expense (1) 68 ------------------ EBIT $ 67 $ 348 ================== Natural gas marketed, TBtu/d 13.8 13.6 Electricity marketed and traded, GWh 108,220 44,617 Proportional megawatt capacity in operation 7,515 5,064 Proportional megawatt capacity owned /a/ 18,605 10,054 ================================================================ /a/ Includes under construction or under contract at period end 19 For the three months ended March 31, 2002, NAWE's EBIT decreased $281 million compared to the same period in 2001. Increases of 48% in the proportional megawatt capacity of generation assets in operation and 143% in the marketing and trading of electricity volumes were significantly offset by decreased origination activities and trading margins. Last year's results were driven by unusually high natural gas and power prices and volatility levels, especially in the western U.S. This year's results reflect a return to more normal commodity pricing and volatility. In 2002, NAWE also held several short positions during a period of rising market prices (contracts under which a trader has agreed to sell a commodity at a future date for a specific price) which also contributed to the decrease in EBIT. Partially offsetting these decreases were lower variable compensation costs related to the trading activities. Changes in the ownership percentage of NAWE's waste-to-energy plants and decreased earnings at Duke Energy Trading and Marketing, LLC (DETM) resulted in a $69 million decrease in minority interest expense compared to the prior year. International Energy ================================================================================ Three Months Ended March 31, ------------------ (in millions, except where noted) 2002 2001 - ------------------------------------------------------------------------------- Operating revenues $ 986 $ 502 Operating expenses 927 428 ------------------ Operating income 59 74 Other income, net of expenses 13 9 Minority interest expense 5 7 ------------------ EBIT $ 67 $ 76 ================== Proportional megawatt capacity in operation 4,705 4,199 Proportional megawatt capacity owned /a/ 5,748 4,847 Proportional maximum pipeline capacity in operation /a/, MMcf/d /b/ 363 255 Proportional maximum pipeline capacity owned /a/, MMcf/d /b/ 363 363 ================================================================================ /a/ Includes under construction or under contract at period end /b/ Million cubic feet per day International Energy's EBIT decreased $9 million for the three months ended March 31, 2002 compared to the same period in 2001, due primarily to decreased earnings from Latin America investments and European operations. The Latin American operations were affected by lower demand in Brazil due to the government's mandatory energy rationing, which was in effect until mid-March 2002. The European operations were affected by lower trading margins and lower product prices. The corresponding increases in International Energy's operating revenues and expenses for 2002 are due primarily to its increased trading and marketing activities in Europe. Other Energy Services ===================================================================== Three Months Ended March 31, ------------------ (in millions) 2002 2001 - --------------------------------------------------------------------- Operating revenues $136 $118 Operating expenses 138 114 ------------------ EBIT $ (2) $ 4 ===================================================================== 20 For the three months ended March 31, 2002, EBIT for Other Energy Services decreased $6 million compared to the same period in 2001. On April 30, 2002, Duke Energy completed the sale of Duke Engineering & Services, Inc. to Framatome ANP, Inc. and, on May 1, 2002, Duke Energy completed the sale of DukeSolutions, Inc. to Ameresco, Inc. (See Note 3 to the Consolidated Financial Statements). The decrease in EBIT as compared to the prior year was due primarily to a current-year $15 million reserve for the expected loss associated with the sale of DukeSolutions, Inc. This loss was partially offset by project income at Duke/Fluor Daniel. Duke Ventures ================================================================================ Three Months Ended March 31, ------------------- (in millions) 2002 2001 - -------------------------------------------------------------------------------- Operating revenues $39 $37 Operating expenses 34 30 ------------------- Operating income 5 7 Minority interest benefit (1) -- ------------------- EBIT $ 6 $ 7 ================================================================================ EBIT for Duke Ventures decreased $1 million for the three months ended March 31, 2002 compared to the same period in 2001. On April 17, 2002, Duke Energy completed the sale of Anderson Water Company to Anderson County Joint Municipal Water System and the City of Anderson. (See Note 8 to the Consolidated Financial Statements.) Other Impacts on Earnings Available for Common Stockholders For the three months ended March 31, 2002, interest expense decreased $24 million compared to the same period in 2001, due primarily to lower interest rates on commercial paper. Minority interest expense decreased $128 million for the three months ended March 31, 2002 compared to the same period in 2001. Minority interest expense includes expense related to regular distributions on preferred securities of Duke Energy and its subsidiaries. This expense decreased $11 million for the three months ended March 31, 2002 due to lower distributions related to Catawba River Associates, LLC (Catawba). Catawba is a fully consolidated financing entity formed by Duke Energy in September 2000 and is managed by a Duke Energy subsidiary. Minority interest expense as shown and discussed in the preceding business segment EBIT discussions includes only minority interest expense related to EBIT of Duke Energy's joint ventures. It does not include minority interest expense related to interest and taxes of the joint ventures. Total minority interest expense related to the joint ventures (including the portion related to interest and taxes) decreased $117 million for the three month period due to decreased income from Field Services' joint venture with Phillips Petroleum, changes in the ownership percentage of NAWE's waste-to-energy plants and decreased earnings at DETM, NAWE's joint venture with Exxon Mobil Corporation. A state tax settlement finalized during the three months ended March 31, 2002, as well as the optimization of tax savings benefits, resulted in an effective tax rate of 29%, compared to 37% for the same period in 2001. Duke Energy's overall effective tax rate for 2002 is expected to be in the range of 35%-36%. During the first quarter of 2001, Duke Energy recorded a one time net-of-tax charge of $96 million related to the cumulative effect of change in accounting principle for the January 1, 2001 adoption of SFAS No. 133. This charge related to contracts that either did not meet the definition of a derivative under previous accounting guidance or do not qualify as hedges under new accounting requirements. 21 LIQUIDITY AND CAPITAL RESOURCES Operating Cash Flows Net cash provided by operations increased $801 million in 2002 when compared to the same period in 2001. The increase is due primarily to the change in the net unrealized mark-to-market and hedging transactions resulting from increased cash earnings in first quarter 2002 versus the same period in 2001. As a result of the increased volatility and higher prices in the western U.S. for power in the first quarter 2001, Duke Energy experienced a higher level of non-cash earnings from mark-to-market transactions as compared to first quarter 2002. Investing Cash Flows Net cash used in investing activities increased $2,346 million in 2002 when compared to the same period in 2001, primarily due to the acquisition of Westcoast for $1,690 million in cash, net of cash acquired (see Note 3 to the Consolidated Financial Statements). Capital and investment expenditures increased $547 million in 2002 compared to 2001. The increase reflects additional expansion and development expenditures (especially related to NAWE's generating facilities), refurbishment and upgrades to existing assets and minor acquisitions of businesses and assets. Financing Cash Flows Duke Energy's consolidated capital structure at March 31, 2002, including short-term debt, was 53% debt, 36% common equity, 7% minority interests, 3% trust preferred securities and 1% preferred stock. Fixed charges coverage, calculated using the Securities and Exchange Commission (SEC) guidelines, was 2.7 for the three months ended March 31, 2002 and 4.3 times for the three months ended March 31, 2001. The decrease in the fixed charges coverage is attributed primarily to decreased net income and decreased tax expenses. Duke Energy's growth initiatives, along with dividends, debt repayments and operating requirements are expected to be funded by cash from operations, debt and capital market financings, project financings, common stock issuances through its InvestorDirect Choice Plan and employee benefit plans, and proceeds from the sale of assets. These financing opportunities are dependent upon the market opportunities presented and favorable market conditions. Additionally, internal cash generation should fund approximately half of the capital needs. Management believes Duke Energy has adequate financial resources to meet its future needs. In January 2002, Duke Energy issued $750 million of 6.25% senior unsecured bonds due in 2012 and $250 million of floating rate (based on the three-month London Interbank Offered Rate (LIBOR) plus 0.35%) senior unsecured bonds due in 2005. The proceeds from these issuances were used to manage working capital needs. In February 2002, Duke Capital Corporation, a wholly owned subsidiary of Duke Energy, issued $500 million of 6.25% senior unsecured bonds due in 2013 and $250 million of 6.75% senior unsecured bonds due in 2032. In addition, Duke Capital Corporation, through a private placement transaction, issued $500 million of floating rate (based on the one-month LIBOR plus 0.65%) senior unsecured bonds due in 2003. The proceeds from these issuances were used to manage working capital needs and to fund a portion of the cash consideration for the Westcoast acquisition. In March 2002, a wholly owned subsidiary of Duke Energy, Duke Australia Pipeline Finance Pty Ltd., closed a syndicated bank debt facility for $450 million with various banks to fund its pipeline business in Australia. The facility is split between a Duke Capital Corporation-guaranteed tranche and a non-recourse project finance tranche that is secured by liens over existing Australian pipeline assets. Proceeds from the project finance tranche were used to repay inter-company loans. In April 2002, Duke Energy issued $250 million of 6.60% retail bonds due in 2022. The senior unsecured bonds were insured to obtain an `AAA' credit rating. Duke Energy subsequently swapped the bonds to a floating rate (based on the three-month LIBOR). The proceeds from this issuance were used for general corporate purposes. In addition, Duke Capital Corporation, through a private placement transaction, issued 22 $100 million of floating rate (based on the one-month LIBOR plus 0.85%) senior unsecured bonds due in 2004. The proceeds from this issuance were used to repay commercial paper. On March 14, 2002, Duke Energy acquired Westcoast for approximately $8 billion, including the assumption of $4.7 billion of debt. The assumed debt consists of debt of Westcoast. Union Gas Limited (a wholly-owned subsidiary of Westcoast) and various project entities that are wholly-owned or consolidated by Duke Energy. The interest rates on the assumed debt range from 2.53% to 15.0%, with maturity dates ranging from 2002 through 2027. In addition to the debt assumed, Westcoast and Union Gas Limited have operating credit facilities of 600 million Canadian dollars and 715 million Canadian dollars, respectively. Borrowings under each of these facilities are subject to and dependent upon the senior unsecured ratings of Westcoast (currently rated A for Dominion Bond Rating Service (DBRS) and A+ for Standard & Poor's) and Union Gas (currently rated A(low) for DBRS and A+ for Standard & Poor's). For the Westcoast credit facility, a material adverse change could occur if the ratings for Westcoast fall below a BBB(low) at DBRS or a BB+ at Standard & Poor's, although a change in ratings is not in and of itself a material adverse change. For Union Gas Limited's facility, no material adverse change can be declared if Union Gas Limited maintains a rating of BBB or greater by either DBRS or Standard & Poor's. For both facilities, any outstanding debt would not become due and payable as a result of the change in ratings. Westcoast, headquartered in Vancouver, British Columbia, is a North American energy company with interests in natural gas gathering, processing, transmission, storage and distribution, as well as power generation and international energy businesses. In the transaction, a Duke Energy subsidiary acquired all of the outstanding common shares of Westcoast in exchange for approximately 49.9 million shares of Duke Energy common stock (including exchangeable shares of a Duke Energy Canadian subsidiary that are substantially equivalent to and exchangeable on a one-for-one basis for Duke Energy common stock), and approximately $1.8 billion in cash. Under prorating provisions of the acquisition agreement that ensured that approximately 50% of the total consideration was paid in cash and 50% in stock, each common share of Westcoast entitled the holder to elect to receive 43.80 in Canadian dollars, 0.7711 of a share of Duke Energy common stock or of an exchangeable share of a Duke Energy Canadian subsidiary, or a combination thereof. The cash portion of the consideration was funded with the proceeds from the issuance of $750 million in mandatory convertible securities in November 2001 along with incremental commercial paper. Duke Energy plans to retire the commercial paper later in 2002 and replace it with permanent capital in the form of mandatory convertible market equity. The timing for the mandatory convertible equity will be dependent on the market opportunities presented and favorable market conditions. The Westcoast acquisition was accounted for using the purchase method of accounting, and goodwill totaling approximately $2.5 billion was recorded in the transaction. Under its commercial paper, medium-term notes and extendible commercial notes (ECNs) programs, Duke Energy had the ability to borrow up to $7,917 million at March 31, 2002 compared with $5,358 million at December 31, 2001. These programs do not have termination dates. The following table summarizes the commercial paper, medium-term notes and ECNs as of March 31, 2002.
============================================================================================================== Duke Duke Duke Capital Duke Energy Energy Westcoast Union Gas (in millions) Energy Corporationa/a/ Field Services International Energy Limited Total - -------------------------------------------------------------------------------------------------------------- Commercial Paper $1,250 $2,550 $650 $400/b/ $376 $470 $5,696 Medium-term notes -- -- -- -- 470 251 721 ECNs 500 1,000 -- -- -- -- 1,500 ------------------------------------------------------------------------------------------ Total $1,750 $3,550 $650 $400 $846 $721 $7,917 ==============================================================================================================
/a/ Duke Capital Corporation provides financing and credit enhancement services for its subsidiaries. /b/ Includes ability to issue medium term notes The total amount of Duke Energy's bank credit facilities was $7,136 million as of March 31, 2002 compared with $4,606 million as of December 31, 2001. Some of the credit facilities support the issuance of commercial paper and as a result, the issuance of commercial paper reduces the amount available under these credit facilities. As of March 31, 2002, $4,460 million was outstanding in the form of commercial paper, medium-term notes and ECNs, and $40 million of borrowings were outstanding under the bank credit facilities. The credit facilities expire from 2002 to 2005 and are not subject to minimum cash requirements. As of March 31, 2002, Duke Energy and its subsidiaries had effective SEC shelf registrations for up to $1,750 million in gross proceeds from debt and other securities. Effective April 2002, the amount available was increased by $1,750 million. Such securities may be issued as senior notes, first and refunding mortgage bonds, subordinated notes, trust preferred securities, Duke Energy common stock, stock purchase contracts or stock purchase units. In addition, Westcoast and its subsidiaries had $439 million of unused Canadian debt capacity. 23 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Risk and Accounting Policies Duke Energy is exposed to market risks associated with commodity prices, credit exposure, interest rates, equity prices and foreign currency exchange rates. Management has established comprehensive risk management policies to monitor and manage these market risks. Duke Energy's Policy Committee is responsible for the overall approval of market risk management policies and the delegation of approval and authorization levels. The Policy Committee is composed of senior executives who receive periodic updates from the Chief Risk Officer (CRO) on market risk positions, corporate exposures, credit exposures and overall risk management activities. The CRO is responsible for the overall management of credit risk and commodity price risk, including monitoring exposure limits. Mark-to-Market Accounting (MTM accounting). Under the MTM accounting method, an asset or liability is recognized at fair value and the change in the fair value of that asset or liability is recognized in earnings during the current period. This accounting method has been used by other industries for many years, and in 1998 the Financial Accounting Standards Board's (FASB) Emerging Issues Task Force (EITF) issued guidance that required MTM accounting for energy trading contracts. MTM accounting reports contracts at their "fair value," (the value a willing third party would pay for the particular contract at the time a valuation is made). When available, quoted market prices are used to record a contract's fair value. However, market values for energy trading contracts may not be readily determinable because the duration of the contracts exceeds the liquid activity in a particular market. If no active trading market exists for a commodity or for a contract's duration, holders of these contracts must calculate fair value using pricing models or matrix pricing based on contracts with similar terms and risks. This is validated by an internal group independent of Duke Energy's trading area. Holders of thinly traded securities or investments (mutual funds, for example) use similar techniques to price such holdings. Correlation and volatility are two significant factors used in the computation of fair values. Duke Energy validates its internally developed fair values by comparing locations/durations that are highly correlated, using market intelligence and mathematical extrapolation techniques. While Duke Energy uses industry best practices to develop its pricing models, changes in Duke Energy's pricing methodologies or the underlying assumptions could result in significantly different fair values, income recognition and realization in future periods. Hedge Accounting. Hedging typically refers to the mechanism that Duke Energy uses to mitigate the impact of volatility associated with price fluctuations. Hedge accounting treatment is used when Duke Energy contracts to buy or sell a commodity such as natural gas or electricity at a fixed price for future delivery corresponding with anticipated physical sales or purchases of natural gas and power (cash flow hedge). In addition, hedge accounting treatment is used when Duke Energy holds firm commitments or asset positions, and enters into transactions that "hedge" the risk that the price of natural gas or power may change between the contract's inception and the physical delivery date of the commodity ultimately affecting the underlying value of the firm commitment or position (fair value hedge). While the majority of Duke Energy's hedging transactions are used to protect the value of future cash flows related to its physical assets, to the extent the hedge is effective, Duke Energy recognizes in earnings the value of the contract when the commodity is purchased or sold, or the hedged transaction occurs or settles. Normal Purchases and Normal Sales, Special Exemption. A unique characteristic of the electric power industry is that electricity cannot be readily stored in significant quantities. As a result, some of the contracts to buy and sell electricity allow the buyer some flexibility in determining when to take electricity and in what quantity to match fluctuating demand. These contracts would normally meet the definition of a derivative requiring MTM or hedge accounting. However, because electricity cannot be readily stored in significant quantities and an entity engaged in selling electricity is obligated to maintain sufficient capacity to meet the electricity needs of its customer base, an option contract for the purchase of electricity qualifies 24 for the normal purchases and sales exemption described in Paragraph 10 of SFAS No. 133 and Derivative Implementation Group (DIG) Issue No. C15, "Scope Exceptions: Normal Purchases and Normal Sales Exception for Option-Type Contracts and Forward Contracts in Electricity." Therefore, contracts that Duke Energy holds for the sale of power in future periods that meet the criteria in DIG Issue No. C15 have been designated as "normal purchases, normal sales" contracts, and are exempted from recognition in the Consolidated Financial Statements until power is delivered. Duke Energy tracks these contracts separately in its hedge portfolio, but no value for these contracts is included in the Consolidated Financial Statements until power is actually delivered. North American Merchant Generation Duke Energy's wholesale energy portfolio in North America includes the merchant generation facilities and trading contracts held for power, natural gas, crude oil and petroleum products. Of the total estimated value of this portfolio, approximately 80% is attributed to the anticipated value of merchant generation facility capacity owned or controlled by Duke Energy. This portion of the value of the merchant generation portfolio is anticipated to be realized in future periods as the generation facilities are dispatched. A portion of this future value is secured by hedge contracts. Of the unhedged capacity, dispatch performance, and in some cases price, has been further secured through contracts designated as normal purchases and normal sales. Only the contracts designated and effective as qualifying hedges are reflected on Duke Energy's Consolidated Balance Sheets at fair value. Changes in the fair value of qualifying hedging contracts do not affect current-period earnings. Normal purchases and normal sales contracts are not subject to accounting recognition until contract performance occurs. The remaining percentage of the total estimated value of the merchant generation portfolio is attributed to the current value of trading contracts. These contracts are subject to MTM accounting and changes in the contract fair value are recorded as part of current-period earnings. The table below represents the value by year of Duke Energy's North American merchant generation portfolio. It does not include the value of trading positions, or hedges of other commodity risks or exposures.
============================================================================================= North American Merchant Generation Portfolio Value as of March 31, 2002 (in millions) - --------------------------------------------------------------------------------------------- Maturity in 2005 Total Maturity in 2002 Maturity in 2003 Maturity in 2004 and Thereafter /a/ Portfolio Value - --------------------------------------------------------------------------------------------- $747 $785 $895 $4,378 $6,805 =============================================================================================
/a/ For purposes of calculating total portfolio value, model valuations were calculated through March 2010. As of March 31, 2002, the portion hedged of NAWE's expected output of its merchant generation portfolio was 74% for 2003, 60% for 2004 and 59% for 2005, through derivative contracts such as forward natural gas purchases and forward power sales. Commodity Price Risk Duke Energy, substantially through its subsidiaries, is exposed to the impact of market fluctuations in the price of natural gas, electricity and other energy-related products marketed and purchased. Duke Energy employs established policies and procedures to manage its risks associated with these market fluctuations using various commodity derivatives, including forward contracts, futures, swaps and options for trading purposes and for activity other than trading activity (primarily hedge strategies). (See Notes 2 and 4 to the Consolidated Financial Statements.) Trading. The risk in the trading portfolio is measured and monitored on a daily basis utilizing a Value-at-Risk base model to determine the potential one-day favorable or unfavorable Daily Earnings at Risk (DER) as described below. DER is monitored daily in comparison to established thresholds. Other measures are also used to limit and monitor risk in the trading portfolio (which includes all trading contracts not designated as hedge positions) on monthly and annual bases. These measures include limits on the nominal size of positions and periodic loss limits. 25 DER computations are based on historical simulation, which uses price movements over a specified period (generally ranging from seven to 14 days) to simulate forward price curves in the energy markets to estimate the potential favorable or unfavorable impact of one day's price movement on the existing portfolio. The historical simulation emphasizes the most recent market activity, which is considered the most relevant predictor of immediate future market movements for natural gas, electricity and other energy-related products. DER computations use several key assumptions, including a 95% confidence level for the resultant price movement and the holding period specified for the calculation. Duke Energy's DER amounts for instruments held for trading purposes are shown in the following table.
======================================================================================================= Daily Earnings at Risk (in millions) - ------------------------------------------------------------------------------------------------------- Estimated Average Estimated Average One-Day Impact on One-Day Impact on High One-Day Impact Low One-Day Impact EBIT for 1st Quarter EBIT for 1st Quarter on EBIT for 1st on EBIT for 1st 2002 /a/ 2001 Quarter 2002 Quarter 2002 - ------------------------------------------------------------------------------------------------------- Calculated DER $17 $30 $24 $10 =======================================================================================================
/a/ Amount does not include the impact of Westcoast's trading activity. DER is an estimate based on historical price volatility. Actual volatility can exceed assumed results. DER also assumes a normal distribution of price changes; thus, if the actual distribution is not normal, the DER may understate or overstate actual results. DER is used to estimate the risk of the entire portfolio, and for locations that do not have daily trading activity, it may not accurately estimate risk due to limited price information. Stress tests are employed in addition to DER to measure risk where market data information is limited. In the current DER methodology, options are modeled in a manner equivalent to forward contracts which may understate the risk. Duke Energy's exposure to commodity price risk is influenced by a number of factors, including contract size, length, market liquidity, location and unique or specific contract terms. The following table illustrates the movements in the fair value of Duke Energy's trading instruments during the first quarter of 2002.
======================================================================================= Changes in Fair Value of Trading Contracts (in millions) - --------------------------------------------------------------------------------------- Fair value of contracts outstanding at the beginning of the year $1,069 Contracts realized or otherwise settled during the period (93) Fair value of contracts entered into during the period 70 Changes in fair value amounts attributable to changes in valuation techniques 36 Other changes in fair values (63) ------- Fair value of contracts outstanding at the end of the period $1,019 =======================================================================================
For the quarter ended March 31, 2002, the unrealized net loss recognized in operating income was $68 million, compared to a $557 million gain for the first quarter of 2001. The fair value of these contracts is expected to be realized in future periods, as detailed in the following table. The amount of cash ultimately realized for these contracts will differ from the amounts shown in the following table due to factors such as market volatility, counterparty default and other unforeseen events that could impact the amount and/or realization of these values. At March 31, 2002, Duke Energy held cash or letters of credit of $798 million to secure such future performance, and had deposited with counterparties $96 million of such collateral to secure its obligations to provide such future services. Collateral amounts held or posted vary depending on the value of the underlying contracts and cover trading, normal purchases and normal sales, and hedging contracts outstanding. Duke Energy may be required to return held collateral and post additional collateral should price movements adversely impact the value of open contracts or positions. When available, Duke Energy uses observable market prices for valuing its trading instruments. When quoted market prices are not available, management uses established guidelines for the valuation of these contracts. Management may use a variety of reasonable methods to assist in determining the valuation of a trading instrument, including analogy to reliable quotations of similar trading instruments, pricing models, 26 matrix pricing and other formula-based pricing methods. These methodologies incorporate factors for which published market data may be available. All valuation methods employed by Duke Energy are approved by an independent internal corporate risk management organization. The following table shows the fair value of Duke Energy's trading portfolio as of March 31, 2002.
========================================================================================================= Fair Value of Trading Contracts as of March 31, 2002 (in millions) - --------------------------------------------------------------------------------------------------------- Maturity in Maturity in Maturity in Maturity in 2005 and Total Fair Sources of Fair Value 2002 2003 2004 Thereafter Value - --------------------------------------------------------------------------------------------------------- Prices supported by quoted market prices and other external sources $210 $148 $ 83 $ 32 $ 473 Prices based on models and other valuation methods 27 20 63 436 546 - --------------------------------------------------------------------------------------------------------- Total $237 $168 $146 $468 $1,019 =========================================================================================================
The "prices supported by quoted market prices and other external sources" category includes Duke Energy's New York Mercantile Exchange (NYMEX) futures positions in natural gas and crude oil. The NYMEX has currently quoted prices for the next 32 months. In addition, this category includes Duke Energy's forward positions and options in natural gas and power and natural gas basis swaps at points for which over-the-counter (OTC) broker quotes are available. On average, OTC quotes for natural gas and power forwards and swaps extend 22 and 32 months into the future, respectively. OTC quotes for natural gas and power options extend 12 months into the future, on average. Duke Energy values these positions against internally developed forward market price curves that are constantly validated and recalibrated against OTC broker quotes. This category also includes "strip" transactions whose prices are obtained from external sources and then modeled to daily or monthly prices as appropriate. The "prices based on models and other valuation methods" category includes (i) the value of options not quoted by an exchange or OTC broker, (ii) the value of transactions for which an internally developed price curve was constructed as a result of the long dated nature of the transaction or the illiquidity of the market point, and (iii) the value of structured transactions. It is important to understand that in certain instances structured transactions can be decomposed and modeled by Duke Energy as simple forwards and options based on prices actively quoted. Although the valuation of the simple structures might not be different from the valuation of contracts in other categories, the effective model price for any given period is a combination of prices from two or more different instruments and therefore have been included in this category due to the complex nature of these transactions. The value of Duke Energy's trading portfolio valuation adjustments for liquidity, credit and cost of service is reflected in the above amounts. Hedging Strategies. Some Duke Energy subsidiaries are exposed to market fluctuations in the prices of energy commodities related to their power generating and natural gas gathering, processing and marketing activities. Duke Energy closely monitors the risks associated with these commodity price changes on its future operations and, where appropriate, uses various commodity instruments such as electricity, natural gas, crude oil and NGL contracts to hedge the value of its assets and operations from such price risks. In accordance with SFAS No. 133, Duke Energy's primary use of energy commodity derivatives is to hedge the output and production of assets it physically owns. Contract terms are up to 23 years; however, since these contracts are designated and qualify as effective hedge positions of future cash flows, or fair values of assets owned by Duke Energy, to the extent that the hedge relationships are effective, their market value change impacts are not recognized in current earnings. The unrealized gains or losses on these contracts are deferred in Other Comprehensive Income (OCI) for cash flow hedges or included in Other Current or 27 Noncurrent Assets or Liabilities on the Consolidated Balance Sheets for fair value hedges of firm commitments, in accordance with SFAS No. 133. Amounts deferred in OCI are realized in earnings concurrently with the transaction being hedged. (See Notes 2 and 4 to the Consolidated Financial Statements.) However, in instances where the hedging contract no longer qualifies for hedge accounting, amounts included in OCI through the date of de-designation remain in OCI until the underlying transaction actually occurs. The derivative contract (if continued as an open position) will be marked to market currently through earnings. Several factors influence the effectiveness of a hedge contract, including counterparty credit risk and using contracts with different commodities or unmatched terms. Hedge effectiveness is monitored regularly and measured each month. The following table shows when gains and losses deferred on the Consolidated Balance Sheets for derivative instruments qualifying as effective hedges of firm commitments or anticipated future transactions will be recognized into earnings. Contracts with terms extending several years are generally valued using models and assumptions developed internally or by industry standards. However, as mentioned previously, the gains and losses for these contracts are not recognized in earnings until settlement at their then market price. Therefore, assumptions and valuation techniques for these contracts have no impact on reported earnings prior to settlement. The fair value of Duke Energy's qualifying hedge positions at a point in time is not necessarily indicative of the value realized when such contracts settle.
========================================================================================== Fair Value of Hedge Position Contracts as of March 31, 2002 (in millions) - ------------------------------------------------------------------------------------------ Maturity in 2005 Total Maturity in 2002 Maturity in 2003 Maturity in 2004 and Thereafter Contract Value - ------------------------------------------------------------------------------------------ $408 $136 $100 $150 $794 ==========================================================================================
In addition to the hedge contracts described above and recorded on the Consolidated Balance Sheets, Duke Energy enters into other contracts that qualify for the normal purchases and sales exemption described in Paragraph 10 of SFAS No. 133 and DIG Issue No. C15. These contracts, generally forward agreements to sell power, bear the same counterparty credit risk as the hedge contracts described above. Under the same risk reduction guidelines used for other contracts, normal purchases and sales contracts are also subject to collateral requirements. Income recognition and realization related to these contracts coincide with the physical delivery of power. Credit Risk Duke Energy's principal customers for power and natural gas marketing services are industrial end-users and utilities located throughout the U.S., Canada, Asia Pacific, Europe and Latin America. Duke Energy has concentrations of receivables from natural gas and electric utilities and their affiliates, as well as industrial customers throughout these regions. These concentrations of customers may affect Duke Energy's overall credit risk in that some customers may be similarly affected by changes in economic, regulatory or other factors. Where exposed to credit risk, Duke Energy analyzes the counterparties' financial condition prior to entering into an agreement, establishes credit limits and monitors the appropriateness of those limits on an ongoing basis. Duke Energy frequently uses master collateral agreements to mitigate credit exposure. The collateral agreement provides for a counterparty to post cash or letters of credit for exposure in excess of the established threshold. The threshold amount represents an open credit limit, determined in accordance with the corporate credit policy. The collateral agreement also provides that the inability to post collateral is sufficient cause to terminate a contract and liquidate all positions. The change in market value of New York Mercantile Exchange-traded futures and options contracts requires daily cash settlement in margin accounts with brokers. Financial derivatives are generally cash settled periodically throughout the contract term. However, these transactions are also generally subject to margin agreements with many of Duke Energy's counterparties. 28 As of March 31, 2002, Duke Energy had a pre-tax bad debt provision of $90 million related to receivables for energy sales in California. Following the bankruptcy of Enron Corporation, Duke Energy terminated substantially all contracts with Enron Corporation and its affiliated companies (collectively, Enron). As a result, in 2001Duke Energy recorded, as a charge, a non-collateralized accounting exposure of $43 million. The $43 million non-collateralized accounting exposure was composed of charges of $36 million at NAWE, $3 million at International Energy, $3 million at Field Services and $1 million at Natural Gas Transmission. These amounts were stated on a pre-tax basis as charges against the reporting segment's earnings in 2001. Duke Energy's determination of its bankruptcy claims against Enron is still under review, and its claims made in the bankruptcy case are likely to exceed $43 million. Any bankruptcy claims that exceed this amount would primarily relate to termination and settlement rights under contracts and transactions with Enron that would have been recognized in future periods, and not in the historical periods covered by the financial statements to which the $43 million charge relates. Substantially all contracts with Enron were completed or terminated prior to December 31, 2001. Duke Energy has continuing contractual relationships with certain Enron affiliates, which are not in bankruptcy. In Brazil, a power purchase agreement between a Duke Energy affiliate, Companhia de Geracao de Energia Electrica Paranapanema (Paranapanema), and Elektro Eletricidade e Servicos S/A (Elektro), a distribution company 40% owned by Enron, will expire December 31, 2005. The contract was executed by Duke Energy's predecessor in interest in Paranapanema, and obligates Paranapanema to provide energy to Elektro on an irrevocable basis for the contract period. In addition, a purchase/sale agreement expiring September 1, 2005 between a Duke Energy affiliate and Citrus Trading Corporation (Citrus), a 50/50 joint venture between Enron and El Paso Corporation, continues to be in effect. The contract requires the Duke Energy affiliate to provide liquefied natural gas to Citrus. Citrus has provided a letter of credit in favor of Duke Energy to cover its exposure. Interest Rate Risk Duke Energy is exposed to risk resulting from changes in interest rates as a result of its issuance of variable-rate debt, fixed-to-floating interest rate swaps, commercial paper and auction rate preferred stock. Duke Energy manages its interest rate exposure by limiting its variable-rate and fixed-rate exposures to percentages of total capitalization, as set by policy, and by monitoring the effects of market changes in interest rates. Duke Energy also enters into financial derivative instruments, including, but not limited to, interest rate swaps, options, swaptions and lock agreements to manage and mitigate interest rate risk exposure. (See Notes 2, 4, and 6 to the Consolidated Financial Statements.) Equity Price Risk Duke Energy maintains trust funds, as required by the Nuclear Regulatory Commission (NRC), to fund certain costs of nuclear decommissioning. As of December 31, 2001 and 2000, these funds were invested primarily in domestic and international equity securities, fixed-rate, fixed-income securities and cash and cash equivalents. Duke Energy has an agreement with the NRC that these funds will only be used for activities relating to nuclear decommissioning. Because the accounting for nuclear decommissioning recognizes that costs are recovered through Franchised Electric's rates, fluctuations in equity prices or interest rates do not affect consolidated results of operations, cash flows or financial position. Foreign Currency Risk Duke Energy is exposed to foreign currency risk from investments in international affiliates and businesses owned and operated in foreign countries. To mitigate risks associated with foreign currency fluctuations, when possible, transactions are denominated in or indexed to the U.S. dollar and/or local inflation rates, or investments may be hedged through debt denominated or issued in the foreign currency. Duke Energy also uses foreign currency derivatives, where possible, to manage its risk related to foreign currency fluctuations. To monitor its currency exchange rate risks, Duke Energy uses sensitivity analysis, which measures the impact of devaluation of the foreign currencies to which it has exposure. 29 Since 1991, the Argentine peso had been pegged to the U.S. dollar at a fixed 1:1 exchange ratio. In December 2001, the Argentine government imposed a restriction that limited cash withdrawals above a certain amount and foreign money transfers. Financial institutions were allowed to conduct limited activity as a bank and exchange holiday was announced, and currency exchange activity was essentially halted. In January 2002, the Argentine government announced the creation of a dual-currency system. Subsequently, however, the Argentine government has decided to use a free-floating currency. Duke Energy's investment in Argentina was U.S. dollar functional as of December 31, 2001. Once a functional currency determination has been made, that determination must be adhered to consistently, unless significant changes in economic factors indicate that the entity's functional currency has changed. The events in Argentina required a change. In January 2002, the functional currency of Duke Energy's investment in Argentina changed from the U.S. dollar to the Argentine peso. In compliance with SFAS No. 52, "Foreign Currency Translation," the change in functional currency will be made prospectively. Management believes that the events in Argentina will have no material adverse effect on Duke Energy's future consolidated results of operations, cash flows or financial position. CURRENT ISSUES Environmental. In 2001, legislation was introduced in the North Carolina General Assembly that would require North Carolina electric utilities, including Duke Energy, to make significant reductions in emissions of sulfur dioxide and nitrogen oxides from its North Carolina coal-fired power plants over the next seven to 11 years. Management estimates the cost to Duke Energy of achieving the specified emission reductions in the proposed legislation to be approximately $1.5 billion. The proposed North Carolina legislation included a provision that allows Duke Energy to recover some or all of these costs from customers through an environmental compliance expenditure-recovery factor that would have been separate from the utility's base rates. In April 2002, Governor Easley of North Carolina announced his Clean Air Initiative which is intended to supersede the proposed legislation introduced in 2001. Through discussions with Duke Energy and other stakeholders, the Governor developed a plan to implement the emission reductions introduced in 2001, but without any increase in costs to consumers. Instead, North Carolina electric utilities would freeze their rates for five years and use the money collected during that period to pay for controls to meet the required emission reductions. This plan has not yet been introduced as legislation, but is expected to be introduced and acted upon quickly in late May 2002 or early June 2002. The final legislation, if passed into law, could differ significantly from the Governor's announced initiative. California Issues. Duke Energy, some of its subsidiaries and three current or former executives have been named as defendants, among other corporate and individual defendants, in one or more of a total of six lawsuits brought by or on behalf of electricity consumers in the State of California. The plaintiffs seek damages as a result of the defendants' alleged unlawful manipulation of the California wholesale electricity markets. Duke Energy North America, LLC (DENA) and DETM are among 16 defendants in a class-action lawsuit (the Gordon lawsuit) filed against generators and traders of electricity in California markets. DETM was also named as one of numerous defendants in four additional lawsuits, including two class actions (the Hendricks and Pier 23 Restaurant lawsuits), filed against generators, marketers, traders and other unnamed providers of electricity in California markets. A sixth lawsuit (the Bustamante lawsuit) was brought by the Lieutenant Governor of the State of California and a State Assemblywoman, on their own behalf as citizens and on behalf of the general public, and includes Duke Energy, some of its subsidiaries and three current or former executives of Duke Energy among other corporate and individual defendants. The Gordon and Hendricks class-action lawsuits were filed in the Superior Court of the State of California, San Diego County, in November 2000. Three other lawsuits were filed in January 2001, one in Superior Court, San Diego County, and the other two in Superior Court, County of San Francisco. The Bustamante lawsuit was filed in May 2001 in Superior Court, Los Angeles County. These lawsuits generally allege that the defendants manipulated the wholesale electricity markets in violation of state laws against unfair and unlawful business practices and state antitrust laws. The plaintiffs seek aggregate damages of billions of 30 dollars. The lawsuits seek the refund of alleged unlawfully obtained revenues for electricity sales and, in four lawsuits, an award of treble damages. These suits have been consolidated before a state court judge in San Diego. The plaintiffs in the six lawsuits filed a joint Master Amended Complaint on March 8, 2002, which adds additional defendants. The claims against the defendants are similar to those in the original complaints. The court has approved a schedule which calls for class certification motions to be filed by October 1, 2002 in the class action lawsuits. Trial has been scheduled for March 1, 2004. While these matters are in their earliest stages, management believes, based on its analysis of the facts and the asserted claims, that their resolution will have no material adverse effect on Duke Energy's consolidated results of operations, cash flows or financial position. Duke Energy and its subsidiaries are involved in other legal and regulatory proceedings and investigations related to activities in California. These other activities were disclosed in Duke Energy's Form 10-K for the year ended December 31, 2001, and there have been no new material developments in relation to these issues. Regulatory Matters. In November 2001, Nevada Power Company and Sierra Pacific Power Company (collectively, the Companies) filed a complaint with the Federal Energy Regulatory Commission (FERC) against DETM. The complaint requests the FERC to mitigate prices in sales contracts between Duke Energy and Nevada Power, and Duke Energy and Sierra Pacific that were entered into between December 7, 2000 and June 20, 2001. The Companies allege that the contract prices are unjust and unreasonable because they were entered into during a period that the FERC determined the California market to be dysfunctional and uncompetitive, and that the California market influenced the contract prices. In April 2002, the FERC issued an order which provides for an evidentiary hearing, establishes refund dates, and requires the parties to participate in settlement negotiations. In the order, the FERC also estimated a final decision by July 2003. While this matter is in its earliest stages, management believes, based on its analysis of facts and the asserted claims, that the resolution will have no material adverse effect on Duke Energy's consolidated results of operations, cash flows or financial position. Subsequent Event. On April 17, 2002, Duke Energy completed the sale of the Anderson Water Company to the Anderson County Joint Municipal Water System and the City of Anderson. The agreements for closing are two-fold. The first part represents the sale of the water treatment facility and the related water transmission system to the traditional wholesale customers forming the Anderson County Joint Municipal Water System. The second relates to the sale of the retail water system to the City of Anderson. As a result, the City of Anderson becomes a wholesale customer participant in and a member of the joint system. 31 PART II. OTHER INFORMATION Item 1. Legal Proceedings. For information concerning litigation and other contingencies, see Note 7 to the Consolidated Financial Statements, "Commitments and Contingencies," and Item 3, "Legal Proceedings," included in Duke Energy's Form 10-K for December 31, 2001, which are incorporated herein by reference. Management believes that the final disposition of these proceedings will have no material adverse effect on Duke Energy's consolidated results of operations, cash flows or financial position. Item 4. Submission of Matters to a Vote of Security Holders. There were no matters submitted to a vote of the security holders of Duke Energy during the first quarter of 2002. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits Exhibit Number - ------- 3 Articles of Amendment to Restated Articles of Incorporation of registrant. 10 $500,000,000 364-Day Credit Agreement dated as of April 18, 2002, among Duke Capital Corporation, the Banks listed therein and Bank One, NA, as Administrative Agent. (b) Reports on Form 8-K A Current Report on Form 8-K filed on January 9, 2002 contained disclosures under Item 9, Regulation FD Disclosure. A Current Report on Form 8-K filed on March 29, 2002 contained disclosures under Item 2, Acquisition or Disposition of Assets and Item 7, Financial Statements, Pro forma Financial Information and Exhibits. 32 SIGNATURES Pursuant to the requirements 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. DUKE ENERGY CORPORATION May 15, 2002 /s/ Robert P. Brace ----------------------------------- Robert P. Brace Executive Vice President and Chief Financial Officer May 15, 2002 /s/ Keith G. Butler ----------------------------------- Keith G. Butler Senior Vice President and Controller 33 EX-3 3 dex3.txt ARTICLES OF AMENDMENT Exhibit 3 ARTICLES OF AMENDMENT OF DUKE ENERGY CORPORATION The undersigned corporation hereby submits these Articles of Amendment for the purpose of amending its Articles of Incorporation: 1. The name of the corporation is Duke Energy Corporation. 2. The following amendments to the Articles of Incorporation of the corporation were adopted by the holders of its Common Stock on the 25th day of April, 2002, in the manner prescribed by Chapter 55 of the General Statutes of North Carolina: Article III of the Articles of Incorporation is hereby amended by deleting Article III in its entirety and substituting therefor a new Article III to read as follows: The purpose for which the Corporation is organized is to engage in any lawful activity for which corporations may be organized under Chapter 55 of the General Statutes of North Carolina, as amended from time to time. Article IV of the Articles of Incorporation is hereby amended by deleting Article IV in its entirety and substituting therefor a revised Article IV to read as follows: The total number of authorized shares of this Corporation is 2,044,000,000 shares, divided into 12,500,000 shares of Preferred Stock of the par value of $100 each (hereafter called Preferred Stock), 10,000,000 shares of Preferred Stock A of the par value of $25 each (hereafter called Preferred Stock A), 20,000,000 shares of Serial Preferred Stock without par value (hereafter called Serial Preferred Stock), 1,500,000 shares of Preference Stock of the par value of $100 each (hereafter called Preference Stock), and 2,000,000,000 shares of Common Stock without par value (hereafter called Common Stock). The Preferred Stock and the Preferred Stock A (sometimes collectively referred to as the Preferred Stocks) shall rank equally with no preference or priority of the Preferred Stock over the Preferred Stock A or of the Preferred Stock A over the Preferred Stock with respect to dividends and distribution of assets upon liquidation, dissolution or winding up of the Corporation. The Serial Preferred Stock shall rank junior to the Preferred Stocks and senior to the Preference Stock with respect to dividends and distribution of assets upon liquidation, dissolution or winding up of the Corporation. (a) Preferred Stock and Preferred Stock A (1) The Board of Directors is hereby empowered, subject to the provisions of paragraph (9) of this section (a) of Article IV, to cause the authorized and unissued shares of the Preferred Stock and of the Preferred Stock A to be issued in one or more series from time to time, upon such consideration (not less than the par value thereof), upon such terms, and in such manner, and with such variations as to (i) the rates of dividend payable thereon, (ii) the periods of time during which dividends shall accrue and the dates on which dividends shall become payable on the shares of such series, (iii) the terms on which the same may be redeemed, (iv) the terms or amount of any sinking fund provided for the purpose of redemption thereof, and (v) the terms upon which the holders thereof may convert the same into stock of any other class or classes, or into one or more series of the same class, or of another class or classes, as may be determined by the Board of Directors at the time of the creation of each series, but the amount at which said stock may be redeemed shall in no case be less than the par value thereof. (2) The shares of each series of the Preferred Stock and of the Preferred Stock A shall entitle the holders thereof to receive out of the retained earnings of the Corporation or net profits earned during the current or preceding accounting period (each said period to be not less than six months or more than one year in duration) or, if retained earnings and net profits are not available, out of capital surplus, a dividend at the annual rate fixed for the particular series, but not exceeding such rate, cumulative from and after the date of issuance thereof, payable quarterly on the 16th day of March, June, September and December of each year (or, if any such day shall not be a business day, on the next succeeding business day) or at such intervals and on such dates as otherwise are expressly set forth in the resolution of the Board of Directors creating such series or, if such intervals and dividend payment dates shall vary from time to time for such series, the method by which such intervals and dates shall be determined, before any dividend shall be set apart for or paid on the Serial Preferred Stock, the Preference Stock or the Common Stock. Any dividends declared or paid on the Preferred Stock or the Preferred Stock A in an amount less than full cumulative dividends payable at such time upon all shares of the Preferred Stock or the Preferred Stock A outstanding shall, if more than one series be outstanding, be divided among the different series in proportion to the aggregate amounts that would be distributable to the Preferred Stock simultaneously declared and paid thereon at such time without regard to the applicable dividend payment dates. (3) All series of the Preferred Stock shall rank equally and be alike in all respects except for the variations and differences between series herein expressly provided for, and all series of the Preferred Stock A shall rank equally and be alike in all respects except for the variations and differences between series herein expressly provided for. -2- (4) In case of liquidation or dissolution or distribution of the assets of the Corporation, there shall be paid (a) to the holders of the Preferred Stock (i) in case such liquidation, dissolution or distribution shall be voluntary, $105 per share, and (ii) in case such liquidation, dissolution or distribution shall be involuntary, $100 per share, and (b) to the holders of the Preferred Stock A (i) in case such liquidation, dissolution or distribution shall be voluntary, $26.25 per share, and (ii) in case such liquidation, dissolution or distribution shall be involuntary, $25 per share, plus in each case the amount of dividends (if any) accumulated and unpaid thereon, before any amount shall be payable to the holders of the Serial Preferred Stock, the Preference Stock or the Common Stock; the balance of the assets of the Corporation, subject to the rights of the holders of the Serial Preferred Stock and the holders of the Preference Stock, shall be distributed ratably among the holders of the Common Stock. (5) Holders of the Preferred Stock and of the Preferred Stock A shall not be entitled to any payment by way of dividends or otherwise, or have any rights in the property of the Corporation or in the distribution thereof, other than specifically provided in the preceding paragraphs. (6) The Preferred Stock or the Preferred Stock A may be called for redemption in whole or in part on any dividend date at the option of the Board of Directors by mailing notice thereof to the holders of record of the shares to be redeemed at least thirty (30) days prior to the date fixed for redemption, and such shares may be then redeemed by paying for each share so called all accrued and unpaid dividends thereon to the date fixed for such redemption and such additional sum as shall have been fixed by the Board of Directors as the redemption price of stock of the series of which the stock so to be redeemed is a part. Whenever less than all of the outstanding shares of the Preferred Stock or of the Preferred Stock A of any series are to be redeemed, either (i) the shares of such series to be redeemed shall be selected by lot in such manner as may be prescribed by the Board of Directors, or (ii) the redemption shall be made in such manner that each holder of the Preferred Stock or of the Preferred Stock A of the series to be redeemed shall participate therein in the proportion that the number of shares of such series to be redeemed bears to the whole number of shares of stock of that series then outstanding, provided that there shall be no obligation to redeem less than a whole share. From and after the date of redemption, unless default be made by the Corporation in payment of the redemption price pursuant to such notice, all dividends on the shares called for redemption shall cease to accrue, and all rights of the holders thereof in respect of such stock, except the right to receive the redemption price plus accrued and unpaid dividends to the date fixed for such redemption, shall cease and determine. (7) No holder of any of the Preferred Stock or of the Preferred Stock A shall be entitled to vote at any election of directors or, except as otherwise -3- required by statute and except as provided in paragraphs (8), (9), (10) and (11) of this section (a) of Article IV, on any other matter submitted to the shareholders, provided that if and whenever dividends on any part of the Preferred Stock or of the Preferred Stock A shall be in arrears in an amount equivalent to the aggregate dividends required to be paid on such Preferred Stock or such Preferred Stock A in any period of twelve (12) calendar months the holders of the Preferred Stock as a class shall thereafter at all elections of directors have the exclusive right to elect such number of directors of the Corporation as shall constitute a majority of the authorized number of directors, the holders of the Preferred Stock A as a class shall thereafter at all elections of directors have the exclusive right to elect two directors, and the holders of the Common Stock of the Corporation and the holders of such series of the Serial Preferred Stock as are entitled to vote generally with respect to the election of directors, voting together, shall have the exclusive right, subject to the right, if any, of holders of the Serial Preferred Stock to elect directors, and the right of the holders of the Preference Stock as a class to elect two directors, under certain circumstances, to elect the remaining number of directors of the Corporation which right of the holders of the Preferred Stocks, however, shall cease when all accrued and unpaid dividends on the Preferred Stocks shall have been paid in full. The terms of office of all persons who may be directors of the Corporation at the time when the right to elect directors shall accrue to the holders of the Preferred Stocks, as herein provided, shall terminate upon the election of their successors at the next annual meeting of the shareholders or at an earlier special meeting of the shareholders held as hereinafter provided. Such special meeting shall be held at any time after the accrual of such voting power, upon notice similar to that provided in the By-Laws for an annual meeting, which notice shall be given at the request in writing of the holders of not less than ten (10%) percent of the number of shares of the then outstanding Preferred Stocks, addressed to the Secretary of the Corporation at its principal business office. Upon the termination of such right of the holders of the Preferred Stocks to elect directors of the Corporation, the terms of office of all the directors of the Corporation shall terminate upon the election of their successors at the next annual meeting of the shareholders or at an earlier special meeting of the shareholders held as hereinafter provided. Such special meeting shall be held at any time after the termination of such right of the holders of the Preferred Stocks to elect directors, upon notice similar to that provided in the By-Laws for an annual meeting, which notice shall be given at the request in writing of the holders of not less than ten (10%) percent of the number of the then outstanding shares of stock of all classes of the Corporation entitled to vote generally with respect to the election of directors, addressed to the Secretary of the Corporation at its principal business office. (8) (i) So long as any of the Preferred Stock remains outstanding, the authorization of the holders of at least two-thirds (2/3) of the Preferred Stock -4- then outstanding, voting as a class regardless of series (given at a meeting called for that purpose), shall be necessary for effecting or validating the amendment, alteration, change or repeal of any of the express terms of the Preferred Stock, or any series thereof, then outstanding, in a manner prejudicial to the holders thereof; provided that if any such amendment, alteration, change or repeal would be prejudicial to the holders of the shares of one or more, but not all, of the series of the Preferred Stock at the time outstanding, such authorization shall be required only of the holders of at least two-thirds (2/3) of the total number of outstanding shares of all series so affected. (ii) So long as any of the Preferred Stock A remains outstanding, the authorization of the holders of at least two-thirds (2/3) of the Preferred Stock A then outstanding, voting as a class regardless of series (given at a meeting called for that purpose), shall be necessary for effecting or validating the amendment, alteration, change or repeal of any of the express terms of the Preferred Stock A, or any series thereof, then outstanding, in a manner prejudicial to the holders thereof; provided that if any such amendment, alteration, change or repeal would be prejudicial to the holders of the shares of one or more, but not all, of the series of the Preferred Stock A at the time outstanding, such authorization shall be required only of the holders of at least two-thirds (2/3) of the total number of outstanding shares of all series so affected. (9) So long as any of the Preferred Stock or of the Preferred Stock A remains outstanding, the affirmative vote of the holders of at least two-thirds (2/3) of the Preferred Stock then outstanding, voting as a class regardless of series, and the affirmative vote of the holders of at least two-thirds (2/3) of the Preferred Stock A then outstanding, voting as a class regardless of series, shall be necessary to enable the Corporation to issue shares of Preferred Stock in excess of 250,000 shares or shares of Preferred Stock A in excess of 1,000,000 shares, or any other class of stock having rights in the distribution of the earnings or assets of the Corporation prior to or on a parity with those of the Preferred Stock or of the Preferred Stock A, or any obligations convertible into or evidencing the right to purchase any of such shares of stock, unless both (i) the net earnings of the Corporation available for dividends on the Preferred Stock and on the Preferred Stock A, determined in accordance with generally accepted accounting practices, for any twelve (12) consecutive calendar months within the fifteen (15) calendar months preceding the month within which the additional shares shall be issued, shall have been at least twice the dividend requirements for a twelve (12) months' period upon the entire amount of the Preferred Stock and of the Preferred Stock A and all such other stock ranking prior to or on a parity with the Preferred Stock and the -5- Preferred Stock A as to dividends or other distributions to be outstanding immediately after the proposed issue of shares of the Preferred Stock or of the Preferred Stock A or such other stock, and (ii) the total net assets of the Corporation at a date not more than ninety (90) days prior to the date on which the proposed stock is to be issued shall equal at least twice the aggregate amount payable, upon the involuntary liquidation of the Corporation, to the holders of the Preferred Stock and of the Preferred Stock A and such other stock to be outstanding immediately after the proposed issue of such additional shares. (10) So long as any of the Preferred Stock or of the Preferred Stock A remains outstanding, the affirmative vote of the holders of at least two-thirds (2/3) of the Preferred Stock then outstanding, voting as a class regardless of series, and the affirmative vote of the holders of at least two-thirds (2/3) of the Preferred Stock A then outstanding, voting as a class regardless of series, shall be necessary to authorize the creation of, or an increase in the authorized number of shares of, any stock having preferential rights in the distribution of earnings or assets of the Corporation prior to or on a parity with those of the outstanding Preferred Stock or of the outstanding Preferred Stock A. (11) So long as any of the Preferred Stock or of the Preferred Stock A remains outstanding, the consent or authorization of the holders of at least two-thirds (2/3) of the Preferred Stock then outstanding, voting as a class regardless of series (given at a meeting called for that purpose), and the consent or authorization of the holders of at least two-thirds (2/3) of the Preferred Stock A then outstanding, voting as a class regardless of series (given at a meeting called for that purpose), shall be necessary for effecting or validating (i) the sale or exchange of all, or substantially all, of the property and assets of the Corporation, or (ii) the merger or consolidation of the Corporation with any other corporation or corporations (other than subsidiaries of the Corporation); provided that the provisions of this paragraph shall not apply to the purchase or other acquisition by the Corporation of franchises or other assets of another corporation, or to any merger or consolidation ordered or authorized by the Federal Power Commission or by any succeeding regulatory authority of the United States having jurisdiction in the premises. (12) At any meeting at which the holders of the Preferred Stock or of the Preferred Stock A shall have the right to vote as a class, the presence in person or by proxy of the holders of a majority of the outstanding shares of the Preferred Stock or of the Preferred Stock A shall be required to constitute a quorum of such class. Whenever the holders of the outstanding Preferred Stock or of the outstanding Preferred Stock A shall have the right -6- to vote, each holder thereof shall be entitled to one vote for each share standing in his name. (b) Serial Preferred Stock (1) The Serial Preferred Stock may be issued from time to time as herein provided in one or more series. The Board of Directors is hereby expressly granted authority, subject to the provisions of this Article IV, to issue from time to time Serial Preferred Stock in one or more series out of the then authorized and unissued shares of Serial Preferred Stock and with respect to each series to fix, by resolution or resolutions providing for the issuance of such series, such designations, preferences, limitations and relative rights of such series as may be permitted to be fixed by the Board of Directors by the laws of the State of North Carolina as in effect at the time the particular series is authorized, including, without limitation, authority so to fix any one or more of the following: (i) the designation of such series; (ii) the number of shares of the series; (iii) the dividend rate or rates, if any, thereof (or method of determining such dividends), the conditions and dates upon which such dividends shall be payable, the preference or relation of such dividends, subject to the provisions of this Article IV, to dividends payable on any other class or classes of capital stock of the Corporation, and whether such dividends shall be cumulative or noncumulative; (iv) whether the shares of such series shall be subject to redemption by the Corporation, and, if made subject to such redemption, the times, prices, rates, adjustments and other terms and conditions of such redemption; (v) the terms and amount of any sinking or similar fund provided for the purchase or redemption of the shares of such series; (vi) providing that the shares of such series may be convertible into or exchangeable for shares of Common Stock or other securities of the Corporation or of any other corporation or other entity and the times, prices, rates, adjustments and other terms and conditions of such conversion or exchange; (vii) the extent, if any, to which the holders of the shares of such series shall be entitled to vote as a series or otherwise, subject to -7- the provisions of this Article IV and as otherwise may be provided by law, with respect to the election of directors or otherwise; (viii) the restrictions and conditions, if any, upon the issue of any additional Serial Preferred Stock ranking on a parity with or prior to such shares as to dividends or upon dissolution; (ix) the rights of the holders of the shares of such series upon the liquidation, dissolution or distribution of the assets of the Corporation, which rights may be different in case such liquidation, dissolution or distribution shall be voluntary or involuntary; and (x) any other preferences, limitations or relative rights of shares of such series consistent with this Article IV and applicable law. All shares of the Serial Preferred Stock of the same series shall be identical in all respects. All shares of the Serial Preferred Stock, irrespective of series, shall constitute one and the same class of stock, shall be of equal rank and shall be identical in all respects except that to the extent not otherwise limited in this Article IV any series may differ from any other series with respect to any one or more of the designations, preferences, limitations and relative rights described or referred to in subparagraphs (i) to (x), inclusive above. (c) Preference Stock (1) The Preference Stock may be issued from time to time as herein provided in one or more series. The Board of Directors of the Corporation is hereby expressly granted authority, subject to the provisions of this Article IV, to issue from time to time Preference Stock in one or more series out of the then authorized and unissued shares of Preference Stock and with respect to each series to fix, by resolution or resolutions providing for the issuance of such series, such designations, preferences, limitations and relative rights of such series as may be permitted to be fixed by the Board of Directors by the laws of the State of North Carolina as in effect at the time the particular series is authorized by the Board of Directors, including, without limitation, authority so to fix any one or more of the following: (i) the distinctive designation of such series and the number of shares which shall constitute such series; (ii) the annual dividend rate for the shares of such series; (iii) the terms on which shares of such series may be redeemed, including, without limitation, the redemption price or -8- prices for such series, which may consist of a redemption price or scale of redemption prices applicable only to redemption in connection with a sinking fund and the same or a different redemption price or scale of redemption prices applicable to any other redemption; (iv) the terms and amount of any sinking fund provided for the purchase or redemption of shares of such series; (v) the amount per share payable on the shares of such series upon the voluntary and involuntary liquidation, dissolution or winding up of the Corporation, which amount may vary depending upon whether such liquidation, dissolution or winding up is voluntary or involuntary; and (vi) the terms and conditions, if any, upon which holders of shares of such series may convert the same into, or exchange the same for, Common Stock, as well as provisions for adjustment of the conversion rate in such events as the Board of Directors shall determine. All shares of Preference Stock of the same series shall be identical in all respects. All shares of Preference Stock, irrespective of series, shall constitute one and the same class of stock, shall be of equal rank and shall be identical in all respects except that to the extent not otherwise limited in this Article IV any series may differ from any other series with respect to any one or more of the designations, preferences, limitations and relative rights described or referred to in subparagraphs (i) to (vi), inclusive above. (2) Subject to full dividends accrued on all outstanding shares of Preferred Stocks and Serial Preferred Stock for all past dividend periods and for the then current dividend period having been paid or declared and set apart for payment, holders of the Preference Stock shall be entitled to receive, but only when and as declared by the Board of Directors out of funds legally available for the declaration and payment of dividends, cumulative dividends in cash at the annual dividend rate per share fixed for the particular series, and no more, payable in respect of each quarterly dividend period, commencing on the date specified for the first dividend payment to shareholders of record on the respective dates fixed in advance for the purpose by the Board of Directors prior to the payment of each such dividend, which record date for each dividend shall be the same for all series. Dividends on shares of each series of the Preference Stock shall be cumulative: -9- (i) on shares of any series issued prior to the first dividend payment date for such series, from the date of issuance of such shares; and (ii) on shares of any series issued on or after such first dividend payment date, from the quarterly dividend payment date next preceding the date of issuance of such shares or from the date of issuance if that be a dividend payment date. No dividend shall be declared on any series of the Preference Stock for any quarterly dividend period unless there shall have been paid or declared and set apart for payment like proportionate dividends, ratably, in proportion to the annual dividend rates fixed therefor, on all shares at the time outstanding of all series of the Preference Stock, in respect of the same quarterly dividend period to the extent that such shares are entitled to receive dividends for such quarterly dividend period. The expression "dividends accrued," as used in this paragraph (2) and in any resolutions providing for the issuance of series of the Preference Stock, shall mean the sum of amounts in respect of shares of the particular class or series then outstanding which, as to each share, shall be an amount computed at the dividend rate per annum fixed for the particular share from the date from which dividends on such share became cumulative to the date with reference to which the expression is used, irrespective of whether such amount or any part thereof shall have been declared as dividends or there shall have existed any funds legally available for the declaration and payment thereof, less the aggregate of all dividends paid on such share. No dividend shall be declared or paid or set aside for payment or other distribution declared or made upon the Common Stock, nor shall any Common Stock be purchased or otherwise acquired for any consideration by the Corporation or any subsidiary, while any of the Preference Stock is outstanding, unless, in each case: (a) full dividends accrued on all outstanding shares of the Preference Stock for all past dividend periods shall have been paid or declared and set apart for payment; and (b) the Corporation shall have made, or set aside for payment, all payments, if any, then or theretofore due under the requirements of any sinking fund for the purchase or redemption of shares of any series of the Preference Stock. (3) Except as otherwise provided by law, the holders of the Preference Stock shall not have any right to vote for the election of directors or for any other purpose except as set forth below: -10- (i) In the event that at any time, or from time to time: (a) six (6) or more quarterly dividends, whether consecutive or not, on any series of the Preference Stock shall be in arrears and unpaid, whether or not earned or declared; or (b) the Corporation shall not have made, or set aside for payment, all payments, if any, then or theretofore due under the requirements of any sinking fund for the purchase or redemption of shares of any series of the Preference Stock; the holders of the Preference Stock of all series then outstanding, voting as a class without regard to series, shall have, subject to the rights of the holders of the Preferred Stocks and the rights, if any, of holders of the Serial Preferred Stock to elect directors under certain circumstances, the exclusive right to elect two directors at the next annual meeting of shareholders. In any such event, subject to the voting rights of the Preferred Stocks and the voting rights, if any, of the Serial Preferred Stock to elect directors under certain circumstances, the holders of the Common Stock and the holders of such series of the Serial Preferred Stock as are entitled to vote generally with respect to the election of directors, to the exclusion of the holders of the Preference Stock entitled to elect two members of the Board pursuant to this paragraph (3), voting together, shall be entitled to elect the balance of the Board of Directors. The voting rights of the holders of the Preference Stock to elect two directors shall continue until: (x) all dividends on the Preference Stock in arrears shall have been paid in full and dividends on the Preference Stock for the current dividend period shall have been paid or declared and set aside for payment; and (y) all payments, if any, then or theretofore due under the requirements of any sinking fund for the purchase or redemption of shares of any series of the Preference Stock shall have been made or set aside for payment; in which event the voting rights of the holders of the Preference Stock to elect two directors shall terminate, subject to revival as aforesaid, upon the occurrence of any of the events specified in (a) or (b) of this clause (i) of this paragraph (3), and in the event of the termination of such voting right, the directors who have been elected by the holders -11- of the Preference Stock shall continue in office until the next annual meeting of shareholders. (ii) The affirmative approval of the holders of at least two-thirds (2/3) of the Preference Stock at the time outstanding, voting as a class without regard to series, shall be required for any amendment of the Articles of Incorporation altering materially any existing provision of the Preference Stock or for the creation, or an increase in the authorized amount, of any class of stock ranking, as to dividends or assets, prior to the Preference Stock, and the affirmative approval of the holders of at least a majority of the Preference Stock at the time outstanding, voting as a class without regard to series, shall be required for an increase in the authorized amount of the Preference Stock or for the creation, or an increase in the authorized amount, of any class of stock ranking, as to dividends or assets, on a parity with the Preference Stock; provided, however, that if any amendment of the Articles of Incorporation shall affect adversely the rights or preferences of one or more, but not all, of the series of Preference Stock at the time outstanding or shall unequally adversely affect the rights or preferences of different series of Preference Stock at the time outstanding, the affirmative approval of the holders of at least two-thirds (2/3) of such shares of each such series so adversely or unequally adversely affected shall be required in lieu of or (if such affirmative approval is required by law) in addition to the affirmative approval of the holders of at least two-thirds (2/3) of the outstanding shares of Preference Stock as a class. At any meeting at which the holders of the Preference Stock shall have the right to vote as a class, the presence in person or by proxy of the holders of a majority of the outstanding shares of Preference Stock shall be required to constitute a quorum of such class. Each holder of Preference Stock entitled to vote at any particular time shall have one vote for each share of stock held of record by him. (4) The Preference Stock shall rank junior to the Preferred Stocks and the Serial Preferred Stock with respect to the distribution of assets of the Corporation. After the payment to the holders of the Preferred Stocks and the Serial Preferred Stock of all amounts payable to them in the event of any liquidation or dissolution or distribution of the assets (whether voluntary or involuntary) of the Corporation, in the event of any liquidation, dissolution or winding up (whether voluntary or involuntary) of the Corporation, the holders of each series of the Preference Stock at the time outstanding shall be entitled to be paid in cash the distributive amount fixed for the particular series, which shall include dividends accrued thereon to the date fixed for payment of such distributive amounts, and no more, before any such -12- distribution or payment shall be made to the holders of Common Stock. Neither the consolidation nor merger of the Corporation with or into any other corporation or corporations, nor the sale or transfer by the Corporation of all or any part of its assets, shall be deemed a liquidation, dissolution or winding up of the Corporation. In the event of any liquidation, dissolution or winding up (whether voluntary or involuntary) of the Corporation, no payment shall be made to the holders of any series of the Preference Stock unless there shall likewise be paid at the same time to the holders of all shares at the time outstanding of each series of the Preference Stock like proportionate distributive payments, ratably, in proportion to the full distributive payments to which they are respectively entitled. (5) The Corporation, at the option of the Board of Directors, may redeem at any time or times, and from time to time, all or any part of any one or more series of Preference Stock outstanding upon notice duly given as hereinafter specified, by paying for each share the then applicable redemption price fixed by the Board of Directors as provided herein, plus an amount equal to dividends accrued thereon to the date fixed for redemption; provided, however, that a notice specifying the shares to be redeemed and the time and place of redemption shall be mailed, addressed to the holders of record of the Preference Stock to be redeemed at their respective addresses as the same shall appear upon the books of the Corporation, not less than thirty (30) days prior to the date fixed for redemption. If less than the whole amount of any outstanding series of Preference Stock is to be redeemed, the shares of such series to be redeemed shall be selected by lot or pro rata in any manner determined by resolution of the Board of Directors to be fair and proper. From and after the date fixed in any such notice as the date of redemption (unless default shall be made by the Corporation in providing moneys at the time and place of redemption for the payment of the redemption price), all dividends upon the Preference Stock so called for redemption shall cease to accrue, and all rights of the holders of said Preference Stock as shareholders in the Corporation, except the right to receive the redemption price upon surrender of the certificate representing the Preference Stock so called for redemption, duly endorsed for transfer, if required, shall cease and determine. With respect to any shares of Preference Stock so called for redemption, if, before the redemption date, the Corporation shall deposit with a bank or trust company in the Borough of Manhattan, City of New York, having a capital and surplus of at least $5,000,000, funds necessary for such redemption, in trust, to be applied to the redemption of the shares of Preference Stock so called for redemption, then from and after the date of such deposit, all rights of the holders of such shares of Preference Stock, so called for redemption, shall cease and determine, except the right to receive, on and after the redemption date, the redemption price upon surrender of the certificates representing such shares -13- of Preference Stock, so called for redemption, duly endorsed for transfer, if required. Any interest accrued on such funds shall be paid to the Corporation from time to time. Any funds so deposited and unclaimed at the end of six (6) years from such redemption date shall be released or repaid to the Corporation, after which the holders of such shares of Preference Stock so called for redemption shall look only to the Corporation for payment of the redemption price. If at any time the Corporation shall have failed to declare and pay or set apart for payment dividends in full upon the Preference Stock of all series for all past dividend periods, or shall not have made, or set aside for payment, all payments, if any, then or theretofore due under the requirements of any sinking fund for the purchase or redemption of shares of any series of the Preference Stock, thereafter and until all such dividends shall have been paid in full or declared and set apart for payment and all sinking fund payments shall have been made, or set aside for payment, the Corporation shall not redeem or purchase, or permit any subsidiary to purchase, for any purpose, any shares of Preference Stock of any series, unless all shares of Preference Stock of all series then outstanding shall be redeemed or purchased. (d) Common Stock (1) The Corporation may, from time to time, issue and sell any of its authorized and unissued shares of Common Stock for such consideration, upon such terms and in such manner as may from time to time be fixed and determined by the Board of Directors, and any and all such shares so issued, the full consideration for which shall have been paid, shall be conclusively deemed to be fully paid and nonassessable. (2) Whenever the full dividends on the Preferred Stocks, on the Serial Preferred Stock and on the Preference Stock at the time outstanding for all past dividend periods and for the then current dividend period shall have been paid, or declared and a sum sufficient for the payment thereof set apart, then, and then only, such dividends (payable in cash, stock or otherwise) as may be determined by the Board of Directors, may be declared and paid on the Common Stock, from time to time, out of the remaining retained earnings or net profits of the Corporation, and the Preferred Stocks, the Serial Preferred Stock or the Preference Stock shall not be entitled to participate in any such dividends, whether payable in cash, stock or otherwise. (3) In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, after payment in full has been made to the holders of the Preferred Stocks, to the holders of the Serial Preferred Stock and to the holders of the Preference Stock of the amounts to -14- which they are respectively entitled or sufficient sums have been set apart for the payment thereof, the holders of the Common Stock shall be entitled to receive ratably any and all assets remaining to be paid or distributed, and neither the holders of the Preferred Stocks, the holders of the Serial Preferred Stock nor the holders of the Preference Stock shall be entitled to share therein. (4) Holders of the Common Stock shall be entitled to one (1) vote for each share of such stock held at any and all meetings of the shareholders of the Corporation, and, except as otherwise stated in this Article IV or as otherwise provided by law or by the resolution or resolutions fixing the designations, preferences, limitations and relative rights of any series of Serial Preferred Stock, the exclusive voting power for all purposes shall be vested in the holders of the Common Stock. Article VII of the Articles of Incorporation is hereby amended by deleting Article VII in its entirety and substituting therefor a revised Article VII to read as follows: In addition to any requirements of the By-Laws and the North Carolina Business Corporation Act as in effect from time to time (and notwithstanding the fact that a lesser vote may be specified by the By-Laws or the North Carolina Business Corporation Act), the affirmative vote of the holders of at least a majority of the combined voting power of the then outstanding shares of stock of all classes of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required for the shareholders of the Corporation to adopt, amend, alter, change or repeal any provisions contained in the By-Laws of the Corporation. The provisions of this Article VII may not be altered, amended or repealed in any respect, nor may any provision inconsistent therewith be adopted, unless such alteration, amendment, repeal or adoption is approved by the affirmative vote of the holders of at least a majority of the combined voting power of the then outstanding shares of stock of all classes of the Corporation entitled to vote generally in the election of directors, voting together as a single class. Article VIII of the Articles of Incorporation is hereby amended by deleting clause (a) of Article VIII in its entirety and substituting therefor a revised clause (a) of Article VIII to read as follows: (a) Number. Except as may be otherwise fixed by or pursuant to the ------ provisions of these Articles of Incorporation, as amended from time to time, relating to the rights of the holders of any class of stock having a preference over the Common Stock as to dividends or upon liquidation to elect directors under specified circumstances, the number of directors constituting the Board of Directors shall not be less than nine (9) nor more than eighteen (18), as may be fixed from time to time by the Board of Directors. -15- 3. Only shares of Common Stock of the corporation were entitled to vote with respect to these amendments. The number of such shares of the corporation outstanding at the time of such adoption was 829,807,359; the number of votes entitled to be cast thereon was 778,199,474; and the number of votes indisputably represented at the meeting of shareholders was 654,205,377. The total number of undisputed votes cast for each of the four amendments described herein was sufficient for approval of the respective amendment, as required by Chapter 55 of the General Statues of North Carolina. This the 1st day of May, 2002. DUKE ENERGY CORPORATION By: /s/ Richard B. Priory ------------------------------------ Richard B. Priory Chairman of the Board, President and Chief Executive Officer -16- EX-10 4 dex10.txt CREDIT AGREEMENT Exhibit 10 $500,000,000 364-DAY CREDIT AGREEMENT dated as of April 18, 2002 among DUKE CAPITAL CORPORATION, as Borrower -------- THE BANKS LISTED HEREIN as Banks ----- and BANK ONE, NA as Administrative Agent -------------------- BANC ONE CAPITAL MARKETS, INC. Lead Arranger and Sole Book Runner ---------------------------------- TABLE OF CONTENTS
Page ARTICLE 1 DEFINITIONS AND ACCOUNTING TERMS...................................................1 Section 1.01. Definitions.................................................................1 Section 1.02. Accounting Terms and Determinations........................................10 Section 1.03. Types and Classes of Borrowings............................................10 ARTICLE 2 THE CREDITS.......................................................................10 Section 2.01. Commitments................................................................10 Section 2.02. Notice of Borrowings.......................................................11 Section 2.03. Notice to Banks; Funding of Loans..........................................11 Section 2.04. Registry; Notes............................................................12 Section 2.05. Maturity of Loans..........................................................13 Section 2.06. Interest Rates.............................................................13 Section 2.07. Commitment Fees............................................................14 Section 2.08. Optional Termination or Reduction of Commitments...........................14 Section 2.09. Method of Electing Interest Rates..........................................14 Section 2.10. Mandatory Termination of Commitments.......................................15 Section 2.11. Optional Prepayments.......................................................15 Section 2.12. General Provisions as to Payments..........................................16 Section 2.13. Funding Losses.............................................................16 Section 2.14. Computation of Interest and Fees...........................................16 Section 2.15. Regulation D Compensation..................................................17 Section 2.16. Facility LCs...............................................................17 ARTICLE 3 CONDITIONS........................................................................22 Section 3.01. Effectiveness..............................................................22 Section 3.02. Credit Extensions..........................................................23 ARTICLE 4 REPRESENTATIONS AND WARRANTIES....................................................23 Section 4.01. Organization and Power.....................................................23 Section 4.02. Corporate and Governmental Authorization; No Contravention.................23 Section 4.03. Binding Effect.............................................................24 Section 4.04. Financial Information......................................................24 Section 4.05. Regulation U...............................................................24
-i- TABLE OF CONTENTS (Continued)
Page Section 4.06. Litigation.................................................................24 Section 4.07. Compliance with Laws.......................................................24 Section 4.08. Taxes......................................................................25 Section 4.09. Public Utility Holding Company Act.........................................25 ARTICLE 5 COVENANTS.........................................................................25 Section 5.01. Information................................................................25 Section 5.02. Payment of Taxes...........................................................27 Section 5.03. Maintenance of Property; Insurance.........................................27 Section 5.04. Maintenance of Existence...................................................27 Section 5.05. Compliance with Laws.......................................................27 Section 5.06. Books and Records..........................................................27 Section 5.07. Maintenance of Ownership of Principal Subsidiaries.........................28 Section 5.08. Negative Pledge............................................................28 Section 5.09. Consolidations, Mergers and Sales of Assets................................29 Section 5.10. Use of Proceeds............................................................29 Section 5.11. Transactions with Affiliates...............................................29 Section 5.12. Indebtedness/Capitalization Ratio..........................................30 ARTICLE 6 DEFAULTS..........................................................................30 Section 6.01. Events of Default..........................................................30 Section 6.02. Notice of Default..........................................................33 ARTICLE 7 THE ADMINISTRATIVE AGENT..........................................................33 Section 7.01. Appointment; Nature of Relationship........................................33 Section 7.02. Administrative Agent and Affiliates........................................33 Section 7.03. Action by Administrative Agent.............................................33 Section 7.04. Consultation with Experts..................................................34 Section 7.05. Liability of Administrative Agent..........................................34 Section 7.06. Indemnification............................................................34 Section 7.07. Credit Decision............................................................34 Section 7.08. Successor Administrative Agent.............................................34 Section 7.09. Administrative Agent's Fee.................................................35
-ii- TABLE OF CONTENTS (Continued)
Page ARTICLE 8 CHANGE IN CIRCUMSTANCES...........................................................35 Section 8.01. Basis for Determining Interest Rate Inadequate or Unfair...................35 Section 8.02. Illegality.................................................................35 Section 8.03. Increased Cost and Reduced Return..........................................36 Section 8.04. Taxes......................................................................37 Section 8.05. Alternate Base Rate Loans Substituted for Affected Euro-Dollar Loans.......39 Section 8.06. Substitution of Bank.......................................................40 ARTICLE 9 MISCELLANEOUS.....................................................................40 Section 9.01. Notices....................................................................40 Section 9.02. No Waivers.................................................................41 Section 9.03. Expenses; Indemnification..................................................41 Section 9.04. Sharing of Set-offs........................................................41 Section 9.05. Amendments and Waivers.....................................................42 Section 9.06. Successors and Assigns.....................................................42 Section 9.07. Collateral.................................................................43 Section 9.08. Confidentiality............................................................43 Section 9.09. Governing Law; Submission to Jurisdiction..................................44 Section 9.10. Counterparts; Integration..................................................44 Section 9.11. WAIVER OF JURY TRIAL.......................................................44 Section 9.12. Payments Set Aside.........................................................44
-iii- COMMITMENTS SCHEDULE PRICING SCHEDULE NOTICE ADDRESSES SCHEDULE EXISTING LCS SCHEDULE EXHIBIT A - Note EXHIBIT B-1 - Opinion of Deputy General Counsel of the Borrower EXHIBIT B-2 - Opinion of Special Counsel for the Borrower EXHIBIT C - Assignment and Assumption Agreement EXHIBIT D - Extension Agreement EXHIBIT E - Facility LC Application EXHIBIT F - Facility LC 364-DAY CREDIT AGREEMENT 364-DAY CREDIT AGREEMENT dated as of April 18, 2002 among DUKE CAPITAL CORPORATION, the BANKS listed on the signature pages hereof and BANK ONE, NA, a national banking association having its principal office in Chicago, Illinois, as Administrative Agent. The parties hereto agree as follows: ARTICLE 1 DEFINITIONS AND ACCOUNTING TERMS Section 1.01. Definitions. The following terms, as used herein, have the ----------- following meanings: "Additional Bank" means any financial institution that becomes a Bank for --------------- purposes hereof in connection with the replacement of a Bank pursuant to Section 8.06. "Administrative Agent" means Bank One, NA, in its capacity as -------------------- administrative agent for the Banks hereunder, and its successors in such capacity. "Administrative Questionnaire" means, with respect to each Bank, the ---------------------------- administrative questionnaire in the form submitted to such Bank by the Administrative Agent and submitted to the Administrative Agent (with a copy to the Borrower) duly completed by such Bank. "Affiliate" means, as to any Person (the "specified Person") (i) any Person --------- that directly, or indirectly through one or more intermediaries, controls the specified Person (a "Controlling Person") or (ii) any Person (other than the ------------------ specified Person or a Subsidiary of the specified Person) which is controlled by or is under common control with a Controlling Person. As used herein, the term "control" means possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ownership of voting securities, by contract or otherwise. Unless otherwise specified, "Affiliate" means an Affiliate of the Borrower. "Aggregate Commitment" means the aggregate of the Commitments of all the -------------------- Banks. "Aggregate Outstanding Credit Exposure" means, at any time, the aggregate ------------------------------------- of the Outstanding Credit Exposure of all the Banks. "Alternate Base Rate" means, for any day, a rate of interest per annum ------------------- equal to the higher of (i) the Prime Rate for such day and (ii) the sum of the Federal Funds Effective Rate for such day plus 1/2% per annum. "Alternate Base Rate Loan" means a Loan which, except as otherwise provided ------------------------ in Section 2.06, bears interest at the Alternate Base Rate. "Applicable Lending Office" means, with respect to any Bank, (i) in the ------------------------- case of its Alternate Base Rate Loans, its Domestic Lending Office and (ii) in the case of its Euro-Dollar Loans, its Euro-Dollar Lending Office. "Applicable Margin" means, with respect to Euro-Dollar Borrowings at any ----------------- time, the percentage rate per annum which is applicable to such time with respect to Euro-Dollar Borrowings as set forth in the Pricing Schedule. "Approved Officer" means the president, a vice president, the treasurer or ---------------- an assistant treasurer or the controller of the Borrower or such other representative of the Borrower as may be designated by any one of the foregoing with the consent of the Administrative Agent. "Assignee" has the meaning set forth in Section 9.06(c). -------- "Available Aggregate Commitment" means, at any time, the Aggregate ------------------------------ Commitment then in effect minus the Aggregate Outstanding Credit Exposure at such time. "Bank" means each bank or other financial institution listed on the ---- signature pages hereof, each Additional Bank, each Assignee which becomes a Bank pursuant to Section 9.06(c), and their respective successors. "Bank One" means Bank One, NA, a national banking association having its -------- principal office in Chicago, Illinois, in its individual capacity, and its successors. "Borrower" means Duke Capital Corporation, a Delaware corporation, and its -------- successors. "Borrowing" has the meaning set forth in Section 1.03. --------- "Cash Equivalents" means (i) securities issued or unconditionally ---------------- guaranteed by the United States of America or any agency or instrumentality thereof, backed by the full faith and credit of the United States of America and maturing within 30 days from the date of acquisition, (ii) commercial paper issued by any Person organized under the laws of the United States of America, maturing within 30 days from the date of acquisition and, at the time of acquisition, having a rating of at least A-1 or the equivalent thereof by S&P or at least P-1 or the equivalent thereof by Moody's, (iii) time deposits and certificates of deposit maturing within 30 days from the date of issuance and issued by a bank or trust company organized under the laws of the United States of America or any state thereof that has combined capital and surplus of at least $500,000,000 and that has (or is a subsidiary of a bank holding company that has) a long-term unsecured debt rating of at least A or the equivalent thereof by S&P or at least A2 or the equivalent thereof by Moody's, (iv) repurchase obligations with a term not exceeding seven (7) days with respect to underlying securities of the types described in clause (i) above entered into with any bank or trust company meeting the qualifications specified in clause (iii) above, and (v) money market funds at least 95% of the assets of which are continuously invested in securities of the type described in clause (i) above. "Class" refers to the determination whether a Loan is a Revolving Credit ----- Loan or a Term Loan. 2 "Collateral Shortfall Amount" is defined in Section 6.01. --------------------------- "Commitment" means (i) with respect to each Bank listed on the signature ---------- pages hereof, the amount set forth opposite the name of such Bank on the Commitment Schedule, and (ii) with respect to each Additional Bank or Assignee which becomes a bank pursuant to Sections 2.01(c) and 9.06(c), the amount of the Commitment thereby assumed by it, in each case as such amount may from time to time be reduced pursuant to Section 2.08, 2.10 or 9.06(c) or increased pursuant to Section 8.06 or 9.06(c). "Commitment Fee Rate" means, on any day, the percentage rate per annum ------------------- applicable on such day as set forth in the Pricing Schedule. "Commitment Schedule" means the Schedule attached hereto identified as ------------------- such. "Commitment Termination Date" means, for each Bank, April 17, 2003, as such --------------------------- date may be extended from time to time pursuant to Section 2.01(c) or, if any such day is not a Euro-Dollar Business Day, the next preceding Euro-Dollar Business Day. "Consolidated Capitalization" means the sum of (i) Consolidated --------------------------- Indebtedness, (ii) consolidated common stockholders' equity as would appear on a consolidated balance sheet of the Borrower and its Consolidated Subsidiaries prepared in accordance with generally accepted accounting principles, (iii) the aggregate liquidation preference of preferred stocks (other than preferred stocks subject to mandatory redemption or repurchase) of the Borrower and its Consolidated Subsidiaries upon involuntary liquidation, (iv) the aggregate outstanding amount of all Equity Preferred Securities, and (v) minority interests as would appear on a consolidated balance sheet of the Borrower and its Consolidated Subsidiaries prepared in accordance with generally accepted accounting principles. "Consolidated Indebtedness" means, at any date, all Indebtedness of ------------------------- Borrower and its Consolidated Subsidiaries determined on a consolidated basis in accordance with generally accepted accounting principles. "Consolidated Subsidiary" means, for any Person, at any date any Subsidiary ----------------------- or other entity the accounts of which would be consolidated with those of such Person in its consolidated financial statements if such statements were prepared as of such date; unless otherwise specified "Consolidated Subsidiary" means a Consolidated Subsidiary of the Borrower. "Credit Extension" means the issuance of a Facility LC hereunder or the ---------------- making of a Borrowing. "Credit Rating" is defined in the Pricing Schedule. ------------- "Default" means any condition or event which constitutes an Event of ------- Default or which with the giving of notice or lapse of time or both would, unless cured or waived, become an Event of Default. "Domestic Business Day" means any day except a Saturday, Sunday or other --------------------- day on which commercial banks in Chicago, Illinois are authorized by law to close. 3 "Domestic Lending Office" means, as to each Bank, its office located at its ----------------------- address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Domestic Lending Office) or such other office as such Bank may hereafter designate as its Domestic Lending Office by notice to the Borrower and the Administrative Agent. "Effective Date" means the date this Agreement becomes effective in -------------- accordance with Section 3.01. "Environmental Laws" means any and all federal, state, local and foreign ------------------ statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements or other governmental restrictions relating to the environment or to emissions, discharges, releases of pollutants, contaminants, chemicals, or industrial, toxic or hazardous substances or wastes into the environment including, without limitation, ambient air, surface water, ground water, or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, or handling of pollutants, contaminants, chemicals, or industrial, toxic or hazardous substances or wastes. "Equity Preferred Securities" means any securities, however denominated, i) --------------------------- issued by the Borrower or any Consolidated Subsidiary of the Borrower, (ii) that are not subject to mandatory redemption or the underlying securities, if any, of which are not subject to mandatory redemption, (iii) that are perpetual or mature no less than 20 years from the date of issuance, (iv) the indebtedness issued in connection with which, including any guaranty, is subordinated in right of payment to the unsecured and unsubordinated indebtedness of the issuer of such indebtedness or guaranty, and (v) the terms of which permit the deferral of interest or distributions thereon to a date occurring after the first anniversary of the later of (A) the Commitment Termination Date and (B) the "Commitment Termination Date" under the Three-Year Credit Agreement. "ERISA" means the Employee Retirement Income Security Act of 1974, as ----- amended. "ERISA Group" means all members of a controlled group of corporations and ----------- all trades or businesses (whether or not incorporated) under common control which, together with the Borrower, are treated as a single employer under Section 414 of the Internal Revenue Code. "Euro-Dollar Base Rate" has the meaning set forth in Section 2.06(b). --------------------- "Euro-Dollar Business Day" means any Domestic Business Day on which ------------------------ commercial banks are open for international business (including dealings in dollar deposits) in London. "Euro-Dollar Lending Office" means, as to each Bank, its office, branch or -------------------------- affiliate located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Euro-Dollar Lending Office) or such other office, branch or affiliate of such Bank as it may hereafter designate as its Euro-Dollar Lending Office by notice to the Borrower and the Administrative Agent. "Euro-Dollar Loan" means a Loan which, except as otherwise provided in ---------------- Section 2.06, bears interest at the applicable Euro-Dollar Rate. 4 "Euro-Dollar Rate" means a rate of interest determined pursuant to Section ---------------- 2.06(b) on the basis of a Euro-Dollar Base Rate. "Euro-Dollar Reserve Percentage" has the meaning set forth in Section 2.15. ------------------------------ "Event of Default" has the meaning set forth in Section 6.01. ---------------- "Existing Credit Agreement" means the 364-Day Credit Agreement dated as of ------------------------- April 19, 2001 among the Borrower, the lenders party thereto and Bank One, NA as administrative agent. "Existing LC" means a letter of credit listed on the Existing LCs Schedule. ----------- "Existing LCs Schedule" means the Schedule attached hereto identified as --------------------- such. "Facility LC" means an Existing LC or a letter of credit issued pursuant to ----------- Section 2.16(a). "Facility LC Application" is defined in Section 2.16(c). ----------------------- "Facility LC Collateral Account" is defined in Section 2.16(k). ------------------------------ "Federal Funds Effective Rate" means, for any day, an interest rate per ---------------------------- annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published for such day (or, if such day is not a Domestic Business Day, for the immediately preceding Domestic Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Domestic Business Day, the average of the quotations at approximately 10:00 a.m. (Chicago time) on such day on such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by the Administrative Agent in its sole discretion. "Final Maturity Date" means the one-year anniversary of the Commitment ------------------- Termination Date, as such date may be extended pursuant to Section 2.01(c). "Group of Loans" means at any time a group of Loans of the same Class -------------- consisting of (i) all Alternate Base Rate Loans of such Class outstanding at such time or (ii) all Euro-Dollar Loans of such Class having the same Interest Period at such time, provided that, if a Loan of any particular Bank is converted to or made as an Alternate Base Rate Loan pursuant to Article 8, such Loan shall be included in the same Group or Groups of Loans from time to time as it would have been if it had not been so converted or made. "Indebtedness" of any Person means at any date, without duplication, (a) ------------ all obligations of such Person for borrowed money, (b) all indebtedness of such Person for the deferred purchase price of property or services purchased, (c) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired, (d) all indebtedness under leases which shall have been or should be, in accordance with generally accepted accounting principles, recorded as capital leases in respect of which such Person is liable as lessee, (e) the face amount of all outstanding letters of credit issued for the account of 5 such Person (other than letters of credit relating to indebtedness included in Indebtedness of such Person pursuant to another clause of this definition) and, without duplication, the unreimbursed amount of all drafts drawn thereunder, (f) indebtedness secured by any Lien on property or assets of such Person, whether or not assumed (but in any event not exceeding the fair market value of the property or asset), (g) all direct guarantees and sureties in respect of indebtedness referred to in clauses (a) through (f) above of another Person, (h) all amounts payable in connection with mandatory redemptions or repurchases of preferred stock and (i) any obligations of such Person (in the nature of principal or interest) in respect of acceptances or similar obligations issued or created for the account of such Person. "Interest Period" means, with respect to each Euro-Dollar Loan, the period --------------- commencing on the date of borrowing specified in the applicable Notice of Borrowing or on the date specified in an applicable Notice of Interest Rate Election and ending one, two, three or six, or, if deposits of a corresponding maturity are generally available in the London interbank market, nine or twelve, months thereafter, as the Borrower may elect in such notice; provided that: (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Euro-Dollar Business Day; and (b) any Interest Period which begins on the last Euro-Dollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Euro-Dollar Business Day of a calendar month; provided further that: (x) any Interest Period applicable to any Loan which begins before the Commitment Termination Date and would otherwise end after the Commitment Termination Date shall end on the Commitment Termination Date; and (y) any Interest Period applicable to any Loan which would otherwise end after the Final Maturity Date shall end on the Final Maturity Date. "Internal Revenue Code" means the Internal Revenue Code of 1986, as --------------------- amended, or any successor statute. "Investment Grade Status" exists as to any Person at any date if all senior ----------------------- long-term unsecured debt securities of such Person outstanding at such date which had been rated by S&P or Moody's are rated BBB- or higher by S&P or Baa3 or higher by Moody's, as the case may be. "LC Fee" is defined in Section 2.16(d). ------ "LC Issuer" means Bank One (or any subsidiary or affiliate of Bank One --------- designated by Bank One) in its capacity as issuer of Facility LCs hereunder, First Union National Bank in its capacity as issuer of Facility LCs hereunder, any other Bank listed as the issuer of an Existing LC on the Existing LCs Schedule and any other Bank which accepts a designation by the Borrower and the Administrative Agent as an LC Issuer hereunder. 6 "LC Obligations" means, at any time, the sum, without duplication, of (i) -------------- the aggregate undrawn stated amount under all Facility LCs outstanding at such time plus (ii) the aggregate unpaid amount at such time of all Reimbursement Obligations. "LC Payment Date" is defined in Section 2.16(e). --------------- "Lien" means, with respect to any asset, any mortgage, lien, pledge, ---- charge, security interest or encumbrance of any kind in respect of such asset. For the purposes of this Agreement, the Borrower or any Subsidiary shall be deemed to own subject to a Lien any asset which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset. "Loan" means a Revolving Credit Loan or a Term Loan made by a Bank pursuant ---- to Section 2.01. "Loan Documents" means this Agreement, the Facility LC Applications and any -------------- Notes issued pursuant to Section 2.04. "Material Debt" means Indebtedness of the Borrower or any of its ------------- Subsidiaries in an aggregate principal amount exceeding $150,000,000. "Material Plan" has the meaning set forth in Section 6.01(i). ------------- "Material Subsidiary" means at any time any Subsidiary of the Borrower ------------------- having, together with its Subsidiaries, consolidated assets in excess of 10% of the total assets of the Borrower and its Consolidated Subsidiaries, determined on a consolidated basis as of such time. "Modify" and "Modification" are defined in Section 2.16(a). ------ ------------ "Moody's" means Moody's Investors Service, Inc. ------- "Notes" means promissory notes of the Borrower, in the form required by ----- Section 2.04, evidencing the obligation of the Borrower to repay the Loans, and "Note" means any one of such promissory notes issued hereunder. "Notice Addresses Schedule" means the Schedule attached hereto identified ------------------------- as such. "Notice of Borrowing" has the meaning set forth in Section 2.02. ------------------- "Notice of Interest Rate Election" has the meaning set forth in Section -------------------------------- 2.09(a). "Obligations" means all unpaid principal of and accrued and unpaid interest ----------- on the Loans, all Reimbursement Obligations, all accrued and unpaid fees and all expenses, reimbursements, indemnities and other obligations of the Borrower to the Banks or to any Bank, the Administrative Agent, any LC Issuer or any indemnified party arising under the Loan Documents. 7 "Outstanding Credit Exposure" means, as to any Bank at any time, the sum of --------------------------- (i) the aggregate principal amount of its Loans outstanding at such time, plus (ii) an amount equal to its Pro Rata Share of the LC Obligations at such time. "Parent" means, with respect to any Bank, any Person controlling such Bank. ------ "Participant" has the meaning set forth in Section 9.06(b). ----------- "PBGC" means the Pension Benefit Guaranty Corporation or any entity ---- succeeding to any or all of its functions under ERISA. "Person" means an individual, a corporation, a partnership, an association, ------ a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Plan" means at any time an employee pension benefit plan which is covered ---- by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Internal Revenue Code and is either (i) maintained by a member of the ERISA Group for employees of a member of the ERISA Group or (ii) maintained pursuant to a collective bargaining agreement or any other arrangement under which more than one employer makes contributions and to which a member of the ERISA Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions. "Pricing Schedule" means the Schedule attached hereto identified as such. ---------------- "Prime Rate" means a rate per annum equal to the prime rate of interest ---------- announced from time to time by Bank One or its parent (which is not necessarily the lowest rate charged to any customer), changing when and as said prime rate changes. "Principal Subsidiary" means each of Texas Eastern Transmission Limited -------------------- Partnership, Algonquin Gas Transmission Company, PanEnergy Corp, and their respective successors. "Pro Rata Share" means, with respect to a Bank, a portion equal to a -------------- fraction the numerator of which is such Bank's Commitment and the denominator of which is the Aggregate Commitment. "Quarterly Payment Date" means the first Domestic Business Day of each ---------------------- January, April, July and October. "Regulation U" means Regulation U of the Board of Governors of the Federal ------------ Reserve System, as in effect from time to time. "Reimbursement Date" has the meaning set forth in Section 2.16(f). ------------------ "Reimbursement Obligations" means, at any time, the aggregate of all ------------------------- obligations of the Borrower then outstanding under Section 2.16 to reimburse the LC Issuers for amounts paid by the LC Issuers in respect of any one or more drawings under Facility LCs. 8 "Required Banks" means at any time Banks (i) having at least 51% of the -------------- Aggregate Commitment or (ii) if all of the Commitments shall have been terminated, having at least 51% of the Aggregate Outstanding Credit Exposure. "Revolving Credit Loan" means a loan made or to be made by a Bank pursuant --------------------- to Section 2.01(a); provided that, if any such loan or loans (or portions thereof) are combined or subdivided pursuant to a Notice of Interest Rate Election, the term "Revolving Credit Loan" shall refer to the combined principal amount resulting from such combination or to each of the separate principal amounts resulting from such subdivision, as the case may be. "Revolving Credit Period" means the period from and including the Effective ----------------------- Date to but not including the Commitment Termination Date. "S&P" means Standard & Poor's Rating Services, a division of The --- McGraw-Hill Companies, Inc. "Subsidiary" means, as to any Person, any corporation or other entity of ---------- which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by such Person; unless otherwise specified, "Subsidiary" means a Subsidiary of the Borrower. "Substantial Assets" means assets sold or otherwise disposed of in a single ------------------ transaction or a series of related transactions representing 25% or more of the consolidated assets of the Borrower and its Consolidated Subsidiaries, taken as a whole. "Term Loan" means a loan made or to be made by a Bank pursuant to Section --------- 2.01(b); provided that, if any such loan or loans (or portions thereof) are combined or subdivided pursuant to a Notice of Interest Rate Election, the term "Term Loan" shall refer to the combined principal amount resulting from such combination or to each of the separate principal amounts resulting from such subdivision, as the case may be. "Three-Year Credit Agreement" means the Three-Year Credit Agreement dated --------------------------- as of April 19, 2001 among the Borrower, certain lenders and Bank One, NA, as administrative agent, as such agreement may be amended or modified from time to time. "Type" means, with respect to any Loan, its nature as an Alternate Base ---- Rate Loan or a Euro-Dollar Loan. "United States" means the United States of America, including the States ------------- and the District of Columbia, but excluding its territories and possessions. "Unfunded Vested Liabilities" means, with respect to any Plan at any time, --------------------------- the amount (if any) by which (i) the present value of all benefits under such Plan exceeds (ii) the fair market value of all Plan assets allocable to such benefits, all determined as of the then most recent valuation date for such Plan, but only to the extent that such excess represents a potential liability of a member of the ERISA Group to the PBGC or the Plan under Title IV of ERISA. 9 Section 1.02. Accounting Terms and Determinations. Unless otherwise ----------------------------------- specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared in accordance with generally accepted accounting principles as in effect from time to time, applied on a basis consistent (except for changes concurred in by the Borrower's independent public accountants) with the most recent audited consolidated financial statements of the Borrower and its Consolidated Subsidiaries delivered to the Banks. Section 1.03. Types and Classes of Borrowings. The term "Borrowing" denotes ------------------------------- the aggregation of Loans of the Banks to be made to the Borrower pursuant to Article 2 on a single date and for a single Interest Period. Borrowings are classified for purposes of this Agreement either by reference to the pricing of Loans comprising such Borrowing (e.g., a "Euro-Dollar Borrowing" is a Borrowing comprised of Euro-Dollar Loans) or by reference to the Class of Loans comprising such Borrowing (e.g., a "Term Borrowing" is a Borrowing comprised of Term Loans). ARTICLE 2 THE CREDITS Section 2.01. Commitments. (a) Revolving Credit Loans; Facility LCs. During ----------- ------------------------------------ the Revolving Credit Period, each Bank severally agrees, on the terms and conditions set forth in this Agreement, (i) to make loans to the Borrower and (ii) to participate in Facility LCs issued upon the request of the Borrower, from time to time, provided that, after giving effect to the making of each such Revolving Credit Loan and the issuance of each such Facility LC, such Bank's Outstanding Credit Exposure shall not exceed its Commitment. Each Borrowing under this subsection shall be in an aggregate principal amount of $10,000,000 or any larger multiple of $1,000,000 (except that any such Borrowing may be in the aggregate amount available in accordance with Section 3.02(b)) and shall be made from the Banks ratably according to their Pro Rata Shares. Within the foregoing limits, the Borrower may borrow under this subsection (a), or to the extent permitted by Section 2.11, prepay Loans and reborrow at any time during the Revolving Credit Period under this subsection (a). The Commitments to extend credit hereunder shall expire on the Commitment Termination Date. The LC Issuers will issue Facility LCs hereunder on the terms and conditions set forth in Section 2.16. (b) Term Loans. Each Bank severally agrees, on the terms and conditions set ---------- forth in this Agreement, to make a loan to the Borrower on the Commitment Termination Date in an amount up to but not exceeding the amount of its Revolving Credit Loans outstanding on the Commitment Termination Date. Each Borrowing under this subsection (b) shall be made from the Banks ratably according to their Pro Rata Shares. (c) Extension of Commitments. On no more than two separate occasions, the ------------------------ Borrower may, upon notice not less than 45 days but no earlier than 60 days prior to the then current Commitment Termination Date to the Administrative Agent (which shall notify each Bank of receipt of such request), propose to extend the Revolving Credit Period for an additional 364 days measured from the Commitment Termination Date then in effect. Each Bank shall endeavor to respond to such request, whether affirmatively or negatively (such determination in 10 the sole discretion of such Bank), by notice to the Borrower and the Administrative Agent not more than 45 days nor less than 30 days prior to the Commitment Termination Date. Subject to the execution by the Borrower, the Administrative Agent and such Banks of a duly completed Extension Agreement in substantially the form of Exhibit D, the Commitment Termination Date applicable to the Commitment of each Bank so affirmatively notifying the Borrower and the Administrative Agent shall be extended for the period specified above; provided that the Commitment Termination Date shall not be extended unless Banks shall have elected so to extend their Commitments that have Commitments constituting at least the greater of (i) 66K% in aggregate amount of the Commitments in effect at the time any such extension is requested and (ii) the Aggregate Outstanding Credit Exposure on the Commitment Termination Date prior to any extension thereof and after giving effect to any repayment of Loans and/or termination of Facility LCs on such date. Any Bank which does not give such notice to the Borrower and the Administrative Agent shall be deemed to have elected not to extend as requested, and on the Commitment Termination Date determined without giving effect to such requested extension, the Commitment of each non-extending Bank shall terminate, the participations of each non-extending Bank in Facility LCs shall terminate, and the Borrower shall repay all Loans and other Obligations owing to such non-extending Bank. The Borrower may, in accordance with Section 8.06, designate another bank or other financial institution (which may be, but need not be, an extending Bank) to replace a non-extending Bank. The Borrower may revoke its proposal to extend the then current Commitment Termination Date by giving notice of such revocation to the Administrative Agent (which shall notify each Bank of such revocation) at any time prior to the then current Commitment Termination Date and prior to execution by the Borrower of an Extension Agreement. Section 2.02. Notice of Borrowings. The Borrower shall give the -------------------- Administrative Agent notice (a "Notice of Borrowing") not later than 10:00 A.M. ------------------- (Chicago time) on (x) the date of each Alternate Base Rate Borrowing and (y) the third Euro-Dollar Business Day before each Euro-Dollar Borrowing, specifying: (a) the date of such Borrowing, which shall be a Domestic Business Day in the case of a Domestic Borrowing or a Euro-Dollar Business Day in the case of a Euro-Dollar Borrowing, (b) the aggregate amount of such Borrowing, (c) whether the Loans comprising such Borrowing are to bear interest initially at the Alternate Base Rate or a Euro-Dollar Rate, (d) the Class of Loans comprising such Borrowing, and (e) in the case of a Euro-Dollar Borrowing, the duration of the initial Interest Period applicable thereto, subject to the provisions of the definition of Interest Period. Section 2.03. Notice to Banks; Funding of Loans. (a) Upon receipt of a --------------------------------- Notice of Borrowing, the Administrative Agent shall promptly notify each Bank of the contents thereof and of such Bank's share of such Borrowing and such Notice of Borrowing shall not thereafter be revocable by the Borrower. 11 (a) Not later than 12:00 Noon (Chicago time) on the date of each Borrowing, each Bank shall (except as provided in subsection (c) of this Section) make available its share of such Borrowing, in Federal or other funds immediately available in Chicago, to the Administrative Agent at its address specified in or pursuant to Section 9.01. Unless the Administrative Agent determines that any applicable condition specified in Article 3 has not been satisfied, the Administrative Agent will make the funds so received from the Banks available to the Borrower at the Administrative Agent's aforesaid address. (b) Unless the Administrative Agent shall have received notice from a Bank prior to the date of any Borrowing that such Bank will not make available to the Administrative Agent such Bank's share of such Borrowing, the Administrative Agent may assume that such Bank has made such share available to the Administrative Agent on the date of such Borrowing in accordance with subsection (b) of this Section 2.03 and the Administrative Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Bank shall not have so made such share available to the Administrative Agent, such Bank and, if such Bank shall not have made such payment within two Domestic Business Days of demand therefor, the Borrower severally agree to repay to the Administrative Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Administrative Agent, at (i) in the case of the Borrower, a rate per annum equal to the higher of the Federal Funds Effective Rate and the interest rate applicable thereto pursuant to Section 2.06 and (ii) in the case of such Bank, the Federal Funds Effective Rate. If such Bank shall repay to the Administrative Agent such corresponding amount, such amount so repaid shall constitute such Bank's Loan included in such Borrowing for purposes of this Agreement. (c) The failure of any Bank to make the Loan to be made by it as part of any Borrowing shall not relieve any other Bank of its obligation thereunder to make a Loan on the date of such Borrowing, but no Bank shall be responsible for the failure of any other Bank to make a Loan to be made by such other Bank. Section 2.04. Registry; Notes. (a) The Administrative Agent shall maintain --------------- a register (the "Register") on which it will record the Commitment of each Bank, -------- each Loan made by such Bank and each repayment of any Loan made by such Bank. Any such recordation by the Administrative Agent on the Register shall be conclusive, absent manifest error. Failure to make any such recordation, or any error in such recordation, shall not affect the Borrower's obligations hereunder. (b) The Borrower hereby agrees that, promptly upon the request of any Bank at any time, the Borrower shall deliver to such Bank a duly executed Note, in substantially the form of Exhibit A hereto, payable to the order of such Bank and representing the obligation of the Borrower to pay the unpaid principal amount of the Loans made to the Borrower by such Bank, with interest as provided herein on the unpaid principal amount from time to time outstanding. (c) Each Bank shall record the date, amount and maturity of each Loan made by it and the date and amount of each payment of principal made by the Borrower with respect thereto, and each Bank receiving a Note pursuant to this Section, if such Bank so elects in 12 connection with any transfer or enforcement of its Note, may endorse on the schedule forming a part thereof appropriate notations to evidence the foregoing information with respect to each such Loan then outstanding; provided that the failure of such Bank to make any such recordation or endorsement shall not affect the obligations of the Borrower hereunder or under the Notes. Such Bank is hereby irrevocably authorized by the Borrower so to endorse its Note and to attach to and make a part of its Note a continuation of any such schedule as and when required. Section 2.05. Maturity of Loans. (a) Each Revolving Credit Loan made by any ----------------- Bank shall mature, and the principal amount thereof shall be due and payable together with accrued interest thereon, on the Commitment Termination Date. (b) The Term Loans of each Bank shall mature, and the principal amount thereof shall be due and payable, together with accrued interest thereon, on the Final Maturity Date. Section 2.06. Interest Rates. (a) Each Alternate Base Rate Loan shall bear -------------- interest on the outstanding principal amount thereof for each day from the date such Loan is made until it becomes due, at a rate per annum equal to the Alternate Base Rate for such day. Such interest shall be payable quarterly in arrears on each Quarterly Payment Date and at maturity. Any overdue principal of or overdue interest on any Alternate Base Rate Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 1% plus the Alternate Base Rate for such day. (b) Each Euro-Dollar Loan shall bear interest on the outstanding principal amount thereof, for each day during each Interest Period applicable thereto, at a rate per annum equal to the sum of the Applicable Margin for such day plus the Euro-Dollar Base Rate applicable to such Interest Period. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than three months, at intervals of three months after the first day thereof, and at maturity. "Euro-Dollar Base Rate" means, with respect to a Euro-Dollar Borrowing for --------------------- the relevant Interest Period, the applicable British Bankers' Association Interest Settlement Rate for deposits in U.S. dollars appearing on Reuters Screen FRBD as of 11:00 A.M. (London time) two Euro-Dollar Business Days prior to the first day of such Interest Period, and having a maturity equal to such Interest Period, provided that, (i) if Reuters Screen FRBD is not available to the Administrative Agent for any reason, the applicable Euro-Dollar Base Rate for the relevant Interest Period shall instead be the applicable British Bankers' Association Interest Settlement Rate for deposits in U.S. dollars as reported by any other generally recognized financial information service as of 11:00 A.M. (London time) two Euro-Dollar Business Days prior to the first day of such Interest Period, and having a maturity equal to such Interest Period, and (ii) if no such British Bankers' Association Interest Settlement Rate is available to the Administrative Agent, the applicable Euro-Dollar Base Rate for the relevant Interest Period shall instead be the rate determined by the Administrative Agent to be the rate at which Bank One or one of its Affiliate banks offers to place deposits in U.S. dollars with first-class banks in the London interbank market approximately 11:00 A.M. (London time) two Euro-Dollar Business Days prior to the first day of such Interest Period, in the approximate amount of Bank One's relevant Euro-Dollar Loan and having a maturity equal to such Interest Period. 13 (c) Any overdue principal of or overdue interest on any Euro-Dollar Loan shall bear interest, payable on demand, for each day from and including the date payment thereof was due to but excluding the date of actual payment, at a rate per annum equal to the sum of 1% plus the higher of (i) the Alternate Base Rate for such day and (ii) the sum of the Applicable Margin for such day plus the Euro-Dollar Base Rate for such day. (d) The Administrative Agent shall determine each interest rate applicable to the Loans hereunder. The Administrative Agent shall give prompt notice to the Borrower and the participating Banks by telecopy, telex or cable of each rate of interest so determined, and its determination thereof shall be conclusive in the absence of manifest error unless the Borrower raises an objection thereto within five Domestic Business Days after receipt of such notice. Section 2.07. Commitment Fees. The Borrower shall pay to the Administrative --------------- Agent for the account of the Banks ratably according to their Pro Rata Shares a commitment fee at the Commitment Fee Rate (determined daily in accordance with the Pricing Schedule). Such commitment fee shall accrue from and including the Effective Date to but excluding the Commitment Termination Date, on the daily average Available Aggregate Commitment. Accrued commitment fees under this Section shall be payable quarterly in arrears on each Quarterly Payment Date and on the Commitment Termination Date. Section 2.08. Optional Termination or Reduction of Commitments. The ------------------------------------------------ Borrower may, upon at least three Domestic Business Days' notice to the Administrative Agent, (i) terminate the Commitments at any time, if no Loans are outstanding at such time or (ii) ratably reduce from time to time by an aggregate amount of $10,000,000 or any larger multiple of $1,000,000 the aggregate amount of the Commitments in excess of the Aggregate Outstanding Credit Exposure. Section 2.09. Method of Electing Interest Rates. (a) The Loans included in --------------------------------- each Borrowing shall bear interest initially at the type of rate specified by the Borrower in the applicable Notice of Borrowing. Thereafter, the Borrower may from time to time elect to change or continue the type of interest rate borne by each Group of Loans (subject in each case to the provisions of Article 8 and the last sentence of this subsection (a)), as follows: (A) if such Loans are Alternate Base Rate Loans, the Borrower may elect to convert such Loans to Euro-Dollar Loans as of any Euro-Dollar Business Day; and (B) if such Loans are Euro-Dollar Loans, the Borrower may elect to convert such Loans to Alternate Base Rate Loans or elect to continue such Loans as Euro-Dollar Loans for an additional Interest Period, subject to Section 2.13 in the case of any such conversion or continuation effective on any day other than the last day of the then current Interest Period applicable to such Loans. Each such election shall be made by delivering a notice (a "Notice of Interest ------------------ Rate Election") to the Administrative Agent not later than 10:00 A.M. (Chicago - ------------- time) on the third Euro-Dollar Business Day before the conversion or continuation selected in such notice is to be effective. A Notice of Interest Rate Election may, if it so specifies, apply to only a portion of the aggregate principal amount of the relevant Group of Loans, provided that (i) such portion is allocated ratably among the Loans comprising such Group and (ii) the portion to which such notice 14 applies, and the remaining portion to which it does not apply, are each $10,000,000 or any larger multiple of $1,000,000. (b) Each Notice of Interest Rate Election shall specify: (i) the Group of Loans (or portion thereof) to which such notice applies; (ii) the date on which the conversion or continuation selected in such notice is to be effective, which shall comply with the applicable clause of subsection 2.09(a) above; (iii) if the Loans comprising such Group are to be converted, the new Type of Loans and, if the Loans being converted are to be Euro-Dollar Loans, the duration of the next succeeding Interest Period applicable thereto; and (iv) if such Loans are to be continued as Euro-Dollar Loans for an additional Interest Period, the duration of such additional Interest Period. Each Interest Period specified in a Notice of Interest Rate Election shall comply with the provisions of the definition of the term "Interest Period." (b) Promptly after receiving a Notice of Interest Rate Election from the Borrower pursuant to subsection 2.09(a) above, the Administrative Agent shall notify each Bank of the contents thereof and such notice shall not thereafter be revocable by the Borrower. If no Notice of Interest Rate Election is timely received prior to the end of an Interest Period for any Group of Loans, the Borrower shall be deemed to have elected that such Group of Loans be converted to Alternate Base Rate Loans as of the last day of such Interest Period. (c) An election by the Borrower to change or continue the rate of interest applicable to any Group of Loans pursuant to this Section shall not constitute a "Borrowing" subject to the provisions of Section 3.02. Section 2.10. Mandatory Termination of Commitments. The Commitment of each ------------------------------------ Bank shall terminate on the Commitment Termination Date, and any Revolving Credit Loans of such Bank then outstanding (together with accrued interest thereon) shall be due and payable on such date; provided that such Revolving Credit Loans shall be paid with the proceeds from the Term Loans if Term Loans are made on the Commitment Termination Date. Section 2.11. Optional Prepayments. (a) The Borrower may (i) upon notice to -------------------- the Administrative Agent not later than 10:00 A.M. (Chicago time) on any Domestic Business Day prepay on such Domestic Business Day any Group of Alternate Base Rate Loans and (ii) upon at least three Euro-Dollar Business Days' notice to the Administrative Agent not later than 10:00 A.M. (Chicago time) prepay any Group of Euro-Dollar Loans, in each case in whole at any time, or from time to time in part in amounts aggregating $5,000,000 or any larger multiple of $1,000,000, by paying the principal amount to be prepaid together with accrued interest thereon to the date of prepayment and together with any additional amounts payable pursuant to Section 2.13. Each such optional prepayment shall be applied to prepay ratably the Loans of the several Banks included in such Group or Borrowing. 15 (b) Upon receipt of a notice of prepayment pursuant to this Section, the Administrative Agent shall promptly notify each Bank of the contents thereof and of such Bank's share of such prepayment and such notice shall not thereafter be revocable by the Borrower. Section 2.12. General Provisions as to Payments. (a) The Borrower shall --------------------------------- make each payment of principal of, and interest on, the Loans and of fees hereunder, not later than 12:00 Noon (Chicago time) on the date when due, in Federal or other funds immediately available in Chicago, to the Administrative Agent at its address referred to in Section 9.01. The Administrative Agent will promptly distribute to each Bank its ratable share of each such payment received by the Administrative Agent for the account of the Banks. Whenever any payment of principal of, or interest on, the Alternate Base Rate Loans, or of fees shall be due on a day which is not a Domestic Business Day, the date for payment thereof shall be extended to the next succeeding Domestic Business Day. Whenever any payment of principal of, or interest on, the Euro-Dollar Loans shall be due on a day which is not a Euro-Dollar Business Day, the date for payment thereof shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case the date for payment thereof shall be the next preceding Euro-Dollar Business Day. If the date for any payment of principal is extended by operation of law or otherwise, interest thereon shall be payable for such extended time. (b) Unless the Administrative Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Banks hereunder that the Borrower will not make such payment in full, the Administrative Agent may assume that the Borrower has made such payment in full to the Administrative Agent on such date and the Administrative Agent may, in reliance upon such assumption, cause to be distributed to each Bank on such due date an amount equal to the amount then due such Bank. If and to the extent that the Borrower shall not have so made such payment, each Bank shall repay to the Administrative Agent forthwith on demand such amount distributed to such Bank together with interest thereon, for each day from the date such amount is distributed to such Bank until the date such Bank repays such amount to the Administrative Agent, at the Federal Funds Effective Rate. Section 2.13. Funding Losses. If the Borrower makes any payment of -------------- principal with respect to any Euro-Dollar Loan or any Euro-Dollar Loan is converted to a Alternate Base Rate Loan or continued as a Euro-Dollar Loan for a new Interest Period (pursuant to Article 2, 6 or 8 or otherwise) on any day other than the last day of an Interest Period applicable thereto, or if the Borrower fails to borrow, prepay, convert or continue any Euro-Dollar Loans after notice has been given to any Bank in accordance with Section 2.03(a), 2.09(c) or 2.11(b), the Borrower shall reimburse each Bank within 15 days after demand for any resulting loss or expense incurred by it (or by an existing or prospective Participant in the related Loan), including (without limitation) any loss incurred in obtaining, liquidating or employing deposits from third parties, but excluding loss of margin for the period after any such payment or conversion or failure to borrow, prepay, convert or continue, provided that such Bank shall have delivered to the Borrower a certificate setting forth in reasonable detail the calculation of the amount of such loss or expense, which certificate shall be conclusive in the absence of manifest error. Section 2.14. Computation of Interest and Fees. Interest based on the Prime -------------------------------- Rate hereunder shall be computed on the basis of a year of 365 days (or 366 days in a leap year) and 16 paid for the actual number of days elapsed (including the first day but excluding the last day). All other interest and fees (including the LC Fees and fronting fees) shall be computed on the basis of a year of 360 days and paid for the actual number of days elapsed (including the first day but excluding the last day). Section 2.15. Regulation D Compensation. In the event that a Bank is ------------------------- required to maintain reserves of the type contemplated by the definition of "Euro-Dollar Reserve Percentage", such Bank may require the Borrower to pay, contemporaneously with each payment of interest on the Euro-Dollar Loans, additional interest on the related Euro-Dollar Loan of such Bank at a rate per annum determined by such Bank up to but not exceeding the excess of (i) (A) the applicable Euro-Dollar Base Rate divided by (B) one minus the Euro-Dollar Reserve Percentage over (ii) the applicable Euro-Dollar Base Rate. Any Bank wishing to require payment of such additional interest (x) shall so notify the Borrower and the Administrative Agent, in which case such additional interest on the Euro-Dollar Loans of such Bank shall be payable to such Bank at the place indicated in such notice with respect to each Interest Period commencing at least three Euro-Dollar Business Days after the giving of such notice and (y) shall notify the Borrower at least three Euro-Dollar Business Days prior to each date on which interest is payable on the Euro-Dollar Loans of the amount then due it under this Section. Each such notification shall be accompanied by such information as the Borrower may reasonably request. "Euro-Dollar Reserve Percentage" means for any day that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement for a member bank of the Federal Reserve System in Chicago with deposits exceeding five billion dollars in respect of "Eurocurrency liabilities" (or in respect of any other category of liabilities which includes deposits by reference to which the interest rate on Euro-Dollar Loans is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of any Bank to United States residents). Section 2.16. Facility LCs. ------------ (a) Issuance; Existing LCs. Each LC Issuer hereby agrees, on the terms and ------------ conditions set forth in this Agreement, to issue standby and trade letters of credit and to renew, extend, increase, decrease or otherwise modify each Facility LC ("Modify," and each such action a "Modification"), from time to time ------ ------------ during the Revolving Credit Period upon the request of the Borrower; provided that immediately after each such Facility LC is issued or Modified, the Aggregate Outstanding Credit Exposure shall not exceed the Aggregate Commitment. No Facility LC shall have an expiry date later than the Final Maturity Date. The stated account party under any Facility LC may be the Borrower, a Subsidiary of the Borrower or an Affiliate of the Borrower. By their execution of this Agreement, the Borrower and each Bank listed as an issuer of an Existing LC on the Existing LCs Schedule hereby agree that effective as of the Effective Date (i) such Existing LC shall be a Facility LC under this Agreement and subject to the terms hereof, (ii) such Bank shall be an LC Issuer hereunder with respect to such Existing LC, and (iii) the prior reimbursement agreement or letter of credit application of the Borrower and such Bank relating to such Existing LC is replaced by this Agreement. 17 (b) Participations. Upon the occurrence of the Effective Date, with respect -------------- to each Existing LC, and upon the issuance or Modification by an LC Issuer of a Facility LC in accordance with this Section 2.16, such LC Issuer shall be deemed, without further action by any party hereto, to have unconditionally and irrevocably sold to each Bank, and each Bank shall be deemed, without further action by any party hereto, to have unconditionally and irrevocably purchased from such LC Issuer, a participation in such Facility LC (and each Modification thereof) and the related LC Obligations in proportion to its Pro Rata Share. (c) Notice. Subject to Section 2.16(a), the Borrower shall give the ------ applicable LC Issuer and the Administrative Agent notice of the proposed issuance or Modification of a Facility LC, substantially in the form of Exhibit E (a "Facility LC Application") specifying the beneficiary, the proposed date of ----------------------- issuance (or Modification) and the expiry date of such Facility LC, and describing the proposed terms of such Facility LC, such duly completed Facility LC Application to be received prior to 10:00 A.M. (Chicago time) on the Business Day that is at least two Domestic Business Days prior to the proposed date of issuance or Modification of each Facility LC or in the case of a Facility LC substantially in the form of Exhibit F, at least one Domestic Business Day prior to the proposed date of issuance or Modification. Upon receipt of such Facility LC Application, such LC Issuer shall promptly notify the Administrative Agent, and the Administrative Agent shall promptly notify each Bank, of the contents thereof and of the amount of such Bank's participation in such proposed Facility LC. The issuance or Modification by any LC Issuer of any Facility LC shall, in addition to the conditions precedent set forth in Article 3 (the satisfaction of which such LC Issuer shall have no duty to ascertain), be subject to the condition precedent that such Facility LC shall be satisfactory to such LC Issuer. In the event of any conflict between the terms of this Agreement and the terms of any Facility LC Application, the terms of this Agreement shall control. Subject to the foregoing conditions, the applicable LC Issuer will endeavor to issue or Modify such Facility LC as soon as practicable after receiving such Facility LC Application but in any event within two Domestic Business Days after receiving such Facility LC Application or, in the case of a Facility LC substantially in the form of Exhibit F, within one Domestic Business Day after receiving such Facility LC Application. (d) LC Fees. The Borrower shall pay to the Administrative Agent, for the ------- account of the Banks ratably in accordance with their respective Pro Rata Shares, a letter of credit fee at a per annum rate equal to the sum of (i) the Applicable Margin for Euro-Dollar Loans in effect from time to time plus (ii) 0.125% during any period following the Commitment Termination Date plus (iii) if an Event of Default exists, 1%, on the average daily undrawn stated amount under each Facility LC, such fee to be payable in arrears on each Quarterly Payment Date and the Final Maturity Date (each such fee described in this sentence an "LC Fee"). The Borrower shall also pay to each LC Issuer for its own account (x) ------ a fronting fee at a per annum rate equal to 0.10% on the average daily undrawn stated amount under each Facility LC issued by such LC Issuer, such fee to be payable in arrears on each Quarterly Payment Date and the Final Maturity Date and (y) documentary and processing charges in connection with the issuance or Modification or transfer of and draws under Facility LCs issued by such LC Issuer in accordance with such LC Issuer's standard schedule for such charges as in effect from time to time (or such other amounts as such LC Issuer and the Borrower may agree). 18 (e) Administration; Reimbursement by Banks. Upon receipt from the -------------------------------------- beneficiary of any Facility LC of any demand for payment under such Facility LC, the applicable LC Issuer shall notify the Administrative Agent and the Borrower and the Administrative Agent shall promptly notify each other Bank as to the amount to be paid by such LC Issuer as a result of such demand and the proposed payment date (the "LC Payment Date"). The responsibility of such LC Issuer to --------------- the Borrower and each Bank shall be only to determine that the documents (including each demand for payment) delivered under each Facility LC in connection with such presentment shall be in conformity in all material respects with such Facility LC. Each LC Issuer shall endeavor to exercise the same care in the issuance and administration of its Facility LCs as it does with respect to letters of credit in which no participations are granted, it being understood that in the absence of any gross negligence or willful misconduct by such LC Issuer, each Bank shall be unconditionally and irrevocably liable without regard to the occurrence of any Default or any condition precedent whatsoever, to reimburse such LC Issuer on demand for (i) such Bank's Pro Rata Share of the amount of each payment made by such LC Issuer under each Facility LC to the extent such amount is not reimbursed by the Borrower pursuant to Section 2.16(f) below, plus (ii) interest on the foregoing amount to be reimbursed by such Bank, for each day from the date of such LC Issuer's demand for such reimbursement (or, if such demand is made after 10:00 A.M. (Chicago time) on such date, from the next succeeding Domestic Business Day) to the date on which such Bank pays the amount to be reimbursed by it, at a rate of interest per annum equal to the Federal Funds Effective Rate for the first three days and, thereafter, at a rate of interest equal to the rate applicable to Alternate Base Rate Borrowings. (f) Reimbursement by Borrower. The Borrower shall be irrevocably and ------------------------- unconditionally obligated to reimburse the applicable LC Issuer for any amounts to be paid by such LC Issuer upon any drawing under any Facility LC, without presentment, demand, protest or other formalities of any kind; provided that neither the Borrower nor any Bank shall hereby be precluded from asserting any claim for direct (but not consequential) damages suffered by the Borrower or such Bank to the extent, but only to the extent, caused by (i) the willful misconduct or gross negligence of such LC Issuer in determining whether a request presented under any Facility LC issued by it complied with the terms of such Facility LC or (ii) such LC Issuer's failure to pay under any Facility LC issued by it after the presentation to it of a request strictly complying with the terms and conditions of such Facility LC. The Borrower shall make such reimbursement (1) on or before 2:00 P.M. (Chicago time) on the applicable LC Payment Date if the Borrower receives notice of the related demand for payment no later than 10:00 A.M. (Chicago time) on such LC Payment Date or (2) if the Borrower receives notice of the related demand for payment later than 10:00 A.M. (Chicago time) on such LC Payment Date, on or before 2:00 P.M. (Chicago time) on the next succeeding Domestic Business Day (such date by which reimbursement must be made (the LC Payment Date under clause (1) or the next succeeding Domestic Business Day under clause (2)) being the "Reimbursement Date"). All such amounts paid by such LC Issuer and remaining unpaid by the Borrower shall bear interest, payable on demand, for each day until paid at a rate per annum equal to (x) the rate applicable to Alternate Base Rate Borrowings for such day if such day falls on or before the applicable Reimbursement Date and (y) the sum of 1% plus the rate applicable to Alternate Base Rate Borrowings for such day if such day falls after such Reimbursement Date. Such LC Issuer will pay to each Bank ratably in accordance with its Pro Rata Share all amounts received by it from the Borrower for application in payment, in whole or in part, of the Reimbursement Obligation in 19 respect of any Facility LC issued by such LC Issuer, but only to the extent such Bank has made payment to such LC Issuer in respect of such Facility LC pursuant to Section 2.16(e). Subject to the terms and conditions of this Agreement (including without limitation the submission of a Notice of Borrowing in compliance with Section 2.02 and the satisfaction of the applicable conditions precedent set forth in Article 3), the Borrower may request a Borrowing hereunder for the purpose of satisfying any Reimbursement Obligation. (g) Obligations Absolute. The Borrower's obligations under this Section -------------------- 2.16 shall be absolute and unconditional under any and all circumstances and irrespective of any setoff, counterclaim or defense to payment which the Borrower may have or have had against any LC Issuer, any Bank or any beneficiary of a Facility LC. The Borrower further agrees with the LC Issuers and the Banks that the LC Issuers and the Banks shall not be responsible for, and the Borrower's Reimbursement Obligation in respect of any Facility LC shall not be affected by, among other things, the validity or genuineness of documents or of any endorsements thereon, even if such documents should in fact prove to be in any or all respects invalid, fraudulent or forged, or any dispute between or among the Borrower, any of its Affiliates, the beneficiary of any Facility LC or any financing institution or other party to whom any Facility LC may be transferred or any claims or defenses whatsoever of the Borrower or of any of its Affiliates against the beneficiary of any Facility LC or any such transferee. No LC Issuer shall be liable for any error, omission, interruption or delay in transmission, dispatch or delivery of any message or advice, however transmitted, in connection with any Facility LC. The Borrower agrees that any action taken or omitted by any LC Issuer or any Bank under or in connection with each Facility LC and the related drafts and documents, if done without gross negligence or willful misconduct, shall be binding upon the Borrower and shall not put any LC Issuer or any Bank under any liability to the Borrower. Nothing in this Section 2.16(g) is intended to limit the right of the Borrower to make a claim against any LC Issuer for damages as contemplated by the proviso to the first sentence of Section 2.16(f). (h) Actions of LC Issuer. Each LC Issuer shall be entitled to rely, and -------------------- shall be fully protected in relying, upon any Facility LC, draft, writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, telecopy, telex or teletype message, statement, order or other document believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons, and upon advice and statements of legal counsel, independent accountants and other experts selected by such LC Issuer. Each LC Issuer shall be fully justified in failing or refusing to take any action under this Agreement unless it shall first have received such advice or concurrence of the Required Banks as it reasonably deems appropriate or it shall first be indemnified to its reasonable satisfaction by the Banks against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. Notwithstanding any other provision of this Section 2.16, each LC Issuer shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement in accordance with a request of the Required Banks, and such request and any action taken or failure to act pursuant thereto shall be binding upon the Banks and any future holders of a participation in any Facility LC. (i) Indemnification. The Borrower hereby agrees to indemnify and hold --------------- harmless each Bank, each LC Issuer and the Administrative Agent, and their respective directors, officers, agents and employees from and against any and all claims and damages, losses, liabilities, costs 20 or expenses which such Bank, such LC Issuer or the Administrative Agent may incur (or which may be claimed against such Bank, such LC Issuer or the Administrative Agent by any Person whatsoever), including reasonable fees and disbursements of counsel, by reason of or in connection with the issuance, execution and delivery or transfer of or payment or failure to pay under any Facility LC or any actual or proposed use of any Facility LC, including, without limitation, any claims, damages, losses, liabilities, costs or expenses which any LC Issuer may incur by reason of or in connection with (i) the failure of any other Bank to fulfill or comply with its obligations to such LC Issuer hereunder (but nothing herein contained shall affect any rights the Borrower may have against any defaulting Bank) or (ii) by reason of or on account of any LC Issuer issuing any Facility LC which specifies that the term "Beneficiary" included therein includes any successor by operation of law of the named Beneficiary, but which Facility LC does not require that any drawing by any such successor Beneficiary be accompanied by a copy of a legal document, satisfactory to such LC Issuer, evidencing the appointment of such successor Beneficiary; provided that the Borrower shall not be required to indemnify any Bank, any LC Issuer or the Administrative Agent for any claims, damages, losses, liabilities, costs or expenses to the extent, but only to the extent, caused by (x) the willful misconduct or gross negligence of such LC Issuer in determining whether a request presented under any Facility LC complied with the terms of such Facility LC or (y) any LC Issuer's failure to pay under any Facility LC after the presentation to it of a request strictly complying with the terms and conditions of such Facility LC. Nothing in this Section 2.16(i) is intended to limit the obligations of the Borrower under any other provision of this Agreement. (j) Banks' Indemnification. Each Bank shall, ratably in accordance with its ---------------------- Pro Rata Share, indemnify each LC Issuer, its affiliates and their respective directors, officers, agents and employees (to the extent not reimbursed by the Borrower) against any cost, expense (including reasonable counsel fees and disbursements), claim, demand, action, loss or liability (except such as result from such indemnitees' gross negligence or willful misconduct or such LC Issuer's failure to pay under any Facility LC of such LC Issuer after the presentation to it of a request strictly complying with the terms and conditions of such Facility LC) that such indemnitees may suffer or incur in connection with this Section 2.16 or any action taken or omitted by such indemnitees hereunder. (k) Facility LC Collateral Account. The Borrower agrees that it will, upon ------------------------------ the occurrence (i) of an Event of Default and (ii) (A) at the request of the Administrative Agent with the consent of the Banks having Pro Rata Shares of more than 66K% pursuant to Section 6.01 or (B) at the request of the Banks having Pro Rata Shares of more than 66K% pursuant to Section 6.01 and until the final expiration date of any Facility LC and thereafter as long as any amount is payable to the LC Issuers or the Banks in respect of any Facility LC, maintain a special collateral account pursuant to arrangements satisfactory to the Administrative Agent (the "Facility LC Collateral Account") at the ------------------------------ Administrative Agent's office at the address specified pursuant to Section 9.01, in the name of the Borrower but under the sole dominion and control of the Administrative Agent, for the benefit of the Banks and in which such Borrower shall have no interest other than as set forth in Section 6.01. The Borrower hereby pledges, assigns and grants to the Administrative Agent, on behalf of and for the ratable benefit of the Banks and the LC Issuers, a security interest in all of the Borrower's right, title and interest in and to all funds which may from time to time be on deposit in the Facility LC Collateral Account and all investments thereof, interest and returns thereon and proceeds thereof to secure the prompt and 21 complete payment and performance of the Obligations. The Administrative Agent will invest any funds on deposit from time to time in the Facility LC Collateral Account in Cash Equivalents. Interest and returns realized by such investments shall be credited to the Facility LC Collateral Account and applied as required by Section 6.01. Nothing in this Section 2.16(k) shall either obligate the Administrative Agent to require the Borrower to deposit any funds in the Facility LC Collateral Account or limit the right of the Administrative Agent to release any funds held in the Facility LC Collateral Account in each case other than as required by Section 6.01. (l) Rights as a Bank. In its capacity as a Bank, each LC Issuer shall have ---------------- the same rights and obligations as any other Bank. ARTICLE 3 CONDITIONS Section 3.01. Effectiveness. This Agreement shall become effective on the ------------- date that each of the following conditions shall have been satisfied (or waived in accordance with Section 9.05): (a) receipt by the Administrative Agent of counterparts hereof signed by each of the parties hereto (or, in the case of any party as to which an executed counterpart shall not have been received, receipt by the Administrative Agent in form satisfactory to it of telegraphic, telecopy, telex or other written confirmation from such party of execution of a counterpart hereof by such party); (b) receipt by the Administrative Agent of an opinion of the Deputy General Counsel to the Borrower substantially in the form of Exhibit B-1 hereto and covering such additional matters relating to the transactions contemplated hereby as the Required Banks may reasonably request; (c) receipt by the Administrative Agent of an opinion of Robinson, Bradshaw & Hinson, P.A., special counsel for the Borrower, substantially in the form of Exhibit B-2 hereto and covering such additional matters relating to the transactions contemplated hereby as the Required Banks may reasonably request.; (d) receipt by the Administrative Agent of a certificate signed by a Vice President, the Treasurer or the Controller of the Borrower, dated the Effective Date, to the effect set forth in clauses (c) and (d) of Section 3.02; (e) receipt by the Administrative Agent of all documents it may have reasonably requested prior to the date hereof relating to the existence of the Borrower, the corporate authority for and the validity of this Agreement and the Notes, and any other matters relevant hereto, all in form and substance satisfactory to the Administrative Agent; and provided that this Agreement shall not become effective or be binding on any party hereto unless all of the foregoing conditions are satisfied not later than April 30, 2002. The Administrative Agent shall promptly notify the Borrower and the Banks of the Effective Date, and such notice shall be conclusive and binding on all parties hereto. The Borrower and the Banks party to the 22 Existing Credit Agreement, comprising the "Required Banks" as defined therein, hereby agree that (i) the commitments of the lenders under the Existing Credit Agreement shall terminate in their entirety immediately and automatically upon the effectiveness of this Agreement, without further action by any party to the Existing Credit Agreement, (ii) all accrued fees under the Existing Credit Agreement shall be due and payable at such time, (iii) subject to the funding loss indemnities in the Existing Credit Agreement, the Borrower may prepay any and all loans outstanding thereunder on the date of effectiveness of this Agreement, and (iv) any letters of credit remaining outstanding under the Existing Credit Agreement shall be Existing LCs under this Agreement. Section 3.02. Credit Extensions. The obligation of any Bank to make a ----------------- Credit Extension on the occasion of any Borrowing or issuance of a Facility LC is subject to the satisfaction of the following conditions: (a) receipt by the Administrative Agent of a Notice of Borrowing or receipt by the applicable LC Issuer and the Administrative Agent of a Facility LC Application (except for Existing LCs) as required by Section 2.02 or 2.16, as the case may be; (b) the fact that, immediately after such Credit Extension the Aggregate Outstanding Credit Exposure will not exceed the Aggregate Commitment; (c) the fact that, immediately after such Credit Extension, no Default shall have occurred and be continuing; and (d) the fact that the representations and warranties of the Borrower contained in this Agreement (except the representations and warranties set forth in Sections 4.04(b) and 4.06) shall be true on and as of the date of such Credit Extension. Each Credit Extension hereunder shall be deemed to be a representation and warranty by the Borrower on the date of such Credit Extension as to the facts specified in clauses (b), (c) and (d) of this Section. ARTICLE 4 REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants that: Section 4.01. Organization and Power. The Borrower is duly organized, ---------------------- validly existing and in good standing under the laws of Delaware, and has all requisite powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted and is duly qualified to do business in each jurisdiction where such qualification is required, except where the failure so to qualify would not have a material adverse effect on the business, financial position or results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole. Section 4.02. Corporate and Governmental Authorization; No Contravention. ---------------------------------------------------------- The execution, delivery and performance by the Borrower of this Agreement and the Notes are within 23 the Borrower's corporate powers, have been duly authorized by all necessary corporate action, require no action by or in respect of, or filing with, any governmental body, agency or official and do not contravene, or constitute a default under, any provision of applicable law or regulation or of the articles of incorporation or by-laws of the Borrower or of any agreement, judgment, injunction, order, decree or other instrument binding upon the Borrower or result in the creation or imposition of any Lien on any asset of the Borrower or any of its Material Subsidiaries. Section 4.03. Binding Effect. This Agreement constitutes a valid and -------------- binding agreement of the Borrower and each Note, if and when executed and delivered in accordance with this Agreement, will constitute a valid and binding obligation of the Borrower, in each case enforceable in accordance with its terms, except as the same may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and by general principles of equity. Section 4.04. Financial Information. (a) The consolidated balance sheet of --------------------- the Borrower and its Consolidated Subsidiaries as of December 31, 2001 and the related consolidated statements of income, cash flows, capitalization and retained earnings for the fiscal year then ended, reported on by Deloitte & Touche, copies of which have been delivered to each of the Banks, fairly present, in conformity with generally accepted accounting principles, the consolidated financial position of the Borrower and its Consolidated Subsidiaries as of such date and their consolidated results of operations and cash flows for such fiscal year. (b) Since December 31, 2001, there has been no material adverse change in the business, financial position or results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole. Section 4.05. Regulation U. The Borrower and its Material Subsidiaries are ------------ not engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U issued by the Board of Governors of the Federal Reserve System) and no proceeds of any Credit Extension by the Borrower will be used to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any margin stock. Not more than 25% of the value of the assets of the Borrower and its Material Subsidiaries is represented by margin stock. Section 4.06. Litigation. Except as disclosed in the reports referred to in ---------- Section 4.04, there is no action, suit or proceeding pending against, or to the knowledge of the Borrower threatened against or affecting, the Borrower or any of its Subsidiaries before any court or arbitrator or any governmental body, agency or official which would be likely to be decided adversely to Borrower or such Subsidiary and, as a result, have a material adverse effect upon the business, consolidated financial position or results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole, or which in any manner draws into question the validity of this Agreement or any Note. Section 4.07. Compliance with Laws. The Borrower and each Material -------------------- Subsidiary is in compliance in all material respects with all applicable laws, ordinances, rules, regulations and requirements of governmental authorities (including, without limitation, ERISA and 24 Environmental Laws) except where (i) non-compliance would not have a material adverse effect on the business, financial position or results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole, or (ii) the necessity of compliance therewith is contested in good faith by appropriate proceedings. Section 4.08. Taxes. The Borrower and its Material Subsidiaries have filed ----- all United States Federal income tax returns and all other material tax returns which are required to be filed by them and have paid all taxes due pursuant to such returns or pursuant to any assessment received by the Borrower or any Material Subsidiary except (i) where nonpayment would not have a material adverse effect on the business, financial position or results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole or (ii) where the same are contested in good faith by appropriate proceedings. The charges, accruals and reserves on the books of the Borrower and its Material Subsidiaries in respect of taxes or other governmental charges are, in the opinion of the Borrower, adequate. Section 4.09. Public Utility Holding Company Act. The Borrower is not a ---------------------------------- holding company subject to the registration requirements of the Public Utility Holding Company Act of 1935, as amended. ARTICLE 5 COVENANTS The Borrower agrees that, so long as any Bank has any Commitment hereunder or any amount payable hereunder remains unpaid or any Facility LC remains outstanding: Section 5.01. Information. The Borrower will deliver to each of the Banks: ----------- (a) as soon as available and in any event within 120 days after the end of each fiscal year of the Borrower, a consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of the end of such fiscal year and the related consolidated statements of income, cash flows, capitalization and retained earnings for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, all reported on in a manner consistent with the requirements of the Securities and Exchange Commission by Deloitte & Touche or other independent public accountants of nationally recognized standing; (b) as soon as available and in any event within 60 days after the end of each of the first three quarters of each fiscal year of the Borrower, a consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of the end of such quarter and the related consolidated statements of income and cash flows for such quarter and for the portion of the Borrower's fiscal year ended at the end of such quarter, setting forth in each case in comparative form the figures for the corresponding quarter and the corresponding portion of the Borrower's previous fiscal year, all certified (subject to normal year-end adjustments) as to fairness of presentation, generally accepted accounting principles and consistency by an Approved Officer of the Borrower; (c) simultaneously with the delivery of each set of financial statements referred to in clauses (a) and (b) above, a certificate of an Approved Officer of the Borrower stating whether 25 any Default exists on the date of such certificate and, if any Default then exists, setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto; (d) within five days after any officer of the Borrower with responsibility relating thereto obtains knowledge of any Default, if such Default is then continuing, a certificate of an Approved Officer of the Borrower setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto; (e) promptly upon the filing thereof copies of all registration statements (other than the exhibits thereto and any registration statements on Form S-8 or its equivalent) and reports on Forms 10-K, 10-Q and 8-K (or their equivalents) which the Borrower shall have filed with the Securities and Exchange Commission; (f) if and when any member of the ERISA Group (i) gives or is required to give notice to the PBGC of any "reportable event" (as defined in Section 4043 of ERISA) with respect to any Material Plan which might constitute grounds for a termination of such Plan under Title IV of ERISA, or knows that the plan administrator of any Material Plan has given or is required to give notice of any such reportable event, a copy of the notice of such reportable event given or required to be given to the PBGC; (ii) receives notice of complete or partial withdrawal liability under Title IV of ERISA or notice that any Material Plan is in reorganization, is insolvent or has been terminated, a copy of such notice; (iii) receives notice from the PBGC under Title IV of ERISA of an intent to terminate, impose material liability (other than for premiums under Section 4007 of ERISA) in respect of, or appoint a trustee to administer any Plan, a copy of such notice; (iv) applies for a waiver of the minimum funding standard under Section 412 of the Internal Revenue Code, a copy of such application; (v) gives notice of intent to terminate any Material Plan under Section 4041(c) of ERISA, a copy of such notice and other information filed with the PBGC; (vi) gives notice of withdrawal from any Material Plan pursuant to Section 4063 of ERISA, a copy of such notice; or (vii) fails to make any payment or contribution to any Material Plan or makes any amendment to any Material Plan which has resulted or could result in the imposition of a Lien or the posting of a bond or other security, a certificate of the chief financial officer or the chief accounting officer of the Borrower setting forth details as to such occurrence and action, if any, which the Borrower or applicable member of the ERISA Group is required or proposes to take; and (g) from time to time such additional information regarding the financial position or business of the Borrower and its Subsidiaries as the Administrative Agent, at the request of any Bank, may reasonably request. Information required to be delivered pursuant to these Sections 5.01(a), 5.01(b) and 5.01(e) shall be deemed to have been delivered on the date on which the Borrower provides notice to the Banks that such information has been posted on the Securities and Exchange Commission website on the Internet at sec.gov/edaux/searches.htm or at another website identified in such notice and accessible by the Banks without charge; provided that (i) such notice may be included in a certificate delivered pursuant to Section 5.01(c) and (ii) the Borrower shall deliver paper copies of the information referred to in Sections 5.01(a), 5.01(b) and 5.01(e) to any Bank which requests such delivery. 26 Section 5.02. Payment of Taxes. The Borrower will pay and discharge, and ---------------- will cause each Material Subsidiary to pay and discharge, at or before maturity, all their tax liabilities, except where (i) nonpayment would not have a material adverse effect on the business, financial position or results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole, or (ii) the same may be contested in good faith by appropriate proceedings, and will maintain, and will cause each Material Subsidiary to maintain, in accordance with generally accepted accounting principles, appropriate reserves for the accrual of any of the same. Section 5.03. Maintenance of Property; Insurance. (a) The Borrower will ---------------------------------- keep, and will cause each Material Subsidiary to keep, all property useful and necessary in its business in good working order and condition, ordinary wear and tear excepted. (b) The Borrower will, and will cause each of its Material Subsidiaries to, maintain (either in the name of the Borrower or in such Subsidiary's own name) with financially sound and responsible insurance companies, insurance on all their respective properties in at least such amounts and against at least such risks (and with such risk retention) as are usually insured against in the same general area by companies of established repute engaged in the same or a similar business; provided that self-insurance by the Borrower or any such Material Subsidiary shall not be deemed a violation of this covenant to the extent that companies engaged in similar businesses and owning similar properties in the same general areas in which the Borrower or such Material Subsidiary operates self-insure; and will furnish to the Banks, upon request from the Administrative Agent, information presented in reasonable detail as to the insurance so carried. Section 5.04. Maintenance of Existence. The Borrower will preserve, renew ------------------------ and keep in full force and effect, and will cause each Material Subsidiary to preserve, renew and keep in full force and effect their respective corporate or other legal existence and their respective rights, privileges and franchises material to the normal conduct of their respective businesses; provided that nothing in this Section 5.04 shall prohibit the termination of any right, privilege or franchise of the Borrower or any Material Subsidiary or of the corporate or other legal existence of any Material Subsidiary or the change in form of organization of the Borrower or any Material Subsidiary if the Borrower in good faith determines that such termination or change is in the best interest of the Borrower, is not materially disadvantageous to the Banks and, in the case of a change in the form of organization of the Borrower, the Administrative Agent has consented thereto. Section 5.05. Compliance with Laws. The Borrower will comply, and cause -------------------- each Material Subsidiary to comply, in all material respects with all applicable laws, ordinances, rules, regulations, and requirements of governmental authorities (including, without limitation, ERISA and Environmental Laws) except where (i) noncompliance would not have a material adverse effect on the business, financial position or results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole, or (ii) the necessity of compliance therewith is contested in good faith by appropriate proceedings. Section 5.06. Books and Records. The Borrower will keep, and will cause ----------------- each Material Subsidiary to keep, proper books of record and account in which full, true and correct entries shall be made of all financial transactions in relation to its business and activities in 27 accordance with its customary practices; and will permit, and will cause each Material Subsidiary to permit, representatives of any Bank at such Bank's expense (accompanied by a representative of the Borrower, if the Borrower so desires) to visit any of their respective properties, to examine any of their respective books and records and to discuss their respective affairs, finances and accounts with their respective officers, employees and independent public accountants, all upon such reasonable notice, at such reasonable times and as often as may reasonably be desired. Section 5.07. Maintenance of Ownership of Principal Subsidiaries. The -------------------------------------------------- Borrower will maintain ownership of all shares of the common equity interests of each Principal Subsidiary, directly or indirectly through Subsidiaries, free and clear of all Liens, provided that any Principal Subsidiary may merge or consolidate with or into the Borrower or another wholly-owned Subsidiary. Section 5.08. Negative Pledge. The Borrower will not create, assume or --------------- suffer to exist any Lien on any asset now owned or hereafter acquired by it, except: (a) Liens granted by the Borrower existing on the date of this Agreement securing Indebtedness outstanding on the date of this Agreement in an aggregate principal amount not exceeding $100,000,000; (b) any Lien on any asset of any Person existing at the time such Person is merged or consolidated with or into the Borrower and not created in contemplation of such event; (c) any Lien existing on any asset prior to the acquisition thereof by the Borrower and not created in contemplation of such acquisition; (d) any Lien on any asset securing Indebtedness incurred or assumed for the purpose of financing all or any part of the cost of acquiring such asset, provided that such Lien attaches to such asset concurrently with or within 180 days after the acquisition thereof; (e) any Lien arising out of the refinancing, extension, renewal or refunding of any Indebtedness secured by any Lien permitted by any of the foregoing clauses of this Section, provided that such Indebtedness is not increased and is not secured by any additional assets; (f) Liens for taxes, assessments or other governmental charges or levies not yet due or which are being contested in good faith by appropriate proceedings and with respect to which adequate reserves or other appropriate provisions are being maintained in accordance with generally accepted accounting principles; (g) statutory Liens of landlords and Liens of carriers, warehousemen, mechanics, materialmen and other Liens imposed by law, created in the ordinary course of business and for amounts not past due for more than 60 days or which are being contested in good faith by appropriate proceedings which are sufficient to prevent imminent foreclosure of such Liens, are promptly instituted and diligently conducted and with respect to which adequate reserves or other appropriate provisions are being maintained in accordance with generally accepted accounting principles; 28 (h) Liens incurred or deposits made in the ordinary course of business (including, without limitation, surety bonds and appeal bonds) in connection with workers' compensation, unemployment insurance and other types of social security benefits or to secure the performance of tenders, bids, leases, contracts (other than for the repayment of Indebtedness), statutory obligations and other similar obligations or arising as a result of progress payments under government contracts; (i) easements (including, without limitation, reciprocal easement agreements and utility agreements), rights-of-way, covenants, consents, reservations, encroachments, variations and other restrictions, charges or encumbrances (whether or not recorded) affecting the use of real property; (j) Liens with respect to judgments and attachments which do not result in an Event of Default; (k) Liens, deposits or pledges to secure the performance of bids, tenders, contracts (other than contracts for the payment of money), leases (permitted under the terms of this Agreement), public or statutory obligations, surety, stay, appeal, indemnity, performance or other obligations arising in the ordinary course of business; (l) Liens required by Section 2.16(k) and other similar customary cash collateral requirements with respect to letters of credit upon the occurrence of a default, including, without limitation, such requirements under the Three-Year Credit Agreement; and (m) other Liens including Liens imposed by Environmental Laws arising in the ordinary course of its business which (i) do not secure Indebtedness, (ii) do not secure any obligation in an amount exceeding $100,000,000 at any time at which Investment Grade Status does not exist as to the Borrower and (iii) do not in the aggregate materially detract from the value of its assets or materially impair the use thereof in the operation of its business; and (n) Liens not otherwise permitted by the foregoing clauses of this Section securing obligations in an aggregate principal or face amount at any date not to exceed $500,000,000. Section 5.09. Consolidations, Mergers and Sales of Assets. The Borrower ------------------------------------------- will not (i) consolidate or merge with or into any other Person or (ii) sell, lease or otherwise transfer, directly or indirectly, Substantial Assets to any Person (other than a Subsidiary); provided that the Borrower may merge with another Person if the Borrower is the corporation surviving such merger and, after giving effect thereto, no Default shall have occurred and be continuing. Section 5.10. Use of Proceeds. The proceeds of the Loans made under this --------------- Agreement will be used by the Borrower for its general corporate purposes, including liquidity support for outstanding commercial paper and acquisitions. None of such proceeds will be used, directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of buying or carrying any "margin stock" within the meaning of Regulation U. Section 5.11. Transactions with Affiliates. The Borrower will not, and will ---------------------------- not permit any Subsidiary to, directly or indirectly, pay any funds to or for the account of, make any investment in, lease, sell, transfer or otherwise dispose of any assets, tangible or intangible, to, or 29 participate in, or effect, any transaction with, any Affiliate unless all such transactions between the Borrower and its Subsidiaries on the one hand and any Affiliate on the other, taken in the aggregate and not individually, shall be on an arms-length basis on terms no less favorable to the Borrower or such Subsidiary than could have been obtained from a third party who was not an Affiliate; provided that the foregoing provisions of this Section shall not prohibit the Borrower and each Subsidiary from (i) declaring or paying any lawful dividend so long as, after giving effect thereto, no Default shall have occurred and be continuing, (ii) issuing and maintaining letters of credit, guaranties and sureties as contingent obligations on behalf of Affiliates, or (iii) the payment of funds and making of capital contributions, loans and other transfers of money to Affiliates or to other Persons, including payments made under letters of credit, guarantees and sureties issued and maintained on behalf of Affiliates, provided that the aggregate amount for all such payments and transfers does not exceed $200,000,000 at any time outstanding. Section 5.12. Indebtedness/Capitalization Ratio. The ratio of Consolidated --------------------------------- Indebtedness to Consolidated Capitalization will at no time exceed 65%. ARTICLE 6 DEFAULTS Section 6.01. Events of Default. If one or more of the following events ----------------- ("Events of Default") shall have occurred and be continuing: ----------------- (a) the Borrower shall fail to pay when due any principal of any Loan or Reimbursement Obligation or shall fail to pay, within five days of the due date thereof, any interest, fees or any other amount payable hereunder; (b) the Borrower shall fail to observe or perform any covenant contained in Sections 5.04, 5.08, 5.09, 5.12 or the second sentence of 5.10, inclusive; (c) the Borrower shall fail to observe or perform any covenant or agreement contained in this Agreement (other than those covered by clause (a) or (b) above) for 30 days after notice thereof has been given to the Borrower by the Administrative Agent at the request of any Bank; (d) any representation, warranty, certification or statement made by the Borrower in this Agreement or in any certificate, financial statement or other document delivered pursuant to this Agreement shall prove to have been incorrect in any material respect when made (or deemed made); (e) the Borrower or any Subsidiary shall fail to make any payment in respect of Material Debt (other than the Loans) when due or within any applicable grace period; (f) any event or condition shall occur and shall continue beyond the applicable grace or cure period, if any, provided with respect thereto so as to result in the acceleration of the maturity of Material Debt; 30 (g) the Borrower or any Material Subsidiary shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall admit in writing its inability to, or shall fail generally to, pay its debts as they become due, or shall take any corporate action to authorize any of the foregoing; (h) an involuntary case or other proceeding shall be commenced against the Borrower or any Material Subsidiary seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 90 days; or an order for relief shall be entered against the Borrower or any Material Subsidiary under the federal bankruptcy laws as now or hereafter in effect; (i) any member of the ERISA Group shall fail to pay when due an amount or amounts aggregating in excess of $25,000,000 which it shall have become liable to pay to the PBGC or to a Plan under Title IV of ERISA; or notice of intent to terminate a Plan or Plans having aggregate Unfunded Vested Liabilities in excess of $50,000,000 (collectively, a "Material Plan") shall be filed under Title IV -------- ---- of ERISA by any member of the ERISA Group, any plan administrator or any combination of the foregoing; or the PBGC shall institute proceedings under Title IV of ERISA to terminate or to cause a trustee to be appointed to administer any Material Plan or a proceeding shall be instituted by a fiduciary of any Material Plan against any member of the ERISA Group to enforce Section 515 or 4219(c)(5) of ERISA and such proceeding shall not have been dismissed within 90 days thereafter; or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any Material Plan must be terminated; (j) a judgment or other court order for the payment of money in excess of $50,000,000 shall be rendered against the Borrower or any Material Subsidiary and such judgment or order shall continue without being vacated, discharged, satisfied or stayed or bonded pending appeal for a period of 45 days; (k) the Borrower shall cease to be a Subsidiary or Affiliate of Duke Energy Corporation; or (l) an "Event of Default" as defined in the Three-Year Credit Agreement shall have occurred and be continuing; then, and in every such event, the Administrative Agent shall (i) if requested by Banks having Pro Rata Shares of more than 66K%, by notice to the Borrower terminate the Commitments and they shall thereupon terminate, (ii) if requested by Banks having Pro Rata Shares of more than 66K%, by notice to the Borrower declare the Loans and all Reimbursement Obligations (together 31 with accrued interest thereon) to be, and the Loans and all Reimbursement Obligations shall thereupon become, immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower, and (iii) if requested by Banks having Pro Rata Shares of more than 66K%, by notice to the Borrower and in addition to the continuing right to demand payment of all amounts payable under the Loan Documents, make demand on the Borrower to pay, and the Borrower will, forthwith upon such demand and without any further notice, act or demand, pay to the Administrative Agent an amount in immediately available funds, which funds shall be held in the Facility LC Collateral Account, equal to the difference of (x) the amount of LC Obligations at such time, less (y) the amount on deposit in the Facility LC Collateral Account at such time which is free and clear of all rights and claims of third parties and has not been applied against the Obligations (such difference, the "Collateral Shortfall Amount"); provided that --------------------------- in the case of any of the Events of Default specified in clause (g) or (h) above with respect to the Borrower, without any notice to the Borrower or any other act by the Administrative Agent or the Banks, the Commitments shall thereupon terminate and the Loans and all Reimbursement Obligations (together with accrued interest thereon) shall become immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower, and the Borrower will be and become thereby unconditionally obligated, without any further notice, act or demand, to pay forthwith to the Administrative Agent the Collateral Shortfall Amount, which funds shall be deposited in the Facility LC Collateral Account. If at any time after the Banks have requested the Borrower to pay the Administrative Agent funds to be held in the Facility LC Collateral Account, the Administrative Agent determines that the Collateral Shortfall Amount at such time is greater than zero, the Administrative Agent may make demand on the Borrower to pay, and the Borrower will, forthwith upon such demand and without any further notice or act, pay to the Administrative Agent the Collateral Shortfall Amount, which funds shall be deposited in the Facility LC Collateral Account. The Administrative Agent may at any time or from time to time after funds are deposited in the Facility LC Collateral Account, apply such funds to the payment of the LC Obligations and any other amounts as shall from time to time have become due and payable by the Borrower to the Banks or the LC Issuers under the Loan Documents. At any time while any Event of Default is continuing, neither the Borrower nor any Person claiming on behalf of or through the Borrower shall have any right to withdraw any of the funds held in the Facility LC Collateral Account. After the sooner of (i) the Required Banks waiving the Event(s) of Default that gave rise to requesting the Borrower to pay funds into the Facility LC Collateral Account and (ii) all of the LC Obligations have been indefeasibly paid in full and all Facility LCs have expired or terminated and the Aggregate Commitment has been terminated, any funds remaining in the Facility LC Collateral Account, including accrued interest, after application to any other Obligations then due and owing to the Administrative Agent and the Banks, shall be returned by the Administrative Agent to the Borrower or paid to whomever may be legally entitled thereto at such time. 32 Section 6.02. Notice of Default. The Administrative Agent shall give notice ----------------- to the Borrower under Section 6.01(c) promptly upon being requested to do so by any Bank and shall thereupon notify all the Banks thereof. ARTICLE 7 THE ADMINISTRATIVE AGENT Section 7.01. Appointment; Nature of Relationship. Bank One is hereby ----------------------------------- appointed by each of the Banks as its contractual representative (herein referred to as the Administrative Agent) hereunder and under each other Loan Document, and each of the Banks irrevocably authorizes the Administrative Agent to act as the contractual representative of such Bank with the rights and duties expressly set forth herein and in the other Loan Documents. The Administrative Agent agrees to act as such contractual representative upon the express conditions contained in this Article 7. Notwithstanding the use of the defined term "Administrative Agent," it is expressly understood and agreed that the Administrative Agent shall not have any fiduciary responsibilities to any Bank by reason of this Agreement or any other Loan Document and that the Administrative Agent is merely acting as the contractual representative of the Banks with only those duties as are expressly set forth in this Agreement and the other Loan Documents. In its capacity as the Banks' contractual representative, the Administrative Agent (i) does not hereby assume any fiduciary duties to any of the Banks, (ii) is a "representative" of the Banks within the meaning of Section 9-105 of the Uniform Commercial Code and (iii) is acting as an independent contractor, the rights and duties of which are limited to those expressly set forth in this Agreement and the other Loan Documents. Each of the Banks hereby agrees to assert no claim against the Administrative Agent on any agency theory or any other theory of liability for breach of fiduciary duty, all of which claims each Bank hereby waives. The Administrative Agent shall have and may exercise such powers under the Loan Documents as are specifically delegated to the Administrative Agent by the terms of each thereof, together with such powers as are reasonably incidental thereto. The Administrative Agent shall have no implied duties to the Banks, or any obligation to the Banks to take any action thereunder except any action specifically provided by the Loan Documents to be taken by the Administrative Agent. Section 7.02. Administrative Agent and Affiliates. Bank One shall have the ----------------------------------- same rights and powers under this Agreement as any other Bank and may exercise or refrain from exercising the same as though it were not the Administrative Agent, and Bank One and its affiliates may accept deposits from, lend money to, and generally engage in any kind of business with the Borrower or any Subsidiary or affiliate of the Borrower as if it were not the Administrative Agent hereunder. Section 7.03. Action by Administrative Agent. The obligations of the ------------------------------ Administrative Agent hereunder are only those expressly set forth herein. Without limiting the generality of the foregoing, the Administrative Agent shall not be required to take any action with respect to any Default, except as expressly provided in Article 6. 33 Section 7.04. Consultation with Experts. The Administrative Agent may ------------------------- consult with legal counsel (who may be counsel for the Borrower), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts. Section 7.05. Liability of Administrative Agent. Neither the Administrative --------------------------------- Agent nor any of its affiliates nor any of their respective directors, officers, agents or employees shall be liable to any Bank for any action taken or not taken by it in connection herewith (i) with the consent or at the request of the Required Banks or (ii) in the absence of its own gross negligence or willful misconduct. Neither the Administrative Agent nor any of its affiliates nor any of their respective directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into or verify (i) any statement, warranty or representation made in connection with this Agreement or any borrowing hereunder; (ii) the performance or observance of any of the covenants or agreements of the Borrower; (iii) the satisfaction of any condition specified in Article 3, except receipt of items required to be delivered to the Administrative Agent; or (iv) the validity, effectiveness or genuineness of this Agreement, the Notes or any other instrument or writing furnished in connection herewith. The Administrative Agent shall not incur any liability by acting in reliance upon any notice, consent, certificate, statement, or other writing (which may be a bank wire, telex or similar writing) believed by it in good faith to be genuine or to be signed by the proper party or parties. Without limiting the generality of the foregoing, the use of the term "agent" in this Agreement with reference to the Administrative Agent is not intended to connote any fiduciary or other implied (or express) obligations arising under agency doctrine of any applicable law. Instead, such term is used merely as a matter of market custom and is intended to create or reflect only an administrative relationship between independent contracting parties. Section 7.06. Indemnification. Each Bank shall, ratably in accordance with --------------- its Commitment, indemnify the Administrative Agent, its affiliates and their respective directors, officers, agents and employees (to the extent not reimbursed by the Borrower) against any cost, expense (including counsel fees and disbursements), claim, demand, action, loss or liability (except such as result from such indemnitees' gross negligence or willful misconduct) that such indemnitees may suffer or incur in connection with this Agreement or any action taken or omitted by such indemnitees thereunder. Section 7.07. Credit Decision. Each Bank acknowledges that it has, --------------- independently and without reliance upon the Administrative Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Bank also acknowledges that it will, independently and without reliance upon the Administrative Agent or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking any action under this Agreement. Section 7.08. Successor Administrative Agent. The Administrative Agent may ------------------------------ resign at any time by giving notice thereof to the Banks and the Borrower. Upon any such resignation, the Borrower, with the consent of the Required Banks (such consent not to be unreasonably withheld or delayed), shall have the right to appoint a successor Administrative Agent. If no successor Administrative Agent shall have been so appointed, and shall have accepted such appointment, 34 within 30 days after the retiring Administrative Agent gives notice of resignation, then the retiring Administrative Agent may, on behalf of the Banks, appoint a successor Administrative Agent, which shall be a commercial bank organized or licensed under the laws of the United States of America or of any State thereof and having a combined capital and surplus of at least $250,000,000. Upon the acceptance of its appointment as Administrative Agent hereunder by a successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder; provided that if such successor Administrative Agent is appointed without the consent of the Borrower, such successor Administrative Agent may be replaced by the Borrower with the consent of the Required Banks. After any retiring Administrative Agent's resignation hereunder as Administrative Agent, the provisions of this Article shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent. Section 7.09. Administrative Agent's Fee. The Borrower shall pay to the -------------------------- Administrative Agent for its own account fees in the amounts and at the times previously agreed upon between the Borrower and the Administrative Agent. ARTICLE 8 CHANGE IN CIRCUMSTANCES Section 8.01. Basis for Determining Interest Rate Inadequate or Unfair. If -------------------------------------------------------- on or prior to the first day of any Interest Period for any Euro-Dollar Borrowing: (a) the Administrative Agent determines that deposits in dollars (in the applicable amounts) are not being offered to the Administrative Agent in the relevant market for such Interest Period, or (b) in the case of a Euro-Dollar Borrowing, Banks having 66K% or more of the aggregate amount of the affected Loans advise the Administrative Agent that the Euro-Dollar Base Rate as determined by the Administrative Agent will not adequately and fairly reflect the cost to such Banks of funding their Euro-Dollar Loans for such Interest Period, the Administrative Agent shall forthwith give notice thereof to the Borrower and the Banks, whereupon until the Administrative Agent notifies the Borrower that the circumstances giving rise to such suspension no longer exist, (i) the obligations of the Banks to make Euro-Dollar Loans or to continue or convert outstanding Loans as or into Euro-Dollar Loans shall be suspended and (ii) each outstanding Euro-Dollar Loan shall be converted into a Alternate Base Rate Loan on the last day of the then current Interest Period applicable thereto. Unless the Borrower notifies the Administrative Agent at least one Domestic Business Day before the date of any Euro-Dollar Borrowing for which a Notice of Borrowing has previously been given that it elects not to borrow on such date, such Borrowing shall instead be made as a Alternate Base Rate Borrowing. Section 8.02. Illegality. If, on or after the date of this Agreement, the ---------- adoption of any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or any 35 change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Euro-Dollar Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall make it unlawful or impossible for any Bank (or its Euro-Dollar Leading Office) to make, maintain or fund any of its Euro-Dollar Loans and such Bank shall so notify the Administrative Agent, the Administrative Agent shall forthwith give notice thereof to the other Banks and the Borrower, whereupon until such Bank notifies the Borrower and the Administrative Agent that the circumstances giving rise to such suspension no longer exist, the obligation of such Bank to make Euro-Dollar Loans, or to continue or convert outstanding Loans as or into Euro-Dollar Loans, shall be suspended. Before giving any notice to the Administrative Agent pursuant to this Section, such Bank shall designate a different Euro-Dollar Lending Office if such designation will avoid the need for giving such notice and will not be otherwise disadvantageous to such Bank in the good faith exercise of its discretion. If such notice is given, each Euro-Dollar Loan of such Bank then outstanding shall be converted to a Alternate Base Rate Loan either (a) on the last day of the then current Interest Period applicable to such Euro-Dollar Loan if such Bank may lawfully continue to maintain and fund such Loan to such day or (b) immediately if such Bank shall determine that it may not lawfully continue to maintain and fund such Loan to such day. Section 8.03. Increased Cost and Reduced Return. (a) If on or after the --------------------------------- date of this Agreement, in the case of any Loan or Facility LC or any obligation to make Loans or issue or maintain Facility LCs, the adoption of any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Applicable Lending Office) or any LC Issuer with any request or directive (whether or not having the force of law) issued on or after such date of any such authority, central bank or comparable agency shall impose, modify or deem applicable any reserve, special deposit or similar requirement (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System, but excluding with respect to any Euro-Dollar Loan any such requirement included in an applicable Euro-Dollar Reserve Percentage) against assets of, deposits with or for the account of, or credit extended by, any Bank (or its Applicable Lending Office) or any LC Issuer or shall impose on any Bank (or its Applicable Lending Office) or any LC Issuer or on the London interbank market any other condition (other than in respect of Taxes or Other Taxes) affecting its Euro-Dollar Loans, its Note, any Facility LC Application, any Facility LCs, its obligation to make Euro-Dollar Loans or its obligation to issue or to participate in Facility LCs and the result of any of the foregoing is to increase the cost to such Bank (or its Applicable Lending Office) or such LC Issuer of making or maintaining any Euro-Dollar Loan or Facility LC, or to reduce the amount of any sum received or receivable by such Bank (or its Applicable Lending Office) or such LC Issuer under this Agreement or under its Note with respect thereto, by an amount deemed by such Bank or such LC Issuer to be material, then, within 15 days after demand by such Bank or such LC Issuer (with a copy to the Administrative Agent), the Borrower shall pay to such Bank or such LC Issuer such additional amount or amounts as will compensate such Bank or such LC Issuer for such increased cost or reduction; provided that no such amount shall be payable with respect to any period commencing more than 90 days prior to the date such Bank or such LC Issuer first notifies the Borrower of its intention 36 to demand compensation therefor under this Section 8.03(a) unless such increased cost or reduction is imposed on such Bank or such LC Issuer on a retroactive basis. (b) If any Bank or any LC Issuer shall have determined that, on or after the date of this Agreement, the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change in any such law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency given or made after the date of this Agreement, has or would have the effect of reducing the rate of return on capital of such Bank or LC Issuer (or its Parent) as a consequence of such Bank's or LC Issuer's obligations hereunder to a level below that which such Bank or LC Issuer (or its Parent) could have achieved but for such adoption, change, request or directive (taking into consideration its policies with respect to capital adequacy) by an amount deemed by such Bank or LC Issuer to be material, then from time to time, within 15 days after demand by such Bank or LC Issuer (with a copy to the Administrative Agent), the Borrower shall pay to such Bank or LC Issuer such additional amount or amounts as will compensate such Bank or LC Issuer (or its Parent) for such reduction; provided that no such amount shall be payable with respect to any period commencing less than 30 days after the date such Bank or LC Issuer first notifies the Borrower of its intention to demand compensation under this Section 8.03(b). (c) Each Bank and LC Issuer will promptly notify the Borrower and the Administrative Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Bank or LC Issuer to compensation pursuant to this Section and will designate a different Applicable Lending Office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the judgment of such Bank or LC Issuer, be otherwise disadvantageous to such Bank or LC Issuer. A certificate of any Bank or LC Issuer claiming compensation under this Section and setting forth the additional amount or amounts to be paid to it hereunder shall be conclusive in the absence of manifest error. In determining such amount, such Bank or LC Issuer may use any reasonable averaging and attribution methods. Section 8.04. Taxes. (a) For purposes of this Section 8.04, the following ----- terms have the following meanings: "Taxes" means any and all present or future taxes, duties, levies, imposts, ----- deductions, charges or withholdings with respect to any payment by the Borrower pursuant to this Agreement or any Note or Facility LC Application, and all liabilities with respect thereto, excluding (i) in the case of each Bank, LC Issuer and the Administrative Agent, taxes imposed on its income, net worth or gross receipts and franchise or similar taxes imposed on it by a jurisdiction under the laws of which such Bank, LC Issuer or the Administrative Agent (as the case may be) is organized or in which its principal executive office is located or, in the case of each Bank, in which its Applicable Lending Office is located and (ii) in the case of each Bank and LC Issuer, any United States withholding tax imposed on such payments except to the extent that such Bank and LC Issuer is subject to United States withholding tax by reason of a U.S. Tax Law Change. 37 "Other Taxes" means any present or future stamp or documentary taxes and ----------- any other excise or property taxes, or similar charges or levies, which arise from any payment made pursuant to this Agreement or under any Note or Facility LC Application or from the execution or delivery of, or otherwise with respect to, this Agreement or any Note or Facility LC Application. "U.S. Tax Law Change" means with respect to any Bank or Participant the ------------------- occurrence (x) in the case of each Bank listed on the signature pages hereof, after the date of its execution and delivery of this Agreement and (y) in the case of any other Bank, after the date such Bank shall have become a Bank hereunder, and (z) in the case of each Participant, after the date such Participant became a Participant hereunder, of the adoption of any applicable U.S. federal law, U.S. federal rule or U.S. federal regulation relating to taxation, or any change therein, or the entry into force, modification or revocation of any income tax convention or treaty to which the United States is a party. (b) Any and all payments by the Borrower to or for the account of any Bank, LC Issuer or the Administrative Agent hereunder or under any Note or Facility LC Application shall be made without deduction for any Taxes or Other Taxes; provided that, if the Borrower shall be required by law to deduct any Taxes or Other Taxes from any such payments, (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 8.04) such Bank, LC Issuer or the Administrative Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions, (iii) the Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law and (iv) the Borrower shall furnish to the Administrative Agent, at its address referred to in Section 9.01, the original or a certified copy of a receipt evidencing payment thereof. (c) The Borrower agrees to indemnify each Bank, LC Issuer and the Administrative Agent for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed or asserted by any jurisdiction on amounts payable under this Section 8.04) paid by such Bank, LC Issuer or the Administrative Agent (as the case may be) and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto. This indemnification shall be paid within 15 days after such Bank, LC Issuer or the Administrative Agent (as the case may be) makes demand therefor. (d) Each Bank organized under the laws of a jurisdiction outside the United States, on or prior to the date of its execution and delivery of this Agreement in the case of each Bank listed on the signature pages hereof and on or prior to the date on which it becomes a Bank in the case of each other Bank, and from time to time thereafter as required by law (but only so long as such Bank remains lawfully able to do so), shall provide the Borrower two completed and duly executed copies of Internal Revenue Service form W-8BEN or W-8ECI, as appropriate, or any successor form prescribed by the Internal Revenue Service, or other documentation reasonably requested by the Borrower, certifying that such Bank is entitled to benefits under an income tax treaty to which the United States is a party which exempts the Bank from United States withholding tax or reduces the rate of withholding tax on payments of interest for the account of 38 such Bank or certifying that the income receivable pursuant to this Agreement is effectively connected with the conduct of a trade or business in the United States. (e) For any period with respect to which a Bank has failed to provide the Borrower with the appropriate form pursuant to Section 8.04(d) (unless such failure is due to a U.S. Tax Law Change), such Bank shall not be entitled to indemnification under Section 8.04(b) or 8.04(c) with respect to any Taxes or Other Taxes which would not have been payable had such form been so provided, provided that if a Bank, which is otherwise exempt from or subject to a reduced rate of withholding tax, becomes subject to Taxes because of its failure to deliver a form required hereunder, the Borrower shall take such steps as such Bank shall reasonably request to assist such Bank to recover such Taxes (it being understood, however, that the Borrower shall have no liability to such Bank in respect of such Taxes). (f) If the Borrower is required to pay additional amounts to or for the account of any Bank pursuant to this Section 8.04, then such Bank will take such action (including changing the jurisdiction of its Applicable Lending Office) as in the good faith judgment of such Bank (i) will eliminate or reduce any such additional payment which may thereafter accrue and (ii) is not otherwise disadvantageous to such Bank. (g) If any Bank or the Administrative Agent receives a refund (including a refund in the form of a credit against taxes that are otherwise payable by the Bank or the Administrative Agent) of any Taxes or Other Taxes for which the Borrower has made a payment under Section 8.04(b) or (c) and such refund was received from the taxing authority which originally imposed such Taxes or Other Taxes, such Bank or the Administrative Agent agrees to reimburse the Borrower to the extent of such refund, provided that nothing contained in this paragraph (g) shall require any Bank or the Administrative Agent to seek any such refund or make available its tax returns (or any other information relating to its taxes which it deems to be confidential). Section 8.05. Alternate Base Rate Loans Substituted for Affected -------------------------------------------------- Euro-Dollar Loans. If (i) the obligation of any Bank to make or to continue or - ----------------- convert outstanding Loans as or into Euro-Dollar Loans has been suspended pursuant to Section 8.02 or (ii) any Bank has demanded compensation under Section 8.03(a) or 8.04 with respect to its Euro-Dollar Loans and the Borrower shall, by at least five Euro-Dollar Business Days' prior notice to such Bank through the Administrative Agent, have elected that the provisions of this Section shall apply to such Bank, then, unless and until such Bank notifies the Borrower that the circumstances giving rise to such suspension or demand for compensation no longer apply: (a) all Loans which would otherwise be made by such Bank as (or continued as or converted to) Euro-Dollar Loans, as the case may be, shall instead be Alternate Base Rate Loans (on which interest and principal shall be payable contemporaneously with the related Euro-Dollar Loans of the other Banks), and (b) after each of its Euro-Dollar Loans has been repaid, all payments of principal which would otherwise be applied to repay such Loans shall be applied to repay its Alternate Base Rate Loans instead. 39 If such Bank notifies the Borrower that the circumstances giving rise to such suspension or demand for compensation no longer exist, the principal amount of each such Alternate Base Rate Loan shall be converted into a Euro-Dollar Loan on the first day of the next succeeding Interest Period applicable to the related Euro-Dollar Loans of the other Banks. Section 8.06. Substitution of Bank. If (i) the obligation of any Bank to -------------------- make or to convert or continue outstanding Loans as or into Euro-Dollar Loans has been suspended pursuant to Section 8.02, (ii) any Bank has demanded compensation under Section 8.03 or 8.04, (iii) any Bank exercises its right not to extend its Commitment Termination Date pursuant to Section 2.01(c), or (iv) Investment Grade Status ceases to exist as to any Bank, then: (a) the Borrower shall have the right, with the assistance of the Administrative Agent, to designate a substitute bank or banks (which may be one or more of the Banks) mutually satisfactory to the Borrower and the Administrative Agent (whose consent shall not be unreasonably withheld or delayed) to purchase for cash, pursuant to an Assignment and Assumption Agreement in substantially the form of Exhibit C hereto, the outstanding Loans, Reimbursement Obligations and Facility LC participations of such Bank and assume the Commitment of such Bank, without recourse to or warranty by, or expense to, such Bank, for a purchase price equal to the principal amount of all of such Bank's outstanding Loans and Reimbursement Obligations plus any accrued but unpaid interest thereon and the accrued but unpaid fees in respect of such Bank's Commitment and Facility LCs hereunder plus such amount, if any, as would be payable pursuant to Section 2.13 if the outstanding Loans of such Bank were prepaid in their entirety on the date of consummation of such assignment, and the Borrower shall cause the termination or cancellation of all Facility LCs issued by such Bank, not later than the date of consummation of such assignment; and (b) if at the time Investment Grade Status exists as to the Borrower and no Default and Event of Default then exists, the Borrower may elect to terminate this Agreement as to such Bank, provided that (i) the Borrower notifies such Bank through the Administrative Agent of such election at least three Euro-Dollar Business Days before the effective date of such termination, (ii) the Borrower repays or prepays the principal amount of all outstanding Loans made by such Bank and Reimbursement Obligations of such Bank plus any accrued but unpaid interest thereon and the accrued but unpaid fees in respect of such Bank's Commitment and Facility LCs hereunder plus all other amounts payable by the Borrower to such Bank hereunder, not later than the effective date of such termination and (iii) the Borrower causes the termination or cancellation of all Facility LCs issued by such Bank not later than the effective date of such termination. Upon satisfaction of the foregoing conditions, the Commitment of such Bank shall terminate on the effective date specified in such notice. ARTICLE 9 MISCELLANEOUS Section 9.01. Notices. All notices, requests and other communications to ------- any party hereunder shall be in writing (including bank wire, telex, facsimile transmission or similar writing) and shall be given to such party: (x) in the case of the Borrower or the Administrative Agent, at its address or telecopy or telex number set forth on the Notice Addresses Schedule, (y) in the case of any Bank or LC Issuer, at its address or telecopy or telex number set forth in its 40 Administrative Questionnaire or the Notice Addresses Schedule or (z) in the case of any party, such other address or telecopy or telex number as such party may hereafter specify for the purpose by notice to the Administrative Agent and the Borrower. Each such notice, request or other communication shall be effective (i) if given by telecopy or telex, when such telecopy or telex is transmitted to the telecopy or telex number specified in this Section and the appropriate answerback or confirmation slip, as the case may be, is received, or (ii) if given by any other means, when delivered at the address specified in this Section; provided that notices to the Administrative Agent under Article 2 or Article 3 shall not be effective until delivered. Section 9.02. No Waivers. No failure or delay by the Administrative Agent, ---------- any LC Issuer or any Bank in exercising any right, power or privilege hereunder or under any Note or Facility LC Application shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. Section 9.03. Expenses; Indemnification. (a) The Borrower shall pay (i) all ------------------------- reasonable out-of-pocket expenses of the Administrative Agent, including reasonable fees and disbursements of special counsel for the Administrative Agent, in connection with the preparation of this Agreement, any waiver or consent hereunder or any amendment hereof or any Default or alleged Default hereunder and (ii) if an Event of Default occurs, all reasonable out-of-pocket expenses incurred by the Administrative Agent, any LC Issuer or any Bank, including reasonable fees and disbursements of counsel, in connection with such Event of Default and collection and other enforcement proceedings resulting therefrom. (b) The Borrower agrees to indemnify the Administrative Agent, each LC Issuer and each Bank, their respective affiliates and the respective directors, officers, agents and employees of the foregoing (each an "Indemnitee") and hold ---------- each Indemnitee harmless from and against any and all liabilities, losses, damages, costs and expenses of any kind, including, without limitation, the reasonable fees and disbursements of counsel, which may be incurred by such Indemnitee in connection with any investigative, administrative or judicial proceeding (whether or not such Indemnitee shall be designated a party thereto) relating to or arising out of this Agreement or any actual or proposed use of proceeds of Loans hereunder; provided that no Indemnitee shall have the right to be indemnified hereunder for such Indemnitee's own gross negligence or willful misconduct as determined by a court of competent jurisdiction. Section 9.04. Sharing of Set-offs. Each Bank agrees that if it shall, by ------------------- exercising any right of set-off or counterclaim or otherwise, receive payment of a proportion of the aggregate amount then due with respect to the Obligations held by it which is greater than the proportion received by any other Bank in respect of the aggregate amount then due with respect to the Loans held by such other Bank, the Bank receiving such proportionately greater payment shall purchase such participations in the Obligations held by the other Banks, and such other adjustments shall be made, as may be required so that all such payments with respect to the Loans held by the Banks shall be shared by the Banks pro rata; provided that nothing in this Section shall impair the right of any Bank to exercise any right of set-off or counterclaim it may have and to apply the amount subject to such exercise to the payment of indebtedness of the Borrower other than its indebtedness under this Agreement. 41 Section 9.05. Amendments and Waivers. Any provision of this Agreement or ---------------------- the Notes may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by the Borrower and the Required Banks (and, if the rights or duties of the Administrative Agent are affected thereby, by the Administrative Agent and, if the rights or duties of an LC Issuer are affected thereby, by such LC Issuer); provided that no such amendment or waiver shall, unless signed by all the Banks, (i) increase or decrease the Commitment of any Bank (except for a ratable decrease in the Commitments of all Banks) or subject any Bank to any additional obligation, (ii) reduce the principal of or rate of interest on any Obligations or any fees hereunder, (iii) postpone the date fixed for any payment of principal of or interest on any Loan or interest thereon or any fees hereunder or for termination of any Commitment or (iv) change the percentage of the Commitments or of the aggregate Pro Rata Shares, or the number of Banks, which shall be required for the Banks or any of them to take any action under this Section or any other provision of this Agreement. Section 9.06. Successors and Assigns. (a) The provisions of this Agreement ---------------------- shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Borrower may not assign or otherwise transfer any of its rights under this Agreement without the prior written consent of all Banks. (b) Any Bank may, with (unless an Event of Default then exists) the consent of the Borrower (such consent not to be unreasonably withheld or delayed), at any time grant to one or more banks or other institutions (each a "Participant") ----------- participating interests in its Commitment or any or all of its Obligations. In the event of any such grant by a Bank of a participating interest to a Participant, whether or not upon notice to the Administrative Agent, such Bank shall remain responsible for the performance of its obligations hereunder, and the Borrower and the Administrative Agent shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement. Any agreement pursuant to which any Bank may grant such a participating interest shall provide that such Bank shall retain the sole right and responsibility to enforce the obligations of the Borrower hereunder including, without limitation, the right to approve any amendment, modification or waiver of any provision of this Agreement; provided that such participation agreement may provide that such Bank will not agree to any modification, amendment or waiver of this Agreement described in clause (i), (ii) or (iii) of Section 9.05 without the consent of the Participant. The Borrower agrees that each Participant shall, to the extent provided in its participation agreement, be entitled to the benefits of Article 8 with respect to its participating interest, subject to the performance by such Participant of the obligations of a Bank thereunder. An assignment or other transfer which is not permitted by subsection (c) or (d) below shall be given effect for purposes of this Agreement only to the extent of a participating interest granted in accordance with this subsection (b). (c) Any Bank may at any time assign to one or more banks or other financial institutions (each an "Assignee") all, or a proportionate part (equivalent to an -------- initial Commitment of not less than $10,000,000 (unless the Borrower and the Administrative Agent shall otherwise agree)) of all, of its rights and obligations under this Agreement and its Note (if any), and such Assignee shall assume such rights and obligations, pursuant to an Assignment and Assumption Agreement in substantially the form of Exhibit C hereto executed by such Assignee and such transferor Bank, with (and only with and subject to) the prior written consent of the Borrower (given in its sole discretion), provided that an Event of Default does not exist, and the 42 Administrative Agent (which shall not be unreasonably withheld or delayed), provided that unless such assignment is of the entire right, title and interest of the transferor Bank hereunder, after making any such assignment such transferor Bank shall have a Commitment of at least $10,000,000 (unless the Borrower and the Administrative Agent shall otherwise agree). Upon execution and delivery of such instrument of assumption and payment by such Assignee to such transferor Bank of an amount equal to the purchase price agreed between such transferor Bank and such Assignee, such Assignee shall be a Bank party to this Agreement and shall have all the rights and obligations of a Bank with a Commitment as set forth in such instrument of assumption, and the transferor Bank shall be released from its obligations hereunder to a corresponding extent, and no further consent or action by any party shall be required. Upon the consummation of any assignment pursuant to this subsection (c), the transferor Bank, the Administrative Agent and the Borrower shall make appropriate arrangements so that, if required by the Assignee, a Note is issued to the Assignee. If the Assignee is not incorporated under the laws of the United States of America or a state thereof it shall, prior to the first date on which interest or fees are payable hereunder for its account, deliver to the Borrower and the Administrative Agent certification as to exemption from deduction or withholding of any United States federal income taxes in accordance with Section 8.04. All assignments shall be subject to a transaction fee established by, and payable by the transferor Bank to, the Administrative Agent for its own account (which shall not exceed $5,000). (d) Any Bank may at any time assign all or any portion of its rights under this Agreement and its Note (if any) to a Federal Reserve Bank. No such assignment shall release the transferor Bank from its obligations hereunder or modify any such obligations. (e) No Assignee, Participant or other transferee of any Bank's rights (including any Applicable Lending Office other than such Bank's initial Applicable Lending Office) shall be entitled to receive any greater payment under Section 8.03 or 8.04 than such Bank would have been entitled to receive with respect to the rights transferred, unless such transfer is made by reason of the provisions of Section 8.02, 8.03 or 8.04 requiring such Bank to designate a different Applicable Lending Office under certain circumstances or at a time when the circumstances giving rise to such greater payment did not exist. Section 9.07. Collateral. Each of the Banks represents to the ---------- Administrative Agent and each of the other Banks that it in good faith is not relying upon any "margin stock" (as defined in Regulation U) as collateral in the extension or maintenance of the credit provided for in this Agreement. Section 9.08. Confidentiality. The Administrative Agent and each Bank agree --------------- to keep any information delivered or made available by the Borrower pursuant to this Agreement confidential from anyone other than persons employed or retained by such Bank and its affiliates who are engaged in evaluating, approving, structuring or administering the credit facility contemplated hereby, provided that nothing herein shall prevent any Bank from disclosing such information (a) to any other Bank or to the Administrative Agent, (b) to any other Person if reasonably incidental to the administration of the credit facility contemplated hereby, (c) upon the order of any court or administrative agency, (d) upon the request or demand of any regulatory agency or authority, (e) which had been publicly disclosed other than as a result of a disclosure by the Administrative Agent or any Bank prohibited by this Agreement, (f) in connection with 43 any litigation to which the Administrative Agent, any Bank or its subsidiaries or Parent may be a party, (g) to the extent necessary in connection with the exercise of any remedy hereunder, (h) to such Bank's or Administrative Agent's legal counsel and independent auditors and (i) subject to provisions substantially similar to those contained in this Section 9.08, to any actual or proposed Participant or Assignee. Section 9.09. Governing Law; Submission to Jurisdiction. This Agreement and ----------------------------------------- each Note (if any) shall be construed in accordance with and governed by the law of the State of New York. The Borrower hereby submits to the nonexclusive jurisdiction of the United States District Court for the Southern District of New York and of any New York State court sitting in New York City for purposes of all legal proceedings arising out of or relating to this Agreement or the transactions contemplated hereby. The Borrower irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. Section 9.10. Counterparts; Integration. This Agreement may be signed in ------------------------- any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement constitutes the entire agreement and understanding among the parties hereto and supersedes any and all prior agreements and understandings, oral or written, relating to the subject matter hereof. Section 9.11. WAIVER OF JURY TRIAL. EACH OF THE BORROWER, THE -------------------- ADMINISTRATIVE AGENT AND THE BANKS, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO UNDER APPLICABLE LAW, HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. Section 9.12. Payments Set Aside. To the extent that the Borrower makes a ------------------ payment to the Administrative Agent or any Bank, or the Administrative Agent or any Bank exercises any right of set-off, and such payment or the proceeds of such set-off or any part thereof is subsequently invalidated, declared to be fraudulent or preferential, set aside or required (including pursuant to any settlement entered into by the Administrative Agent or such Bank in its discretion) to be repaid by the Administrative Agent or such Bank (the "Repaying -------- Party") to a trustee, receiver or any other party, in connection with any - ----- proceeding under any debtor relief law or otherwise, then (a) to the extent of such recovery, the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such set-off had not occurred, and (b) each Bank severally agrees to pay to the Repaying Party upon demand its applicable share of any amount so recovered from or repaid by the Repaying Party, plus interest thereon from the date of such demand to the date such payment is made at a rate per annum equal to the Federal Funds Effective Rate from time to time in effect. 44 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. DUKE CAPITAL CORPORATION By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- S-1 BANK ONE, NA, as Administrative Agent, LC Issuer and a Bank By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- S-2 WACHOVIA BANK, NATIONAL ASSOCIATION, as Co-Syndication Agent and a Bank By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- S-3 WESTDEUTSCHE LANDESBANK GIROZENTRALE, as Co-Syndication Agent and a Bank By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- S-4 DEUTSCHE BANK AG NEW YORK BRANCH, as Co-Documentation Agent and a Bank By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- S-5 UBS AG, STAMFORD BRANCH, as Co-Documentation Agent and a Bank By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- S-6 ABN AMRO BANK N.V., as Co-Agent and a Bank By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- S-7 THE BANK OF TOKYO-MITSUBISHI TRUST COMPANY, as Co-Agent and a Bank By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- S-8 BNP PARIBAS, as a Bank By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- S-9 TORONTO DOMINION (TEXAS), INC., as a Bank By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- S-10 CREDIT SUISSE FIRST BOSTON, as a Bank By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- S-11 CITIBANK, N.A., as a Banks By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- S-12 MIZUHO CORPORATE BANK LTD., as a Bank By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- S-13 BARCLAYS BANK PLC, as a Bank By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- S-14 JPMORGAN CHASE BANK, as a Bank By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- S-15 BANK OF AMERICA, N.A., as a Bank By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- S-16 BANCO BILBAO VIZCAYA ARGENTARIA S.A., as a Bank By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- S-17 WESTPAC BANKING CORPORATION, as a Bank By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- S-18 SUNTRUST BANK, as a Bank By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- S-19 Commitments Schedule -------------------- Bank Commitment ---- ------------ Bank One, NA $ 50,000,000 Wachovia Bank, National Association $ 50,000,000 Westdeutsche Landesbank Girozentrale $ 50,000,000 Deutsche Bank AG New York Branch $ 50,000,000 UBS AG, Stamford Branch $ 50,000,000 ABN AMRO Bank N.V. $ 37,500,000 The Bank of Tokyo-Mitsubishi Trust Company $ 37,500,000 BNP Paribas $ 25,000,000 Toronto Dominion (Texas), Inc. $ 25,000,000 Credit Suisse First Boston $ 25,000,000 Citibank, N.A. $ 12,500,000 Mizuho Corporate Bank Ltd. $ 12,500,000 Barclays Bank PLC $ 12,500,000 JPMorgan Chase Bank $ 12,500,000 Bank of America, N.A. $ 12,500,000 Banco Bilbao Vizcaya Argentaria S.A. $ 12,500,000 Westpac Banking Corporation $ 12,500,000 SunTrust Bank $ 12,500,000 ------------ Total $500,000,000 Pricing Schedule ---------------- The "Commitment Fee Rate" and the "Applicable Margin" for any day are the respective percentages set forth below in the applicable row under the column corresponding to the Status that exists on such day:
- ------------------------------------------------------------------------------------ LEVEL I LEVEL II LEVEL III LEVEL IV LEVEL V LEVEL VI - ------------------------------------------------------------------------------------ Commitment Fee Rate 0.08% 0.09% 0.105% 0.125% 0.15% 0.20% - ------------------------------------------------------------------------------------ Applicable Margin 0.50% 0.55% 0.625% 0.75% 1.0% 1.375% Utilization A33N% - ------------------------------------------------------------------------------------ Applicable Margin 0.5625% 0.6125% 0.6875% 0.8125% 1.0625% 1.4375% Utilization >33N% but A66K% - ------------------------------------------------------------------------------------ Applicable Margin 0.625% 0.675% 0.75% 0.875% 1.125% 1.5% Utilization >66K% - ------------------------------------------------------------------------------------
For purposes of this Schedule, the following terms have the following meanings: "Level I Status" exists at any date if, at such date, the Borrower is rated "A+" or higher by S&P or "A1" or higher by Moody's. "Level II Status" exists at any date if, at such date, (i) the Borrower is rated "A" or higher by S&P or "A2" or higher by Moody's and (ii) Level I Status does not exist. "Level III Status" exists at any date if, at such date, (i) the Borrower is rated "A-" or higher by S&P or "A3" or higher by Moody's and (ii) neither Level I Status nor Level II Status exists. "Level IV Status" exists at any date if, at such date, (i) the Borrower is rated "BBB+" by S&P or "Baa1" by Moody's and (ii) neither Level I Status, Level II Status nor Level III Status exists. "Level V Status" exists at any date if, at such date, (i) the Borrower is rated "BBB" by S&P or "Baa2" by Moody's and (ii) neither Level I Status, Level II Status, Level III Status nor Level IV Status exists. "Level VI Status" exists at any date if, at such date, no other Status exists. "Status" refers to the determination of which of Level I Status, Level II Status, Level III Status, Level IV Status, Level V Status or Level VI Status exists at any date. "Utilization" means, at any date, the percentage equivalent of a fraction (i) the numerator of which is the Aggregate Outstanding Credit Exposure at such date and (ii) the denominator of which is the aggregate amount of the Commitments at such date (or if such date is after the Commitment Termination Date, the aggregate amount of the Commitments as in effect prior to their termination on the Commitment Termination Date). The credit ratings to be utilized for purposes of this Schedule (a "Credit Rating") are those indicated for or assigned to the senior unsecured long-term debt securities of the Borrower without third-party credit enhancement, and any rating indicated for or assigned to any other debt security of the Borrower shall be disregarded. The ratings in effect for any day are those in effect at the close of business on such day. A change in credit rating will result in an immediate change in the applicable Status. In the case of split ratings from S&P and Moody's, the rating to be used to determine the applicable Status is the higher of the two. 2 Notice Addresses Schedule ------------------------- DUKE CAPITAL CORPORATION 422 South Church Street Charlotte, NC 28202-1904 Attention: John R. Heffernan Telephone: (704) 382-3239 Facsimile: (704) 382-9497 Electronic Mail: jrheffernan@duke-energy.com BANK ONE, NA Administrative Agent's Office, L/C Issuer and Bank One, NA, Lending Office - -------------------------------------------------------------------------- Bank One, NA 1 Bank One Plaza 15th Floor Suite IL1-0429 Chicago, IL 60670 Attention: Brian Zimmer Telephone: (312) 732-2169 Facsimile: (312) 732-7455 Electronic Mail: brian_j_zimmer@bankone.com Account No.: (4811 5286 0000) Ref: Duke Capital ABA #071-000-013 WACHOVIA BANK, NATIONAL ASSOCIATION Credit Contact: - -------------- Wachovia Bank, National Association c/o Mitch Wilson One Wachovia Center 301 South College Street, 5th Floor Charlotte, NC 28288-0251 Attention: Mitch Wilson Telephone: (704) 383-5642 Facsimile: (704) 374-2570 Electronic Mail: mitch.wilson@wachovia.com Administrative Contact: - ---------------------- Wachovia Bank, National Association c/o Chanue Michael 201 South College Street, 17th Floor Charlotte, NC 28288-1183 Attention: Chanue Michael Telephone: (704) 715-1195 Facsimile: (704) 383-2701 Electronic Mail: chanue.michael@wachovia.com WESTDEUTSCHE LANDESBANK GIRONZENTRALE Credit Contact: - -------------- 1211 Avenue of the Americas New York, NY 10036 Attention: Anthony Alessandro Telephone: (212) 852-5944 Facsimile: (212) 852-6148 Electronic Mail: anthony_alessandro@westlb.com Administrative Contact: - ---------------------- 1211 Avenue of the Americas New York, NY 10036 Attention: Dan Palermo Telephone: (212) 852-6157 Facsimile: (212) 302-7946 Electronic Mail: daniel_palermo@westlb.com DEUTSCHE BANK AG NEW YORK BRANCH Credit Contact: - -------------- Deutsche Bank AG New York Branch 31 West 52nd Street, 24th Floor New York, NY 10019 Attention: Joel Makowsky Telephone: (212) 469-7896 Facsimile: (212) 469-5711 Electronic Mail: joel.makowsky@db.com 2 Administrative Contact: - ---------------------- Deutsche Bank AG New York Branch 90 Hudson Street Jersey City, New Jersey 07302 Attention: Noble Samuel Telephone: (201) 593-2222 Facsimile: (201) 593-2313 Electronic Mail: noble.samuel@db.com UBS AG, STAMFORD BRANCH Credit Contact: - -------------- UBS AG, Stamford Branch 677 Washington Blvd. Stamford, CT 06901 Attention: Juan Zuniga Telephone: (203) 719-5993 Facsimile: (203) 719-3888 Electronic Mail: juan.zuniga@ubsw.com Administrative Contact: - ---------------------- UBS AG, Stamford Branch 677 Washington Blvd. Stamford, CT 06901 Attention: Lynne Alfarone Telephone: (203) 719-4308 Facsimile: (203) 719-3888 Electronic Mail: lynne.alfarone@ubsw.com ABN AMRO BANK N.V. Credit Contact: - -------------- ABN AMRO Bank N.V. 135 South LaSalle Street Suite 710 Chicago, IL 60604-1003 Attention: Frank van Deur Telephone: (312) 904-4975 Facsimile: (312) 904-6387 Electronic Mail: frank.van.deur@abnamro.com 3 Administrative Contact: - ---------------------- ABN AMRO Bank N.V. 208 South LaSalle Street Suite 1500 Chicago, IL 60604-1003 Attention: Credit Administration Telephone: (312) 992-5110 Facsimile: (312) 992-5111 Electronic Mail: kenneth.keck@abnamro.com THE BANK OF TOKYO-MITSUBISHI TRUST COMPANY Credit Contact: - -------------- Bank of Tokyo-Mitsubishi Trust Company 1251 Avenue of the Americas, 12th Floor New York, NY 10020-1104 Attention: Nicholas R. Battista Telephone: (212) 782-4333 Facsimile: (212) 782-4979 Electronic Mail: nbattista@btmna.com Attention: Bill Rhodes Telephone: (212) 782-4580 Facsimile: (212) 782-4979 Electronic Mail: brhodes@btmna.com Administrative Contact: - ---------------------- Bank of Tokyo-Mitsubishi Trust Company BTM Information Services, Inc. c/o Bank of Tokyo-Mitsubishi Trust Company 1251 Avenue of the Americas, 12th Floor New York, NY 10020-1104 Attention: Rolando Uy Telephone: (201) 413-8570 Facsimile: (201) 521-2304 (201) 521-2305 Electronic Mail: ruy@btmna.com 4 BNP PARIBAS Credit Contact: - -------------- BNP Paribas Project Finance & Utilities Group 787 7th Avenue New York, NY 10019 Attention: Sean Finnegan Telephone: (212) 841-2310 Facsimile: (212) 841-2052 Electronic Mail: sean.finnegan@americas.bnpparibas.com Administrative Contact: - ---------------------- BNP Paribas 919 Third Avenue New York, NY 10022-1278 Attention: Tecla Hurley Telephone: (212) 471-6651 Facsimile: (212) 471-6697 Electronic Mail: tecla.hurley@americas.bnpparibas.com TORONTO DOMINION (TEXAS), INC. Credit Contact: - -------------- TD Securities (USA), Inc. 31 West 52nd Street New York, NY 10019 Attention: Ashish Shukla Telephone: (212) 827-7778 Facsimile: (212) 827-7244 Electronic Mail: ashish.shukla@tdsecurities.com Administrative Contact: - ---------------------- TD Securities (USA), Inc. The Toronto-Dominion Bank 909 Fannin Street, 17th Floor Houston, TX 77010 Attention: Carol Brandt Telephone: (713) 653-8204 Facsimile: (713) 951-9921 Electronic Mail: carol.brandt@tdsecurities.com 5 CREDIT SUISSE FIRST BOSTON Credit Contact: - -------------- Credit Suisse First Boston Eleven Madison Avenue New York, NY 10010 Attention: Paul L. Colon Telephone: (212) 325-5352 Facsimile: (212) 325-8314 Electronic Mail: paul.colon@csfb.com Attention: Vanessa Gomez Telephone: (212) 538-2993 Facsimile: (212) 325-8314 Electronic Mail: vanessa.gomez@csfb.com Administrative Contact: - ---------------------- Credit Suisse First Boston Eleven Madison Avenue New York, NY 10010 Attention: Ed Markowski Telephone: (212) 538-3380 Facsimile: (212) 538-6851 Electronic Mail: edward.markowski@csfb.com Attention: Nirmala Durgano Telephone: (212) 538-3525 Facsimile: (212) 561-8926 Electronic Mail: nirmala.durgano@csfb.com CITIBANK, N.A. Credit Contact: - -------------- Citibank, N.A. 388 Greenwich Street, 21st Floor New York, NY 10013 Attention: Dhaya Ranganathan Telephone: (212) 816-8598 Facsimile: (212) 816-8098 Electronic Mail: dhaya.ranganathan@citi.com 6 Administrative Contact: - ---------------------- Citibank, N.A. 388 Greenwich Street, 21st Floor New York, NY 10013 Attention: Angie Perez Telephone: (212) 816-5549 Facsimile: (212) 816-8098 Electronic Mail: angelica.perez@citi.com MIZUHO CORPORATE BANK LTD. Credit Contact: - -------------- Mizuho Corporate, Ltd. 1251 Avenue of the Americas, 32nd Floor New York, NY 10020 Attention: John Dippo Telephone: (212) 282-3412 Facsimile: (212) 282-4488 Electronic Mail: jdippo@us.mizuho-cb.com Attention: Michael Venditti Telephone: (212) 282-3415 Facsimile: (212) 282-4488 Electronic Mail: mvenditti@us.mizuho-cb.com Administrative Contact: - ---------------------- Mizuho Corporate, Ltd. 1251 Avenue of the Americas New York, NY 10020-1104 Attention: Fernando Silva Telephone: (212) 282-4061 Facsimile: (212) 282-4480 Electronic Mail: fsilva@us.mizuho-cb.com 7 BARCLAYS BANK PLC Credit Contact - -------------- Barclays Capital 222 Broadway, 8th Floor New York, NY 10038 Attention: Sydney Dennis Telephone: (212) 412-2470 Facsimile: (212) 412-2441 Electronic Mail: sydney.dennis@barcap.cm Attention: Mark Griffin Telephone: (212) 412-7625 Facsimile: (212) 412-7511 Electronic Mail: mark.griffin@barcap.com Administrative Contact: - ---------------------- Barclays Group Inc. (USA) 222 Broadway, 11th Floor New York, NY 10038 Attention: Anthony Alexander Telephone: (212) 412-5364 Facsimile: (212) 412-5306 Electronic Mail: anthony.alexander@barcap.com JPMORGAN CHASE BANK Credit Contact: - -------------- JPMorgan Chase Bank 270 Park Avenue 23rd Floor New York, NY 10017 Attention: Steven G. Wood Telephone: (212) 270-7056 Electronic Mail: steven.wood@jpmorgan.com Administrative Contact: - ---------------------- JPMorgan Chase Bank 1 Chase Manhattan Plaza 8th Floor New York, NY 10081 Attention: Lisa Picciarelli Telephone: (212) 552-7886 Facsimile: (212) 552-5777 Electronic Mail: lisa.pucciarelli@jpmorgan.com 8 BANK OF AMERICA, N.A. Credit Contact: - --------------- Bank of America, N.A. 100 North Tryon Street, 16th Floor Mail Code NC1-007-16-13 Charlotte, NC 28255 Attention: Gretchen P. Burud Telephone: (704) 386-8394 Facsimile: (704) 386-1319 Electronic Mail: gretchen.burud@bankofamerica.com Administrative Contact: - ---------------------- Bank of America, N.A. Bank of America Plaza 901 Main Street 14th Floor, TX1-492-14-05 Dallas, TX 75202-3714 Attention: Nora J. Taylor Telephone: (214) 209-0175 Facsimile: (214) 290-9440 Electronic Mail: nora.j.taylor@bankofamerica.com Attention: Shelly Bloom Telephone: (214) 209-3098 Facsimile: (214) 290-9485 Electronic Mail: shelley.a.bloom@bankofamerica.com 9 BANCO BILBAO VIZCAYA ARGENTARIA S.A. Credit Contact: - -------------- Banco Bilbao Vizcaya Argentaria, New York Branch 1345 Avenue of the Americas, 45th Floor New York, NY 10105 Attention: Philip Paddack Telephone: (212) 728-1511 Facsimile: (212) 333-2904 Electronic Mail: philip.paddock@bbvany.com Attention: Francese Alvarez Telephone: (212) 728-1634 Facsimile: (212) 333-2904 Electronic Mail: francese.alvarez@bbvany.com Administrative Contact: - ---------------------- Banco Bilbao Vizcaya Argentaria, New York Branch 1345 Avenue of the Americas, 45th Floor New York, NY 10105 Attention: Francisco Miguens Telephone: (212) 728-1682 Facsimile: (212) 333-2926 Electronic Mail: francisco.miguens@bbvany.com WESTPAC BANKING CORPORATION Credit Contact: - -------------- Westpac Banking Corporation 575 Fifth Avenue 39th Floor New York, NY 10017 Attention: Tony Smith Telephone: (212) 551-1814 Facsimile: (212) 551-1995 Electronic Mail: tonysmith@westpac.com.au 10 Administrative Contact: - ---------------------- Westpac Banking Corporation 575 Fifth Avenue 39th Floor New York, NY 10017 Attention: Susan Wildstein Telephone: (212) 551-1960 Facsimile: (212) 551-1998 Electronic Mail: swildstein@westpac.com.au SUNTRUST BANK Credit Contact: - -------------- SunTrust Bank Mail Code 1929 303 Peachtree Street, 10th Floor Atlanta, GA 30308 Attention: Linda Stanley Telephone: (404) 532-0989 Facsimile: (404) 827-6270 Electronic Mail: linda.stanley@suntrust.com Administrative Contact: - ---------------------- SunTrust Bank Mail Code 1941 303 Peachtree Street, 10th Floor Atlanta, GA 30308 Attention: Ernestine Fambrough Telephone: (404) 581-1612 Facsimile: (404) 575-2730 Electronic Mail: ernestine.fambrough@suntrust.com 11 Existing LCs Schedule --------------------- Duke Energy Corporation Letters of Credit April 2, 2002
- ------------------------------------------------------------------------------------------------------------------------ Auto Obligor For Beneficiary Bank Amount BP Price Effective Expiration Ext.Days - ------------------------------------------------------------------------------------------------------------------------ DCC DENA/DETM Cal. P.X. Trading Svcs. WB 1,500,000 40.0 06/11/99 06/01/02 90 DCC DENA Nevada Power WB 726,000 37.5 04/12/00 04/11/03 60 DCC DENA Nevada Power WB 726,000 37.5 04/12/00 04/11/03 60 DCC DENA Nevada Power CM 1,391,500 45.0 08/11/00 08/08/02 60 DCC DENA Salt River Agricultural Project WB 4,900,000 37.5 06/19/00 06/01/02 No DCC DENA Sierra Pacific Power Co. WB 1,144,000 37.5 04/12/00 04/11/03 60 DCC DENA Sierra Pacific Power Co. WB 572,000 37.5 04/12/00 04/11/03 60 ---------- 10,959,500 - ------------------------------------------------------------------------------------------ Obligor For Beneficiary Auto Ext.Date Comments - ------------------------------------------------------------------------------------------ DCC DENA/DETM Cal. P.X. Trading Svcs. 03/03/02 LOC # LC968-111247 DCC DENA Nevada Power 02/10/03 LOC # LC968-118723 DCC DENA Nevada Power 02/10/03 LOC # LC968-118724 DCC DENA Nevada Power 06/09/02 LOC # P-204234 DCC DENA Salt River Agricultural Project -- LOC # LC968-121937 DCC DENA Sierra Pacific Power Co. 02/10/03 LOC # LC968-118614 DCC DENA Sierra Pacific Power Co. 03/10/03 LOC # LC968-118679
EXHIBIT A NOTE New York, New York , 2002 ------- For value received, Duke Capital Corporation, a Delaware corporation (the "Borrower"), promises to pay to the order of (the "Bank"), for the account of its Applicable Lending Office, the unpaid principal amount of each Loan made by the Bank to the Borrower pursuant to the Credit Agreement referred to below on the date specified in the Credit Agreement. The Borrower promises to pay interest on the unpaid principal amount of each such Loan on the dates and at the rate or rates provided for in the Credit Agreement. All such payments of principal and interest shall be made in lawful money of the United States in Federal or other immediately available funds at the office of Bank One, NA, 1 Bank One Plaza, Chicago, Illinois. All Loans made by the Bank, the respective types and maturities thereof and all repayments of the principal thereof shall be recorded by the Bank and, the Bank, if the Bank so elects in connection with any transfer or enforcement of its Note, may endorse on the schedule attached hereto appropriate notations to evidence the foregoing information with respect to the Loans then outstanding; provided that the failure of the Bank to make any such recordation or endorsement shall not affect the obligations of the Borrower hereunder or under the Credit Agreement. This note is one of the Notes referred to in the 364-Day Credit Agreement dated as of April 18, 2002 among the Borrower, the banks listed on the signature pages thereof and Bank One, NA, as Administrative Agent (as the same may be amended from time to time, the "Credit Agreement"). Terms defined in the Credit Agreement are used herein with the same meanings. Reference is made to the Credit Agreement for provisions for the prepayment hereof and the acceleration of the maturity hereof. DUKE CAPITAL CORPORATION By --------------------------------- Title: Note (cont'd) LOANS AND PAYMENTS OF PRINCIPAL - ---------------------------------------------------------------------------- Amount of Amount Type Principal Maturity Notation Date of Loan of Loan Repaid Date Made By - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- 2 EXHIBIT B-1 Duke Capital Corporation [LOGO] Duke Capital 526 South Church Street Charlotte, NC 28202-1802 April 18,2002 To the Banks and the Administrative Agent Referred to Below c/o Bank One, NA as Administrative Agent 1 Bank One Plaza, 15th Floor Suite ILI-0429 Chicago, Illinois 60670 Ladies and Gentlemen: I am the Deputy General Counsel of Duke Capital Corporation (the "Borrower") and have acted as its counsel in connection with the 364-Day Credit -------- Agreement (the "Credit Agreement"), dated as of April 18, 2002, among the ---------------- Borrower, the banks listed on the signature pages thereof, and Bank One, NA, as Administrative Agent. Capitalized terms defined in the Credit Agreement are used herein as therein defined. This opinion letter is being delivered pursuant to Section 3.01 (b) of the Credit Agreement. In such capacity, I or attorneys under my direct supervision have examined originals or copies, certified or otherwise identified to my satisfaction, of such documents, corporate records, certificates of public officials and other instruments and have conducted such other investigations of fact and law as I have deemed necessary or advisable for purposes of this opinion. Upon the basis of the foregoing, I am of the opinion that: 1. The Borrower is a corporation duly incorporated, validly existing and in good standing under the laws of Delaware and has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. 2. The execution, delivery and performance by the Borrower of the Credit Agreement and any Notes are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action, require no action by or in respect of, or filing with, any governmental body, agency or official and do not contravene, or constitute a default under, any provision of applicable law or regulation or of the certificate of incorporation or by-laws of the Borrower or, to my knowledge, of any agreement, judgment, injunction, order, decree or other instrument binding upon the Borrower or, to my knowledge, result in the creation or imposition of any Lien on any asset of the Borrower or any of its Material Subsidiaries. The Banks and the Administrative Agent Referred to Below April 18, 2002 Page 2 - -------------------------------------- 3. The Borrower has duly executed and delivered the Credit Agreement and the Notes to be signed on the date of this opinion letter. 4. Except as disclosed in the reports referred to in Section 4.04 of the Credit Agreement, to my knowledge (but without independent investigation), there is no action, suit or proceeding pending or threatened against or affecting, the Borrower or any of its Subsidiaries before any court or arbitrator or any governmental body, agency or official, which would be likely to be decided adversely to the Borrower or such Subsidiary and, as a result, to have a material adverse effect upon the business, consolidated financial position or consolidated results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole or which in any manner draws into question the validity of the Credit Agreement or any Notes. 5. The Borrower is not a holding company subject to the registration requirements of the Public Utility Holding Company Act of 1935, as amended. The phrase "to my knowledge", as used in the foregoing opinion, refers to my actual knowledge without any independent investigation as to any such matters. I am a member of the Bar of the State of North Carolina and do not express any opinion herein concerning any law other than the law of the State of North Carolina, the General Corporation Law of the State of Delaware and the federal law of the United States of America. This opinion is rendered to you in connection with the above-referenced matter and may not be relied upon by you for any other purpose, or relied upon by, or furnished to, any other Person, firm or corporation without my prior written consent, except for Additional Banks, Assignees and Participants. My opinions expressed herein are as of the date hereof, and I undertake no obligation to advise you of any changes of applicable law or any other matters that may come to my attention after the date hereof that may affect my opinions expressed herein. Very truly yours, Edward M. Marsh, Jr. EXHIBIT B-2 Robinson, Bradshaw & Hinson, P.A. Attorneys at Law 101 North Tryon Street, Suite 1900 Charlotte, North Carolina 28246 Telephone (704) 377-2536 Fax (704) 378-4000 South Carolina Office The Guardian Building 223 E, Main Street, Suite 600 P.O. Drawer 12070 Rock Hill, S.C. 29731 Telephone (803) 825-2900 Fax (803) 825-2929 April 18, 2002 To the Banks and the Administrative Agent Referred to Below c/o Bank One, NA as Administrative Agent 1 Bank One Plaza, 15th Floor Suite IL1-0429 Chicago, Illinois 60670 Ladies and Gentlemen: We have acted as counsel to Duke Capital Corporation, a Delaware corporation, in connection with the 364-Day Credit Agreement (the "Credit ------ Agreement"), dated as of April 18, 2002, between Duke Capital Corporation, the - --------- banks listed on the signature pages thereof, and Bank One, NA, as Administrative Agent. Capitalized terms used herein and not defined shall have the meanings given to them in the Credit Agreement. This opinion letter is being delivered pursuant to Section 3.01(c) of the Credit Agreement. In connection with this opinion, we also examined originals, or copies identified to our satisfaction, of such other documents and considered such matters of law and fact as we, in our professional judgment, have deemed appropriate to render the opinions contained herein. Where we have considered it appropriate, as to certain facts we have relied, without investigation or analysis of any underlying data contained therein, upon certificates or other comparable documents of public officials and officers or other appropriate representatives of the Borrower. In rendering the opinions contained herein, we have assumed, among other things, that the Credit Agreement and any Notes to be executed (i) are within the Borrower's corporate powers, (ii) have been duly authorized by all necessary corporate action, (iii) have been duly executed and delivered, (iv) require no action by or in respect of, or filing with, any governmental body, agency of official, and (v) do not contravene, or constitute a default under, any provision of applicable law or regulation or of the Borrower's certificate of incorporation or by-laws or any agreement, judgment, injunction, order, decree or other instrument binding upon the Borrower or result in the creation or imposition of any Lien on any asset of the Borrower. In addition, we have assumed that the Credit Agreement fully states the agreement between the Borrower and the Banks with respect to the matters addressed therein, and that the Credit Agreement constitutes a legal, valid and binding obligation of each Bank, enforceable in accordance with its respective terms. The Banks and the Administrative Agent Referred to Below April 18, 2002 Page 2 - -------------------------------------- The opinions set forth herein are limited to matters governed by the laws of the State of North Carolina and the federal laws of the United States, and no opinion is expressed herein as to the laws of any other jurisdiction. For purposes of our opinions, we have disregarded the choice of law provisions in the Credit Agreement and, instead, have assumed with your permission that the Credit Agreement and the Notes are governed exclusively by the internal, substantive laws and judicial interpretations of the State of North Carolina. We express no opinion concerning any matter respecting or affected by any laws other than laws that a lawyer in North Carolina exercising customary professional diligence would reasonably recognize as being directly applicable to the Borrower, the Loans, the Facility LCs, or any of them. Based upon and subject to the foregoing and the further limitations and qualifications hereinafter expressed, it is our opinion that the Credit Agreement constitutes the legal, valid and binding obligation of the Borrower and the Notes, if and when issued, will constitute legal, valid and binding obligations of the Borrower, in each case, enforceable against the Borrower in accordance with its terms. The opinions expressed above are subject to the following qualifications and limitations: 1. Enforcement of the Credit Agreement and the Notes is subject to the effect of applicable bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium and similar laws affecting the enforcement of creditors' rights generally. 2. Enforcement of the Credit Agreement and the Notes is subject to the effect of general principles of equity (regardless of whether considered in a proceeding in equity or at law) by which a court with proper jurisdiction may deny rights of specific performance, injunction, self-help, possessory remedies or other remedies. 3. We do not express any opinion as to the enforceability of any provisions contained in the Credit Agreement or any Note that (i) purport to excuse a party for liability for its own acts, (ii) purport to make void any act done in contravention thereof, (iii) purport to authorize a party to act in its sole discretion, (iv) require waivers or amendments to be made only in writing, (v) purport to effect waivers of constitutional, statutory or equitable rights or the effect of applicable laws, (vi) impose liquidated damages, penalties or forfeiture, or (vii) purport to indemnify a party for its own negligence or willful misconduct. Indemnification provisions in the Credit Agreement are subject to and may be rendered unenforceable by applicable law or public policy, including applicable securities law. 4. We do not express any opinion as to the enforceability of any provisions contained in the Credit Agreement or the Notes purporting to require a party thereto to pay or reimburse attorneys' fees incurred by another party, or to indemnify another party therefor, which may be limited by applicable statutes and decisions relating to the collection and award of attorneys' fees, including but not limited to North Carolina General Statutes (S) 6-21.2. The Banks and the Administrative Agent Referred to Below April 18, 2002 Page 3 - -------------------------------------- 5. We do not express any opinion as to the enforceability of any provisions contained in the Credit Agreement purporting to waive the right of jury trial. Under North Carolina General Statutes (S) 22B-10, a provision for the waiver of the right to a jury trial is unconscionable and unenforceable. 6. We do not express any opinion as to the enforceability of any provisions contained in the Credit Agreement concerning choice of forum or consent to the jurisdiction of courts, venue of actions or means of service of process. 7. We assume that the "prime" rate of interest, as prescribed in the Credit Agreement, is a readily ascertainable rate of interest and that the Borrower would be able to ascertain the rates so described at all times during the term of the Loans. 8. It is likely that North Carolina courts will enforce the provisions of the Credit Agreement providing for interest at a higher rate resulting from a Default or Event of Default (a "Default Rate") which rate is higher than the ------------ rate otherwise stipulated in the Credit Agreement. The law, however, disfavors penalties, and it is possible that interest at the Default Rate may be held to be an unenforceable penalty, to the extent such rate exceeds the rate applicable prior to a default under the Credit Agreement. Also, since North Carolina General Statutes (S) 24-10.1 expressly provides for late charges, it is possible that North Carolina courts, when faced specifically with the issue, might rule that this statutory late charge preempts any other charge (such as default interest) by a bank for delinquent payments. The only North Carolina case which we have found that addresses this issue is a 1978 Court of Appeals decision, which in our opinion is of limited precedential value, North Carolina National Bank v. Burnette, 38 N.C. App. 120, 247 S.E.2d 648 (1978), rev'd on other grounds, 297 N.C. 524, 256 S.E.2d 388 (1979). While the court in that case did allow interest after default (commencing with the date requested in the complaint) at a rate six percent in excess of pre-default interest, we are unable to determine from the opinion that any question was raised as to this being penal in nature, nor does the court address the possible question of the statutory late charge preempting a default interest surcharge. Therefore, since the North Carolina Supreme Court has not ruled in a properly presented case raising issues of its possible penal nature and those of North Carolina General Statutes (S) 24-10.1, we are unwilling to express an unqualified opinion that the Default Rate of interest prescribed in the Credit Agreement is enforceable. 9. We do not express any opinion as to the enforceability of any provisions contained in the Credit Agreement relating to evidentiary standards or other standards by which the Credit Agreement are to be construed. This opinion letter is delivered solely for your benefit in connection with the Credit Agreement and, except for any Additional Bank, any Assignee which becomes a Bank pursuant to Section 9.06(c) of the Credit Agreement or any Person which becomes a Participant pursuant to Section 9.06(b) of the Credit Agreement, may not be used or relied upon by any other Person or for any other purpose without our prior written consent in each instance. Our opinions expressed herein are as of the date hereof, and we undertake no obligation to advise you of any The Banks and the Administrative Agent Referred to Below April 18, 2002 Page 4 - -------------------------------------- changes of applicable law or any other matters that may come to our attention after the date hereof that may affect our opinions expressed herein. Very truly yours, ROBINSON, BRADSHAW & HINSON, P.A. Stephan J. Willen EXHIBIT C ASSIGNMENT AND ASSUMPTION AGREEMENT AGREEMENT dated as of , 200 among [ASSIGNOR] (the "Assignor"), --------- - [ASSIGNEE] (the "Assignee"), DUKE CAPITAL CORPORATION (the "Company") and BANK ONE, NA, a national banking association having its principal office in Chicago, Illinois, as Administrative Agent (the "Administrative Agent"). W I T N E S S E T H WHEREAS, this Assignment and Assumption Agreement (the "Agreement") relates to the 364-Day Credit Agreement dated as of April 18, 2002 among the Company, the Assignor and the other Banks party thereto, as Banks, and the Administrative Agent (the "Credit Agreement"); WHEREAS, as provided under the Credit Agreement, the Assignor has a Commitment to make Loans and to issue or participate in Facility LCs in an aggregate principal amount at any time outstanding not to exceed $ ;* ---------- WHEREAS, Loans made to the Borrower by the Assignor under the Credit Agreement in the aggregate principal amount of $ are outstanding at ---------- the date hereof; WHEREAS, the Assignor holds participations in Facility LCs under the Credit Agreement in the aggregate principal amount of $ outstanding on -------------- the date hereof; and WHEREAS, the Assignor proposes to assign to the Assignee all of the rights of the Assignor under the Credit Agreement in respect of a portion of its Commitment thereunder in an amount equal to $ (the "Assigned Amount"), ---------- together with a corresponding portion of its outstanding Committed Loans, and the Assignee proposes to accept assignment of such rights and assume the corresponding obligations from the Assignor on such terms;* NOW, THEREFORE, in consideration of the foregoing and the mutual agreements contained herein, the parties hereto agree as follows: Section 1. Definitions. All capitalized terms not otherwise defined herein shall have the respective meanings set forth in the Credit Agreement. Section 2. Assignment. The Assignor hereby assigns and sells to the Assignee all of the rights of the Assignor under the Credit Agreement to the extent of the Assigned Amount, and the Assignee hereby accepts such assignment from the Assignor and assumes all of the obligations of the Assignor under the Credit Agreement to the extent of the Assigned Amount, including the purchase from the Assignor of the corresponding portion of the principal amount of the Committed Loans made by the Assignor outstanding at the date hereof. Upon the execution and delivery hereof by the Assignor, the Assignee, the Company and the Administrative Agent - ---------- * The asterisked provisions shall be appropriately revised in the event of an assignment after the Commitment Termination Date. and the payment of the amounts specified in Section 3 required to be paid on the date hereof (i) the Assignee shall, as of the date hereof, succeed to the rights and be obligated to perform the obligations of a Bank under the Credit Agreement with a Commitment in an amount equal to the Assigned Amount, and (ii) the Commitment of the Assignor shall, as of the date hereof, be reduced by a like amount and the Assignor released from its obligations under the Credit Agreement to the extent such obligations have been assumed by the Assignee. The assignment provided for herein shall be without recourse to the Assignor. Section 3. Payments. As consideration for the assignment and sale contemplated in Section 2 hereof, the Assignee shall pay to the Assignor on the date hereof in Federal funds the amount heretofore agreed between them.** It is understood that facility fees accrued to the date hereof in respect of the Assigned Amount are for the account of the Assignor and such fees accruing from and including the date hereof are for the account of the Assignee. Each of the Assignor and the Assignee hereby agrees that if it receives any amount under the Credit Agreement which is for the account of the other party hereto, it shall receive the same for the account of such other party to the extent of such other party's interest therein and shall promptly pay the same to such other party. Section 4. Consent of the Borrower and the Administrative Agent. This Agreement is conditioned upon the consent of the Borrower and the Administrative Agent pursuant to Section 9.06(c) of the Credit Agreement. The execution of this Agreement by the Borrower and the Administrative Agent is evidence of this consent. Pursuant to Section 2.04(c) of the Credit Agreement the Borrower agrees to execute and deliver a Note, if required by the Assignee, payable to the order of the Assignee to evidence the assignment and assumption provided for herein. Section 5. Non-reliance on Assignor. The Assignor makes no representation or warranty in connection with, and shall have no responsibility with respect to, the solvency, financial condition, or statements of any Borrower, or the validity and enforceability of the obligations of any Borrower in respect of the Credit Agreement or any Note. The Assignee acknowledges that it has, independently and without reliance on the Assignor, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement and will continue to be responsible for making its own independent appraisal of the business, affairs and financial condition of the Borrowers. Section 6. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. Section 7. Counterparts. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. Section 8. Administrative Questionnaire. Attached is an Administrative Questionnaire duly completed by the Assignee. - ---------- **Amount should combine principal together with accrued interest and breakage compensation, if any, to be paid by the Assignee. It may be preferable in an appropriate case to specify these amounts generically or by formula rather than as a fixed sum. 2 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered by their duly authorized officers as of the date first above written. 3 [ASSIGNOR] By ------------------------------------ Title: [ASSIGNEE] By ------------------------------------ Title: 4 DUKE CAPITAL CORPORATION By ------------------------------------ Title: BANK ONE, NA., as Administrative Agent By ------------------------------------ Title: 5 EXHIBIT D EXTENSION AGREEMENT Bank One, NA, as Administrative Agent under the Credit Agreement referred to below 1 Bank One Plaza Chicago, Illinois 60670 Ladies and Gentlemen: Effective as of [date], the undersigned hereby agrees to extend its Commitment and Commitment Termination Date under the 364-Day Credit Agreement dated as of April 18, 2002 among Duke Capital Corporation (the "Borrower"), the banks parties thereto and Bank One, NA, as Administrative Agent (the "Credit Agreement") for 364 days to [date to which its Commitment Termination Date is to be extended] pursuant to Section 2.01(c) of the Credit Agreement. Terms defined in the Credit Agreement are used herein as therein defined. This Extension Agreement shall be construed in accordance with and governed by the law of the State of New York. This Extension Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. [NAME OF BANK] By ------------------------------------ Title: Agreed and Accepted: DUKE CAPITAL CORPORATION, as Borrower By -------------------------------- Title: BANK ONE, NA, as Administrative Agent By -------------------------------- Title: 2 EXHIBIT E FACILITY LC APPLICATION Date: ------------ To: Bank One, NA, as Administrative Agent as LC Issuer ------------- From: Duke Capital Corporation Re: 364-Day Credit Agreement dated as of April 18, 2002 (as amended from time to time, the "Credit Agreement") among Duke Capital Corporation ---------------- (the "Borrower"), the Banks parties thereto and Bank One, NA as -------- Administrative Agent The Borrower hereby gives notice pursuant to Section 2.16(c) of the Credit Agreement that the Borrower requests the above-named LC Issuer to issue on or before a Facility LC containing the terms attached hereto as ----------------- Schedule 1 (the "Requested Letter of Credit"). -------------------------- The Requested Letter of Credit will be subject to [UCP 500] [ISP98]. The Borrower hereby represents and warrants to the LC Issuer, the Administrative Agent and the Banks that: ARTICLE (a) immediately after the issuance of the Requested Letter of Credit the Aggregate Outstanding Credit Exposure will not exceed the Aggregate Commitment; (b) immediately after the issuance of the Requested Letter of Credit, no Default shall have occurred and be continuing; and (c) the representations and warranties contained in the Credit Agreement (except the representations and warranties set forth in Sections 4.04(c) and 4.06 of the Credit Agreement) shall be true and correct on and as of the date of issuance of the Requested Letter of Credit. The Borrower hereby authorizes the LC Issuer to issue the Requested Letter of Credit with such variations from the above terms as the LC Issuer may, in its discretion, determine are necessary and are not materially inconsistent with this Facility LC Application. The opening of the Requested Letter of Credit and the Borrower's responsibilities with respect thereto are subject to [UCP 500] [ISP98] as indicated above and the terms and conditions set forth in the Credit Agreement. Terms used herein and not otherwise defined herein have the meanings assigned to them in the Credit Agreement. DUKE CAPITAL CORPORATION By: ------------------------------------ Title: --------------------------------- 2 SCHEDULE 1 Please issue an Irrevocable Letter of Credit as set forth below and forward same to the Correspondent for the LC Issuer for delivery to the Beneficiary or, at the LC Issuer's option, forward same directly to the Beneficiary as indicated below (by check "X"). Transmit by: [ ] Courier [ ] Air Mail [ ] Full Telex/SWIFT [ ] Other (specify in detail): - ---------- - --------------------------------------------------------------------------------------------------------------- Advising Bank (Name and Address) For account of (Name and Address) (LC Issuer use only unless Borrower designates advising ----------- bank) ------ - ---------- ----------------------------------------------------- Phone Number (___) Fax Number (___) ------- -------- - --------------------------------------------------------------------------------------------------------------- To Beneficiary (Name and Address) Amount (Figures) ---- - ---------- ----------------------------------------------------- (In Words) ---- ----------------------------------------------------- : +/- % ------- ----------------------------------------------------- Expiry Date: At the counters of the LC Issuer ------ - ---------------------------------------------------------------------------------------------------------------
Available against Beneficiary's draft(s) at sight drawn on the LC Issuer and accompanied by the following document(s). [ ] Beneficiary's signed and dated statement stating that: ---- [ ] Automatically renewable for months or for days with a final ----- ----- expiration date of ----- [ ] Copy(ies) of Beneficiary's commercial invoice(s) marked "unpaid": ----- [ ] Other: ------ [ ] The required letter of credit terms and conditions are attached. [ ] Special Conditions: ----- ==================================================================================================================================== Complete only when the Beneficiary's bank or Correspondent is to issue its guarantee or undertaking based on the issued Letter of Credit. [ ] Request Beneficiary's bank to issue and deliver their (Specify type of bid or performance bond, guarantee, undertaking or ---- other) [ ] In favor of: Name(s) & Attention ------- Address/Street ------- Address/City State Country ----- ----- ----- Telephone( ) Fax Number( ) ----------- ------------ For an amount not exceeding that specified above, effective immediately and expiring at their office on ------ (At least 30 days prior to Expiry Date above) Cover . ------ (specify number or bid or performance bond, etc.) ==================================================================================================================================
Drawings (Check where applicable): [ ] Partial drawings prohibited [ ] Multiple drawings prohibited [ ] Tele-facsimile drawings permitted Charges: (Unless specified, all charges will be for Borrower's account) All banking charges other than the LC Issuer's are for [ ] Beneficiary [ ] Borrower Please include a brief description as to the purpose of the Requested Letter of Credit: ------------- Please issue the Requested Letter of Credit subject to: (check one) 0ISP98 or 0UCP 500. If no selection is made, the Requested Letter of Credit shall be subject to the UCP 500. DUKE CAPITAL CORPORATION By: ------------------------------------ Title: --------------------------------- 2 EXHIBIT F [APPROVED FORM OF FACILITY LC] IRREVOCABLE STANDBY LETTER OF CREDIT NO. BENEFICIARY: LADIES AND GENTLEMEN: WE HEREBY ISSUE OUR IRREVOCABLE STANDBY LETTER OF CREDIT NUMBER , --------------- IN FAVOR OF [INSERT BENEFICIARY NAME], BY ORDER AND FOR THE ACCOUNT OF DUKE CAPITAL CORPORATION, ON BEHALF OF [DUKE ENERGY TRADING AND MARKETING, LLC, 422 SOUTH CHURCH STREET, CHARLOTTE, NC 28202-1904,] AT SIGHT FOR [APPROXIMATELY] U.S. DOLLARS ([APPROXIMATELY] UNITED - ------------------ ------------------- STATES DOLLARS) AGAINST ANY ONE OF THE FOLLOWING DOCUMENTS: 1) A BENEFICIARY'S SIGNED CERTIFICATE STATING "DUKE CAPITAL CORPORATION IS IN DEFAULT UNDER ONE OR MORE AGREEMENTS BETWEEN DUKE CAPITAL CORPORATION AND [INSERT BENEFICIARY'S NAME]." OR 2) A BENEFICIARY'S SIGNED CERTIFICATE STATING "[INSERT BENEFICIARY'S NAME] HAS REQUESTED ALTERNATE SECURITY FROM DUKE CAPITAL CORPORATION AND DUKE CAPITAL CORPORATION HAS NOT PROVIDED ALTERNATE SECURITY ACCEPTABLE 1-0 [INSERT BENEFICIARY'S NAME] AND THIS LETTER OF CREDIT HAS LESS THAN TWENTY DAYS UNTIL EXPIRY." SPECIAL CONDITIONS: 1. PARTIAL DRAWINGS ARE PERMITTED. 2. DOCUMENTS MUST BE PRESENTED AT OUR COUNTER NO LATER THAN , ----------------- WHICH IS THE EXPIRY DATE OF THIS STANDBY LETTER OF CREDIT. WE HEREBY ENGAGE WITH YOU THAT ALL DRAFTS DRAWN UNDER AND IN COMPLIANCE WITH THE TERMS OF THIS CREDIT WILL BE DULY HONORED IF DRAWN AND PRESENTED FOR PAYMENT AT OUR OFFICE LOCATED AT ON OR BEFORE THE EXPIRY DATE OF ------------------------ THIS CREDIT. EXCEPT AS OTHERWISE EXPRESSLY STATED HEREIN, THIS CREDIT IS SUBJECT TO THE UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTARY CREDITS. 1993 REVISION, INTERNATIONAL CHAMBER OF COMMERCE PUBLICATION NO. 500. COMMUNICATIONS WITH RESPECT TO THIS STANDBY LETTER OF CREDIT SHALL BE IN WRITING AND SHALL BE ADDRESSED TO US AT , SPECIFICALLY REFERRING ---------------------- TO THE NUMBER OF THIS STANDBY LETTER OF CREDIT. VERY TRULY YOURS [LC ISSUER] 2 -----END PRIVACY-ENHANCED MESSAGE-----