ML20148L639

Duke Power Co Annual Rept 1987

ML20148L639
Person / Time
Site:	Oconee
Issue date:	12/31/1987
From:	Booth D, Willie Lee DUKE POWER CO.
To:
Shared Package
ML15224A804	List: ML15224A803 ML20148L639
References
NUDOCS 8804040050
Download: ML20148L639 (101)

Text

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'.? . w cn.g.-:%s:... - 2 ? 'E ' *j w.:. w.g _ k. h. W About Due PowerCompany contents k Iber is the nation's sesenth-through 100 customer senice othces Financial Highlights. . I largest mwstor-owned electric util-throughout its semce area. D,e Company Letter to Shareholders . 2 ity. Headquartered in Charlotte. also makes w holesale bulk pmer and con-Year in Review .4 N.C., the Company senes a 20.000-square-tmetual sales. W "Mining the Energy Valleys" .14 mile senice area in North Carolina and 5 uth Carolina with a population of 4.5 Financial Statements .23 million. Duke Iber supplies electricity to Notes to Financial Statements.27 more than 1.5 million residential. comnier-l Auditors' Opinion .36 cial and industrial customers in that area. I Responsibility for De Company's three nuclear generating Financial Statements .36 stations, eight coal-f red stations and 26 h>- l droelectric stations produced 69.9 billion Management.s kilmutt-hours of electncity m 1987. Elec-Discussion and Analysis. .37 tric rewnues totaled $3.7 billion. About 70 Other Financial Data .4I perant of sales were in North Carolina and Board of Directors 30 percent were in South Carolina. and Officers .44 Duke Power senes retail customers i

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,,a2 9.- Jou: Duxe Power om aany ('mtents < - uke Pm er is the natn ini ses enth-through UH> t u<tomer ser s u e otht es I-inancial Highhghts I lareest msestom ned chxtra uts throue.hout as sen h e.uca I he ( ompms Letter to Sharehoklers 2 'licAumered m ( hd >ne Ai m As ss h Ade bulk p eer and mn-m War in Reueu 4 '.( t he ( om nu e. wn cs a 3 e u % u.ne-tra tual s. des a "Niining the I nerg'. Jalley s" 14 "* m ' c d re" "~ W ( '" 4 "" " "d N-th ( utdm anh a p,pulatn in < ! 4 ' I nanClal Statements mi.hsm l)uL e lh ucr suppnesektuhits si Notes to f~lnanClal Statements l' m irt 'han PG n resd nM wmmer- \\ uditi)rs' ( )pi nio n b Ld and induC LU s u4imcrs in t hat area s ihc( nman; s duce n as ku ancraung Responsibilits f or f inancial Statements 4

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1)is ussmn and \\nals sis s o ics c n -cs t.t.ned 5 -.. N~ .n W mt li Other I inancial 1)ata 4I s a < hnaana p m m, a sa a c, n s I$0ard of'I)lreclurs Ui p h ent aca ! ! N 'u t h (.o h u and ()lhCers 44 I)uk U l u c t vtsis Ic'all u 4:'Itiers

SOMiWMBMWWWfMlW?EWf3WW"%I?MBES% V Financial Highlights = Marketing Is 1987 1986 (decrease) Q(([ggreSS1VC ~} Kilowatt-hour sales

• 64,751,060,000 60,513,229,000 7.0 Electric revenues.

$3,705,784,000 $3,400,933,000 9.0 1-i Earnings for common stock. $ 445,934,000 $ 409,067,000 9.0 New Style Common Stock Data uke Power moved in 1987 to be-Average shares outstanding. 101,250,0(X) 101,220,000 come a more aggressise competi-Earnings per share. 54.40 $4.04 8.9 tor in the energy market, deter-Dividends per share $2.74 $2.64 3.8 mined to increase its profitability for Book value per share (year-end) $31.96 $30.34 5.3 shareholders by increasing sales w hile hold-ing the line on prices. This strategy was not feasible in the past decade when growth in peak demand Return on average common equity 14.28 13.7% 3.6 threatened to outstrip capacity. During that Plant construction costs. $ 790,203,000 $ 690,352.000 14.5 time Duke discouraged on-peak use of otal electric plant, net. 56,917.245,000 $6.638,751,000 4.2 electricity and focused on fmancing and (deak load (kw) building power plants to meet growing demand. Summer. 12,691,000 12,471.000 1.8 e s n t onMea-y, n ggressne s Winter. I1,451.000 12,586,000 (9.0) sible, it is mandatory as competition in the enea;y market intensifies. Duke Ibwer has an ambitious new strategy to gain market

• Exchtdes a portion ofIhe energy sold to Ihe orherjoint owners ofIhe Catawba Nu-share of energy sales w hile controlling peak chur Station.

demand and to incause earnings for the balance of the 1980s and into the '90s. A Eamings per share Retum on awage common e special report about the Fne-Year Market-m ing Plan begins on page 14. m

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wesegM N E m masm M G rrass O Our Saareno cers: l l l' tin' Illt Willt! Yit.'lll111thly it) llllllll tllir plL'tlgl' It > J1)ll l l n W l) uke PoucI took many sicps ,,. - '. ;,. lg.(;p +.g,, l.; ,g3g%g @ _ ', 4, z. b ;F., ;..M. i.. ; Je?., d ' ' T / O l{--h; ' ~,(J.!;I;:-/ ?.-5,.'D * ~ M.. 2"I@ v5> 47 f.%. ;. g, I.' k to..u n,ut the su.negy we outhned a b*E;- Y

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3.w7 -a .. -./ t.. N, N: k-( 4,.,X U A.3[;L/4 M d iK M. b O tb ( $[NSkddMi-[vdi'Mi.hl!' b U J. ' J most recent is still pending before the quarter we negotiated a contract to sup-and disidends oser the next soeral years North Carolina Supreme Court. ply Carolina Power & Light Company requires growth in diversified earnings. To In July 1987 the Court allirmed the (CP&L) of Raleigh, N.C., with 400.000 achine that our operating suldidiaries North Carolina Utilities Commission's kilowatts of generating capacity for six must take full advantage of their market 1985 order allowing us $157.7 million in years beginning in 1992. This centract, potential in real estate, electrical and elec-additional revenues. The Court has not which requires regulatory approval, will tronic equipment sales and engineering 3et ruled on issues appealed in the Com-rtake etlicient use of our baseload capac-senices. In 1988 we will be working hard mission's 1986 order allowing us a $ 133.1 ity. We are seeking additional temporary toward this objective. million increase in revenues. bulk power sales to other Southeast Building on Strengths utilities. Shaping the Future We followed the CP&L contract with key to the success ofour competitise nereasing retail electric sales is an m. an agreement in the fourth quarter to ac- / ' strategy is avoiding rate increases, so Iportant component of.our long-term quire Nantahala Power & Light Com. cost controlis a major component business strategy. We want to supply a pany' (NP&L), headquartered in f ur plan. We began 1988 in a strong larger share of the energy needs in the Franklin, N.C. The agreement opens a e mpetitive position. Refinancings com-l Piedmont Carolinas. So do other utilities: market for bulk power sales in western pleted in 1987 sased more than $8.3 mil-natural gas suppliers, neighboring electric North Carolina and possibly bound. li a f r the year. Renegotiation ofsoeral mmpanics, municipal electric systems if regulators approse the ac'quisition, major fuel contracts reduced cats further. i and rural electric rooperatives. we expect that NP&L will become a l To successfully meet this competition wholly onned subsidiary of Duke Power. Our 20.000 employees are committed } e have deseloped a new Five-Year Mar-The Company will in turn supply bulk to a market-driven philosophy that will l eting Plan aimec' at increasing our share power to supplement NP&L's hyd'roelec. enable us to meet the competition. They of energy market;. In 1987, for the first tric generating system. To deliver that are diligently seeking way s to do our busi-time in more than a decade, we began ag-power Duke wil'1 built a transmission ness more etliciently. We are continually gressively promoting our product through line to the NP&L system and gain a direct enhancing our strategic business plan to new senices and programs. With our tra-link for the first tiine with the Tennessee capitalize on our strengths, and we re-dition of customer senice and our ability Vallev Authority, which senes more than main alert to business opportunities that to remain a low-cost producer, we are 3.1 rnillion cu'stomers in sesen states. will improse customer senice and in-crease shareholder value. confident we will tcat the competition. That link will create the opportunity for We remain mindful, though, of the les-other bulk power sales to the west. We have confidence in the strength of sons of the late 1960s and early 1970s, the economy of the Piedmont Carolinas. ~ when growth in peak energy demand Niore Effort,on Non-Utility We recognite the importance of eco-Actisities Ahead nomic growth to our own growth, and we threatened te outstrip our ability to meet it. Our new marketing plan therefore ern. hile we made progress in our are prepared to weather iluctuations in phasizes off peak sales that will not create strategy to expand diyersitied op-the economie >cle. With our support, 3 a need for additional power plants. rations, total non-utihty earmngs we look forward to an exciting future.E "cre down in 1987. We will focus on in-Increasing oft-peak sales will enhance shareholder value by increasmg revenues creasing non-utility operating earnings in 1988 w hile minimiting new investment in gen-m erating plants. OtT-peak sales benefit cus-Most of the earnings decline was due to W,illiam S. Lee losses related to the stock market crash of tomers by allowing us to spread fixed "d ""d costs over greater sales. holding prices the fourth quarter and a reduced loel of """"l, ' I j down. imestment. We have responded to in-For a closer k>ok at the Fise-Year Mar-creased market volatility by roiewing our keting Plan and early results, please read inyestment practices and making appro- [g Jhe special report beginning on page 14. pnate changes. In the years ahead non-utihtv carmngs will be less affected by the SI I*"dC"' ""d Strategic Bulk Sales Sought performance of the stock market as our n keeping with our long-term busi-temporary financial im estments are rede-Iness strategy, we pursued increased ployed in electric facilities. bulk power sales in 1987. In the first Our plan for increasing total carnings / Anay /.' les PV.1 1

mesessamamum um.c m y Higaer Sa es Drive W' Higaer Earnings Shareholders get i2th consecutire dividend increase .-g. g' N. m ore customers used more elec-Eamings coverage of fixed charges y tricity in Duke Power's senice acmn area in 1987, pushing sales and i earnings to new highs. Electric restnues grew to $3.7 billion and Duke Power common stock earned $4.40 a share in s 1987, up 8.9 percent from $4.04 in 1986. Total earnings for common stock were $445.9 million, up from $409.1 million. Many Carolinas cities enjoyed building booms to accommodate the population growth that continues to characterize the Sun Belt. Residential use of electricity rose 6 percent. Another unusually hot summer baked Earnings in 1937 acam met the Companr's V"dl"I # 'i'"C' /"C'/ ' hd"'C' the Piedmont in 1987, prompting cus-tomers to turn to their air conditioners hard on July 23's peak demand of for relief. August produced a new 12,691,000 kilowatts, up from the previ-monthly sales record,9.1 percent higher ous all-time peak of 12.687 (X)0 kilowatts than August 1986. That record followed set on January 21, 1985. A subsequen peak Jemand of 12,728,000 kilowatts was i g,ptal structure s oar ce.w.y set on January 27,1988. Ca l ..s g3, The thriving North Carolina and South u7 ui (M2 - + n Carolina economics stayed strong d d I throughout 1987. Industrial electricity ue

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i Duke I\\mer's directors in July soted a 5 4 h 12th consecutise dividend increase, to 70 5 [- h h hi d cents a share per quaner from 67 cents. The increase, effectise in the third quar-ter, raised the indicated annual disidend i to $2.80 from $2.68. Oser the long term, l Duke Power intends regular disidend in-creases to maintain a payout ratio of 60 to 65 percent of earnings for common j stock. l The Company had no new common m ma w ms we m stock issues during the year and antici-a e x, pates no need for one m the foreseeable usumu N*mmw+m e m summes cy.nu, future. The Company issued $325 mil- [ lion worth of new bonds and preferred Common cemtr a s a ren cntacc ol tota / rarua/ rontmucs m rne. stock during the year to refund older, ~ Financial Snapshot l Duke Power Company 1987 1986 i Common stock earnings (nnl/lom) $445.9 $409.1 + 9.0% i Earnings per share $4.40 $4.04 + 8.9% Dividends per share $2.74 $2.64 + 3.8% Return on average equity 14.2% 13.7 % + 3.6% Coverage of fned charges (goal 4.0X) 4.49X 4.26X Internal cash generation (goal 50%) 67% $6% PsGI 4 {

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kNI[ MN30YMkMNINMINIDM3bIMNN-NNN i order granting $157.7 million in addi-i l tional revenues. It also unanimously up-4 9 eld the Commission's 1985 approsal of N je contract terms goserning sales of por-tions of the Catawba Nuclear Station. An 8l f appeal of a $ 133.1 million 1986 rate order 1 N' is still pending. however. E g,. - The federal Energy Regulatory Com-mission ruled in 198'7 that costs associ-g-= p, Q ;' ated with canceled nuclear plants must be C : 3 i' ' excluded from the supplemental power rates charged to other co-owners of Ca-lt ~ tawba Nuclear Station. The Company is 8,.xg,g.g> ' m y a 1 T. ^ appealing the ruling to the courts. E (- gp y Fi. g..- (h Total kEowatt-hour sales ~,1 0 'A,'~./ as, u...., 7;.. flome construction took ol]'in the mid-1980s as a healthy mmomy drew thousands ofnewcomers ta the l*iedmont Carolina s. u.s. ! o, ".5 f v ? - New Customers 4 Boost Energy Sales x ore than 37,000 new customers Economic development has been espe- ) joined the Duke Power systemin cially strong in the metropolitan areas s 1987 as thousands of new jobs Citics - particularly Charlotte Durham were created by robust grmth and a and Chapel llill, N.C. - hase experi. l healthy economy in the senice area. enced vigorous building activity that has [ At year-end the Company sened more added thousands of new homes. This than 1.5 million customers, up 2.5 per-building boom has created a marketing w im ou ms m m7 cent from 1986, opportunity for Duke Power, which the r. , - -. ~.., -.... p lhe trend m cicaricar sales in /vr customer base has grown by nearly all-electric Maximum Value Home. E contmued utm ard 200,000. (.See a slucial n7vrl on the.\\ fax, pge 21.) ele revenues [ r 1987 Electne revenues 1987 Kiowatt-hour sales I B-cs ct acn e.0,u - cuaasaa w ta m e,c a c., w us3n,t m,y j{ ./an, c-o sem --- cwa seme i

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o v. %7 wa,L -Q# Resenun hase en u n u nh etransion an Rcr enan < owe from es cr y eu unomic sen tor ibukc\\ sain mn rc!!ccis thedoersur Iluke 11m er's market of the ( 'a voh na s ' cu monn

I T6644WB!lr8%TP/3.5 '. .i.' W.- A E lD PR? N.C.E3"(- -.. ] E Concrete Solutions t Generating system continues pace-setting perfbrmance ke Power's generating system had - a self-policing industry association one ofits best years eser in 1987. that promotes excellence through train-Nuclear power shouldered an in-ing, certification and sharing ofinforma-creasing load while the coal-fired system tion - have independently found Duke's continued to set records nuclear plants to be superior. With the addition ofCataw ba Unit 2 in Nesertheless, the plants occasionally late 1986, Duke now operates seven nu-hase been out ofcompliance with regula-clear units which produced 64 percent of tions because tens of thousands of fune-total power generated in 1987 tions must be performed within narrow Duke's nuclear plants performed su-limits each month. Duke will continue to perbly, operating at 71 percent ofcapacity. emphasize performance improvement This is well ahne a national average of 58 and measure year-to-year progrew in im-percent and abos e the sy stem's 61 percent portant quality indicators. capacity factor in 1986. According to in-The large contribution of nuclear formation compiled by the Nuclear Reg-power to Duke's generating needs sased ulatory Commission (NRC) on the $440 million in fuel expense in 1987, etliciency of multi-unit nuclear plants, compared to producing the same amount h!cGuire, Catawba and Oconee nuclear of power at the Company's most etheient stations were first. second and fourth in coal-fired plant. T he cost of n uclear fuel is the nation in 1986, the latest year Ihr about one-third that of coal. which statistics are asailable. N!cGuire Duke Power continues to get the mo Unit 2 was the country's most etlicient from estry fuel dollar. 'l he Company in single reactor in 1986. 1986 operated the most etlicient fossil in 1987 Duke Power paid three lines to generating system among the country's the NRC totaling $125.000. These lines insestor-owned utilities for the 13th were incurred despite overall safe and elli-straight year, according to Electrie 1.ight l cient pertbrmance. Both the NRC and & Power (El4 P) magazine. EX 4 Pannu-l the Institute of Nuclear Power Operations ally suncy s 100 insestor-ow ned utilities. pre Man 2M faibfud generating Gwrahng capacity Net generation-- - umts across the country compete in the i.w J,., ~~ s 1 R.u is s is e eg g-etliciency ranking. In El4P's 1986 rank-ing, Duke Power's Belews Creek Unit 2, ]O g3 13 2 13 4 '36 6' 0' N1arshall Unit 3, Alarshall Unit 4 and 59 6-muminu"""" 2 e o 3s 34% ' Beleus Creek Unit I, respectisely, were p 6,,,,, y e [ d E h 46% [ the top four performers in the country. i) 0% - d 4t% f y y i H The slightly smaller and older Ntarshall s 9 4sw h 44% d C d ? n '5* N / .b 54% $ n( j Units I and 2 linished 10th and lith, 9 49 % ? n' 4 g A 1 respectisely. ,33% b p% s L ms 3 o N n y llad the fossil system performed only ,f h as well as the nation's second-ranked sys-n 4 i tem Duke would hase needed an addi-tional $23.7 million worth of coal in 1986. Ilaseload Capacity in I' lace With a large, stahle nuclear system and the countn's most ethcient coal ssstem w m .w ms .c g g I) uke Power has enough haseload 'apa v1" c g asammum n, y-manage,, l ity to meet customer needs until earl) u, I the 21st Century. I:llectise energy m n-il nh the o. mph tion of a.% car j.h / car von er en hn cd a ro ord 6 / pen cet t on or n, non precram mn / car compmn j of /M c ron cii c!n f ra ai m /M - agement programs (see hn) and a Plant N1oderni/ation Program hase postponed ] Jo pen ent el c arai n t j e v.i,i

L_-sawd5??fD-m.N...&. OYVNW. Yk_ t' W ~. ?? WW%N_ Y ~ ,__a, m a s,, i i i resenoir to a higher one. The water is re-l the Keowee-Toxaway Project. The pro-the need for additional baseload ca-padty. leased to drise turbines to generate elec-posed 2.1 million-kilowatt project at g The Plant Modernization Program will tricity during periods of peak demand. Coley Creek would include six under-xtend the lives of 15 older coal units by at The Company announced in 1987 ground turbines and a 352-acre upper res-least 20 years per unit at a cost of about that it is considering building another encir on the North Carolina-South Caro- $200 a kilowntt, a fraction of the cost of pumped-storage hydroelectric station at lina border. building new plants. About 1.4 million Required licensing by the Federal En. kilowatts ofcapacity are invohed. Putting a lid on demand... ergy Regulatory Commission could take 4 l The only new plant under constmetion Amount peak demand was reduced four or more years. If approved and com-is the Bad Creek flydroelectric Station. a through energy management pro-pleted. the station could begin producing I 1 million-kilowatt pumped-storage facil. grams: electricity around the turn of the cen-ity at the Keowee-Toxaway Project in 1987 tu ry. South Carolina. Bad Creek was 29 per-Summer. .279,000 kilowatts The Company has not yet decided cent complete as of December 31. The Winter . 321,000 kilowatts whether to paned with the Coley Creek I station's four units are scheduled for op-project. The station will be built only if a l eration in 1991 and 1992-Since 1975 necf for turn-of the-century operation is A pumped-storage station uses electric-demonstrated. It is necessary to begin the Summer . 3.8 million kilowatts I ity during off-peak periods at night and en ng pm nm howem, in oMer Winter. .3.6 million kilowatts on weekends to pump water from a lower to piesene that option. E ,m. _, _ - ~.. - -.. -.. ~. -.. - - 7 2 r'. - ,,s .y ) ^ ' ' . 4; y 9 . sad W 6,' ~ j g.g/gagge @.i. h '" j l .p. f I v 4 l [- ~ 7, g'OIc i o )' Yfr< M'y ; l %,e ); - g L c r \\ I r - n .' F.: s t i i . yaf: s n i 4 'c' i r .j . 3, .r .4 j P,' t-, ",-,sa-. 9 + t a, 9, ? ,$e f_ - w% t, ' p' g: e ~ .,l h hl kW ? ,w e , s c .s 3.... j y rg e 4 ^ e s F c s. "y g n = 3 p ? i ~ ,; g-I 'R I l \\ ,I l

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.4k nu M h ksthP ~ l Service Ethic l-Setting ihe standardJbr corparate citi enship uke Power continued in 1987 to more than $2.6 million to the United 4 l l build on its tradition ofgood cor-Way in 1987. Corporate and employee porate citizenship in the commu-contributions together continue to make j nities it senes. Duke Power a leading contributor to the L s. During the 1986-87 winter. the Com-United Way in North Caiolina and South 1 pany, its customers. employees and share-Carolina. holders and k> cal senice organizations Duke Power employees also set exam-a throughout the Duke senice area helped ples in their communities. Oser the past thousands of less fortunate people stay three years an estraordinary 77 Duke em-warm through Duke's Share the Warmth ployees base sened as presidents of their and Community Challenge IIcating kical chambers of commerce or as chair-l j Fund programs. These two programs men of their kical United Way campaigns j raised more than $2 million. in the Piedmont Carolinas. The Company matched $374.0(K) in Employees Meet Goals customer contributions through Share in 1987 Duke Power's 20.0(K) employees the Warmth. The money was distnbuted met seven of 10 priman Employee incen-throughout the senice area to help cus-tive Goals plus th: bor$us goal of cost re-tomers pay heating bills, regardless of the duction. As a result of employee efforts. milli ns fdolla's hase been saved for the lunity Challenge Heating C mpany and its customers. Fund matched $1 for each $3 raised by local senice organizations. The Com-mp yees met or suqW goah r custonm senW rehaMty, alnn l pany contributed $325,(xW) to this pro-mathe aedon, energy management, nm L gram, w hich also helped the less fortunate cle r p u on, g n n e hh, power pay their heating bills. These programs were repeated in the pl ni design, qualit>l of nuclear opera-tions and cost reduction. winter of 1987-88. Another was Duke shou s it cares about ^ ""E # yponte goah cams end

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the Piedmont Carolinas is through its b }""" tion to the Stock Purchase-Sasings Pro-concern for the emironment. The Soil .*I "}##*' E"

• Consenation Societs of Americain 1987 n thn > van oW goak pmgmm, awarded the Company one of nine na-empi ytes base met 58 of 74 goals for a tional.\\ferit Awards for esemplary serv-Wrcent se um ice in land and water consenation.

n new go Is plus the bonus cost re-The coq 30mle senice ethic fmds wide duction goal hase been set for 1988. E expression among the Company,s em-ployees. Duke and its employees p! edged l l r Achieving employee goals Goals Achieved Percent 1987 11 8 73 since 1981 74 58 78 investing in the community 4 i I Duke h1atching Gifts Program. .. $210,000 for 180 schools i I company mate hcs employee contribraions to wlleges and uniser sitles. Share the Warmth ... Un to $400.000 match Company matches customer contributions ofup to $23 each. Community Challenge Heating Fund.... . Up to $325,000 match Company man hes $IJar eat h $3 raised by. service organi:ations. 1 pol 10 j t

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_-~_ &%w L.. .wg { ~ J A Seering New Horizons Duke Power expands its core business by building on its strengths i uke Power took decisise steps in to the Duke Power senice area. 1987 despite losses incurred in the finan-4l changing utility industry environ-1987 to take advantage of today's if the acquisition is approsed by the cial markets. North Carolina Utilities Commission, Non-utility operating earnings were ment. The Public Senice Commission of South contributed by Duke Engineering & Ser-In onc year Duke: Carolina and the Federal Energy Regula-vices, Inc., Crescent Land & Timber a Arranged to purchase another elec-tory Commission (FERC), NP&L is ex-Carp., N1il!-Power Supply Company and tric utility; pected to become a w holly ou ned subsid-Duke Power's Sterchandising Opera-a Contracted to sell 400.000 kilowatts iary of Duke Power Company. Hearings tions. Insestmem results came through of bulk power to a neighboring utility; on the acquisition are scheduled in North financial investments held directly by G Formed a new subsidiary to market Carolina in N1 arch 1988 and are expected Duke Power Company as well as its sub-engineering and technical senices to in the otherjurisdictions during the > ear. sidiarics, including Church Street Capital other companies; and NP&L operates 11 hydroelectrie sta-Corp. O Expanded the scope of existing land tions and buys supplemental guer from Nnn-utility operating earnings totak-d management and equipment subsid-the Tennessee Valley Authority (TVA). $10.4 million in 1987, up 10.6 percent iaries. After the acquisition and with regulatory from $9.4 million in 1986. Insestment in October Duke Power and the Alu-approval. Duke wil: build a transmission earnings. affected by the October stock mlnum Company of America ( ALCOA) line that will link tb.: Duke and NP&L markct crash and a smaller portfolio of reached an agreement for Duke to ac-s> stems. This line will assure NP&L cus-insestments, declined to $9 million in quire Nantah:tla Pewtr & Light Com-tomers a reliable souret of pmer and pro-1987 from $35.3 million in 1986. pany (NP&L), headquartered in side NP&L with supplemental p mer at l he sum of tnese operating and invest-Franklin, N.C., for the net book value of rates hmer than TVA's. ment earnings was J neicent of earning its common stock. The supplemental pmer sales will be for common s'ock in lW7, dow n from 11 ALCOA began building a bydroelectric mostly off-peak, as the greatest power percent in 1986. s>steta in the western North Carolina needs in NPA L's mountainous region are The Company formed a new subsidi-mountains in the early part of this cen-in the winter. The Duke Power system is ary. Duke Engineering & Senices, Inc., tury to supply power to its aluminum-ty pically summer-peaking. on January 1,1987, to market :ngineer-producing plants in Tennessee. In 1929 The acquisition, with the new trans-ing and other technical senices to other ALCOA formed NP&L, which now mission line Duke will build, will proside companies. serses abou! 43.00r) mostly residential a direct transmission link to TVA for the Duke Fngineering continued the sen-customen in fise western Nonh Carolina first time, otrering a potential for addi-ice business begun in 1982 by Duke's counties. NP&L's senice area is adiacent j in the future,tional temporary bulk pmer transactions Mana3cment and lechnical Scnices or-ganization. During the year, Duke Engi-In Marca the Company completed a neering worked on the design of 595.00() bulk power agreement with Carolina kihmutts ofgenerating eapacity for six cli-Power & 1 ight Company (CP&la of Ra-ents building generating units. Overall, leigh, N C. Duke will sell CP&L 400.000 Duke Engineerirg prosided engineering kilowatts of generating capacity for six and technical senices on 73 projects for >rars beginning in 1992. If FERC ap. 4') clients in 1987. proses the agreement, CP&L esentually Crescent Land & Timber Corp., Duk e e m_ 'a could purchase up to 2 billion kilowatt. Power's land management subsidiary, re, (';F hours of energy a year. corded hver earnings in 1987, primarily e io '.i,. F'" The transaction will increase Duke's becauw of the fourth quarter steek mar-

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• ECN, i the Company's position as a km cost en.

tirnber operations remained healthy in m ' 6DTE[~ crgy producer in the 1990s. 1987 as Crescent continued its planned l expansion. but were offset by financial m-Crescent's expansion ellorts Non Utility Earnings , sestment losses. AIfCCled U SIOCk M nfkCI l F /hde /.nemccrme d Scnicct /m. hnS[NN5hNIvIE/[ Duke Power's operating subsidiaries and I part (m nership of a lloliday Inn north of t . dhersified businesses continued to de ; Charlotte. l he hotel surpassed occu-N C. n onc o/ men /M elnemecime j has Jeuencd for Coccom c Inc I sclopaccording to the Company's plan 'n I pancy projections aller opemng in 1987. Fu o

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.ir., la n n aa, ().J c ' inmn /c e lo li n : n.. r ej 'cnu m : 'n 1 Ihe liohday Inn is part 'il Crescenti International ilusiness N1achines ('hurch Street's earnings IcIl behm planned growth in residential and com-('orp?s manufA turing systents priiducts their 10% lesel Ircause of stotk market mercial projest( Including shopping cen-dis tstol'1 named \\lill-Pifwer lechnologies lowes and a louer lesel ofinsestments E ters and busine% and Industnal p.M ks. Its Nalional Ill\\1 Industnal ('omputer Crescent also entered the ornamental tree 1)ntroutor til the 'icar in 19C for "a high busine% m 19C lent of Industnal compulcr product Crescent mJn:' pes TU,U(H) m Fes ol knowledge and customcr sersice' _1987 Ibn-Utlkty K40me non utillt) propCrt). 5.uppl)ing timber lor N1ill-Power \\ Purchasing 1)nision is ^~, the turmture. home-bmidmg and paper purchasing agent f or 1)ake Power and its ind ust rie\\ in IC 11 harsested 31.N mil-subsidianes I ht dis nion twiurht more l hon board lect of timber and $i.W coids than 51. I bilhon m equipment. fuel. sup-i of pulpwood. phes and seruces f or 1)uk e Power m 19C N1ill Power Supply ('ompany es-

1) uke Power's N1erthandnmg ()pera-panded the operations of its Sales I)ni-tions sells electrical apphances to retail i

sion in 19C by Aqumng a i umly-ow ned customers at I)nk e Power othces through-electncal supply u mpans m ( harleston. out the veruce area l he dnnion m-S. ( ' 'I he acquiw n:.' will piin ide new creased its siles erbirts in los' and began 94 rarr. 3c markets for its a holesde elettrital thstn-aggrewne promotions m 14e that are ci-M b cs k(djr" bution businew N1ill Power also es-petted to accelerate its earnings growth. y V ,jf n panded to the north. opening a sdes othce secsimi"1al'l' m eudo llaec/s. in Richmond. Va.. f or its N1:ll-Power ( hurch Street ( apital Corp w as ech nologies ()ep.u tment. \\lill-Pow e r tonned m IW to manage.i iurtioho of eaa.wege lethnailogies was estaIYshed in l'id tti intermediale-tcrm InsCstWenik ( hurch - market energy mar.gement equipment. StrectN cash.n.nlable for msotment uas n i/,a a nu / >:. < i:4 8/.,e.8.m ii< programmable controllers and com-rCducet) m lh as lunds welC rCdJPlo>ed ,.! l s, ( t, J,, o n,,4, t,,a s o, ; / 1- ' " ' ' l8 Li '!"4* pulers ltir utilll) Plant. .E - ~. -. ~ -.

....,../d ( s O M m..mg The Energ alle s }.t y () s ... h'h ~ s j{ ~ g ;. I sor the first time since the early 1 1970s, Duke Power set out to aggres- ' j street lights; and M Add 20 million kilowatt-hours a > var ,~ in sales through a new industrial program sively market its product in 1987. s After focusing for a decade and a half on 'R. I ' f called ilERO, or lleat Recovery discouraging growth in energy demand,

• *iNP s Opportunities.

s Duke launched new programs for all cus-T Duke has also rededicated itself to re- ~ tomer groups to accelerate sales of off- /5 g cruiting new and diversified industrial peak electricity and boost earnings oser I . 'T f,*", customen to its service area and is re-t searching and promoting new electric y' J i the coming years. s The strategg Make maximum use of technologies. existing production capacity while mini- ./, y The new marketing plan is tailored for ~ miring the need to add new capacity. To

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the energy market of the late 1980s and accomplish this. Duke will concentrate gf ~ 1990sjust as earlier plans were tailored to l on filling the "s alleys" ofenergy demand, j 4,f ' meet the market conditions of their time. j selling additional power during the off. During the 1970s and early 1980s Duke peak periods at night, on weekends and Power responded to market conditions by / /7. , O, / 7$ promoting conservation and load man-throughout the winter. agement to reduce the need for additional Duke's goals, set out in its Fise-Year O C!O /I2 [O /70W generating plants. That program success-l Marketing Plan, are ambitious but attain-able. The Company plans to: / fully curtailed growth in peak demand by D Iupand its share of the residential /I20/*KO[8 an estimated 3.6 million kilowatts oser space-heating market from 41 percent to the past 12 years allowing the Company 50 percent; R increase the number of commercial time to fmance and build the plants nec-n Maintain 86 percent of the home heating customers by 5 percent a year and essary to serse a gnming customer base water heating market; espand penetration in the commercial Today's market conditions dictate i n increase new Safe 1.ight accounts for cooking market; new strategy. Duke now has sufficient ca-all night residential outdoor lighting f rom n Add 7 million kihmutt-hours a 3 ear pacity to accommodate profitable sales l 9,000 to 30,000 a year; I in mies from outdoor commercial and growth as well as to supply esisting needs. rua i4

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s' . a e '4 p i story on the.tIax. page 21J l The Max is the first all-electric home to l b"=moted to builders and home busers Bowater FindsIts HERO sbe pro m"t= = & liome program was discontinued in favor i of the Energy Etheient Structure, which Regyc/jpg Sfggm Sgyggfhg/ addressed the consersation needs of the 1970s. t takes more energy to make a ton of found it had to reduce the steam s pres-New construction is just one segment paper than to make a ton of steel sure for pulp quality reasons. On Doke's of the home heating market. Another key So when one of the country's biggest recommendation Ibuter ofhcials stud-element of the FiseNear Marketing Plan paper mills installed a new process in its ied ilERO technology at other industrial is to pursue the retrofit market. South Carolina plant to improse paper locations and found the savings compel-Through an utensise multimedia ad quality, otheials looked hard for ways to ling. Now flowater plans to run the steam i campaign. the Com pany is promoting tne cut energy costs. through a compressor, concentrate its heat pump as "The Comfort Machine.* Using an indurtrial heat pump in con-heat and produce high-pressure steam The Com fort Machine is a high-etheiency junction with other recovery techniques, with two large heat pumps. heat pump that uses less electricity to pro-Bownter Carolina Company in Catawba, The heat pumps will use electricity al-side a higb:r lesel of comfort than the S.C., expects to cut its fuel bill for drying most cordinuously through oft peak peri-heat pumps of a decade ago. finished paper in half. ods at night and on weekends as well as Duke initiated a low-interest Comfort in 1988 Bowater will install this equip-during weekdays. But ihmter will use Machine financing program in 1987 to ment as part of a Duke Power program less fuel than pres iously to produce steam encourage customers to install heat called liERO - lleat Recovery Oppor-for drying. pumps.Customerscan borroa moneydi. tunities. Bowater had considered similar Duke Power's industrial marketing reeth from Duke Power with no down equipment in 1986 when it first ir. stalled representatiws are showing !!ERO to payrnent and repay the loan oser fne its new "thermomechanical pt.Y (TMP) other large customers. The technology is Sears with a small monthly pasment mill The TMP mill produces copious especially valuable to textile, food pro-added to their electric bills. amounts of steam w hile grinding wood to cessing, chemical and pulp and paper Oserall heat pump sales in the Duke pulp, and Bownter had expected to put manufacturers who can recover large Power sersice area were up 14 percent in that steam to work drying paper. amounts of energy from steam or 101 i 1987 from their 1986 lesel. Bowatcr installed a heat recosery sys-water. E tem to capture the steam's energy, but Since most customer decisions on heat-ing systems are influenced by equipment f suppliers. Duke tiraer has built a network 6 e - c;- of "Authorized Comfort MacHne Deal-L [.c f, ers." Participating dealers agree to meet $Q1 'f g i l Duke's installation and etliciency stan-J f v sJ,.' l dards and hase the opportunity to use the T j

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' ~, \\ h Company's financing program as a sales g g - '. ' ' taol l Another goal in the residential energ)

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3 market is to maintain Duke's strong 86 A ', m i e J percent share of water heaters. As an in- >.~ M[;Qkk - W.. centise, the Company has deseloped an innosatise program called fialf Price Water lleating. It otters electricity for " ?. M@gg - ~ - a heating water at half the standard rate to ' O. s4 customers who agree to use their water [ i '. l heaters only during otT peak hours and on - g' weekends. More than 2MW customers y are participating in this pragram, and .f Duke is researching additional incentise programs to boost electric water-heating .~~f 6 l ales W- / s i.ighting Up The Night t DukcN 12.7 percent market pc :tration h4 /. " = - for all night outdoor residential oghting is l amuter Carolma Comnmr Du Ac Amer's /arrcit one la ation i la,xc andwtrial heat pronts to ra mer energyfrom steam pulum)m maline paper l (wntinued on page lw Pv,1

.,: m n,r T,m sv_., s.,wo,~:n - := ,.., ww a... ;.; v From E ec:ric Irons o Microwaves lpp!Illlic l' \\lllL'S (1)llll' t }l'llt'l' Wifll Fl'llh l l'llrlaillt!'\\ ill lYS ~ n the Pnos I )u kt Pimer applunt e com m nsioned salesmen. u n h r et og m-plunt es and sei s a c \\nd it c uns prot:ts r { salesmen swidled elet tr anons fro m tion anJ aw uth for top sal, s ph Alut cis Juet tl'. f or 1) uke Poweri bottom h ne the bat ks of tr ut ks to buiki enough I' uke Pimer i competa alge n qtul-Ihe ( o m pa n s i giuls all f or \\ler-t load to iustity reshiential cletinc hnes ity equipm ci.t and soha -r s a e Ihe t hanthsing to carn a t umulatne 52x mil-li Alas. SI seals latel. t u'tomer s tan ( o m pa n s q uit kls es Jlu. ustome;s hon in pre-ta\\ phillts bCtueen ID~ and t sill! bus t iet ti h ih1 Tis If om l } Uke Pi he: li >I < ! Cd'! \\ nd lls la.b1 .u neJ ser s h e t w I in 19C \\lci t ha nd nm g ( )pe r ation s i ithei appluin es tet h nn ians revils t Y ? ; w :. c n < >! a!i ser s - aaJ ictiud c.u nings 1 it inillnin beh ne as WCl) n di/ensti: t i thim tr ash t iimpa ton to m h r ow,n e hetalls m iust 1'n s sn fase s is e ns ln l9XN l i. L.. pl. 'is It ) sel} 'nsile than ( iltM th in the t!1s isitill's unicpuI.tled ln caris Wss I)ui t began ads eitnme El d

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61AmoIf16limWx New all-electric home is tops in eficiency and value , r eonard and Jill Taylor built their high-elliciency heat pump, or Comfort fluilders in the Carolinas were quick to dream house in 1987 and became one hiachine. Duct work for heating and recognize the hias's appeal to home buy- -- /of the first families to own Duke cooling must deliver air to the outside ers. One North Carolina builder an-ther's new all-electric hlaximum Value wall of all rooms to preside maximum nounced plans in 1987 for 200 hias

IIcme, comfort on the hottest summer afler-homes in a subdivision in Thomassille, Like other hias buyers. the Taylors noons or coldest winter mornings.

N.C. A nationally known builder soon hase found that the hlas offers the best in The Stas is pre wired for all residential followed with a commitment to build all energy elficiency and energy manage-load control options, allowing customers its homes in Charlotte to hlas standards. ment technokigy. And the hias has the to take advantage of every opportunity Though the program was only introduced convenience of a high-elliciency heat for energy sasings. on June I,1987, by year's end 200 build-pump for both heating and cooling. Because Duke Power certifies each ers had begun construction on 1,600 N1as Because hias homes are built to the Stat the buyer knows the home will re-homes in Duke's service area. E highest energy-elliciency standards, they tain that value on resale. use less energy for heating and cooling. In addition, their ow ners are rewarded with Good track record a 2 pereent discount on their electric rate. Ihe sucun of ihe Ala s Ilome rrogram < an be prahcted from ihe em iable trad records "We've been very pleased all around," compi!cd by n s forerwmen - thc Gold Aledallion flome and 1:mur I:thesent structure. said Jill A The Taylors built their new home be-f \\ -cause they needed more room. Their two /' k }hildren, Ashlev,6, and llollis,4, and the / A Y d60.oso

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erated at home were competing for space. ) l 91,162 8 ' 84.686 Building the home according to Nias N 7 + standards appealed to them because they N_' 39.300k felt it would add salue to the home as well [' r632 9- + as ensure additional com fbrt "I defmitely et thought it would help if we ever sell the i j 4 - g; home," said Leonard. j 1 " -- A - u When Duke decided to promote a new 6 e I" * **** I"" all-electric home in 1987, it wanted to comnine the best features of previous resi-dential marketing programs a id to ap- "The $"N ianion nome pro. Not Just Any Home Can Be A Max />ukc hmcr i specificatiom for the.1/asimtml l a/uc l/ome gram that helped produce more than 160,000 all-electric homes in the Duke l'eature Description senice area between 1958 and 1972, the liigh-efficiency heat pump Seasonal Energv Elliciency Rating hlas is designed to maintain Duke's lead-(SEER)of 9 or higlwr ership in the home energy market.1he Electric water heater Company projects that 80,000 51as Pre-wiring for hiad control Alkms the option of additional sasings; homes will be built in its senice area by helps Duke IWer manage its load 1991. QO insulation in ceilings, hiinimites heat Like the Energy Ellicient Structure R-16 in walls, R 19 under Doors km/ gain l (EES) program introduced in 1977, the Glass is limited to 15 percent h1inimizes heat 'sNias helps Duke Iber manage its k>ad. of Coot :.rea km/ gain l ) tore than 138,000 homes were built to Outdoor thermostat for heat pump Limits operation of ausiliary heat l -EES standards through 1987. The hlas to only coldest periods must meet many of the EES etliciency Itrimeter distribution duct work Delisers warm / cool air to outside wall standards as well as others, including a with R-6.5 insulation of all rooms for greater comfbrt P\\( d 2 )

l the residential Comfort Stachine pro-ration announced a 200-employee plastic Industrial heat pump technology is es-gram to encourage referrals for commer-cup factory in Randleman, N.C. pecially suited fi>r the textile, fini pro-cial structures. Alitsubishi Semiconductor of America, cessing, chemical. and pulp and paper in Electric cooking offers a tremendous Inc. meanwhile announced a major es-dustries. T he Company espects to add 3 potential fi>r increased sales as restaurants pansion ofitt semiconductor wafer plant million kilowatt-hours of sales a scar proliferate with changing lifestyles and near Durham, N.C. through its llERO program alone by population gnmth. One major restaurant Duke Power is also working with esist-1991. operator in Duke's senice area already ing industrial customers to help them cut fasors the all-electric concept. Rxidie-their total energs bills by comerting some " N.- - ure WM

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Noell Enterprises of Rocky Stount, N.C., processes to electricity.' The Companis ate n M a n l a con en the largest prisately owned franchisee of industrial representatives are imestigat- "W l E" the Hardee's Food System, uses all-ing with customers new applications of enha mme an mu But j ) electrie cooking in most ofits liardee's electrica! technologs li>r dning and heat-W n naea ng ma et i restaurants sened by Duke. The Compa-ing, including mienma es, radio frequen-ny's commercial sales representatises are cies infrared light and heat pumps. i E l working to comert other restaurants. T he Carolinas' testile and furniture in-i[' Finally, Duke is promoting creatiye dustnes present a large potential market rg outdoor lighting to architects and engJ-for new electrical applications. Alba-I i neers through adsertising and customer Waldensian. Ine., of Valdese. N C., for es- { contacts. In 1987, 5.3 million kikmatt-ample, is using a radio-frequenes dner hours were added to sales through out-which works much like a mie'rowab I i for the challenges ahead and to better j (ioor lighting insta!!ations. osen, to dry textile products after they are sene customers and imestors alike. E 3 i Recruiting Nen Industry dyed. [ hlore than one-third of the electricits "T his is a better drying program." said l Duke pnxtuces goes to ptmei the Pied'. Ron W. Scott. Alba Waldensian sice pres- [ mont Carolinas' growing industrial econ. ident. Alba Waldensian has reduced the omy. I he Company intnwlueed programs time it takes to d>e a pnxluet, dry it and i in 1987 that promise to enhance off peak ship it from three day s to osernight. sales to industrial customers for scars to like many apparel companies. Alba- ~ Waldensian had pres iously dried its pnx!- come. Duke Power has renewed its elfons to ucts in a "hot room" heated by steam. l attract desirable new industry to the sen-which had required N to 36 hours. Now, ice area as part of the Fise-Year N1arket. mos. pnxtuets are dried by radio w as es in ing Plan. Working with North Carolina 15 to 30 minutes. l and South Carolina economic deselop. T he many furniture manufacturers i l ment agencies. Company representalises and lumber companies in Duke's senice l l make contacts on a national lesel with a area can benefit tremendously by using l persuasise sales message: Duke Power heat pumps to dry wood. Cronland 1.um-offers superior electric senice and stable ber Company near Lincolnton, N.C.,liir electric rates because it has successfully instance, has found that using kilns /)udc'S (rug /S, Sc/ pit / /// [/S financed and completed an entire genera-heated with heat pumps to dry green lum-j;j g,g, {,g f. j f g f.g.,7 jg, tion of baseload power plants. ber results m better quality control than ['[Ull. U/P (UH/I[l[UNS, [IUl I hese efforts paid olTin 1947 as seseral using steam heat. I major corporations announced plans to "Ihis is the way to go." said Cronland U//d//l(1/1/e, i hicate facilities in Duke's sen ice area. For President Aaron Cronland. "htost old j esample. White Consolidated Industries, kilns are boiler tired, and they pnsluce a inc.. said it would build a plant to employ much higher heat. That stresses the wood I' 1,(XX) people making refrigerators in An-and starts hurting the praluet." Cronland derson, S C. Guardian industries, Inc., has found it can dry lumber estremely announced a 300-job glass factory in etliciently with electricity because less I Chester County. S.C., and W.W. Grainger lumber is wasted. Company announced a 300-job regional 1he industrial heat pump is another j distribution center for the East Coast in promising technology. IIERO. or lleat i G reem ille County, S.C. Recosery Opportunities, is a Duke 1%rr l Ilome Sasings of America announced program that promotes the use ofindus. { a residential mortgage senice center in trial heat pumps to recycle energy nor-Charlotte that will ultimately employ mally lost in hot water or steam. $ce i g 1.00() people, and Dart Container Corpo-story m HI?RO paec / 7)

~.?Y J- .Ic >l 1 Statements ofIncome IMlars in hiuunds Year ended IAwmtw 31, 19N7 1986 1983 Electric resenues (Notes I and 2). $3,705.784 $3.400.933 $2.898.911 Electric espenws Operation Fuel used in electric generation (Note 1) 624,814 726,151 719,254 Net interchange and purchased power (Note 3). 581,l5 378,377 107,145 Wages, benefits and materials. 4M5,192 488,631 435,70i Maintenance of plant facilities. 375,085 291,164 260,36i Depreciation and amonization (Notes I and 11) 411,182 327.844 319,295 General tases(Note 1) 173,897 166,385 .141,343 Income tases (Notes I and 4). 3 %,482 437.605 387,777 Total electric espenses. J,047,N 27 2,816,I57 2.370.876 Electric operating income. 657,957 584.776 528.035 Other income (Notes I,4 and 5) Allowance for equity funds used during construction. 36,742 52,444 62,741 Earnings of subsidiaries, net. 1,183 11,181 11,156 Other, net i2,947 35,203 68,966 income tases - other, net (525) (3,111) (19,405) Income tases - credit 22,555 32,163 40.363 Toial other income 72,902 127,880 .163.821 (- Income before interest deductions 730 H59 712.656 691.856 I:terest deductions Interest on long-term debt 237.367 252,503 267,345 Other interest 3,853 5,764 3,926 Allowance for borrowed funds used during construction (credit)(Note 1). (10,559) (13.445) (17.008) Total interest deductions. 230,661 244.822 254.263 Net income 500,198 467,834 437,593 Dividends on preferred and preference stocks. 54,2M $8.767 60.912 Earnings for common stock. $_445,934 $ 409,067 $ 376,6_8_I Common stock data Average shares outstanding (thousands) 101,250 101,220 101,178 Eantings per share. 54.40 $104 $3.72 Disidends per share 52.7d $2.64 $2.54 J .%y Errs to f maen ta/ S!stcmous PCI 21

r - ~. mwg. n gen pne., e-~m .-~~nn~n--ww-~~-.-m - m.n,. r gn -- my, b bi S N. n Js wi.. w.w w -a w--w-kass-m u Statements of Changes in Financial Position IMlan in 1 housands Year en&d (kcember M. 19M7 1986 1985 Sources of l'unds Opetations Net income 5 5tKl.198 5 467,834 $ 437,593 Non-fund items Depreciation and amor'iration (Notes I and II). 614,835 502.151 484,527 Deferred income tases and insestment tas credit, net of amortization (Note 4). 82,623 161,596 141,105 Allowance for equity funds used during construction (36,742) (52,444) (62,741) Purchased capacity levelization (Note 3) (134,452) (77,258) (22,440) Other, net. 8,136 .171(f) (67,219) Total funds from operations J,034,598 929,222 910 825 l'unds from financing and sale of awets issuance of first and refunding mortgage bonds. 245,866 394,006 172,404 Issuance of preferred stock 49,563 98,6!2 Nuclear fuel trusts. 77.388 57,597 57,638 Issuance of pollution-control bonds 38,734 7,251 34,II4 Sale of asseis 23,496 Total funds from fmancing and sale of assets 435,047 557,466 264 E Change in short term position and other marketable securities 65162 149,866 294,222 Total sources of funds 51,534,807 $M36,5N $ 1,469,2(J3 Applications of Funds Construction espenditures 5 753,461 5 637,908 $ 594,431 1 ong term debt, capital stocks retired or reaequired 441,970 672.239 247,192 Disidends paid 331,691 325,991 317 007 Change in working capital' 40,367 49.356 308,500 Other applications, net _ {32,682) (48,940) I,173 Total applications of funds-51,534,807 51,636,554 51,469,20_3 Change in Working Capital increase /([kcrease)in current assets Cash 5 17,895 871 $ (3,01I) Receivables 8,196 81,257 (18.011) Materials and supplies. I5,837 (43,366) 53,735 Prepay ments (1,323) 371 6,633 Decrease /(Increaw) in current liabilities Accounts payable (34,972) 16,056 (6,016) Nuclear fuel disposal costs payable 122,(x)3 Tases accrued 54,692 (51,359) 161,141 Interest accrued and other liabihties 42 45 4_96 17.9_74) Change in working capital

• 5 _ 40,367

$ 49 35f3 $_30M_.00 1 % ludn chanee in short-term p uition and chance in actrent mantritics of lone-term debt and preferred std. 1 i O PVet 24 A,y. bro i.e / vi.va is! Aza!rm wn

t ' EL L JMMs:)%HC232Gl%2pM14MWM j / k._ ) llalance Sheets Dottars in Thouunds December 31. 1987 1986 Assets Electric plant (at original cost - Notes 1,3,10 and 14) Electric plant in service $10,072,552 $9,445,032 Less accumulated depreciation and amortization.. 3.859,917 3.407.345 Electric plant in sersice, net. 6,212,635 o,037,687 Construction work in progress. 704,610 601.064 Total electric plant, net. 6,917.245 6.638.751 Other property and imestments Other property - at cost (less accumulated depreciation: 1987 - $8,832: 1986 - $8.248). 36,052 40,100 Imtstments in and adsunces to subsidiaries (Note 1). 93,633 85,153 Other imestments, primarily marketable securities - at cost or less (Note 1) 161,454 289.721 Total other property and imestments 291.139 414.974 Current aswis Cash (Note 6). 21,509 3,614 Shon term investments 184,779 113,129 Receivables (less alkmance for losses: 1987 - $3,710; 1986 - $3,867). 334,111 325,9I5 Materials and supplies - at average cost Coal 86,923 84,137 Other - 161,901 148,850 ( Prepayments - 13,754 15.077 Total current assets - 802,911 690.722 Ikferred debits Canceled construction projects (Notes 11 and 14) 251,085 296,016 Purchased capacity costs (Note 3). 153,793 101,160 Debt espense, primarily refinancing costs, being amortized oser terms of related debt (Note 1) 78,978 62.106 Other.. 16,5)) 23.000 Total deferred debits. 500,433 482,282 Total awets. .$_8,5_11,794 $8 226 72j Ccpitalization and Liabilitic:, Ccpitalliation (See Statements of Capitalization). 1 6,651,528 $6.514.700 Current liabilities Accounts payable 198,011 143,039 Tases accrued (Note 1). 49,590 104,282 Interest accrued 67,075 68,542 Other 51,143 49.718 Total 365,819 365.581 Current maturities oflong-term debt and preferred stocks. 59.579 38.911 Total current liabilities 425A98 404.492 Accumulated deferred income tases (Notes 1 and 4) __),028,421 913.426 Ikferred credits and ather liabilities investment tas credit (Notes I and 4) 335,647 341,124 m Other 70 194 52.987 ) Total deferred credits and other liabilities 406d41 394.1Il Commitments and contingencies (Note 14) Total capitalliation and liabilities $_8,511,794 $8,226J29 sw wn m re,uaru sal.si.4i.ven,,is r$ca :s

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2. sa L.K E ma.m wa. _,-. ~~,, um Statements of Capitalization and Retained Earnings (A4 tan in Thouunds thremNr.11.

1987 1986 Ctpitalization Common stock equity (Note 7) Common stock, no par, 150,000,000 shares autitorized; 101,258,731 shares outstanding for 1987 and 101,235,772 shales outstanding for 1986 $1,862,177 $ 1.861,628 Retained earnings. _l,374 093 _1,210,229 a Total common stock equity 3,236J70 3,071,857 7 Preferred and preference stocks without sinking fund requirements (Note 8) 428,001 468,510 1 Preferred stocks with sinking fund requirements (Note 9) 263,875 221,991 long-term debt (Note 10) First and refunding mongage bonds 2,630,506 2,635,790 Capitalized leases 79,908 83,890 l Nuclear fuel trusts. 86,000 85,000 1 Unamortized debt discount and premium, net (Note 1) (21,478) (20,112) I Current maturities oflong-term debt. ($1,554) (32 26_6) 1 Total long-term debt. _2,723,382 M5_2.202 Total capitalliation. $6,651,528 $6,514,7_00 O lbflan in T houunds icar ended Decenhr.11. 1987 1946 1985 _ Retained Earnings Halance - Beginning of > ear $1,41A229 $1,071,814 $ 952,360 Add - Net income _ 500,l' 8 467,834 437,593 Total _1710g427 1,539,648 IJ89,953 1 Ikeduct Disidends Common stock 277,427 267,224 256,995 Preferred and preference stocks 54.264 58,767 60,912 Capital stock transactions, net 4,6M 3,428 232 Total deductions. _ 336,334 329,419 318,139 Halance - End of year $1,374 093 11,210J29 $IJ}7 L814 1 O rwus sa w, so r ow,u wi szai,,,,,,,i,

. wny n myym m nmmy .:t A k;# W J Ei.i m w.uu a d p yM a w ;w2ELtdh w O,, Notes To Financial Statements Note 1. A. Additions to Electric Plant Summary of The Company capitalizes all construction. propeny is capitalized. The cost of repairs and re. Significant related direct labor and materials as well as inJi. placements representing less than a unit of prop-Accounting Pblicies rect construction costs. Indirect costs include erty is charged to electric expenses. The original general engineering, taxes and the cost of money cost of property retired, together with remosal (allowance for funds used during construction). costs less salvage value, is charged to accumu-The cost of renewuls and betterments of units of lated depreciation. H Allowance for Funds Used During Construction (AFUDC) AFUDC represents the estimated debt and eq. to recover these capital costs, including a fair re-uity costs of capital funds that are necessary to turn, through their inclusion in rate base and in finance the construction of new facilities. the prosision for depreciation. AFUDC, a non-cash, non-operating item, is ree-AFUIX', which is compounded semiannu-ognized as a cost of"Construction work in prog-ally, was calculated on average embedded ra:es ress"(CWIP) with ofTsetting credits to "Other in- (net of applicable income tases) of 9.15 percent come" and "Interest deductions." Afler for 1987,9.63 percent for 1986 and 9.90 percent construction is completed, a utility is permitted for 1985. C Depreciation and Amortiration Provisions for depreciation are recorded using Under provisions of the Nuclear Waste Policy the straight-line method. The year-end compos-Act of 1982, the Company has entered into con-ite weighted-average depreciation rates were 3.60 tracts with the Department of Energy (DOE) for percent for 1987 and 1986 and 3.58 percent for the disposal of nuclear fuel Payments made to 1985. All coal-fired generating units are depreci-the IX)E for disposal costs are based on nuclear ated at the rate of 3.57 percent. Nuclear units are generation and are included in "Fuel used in q) depreciated at a rate of 4 percent, w hich includes electrie generation" in the Statements ofincome, an allowance for decommissioning costs. The Company fulfilled its obligation for diwsal Amortization of nuclear fuel is included in costs of nuclear fuel consumed prior to April 7 "Fuel used in electric generation" in the State-1983, by a payment in June 1985 of approsi. ments of income. The amortization is recorded mately $ 122,000,000 to the [X)E. using the unit-of production method. ) D. Subsidiaries The Company's fmancial statements reflect con-aries" page 43.) Retained earnings as ofIkcem-solidation of its wholly owned subsidiary, ber 31,1987, include 590,780,000 of undistribu. Church Street Capital Com., formed in Febmary ted earnings of unconsolidated subsidiaries. No 1985. All intercompany t ansactions hase been dividends were received from unconsolidated 1 eliminated in consolidation. Investments in subsidiaries in 1987. Dividends receiwd from other wholly owned subsidiaries hase been ac-such subsidiaries were $1.000,000 in 1986 and 4 counted for by the equity method. (See "Subsidi. $2.200.000 in 1985. E. Income Tases The Company and its subsidiaries file a consoli-projects, and short-term and intermediate-term dated federal income tas return. Income tases investments. are alkicated to each company based on its sepa-Deferred income tases haw been prosided for rate company taxable income or loss. timing differences between book and tas income, income tases are allocated to non-electric op-principally resulting from accelerated tas depre-erations under "Other income" and to electric ciation, leveliiation of purchased power costs. 1 operating espense. The "income taxes - credit" canceled construction projects, and capitalized classified under "Other income" results from tas tases and employee benefits. Imestment tas deductions ofinterest costs relating primarily to credits are deferred and amortired owr the use-investments in CWIP, canceled construction fulliws of the related properties. F, Unamortised Debt Premium, Discount and Espense I Espenses incurred in connection with the issu-re7ectiw issues. Also, any espenses or call pre-( anee of presently outstanding long-term debt, miums associated with refmancing higher-cost and premiums and discounts relating to such debt obligations are being amortiied user the debt, are being amortiied over the terms of the liws of the new issues oflong-term debt. P%GI U

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~ = C _0 tt P A1 N :Y.ama,am&w m a' -b U E"B'i_P 0 W B-t: - _w e Note 1. G, Fuel Cost Adjustment I rocedures Summary of Fuel costs are resiewed semiannually in the was clTectise for periods beginning January 1, Significant wholesale and South Carolina retail jurisdie-1986. The prospect he adjustment in rates of past Accounting Iblicies tions, with provisions for changing such costs in oser or under-recosery of fuel costs was chal-(continued) base rates. In the North Carolina retailjurisdic-lenged in the North Carolina courts. The North tion, a res iew of fuel costs in rates is required an-Carolina legislature ratified a billin July 1987 as-nually and during general rate case proceedings. suring the legality of such adjustments in rates All jurisdictions allow the Company to adjust and required a study of the appropriateness of for past over or under-recosery of fuel costs. such adjustments. T he bill aiso prosides that the 1herefore, the Company reflects in resenues the fuel adjustment statute will be repealed elTectise ditTerence between actual fuel costs incurred and July 1,1989. fuel costs recosered through rates. The North Carolina Utilities Commission ordered the Company to follow these deferred account-ing procedures in its August 1986 order, which II. Other imestments Other investments, which consist primarily of cost or market value. At year-end, the cost of marketable securities are stated at the Imer of these securities approximated market salue. Note 2. The North Carolina Utilities Commission and do!!ars) are annualized on the basis of the filing Rate The Public Sersice Commission of South Caro-test year. M tters lina must approse rates for retail sales within A summary of all changes in general rates re-their respectise states. The Federal Energy Regu-queced or implemented by the Company since latory Commission (FERC) must approse the January 1,1985, is as follows: Company's rates for sales to wholesale custom-ers. The revenues shown below (in millions of Apprmed % of increaelit hrreas1 h.,m I nd of Junslict on and Requoted % of Pro km Rate Order IMtonth Date bled Rocoun Rnenun Request Rnenun I ticetne Test lYnod N.C. retail February 1985 $340.0 $ 157.7 46.4 9.10 September 1985 June 30,1984 March 1986 (a) 289.3 133.1 46.0 6.73 Oc.ober 1986 December 31,1985 December 1986(b) (48.6) (48.6) 100.0 (2.30) January 1987 December 31,1985 Nosember 1987 (b) (63.3) (63.3) 100.0 (3.00) January 1988 December 31,1985 S C. retail April 1985 143.0 78.4 54.8 10.75 October 1985 June 30,1984 May 1986 137.8 79.1 57.4 9.55 November 1986 December 31,1985 December 1986(b) (20.9) (20.9) 100.0 (2.30) January 1987 December 31,1985 October 1987 (b) (26.41 (26.4) 100.0 (3.00) January 1988 December 31,1986 FEH C wholesale (c) July 1985 9.2 5.2 56.5 10.50 March 1986 December 31,1986 August 1986 (b) 6.4 1.9 30.4 3.56 July 1987 December 31,1987 January 1988 (b) ( 1.4 ) Pending December 31,1987 (a) Under appeal. (See Note 14.) (b) Rellects the impact of the lower federal income tas rate. (c) FERC whoksale filings do not include the sales to municipalities and electric cooperatives that purchased interests in the Cataw ba Nuclear Station. Sales tc these entities, w hich pres iously repre-sented a majority of the Company's wholesale resenues. are now set through contractual agree-ments (See Note 3.) rwi 3

Y)kQ] [ ) N( ) i Note 3. T he Company has sold interests in both units of supplemental information regarding their own-Joint Ownership the Catawba Nuclear Station. The other owners ership are as follows: of Generating of portions of the Catawba Nuclear Station and Facilities (k nership Interest (h ner _ _ in the Station D. ate of Lle North Carolina Municipal Power Agency Number 1 (NCN1PA) 37.5% November 29,1978 North Carolina Electrie hiembership Corporation (NCEMC) 28.125 % February 6,1981 Saluda Riser Electric Cooperatise, Inc. (Saluda Riser) 9.375 % February 6,1981 Piedmont Municipal Power Agency (PMPA) 12.5% Ikcember 20,1984 Each participant has prosided its ow n fmancing for its ow nership interest in the plant. The Company retains a 12.5 percent ownership Public Senice Commission of South Carolina interest in Catawba. As of Ikcember 31,1987, allowed the Company recosery on a leselized $4Y7,900JUO of"Electric plant ;n senice" repre-basis of the capital costs of capacity purchased sents the Company's investment in Units I and 2 over a 70-year period. As prosided in current and nuclear fuel for those units Accumulated rates in all jurisdictions, the Company recosers gx ) depreciation and amortization of $57,100J00 the costs of purchased energy and the portions of ( / associated with Cataw ba had been recorded as of purchased capacity not being leselized. The por-year-end. tion of costs not recovered through current rates In connection w;1h the joint ownership, the is being accumulated, and the Company is re-Company has entered into centractual agree-cording a carrying charge on the accuntulated ments with the other joint owners to purchase balance. the Company will start to recoser the annually declining percentages of the generating accumulated balance including the carrymg capacity and energy from the plant. The agree-charge when the capacity payments drop below ments were effective beginning with the com-the leselized resenues. mercial operation ofeach unit. Unit I and Unit 2 For the years ended Ikeember 3.,1987 and began commercial operation in June 1985 and in 1986, the Company recorded purchased capacity August 1986, respectisely. Such agreements were and energy costs from the other joint owners of established for 15 years for NCMPA and PMPA $693,500,0eo and $515,800J00, respectisely. and 10 years for NCEMC and Saluda Riser. These amounts, reduced by the cost of capacity Energy cost payments are based on suriable purchased not rellected in current rates, are in-operating costs, a function of the generation out-cluded in "Net interchange and purchased put. Capacity payments are based on the fned power" in the Statements ofincome. As ofIk-costs of the plant. The estimated purchased ca-cember 31,1987 and 1986, $153,793,000 and pacity obligations through 1992 are $ 101,160.000 net of income tases, respectively, $487JUOJ00 for 1988, $454,000,000 for 1989, associated with the costs of capacity purchased $434.000.000 for 1990, $416,000.000 for 1991 riot reflected in current rates had been accumu-and $402,000,000 for 1992. lated in the llalance Sheets as "Purchased capae-The North Carolina Utilities Cc'nmission and ity costs" the Federal Energy Regulatory Corrraission granted the Company recosery on a lewliied basis of the capital costs and fned operating and maintenance costs of capacity purchased from the otherjoint ow ners owr a 15-year period.1he ~ l PCI N

,,~. n n. n n,.,---g g n.~ n.n - n...n- ~. n.n-.,,,..~,, m_ n,- n,, p w-,I f-u.s, _ a _'W E._'R _'C O'M P A' N : Y 'D:UJK E-PO ~ -.- _ w. :> ~. w.. ~ -ad wna.- -.- O Note 4. Income tas expense consisted of the folkming (dollars in thousands): Income Tax gg gg Expense income taxes related to electric expenses Current income tases Federal. $264,276 $241,150 $200,884 State 50,001 37,862 36,506 314,277 279,012 237,390 Deferred taxes, net Escess tas over book depn:ciation 78,017 89,325 87,362 Catawba purchased capacity costs, net of amounts reflected in current rates 29,209 52,942 37,700 Amortization of canceled construction costs. (26,503) (26,607) (7,584) Cost of bond redemption 7,319 21,560 6,358 Capitalized tases, employee benefits, etc. 3,110 17,023 12,487 Other 4,558 11,738 (5,519) 95,710 165,981 130,804 Imestment tas credit ikferred. 10,604 16,801 40,729 Amortization of deferments (credit). J2iK@ (24,189) 2 21,146) (13,50%) (7.388) 19,583 Total income taxes related to electric expenses 396,4_82 437h05 387.777 income tases related to other income income tases - other, net $25 3,111 19,405 income tases -(credit) J22,555) 2 32 163) (40,363) 1 Total income tases related to other income _L22,0J0) J29,0$2) (20,958) Totalincome tas expense .$ 374,452.$408,553.$366,819 Total current income taxes were $291,829,f00 for 1987, $246,957,000 for 1986 and $225,683,000 for 1985. Of these amounts, state income tases were $46,073,000 for 1987, $33,779,0(X) for 1986 and $34,621,000 for 1985, Total deferred income taxes were $96,128,000 for 19x7, $168,984,000 for 1986 and $121,553,000 for 1985, Of these amounts, deferred state income taxes were $ 15,585,0t0 for 1987, $20,033,000 for 1986 and $13,178,000 for 1985. Income taxes ditTer from ameunts computed by applying the statutory tas rate to pretas income as folkms (dollars in thousands): 19 0 19 % 19 0 income tases on pretas income at the statutory federal rate of 39.95%-1987,46%1986 and 1985 $349,423 $403.138 $370,030 increase (reduction)in tas resulting from: Allowance for all fue used dunng construction ( AFUDC) - (18,897) (30,309) (36,685) Amortization of electric imestment tax credit deferrals (24,109) (24,189) (21,146) AITIX'in book depreciation /amortitation 37,623 43,679 42,575 State income taxes net of federalincome tas benefits 38,142 28,751 25,284 Other items net _ 17,730) J12,517) ll3JM) Total income tas espense (see abose) $374d52.5408,553 $36611_9 T he Financial Accounting Standards Board has issued a statement that will require the Company to change its accounting for meome taxes While classification of certain items on the Balance Sheets will change, there will be no material c!R'et on the Company's results ofoperations ~1 he Company is not required to implement this accounting procedure until 1989. h

-- ~. E R C. O M P'A.N Y ' m 7m- -.,-,_7. A___,,w- - m_D tJ E POW m._m _ _.-. mm - _n =,a.m _ _ _ __ma Note 5. For the years ended December 31, 1987, 1986 net" in the Statements ofincome, The income is Other Income and 1985, the Company recorded imestment in-primarily from dividends and interest on securi-come of $20,000,000, $34,000,000 and ties. The taxes associated with the investment in- $ 5 8,000,000, respectively ($17,800,000, come are recorded as components of "income $29,900,000 and $38,700,000, net of income tases - other, net" in the Company's State-taxes, respectiwly), as a component of "Other, ments ofincome. Note 6. The Company had unused short term credit fa-In 1987 the Company maintained cash bal. Short-Term cilities of $360,700,000 with 54 commercial ances with 54 banks. As of December 31,1987, Ilorrowings and banks as of December 31,1987, $306,150,000 the Company had $18,120,730 on deposit with Compensating-llalance with 56 commercial banks as of December 31, these banks. Substantially all of the Company's Arrangements 1986, and $316,050,000 with 59 commercial cash balances are maintained to compensate banks as of December 31, 1985. Included in banks for their senices, even though the Cou-these credit facilities is $95,000,000, of which pany has no formal compensating balance ar- $40,000,000 is allocated to the 1984 issue and rangements. To compensate banks for credit fa- $55,000,000 is allocated to the 1987 issues of an-cilities, the Company had average balance nual tender, pollution-control revenue bonds. requirements of $ 1,305,500 for 1987, $ 1,351,500 These facilities are on a fee basis and/or for 1986 and $ 1,362,500 for 1985. The Company compensating balance basis. There were no retains the right of withdrawal regarding the short term borrowings during 1987,1986 or funds used for compensating balance

1985, arrangements.

Note 7. Common Stock As ef Dember 31,1987, a total of 4,690,084 Common Stock and During the past three years, stock market pur-shnes was resened for issuance to stock plans Retained Earnings chases were used to satisfy the requirements of and for the com irsion of preference stock, the Company's stock plans. For the nest severa', Hetained Famings years, the Company anticipates issuine nn as o' Dteer<oer 31,1987, none of the Compa-shares of common stock only for tb comersic.) nyi Mairal earnings were restricted as to the of preference stock,(See Note 8.) 1eclarahon or pay ment of dividends. Note 8. The following shares of stock were authorized Preferrna Common Year shares Sharn Preferred and with or without sinking fund requirements as of Preference Stocks December 31,1987 and 1986: j 9 3., 5A89 22,959 y ithout Sinkmg 1 und Requirements - sharn

198t, 10,032 41,970 ru v.aue 1985 9,819 41,078 Preferred Stock

$100 10,000,000 Preferred Stock A 25 10,000.000 In 1986 the Company issued 500,000 shares of Preference Stock 100 1,500,000 Adjusta Me Rate Preferred Stock, Series A, with a par sah e of $ 100 per share. The disidend rate is The outstanding Preference Stock, 6 3/4% adjustel quarterly based on a percentage of the Comenible Series A A, is convertible into shares highest ate among certain U.S. Treasury rates. of common stock at the adjusted conversion llowever, in no esent will the disidend rate for price of $23.89 per share, with each share of pref-any diside id period be less than 5,50 percent per erence stock valued at par. The comersion price annum orgroter thart 40.50 percent perannum. is subject to certain adjustments designed to pro-This rate was 6.91 percent per annum at Decem-tect the comersion prisilege against dilution. In ber 31,1987. 1987,1986 and 1985, shares of preference stock Preferred and preference stocks without sink-were comerted into shares of common stock as ing fund requirements as of December 31,1987 folkms: and 1986, were as folkms (dollars in thousands): 9 PsGL 31

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s D U.'KnE. P O W E 'M C. O ' M P A ' N Y. ] Lwa.- u a.. .w~a~ a - .t- _. _..... m.. um _. ~ x.a. .. m.._. w.- ..w _. m.__a O Note 8. I D ouIsYtn3ing Preferred and Rate /scries 1987 i986 Preference Stocks Without Sinking 4.50% C 1964 350,000 $ 35,000 $ 35,000 Fund Requirements 5,72% D - 1966 350,000 35AKK) 35,000 (continued) 6.72% E 1968 350,000 35,000 35,000 8.70% F 1970 600,000 60,000 60,(XX) 8.20% G. 1971 600,(XX) 60 000 60,(XX) 7.80% 1I. 1972 6(X),000 60,000 60,000 8.28% K. 1977 500,000 50,000 50,000 8.84% M. 1978 400,(XX) 40,000 40,000 15.40% A 1982 1,600,000 40,(XX) Adjustable Rate A 1986 500,000 50,000 50,000 6%%, AA Convertible 1969 30,006 3,001 35,495 3,550 Total 14.'81X11 $468,.M,0 Note 9. Par V.due Sharn Preferred Stocks With Sinking Fund The following shares of stock were authorized Preferred Stock $100 10.000,000 Requirements with or without sinking fund requirements as of Preferred Stock A 25 10,00().000 Ikcember 31,1987 and 1986: Preference Stock 100 1,500,000 Preferred stocks with sinking fund requirements as ofIkcember 31,1987 and 1986, were as follow. (dollars in thousands): Year Sharn Rate $cnes Iv.ued Outstanding 1987 1986 7.35% 1. 1973 50410) $ 50,400 $ $28,(XX) 52,800 8.20% J. 1977 380,000 38,000 400,000 40,000 8.375% L 1978 400,000 40,000 420,000 42,000 8.84% N. 1979 435,000 43,500 451,250 45,125 7.875% P 1986 500,000 50,000 50,000 7.12% Q. 1987 500,000 50.(K)0 Less: Preferred shares reacquired for current and future sinking fund requirements (at cost) sw Rexquired 8.84% N 13,800 (1,289) Ins Current sinking fund requirements 7.35% I (2,400) (2,400) 8.20% J. (2,000) (2,000) 8.375% L (2,000) (2,000) 8.84% N (l 625) (245) Total $263fM $221,991 The annual sinking fund r(quirements The call prosisions for the outstanding pre through l992 are 58.025J)00 in 1988,1989,1990 ferred and preference stocks specify variou: and 199 I and $9,525,(XX)in 1992, with some ad-redemption prices not eweeding 108 percent of ditional redempGons permitted at the Compa-par s alues, plus accumulated disidends to the re-ny's option. demption date. Nan

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,p ; 2 3 x & G a .xL s', n . Note 10. First and refunding mortgage bonds outstanding as of December 31,1987 and 1986, were as follows Long-Term Debt (dollarsin thousands): Year Year Series Due 1987 1986 Series Due 1987 1986 famtmual) 15%% 1991 $ $100,000 9%% 2005 $ 92,800 $ 92,800 4%% 1992 50,000 50,000 8%% 2006 - 96,850 %,850 4%% B 1992 50,000 50,000 8%% 2007 119,500 119,500 4%% 1995 40,000 40,000 9%% 2008 120,610 120,610 I 8%% 3 1995 125,000 125,000 10%% 2009 145,050 145,050 i 7%% 1996 100,000 100,000 10'/i% B 2009 148,000 5%% 1997 72,600 72,600 14%% 2012 16,282 7%% 1997 100,000 12%% 20!$ 62,916 - 67,517 6%% 1998 68,500 68,500 10%% B 2015 50,000 50,000 7% 1999 56,075 56,075 9% 2016 175,000 175,000 8% B 1999 64,739 64,739 8%% 2017 150,000 8%% 2000 69,244 69,244 8%% B 2000 95,635 95,635 IWhition-Control I 7%% 2001 97.900 97,900 6%% 1988 25,000 7%% B 2001 38,050 38,050 9%% 2013 77,000 77,000 7%% 2002 78,100 78,100 4.70% (1987) 2014 40,000 40,000 ? 7%% B 2002 67,900 67.900 4 % % (1986) 7%% 2003 94,872 94,872 6%% 2012 20,000 8%% B 2003 98,050 98,050 4,10% 2017 10,000 i 9%% 2004 95,623 95,623 3.95 % 2017 25,000 Less: Funds held l in trust (16,508) (107) Total. 12 & 30 l 0_6 12 635790 1 Substantially all electric plant was mortgaged as of December 31,1987, The annual maturities oflong-term debt, in-ing obligations under the Company's two nu-ciuding capitalized lease principal payments, clear fuel trusts. The maturities are based on esti-through 1992 are $51,554,000 in 1988, mated fuel consumption. Instead of making cash $35,796,000 in 1989, $12,942,000 in 1990, payments, the Company intends to transfer title i- $5,667,000 in 1991 and $ 106,187,000 in 1992, of additional nuclear fuel to the trusts as fuel is Annual maturities through 1992 include consumed, t amounts relating to the $86 million in outstand-4 Note 11. The construction of the Cherokee and Perkins - As of December 31,1987 and 19,(6, the bal-Canceled Nuclear Stations was canceled Alljurisdictions ances for these canceled projects, net of amorti-i Construction hase permitted recosery of the incurred costs. ration, were $400,905,000 and $472,339,000, re-l Projects These costs are being amortired principally oser spectisely ($251,085,000 and $296,016,000 net a 10-year period beginning October 1983,(See ofincome tas benefits, respectively). Note 14.) Note 12. In the Statements of income and Statements of infermation has been reclassified to conform l Reclassification Changesin FinancialIbsition,certain prior year with 1987 classifications-i i PMIE 33

y,k,,. _ ge mm gn~- n - m-.;g.- ,.n.e g - n. n.n.m.,n _,_ n l -- J-- j; ;iL f D. lj ; K - E P O Wm, L- _E' R. C, OA - n w ~, _.T Y ._ m,.a. w u,_. _, _,a M PA [- K. O Note 13. Th$ Company and its operating subsidiaries The Company adopted the provisions of Fi. Retirement have a non-contributory, de6ned knent retire-nancial Accounting Standards lloard Statement Plan ment plan chering substantially all their em. No. 87 (SFAS 87), "Employers' Accounting for ployees. The knefits are based on years ofcredit-pensions"asofJanuary 1,1987 The adoption of able servic( and the employees' average the new standards did not result in a material compensation based on the highest campensa-change in pension costs for 1987, The new stan-tion during a ednsecutise sity month period. dards have been adopted prospectisely, and re. The benefits are reduced by a Social Security ad-lated disclosures for pres ious years hase not been justment for employees age sixty five and over restated. and for early retirees with no creditable senice A reconciliation of the funded status of the prior to September 1,1980. The Com my's pol-plan to the amounts recognized in the Italance icy for the plan is to fund pension costs accrued. Sheets as of December 31,1987, is as follows: (tMlan in T houvodo Frojected bene 61 obligation $(589.397) Fair market value of plan assets, consisting primarily of short term investments and cash equivalents, common stocks, real estate imestments, and gosernment and industrial bonds, 649,26I Unrecognized net experiene gain (61,734) Remaining unrecognized SFAS 87 transitional obligation 1,870 Accrued pension cost 0 O As of December 31,1987, the portion of the projected bene 6t obligation representing the accumu-lated benefit obligation was $460,923,000, of w hich $424.630,000 represents the sested benefit obli-gation. The effect of future compensation increases included in the projected benent obligation amounted to $128,474,000. Net periodic pension cost for the year ended December 31, 1987, included the following components: (IMlan in Thouundo Senice cost benents earned during the year $26,707 Interest cost on projected benefit obligation $2,212 Actual return on plan assets (43,000) Amount deferred for recognition (9.042) Expected return on plan assets (52,042) Amortization of transitional obligation over 15 years 134 Net periodic pension cost $27.011 The weighted aserage awumed discount rate $528,977,000, with $407,467,000 representing and the assumed increase in future compensa-the vested bene 6t ponion. The weighted average tion les els used in determining the actuarial pres-assumed rate of return used to determine the ac-ent value of the projected benefit obligation as of tuarial present value of accumulated plan December 31,1987, were 9.5 percent and 6.5 bene 6ts was 7.5 percent in 1985, The actuarial percent, respectinly. The espected long-term present value of accumulated plan benefits for rate of return on plan assets used in determining this calculation does not consider future salary pension cost for 1987 was 8.5 percent. increases. l Total pension expense, including trustee fees, Net awets asailable for accumulated pla amounted to $28,815,000 in 1986 and benefits as of December 31, 19 8 5, w er. $31,491.000 in 1985. As of December 31,1985, $557,922JM the accumulated benefit obligation was PV.t 4

w m*mlpw.,.,.. y.m--,.,,, --w ,mmm -m x m wm _ q h-. $1 U lt,.341 m,.a.:.s.~ - du 0 : w g : t _ ~ C O kl 1 A N DY-.s -nM a'h a w.u s wn" Note 14. A. Construction Program the Company's annual premium for $500 mil-Commitments and Projected constmetion and nuclear fuel costs are hon of excess property insurance. Contingencies $2.36 billion an 1 $547 million, respectively, for in addition to the coverage through NEIL's 1988 through 1990. The p ograin is subject to Excess Property insurance Program, the Com-periodic review and resisions, and actual con-pany plaen15620 million through a pool of stock struction costs incurred may vary from such esti-and mutual insurance companies for primar,y mates Cost variances are due to sarious factors, and excess property insurance caerage associ-including revised load estimates ovtcome ofli-ated with its interest in the Catawba Nuclear censing and environmental matters, and cost Station. and availability of capital. Thejoint on ners of Cataw ba will assume their pr rata share of any liability for claims resulting H. Nuclear Insurance The Comranv's public liability for claims result-fr m a nucle r meident.,The Company is bemg mmu by the otherjoint owners for certam ing from any "nuclear incident is limited to $720 ""Clear insurance pre-million under prosisjons of the Price-Anderson

1. 1. "*#5 9 #'#

mmms p id by the Company., Act, which prosides for nuclear liability insur-ance up to that amount. Under these provisions C. Other the Company could be assessed up to $5 million The Company is currently imched in contrac-for each ofits licensed reactors for a nuclear inci-tual disputes with the other joint owners of the dent imching any licensed facility in the nation, Cataw ba Nuclear Station. The Company cannot and up to $10 million a year for each, if more presently determine the ultimate resolution of than one nuclear incident occurred. Legislation these matters, but is of the opinion that there are is pending in Congress that cou!d increase the adequate legal and factual bases for the Compa-limit on the Company's liability and the amount ny's positions in these disputes. the Company could be assessed for each ofits li-On July 28,1987, the Federal Energy Regula. ( } censed reactors. As of December 31,1987, the tory Comminion (FERC) granted a motion Company had seven licensed reactors. made by the other Catawba joint ou ners to eu ( The Company is a member of Nuclear h1utual elude costs of abandoned plants from their sup-Limited (NN1L), which provides property dam-plemental power rates. The Company requested age coverage for certain of the Company's nu-a reconsideration of the order, which FERC de-clear facilities if NN1L's losses ever exceeded its nied. The Compar.y appealed the order to the resenes, the Company would be liable, on a pro courts. The Company estimates that the order, if rata basis, for additional assessments of up to $67 it becomes fmal, would have a one time impact million. This amount represents 10 times the on earnings of approximately $40 million. Company's annual premium to NNil. The Company is aho imohrd in legal tas and The Company is aho a member of Nuclear regulatory proceedings before various courts, Electric Insurance Limited (NEIL), which pro-regulatary commissions and governmental agen-vides insurance for the increased cost of genera-cies regarding matters arising in the ordinary tion and/or purchased power resulting from an course of business, some of which imche sub-accidental outage of a nuclear unit. If NEIL's stantial amounts. Except as discussed below, losses ever exceeded its resenes, the Company management is of the opinion that the final dis-would be liable, on a pro rata b? sis, for additional position of the abose matters indisidually will awessments of up to $19 mi!! ion. This amount not hase a material adveise effect on the resuhs represents five times the Campany's annual pre-of operations or the fmancial position of the mium to NEIL. Company. The Company purchases $775 million of Certain parties appealed the 1985 and 1986 property damage insurance through NEll's Es-rate orders of the North Camlina Utilities Com-cess Property lnsurance Program. T he Company mission to the North Carolina Supreme Court. has also purchased an additional $ 1?O million of On July 28,1987, the Court affirmed the North property damage insurance through a pool of Carolina Utilities Commission's rate order of stock and mutual insurance companics. These 1985. Because the issue of the collection of aban-emvrages are in addition to the $500 million of doned plant costs awociated with canceled nu-coserage prosided by the Company's under!)ing clear stations was decided by an evenly diuded property damage policies iwued through NNIL court, that isuie is being contested in the appeal If Imses eser esceeded the accumulated funds of the 1986 rate case. While the Company is of f_] available to NEll for the Escess Property Insur-the opinion that there are adequate legal and fac-(',, ance Program, the Company would be liable. on tual bases for the Company to presail on this a pro rata basis, for additional assessments of up iwue, the Company cannot presently determine to $28 million.1 his amount represents 7.5 times the ultimate resolution of this matter.

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.-~a ~ w. m< O Auditors' Opinion Duke Power Company: We hase esamined the balance shee's and the as might hase been required had the outcome of statements of capitalitation of Duke Power the uncertainties referred to in the preceding par-Company as of December 31,1987 and 1986, agraph been known, the tinancial statements re-and the related statements of income, retained ferred to alue present fairly the fmancial posi-earnings and changes in fmancial pmition for tion of the Company at December 31,1987 and each of the three >rars in the period ended De-1986, and the results ofits operations and the cember 31,1987. Our esaminations were made changes in its financial position for each of the in accordance with generally accepted auditing three >rars in the period ended December 31, standards and, accordingly, included such tests 1987, in conformity with generally accepted ac-of the accounting records and such other audit-counting principles applied on a consistent ing procedures as we considered necessary in the basis. circumstances. As described more fully in Note 14(C), there E bbM S are uncertainties with respect to the Company's Jy recostry of certain costs related to plant aban-donments. The ultimate outcome of these mat-Deloitte liaskins & Sells ters cannot be determined at this time.

• "Ml l*

8""*d* In our opinion, subject to the etTects on the Charlota, North Carolina financial statements of such adjustments, if any, February 12,1988 9 Responsibility The fmancial statements of Duke Power Com-functions The Company's accounting controls for Financial pany are prepared by management, which is re-are continually reviewed for effectisenest in ad-Statements sponsible for their integrity and objectisity. The dition, 5,ritten policies, standards and proce-statements are prpared in confoimity with gen-dures, and a strong internal audit program aug-erally accepted accounting principles appropri-ment the Company's accounting controls. ate in the circumstances to reflect in all material The floard of Directors pursues its osersight respects the substance ofesents and transactions role for the financial statements through the which should be included. The other informa-audit committee, which is composed entirely of tion in the annual report is consistent with the directors who are not employees of the Com-financial statements. In preparing these state-pany. The audit committee meets with manage-ments, management makes informed judgments ment and internal au htors periodically to res iew and e(timates of the espected effects of events the work of each gr.up and to monitor each and transactions that are currently being group's discharge ofits responsibilities. The audit reported. committee also meets periodically with the The Company's system ofinternal accounting Company's independent auditors, Deloitte control is designed to proside reasonable assur-liaskins & Sells. The it'.ienendent auditors hase ance that assets a e safeguarded and transactions free access to the audit committee and the floard are esecuted according to management's author-of Directors to discuss i,temal accounting con-i/ation. Internal accounting controls also pro-trol, auditing and finar.cial reporting matters side reasonable assurance that transactions are without the presence of management. recorded properly, so that financial statements can be prepared according to generally accepted accounting principles. In addition, the Compa- / ny's accounting contmls proside reasonable as- / Q surance that errors or irregularities which could be material to the financial statements are pre-sent,'d or are detected by employees within a Dasid I.. Ilauser timely period as they perform their assigned ( an, e

I i ~\\g___ .)_ M j "(~ Management's Discussion and Analysis of \\ Results of Operations and Financial Condition Results ofOpnations Earniass arl Disidends Earnings per share increased 9 percent fmm in 1987 purchased power agreements with the $4.04 in 1986 to $4.40 in 1987. The increase was other Catawba joint m ners resulted in a signin. primarily the result of higher kilowatt hour sales cant increase in "Net interchange and purchased due to increased economic activity and tr pmer." This increase was primarily due to addi. weather cor.ditions. Consequently, the earned re. tional capacity and energy costs associated with turn on common equity rose to 14.2 percent the in-senice operation of Catawba Unit 2 for l from 13.7 percent in 1986. the entire year. (See Note 3. "Notes to Financia ! Earnings per share increased over the past five Statements") years at an annual rate of 4 percent, from $3.77 Fuel espenses were relatively stable from 1913 F in 1983 to $4.40 in 1987, through 1986. liigher production requirements The Company continued its practice of in, were erfset by a change in the generation mis and i creasing the common stock disidend annually, by increased energy needs being satisfied through Over the past fne 3 ears, common stock divi-purchased peer agreements with the other Ca-i dends rose at an annual rate of 4 percent, from taw ba joint owners. During this period, the three $2.32 in 1983 to $2.74 in 1987. Indicated annual nuclear units that were placed in senice reduced dividends per share were $2.80 in 1987, up 4 per, the cost per kilowatt hour for fuel. Fuel expense i cent from 1986. decreased in 1987 by 14 percent from 1986.This decrease was primarily d ue to an improved gener-Resenues and Saln ation mis coupled with a more significant por-Resenues increased at an annu.ly because of rate al rate of 11 per-tion of energy requiremer ts being satisfied i cent from 1983 to 1987 pn. man through power purchased from the other Ca. increases and higher kilmatt hour sales. During taw bajoint ow ners. this pened, both growth m economic actisity m t l the Piedmont Carolinas and the weather condi. Other income tions have caused kilowatt-hour sales, including Allowance for funds used during construction 3 electricity delivered to the other joint mners of (AFUDC) was li percent of eamings for com-l j the Catawba Nuclear Station, to increase at a 5 mon stock in 1987, decreasing from an average a percent annual rate. of 30 percent for 19!!3 through 1986. Comple. Kilowatt-hour sales for 1987, including deliv-tion of three nuclear units, the sale ofa portion of i cries to the other Catawba joint owners, rose 6 Catawba Nuclear Station and cancellation of I percent from 1986. Saks to all customer classes Cherokee Unit I caused AIUDC to decline oser increased oser 1986, with sales to residential cus-the past Sve 3 ears. AIUDC will continue to be a tomers increasing 6 percent. Testile and other in-relatisely small percentage of earnings for com-dustrial sales were 6 and 9 percent higher, respec-mon stock for the nest several years. { tisely, reflecting continued economic growth in Total non utility earnings during 1987 were 4 i our senice area. percent of total Company earnings, compared to [ 10 percent in 1986.1hese earnings decreased 57 Operating Espenses percent from 1986 primarily bceause of the 1987 I increased production requirements to support stock market losses. Major components of non-higher kilowatt hour sales haw caused operating utility earnings include interest and disidend in. expenses to nse at an annual rate of 12 percent come, appliance sales md senice, and subsidiarv i o(er the past fne > cars. Factors contributing to earnings. Oser the nest few years, the Compan'y this increase include the addition of three nu-espects the portion of earnings attributable to clear units, mereased maintenance at both nu. non-utility actisities to decline as temporarv l clear and coal 6 red stations, additional Nuclear 6nancial 'imestmer ts are reimested in utilit'v Regulatory Commission requirements and plant. 3

milation, j

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w w.nw-,en n .n n~mav e-m--my e n m m.n.v p-J ~ MLamm-_P O W.ER C O M. P A N N' O- -- ' a.as 0 - V IL E ~ P-1 la.. a-m .,. w. - O Liquidity and Rate Matters Resources in late 1986 the Company was granted rate in-courts. The Com pany estimates that the order, if creases in both North Carolina and South Caro-it becomes final, would hase a one time impact lina retailjurisdictions to recoser its inwstment on earnings of approximately $40 million. in Catanba Unit 2 and pay ments related to the While the Company is of the opinion that there purchased power contracts with the plant's are adequate legal and factual bases for its posi-other joint owners. The Company reduced re-tion, the Company cannot presently determine tail rates by 2.3 percent on January 1,1987, and the ultimate resolution of this matter, by an additional 3 percent on January 1,1988. These reductions are due to the impact of the Capital Structure lowcr corporate income tas rates included in the The Company's capital structure at year-cod Tax Reform Act of 1986. was 49 percent common equity, 41 percent In July 1987 the Federal Energy Regulatory long-term debt and 10 percent preferred and Commission approsed a 3.56 percent increase preference stocks. This capitalitation structure in the Company's V,holesale jurisdiction, reflec-is consistent with the Company's long term ting both the costs of Catawba Unit 2 and the financial goals. lower corporate income tas rate for 1987. A rate The Company's stock plans purchase com-reduction was requested in the Company's mon stock on the stock market to satisfy plan wholesale jurisdiction etfective January l,1988, requirements. For the next wseral rarN the 3 also reflecting the lower corporate income tas Company does not anticipate issuing common rate. stock other than for preference stock The Company was granted approsimately 52 comersions, percent of retail rate requests from 1983 through 1987. These rate changes included recosery of Additional Funds the Company's imestment in McGuire Unit 2 During the past tise >rars, the Company ob-tained addit onal funds of $999 million from i and in both units of the Catawba Nuclear Sta-tion, recovery or increased purchased pow er ano the sale of first and refunJing mortgage bonds operating ewnses. and reco cry of the imest-and $148 million from the sale ci p4eferred ment in the canceled Cherokee Nuclear Station. stock. The Company has not issued any com. Rate increases from 1983 through 1986 were mon stock for the past fise years except to satisfy partially offset by the rate reduction in 1987 re-the requirements ofits stock purchase plans and sulting from the lower federal tax rate, tFor ad-the comersion rights of preference stock. 'See ditional information on rate matters, see Note "Long Term Fiqancings and Sale of Assets"

2. "Notes to Financial Statements.")

page 41.i Certain parties appealed the 1985 and 1986 During 1987 the Company cominued its rate orders of the Nonh Carolina Utilities Com-refinancing actisities, which began in 1984, by mission to the North Carolina Supreme Court. refunding issues of higher <mt securities with On July 28,1987, the Court aUirmed the North lewer cost securities, thus reducing financing Carolina Utilities Commission's rate order of costs and providing substantial cost sasings in 1985. Because the issue of the collection of the 3rm ahead. The Conmany's embedded cost abandoned plant costs awociated with canceled of long term debt was lowered from 9.59 per-nuclear stations was decided by an esenly di-cent at year-end 1984 to 8.64 percent at 3rar-sided court, that issuc is being contested in the end 1987. The embedded cost of preferred stock appeal of the 1986 rate caw. While the Com. declined from 8.75 percent at the end of 1984 to pany is of the opinion that there are adequate 7.93 p:rcent at the end of 198 L legal and factual bases for the Company to pre. During 1987 the Company redeemed or re-7 I sail on this issue. the Company cannet pres-tired $294 million oflong-term debt and issued ently determine the ultimate sesolu: ion of this $305 million in long-term debt. The Company matter. inued $50 million of preferred stock in 1987 m The Federal Energy Regul;. tory Commission replace !11 million of higher cost preferred (i ERC), on July 28, 1987, granted without a stock. F uture refmancing actisities will depend hearir'g a motion made by the otherjoint own-on maatti conditions and presailing interest I ers of the Catawba Nuclear St:dion to exclude rates. (For additional information on the Com pany's capi alitation. see Notes 7,8,9 and 10, plant abandonment costs from their supple-t mental power rates The Company requested a "Notes to Emamia! Statements") reconsideration of the oroer, which FLRC de-In 1984 the Company received $457 million nied. The Company ;,ppealed the order to the from the sale of a portion of the Catawba Nu-pot M

e o t - s. gs -1x. -r clear Station to the Piedmont Municipal Power Funds From Operations Agency. Funds from operations accounted for 67 per-Church Street Capital Corp., c w holly owned cent of total sources of funds in 1987. The per-subsidiary, vcas formed in 198's to imest the centage of internally generated funds would Company's discretionary cash. As of December have been significantly higher if refinancing ac. 3 1987, Duke Power Company and Church tivities had been excluded. The Company is St2 91 had app oximately $185 million in short-funding the portions of purch:tsed capacity pay. ter, investments and $16l million in ments not currently collected in rates. These inte nediate term investments. payments represent an 8 percem reduction in total sources of funds. (For additional informa-Fixed Charges Cmerage tion, see "Purchased Capacity Leve iiation.") Fixed charges coverage, using the Secunties and Also, appm61ately S percent of total applica-Exchange Commission method, incirased to tions of funds is bemg used for construction of 4.49 times for 1987 compared to 4.26 times in the flad Creek flydroelectric Station. 19S6. This coverage is above the Company's The percentage ofinternally generated funds goal of 4.00 times. The increased coverage in still remains above the Company's goal of 50 1987 results from lower interest expense due to percent. refinancings. Capital Needs Property Additicas and Retirements Additions to property and nuclear fuel of $790 lina retail jurisdiction, regulatory treatment of million and r-tirements of $62 million resulted these contracts presides revenue foi the recosery in a net increase in gross plant of $728 million in of the capital costs and the fixed operating and 1987. maintenance costs of purchased capacity on a Since January 1,1983, additions to property levelized basis, in the South Carolina retailjuri!- and nuclear fuel of $3 $ billion and retirements diction, revenues are pnwided for the recovery of of $1.2 billion hase resulted in a net increase in the capital costs of purchased cofacity on a gross phnt of $2.3 billion. Unusually large retire. levelized basis, while the fned operating and men;5 occurred during the period because the maintenance costs are recovered in current Company canceled Cherokee Unit I and sold a rates. portion of the Catawba Nuclear Station. These rate treatments require the Company to fund ponions of the purchased power payments Construction Expenditures until these costs, including carrying charges, are Plant construction costs for generating facilities recovered at a later date. The Company will and for nuclear fuel, including AFUIX', de-begin to recoser the accumulated costs and car-clined from $48 I million in 1983 to $400 million r>ing charges when the purchased capacity pay-in 1987. These costs decimed prima ily because ments drop below the levelized resenues. the Company completed three generating units The levelized recovery of purchased pcmer ob-(McGuire Unit 2 in 1984; Catawba Unit i in ligations under contracts vith the other joint 19X5; and Catawba Unit 2 in 1986) canceled cmners of the Catawba Nuclear Station will re-Cherokee linit I and sold a portion of the Ca-sult in payments by the Company mer the ne.st tawba Nuclear Station. Comtruction work in three years exceeding the amounts collected in progress is espected to increase os er the next few rates tor such power by approsimately $199 Sears because os construction espenditures at the milhon. flad Creek !!)droelectric Station. Other Espenditures Punhased Capacity lxselliation in the past rive >vars. the Company has applied The rates (stablished in the Company 's retailjur-its funds to meturing and refunded securities and isdictions permit the Company to recoser its in-to construction expenditures. (See "Liquidity sestment in both units of the Catawba Nuclear and Resources 7 Station and the costs associated with contractual In June 1983 the Ccmpany paid a lump sum purchases of capacity from the other Catawba amount of $l22 million to the Department of C joint ow ners 1 he centracts re!at;ng to the sales of Energy under the terini of the Nuclear ESste portions of the station obligate the Company to Polisy Act of 1982. The payment was for the ol li-purchase power from the other joint owners on gation related to disposal costs for nuclear t vi an annually Jeelming basis. In the North Caro-consumed prior to April,1983.

mm-m mmyt P'Q . w w -w~~rw y r7-~~ m n-~ x . -C 0-M P) A : N 1Y 4 -1. T. 4 - ~.K U KfEa.u a ~ m c O E Tn Gc..a w,..www, w wm w-w-mua:w waa.~a m --mak 1 0 future Construction Program llecause the Company has complcted its nuclear spent. The estimated cost ef flad Creek is $967 construction program, construction costs for million. mfor generating facilities for 1983 thraugh 1990 Ileyend the completion of Ilad Creek, the will constitute a kmer portior of the Company's Company has no commitment to place a new total applications of funds than in the past fne gene ating plant in senice. The Company is cur-3rars, Projected construction and nu: lear fuel rently resiewing its options for meeting the need costs for the next three years are $2.9 billion. for future peak generating facilities. To keep its Construction of the llad Creek flydroelectric options open, the Company began the I; censing Station continued in 1987. Units I and 2 of the process for a new pumped storage hydroelectrie 1,000-megawatt puroped storage facility are plant on Coley Creek near the North Carolina-scheoeled for completion in 1991, with Units 3 South Carelina luder. No decision has set been and 4 in 1992. lly 3rar-end, $277 million.sas made to construct a plant at this site. Significant Trends While the Company's fmancial position im-charged for sen ice. I prosed oser 1986, the ablity to maintain An agreement was executed by the Company financial strength will depend on sestral facters. and the Aluminum Company of America Future trends in the Compan/s earnings depend ( ALCO \\) prosiding for the nuichase of the com-on economic conditions in the Piedmont Caroli-maa stock of Nantahala l\\mer & Light Com-nas. With an emphasis on operations. :he Com-pany (NP&L), a wholly owned subsidiary of pany will continue to stress system etheiencies A LCOA, at its net book value at closing. The net and cost reductions in preparation for a competi-book value was $26 million on December 31, tive ensironment. 1987. It ;s er.pected that NP&L will operate as a Subject to regulatory approval, Ihe Company separate subsidiary of the Company. Upon com entered mio a bulk power sale agreement to pro-pletion of a transminion line between the tws side Carolina l\\mtr & Light Company (CP&id systems, the Company w ill supply supplemental with 400 megawatts ofcapacity for a sis->rar per-power to NP&L under the t(rms of an intercon-iod beginning in 1992. 'Ihe customers of both nection aprecment. The agreements are subject utilities will benefit from a split-the-sasings rate to app oval by regulatory authorities. Construction costs htemsl cash genera _tg m a un w,a 7361 M0 690 4 4 679 7 g 67 4t Y t Act $$ B* + l 45 ' + M *+ t MkM 4 O h

) 1 {. { 't ,.sp . g *' s ; ,. 3 . y f *. . f' -( ~ L k Y V Long-Term Financings and Sale of Assets h meet its capital requirements, the Company has financed with long-term debt and equity securi-ties and has raised additional capital through other types of fmsacings plus the sale ofcertain assets. From 1985 through 1987, famrable market conditions prompted the Company to refund seseral is-sues of higher cost s curities with lower-cost securities in order to reduce fmancing costs. Financings ar..i sale of assets from 1985 through 1987 were as follows (dollars in thousands): 1987 19M 1985 Net No Na proceeds pramh pm.mh i Preferred stock

7. I 2% Series Q, $ 100 par (500,000 shares issued February 4)

$ 49,563 7.875% Series P, $100 par (500,000 shares issued hiay 15). $ 49.562 Adjustable Rate Series A, $100 par (500,000 shares issued hlay 28). 49.050 Total preferred stotk. 49,563 98.612 'i Long-term debt First and refunding mortgage bonds 7%% Series B duc 1997 (Issued h! arch 5). 9N,402 8%% Series due 2017 (Issued February 4). 147,464 77 % Series d ne 1996(Issued April 1). 98,812 j 9% Series due 2016(Issued hlay 15). 171,019 2 l 8%% Series B due 1995 (Issuec June 12). 124,175 ,f 10Vi% Series B due 2015 (Issued December 12) $ 49,279 i 12%% Series due 2015 (Issued April 1) '12),125 Pollution-control series 38.734 7.251 34.114 Total 284,600 401,257 206,518 Nuclear fuel trusts 77.M 57.597 57.638 Total long term debt. 361.988 458.854 _;!64.156 Total fmancings 411,551 557,466 264,156 Sale of assets. 23,496 1264JJ6 Total long term fmancings and sale of assets M35 047 $$57,466 4 t The Company's stock plans began purchasing stock on the stock market in the followir,g years to sat. b 1 isfy plan requirements: Stak market purchaws initiated Employees' Stock Ownership Plan. 1983 Stock Purchase-Savings Program for Employees. 1984 Disidend Reime.tment and Stock Purchase Plan. 1985 Customer Stock Furchase Plan. 1985 I I J re i I j PCE. 41 e

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..r q y ., au w w-n-w.- - - x-.uw - _= a ik wn.. g g. g-ip : g E - .R' C O / M L P. A c M V ; MW z w + Selected Financial Data 1987 1986 1985 1984 ive Condenwd statements of Income (thousands) Hect ic resenues. 53,705.784 $3,400,933 $2,898,911 $2,710,015 $2,420,252 Electric espenses. _J,047,82] 28&W 1310 826 1 161,914 _l,971,0.38 1 Electric operating i:.come - 657,957 584,776 528,035 548,101 449,214 Other income 72,902 127,880 163 821 161795 2133)1 1 Income before interes* deductions. 730,859 712,656 691,856 710,896 662,215 Interest deductions. 230,661 244,822 254,263 249 M __2J0.938 Net income 500,198 467,834 437,593 461,331 431.277 Disidends on p eferred and preference stocks 54,264 $8.767 60,912 61,786 62,600 Earnings for common stock. L445,934 $_409,067 $_376,681 $_399J4$ $ _J68,677 Common stock data Shares of common stock - > car-end (thouunds) 101,259 101,236 101,194 101,153 99,634 - average (thousands) 101,250 101,220 101,178 100,346 97,784 Per share of common stock Earnings $4,40 $4.04 $3,72 $3.98 $3.77 Dividends $2,74 $2.64 $2.54 $2.42 $2.32 Book salue - > ear-end $31.06 $30.34 $28,98 $27.80 $26.26 Market price - high-kn $51 N-39% $52 34's $361328% $304,22% $265-21 % - > car-end $42% $45% $35% $29 $25% llalance sheet data Ohousands) Total assets $8,511,794 $ 8,226,729 $8,024,163 $8,018,818 $7,379,44 Long-term debt. 52,723,382 $2.752,302 $2,721,041 $2,696,795 $2,745,88 Preferred stocks with sinking fund requirements $ 263,875 $ 221,991 $ 277,012 $ 285,426 $ 295,053 Electrie and other stathfies Kilowatt hour sales (millions) Residential 16,580 15,636 14,241 14,493 14,219 General sersice 13,026 12,312 11,338 10,922 10,339 Industrial. 24,974 23,212 21,837 21,821 20,907 Other energy and wholesale 10,171 9.353 8A42 7,163 8,686 Total kilowatt hour sAs(a) _ _ 64,751 _60,$ i 3 56,048 _ 54,399 54,151 Residential customer data Average annual RWil use 12,830 12,413 11,659 12,210 12,278 Aserage resenue billed per KWil. 7.40c 6.96c 6.42c

6. l l e 5.67c Sources of energy (millions of KWIi)

Generated - Coal 23,617 30,249 27,619 26.394 32,466 - Nuclear (b) 44.N10 35,044 33,700 32,612 25,059 - lly dro I,454 771 1,162 1,995 2,114 - Oil and gas (1) 14 13 8 Tota' generation 69,880 66,078 62,494 61,021 59,647 Purchased power and net interchange f (x22) (1,742) p,908) _ 1 003) Total output 69,885 65,256 60,752 58.113 58,644 Less: Other Cataw ba joint ow ners' share 11,961 6.261 3.827 Plus: Purchases from other Catawba joint owners 10,N72 5,923 3,769 Total sources of energy 68,796 64,948 60,694 58,i13 58,644 1 ine low and Company usage 4,045 4,4]f 4,n26 3,714 4J9] ~Iotal Likrautt. hour sales (a) 64,751 fg5IJ 4058 54,399 $4,l_5 System aserage heat rate 10.024 9.881 9,900 9,853 9,7 t> System h>ad factor 62,5N $9.h% $5.8% 62.2% 58 6 o (a) Eu indes a twrion of the enerey w!J to the orherjoint on nen of Ihe Cata n fu h tw Starion. (19 Indudes ltwu of Catan tu generation rva e

.;-,4 , ~,.- -.-, _.,n - - - m g,. N J ba,8 M iu kb Selected Financial Data Quarterly A summary of quarterly fmancial data for 1987 and 1986 is as follows (dollan in thousands, except Financial Data per4 hare data): I testne O vradng Net ianung l'tett ne i Resenues income income is r Nhare 1987 by quarter fourth $ h9S,769 $ 144,047 $ 92,740 $0.78 ' third 1.036,685 202,641 165.013 1.50 Second 857,750 133,254 102,763 0.88 First 912.580 178,015 139,68.' !.24 { 1986 by quarter l fourth 5 842,959 $ 124,025 $ 92.077 $0.77 ihird 940.551 181,979 152,530 1.37 Second 784.016 119.208 89.820 0.73 Fint 833,407 159.564 133.407

1. l 'i Generally, quarterly earnings Duetuate with seasonal weather conditions, timing of rate chanFes and maintenance of electric generating units, especially nuclear units.

Stock Market Ihe Company had approxin'ately 105.107 holders of record of common stock as of December 31. Information 1957, and 10$ 045 holders as of December 31,1986. During 1987 approsimately 60.550,700 shares of eommon slos k were traded, compared with 49.499,000 during the presious year. The company's common stock prices, as quoted in the New York Stock i u hange Composite t ransactions and dis i- ,y ( ) dends paid are as follows: t h udends 3t.d Pme Range. Ihudends .% d l'nic H.inge Per Share ligh !im is r Share 11wh Iim 1987 by quarter 1956 by quarter f ourth $0.70 $50'4 $40's Fourth $0 67 $49'i $44 lhird 0.70 48'4 43'i Ihird 0 67 52 41'4 I second 0.67 46's 39'i Second 0.65 45'. 39's first 0 67 51'4 4 514 Iirst 0.65 41's 34's l Subsidianes Ibt!.ars in t houunas , _ _ _I_n { 136_ Subsidiary Property and inu stments - at cost imestments Real estate. recreational and land development $45.950 $44.823 Net current assets principally insestments, receisables and msentones 56,469 _47/]61 lotal assets f 02,410 92 284 Deferred income lases _(8,777) _(7p31 ) Total liabilities .(8 177) _ (7p31) Insestments in and adsances to subsidiaries $43p33 $S$,153 l l l Rctla rs the comnmn wwmohd.acJ udn:d:ar:n b; x I I i f i l'\\(it 41

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C.rp wan. e 4 Imas t Cunmitter Ollicers wiiiiam s. t ce J. Kenneth Clark Richard B. Prior) Sue A. Becht t u man,1zu h w Jand l h r heuJem Ca m ewe i u hens w t w en Avnwea treauen ( ks I na wo< o*% a Communu a:u vu I nemme (,arohn R. Duncan Douglas W. Booth Wuham A. Cole) Wilham R. Stimart .c ondi %ucan tw ua.w ad ( w ofca.mg Ihc Brudem crad Iaeheu.um A nis.ri W,. Bruce Shannon oso n u u.w .4 %n s uaav tr w w a Wilham 11. Gngg Rotxrt L DNL George E. StubNns r an wn, ru tw usw s h r hcuaw Co,nr% ru c s u bcusw iv., uru, Phylbs T. Simpwn lassead Comnauaw arl \\lmerwn.e M uemn 4 nWm' %W'n r Warren 11. Owen George W. Ferguson, Jr. Ital B lucker r ugene C. Sites i sa ws< i u r No.sw i u tw,.sw ana npur s u tw ust su.ics t u. nan: Conm os i w.,u, (. :m rm aa s.cnoal Cou,s ha.n..,anmmaa ilansel D. Whitle, 9%ha :u *I h m p y 4, (,, llenr> L Cranford i n hos.w %een s u rwosw c on.m ggg swr s u bcusw nuum ni r u. m Rkhard(. Ranson n w e opmanen James W. Foster James %; White hru./.* Donald 11. Denton. Jr i A r ho sw ns em i a f w,,a., o,.,w ( reuw f aWd Tv'M %% s l u hoJou 9,n, g flAmald t flatley ( c,e sisemg aw xaro ru &cus* C. Joe Shemil W. L Robertwn. Jr. Stese C. Gnthth. Jr sww 4 % m ea,,, i y pga,,, Iw~ Jar %s < s u sw+sw aa 1,,,,m u,, ss an,, I livrt N. llatgepeth, 3t,:/ rwe s..pg, C wn, o.mgal( t 3,.,,, J r. Wilham 11. Grigs ' John D. Ilxks e u /wua.w o war

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g i u tw.uu.a u o., A Parks Cobh. Jr James R. Be n n"+* Daid L llauser /wem i u r%.aou riv%, ( o,,,,, cg I,aul G hlartm o w /ornen u a g,,,,, n sa twwawiauen Rkhard j. Osborne W o lm Ihomas C. Berry nuva rr, our iAe heusett4wt8imt John P Ol.ecfe +/ rorae r.%n i im n, 4., i u ho su 1.oo Shem K. Ih kley. Jr Wilham O, Parker. Jr s a tvua.* n,,- a Ralph W. L, tun tw a n eamou a u ( /m.a. eu t> g. s u m ' John la llu 6 reurcJ leruars I,19a as Jg. %.rn *v nr,.c ment rn for and scruor s u e prcudera for vid la a*fatn a ter 30 tears n ah liuke ikser l'orn. r hu,i tir flu k s wuicJ lu ke in Iv$ ' and nas u namcJ os the Ito irJ or istres ton on lum l>ur, m lui tenure. tir Ith 6 venJcicJ Jutin. eut fed sen u c a nd vot aanam lcader ship to the ( e tnpJni s PV.E 44

i l \\ Other Information Noticeof annualmeetlas sEc Form io-K and statistical supplement The 1988 meeting of holders of Duke Power Upon request, the Company will proside Company common stock will be held without charge a copy ofits 1987 Annual l Thursday, April 28, at 10 a.m. in the O.J. Report to Shareholders on Form 10 K as hiiller Auditorium of the Electric Center, filed with the Securities and Exchange Com. i 526 South Church Street, Charlotte N.C. mission. Also available without charge is the Statistical Supplement to the 1987 Annual Report. Requests for these documents n n k only: should be directed to Rhem Wooten, Shareholder Senices imestor Relations, Duke Power Company, Duke Power Company P.O. Box 36426, Charlotte, N.C. 28236. P.0, Box 36426 Shareholders may call Imestor Relations at Charlotte' N'C' 28236 373-4579 (Charlotte) or at the following toll free numbers: 1800 532 0492 (North All Stocks. Car fina); l 800 438-0142 (elsewhere in the htorgan Siiareholder Senices United States). Trust Company 30 West Broadway Imestor senices New York, N.Y.10015 Duke Power Company offers sestral senices for investors. The Stock Purchase and Dividend Reimestment Plan, available to 1 all shareholders and Duke Power electric l o in Stock only: First Union National Bank customen, prosides a comement way to buy f North Carolina shares without incorring brokerage fees. Direct Deposit of Disidends automatically .12 South Tryon Street credits dividends to shareholders' checkin'g lotte, N.C. 28281 rsavingsace untson thesamedaytheyare paid. And the Small Shares Repurchase Senice allows imestors with fewer than 50 i rgan reholder Senices shares to close their accounts by selling the shares directly back to the Company, f0\\\\,oP{. Sharrholders with questions about any of "$t Bma New York, N.Y. I'0015 these senices can call lmestor Relations at the above numbers. Stock exchange listing N Duke Powei Company common stock is $e 1 87 nual Report is available on listed and traded on the New York Stock Exchange. The trading symbol is DUK. audio and video tape. For copies, write Duke Power Company, Corporate Commu-nications, P.O. Box 33189, Charlotte, N.C. 4 1 Corporate headquarters 28242. 422 South Church Street P.O. Box 33189 J Charlotte. N.C. 28242 [ 704/373-4011 1 1 r- .,,-_..---,,---.y-.__------..__---,,__,___-.,,,_c-m-- rm ,m.,

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fl SECURITIES AND EXCHANGE COMMISSION WASillNGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECI'lON 13 OR 15(d) OF Tile SECURITIES EXCIIANGE ACT OF 1934 For the fiscal year ended December 31,1986 Commission File Number: 1-4928 Duke Power Company (Esact name of registrant as specified in its charter) North Carolina 56-0205520 tState or other jurisdiction of (IRS Emplo>er incorporation or organization) Identification No.) 422 South Church Street Charlotte, North Carolina 28242 t Address of principal esecutise offices) (Zip Code) 704-373-4011 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Name of each eschange Iltle of each claw on which registered Cemmon Stock, without par salue New York Stock Exchange Preferred Stock. par salue $100 8.70% Senes F New York Stock Exchange 8.20% Senes G New York Stock Eschange 7.M1% Senes 11 Nev. York Stock Eschange 5.25% Senes K New York Stock Eschange 8.54% Senes NI New York 5tock Eschange [m\\ t.64% Senes N New York Stock Eschange . k. Preference Stock. par salue $100 6' 4% Cons ertible Senes A x New York Stotk Exchange first and Refunding N1ortgage Bonds 7% Senes H Due 2NI New York Stock Exchange 7% Senes Due 2002 New York Stock Eschange 7% Senes H i)ue 2002 New Yet( Skxk Eschange 7% %cnes Due 200.1 New York Stock Eschange 8% Senes B Due 200.1 New York Stock Exchange 9% Senes Due 2004 New York Stock Eschange 9::N Senes Due 2005 New York Stock Exchange 8' % Senes ()ue 20n6 New York Stock Eschange 8% Senes Due 2007 New York Stock Eschange 9% Senes Due 'im New York Stock Eschange 10% Series Duc 2009 New York Stock Eschange Securities registered pursuant to Section 12(g) of the Act: litle of Clau Preferred Stock, par value $100 Indicate by check mark whether, e registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Es.hange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes __Z No _ Estimated aggregate market value of the voting stock held by nonaffiliates of the registrant at February 27,1987. $ 4,685,355,938 Number of shares of Common Stock, without par value, outstanding at February 27,1987.. 101,245,571 Documents incorporated by reference: The recistrant has incorporated herein by reference certain sections of its proxy statement relating to the 1987 annual meeting of shareholders to provide information required by the following parts of this annual report: Part 111 -Item 10., Directors and Executive Officers of the Registrant O'w/ -Item 11., Executive Compensation -Item 12., Security Ownership of Certain llenclicial Owners and Management -Item 13., Certain Relationships and Related Transactions ~... ~.

DUKE POWER COMPANY {- FOR31 10.K \\ ANNUAL REPORT TO TIIE SECURITIES AND EXCilANGE CO31511SSION FOR TIIE YEAR ENDED DECESIBER 31,1986 r J TABLE OF CONTENTS !L= f*E PARTI. 1. Business..... 1 Executive Officers of the Company...... 12 2. Properties.. 13 3. Legal Proceedings.. 1.5 4. Submission of hiatters to a Vote of Security Holders........... 13 PART II. 5. blarket for the Registrant's Common Equity and Related Stockholder hiatters......... 13 L s 6. Selected Financial Data.. 14 i 7. hianagement's Discussion and Analysis of Financial Condition and Results of Operations.. 15 8. Financial Statements and Supplementary Data................... 20 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 43 PART III. i 10. Directors and Executive Officers of the Registrant.............. 43 11. Executive Compensation.. 43 12. Security Ownership of Certain Beneficial Owners and hianagement.. 43 I 13. Certain Relationships and Related Transactions.............. 43 PART IV. 4 14. Exhibits, Financial Statement Schedules, and Reports on Form 8.K. 43 4 Signatures... 45 Exhibit Index............. 46 i l pb

DUKE POWER COMPANY PARTf. N ltem 1. Business. Duke Power Company (the Company) is engaged in the generation, transmission, distribution and sale of electric energy in the central portion of North Carolina and the western portion of South Carolina, comprising the area in both States known as the Piedmont Carolinas. Its service area, approximately two-thirds of which lies in North Carolina, covers about 20,000 square miles with an estimated population of 4,400,000 and includes a number of cities, of which the largest are Charlotte, Greensboro, Winston-Salem and Durham in North Carolina and Greenville, Spartanburg and Ander-son in South Carolina. During 1986, the Company's electric revenues amounted to approximately $3.4 billion, of which about 70% was derived from North Carolina and 30% from South Carolina. The Company ranks seventh in the United States among investor-owned utilities in kilowatt-hour sales. Its executive offices are located in the Power Building,422 South Church Street, Charlotte, North Carolina 28242 (Telephone No. 704-373-4011). Senice Area The Company supplies electric service directly to approximately 1,483,000 retail customers in more than 200 cities, towns and unincorporated communities in North Carolina and South Carolina. Electricity is sold through contractual arrangements to North Carolina h1unicipal Power Agency Number 1 (NCh1PA) North Carolina Electric hiembership Corporation (NCEhtC), Saluda River Electric Cooperative Inc. (Saluda) and Piedmont hiunicipal Power Agency (Ph1PA), each of which has purchased from the Company portions of the Catawba Nuclear Station (collectively, the Catawba Joint Owners). All constituent entities of the Catawba Joint Owners were formerly wholesale munici-pal or cooperative customers of the Company. Electricity is also sold at wholesale to 9 other incorpo-rakd municipalities and to several private utilities. The Company renders electric service in a total of p 56 counties and is the principal suppher of electric energy in 44 of these counties. 'd The Company's service area is undergoing increasingly diversified industrial development. The textile, tobacco, furniture and chemical industries are of major significance to the economy of tne area, and other industrial activity includes the manufacture of metal products, paper and allied products, food products and various other light and heavy manufacturing and service businesses. The largest industry served by the Company is the textile industry, which accounted for approximately $472 million of the Company's revenues for 1986, representing 14% of electric revenues and 44% of electric industrial revenues. Energy Requirements and Capability The following table sets forth the Company's generating capability at December 31,1986, its sources of electric energy for 1986, and certain corresponding information presently projected for 1987: Generating Capability - KM(a) Gennation - KM 11 (miUionO Projected Actual December 31, .setual Projected December 31,1986 1987 1986 1987 Murce Coal. 6,393.000 6,522,000 30,249 19,977 Nuclear (b). 7,170,000 7,170,000 35,044 45,461 Hydro and other. 2.051.000 2,051,000 _ 785 1,701 Total (b). 15.614.000 15.743.000 66,078 67,139 Less: Catawba Joint Owners' share. 6,261 12,579 Plus: purchases from Catawba Joint Owners.. 5,953 11,421 Purchased power and net interchange. (822) (528) q Total. 64,948 65.453 Q n:w-na rw I

(a) The data relating to capability does not redect the possible unavailability or reduction of capabil-ity of facilities at any given time because of scheduled maintenance, repair requirements or regulatory restrictions. (b) Nuclear capability and related generation for 1986 and projected for 1987 give no effect to the sale of portions of the Catawba Nuclear Station. (See "Joint Ownership of Facilities.") According to industry statistics through 1985, the Company rar.';ed first in the nation for the last 12 consecutive years in terms of efnciency of its steam-fossil generating system as measured by the conversion of fuel energy to -lectric energy. Published rankings indicate that one of the units at the Belews Creek Steam Station was the most eflicient in the nation in 1985. A Company station has been ranked Grst in efGeiency in 18 of the last 20 years through 1985. Statistics supplied to the Nuclear Regulatory Commission (NRC) by utilities demonstrate that the Company's hicGuire and Oconee Nuclear Stations were the most eDicient pressurized water reactor nuclear facilities in the nation in 1984 and ranked Orst and third in 1985. The Company normally experiences seasonal peak loads in summer and winter which are rela-tively in balance. On January 21,1985, the Company experienced its all-time peak load of 12,687,000 KW during record cold weather, The 1986-1987 winter peak load of 11,451,000 KW occurred on January 27,1987. The 1986 summer peak load of 12,471,000 KW occurred on July 21,1986 during a relatively hot summer. The 1985-1986 winter peak load of 12,586,000 KW occurred en January 28, 1986 and the 1985 summer peak load of 11,204,000 KW occurred on September 10,1985. The Company currently forecasts between 2.1% and 3.0% compound annual growth in peak load through 2000. Rate Matters The North Carolina Utilities Commission (NCUC) and The Public Service Commission of South Carolina (PSC) must approve the Company's rates for retail sales within the respective States. The Federal Energy Rcgulatory Commission (FERCi must approve the Company's rates for sales under its wholesale rate schedules. Constituent entities of NCN1PA, NCENIC, Saluda and Ph1PA are served under contractual arrangements between such entities and the Company. For a summary of rate information since January 1,1984, see Note 2, "Notes to Financial Statements." Rate requests Gled by the Company in 1986 with the NCUC, PSC and FERC were principally designed to reDect the Company's investment in Unit 2 of the Catawba Nuclear Station and the costs related to purchased power contracts associated with portions of the Catawba Units that have been sold. Rate orders issued by the NCUC and the PSC allowed the Company to recover all costs related to Catawba, although certain non-fuel purchased power costs, with associated carrying charges, will be recovered on a levelized basi;. In 1986, the NCUC allowed a jurisdictional rate of return on common equity of 13.40% and the PSC allowed a jurisdictional rate of return on common equity of 13.00%. On January 1,1987. the Company implemented a 2.3% rate reduction in its retail jurisdictions. The decrease reRects the lower corporate tax rates due to the Tax Reform Act of 1986 and has been approved by the NCUC and PSC. The Company canceled certain nuclear projects in prior years, including the Cherokee Nuclear Station, citing a slower growth in the demand for electricity, a changing pattern ;r. that growth and more economical means of meeting such changed pattern as reasons for such cancellation.The NCUC and the PSC have authorized the Company to recoser over a 10-year period the costs of abandon-ment of the Cherokee Nuclear Station in recent rate proceedings. Similarly, rates including such abandonment costs are also in effect in the Company's wholesale jurisdiction. Ilowever, no return was allowed on the unamortized portion of such costs. (See Note !!. -Notes to Financial Statements.") Certain mtersenors including the Attorney General of North Carolina, hwe appealed the rate orders of the NCUC in recent rate proceedings. The appellants seek revision or modi 0 cation of such 2

orders in addition to refunds and have raised a number of issues, including the authority of the NCUC to permit recovery by the Company of costs incurred with respect to canceled construction (m') projects and the prudence and reasonableness of pricing amendments to agreements relating to the sale of the Catawba Nuclear Station to the Catawba Joint Owners. While the Company believes that there is an adequate legal and factual basis for each aspect of the decisions of the NCUC, the ultimate resolution of the appeals cannot be predicted. The Catawba Joint Owners have objected to the inclusion of the abandonment costs of nuclear projects in the calculation of their rates and have been negotiating with the Company in this respect. The Company does not anticipate that this matter will have a materially adverse effect on its fmancial position. Fuc/ Cost Adjustment Procedures. The Company has procedures in all three of its regulatory jurisdictions to adjust rates for fluctuations in fuel expense. The NCUC order issued in August 1986 revising its fuel adjustment methodology to include a factor that effectively allows recovery of all prudently incurred fuel costs was reversed in an appeal involving another utility, which remains pending. The ultimate outcome cannot be ascertained at this time. Construction li'ork in Progress (Cil7P). The NCUC is permitted in its discretion to include consuuction work in progress in rate base after giving consideration to the public interest and the Company's financial stability. The PSC may include CWIP in rate base in its discretion. Energy Stanagement The Company currently is engaged in a comprehensive energy management program designed to reduce the growth in peak demand without restricting the continued economic development of the Company's service area and increase oft-peak sales. Peak reduction programs include, among other things, promotion of energy-emeient building structures and appliances, use of residential conserva-tion rates, use of interruptible rates for large customers, control by the Company (with customers' consent) of residential electric water heaters and air conditioners during peak demand periods and time-of-day pricing to a limited number of customers. The current and planned aspects of such programs are designed to reduce the growth in peak demand by approximately 4,257,000 KW in the summer of 1999 (from estimated peak demands at those times without energy management) and to j enhance generating reserve margins through the ability to interrupt approximately 1,177,000 KW in 1999. OIT peak sales programs include promotion of electric end uses such as high efficiency electric heat pumps a'id outdoor lighting to increase seasonal and daily off-peak sales. Through 1990, the Company estimates a minimum reserve margin of approximately 20% ofits anticipated peak load requirements. (for information about the Company's peak loads, see "Energy Requirements and Capability ") Construction Program The Company, utilizing its own construction and engineering force, carries on a continuous construction Program. Such construction program ard the estimated construction costs set forth l below (a substantial portion of which has already been committed) are subject to continuing review l and are revised from time to time in light of changes in load forecasts, the Company's fmancial l condition (including cash flow, earnings and levels of rate increases), changing regulatory and envi-ronmental standards (see "Regulation - Environmental Matters") and other factors. l l l t r 3 i

Estimated Costs Projected constrection and nuclear fuel costs, excluding costs related to portions of the Catawba Nuclear Station that have been sold, for each of 1987,1988 and 1989 and for the three-year period 1987-1989, as now scheduled, are as follows (in millions of dollars): Type of Facilities 1987 1988 1989 Total Generation. $265 $299 $293 $ 857 Transmission. 50 46 41 137 Distribution. 233 233 253 719 IDther.. 163 142 119 424 T otal. 5711 $720 $706 $2,137 Nuclear Fuel. $143 $156 $193 $ 492 The Company's procedures for estimating construction costs (which include allowance for funds used during construction) utilize, among other things, past construction experience, current construction costs and allowances for innation, The Company has experienced higher costs of construction of new facilities as a result of recurring increases in the costs of materials and labor, and increasing capital commitments attributa-ble tc more stringent regulatory requirements. However, the Company believes that in recent years it has been able to construct generating units at a lower cost per KW than generally experienced by other utilities for units of comparable type and vintage. The construction cost per installed KW for the Catawba Nuclear Station, Unit 2 of which began commercial operation in August 1986, was $1,560 at the date of commercial operation. Facilities Under Construction The Company currently has under construction the Bad Creek Hydroelectric Station, a four-unit, 1,000,000-kilowatt pumped storage facility in Oconee County. South Carolir.:.. Units 1 and 2 are scheduled for operation in 1991 and Units 3 and 4 in 1992. As of December 31,1986, ti.e Company had incuned $158.4 million of the total estimated cost of $1.0 billion, with construction costs of $1,008 per installed KW anticipated for this facility. Joint Ownership of Facilities In order to reduce its need for external Anancing, the Company, through several transactions beginning in 1978, sold an 874% undivided interest u. the Catawba Nuclear Station to the Catawba Joint Owners. These transactions contemplate that the Company will operate the facility, interconnect its transmission system, wheel a certain portion of the capacity and energy of such facility to the respective participants, provide back-up services for such capacity, buy for its own use (whether or not the facility is generating electricity) that portion of the capacity not then required by the respec-tive participants, and provide supplemental power as required by the purchasers to enable them to provide service on a Orm basis. The transactions also include a reliability exchange between the Catawba Nuclear Station and the 51cGuire Nuclear Station of the Company, which provides for an exchange of 50% of each Catawba Joint Owner's retained capacity from its ownership interest in the Catawba Units for like amounts of capability and output from units of the hicGuire Nuclear Station. The implementation of the reliability exchange has not had nor does the Company anticipate that such implementation will have a material effect on earnings. The levelized recovery over the next Ove years of the costs of purchased power from the Catawba Nuclear Station under contracts with the Catawba Joint Owners permitted by regulatory authorities will result in payments by the Company exceeding the amounts collected in rates for such power by approximately $340 million (see "Rate 51atters"). O 4

Fuel Supply O The Company presently relies principally on nuclear and coal for the generation of electrie yl energy. The Company's reliance on oil and gas is minimal. Information regarding the utilization of sources of power and cost of fuels is set forth in the following table: Merage Cost per.xlillion HTU Generation by Source on a Hurned Hasis Year Ended December 31 Year Ended December 31 1986 1985 1984 1986 1985 1984 Coal.. 45.8% 44.2% 43.3% 189.64' 194.96' 199.06' Nuclear. 53.0 53.9 53.5 65.57 64.71 61.40 Oil and Gas.. 410.74 543.49 562.59 All Fuels (cost based on weighted aserage). 98.8 98.1 96.8 120.32 121.39 121.24 flydroelectnc* 1.2 J 3.2 100.0% 100.0% 100 0%

• Generating figures are net of that output required to replenish pumped storage units during off-peak periods.

Coal. The Company obtains substantially all ofits coal under long-term supply contracts with mining operators utilizing both deep and surface mining. The Company has on hand an adequate supply of coal. The Company's long-term supply contracts, all of which have price adjustment clauses, have expiration dates ranging from 1993 to 2003. The Company believes that it will be able to renew such contracts as they expire or to enter into similar contractual arrangements with other coal suppliers. The coal covered by the Company's long-term supply contracts is produced from mines located in [\\ eastern Kentucky, southern West Virginia and southwestern Virginia. h The average sulfur content of coal being purchased by the Company is apprc,x;mately 1%. Such coal meets the emission limitation for sulfur dioxide for existing facilities (see "Regulation - Enri-ronmental Matters"). Nuc/ car. Generally, the supply of fuel for nuclear generating units involves the mining and milling of uranium ore to produce uranium concentrate, the conversion of uranium concentrate to uranium hexafluoride, enrichment of that gas and fabrication of the enriched uranium hexafluoride into usable fuel assemblies. After a region (approximately one-third of the nuclear fuel assemblies in the reactor at any time) of spent fuel is removed from a nuclear reactor, it is placed in temporary storage for cooling in a spent fuel pool at the nuclear station site. The Company has contracted for uranium materials and services required to fuel the Oconee, McGuire and Catawba Nuclear Stations. Based upon current projections, these contracts will meet the Company's requirements through the following years: Uranium Coniersion Enrichment Fabrication Nuclear Station Material Senice Senice Senice Oconee. 1992 1992 2014 1995 McGuire.. 1992 1992 2014 1995 Cataw ba. 1992 1992 2014 1995 Approximately 75% of the Company's requirements for uranium material is expected to be obtained from Rio Algom, Ltd., a Canadian supplier. Deliveries to the Company by such supplier, which began in 1981, are subject to permits and export licenses from various Canadian governmental agencies, including the Atomic Energy Control Board, the Department of Industry, Trade and Cort-merce and the Uranium Exports Review Panel. The Company purchased uranium material during 1986 at an average price of approximately $29 per pound. The Company's material nuclear supply contracts generally contain force majeure I.) provisions and provide for price escalation under certain conditions. \\ 5

The Nuclear Waste Policy Act of 1982 requires that the Department of Energy (DOE) begin disposing of spent fuel not later than January 31,1998. The Company presently has adequate storage capacity for spent fuel at Oconee until 1992 and at Catawba until well after 1998. The Company has received regulatory approvals which will enable it to provide adequate storage capacity at McGuire beyond 1998. Consideration is being given to expanding capacity at Oconce to provide adaquate storage until 1998 through transshipment of spent fuel between stations and through the use of developing storage technologies such as rod consolidation and dry cask storage. The Company has entered irto the required contracts with DOE for the disposal of nuclear fuel and began making pay ments in July 1983 for disposal costs of fuel currently being utilized. A one-time payment of $ 122 million was made on June 28.1985 for disposal costs of fuel consumed prior to April 7,1983. The U.S. District Court fe.r the District of Colorado issued orders in a case not involving the I Company prohibiting enrichment by DOE of uranium of foreign origin, which orders, if they become final, would void enrichment contracts between DOE and certain utilities, including the Company. I Such orders hase been appealed to the U.S. Court of Appeals for the Tenth Circuit where the prohibition against enrichment was stayed pending further order of the Court. The Company believes j that regardless of the outcome of the litigation it can continue to obtain necessary enrichment services I for its uramum of foreign origm on a reliable and economical basis. j i l Regulation l The Company is subject to the jurisdiction of the NCUC and the PSC which, among other things, I must approve the issuance of securities. The Company also is subject, as to some phases of its business, to the jurisdiction of FERC, the Environmental Protection Agency (EPA) and state environ-mental agencies and to the jurisdiction of the NRC as to design, construction and operation ofits nuclear power facilities. Emironmental Mancrs. The Company is subject to Federal, state and local regulation with i I respect to environmental matters, including air and water quality. All of the Company's facilities which are currently under construction base been designed to comply with presently applicable environmental regulations. Such compliance has, however, increased the cost of electric service by requiring changes in the design and operation of exis.ing facilities. as well as changes or delays in the design, construction and operation of new facilities. The Company's 1987-1989 construction program includes costs for environmental protection (as now defined by FERC) which are estimated.o be approximately $75 m.llion, including $32 million in 1987 and $28 milhon in 1988. However, gosernmental regulations establishing environmental protection standards are continually evolving and have not, in some cases, been fully established. Therefore, the Company may have to revise these estimates in response to deselopments in these and other areas. AIR Qt' At in. in 1971, pursuant to the Clean Air Act of 1970(the 1970 Act) EPA promulgated primary and secondary ambient air quality standards with respect to certain air pollutants including particulates, sulfur oxides and nitrogen oxides. Pursuant to such regulations. North Carolina and South Carolina have adopted implementation plans, which have been approsed by EPA, containing air emission standards which were generally designed to achieve the primary ambient air quality standards by 1975 and the secondary ambient air quality standards within a reasonable time thereaf-ter. The Company belieses it is presently in substantial compliance with such implementation plans. The 197' amendments to the 1970 Act include, among other things, authority for EPA to impose substantial delayed comphance penahics for failure to comply with apphcable emission limitations after July 1,1979 and cisil penalties of up to $25.000 per day for facilities found to be in violation of an appheable implementation plan prosision. The Company operates its coal-tired generating stations in North Carolina under a revised regulation which prescribes mass emission limits for particulates for each boiler unit. Such regulation was issued by the Nortl' Carolina Ensironmental Management Commission (EMC) and was submit-ted to EPA for approsal as a resision to the state implementation plan. In 1983. EPA published notice of its proposal to approse the new mass emission hmits contingent on an additional submis-sion by the State to document :omphance with regulations for presention of significant deterioration 6

of air quality. The Company completed in 1986 extensive air quality modeling studies which demon-g strated that the proposed mass emission limits for the Company's plants would comply with these t regulations as well as the National Ambient Air Quality Standards. The Company could incur substantial capital costs for pollution control equipment if EPA fails to approve the mass emission limits. Additionally, iflegislation relating to air quality being considered by Congress is enacted, a reduction in sulfur dioxide emission limits for electric utility boilers might be required. WATER QUALITY. The l'ederal Water Pollution Control Act Amendments of 1972 require permits to ensure compliance with its provisions. The Company has received such permits. OTHER ENVIRONMENTAL REGULATIONS. North Carolina has enacted a declaration of environ-mental policy requiring all State agencies to administer their responsibilities in accordance with such policy. The NCUC has adopted rules requiring consideration of environmental effects in determining whether certiGeates of public convenience and necessity will be granted for propo ed generation facilities. Legislation in South Carolina also requires consideration by the PSC of environmental effects in determining whether certiGeates of public convenience and necessity will be granted for proposed generation and certain transmission facilities. North Carolina and South Carolina have adopted regulations implementing the Resources Conservation and Recovery Act which are in com-pliance with such Act. Polychlorinated biphenyls are regulated by provisions of the Toxic Substances Control Act. The Company has implemented procedures to comply with the Act. The Comprehensive Environmental Response, Compensation and Liability Act of 1980, known as "Superfund", became law in 1980. It requires the reporting of releases of hazardous substances into the environment and the notiGeation to EPA of hazardous waste facilities that are not subject to other regulations. The Company has implernented reporting procedures in order to comply with the Act. Title 111 of the Superfund Amendments and Reauthorization Act of 1986 (SARA) establishes the f Emergency Planning and Community Right-To-Know Act. Title !!! imposes requirements on a wide \\ range of facilities to report information regarding the presence and release of speciGe chemicals to state and local emergency planning authorities. The Company is presently implementing procedures to comply with SARA. GENERAL. The Company cannot estimate the efTect of existing and potential regulations upon any of its existing and proposed facilities. However, developments in these and other areas of regulation have in the past required the Company to modify or replace equipment and may in the future delay construction and operation of new or existing facilities at costs which could be substantial. Nuc/ car Faciliti s. The Company's nuclear facilities are subject to continuing regulation by the NRC. The NRC requested the Company to study its Oconee reactor vessels for thermal shock effects of emergency core cooling system operations during a loss of feedwater event, as well as other transients which might induce rapid overcooling of the system. An analysis of the Oconee units conducted by the Company and the manufacturer, Babcock & Wilcox Company, have indicated that the vessels as constructed are adequate to permit safe operation for the remainder of their projected licensed lives. In addition, the NRC has requested that an owner group consisting of representatives of the owners of reactors manufactured by Babcock & Wilcox Company conduct a study in response to two operational incidents, unrelated to the Company, which occurred in 1985. The study will encompass the overall safety of these reactors and is expected to be completed by mid-1987. The results of the study will then be reviewed by the staff of the NRC. The present position of the NRC staffis that the units can operate safely pending completion of the study and its review. The Company currently has insured against public liability claims resulting from nuclear inci-dents to the full $695 million limit on liability under the Price-Anderson Act. The maximum i available private insurance of $160 million has been purchased and the remaining $535 million has been provided through a mandatory industry-wide program of selfinsurance, under which licensees 7

i could be assessed in the event of a nuclear incident involving any licensed facility in the nation up to $5 million for each of its licensed reactors and up to $10 million a year for each of its licensed reactors in the event of more than one incident. The Company currently has seven licensed reactors. Such nuclear insurance coverage does not include coverage of the plant facilities. The Price-Anderton Act is scheduled to expire on August I,1987 for nuclear reactors coming into service after that date. While Price-Anderson has historically been extended by Congress every ten years since its enactment in 1957, recent legislative proposals for extension have been coupled with numerous amendments containing more burdensome provisions for utilities than exist at present. To cover possible damage to certain of its nuclear facilities, the Company maintains property damage insurance with Nuclear 51utual Limited, a Bermuda mutual insurance company of which the Company is a member,in the maximum amount.,vailable from such insurer, which is presently $500 million, or the insurable value of the facilities, whichever is less. The Company has purchased from Nuclear Electric Insurance Limited (NEIL), a Ikrmuda mutual insurance company of which it is a member, an additional $575 million of property damage insurance through its Excess Property Insurance Progrant. The Company also has purchased an additional $85 million of property damage insurance through a pool of stock and mutual insurance companies. In connection with the sale of a portion of its interest in the Catawba Nuclear Station (see "Joint Ownership of Facilities"), the Company placed $585 million through a pool of stock end mutual insurance companies and $575 million through NEIL's Excess Property insurance Program. NEIL also provides insurance against the increased cost of generation or purchased power resulting from the accidental outage of a nuclear unit. The Company's Oconec and McGuire Nuclear Stations and Unit I of the Ca.awba Nuclear Station are insured for up to $1.4 million, $2.4 million and $2.2 million per unit per week, respectively, after a 26-week deductible period. with declining amounts per unit where more than one unit is involved. Coverages continue at 100% for 52 weeks and at 50% for an additional 52 weeks. For information about possible assessments, see Note 14, "Notes to Financial Statements." Hydroc/cctric Liccmes. The principal hydroelectric projects of the Company are licensed by FERC under Part I of the Federal Power Act. Eleven developments on the Catawba-Wateree River in North Carolina and South Carolina, with a nameplate rating of 804,940 KW, are licensed for a term expiring in 2008. The Company also holds a license for a term expiring in 2016 covering a power generation development on the upper tributaries of the Savannah River in northwestern South Carolina. Hydroelectric and pumped storage units in such cevelopment, with a nameplate rating of 750,000 KW, hase been completed. The Federal Power Act provides, among other things, that, upon the expiration of any license issued thereunder, the United States may (a) grant a new license to the licensee for the project,(b) take oser the project upon payment to the licensee ofits "net investmer.t" in the project (but not in excess of the fair value thereof) plus severance damages, or (c) grant a license for the project to a new licensee subject to pay ment to the former licensee of the amount specified in (b) above. Interconnections The Company has major interconnections and arrangements with its neighboring utilities which it considers adequate for coordinated planning, emergency assistance, exchange of capacity and energy, and reliability of power supply. Competition The Company curremly is v 'ect to competition in some areas from government-owned power systems. municipally-owned ele '.c systems and rural electric cooperatives and,in certain instances, from other priute utilities. Statutes in North Carolina and South Carolina provide for the assign-ment by the NCUC and the PSC, respectisely, of all areas outside municipalities in such States to power companies and rural electric cooperatives. Subst:mtially all of the territory comprising the Company's service area has been so assigned. The remaining areas have been designated as unas-signed and in such areas the Company remains subject to competition. A decision of the North 8

Carolina Supreme Court limits, in some instances, the right of North Carolina municipalities to sen e customers outside their corporate limits. In South Carolina there continues to be competition e(xI between municipalities and other electric suppliers outside the corporate limits of the municipalities, subject, however, to the regulation of the PSC. Emplo> ees At Dec^mber 31,1986, the Company employed approximately 20,300 persons. About 1,850 electrical operating employees are represented by the International Brotherhood of Electrical Workers with which the Company has a labor agreement which expires on October 1,1987. f( l V 9

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OPERATING STATISTICS /m [ \\ Year Ended December 31 ( 1986 1985 1984 1983 1982 Sources of Electric Energy hiillions of kilowatt-hours: Generated - net output: Coal.. 30.249 27,519 26.394 32,466 38,927 Nuclear ( A).. 35,044 33,700 32,632 25,059 15,009 ily d ro.... 771 1,162 1,995 2,114 1,569 Oil and gas.. 14 13 8 7 Total generated. 66,078 62,494 61,021 59,647 55,512 Purchased power and net interchange.. 1822) (1,742) (2.908) (1.003) (301) Total output - 65,256 60,752 58,113 58,644 55,211 Less: Catawba Joint Owners' share.. 6.261 3.827 Plus: Purchases from Catawba.. 5.953 3y Tota! sources of energy.. 64,948 60,694 58,113 58.644 55,211 Losses and company use.. (4.435) (4.636) (3.714) (4.493) (3.831) Total energy sales (B).. 6').513 56.058 54.399 54.151 51,380 Aserage Cost Per Ton of Coal Burned.. 547.59 548.66 $49.58 547.24 546.80 Electric Energy Sales hiillions of kilowatt-hours: Residential.. 15,636 14.241 14.493 14.219 13,711 General senice.. 12,312 11,338 10,922 10.339 10,087 Industrial Testile.. 10,595 9,961 10.169 10,115 9,215 Other.. 12,617 11,876 11,652 10,792 10,130 % holesale and other energy safes.. 9.353 8.642 7.163 8.686 8.237 Total energy sales (B).. 60.513 56.058 54.399 54.151 51,380 Electric Resenue /7 Thousands of dollars: Residential.. 51.088,886 5 914.513 5 886.065 5 806,085 5 741,255 V) ( General ser ice.. 748,722 642.006 593,351 521,56E 485,064 Industrial l e stile.. 471,718 420.817 409.635 374,138 335,727 Other...... 593.407 $23.041 487,604 419,755 384,191 Wholesale and other energy sales.. 426.882 358.385 291,435 324.595 309,241 Other electric resenues.. 71,318 40.149 41,925 (25.8S9) (10.998) Total electnc resenues.. 53.400.933 52.898.911 52,710.015 52.420.252 $2.244.480 Number of Customers-End of Year Residential.. 1,272,888 1,236,156 1.199,718 1,167,846 1,139,248 General senice.. 195,248 188,542 181,590 175,142 168,897 Industrial Testile.. 1,355 1.349 1,337 1,323 1,302 Other.. 6.964 6.894 6.680 6,588 6.459 Wholesale and other energy sales.. 6.635 6.516 6.M 5 6.276 6,403 Total customers.. 1.483.090 1.439.457 1.395.710 1.357,175 1.322.309 Residential Customer Statistics Aserage number for year.m... 1.259.655 1.221,419 1,186.962 1,158,123 1,136,431 As crage annual use - KWil.. 12,413 11,659 12.210 12,278 12.065 Aseragc annual billing. 5864.43 5748.73 5746.50 5696.03 5652.27 Aserage Annual Billed Revenue Per KWii Residential.. 6.96* 6.42' 6.11' 5.67' 5.41' General service.. 6.08' 5.66' 5.43' 5.04' 4.81' Industnal.... 4 59' 4.32' 4.11' 3.80' 3.72' Wholesale and other energy sales.. 4.56' 4.15' 4.07' 3.74' 3.75' (A) Includes 100% of Catawba generation. (B) Excludes a portion of the energy sold to the Catawba Joint Owners (see "Business-Joint Ownership of Facilities"). QO 11

EXECLTIIVE OFFICERS OF TIIE COMPANY Senice In Such Capacity Name Position Since Age

• W. S. Lee" Chairman of the Board and Chief Executive 1982 57 Omcer D. W. Booth" President and Chief Operating Omcer and 1982 62 Director W. H. Grigg" Executive Vice President, Finance and 1982 54 Administration, and Director W.11. Owen" Executive Vice President, Engineering, 1982 60 Construction and Production Group, and Director Steve C. Grimth, Jr."

Senior Vice President and General Counsel and 1982 53 Director John D. liicks" Senior Vice President, Public Affairs, and 1977 63 Director Henry L. Cranford.. Senior Vice President, Division Operations 1982 59 Donald H. Denton, Jr. Senior Vice President, hlarketing and Rates 1982 49 James R. Bavis. Vice President, Human Resources 1984 47 Thomas C. Berry. Vice President, Southern Division 1976 56 S. K. Blackley, Jr. Vice President, Transmission 1984 54 Ralph W. Bostian. Vice President, Production Support 1982 60 J. Kenneth Clark.. Vice President, Corporate Communications 1981 54 W. A. Coley. Vice President, Central Division 1986 43 Robert L. Dick.. Vice President, Construction and hiaintenance 1971 59 George W. Ferguson, Jr.. Vice President and Deputy General Counsel 1982 54 E. O. Ferrell, Ill. Vice President, Northern Division 1984 42 James W. Foster. Vice President, Distribution 1986 64 E. N. Hedgepeth, Jr. Vice President, Operation 1986 59 John F. Lomax.. Vice President, Western Division 1980 47 Paul G. hlartin. Vice President Eastern Division 1982 54 John P. O'Keefe.. Vice President. Taxes 1986 55 William O. Parker, Jr. Vice President, Fossil Production 1982 62 R. B. Prion. Vice President Design Engineering 1984 40 William R. Stimart. Vice President, Regulatory Affairs 1979 55 George E. Stubbins.. V;ce President, Information Systems 1982 46 Hal B. Tucker. Vice President, Nuclear Production 1982 58 Fred E. West, Jr.. Vice President, Charlotte Division 1981 50 James W. White.. Vice President, General Services 1979 61 l Lewis F. Camp, Jr. Secretary and Associate General Counsel 1980 58 l Norman P. Alorrow. Controller 1982 39 l Richard J. Osborne.. Treasurer 1981 36 'As of February 1987. "hlember of the Executive Committee. G 12

, Executive omeets are elected annually by the Board of Directors and serve until the first meeting of the Board of Directors following the next annual meeting of shareholders and until their successors s are duly elected. There are no family relationships between any of the executive omeers nor any arrangement or understanding between any executive officer and any other person pursuant 11 which the omeer was selected. All of the above executive omeets have held responsible positions with the Company for the past five years except for James R. Bavis and John P. O'Keefe. hir. Bavis served as Vice President, Human Resources, of Gold Bond Building Products, a division of National Gypsum Company, Inc. from January 1980 to h1 arch 1984 when he joined the Company as Vice President, Human Resources. hir. O'Keefe was a partner of Deloitte Haskins & Sells serving as its National Director, Public Uti;ity Tax Practice, for approximately ten years immediately prior to joining the Company as Vice President, Taxes, on July 1,1986. There have been no events under any bankruptcy act, no criminal proceedings.md no judgments or injunctions material to the evaluation of the ability and integrity of any executive omcer during h the past five years. Item 2. Properties. The map on page 10 shows the location of the Company's service area and generating stations. Reference is made to Schedule V - Property, Plant and Equipment for information concerning the Company's investment in utility plant. Substantially all electric plant is mortgaged under the Indenture relating to the First and Refunding hlortgage Bonds of the Company. For additional information concerning the properties of the Company, see Item 1. "Construc-tion Program - Facili;ies Under Construction" Item 3. Legal Proceedings. Reference is made to Note 2 of "Notes to Financial Statements" for information relating to appeals taken from rate orders previously obtained by the Company from the NCUC Intervenors have also appealed i.4 order of the NCUC issued in February 1982 adjusting rates based on changes in fuel cost, <-ding ns reversal or modification and refunds. The North Carolina Court of Appeals remanded ths.nder to the NCUC for a redetermination of fuel costs. The NCUC has not acted on the remand. Item 4. Submission ofMatters to a Vote ofSecurity lloiders. No matters were submitted to a vote of the Company's security holders during the last quarter of 1986. PART 11 Item 5. Marketfor the Registrant's Common Equity and Related Stockholder Matters. The Common Stock of the Company is traded on the New York Stock Exchange. At December 31,1986, there were approximately 108,045 holders of shares of such Common Stock. l The following table sets forth for the periods indicated the dividends paid per share of Common Stock and the high and low sales prices of such shares reported by the New York Stock Exchange Composite Transactions: Common 5tock Per Share liigh im 1986 by Quarter Fourth. $0.67 494 44 Thi rd.... 0.67 52 416 Second..... 0.65 454 394 0.65 41% 34 % First..... 1985 by Quarter Fourth... $0.65 36% 31 % Third.... 0.65 35% 30 Second.. 0.62 35% 32 First.. 0.62 32% 286 13 l l

Item 6. Selected Financial Data. DUKE POWER COMPANY SELECTED FINANCIAL DATA Year l'nded December 31 1986 1985 1984 1983 1982 (Dollars in thousands, neept per share figum) CONDENSED STATEhlENTS OF INCO$1E Electric resenues.. 5.',400,933 $ 2,898.911 $ 2.710,0 5 $ 2.4 20,.'.5 2 $ 2.244.4 80 Electric expenses.. .:.816.157 2.370.876 2.161.914 1.971.038 1.854.712 Cectric operating income.. 584,776 528.035 548,101 449,214 389,768 Other income. 127.880 163.821 162.795 213,001 175.048 income before interest deductions.. 712.656 691,856 710,896 662,115 564,816 Interest deductions.. 244.822 254.263 249.565 2 30.9 M, 214.939 Income before extraordinary item.. 467,834 437,593 461,331 4 31.2 T' 349.877 Extraordinary item.. 48.304 Net income.. 467,834 437,593 461,331 431,277 398,181 Disidends on preferred and preference stocks.. 58.767 60.912 61.786 62.600 62.164 Earnings for common stock.. $ 409.067 5 376.681 5 399.545 5 368.67: $ 336,0 l 7 RATIO OF EARNINGS TO LINED Cil ARGES (SEC method).. 4.26 3.87 4.21 3.46 2.98 COhtSION STOCK D ATA Shares of common stak - End of year (thousands). 101.236 101.194 101,153 99.634 95.949 - Aserage (thouunds). 101,220 101,178 100,346 97,764 93.679 l Per share of common stock Egnings before estraordinary item.. 4.04 3.72 5 3 98 $ 3.77 3 07 Estraordinarj item.. 0 52 Earnings.. 4 04 $ 3 72 5 3 98 5 3 77 5 3.59 Dividends.. 5 2.64 2.54 5 2.42 2.32 2.24 Book s alue - end of > ear.. 30.34 5 28.98 5 27.80 26.26 24.89 hlarket price - high-low.. $ $2 34~. $ 36'.-284 $ 30'.-22 % $ 26'.-21 % $ 24-20 v l - end of > ear.. 45% $ 35'. 29 $ 25 % $ 23% TOT AL ASSETS.. $ 8.226,729 $ 8,024,163 $ 8.018.818 $ 7.379,445 $ 7.057,780 EONG-TERN 1 DE!L F.. $ 2,752.302 $2.721.041 $2.696 ~/95 $2,745.889 $2.712,372 PREFE,RRED STOCKS WITil SINKINO Il'ND Ru uiREsiEN1.. $ 22i.m 5 277.0i2 $ 28u26 $ 293.053 $ 304.02e j i } l t G 14 l

Item 7. Afanagement's Discussion and Analysis of Financial Condition and Results of Operations. / Results of Operations Earnings and Dividends Earnings per share increased to $4.04 in 1986 compared to $3.72 in 1985. The 9 percent increase primarily resulted from higher kilowatt-hour sales related to unusual weather patterns. These higher sales r.lso caused the earned return on common equity to rise to 13.7 percent froni 13.1 percent in 1985. Over the past five years, earnings per share increased at an annual rate of 3 percent, from $3.59 in 1982 to $4.04 in 1986. Earnings for 1982 included an extraordinary gain of $.52 per share from the exchange of common stock for outstanding bonds. The Company continued its practice of increasing the common stock dividend annually. Com-mon dividends per share paid over the past five years increased to $2.64 in 1986 from $2.24 in 1982, increasing at an annual rate of 4 percent. Indicated annual dividends per share increased to $2.68 in 1986, up 3 percent from 1985. Revenues and Sales Electric revenues iricreased at an annual rate of 1I percent from 1982 to 1986 primarily because of increases in rates and kilowatt-hour sales. Economic expansion in the Piedmont Carolinas and abnormal weather conditions have caused kilowatt hour sales, including electricity delivered to joint owners of the Catawba Nuclear Station, to increase at an annual rate of 5 percent. Kilowatt hour sales for 1986, including deliveries to the Catawba joint owners, increased 7 percent over 1985. Sales to residential customers rose 10 percent from 1985. Sales to textile custom-ers were 6 percent higher in 1986 re0ccting the continued recovery in the textile industry. New industries and expansion of existing industries in our service area caused sales to other industrial g) customers to rise 6 percent above lS5. (J Operating Expenses increased production requirements to meet higher kilowatt-hour sales have caused operating expenses to rise over the past five years. The addition of three nuclear units, increased maintenance at both nuclear and coal-fired stations, additional Nuclear Regulatory Commission requirements and inflation have caused non-fuel operating and maintenance expenses to rise at an annual rate of 11 percent since 1982. Over the past five years, fuel expense has fluctuated pnmarily because cf changes in the genera-tion mis. During this period, the Company placed three nuclear units in service. In 1986, fuel expense increa, d 1 percent over 1985 primarily because mamtenance outages at the nuclear stations resulted in the Company relying more heavily on its coal-fired units. Fuel expense increased in 1985 because of refuelings at the nuclear stations that resulted from a record level of nuclear performance in 1984. "Net interchange and purchased power" expense increased significantly in 1986 because of the purchased power agreements with the joint owners of the Catawba Nuclear Station. (See Note 3. "Notes to Financial Statements.") Other Allowance for funds used during construction (AFUDC) represented 16 percent of earnings for common stock in 1986, decreasing from an average of 40 percent for 1982 through 1985. The decline in AFUDC oser the past live years is a result of the completion of three nuclear units. the sale of a portion of Catawba Nuclear Station and the cancellation of two nuclear projects. Because the Bad Creek Hydroelectric Station is the only generating facility under construction, AFUDC will continue I to be a relatively small percentage of earnings for common stock over the next several years. 15

In 1986, earnings from non-utility operations were 10 percent of total Company earnings, compared to 14 percent in 1985. In total, these earnings decreased 17 percent from 1985. Compo-nents of non-utility earnings include interest and dividend income, subsidiary earnings, appliance sales and service, and Management and Technical Services income. The accline in non-utility earn-ings is primarily a result of a decrease in interest and dividend income because the Company had fewer investments in 1986. The Company reduced its investments to fund construction expenditures and deferred purchased power expenses associated with Catawba Nuclear Station. Through ratemaking procedures, revenues that the Company is allowed to collect frum its customers are based on historical information that does not include recovery for the costs of current and future inflation. In past years, carnings have been negatively impacted to the extent that the Company did not receive revenues to recover these current costs. Because the rates of inflation in recent years have decreased, the negative impact on revenues and earnings has not been as significant as in prior years. Liquidity and llesources Rate ktters The North Carolina Utilities Commission issued a rate order in October 1986 granting the Company a 6.73 percent increase in revenues and a 13.4 percent rate of return on common equity. The Public Service Commission of South Carolina, in a November 1986 rate order, granted the Company a 9.55 percent increase in revenues and a 13.0 percent rate of return on common equity. In August 1986 the Company Aled an application for a rate increase for its wholcsale customers. The Federal Energy Regulatory Commission issued an interim rate order in November 1986 allowing the Company to implement an S.3 percent increase, subject to refund and approval. The rate increases were requested in all three jurisdictions primarily to recover the Company's investment in Unit 2 of Catawba Nuclear Station and payments related to the purchased power contracts with the joint owners of the station. The rate orders in the Company's retail jurisdictions permitted the Company to recover in rates its investment in Catawba Unit 2 and the costs associated with contractual purchases of energy and capacity from the Cataaba joint owners. The contracts relating to the sales of portions of the station obligate the Company to purchase power from the joint owners on an annually declining basis. In the North Carolina retail jurisdiction. reguletory treatment of these contracts provides revenue for the recovery of the capital costs and the fhed operating and maintenance costs of purchased capacity on a levelized basis. In the South Carolina retail jurisdiction, revenues are provided for the recovery of the capital costs of purchased capacity on a leselized basis, while the thed operating and mainte-nance costs are recovered m c urrent rates. The purchased energy costs are recovered through current rates in both retail jurisdictions. These rate treatments require the Company to fund portions of the purchased power payments until these costs including carrying charges, are recovered at a later date. The Company will begin to recoser the accumulated costs and earning charges when the purchased capacity payments drop below the levelized resenues. The Tax Reform Act of 1986 lowers the corporate tax rate over the next two years. To re0cct the lower federal income tax rates, the Company implemented a 2.3 percent rate reduction on January 1, 1987, in its retailjurisdictions. The rate reduction was approsed by both the North Carolina Utilities Commission and The Public Senice Commission of South Carolina. In.\\ugust 1986 the North Carolina Utilities Commission issued an order revising its fue' adjustment methodology, including a factor that etTectisely allows all prudently incurred fuel costs to be recovered. The order requires the Company to follow deferred accounting for the ditTerence between fuel costs incurred and fuel costs collected through rates. Retail rate increases allowing approsimately 52 percent of requested additional revenues. were granted to the Company from 1982 through 1986. These rate increases included recovery of the lh

Company's investment in McGuire Unit 2 and in both units of Catawba Nuclear Ststion, compensa- / tion for increased purchased power and operating expenses, and recovery for the amortization of two Q] canceled nuclear projects. (For additional information on rate matters, see Note 2, "Notes to Financial Statements.") Capital Structure The Company's capital structure at year-end was 47 percent common equity,42 percent long-term debt and 11 percent preferred and preference stocks. The year-end capitalization is consistent with the Company's long-term financial goals. To satisfy the requiremeras of various stock purchase plans, the Company purchases common stock on the stock market. The Company has no plans for the public issuance of common stock for the next several years. Fixed Charges Coverage Co>crage of tixed charges, us ng the Securities and Exchange Commission method, increased to i 4.26 times for 1986 compared wi h 3.87 times in 1985 and is abos e the Company's gcst of 4.00 times. t Higher pre-tax carnings and lower interest expense as a result of refinancings in 1986 contributed to the increased coverage. Funds From Operations in 1986. funds from operations accounted for 57 percent of'he total applications of funds. The percentage ofinternally generated funds would have been significantly higher if refinancing activities had been excleded. Also, the Company is funding the portions of purchased capacity pr.yment3 not curremly collected in rates. The perceritage of internally generated funds still remains above the Company's goal of 50 percent. Additional Fimds Over the past five years, tne Company obt.'ined additional funds from the sale of $936 million in first and refunding mortgage bonds and $137 millfor, in preferred stock, Proceeds from the sale of common stock, including the 1982 issuance of common stock in a non-cash exchange for bonds, totaled $321 million. Continued favorable market conditions in 198t, prompted the Company to refund several issues of higher cost securities with lower cost securities, reducing financing costs and providing substantial savings to the Company's customers in the years ahead. Refinancing activities lowered the Cem-pany's embedded cost oflong-term debt from 9.59 percent at the end of 1984 to 8.87 percent at the close of 1986. The Company's embedded cost of preferred stock declined from 8.75 percent at the end of 1984 to 8.21 percent at the end of 1986. During 1986 the Company redeemed or retired $385 million oflong term deot ai:d issued $401 million in long-term debt in its place. The Company also rstired $101 million of preferred stock and issued $99 million in pre erred stock. The Company plans to continue its refinancing activities during r 1987. (For additional information on the Company's capitahzation, see Notes 7,8,9 and 10,"Notes to Financial Statements.") In 1984 the Company received $457 million from the sale of a portion of Catawba Nuclear Station to the Piedmont Municipal Power Agency. In 1985 the Company formed Church Street Capital Corp., a v, holly owned subsidiary, to invest the Company's discretionary cash. As of December 31,1986, the consolidated entity had approxi-mately Si13 million in short term investments and $262 million in intermediate term investments. 17

Capital Needs Property.lddinons and Retirements Additions to property and nuclear fuel of $690 million and retirements of $70 million resulted in a net increase in gross plant of $620 million in 1986. Sir:ce January 1,1982, additions to property and nuclear fuel of $3.4 billion and retirements of $1.2 billion have resulted in a net increase in gross plant of $2.2 billion. Retrements during the period were unusually large because the Company canceled two nuclear projects and solo a portion of Catawba Nuclear Station. Construction Expenditures Construction costs for major generating facilities and for nuclear fuel, incluaing AFUDC, declined from $558 million in 1982 to $341 million in 1986. These costs declined l"cause the Company placed three nuclear units in commercial operation (McGuire Unit 2 in 1984, Catawba Unit 1 in 1985; and Catawba Unit 2 in 1986). canceled two nuclear projects and soid a portion of Catawba Nuclear Station. Continuing construction expenditures at Bad Creek Hydroelectric Station will cause construction work in progress to rise and exceed $1 billion in the late 1980s. During 1986 funds also were required to expand and replace transmission and distribution facilities. These additional facilities provided service to 43,600 new customers which represents a 3 percent increase over 1985. Other Expenditures in audition to construe' ion expenditures. the Uumpany has applied its funds to redeem maturing and refunded securities over the past five years. (See "Liquidity and Resources.") In Jonc 1985 the Company paid a lump-sum amount of $122 million to the Department of Energy undcr the terms of the Nuclear Waste Policy Act of 1982. The payment was for the obligation related to disposal costs for nuclear fuel consumed prior to April 7,1983. Over the next five years, payments by the Company to the Catawba joint owners for purchased power will exceed the levelized recovery of those costs in rates by approximately $340 million. Futwe Construction Trogram Because the Company has completed its nuclear construction program, construction costs for major generating facilities for 19S7 through 1989 will constitute a lower portion of the Company's total applications of funds compared to the past five > cars. Projected construction and nuclear fuel costs are $2.6 billion for the next three years. Construction of Bad Creek flydroelectric Station continued in 1986. Units 1 and 2 of the 1.000.000-kilowatt pumped-storage facility are scheduled for completion in 1991, with Units 3 and 4 in 1992. The estimated cost of Bad Creek is $1.0 billion, with $158.4 million spent at year-end. Beyond the completion of Bad Creek. the Corapany has no commitments to place a new generat-ing plant in service in the rear future. Studies mdicate a need for peak generating facilities in the 1990s. The Company is currently reviewing its options for meeting that need. Significant Treads While the Company's financial performance for 1986 improved over 1985, the ability to main-tain and improve this level of financial strength will depend on seseral factors. Further economic expansion ja the Piedmont Carolinas and growth in non-utility operations could have a positive ef&ct en total Company earnings. Moving from a construction program to an operating pregram, the Company will continue to fxus on reducing costs w hile operating its sy stem as efliciently as it has in the past. Charges in tax legii,lation through the Tax Reform Act of 19X6 lower the tax rate from 46 percent to 34 percem os er the next n a > cars. Initia!!). these lower tax rates reduce the cost of vrvice to the 18

Core pany's customers However, it is premature to say how the Tax Reform Act, when fully imple-em mented, will afTect future customer rates. Any adjustments in rates will reflect the full impact of the Tax Reform Act and may include the impact of other expenses related to the cost of service, in a move aimed at increasing its non-utility earnings, the Company has turned the operations of the Management and Technical Services division into a wholly owned subsidiary called Duke Engi-neering & Services, Inc. lnis subsidiary became active in January 1987. The Financial Accountmg Standards 13 card has implemented accounting procedures that may cause the Company to write do.vn to present value its canceled construction projects since the Company's recovery of those projects through rates does not include a return on tiie unrecuvered balance. The Company is not required to implement these procedures until 1988. The Company is currently evaluating the impact of th's requirement and does not anticipate that the accounting procedures will have a signiGeant effect on the results ofits operations or Gnancial position. Certain parties have appealed the 1985 and 1986 rate orders of the North Carolina Utilities Commission to the North Carolina Supreme Court. The appellants have raised numerous issues in these appeals including the Commission's 6ndings and conclusions related to the treatment of nuclear plant abandonments. An adverse ruling in thesc cases could have a signi0 cant impact en the Company's results of operations and financial position. While the Company is of the opinion that there is an adequate legal anu factual basis for each aspect of the North Carolina Utilities Commis-sion's decisions in the two cases, the Company cannot presently determine the ultimate resolution. of the appeals. O (a) 19

l l Item 8. Financial Statements a:d Supplementary D:ta. DUKE POWER CO.TIPANY INDEX ) rau Respo.isibility for Financial Statements. 21 l Auditors' Opinion.. 21 Financial Statements: Statements ofincome for the Three Years Ended December 31,1986. 22 l Statements of Changes in Financial Position for the Three Years Ended December 31, 1986.. 23 Balance Sheets-December 31,1986 and 1985. .24-25 Statements of Capitalization - December 31,1986 and 1985.. 26 Statements of Retained Earnings for the Three Years Ended December 31,1986. 26 Notes to Financial Statements. 27 Supplemental Financial Data (Unaudited).. 38 Supplemental Schedules: Schedule V-Property, Plant and Equipment for the Years Ended December 31,1986,1985 and 1984 39 Schedule VI-Accumulated Depreciation and Amortization of Property, Plant and Equipment for the Years Ended December 31,1986.1985 and 1984 40 Schedule Vill-Valuation and Qualif>ing Accounts and Reserves for the Years Ended December 31,1986,1985 and 1984. 41 Schedule X - Supplementary Income Statement Information for the Years Ender! December 31.1986,1985 and 1984... 41 l Exhibit !- Computation of Fully Diluted Earnings Per Share (Unauditcd).. 42 1 t i G 20

RESPONSIBILIIT FOR FINANCIAL STATDIENTS Q The ilnancial statements of Duke Power Company are prepared by management, which is responsible for their integrity and objectivity. The statements are prepared in conformity with generally accepted accounting principles appropriate in the circumstances to reflect in all material respects the substance of events and transactions which should be included. The other information in the annual report is consistent with the financial statements. In preparing these statements, manage-ment makes informed judgments and estimates of the expected effects of events and transactions that are currently being reported. The Company's system of internal accounting control is designed to provide reasonable assur-ance that assets are safeguarded and transactions are executed according to management's authoriza-tion. Internal accounting controls also provide reasonable assurance that transactions are recorded properly, so that financial statements can be prepared according to generally accepted accounting principles. In addition, the Company's accounting controls provide reasonable assurance that errors or irregularities which could be material to the financial statements are prevented or are detected by employees within a timely period as they perform their assigned functions. The Company's account-ing controls are continually reviewed for effectiveness. In addition, written policies, standards and procedures, and a strong internal audit program augment the Company's accounting controls. The Board of Directors pursues its oversight role for the financial statements through the audit committee, which is composed entirely of directors who are not employees of the Company. The audit committee meets with nianagement and internal auditors periodically to review the work of each group and to monitor each group's discharge of its responsibilities. The audit committee also meets periodically with the Company's independent auditors, Deloitte Haskins & Sells. The inde-pendent auditors have free access to the audit committee and the lloard of Directors to discuss internal accounting control, auditing and financial reporting matters without the presence of management. Duke Power Company: We have examined the financial statements and supplemental schedules of Duke Power Com-pany listed in the accompanying index on page 20. Our examinations were made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. As discussed more fully in Note 14, certain parties have appealed the decision of the North Carolina Utilities Commission in the Company's 1985 and 1986 general rate increases. The ultimate outcome of the appeals is uncertain at this time. In our report dated February 14,1986, our opinion on the 1985 and 1984 financial statements referred to above was unqualified; however,in view of the uncertainty referred to above, our present opinion on such financial statements, as expressed herein, is different from that espressed in our previous report. In our opinion, subject to the effects on the financial statements of such adjustments,if any, as might have been required had the outcome of the uncertainty referred to in the preceding paragraph been known, the financial statements referred to above present fairly the financial position of the Company at December 31,1986 and 1985, and the results of its operations and the changes in its financial position for each of the three years in the period ended December 31,1986, in conformity with generally accepted accounting principles applied on a consistent basis. Also, in our opinion, subject to the efTects on the supplemental schedules of such adjustments,if any, as might have been required had the outcome of the uncertainty referred to in the preceding paragraph been known, the supplemental schedules, when considered in relation to the basic financial statements, present fairly in all material respects the information shown therein. DElant H AsKINs & Sitts p Charlotte, North Carolina i V February 13,1987 21

l l DUKE POWER CO.41PANY STATE.TIENTS OF INCOhlE l Year Fnded December 31 D D D l (Dollars in Ihousands) ELECTRIC REVENUES (Notes I and 2).. $ 3,400,933 $ 2,898,911 $2.710,015 ELECTRIC EXPENSES Operation Fuel used in electric generation (Note 1). 726,151 719,254 683,563 Net interchange and purchased power (credit)(Note 3). 378,377 107,145 (36,408) Wages, benefits and materials.. 488,631 435,701 393,448 Niaintenance of plant facilities. 291,164 260,361 207,951 Depreciation and amortization (Notes I and i1).. 327,844 319,295 303,429 General taxes (Note 1).. 166,385 141,343 194,095 Income taxes (Notes 1 and 5).. 437,605 387,777 415.836 Total electric expenses. 2,816.157 2.370,876 2,161,914 Electric operating income. 584,776 528,035 548.101 OTHER INCONIE (Notes I,4 and 5) Allowance for equity funds used during constructicn. 52,444 62,741 98,711 Earnings of subsidiaries, net.. 9,736 10,101 14,706 Other, net. 38,059 71,050 36,349 income taxes - other, net. (4.522) (20,434) (29,180) Income taxes - credit. 32,163 40,363 42.209 Total other income.. 127,880 163.821 162.795 Income before interest deductions.. 712,656 691,856 710.896 INTEREST DEDUCTIONS Interest on long-term debt. 252,503 267,345 276,520 Other interest. 5,764 3,926 3,075 l Allowance for borrowed funds used during j construction (credit)(Note 1). (13.445) (17,008) (30,030) l Total interest deductions. 244,822 254,263 249,565 f NET INCON1E.. 467,834 437,593 461,331 l Dividends on preferred and preference stocks. 58.767 60,912 61,786 EARNINGS FOR CONIN10N STOCK. $ 409.067 $ 376.681 $ 399,545 CO.\\lN10N STOCK DATA Average shares outstanding (thousands). 101.220 101,178 100,346 Earnings per share., $4.04 $3.72 $ 3.98 Dividends per share. $ 2.64 $2.54 $ 2.42 See Notes to Financial Statements. 9 22

DUKE POWER COSIPANY <s (v) STATE 3 TENTS OF CllANGES IN FINANCIAL POSITION Year Ended December 31 1986 198s 1984 SOURCES OF FUNDS (Dollars in Thousands) Operations Net income.. $ 467,834 $ 437,593 $ 461,331 Non-fund items: Depreciation cnd amortization (Notes I 502,151 434,527 469,711 and 11).. Deferred income taxes and investment tax credit, net of amortization (Note 5). 161,596 141,105 103,800 Allowance for equity funds used during construction. (52,444) (62,741) (98,711) Purchased capacity levelization (Note 3).. (77,258) (22,440) _ _ _ 68.250) (13,137) Other, net. (71,963) ( Total funds from operations. 929,916 909,794 922,994 Funds from financing and sale of assets issuaace of first and refunding mortgage bonds. _,.... 394,006 172,404 Issuance of preferred stock. 98,612 Nuclear fuel trusts. 57,597 57,638 84,461 Issuance of poliution-control bonds... 7,251 34,114 60,720 Proceeds from the sale of an interest in the Catawba Nuclear Station.. 457,086 issuance c,f common stock. 37,194 Total funds from financing and sale of [D assets. 557,466 264,156 639.461 Change in short-term position and other marketable securities.,. 149,866 294.222 (690.038) Total sources of funds.. $ 1.637,248 $ 1,468.172 $ 872.417 APPLICATIONS OF FUNDS Construction expenditures..... $ 637,908 $ 594,431 $ 546,043 Long-term debt, capital stock retired or reacquired.. 672,239 247,192 138,652 Dividends paid.. 325,991 317,907 304,577 Change in wcrking capital

• 49,356 308,500 (386,086)

Other applications, net. (48,246) 142 269,231 Total applications of funds. $ 1.637,248 $ 1,468,172 $ 872.417 CllANGE IN WORKING CAPITAL: Increase /(Decrease) in current assets C.u.h. - 871 (3,011) 5,158 Receivables. 81,257 (18,011) 30,092 Refundable income taxes. (41,209) Materials and supplies.. (43,366) 53,735 (21,334) 371 6,633 (2,243) Prepay ments. Decrease /(Increase) in current liabilities Accounts payable.. 16.086 (6,016) (36,812) Nuclear fuel disposal costs payable. 122,003 (122.003) Taxes accrued. (51,359) 161,141 (158,001) Interest accrued and other liabilities. 45.et 6 (7,974) (39,734) Change in working capital *. 49.356 $_308.500 $(386.086)

• Excludes change in short-term position and change in current maturities of long-term debt and

( preferred stock. ( See Notes to Financial Statements. 23

DUKE POWER CO.41PANY ll AIANCE SIIEETS ASSETS Isarrnber l', 19M6 1985 (Do!!ars in 't houunds) ELECTRIC PIANT (At original cost - Notes 1, 3,10 and 14) Electric plant in service.. $9,445,032 $8 609,284 Less accumulated depreciation and amortization. 3,407,345 3,034,473 I Electric plant in service, net.. 6,037,687 5,574,811 Construction werk in progress.. 601.064 817,350 Total electric plant, net.. 6,638,751 6,392.161 OTilER PROPERTY AND INVESThlENTS Other property-at cost (less accumulated depreciation: 1986 - $8,248; 1985 - $7,790).. 40,100 39,951 investments in and advances to subsidiaries (Note 1). 85,153 88,812 Other investments, primarily marketable securities -at cost or less (Note 1), 289,721 254,356 Total other property and investments.. 414,974 383,119 CURRENT ASSETS Cash (Note 6). 3,614 2,743 Short-term investments. I13.129 293,262 Receivables (less allowance for losses: 1986 - $3,867; I 98 5 - $ 4,004).. 325,915 244,658 hfaterials and supplies-at average ecst Coal. 84,137 150,085 Other. 148,850 126,268 Prepayments. 15,077 14,706 Total current assets. 690,722 831.722 DEFERRED DElllTS Canceled construction projects (Notes 11 and 14). 296,016 341,214 Purchased capacity costs (Note 3). 101,160 41,872 Debt expense, primarily relinancing costs, being amortized oser terms of related debt (Note 1).. 62,106 16,946 Other. 23,000 17,129 Total deferred debits., 482,2S2 417,161 TOTAL ASSETS.. $ 8,226.729 $ 8,024,163 See Notes to Financial Statements. l l 24

DUKE POWER COAIPANY BALANCE SIIEETS CAPITALIZATION AND LIABILITIES December 31 1986 1985 (Dollars in Thousands) CAPITALIZATION (See Statements of Capitalization)......... $6,514,700 $6,350,042 CURRENT LIABILITIES Accou nt s pa yable....................................... 143,039 159,125 Taxes accrued (Note 1)............ 104,282 52,923 Interest accrued........... 68,542 86,539 d 49,718 77,217 O t h e r........................ Total................ 365,581 375,804 Current maturities of long-term debt and preferred stocks......... 38.911 133,342 Total current liabilities............... 404,492 509,146 ACCUh1ULATED DEFERRED INCOh1E TAXES (Notes 1 and 5).. 913,426 775,333 DEFERRED CREDITS AND OTHER LIABILITIES Investment tax credit (Notes I and 5)... 341,124 333,227 Other.................................................................... 52,987 36,4 5 Total deferred credits and other liabilities. 394,111 389,642 COhth11ThlENTS AND CONTINGENCIES (Note 14). TOTAL CAPITALIZATION AND LIABILITIES....................... $8.226,729 $8,024.163 5ee Notes to Financial Statements. 25

DUKE POWER CO.\\lPANY STATE.TIENTS OF CAPITALIZATION AND RETAINED EARNINGS CAPITALIZATION December 31 1986 1985 (Dollars in We ands) COhlhlON STOCK EQUITY (Note 7) Common stock, ne par, 150,000,000 shares authorized; 101,235,772 shares outstanding for 1986 and 101,193,802 shares outstanding for 1985. $ 1,861,628 $ 1,860,623 Retained earnings. 1.210.229 1.071,814 Total common stock equity. 1 071,857 2,932,437 PREFERRED AND PREFERENCE STCCKS WITilOUT SINKING FUND REQUIREhlENTS (Note 8) Preferred stock.. 465,000 415,000 Preference stock.. 3,550 4,552 Total preferred r.nd preference stocks without sinking fund requirements 468,550 419,552 PREFERRED STOCKS WITH SINKING FUND REQUIREhlENTS (Note 9).. 221,991 277.012 LONG TERhl DEBT (Note 10) First and refunding mortgage bonds.. 2,635,790 2,614,136 Promissory note due subsidiary,164%.. 58,725 Term note, floating rate. 21,000 Capitalized leases. 83,890 87,537 Nuclear fuel trusts. 85,000 85,000 Unamortized debt discount and premium, net (Note 1).. (20,112) (18,415) Current maturities oflong term debt. (32,266) _ (126,942) Total long-term debt. 2,752.302 2,721,041 TOTAL CAPITAL IZATION. $ 6,514,700 $6.350.042 RETAINED EARNINGS Year i nded December 31 19'46 1985 1984 (Dollars in Ihumands) ( BALANCE - Beginning of year.. $ 1,071,814 $ 952,360 $ 795.512 ADD - Net income. 467,834 437.593 461,331 Total. 1.539,648 1,389.953 1.256.843 DEDUCT Dividends Common stock.. 267,224 256,995 242,791 Preferred and preference stocks.. 58,767 60,912 61,786 Capital stock transacticns, net. 3.428 232 (94) Total deductions. 329.419 318,139 304,483 BALANCE-End of 3 ear. 5,210.229 $1,07 W $ 952 360 See Notes to Financial Statements. 9 26

DUKE POWER CO.ilPANY NOTES TO FINANCIAL STNIE3 TENTS 1. Summary of Significant Accounting Policies A. Additions to E/cctric Mant. The Company capitalizes all construction-related direct labor and materials as well as indirect construction costs. Indirect costs include general engineering, taxes and the cost of money (allowance for funds used during construction). The cost of renewals and betterments of units of property is capitalized. The cost of repairs and replacements representing less than a unit of property is charged to electric expenses. The original cost of property retired, together with remosal costs less salvage value, is chaqed to accumulated depreciation. B. Allos.ance for Funds Used During Construction (.IFUDC). AFUDC represents the esti-mated debt and equity costs of capital funds that are necessary to Gnance the construction of new facilities. AFUDC, a non-cash, non-operating item, is recognized as a cost of"Construction work in progress." with o!Tsetting credits to "Other income" and "Interest deductions." After construction is completed, a utility is permitted to recover these capital costs, including a fair return, through their inclusion in rate base and in the provision for depreciation. AFUDC, which is compounded semiannually, was calculated on average embedded rates (net of applicable income taxes) of 9.63 percent for 1986. 9.90 percent for 1985 and 9.65 percent for 1984. C. Dcereciation and Amorn:ation. Provisions for depreciation are recorded using the straight-line method. The year-end composite weighted-average depreciation rates w ere 3.60 percent for 1986, 3.58 percent for 1985 and 3.56 percent for 1984. All coal-Gred generating units are depreciated at the rate of 3.57 percent. Nuclear units are depreciated at a rate of 4 percent. which includes an allowance for decommissioning costs. Amortization of nuclear fuel is included in "Fuel used in electric generation"in the Statements of Income. The amortization is recorded using the unit-of-production method. Under provisions of the Nuclear Waste Policy Act of 1982, the Company has entered into contracts with the Department of Energy (DOE) for the dispont of nuclear fuel. Payments made to the DOE for disposal sosts are based on nuclear generation and are included in "Fuel used in electric generation" in the Statements of Income. The Company fulGiled its obligation for disposal costs of nuclear fuel consumed prior to April 7,1983, by a payment in June 1985 of approsimately $ 122.000,000 to the DOE. D. Subsidiarics. The Company's financial statements reDect consolidation ofits w holly owned subsidiary, Church Street Capital Corp., formed in February 1985. All intercompany transactions hase been eliminated in consolidation. Insestments in other wholly owned subsidiaries have been accounted for by the equity method. Retained earnings as of December 31, 1986, include $89,118.000 of undistributed earnings of unconsolidated subsidiaries. Dividends received from 2 unconsolidated subsidiaries were $1,000.000 in 1986. $2,200.000 in 1985 and $2,300.000 in 1984. E. Income 7'a ws. The Company and its subsidiaries Ole a consolidated federal income tax return. Income taxes are allocated to each company based on its separate company tatable income or loss. income taxes are allocated to non-electric operations under "Other income" and to electric operating expense. The "income tases-credit" classiGed under "Other income" results from tas deductions of interest costs relating primarily to insenments in CWIP. canceled constru tion projects, and short-term and intermediate-term insestments. Deferred income tases arc prosided for timing ditTerences between book and tas income, princi-pally resultmg from accelerated tas depreciation, leseli/ation of purchased power payments, and capitalized tases and employee bene 0ts. Insestment tax credits are deferred and amortiied oser the ( useful lises of the related properties. 27 I

DUKE POWER COMPANY NOTES 'IO FINANCI AL STNFEMENTS -(Continued) F. Unamorti:ed Debt Premium. Discount and Expense. Expenses incurred in connection with the issuance of tiresently outstanding long-term debt, and premiums and discounts relating to such debt, are being amortired over the lis es of the respective issues. Also, any exp<.nses or call premiums associated with refinancing higher cost debt obligations are being amortized over the lives of the new issues oflong term debt. G. Fucl Co3t.idjustment Procedurcs. Fuel costs are reviewed se;aiannually in the wholesale and South Carolina retail jurisdictions, with provisions for changing such costs in base rates in the North Carolina retail jurisdiction, a review of fuel costs in rates is required annually and during general rate case proceedings. All jurisdictions allow the Company to adjust for past over or under-recovery of fuel costs. Therefore, the Company reflects in res enues the difference between actual fuel costs incurred and fuel costs recovered through base rates. The North Carolina Utilities Commission ordered the Company to follow these deferred accounting procedures in its August 1986 order, which was effective for periods beginning January 1,1986. H. Other /mestments. Other insestments, which consist primarily of marketable securities, are stated at the lower of cost or market value. At year-end, the cost of these securities approximated market value. 1. Franchi3c and Sales Taacs. The North Carolina state franchise tax rate was changed effec-tive January 1,1985, in compliance with North Carolina state law. The statute reduced the franchise tas rate from 6 percent to 3.22 percent and imposed a 3 percent sales tax on the sales of electricity in North Carolina. This reduction in the franchise tax rate is reflected in reduced revenues and reduced general tases in the Statements of Income. The Company is acting as an agent for the state gosern-ment in the collection of sales in and is accumulating the amount as a component of"Taxes accrued" in the Balance Sheets. The Company remits both the sales tax and the franchise tax quarterly. 2. Rate Matters The North Carolina Utilities Commission and The Public Service Commission of South Caro-lina must approse rates for relati sales within their respective states. The Federal Energy Regulatory Commission (FERC) must approse the Company's rates for sales to wholesale customers. The revenues shown below (in millions of dollars) are annualized on the basis of the filing test year. A summary of all general rate increases requested or implemented by the Company since January 1,1984. is as follows: A pproicd

• . of increne End of Jurisdicnon and Reqursied

'. of (her Preiious Rate Order 12-xtonth 'l est Date f iled Hrienun Res t nuo Ha quest Heirnues E frective Period N C. retail % cmher IM $ 212

• 5131 o 61 6 x 4a June 19x4 June 30.19S3 iebru m 195$ w 34 i o 15? '

46 4 9 10 %cptember 19s$ June 30.1984 Marth 1%6 lai. .' M 1 131 ' 46 0 6 73 t )t tober t w o December 31.1985 % i1 retad Ne pt e mbe iv 1 136 0 na ' ' 3.1 17 40 March 1%4 A pril 30,1 % 3 Arni195~ 143 0 ?i4 54 s in ?$ ( Atober 1955 June 30. lW4 Mn1%6 13' A NI $'4 9 $$ Nostmber 19%6 thember 31,1983 i ! R(' w ho nale a bi Det emhcr I M 9$ $0 t,4. 2 9M ( Ataher 1%4 December 31.1984 JuhIM 92 $.2 $6 5 in $u March im Dec ember 31.1956 sup.st t w u> o4 45 'I o 5 30 l'ending December 31. I h? O 28

DUKE POWER COMPANY NOTES TO FINANCIAL, STATEMENTS -(Continued) (a) Under appeal. (See Note 14.) (b) FERC wholesale filings do not include the North Carolina hiunicipal Power Agency Number 1, the North Carolina Electric hiembership Corporation and the Saluda River Electric Cooperative, Inc. Beginning in July 1983, FERC wholesale filings also do not include the Piedmo it hiunicipal Power Agency. These municipalities and electric cooperatives previously purchassd interests in the Catawba Nuclear Station. (See Note 3.) Sales to these entities, which previously represented a majority of the Company's wholesale revenues, are now set through contractual agreements. (c) This increase was implemented in November 1986 through an interim rate order from FERC. This increase is subject to refund and approval. 3, Joint Ownership of Generating Facilities The Company has sold interests in both units of the Catawba Nuclear Station. The owners of portions of the 2,290,000 kilowatt Catawba Nuclear Station and supplemental information regarding their ownership are as follows: O wner dip Interest in Owner the Station Date of Sale North Carolina hiunicipal Power Agency Number 1 (NCN1PA) 37.5% November 29,1978 North Carolina Electric hiembership Corporation (NCEhtC) 28.125% February 6,1981 Saluda River Electric k Cooperative, Inc. (Saluda River) 9.375% February 6,1981 Piedmont hiunicipal Power Agency (Ph1PA) 12.5% December 20,1984 Each participant has provided its own financing for its ownership interest in the plant. The Company retains a 12.5 percent ownership interest in Catawba. As of December 31,1986, $478,800,000 of "Electric plant in service' represents the Company's investment in Units I and 2 and nuclear fuel for those units. Accumulated depreciation and amortization of $25,100,000 associ. ated with Catawba had been recorded as of year-end. Under the terras of the 1984 sale to Ph1PA, the Company received $457,086,000 at closing and a note for $13,800,000 which was paid during 1985 after the commercial operation of Catawba Unit 1. In connection with *,he joint ownership, the Company has entered into contractual agreements with the otherjoint ownert, to purchase annually declining percentages of the generating capacity and energy from the plant. The.:gnements were effective beginning with the commercial operation of each unit. Unit I and Unit 2 began commercial operation in June 1985 and August 1986, respec-titel';. Such agreements were estabiished for 15 years for NCh1PA and Ph1PA and 10 years for NCEhtC and Saluda River. Energy cost payments are based on vatiable operating costs, a function of the generation of the plant. Capacity payments are based on the Oxcd costs of the plant. The estimated purchased capacity obligations through 1991 are $549,961,000 for 1987, $493,674,000 for 1988, $457,532,000 for 1989, $439,655,000 for 1990 and $424,428,000 for 1991. The North Carolina Utilities Commission granted the Company recosery on a levelized basis of the capital costs and Gsed operating and maintenance costs of capacity purchased from the joint A 29

DUKE POWER CO.\\lPANY NOTES 'lO FINANCI Al STATE.\\lEN~IS -(Continued) owners over a 15-year period. The Public Service Commission of South Carolina allowed the Com-pany recosery on a levelized basis of the capital costs of capacity purchased oser a 76-year period. The Federal Energy Regulatory Commission granted the Company recovery on a levelized basis of the capitel costs of capacity purchased from the joint owners over a 15-> car period for Unit 1. Recoscry for Unit 2 has been requested. As provided in current rates in all jurisdictions, the Company recovers the costs of purchased energy and the portions of purchased capacity not being levelized. The portion of costs not recovered through current rates is being accumulated and the Company is recording a carrying chargt on the accumulated balance. The Company will start to recover the accumulated balance when the capacity payments drop below the levelized revenues. For the years ended December 31,1986 and 1985, the Company recorded purchased capacity and energy costs from the joint owners of $515.800,000 and $224,600,000, respectively. These amounts, net of the cost of capacity purchased not retic,ted in current rates, are included in "Net interchange and purchased power" in the Statements ofincome. As of December 31,1986 and 1985, $ 101,160,000 and $41,872,000 net ofincome tases respectively, associated with the costs of capacity purchased not reflected in current rates had been accumulated in the Balance Sheets as "Purchased capacity costs." 4. Other income For the years ended December 31,1986 and 1955, the Company recorded investment income of $34,000,000 and $58,000,000, respectively ($29,900,000 and $38,700,000 net of income taxes, respectively) as a component of"Other, net" in the Statements of Income. The income is primarily from dividends and interest on securities. The tases associated with the investment income are recorded as components of "Income tases - other, net" in the Statements of Income. O 30 l I l

DUKE POWER COMPANY A ) NOTES TO FINANCIAL STATE.\\lENTS-(Continued) 5. Income Tax Expense Income tax expense consisted of the following (dollars in thousands): 1986 1985 1984 Income taxes related to electric expenses Curren, income taxes Federal..,, $241,150 $200,884 $271,960 State.. 37,862 36.506 47,876 279,012 237,39,0 319,836 Deferred taxes, net Excess tax over book depreciation. 89,325 87,362 67,107 Capitalized taxes, employee benefits, etc.. 17,023 12,487 10,337 Catawba purchased capacity cost.. 52,942 37,700 Other.. 6,691 (6.745) (275) 165,981 130.804 77,169 investment tax credit Deferred. I6,801 40,729 37,381 Amortization of deferments (credit). (24.189) (21,146) (18,550) (7,388) 19,583 18,831 Total income taxes related to electric expenses.. 437,605 387,777 415,836 ,f] Income taxes related to other income (y Income taxes - other, net. 4,522 20,434 91,497* Income taxes -(credit). (32,163) (40,363) (42,209) Total income taxes relcted to other income., (27,641) _ 19,929) 49,288 ( Total income tax expense.. $409,964 $367,848 $465,124

• Includes $62,317,000 resulting from the sale of assets in December 1984. Such income taxes, which are included in "Other, net"in the Statements ofIncome, reflect a taxable gain in excess of book gain resulting principally from the treatment of AFUDC,(See Note 3.)

Total current income taxes were $248,368,000 for 1986, $226,712,000 for 1985 and $376,949,000 for 1984. Of these amounts, state income taxes were $33,876,000 for 1986, $34,692,000 for 1985 and $57,587,000 for 1984. Total deferred income taxes were $168,984,000 for 1986, $121,553,000 for 1985 and $69,344,000 for 1984. Of these amounts, deferred state income taxes were $20,060,000 for 1986, $13,178,000 for 1985 and $7,687,000 for 1984. A 31

DUKE POWER CO3tPANY NOFES TO FINANCIAL STATE 51ENTS-(Continued) Income taxes differ from amounts coniputed by applying the statutory tax rate to pretax income as follows (dollars in thousands): ion iw 1984 income taxes on pretax income at the statutory federal rate of 46%, $403,787 $370,503 $ 126,169 increase (reduction) in tax resulting from: Allowance for all funds used during construction ( A FU DC).. (30,309) (36,685) (59,220) Amortization of electric investment tax credit deferrals.. (24,189) (21,146) (18,550) AFUDC in book depreciation /amortiration. 43,679 42,575 45,298 State income taxes, net of federal income tax beneGt.. 28,848 25,320 35,832 Increase in tax expense primarily because of excess of tax gain over book proGt on sale of assets.. 27,280 Other items, net.. (11,852) (12,719) 8.315 Total income tax expense (see page 31).. $409.964 $ 367,848 $465,124

6. Short-Terrn llorrowings The Company had unused short term credit facilities of $306.150,000 with 56 commercial banks as of December 31,198^, $316,050,000 with 59 commercial banks as of December 31,1985,and

$319,500,000 with 60 commercial banks as of December 31,1984. Included in these credit facilities is $40,000,000 allocated to the 1984 issue of annual tender, pollution-control revenue bonds. The facilities are on a fee basis and/or a compensating-baiance basis, with total average balance require-ments of $1,351,500 for 1986, $1.362,500 for 1985, and $1,372,000 for 1984. There were no short-term borrowings during 1986,1985 and 1984. 7. Common Stock and Retained Earnings Common Stock During the past two > cars, the Company used stock market purchases to satisfy the requirements ofits stock plans. The only issuance of common stock, other than conversions, in the past three years was in 1984 when 1,451,607 shares were issued with proceeds of: 37,194,000. For the next several years, the Company anticipates using stock market purchases to satisfy the requirements of all its stock plans and irtends to issue new shares of common stock only for the conversion of preference stock. (See Note 8.) As of December 31,1986, a total of 4,722,041 wares was resers ed for issuance to stock plans and for the conversion of preference stock. Retained Earnmes As of December 31,1986, none of the Company's retained earnings were restricted as to the declaration or payment of dividends. O 32

DUKE POWER COMPANY A NOTES TO FINANCIAL STNIEMENTS-(Continued) 8, Preferred and Preference Stocks Without Sinking Fund Requirements The following shares of stock were authorized with or without sinking fund requirements as of December 31,1986 and 1985: Par Value Shares Preferred Stock.. $100 10,000,000 Preferred Stock A.. 25 10,000,000 Preference Stock.. 100 1.500,000 The outstanding Preference Stock, 6%% Convertible Series AA, is convertible into shares of common stock at the adjusted conversion price of $23.89 per share, with each share of preference stock valued at $100 par. The conversion price is subject to certain adjustments designed to protect the conversion privilege against dilution. In 1986,1985 and 1984, shares of preference stock were converted into shares of common stock as follows: Preference Common g Shares Shares 1986. 10.032 41,970 1985. 9,810 41,078 1984. 16,136 67,510 The Company has issued 500,000 shares of Adjustable Rate Preferred Stock, Series A, with a pa.r value of $100 per share. The disidend rate is adjusted quarterly based on a percentage of the highest rate among certain U.S. Treasury rates. However, in no event will the dividend rate for any dividend ,_) (V period be less than 5.50 percent per annum or greater than 10.50 percent per annum. This rate was 5.73 percent per annum at December 31,1986. Preferred and preference stocks without sinking fund requirements as of December 31,1986 and 1985, were as follows (dollars in thousands): Year Shares Rare / Series Iwued Outstanding 1986 19 6 4.50% C. 1964 350,000 $ 35,000 $ 35.000 5.72% D.. 1966 350,000 35,000 35,000 6.72% E.. 1968 350,000 35.000 35,000 8.70% F.. 1970 600,000 60,000 60,000 8.20% G.. 1971 600,000 60,000 60,000 7.80% H. 1972 600,000 60,000 60,000 8.28% K... 1977 500,000 50,000 50,000 8.84% M. 1978 400.000 40,000 40,000 15.40% A. 1982 1,600,000 40,000 40,000 Adjustable Rate A. 1986 500,000 50,000 64%,AA Cons ertible. 1969 35,495 3,550 45,527 .,552 Total. 5468,550 $419.552 In January 1987, the Company announced plans to call for redemption its 15.40% Series A. The Company plans to itsue additional preferred stock in early 1987 to fund this redemption. ry b 33

DUKE POWER CONil'ANY NO I ES TO l'IN ANCI AL STX1 E.\\lEN'IS - (Continued) 9, Preferred Stocks With Sinking l'und Requirements The following shares of stock were authorized with or without sinking fund requirements as of December 31,1986 and 1985: l'ar g-Shares Preferred Stock. $100 10,000,000 Preferred Stock A. 25 10,000,000 Preference Stock. 100 1,500,000 Preferred stocks with sinking futid requirements as of December 31,1986 and 1985, were as follows (dollars in thousands): l \\ car 5 hares Hate 5(rics issurd Outstanding 19K6 19M5 7.35% 1, 1973 528,000 $ $2,800 $ - i 552,000 55,200 j S.20% J. I977 400,000 40,000 l 420,000 42,000 8.375% L. I978 420,000 42,000 440,000 44,000 8.84% N. 1979 451.250 45,125 467,500 46,750 11.00% 0. 1980 500,000 50,000 10.76% A. 1975 2,040,000 51,000 7.875% P 1986 500.000 50,000 Less: Preferred shares reacquired for current and future sinking fund requirements (at cost) 5 hares Hracquired 10.76% A. 72.500 (1,702) 5.84% N. 13,800 (1,289) 30,050 (2,607) 11.00% 0. 13,750 (1,229) Less: Current sinking fund requirements 7.35% 1. (2,400) (2,400) 8.20% J. (2,000) (2,000) 6.375% L (2,000) (2,000) 8.84% N. (245) Total. $ 221.991 $ 277,012 The annual sinking fur d requirements through 1991, net of amounts reacquired, are $6,645,000 in 1957 and $5.025,000 in 1988,1989.1990 and 1991, with some additional redemptions permitted at the Company's option. The call prosisions for the outstanding preferred and preference stocks specify various redemp-tion prices not escetding 115 percent of par salues, plus accumulated dividends to the redemption date. i e 34

DUKE POWER COSIPANY ( NOTES TO FINANCIAL STATE 51ENTS-(Continued)

10. long-Term Debt First and refunding mortgage bonds outstanding as of December 31,1986 and 1985, v ere as follows (do!!ars in thousands):

Year Year Series llue 1986 1985 Nerles I)ue 19R6 1985 3N%, 1956 $ 30.000 (continued) 12 %,.... s990 75.000 9 %%.. 2005 $

92. mig $ 92.800 15 3.%..

1991 100.0u0 100910 8 5%.. 2006 96.850 96,850 4 t :%...... I992 50.000 SOMx) 8 %%.. 2007 119.500 1!9.500 4%% B.. I992 SOM10 50.000 9 %%.... 2008 120.610 120.610 11%.. 1994 64.250 10' i%...... 2009 145.050 145.050 4 ; :%...... I995 40.000 40.000 10N% H.. 2009 148.000 148.000 8':% H.. 1995 125 000 1.%% H.. 2010 50.000 T- %.. '996 100.OW 14 S % - 2012 16.282 125,000 5 5%.. Is97 72A00 72.600 12 N%...... 2015 67.517 125.000 6 %%.. I993 68.500 68.500 10'i% H.. 2015 50.000 50,000 7%...... 1999 56.075 56.075 9%... 2016 175.000 6% B.. 1999 64.739 64.739 l'ollutwn h ' :%..... 2000 69.244 69.244 Control 8 %% B.. 2000 95.635 95,635 6 %%.. 198s 25N10 25.000 7':%...... 2001 97.900 97.900 9%% j'EE)$ '013 77.000 77.000 1%% H.. 200 1 38.050 35.050 4qgJ 2014 40.000 40,000 7 %%...... 2002 78.100 78.100 $y g (393$, 7 %% B.. 3 02 67.900 67,900 L.ess: l~unds 55En 7 %%.... 2001 94.h72 94.872 t ru st " (107) (7.212) 8 ',% n.. sun 98.050 93.050 9 %%.. 2004 95.623 95.623 T otal.. $ 2.6 35.790 $2.614.136 Substantially all electric plant was mortgaged as of December 31,1986. O The annual maturities oflong-term debt, including capitalized lease principal payments, through 1991 are $32,266,000 in 1987, $64,063,000 in 1988, $26,753,000 in 1989, $5,182,000 in 1990 and $5,664,000 in 1991. Annual maturities through 1901 include amounts relating to the $85 million in outstanding obligations under the Company's two nuclear fuel trusts. The maturities are based on estimated fuel consumption. Instead of making cash payments, the Company intends to transfer title of additional nuclear fuel to the trusts as fuel is consumed, in early 1987, the Company announced plans to call for redemption its 154% Series due 1991 and its 10%% Series B due 2009. The Company plans to issue additionallong term debt in early 1987 to fund these redemptions. Accordingly, the 154% Series is not included in the annual maturities listed above.

11. Canceled Construction Projects The Cherokee and Perkins Nuclear Stations were canceled. All jurisdictions have permitted recosery of the incurred costs. These costs are being amortized principally over a 10-year period beginning October 1983. (See Note 14.)

As of December 31,1986 and 1985, the balances fcr these canceled projects, net of amortization, were $472,339,000 and $544,145,000, respectively ($296,016,000 and $341,214,000 net of income tas benefits, respectisely). The Financial Accounting Standards floard in December 1986 issued a statement in Financial Accounting Standards that may cause the Company to write down to present value its canceled construction projects. This write-down would be required because the Company's recovery of these projects through rates does not include a return on the outstanding canceled construction balances. Implementation of this statement is not required until 1988. The Cornpany is currently evaluating the impact of this statement and does not anticipate that the new accounting requirements will have a V significant elTect on its results of operations or financial position. 35

DUKE POWER CO.TIPANY NO l ES TO l'IN ANCI AI, STATE.%1ENTS -(Continued)

12. Reclassification in the Statements of Income, Statements of Changes in Financial Position, and Balance Sheets, certain prior year information has been teclassi0ed to conform with 1986 classifications.

13. Retirement Plan The Company and its operating subsidiaries have a non-contributory, denned benefit retirement plan covering substantially all their employees. The Company's policy is to fund pension costs accrued. Total pension expense, including trustee fees, amounted to $28,815,000 in 1986,

$31,491,000 in 1985 and $32,828,000 in 1984. The plan was changed in 1984 to include the Early Retirement Supplement Plan, a one-time early retirement offer to eligible employees. In addition, certain amendments were made to the plan in 1985, including changes in requirements for both creditable service and vesting service. The effect of these changes did not signiGeantly increase the Company's pension cost. A comparison of accumulated plan benefits and plan net assets as of December 31,1985, the date of the latest actuarial report, and December 31,1984, is as follows (dollars in thousands): 1985 19M4 Actuarial present value of accumulated plan tenefits Vested. $407,467 $ 340,329 Non-Vested. 121,510 87,400 Total. $ 528,977 $427129 Net assets available for benefits. $ 557,92_2, $447,665 O The weighted-average assumed rate of return used to determine the actuarial present value of accumulated plan benents was 7.5 percent in 1985 and 8.8 percent in 1984. The actuariat present value of accumulated plan benc0ts does not consider future salary increases. The Financial Accountmg Standards Board issued a statement in 1985 which will require the Company to change its method of determining nension espense. The Company will begin implemen-tation of this statement in 1987 and does not anticipate that the accounting requirements will have a signincan' :ffect on its results of operations or financial position.

14. Commitments and Contingencies

.1. Corutruction Program Projected construction and nuclear fuel costs are $2.14 billion and $491 million, respectively, for 1987 through 1989. The program is subject to periodic review and revisions, and actual construction costs incurred may vary f rom such estimates. Cost variances are due to various factors, including revised load estimates, outcome oflicensing and environmental matters, and cost and availabihty of capital. B. h udcar Irnurance The Company's public liability for claims resulting from any nuclear incident is limited to $695 mill >n under provisions of the Price-Anderson Act, which prosides for nuclear liability insurance up to that amount. Under these provisions the Company could be assessed up to $5 million for each of i its licensed reactors for a nuclear incident insolsing any licensed facility in the nation, and up to $10 million a > car for each, if more than one nuclear incident occurred. Legislation is pending in Congress that could increase the limitation liability and the amount the Company couid be assessed for each of its licensed reactors. As of December 31.1986, the Company had seven licensed reactors. 36 1

DUKE POWER COhlPANY NOTES TO l'INANCIAL STATE.TIENTS -(Continued) The Company is a member of Nuclear hlutual Limited (Nh1L), which provides property damage coverage for certain of the Company's nuclear facilities. If Nh1L's losses ever exceeded its resc es, the Company would be liable, on a pro rata basis, for additional assessments of up to $70 million. This amount represents 10 times the Company's annual premium to Nh1L. The Company is also a memb r of Nuclear Electric Insurance Limited (NEIL), which provides insurarwe for the increased tog JJ generation and/or purchased power resulting from an accidental outage of a nuclear unit. F NEll's losses ever exceeded its reserves, the Company would be liable, on a pro rata bass, for addutonal assessments of up to $2) million. This amount represents five times the Company's Ameal prermurri to NEIL. The Cotapany purchases $575 rnillion of property damage insurance through NEIL's Excess Property Insurance Program. The Company also purchased an additional $85 million of property damage insurance througl' ) pool o.'stcG and mutual insurance companies. These coverages are in addition to the 6500 milhon of coverage provided by the Company's underlying property damage policies issued t! rough Nh1L. Iflosses ever exce ded the accumulated funds available to NEIL for the Excess Property Lnurance Program, t' r Company would be liable, on a pro rata basis, for additional asse3snents or op ra $28 million. This mount reoresents 7.5 times the Company's annual premium for $5M millice of eC:ss pzaperty insurance. in addit on 1: the coverate through NEIL's Exce4s Propeny insurance Program, the Company i riaced ',585 million triough a pool of stock and :1 utual insurance companies for primary and excess proper" insurance courage associated with its intezest in the Catawba Nuclear Station. The joint own..of Catawba will assume their pro rata share of any liability for claims resulting from J nue'rar sident. Trie Company is being reimoursed by the other joint owners for certain V) expenses anociated w9h nuclea, insurmee premiems paid b3 the Company. C. Oiler The Company.5 inva?'ed in legal tm and regulatory proceedings before various courts and qencies reghrdicy matters te:Wat in the ordinary course of business, some of which involve substan- .ial.meunts. Except as dis ! sted t,elew; management is of the opinion that the final disposition of these proccecmgs will not hase a raaterially adserse efTect on the Company's results of operations or financH >ositior. Certair oarties br/c a@eded the 1985 and 1986 rate orders of the North Carolina Utilities Commission to the North Caroiina 3apreme Court. The appellants have raised numerous issues in these appeals, including the Co.an,ics:.>n's undings and conclusions related to the treatment of nuclear plant abandonments. An adv:ry raling in th;se cas's could have a significant impact on the Company's results of operasiens and financial position. Jhile the Company is of the opinion that there is an adequate legal v.d fact til basis for eacn aspect of the North Carolina Utilities Commis-sion's decisions in the t r,o cases, the Coinpany cannot presently determine the ultimate resolution of the appeals. b U p

l l DUKE l'OWER COhlPANY SUPPL.EN1 ENTAL FINANCIAL, DATA -(Unaudited) Quarterly Financial Data A summary of quarterly financial data for 1986 and 1985 is as follows (dollars in thousands, except per-share data): Electric Electric Operating Net Earnings Per Reienues income income Share 1986 by Quarter Fourth.. $842,959 $ 124,025 $ 92,077 $0.77 Third.. 940,551 181,979 152,530 1.37 Second. 784.016 119.208 89,820 0.73 First. 833,407 159,564 133,407 1.17 i985 by Quarter Fou rth.. $ 717,893 $ 111,848 $ 89,535 $0.73 Third.. 751,237 141,416 119,358 1.03 Second. 678,332 116,996 93,961 0.78 First. 751,449 I57,775 134,739 1.18 Generally, quarterly earnings fluctuate with seasonal weather conditions timing of rate increases, fuel cost adjustment procedures and maintenance of electric generating units. especially nuclear units. O l 9 38

DUKE POWER COMPANY SCIIEDULE V-PROPERLY, PIANT AND EQUIPMENT v (Dollars in thousands) Halance Balance Beginning Add End Description of Year Additions Retirements (Deduct) of Year For the l' ear Ended Da cmber 31,1956 Electric Plant in Senice-At Onginal Cost Production.. $4.206.638 5 415,387(1) 533,980 $ (24,230) $ 4.563,815 Transminion.. 1,040,301 36.226 3.127 1,943 1.075,343 Dist nbution.. 1,878,797 186.884 22,779 693 2,04),595 General.. 345,832 75,217 10,434 666 411.281 Aliscellaneous.. 152,495 2,018 21.087 175,600 Nuclear fuel.. 985.221 190,177 1,175.398 Total electne plant in senice.. 8.609.284 905.909 70.320 159 9,445.032 Construction Work in Progren.. 817,350 (216.286 M. J

60. 064 Other Property - At Cost Water plant..

28,362 1,841 90 30,113 Transit plant.. 2,609 61 2,548 Non. utility plant. 16.770 11.112) 21 50 15.687 Total other property. 47.741 729 172 50 48.340 Total plant.. 59.474.375 5 690.352 57C).492 5 2(>9 510.094.444 for the ) ear Ended Decembcr 31,1915 Electne Plant in senice-At Onginal Cost Production.. 53,834.893 5 373,742t2) $ 1,750 5 (247) 5 4.206,638 T ransmission.. 1,011,713 29,925 1,578 241 1.040,301 Distn bu tion.. 1,712.747 180,130 15,750 1,670 1,878,797 General.. 307.043 49,473 17,597 6,913 345,832 Ntiscellaneous.. 153.009 356 13 (857) 152,495 / 1 Nuclear Fuel. 790.689 194.532 985.221 'Q) Total elev.tnc plant in senice.. 7.810.094 828.158 36.688 7.720 8.609.284 k Construction Work in Progren.. 98s,790 (172,8 51 N 2) 1,411 8 7.350 Other Propert) - At Cost s ) Water plant.. 27,574 889 92 (9) 28,362 Transit plant. 2,85' '43 2.609 Non utility plant.. 15.771 990 1.255 1.264 16,770 Total other property. 46,197 1.879 1,590 1.255 47.741 Total plant.. 58.845.081 5 657.186 538.278 5 10.386 5 9,474.375 1i r the )' ear Ended Da rm!c 31.19H Electne Plant in Senice - At Onginal Cost Production.. 52.584.775 51,086.485(3) 1 862 5(135.505) 5 3.834.893 Transminion.. 965.463 4 5.4 h 2 1,964 2,732 1.011,713 i Distnbution.. I,$s3.320 145.219 14.956 (836) 1,712,747 General.. 273.466 40.631 9,610 2.556 307.043 Niiscellaneous.. 17,345 680 134.984 153,009 i Nuclear fuel.. 546.430 244.260 (I) 790.689 ) Total elettne plant in senice.. 6.270.799 1.562.757 27.392 3.930 /.810.094 Construction Work in Progress.. 2.296.843 (922.602 W 3) ( 38 5,4 51 W 4) 988.790 Other Propert) - At Cost Water plant.. 23.08 K 710 1.333 109 27,574 Transit plant... 2,934 8' ',852 Non utility plant. I1.773 3.889 321 430 15.771 Total other propert). 42.795 4.5 W l.736 539 46.197 Total plant.. 58.610.437 5 644.754 529.128 513so.982) 5 8.845.081 (1) Pnncipally due to commeraal operation of Unit 2 of Catawba Nuclear Station on August 19.1986 (2p Pnncipally due to commercial operation of Unit 1 of the Catawba Nuclear Station on June 29,1985. (31 Pnncipally due to commercial operation of Unit 2 of the NitGuire Nuclear Station on N1 arch 1,1954. (4) Pnncipally due to the sale of a portion of the Catawba Nuclear Station in December 1984 I i \\ _/ I i 39 l

f DUKE POWER COMPANY SCIIEDLLE VI-ACCl31Cl.AIED DFPRErl\\llON AND ANIORilLAllON OF PROPERIT, PldN F AND EQl'IPNIEN1 (Dullars in thousands) Clearing Other and Changes Hatance ikginning Other Add Fnd of Description ofieur Depreciation Accounts Retirements (lkduct) Year ier the ) car I:nJcJ Decem!rr 31, IYM Accumulated Depreciation of Llectric Plant Production.. 51,124.734 5162,731 5 - 536.262 5 (21.811) 51,229,392 Transmisuon. 359.895 30,137 1,747 l16 388,401 Dist nbution.. 616,240 66,438 21,548 (134) 660.996 General., 116,871 11.758 10.240 9.596 (230) 129,043 Nfiscellaneous.. 139.818 872 21.065 161,755 2,357,558 271.064 11.112 69,153 (994) 2,569,587 Accumulated Amonization of Limited Term Plant.. l.887 486 2,373 Accumulated Amortuation of Nuclear i uel.. 675.028 160.357 835,385 3.034.473 271.004 171,955 69,153 (994) 3,407,345 Accumulated Depreciation of Water Plant.... Accumulated Depreciation of...... 5,226 $50 86 5,690 Tranut Plant. 2.558 42 60 2.540 { 9.299 Total Accumulated Depreciation. 53.042.257 5271.656 5171.955 5 (994) 13.415.575 Ior the 1 car I:nded Decemtvr 31,19% Accumulated Depreciation of Electnc Plant Prod uction. 5 976.360 5150,505 5 - 5 2.005 5 (126) 31.124,734 Transmisuon. 331.297 29,164 598 32 359.895 Distribution. 570.654 60,769 15.067 (116) 616,240 General 109,483 8.977 9,010 10.823 224 116,871 Niiwellaneout. I39.707 58' (476) l 39.818 2.127,501 249,415 9.597 28.493 (462) 2,357,558 Accumulated Amortuation of Limited Term Plant. l.401 486 1.887 Accumulated Amortization of Nuclear f uel.. 517.364 157.664 675.028 2,646.266 249,415 167.747 28.493 (462) 3,034.473 Accumulated Depreciation of % ater Plant.. 4 '77 540 91 5,226 Accumulated Depreciation of Transit Plant.. 1642 157 241 2.558 Total Accumulated Depreciation. 52.653.685 5250.112 5167.747 528.825 5 (462) 53.042.257 Ier the lear I:nded ikccmber 31, tw Accumulated Depreciation of Electne Plant Production.. 5 971.835 1140.603 5 - 5 1.W9 5(135.069) $ 976.360 T ransmission. 304.486 27.971 1.125 (35) 331.297 Distnbution.. 528.766 55.758 13.905 35 570.654 General. 101.191 7.5 $ $ 7,944 7.20' (50) 109.483 Sliscell.incout. 4.178 476 135.053 139.707 1.910.456 231.857 b 470 23.246 (66) 2.127.501 Accumulated Amortuation of Limited Term Plant.. 926 475 1.401 Accumulated Amonuation of Nuclear f uel. 44.76h 21.596 $ 17.364 2.4 u 5.150 2 31.h h ? 32,541 2.1.246 i66) 2.646.266 Accumulated Depreciation of Water Plant. 5.507 $1h 1.332 64 4,777 Accumulated ikpreciation of T ranut Plant. 2.516 2m x2 2.642 Total Accumulated Depreaanon. 52.413.173 5232 633 5 32.541 5 24 A60 5 (2) 52A51685 4() u-

DUKE POWER CO.TIPANY / SCllEDl'LE VIII-VAI.UNilON AND Ql'AI.lFYING ACCOUNIS AND RESFRVES ([hillars in thousands) Charged Balance to Costs Balance Beginning and End of Description or Year Espenses Deductions Year For the l' ear Ended December 31,1986 Reserves Deducted from Assets on llalance Sheet Provision for Uncollectible Account., $ 4,004 5 6,074 $6,211(1) $ 3,867 Other Resenes Operating Resenes (3).. $24,427 $ 13,579 $6,318(2) $31,688 For the Year Ended December 31,1935 Reserves Deducted from Assets on Balance Sheet Provision for Uncollectible Accounts... $ 4,030 $ 5,098 $5,124(1) $ 4,004 Other Reserves Operating Resenes (3).. $ 19,925 $ 6,580 $2,078(2) $24,427 For the Year Ended December 31,1984 Resenes Deducted from Assets on Balance Sheet Provision for Uncollectible Accounts... $ 3,982 $ 4,312 $4,264(1) $ 4,030 Other Resenes Operating Reserves (3). $ 17,552 $ 4,847 $2,474(2) $ 19,925 it) Uncollectible accounts written off, net of recoveries. s.:) Entries represent payments primarily for injuries and damages in North Carolina and South Carolina. (3) Principally consists of injuries and Damages reserves and Property Insurance reserve which are included in "Deferred Credits and Other !.; abilities," in the Balance Sheets. $CllEDL'I.E X - St PPl.EN1EN1 ARY INCOilE SI A IEMENI INIOIO1 AIlON Year Ended Decernber.41 1986 1985 1984 (th>llars in thousands) Taxes, other than payroll and income taxes: Real and personal property. $ 53,348 $ 41,606 $ 40,782 State and city franchise *. 76,647 67,058 123,094 Other.. 6.289 6.504 7,976 Total. $ 136.284 $ 115.168 $ 171,852

• For information relating to the decrease in state and city franchise taxes for 1986 and 1985, see Note 1, "Notes to Financial Statements."

D 41

EXillBIT I DUKE l'OWER CONil'ANY cosit't I A t ton or it I.tx Dit.t i rD F ARNINGs l'ru sli tRE -(t'nauditedi l This calculation is submitted in accordance with Regulation S-K under the Securities Exchange Act of 1934, although not required by footnote 2 to paragrapa 14 of Opinion No.15 of the Account. ing l'rinciples Board because it results in dilution ofless than 3%. ) ear Ended Darmher 31 1986 1985 1984 (Dollars in thousands eucpt per share ngures) Fully Diluted: Earnings applicable to common stock (l).. $409,067 $ 376,681 $ 399,545 Add: Dividends on Preference Stock,6% Convertible Series AA. 263 331 426 Earnings as adjusted for computation. $409,330 $ 377,012 $ 399.971 Average common shares outstanding-twelve months (thousands) 101,220 101,178 100,346 Add: Common shares required for conversion of l' reference Stock,6% Convertible Series AA, $ 100 par, 500,000 shares authorized (35,495 shares outstanding as of December 31, 1986 H 2).. 149 191 232 Common shares as adjusted for computation. 101,369 101,369 100,578 l Fully diluted earnings per share. 4.04 3.72 3.98 (1) These figures agree with the related amounts in the Statements of income. (2) The consersion price used to consert the l' reference Stock, 6% Convertible Series AA, into shares of common stock was $23.59. l l 1 O c

.~ -.- - i Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. No events necessary to be disclosed by the Compar.y under this item have occurred. PART lli. Item 10. Directors and Executive Officers of the Registrant. Information for this item concerning directors of the Company is set forth in the section entitled "Election of Directors"in the proxy statement of the Company relating to its 1987 annual meeting of shareholders, which ts incorporated herein by reference. Information concerning the executive oflicers of the Company is set forth under the section entitled "Executive Officers of the Company" in this annual report. item Ii. Executive Compensation. i Information for this item is set forth in the section entitled "Executive Compensation" in the [ proxy statement of the Company relating to its 1987 annual meeting of shareholders, which is incorporated herein by reference. 1 L ltem 12. Security Ownership of Certain Beneficial Owners and Afanagement. Information for this item is set forth in the sections entitled "Voting Securities Outstanding" and "Election of Directors" in the proxy statement of the Company relating to its 1987 annual meeting of shareholders, which is incorporated herein by reference, i ltem i3. Certain Relationships and Related Transactions. Informatic,n for this item is set forth in the section entitled "Election of Directors" in the proxy statement of the Company relating to its 1987 annual meeting of shareholders, which is incorporated herein by reference. PART IV. 1 i item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8.K. j Financial Statements Supplemental Financial Data and Supplemental Schedules included in Part 11 of this annual report are as follows: i l Financial Statements Statements ofIncome for the Three Years Ended Decemoer 31,1986 Statements of Changes in Financial Position n i for the Three Years Ended December 31,1986 Balance Sheets-December 31,1986 and 1985 i j Statements of Capitalization - December 31,1986 and 1985 Statements of Retained Earnings for the Three Years Ended December 31,1986 Notes to Financial Statements Supplemental Financial Data (Unaudited) Supplemental Schedules Schedule V - Property, Plant and Equipment for the Years Ended ( December 31,1986,1985 and 1984 Schedule VI-Accumulated Depreciation and Amortization of Property, Plant and Equipment for the Years Ended December 31,1986,1985 and 1984 j Schedule Vill-Valuation and Qualifying Accounts and Reserves j 1 for the Years Ended December 31.1986,1985 and 1984 i Schedule X - Supplementary income Statement Information for the Years Ended December 31,1986,1985 and 1984 Exhibit 1 -Computation of Fully Diluted Earnings Per Share (Unaudited) 43 I

All other schedules are omitted because of the absence of the conditions under which they are required or because the required information is included in the Gnancial statements or notes thereto. Financial statements and schedules of the Company's subsidiaries are omitted because all such subsidiaries, considered in the aggregate as a single subsidiary, would not constitute a signincant subsidiary. Exhibits (a) - See Exhibit Index on page 46. (b) - Annual Report on Form Il-K with respect to the Stock Purchase-Savings Program for Employees of the Company for the 6 scal year ended October 31,1986 and the Employees' Stock Ownership Plan for the year ended December 31,1986. Reports on Form 8-K l No reports on Form 8 K were Gled during the last quarter of 1986. O O 44

i SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrart 1:as duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Charlotte and State of North Carolina on the 27th day of March,1987. DUKE POWER CONIPANY i tRegistrant) By: W. S. LEE Chairman of the hoard i Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed belon by the following persons on behalf of the registrant and in the capacities and on the date indicated. Signature Title Date W. S. LEE Chairman of the Board (Principal Exeevtive Officer) hiarch 27,1987 W. ii. GRIGG Executive Vice President, Finance and Administration (Principal Financial Ofncer) hlarch 27,1987 NORNI AN P. hiORROW Controller (Principal Accounting Officer) hinch 27,1987 NAOMI G. ALB ANESE ROBERT L. ALBRIGitT Gi D. W. BOOTli TitONIAs 11. D Avis JollN L. FRALEY ALESTER G. Ft:RNI AN ll! STEVE C. GRif filli, JP.. W. It GRIGG pal'L li. lien 50N l GEORGE R. !!ERHERT l GEftGE DE AN IOllNSON, JR. A majority of the Directors hlarch 27,1987 i j AN1ES V. JOllNsON W. W. JOllNSON l W. S. LEE Bt;K hitchEL REEcE A. 0"ERCA511, JR. WARRLN It OWEN J ANIES C. SEI F lewis F. CANtP, JR., by signing his name hereto. does hereby sign this document on behalf of the issuer and on behalf of each of the above named persorn pursuant to powers of attorney duly I exe;uted by the issuer and such pencns. filed with the Securities and Exchange Commission as supplemental infc tmation. /s/ LEw is F. CANtP. JR. t enis t. O amp. J', Attorney-in fact i 45 4 , ~, _ - ._,n.

EXilllllT INDEX The following eshibits indicated by an asterisk preceding the exhibit number are filed herewith. The balance of the exhibits have heretofore been filcd with the Securities and Exchange Commission and pursuant to Rule 12b-32 are incc.rporated herein by reference. hhite Mmber 3-A - Restated Charter of registrant, dated as of January 1,1979 (filed with Form S 7 File No. 2-63592, etTective h1 arch 14,1979, as Exhibit 2-B-1). 311 - Acticles of Amendment to the Articles of incorporation dated Stay 4,1981 (filed with Form 10-K for the year ended December 31, 1981, File No, 1-4928. as Exhibit 3-B). 3-C - Statement of Classification of Shares rela:iny to the 8.84% Cumulative Preferred Stock, Series N (filed with Form S lo, File No. 2-66561, etTective February 6,1980, as Exhibit 2 B-3), 3D -Statemer,t of Classification of Shares relating to the 11% Cumulative Preferred Stock, Series O (tiled with Form S-16, File No. 2 68582, e Tective August 19,1980, as Exhibit 2-B-4), 3E - Statement of Classification of Shares relating to the 15.40% Preferred Stock A,1982 Series (filed with Form S 16, File No. 2-75953, effective February 23,1982, as Exhibit 2 B-5).

• 3-F

-Statement of Classificatic,n of Shares relating to the 7.875% Cumulative Preferred Stock, Series P. "3 G - Statement of Classificat;on of Shares relating to the Adjustable Rate Cumulative Preferred Stock, Series A.

• 3-11

- Statement of Classificatien of Shares relating to the 7,12% Cumulative Preferred Stock, Series Q. ' 3-1 - 11y Laws of registrant, as amended to date. 4-P-l - First and Refunding Stortgage from registrant to Guaranty Trust Company of New York, Trustee, dated as of December 1,1927 (tiled with Form S-1, File No. 2-7224, etTective October 15, i947, as Exhibit 7(a)). 4-D-2 - Supplemental indeniare, dated as of hiarch 12, 1930, supplementing said h1ortgage (liled aith Form S-1, File No. 2-7224, eff ctive October 15,1947, as Esnibit 7(b)). 4 B-3 -- Suppleinental Indenture, dated as of July 1,1935, supplementing said Stortgage (tiled with Form S-1, File No. 2-7224, etTective October 15,1947, as Exnibit 7(c)). 4-B-4 - Surplemental Indenture, dated as of December 1,1935, supplementing said Ntortgage (tiled with Form S-1, File No. 2-7224, etTectise October 15,1947, as Exhibit 7(d)). 4-B-5 - Supplemental Indenture, dated as of Sept,:mber 1,1936, supplementing said N1ortgage (filed with Form S-1, File No. 2-7224, effectise October 15,1947, as Eshibit 7(e)). 4 11-6 - Supplemental Indenture, dated as of January 1,1941, supplementing said N1ortgage (tiled with Form S-1. File No. 2-72'!4, e Tective October 15,1947, as Exhibit 7(f)). 4B7 - Supplemental Indenture, dated as of April 1,1944, supplementing said Stortgage (tiled with Form S-1, File No. 2-7224, effectise October 15,1947, as Eshibit 7(g)). 4 B-8 - Supplemental indenture, dated as of September 1,1947, supplernenting said N1ortgage (tiled with Form S-1, File No. 2-7224, etTective October 15,1947, as Exhibit 7(h)). O 46

Bhlbit Mmber O, 4 B-9 - Supplemental Indenture, dated as of September 8,1947, supplementing said h!ortgage (filed with Form S 1, File No. 210401, effective August 21,1953, as Exhibit 411-9). 4 B 10 -Supplemental Indenture, dated as of February 1,1949, supplementing said Stortgage (Gled with Form S-1 File No. 2 7808, effectise February 3,1949, as Exhivit 7(j)). i 4 B 11 -S1pplemental Indenture, dated as of h1 arch 1,1949, supplementing said U.ortgage (filed with Form S 1, File No. 2 8877, effective April 5,1951, as Exhibit 7(k)). 4 B 12 -Supplemental Indenture, dated as of A ril 1,1951, supplementing said htortgage (filed with Form S 1 File No. S. 8877, effective April 6,1951, as Exhibit 7(1)). 4 B 13 - Supplemental Indenture, dated as of September 1,1953, supplementing said h!ortgage (filed with Form S 1, File No. 2-10401, effective August 21,1953, as Exhibit 411-13). 4 B-14 -Supplemental Indenture, dated as of October 1,1954, supplementing said hjortgage (6 led with Form S-9, File No. 2 11297, effective December 30, 1954, as Exhibit 2 B 14). 4 B 15 - Supplemental Indenture, dated as of January 1,1955, supplementing said htortgage (Gled with Form S 9, File No. 211297, effective December 30, 1954, as Exhibit 2-B-15). 4-B 16 -Supplemental Indenture, dated as of hlav 1,1956, supplementing said Afortgage (Gled with Form S-9, File No. 21.4402, effective April 26,1956, as Exhibit 2 B 16). 4 B li -Supplemental Indenture, dated as of January 1,1960, supplementing said O htortgage (filed with Form 10, effective June 29,1961, as Exhibit 3 B 18). 4 B-18 -Supplemental Indenture, dawd as of February 1,1960, supplementing said h!ortgage (Gled with Form 10, effectise June 29,1961, as Lxhibit 3 B 19). 4-B-19 -Supplemental indenture, dated as of February 1,1962, supplementing said Stortgage (tiled with Form S-9, /ile No. 2 20577, efTective August 16,1962, as Exhibit 211-20). 4 B 20 - Supplemental Indenture, dated as of August I,1962, supplementing said Stortgage (filed with Form S 1, File Na. 2 25367, effective August 23,1966, as Exhibit 4 B-19). 4 B-21 -Supplemental Inder,ture, dated as of June 15, 1964, supplementing said hlortgage (Gled with Form S 1, File No. 2 25367, efTective August 23,1966, as Exhibit 4 B-20). 4B22 -Supplemental Indenturc, dated as of February 1,1965, supplementing said hlortgage (Gled with Form S-1, File No. 2-25367, effective August 23,1966, as Exhibit 4 B-21). 4-B-23 -Supplemental Indenture, dated as of April 1,1967, supplementing said h!ortgage (filed with Form S-9, File No. 2 28023, efTective Februar/ 15, 1968, as Exhibit 21125). 4 B-24 - Supplemental Indenture, dated as of February 1,1968, supplementing said h1ortgage (filed uith Form S-9, File No. 2 313D4, etTective January 21,1969, as Exhibit 21126). i 4 B-25 -Supplemental Indenture, dated as of February 1,1969, supplementing said hlortgage (filed with Form S-7, File No. 2-34189, effective August 27,1969, as Exhibit 2 B-27). 4 B 26 - Supplemental I.identure, dated a'.;i eptember I,1969, supplementing said htortgage (Gled with Form S-7. .e No. 2 36095, effective February 16, i 1970, as Exhibit 2 B-39), s 47 I

I shibit N umber 4-B-2 7 -Supplemental Indenture, dated as of $1 arch 1,1970, supplementing said htortgage (tiled with Form S 7 File No. 2-37953, elTective July 28,1970, as Exhibit 2-B-42). -Supt emental Indenture, dated as of August 1,1970, supplementing said i 4 B 28 hiongage (tiled with Form S 7, File No. 2 39451, effective hf arch 4,1971, as Exhibit 2 B-28). 4 B-29 -Supplemental Indenture, dated as of Starch 1,1971, supplementing said stortgage (liled with Form S 7, File No. 2-42404, effectise December 7, 1971, as Exhibit 2-11-29). 4 B-30 - Supplemental indenture, dated as of December 1,1971, supnlementing said htortgage (Gled with Form S-7, File No. 2-43122, elTective Starch 7,19i2, as l Exhibit 21130). l 4-B 31 -Supplemental Indenture, daird as of April 1,1972, supplementing said l h'ortgage (Gled with Form S-7, File No. 2-46208, effective November 20, '972, as Exhibit 21131). 4 B 32 - Supplemental Indenture, dated as of December 1,1972, supplementing said l htorte, age (filed with Form S-7, File No. 2-48058, effective June 5,1973, as l Exhibit 2 B 32). l l 4 B-33 - Supplemental Indenture, dated as of June I,1973, supplementing said hjortgage (filed with Form S-7, File No. 2-49333, elTective November 5, 1973, as Exhibit 2-B-33). 4-11 34 - Supplemental Indenture, dated as of November 1,1973, supplementing said htortgage (filed with Form S-7, Fik No. 2-50493, effective April 25,19 /4, as Exhibit 2-B-34). 4-11 35 - Supplemental Indenture, dated ns of hlav 1,1974, supp!cmenting said hjortgage (filed with Form S-7, File No. 2-52669, effective February 11, 1975, as Eshibit 2 B-35). 4 B 36 - Supplemental Indenture, dated as of February 1,1975, supplementing said hjortgage (Gled with Form S-7, File No. 2 57118, etTectise October 5,1976, as Exhibit 2 B 36). 4 B-37 -Supplemental indenture, dated as of July 1,1975, supplementing said Stortgage (Gled with Form S-7, File No. 2-57118, effectise October 5,1976, as Exhibit 2-11-37). 4 B-3S - Supplementa', Indenture, dated as of October 1,1976, supplementing said 51ortgage (Gled with Form S-7, File No. 2-59494, etTective August 10,1977, as Exhittit 2 B 38). 4 B-39 - Supplemental Indenture, dated as of September 1,1977, supplementing said Stortgage (filed with Form S-7, File No. 2-61995, elTectise July 26,1978, as Eshibit 2-11-39). 4-B-40 - Supplemental Indenture, dated as of August 1,1978, supplementing said hjortgage (tiled with Form S-7, File No. 2 64541, etTectise June 7,1979, as Exhibit 2-B-40). 4-B-41 -Supplemental Indenture, dated as of June 1,1979, supplementing said Stortgage (tiled wit; I orm S-7, File No. 2-65371, effectise October 2,1979, as Exhibit 2 B-41). 4 4 2 - opplemental Indenture, dated as of (>ctober 1,1979, supplementing said N1ertgage (tiled with I orm S-7, File No. 2 66659, etTectise Starch 12,1980, as Exhibit 2-11-42). 4 B-43 -Supplemental Indenture, dated as of Starch 1,1950, supplementing said N1ortgage (tiled with Form S 16, File No. 2 65571, etTectis e August 19,1980, as Eshibit 2-B-43). O l l I 45

h hibit N um twr [3 4 B-44 -Supplemental Indenture, dated as of August 1,1980, supplementing said ( ) htortgage (tiled with Form S-16, File No. 2 75951, efTective February 23, 1982, as Exhibit 2-D-44). 4 B-4 $ -Supplemental Indenture, dated as of 51 arch 1,1932, supplementing said Stortgage (filed with Form S-16. File No. 2 75951, elTective February 23, 1982, as Exhibit 2-B 45). 41146 - Supplemental Indenture, dated as of September 1,1982, supplementing said hlortgage (Gled with Form S-3, File No. 2 78882, elTective August 30,1982, as Exhibit 4 B-46). 4 B 47 -Supplemental Indenture, dated as of h!ay 1,1983, supplementing said htortgage (filed with Form S 3, File No. 2 95931, efTective April 1,1985, as Exhibit 4 B-47). 4 11-48 - Supplemental ladenture, dated as of September 1,1983, supplementing said Stortgage (filed with Form S-3, File No. 2-95931, effective April 1,1985, as Exhibit 4 B-48). 4 4 9 - Supplemental Indenture, dated as of September 1,1984, supplementing said 51ortgage (filed with Form S-3, File No. 2 95931, etTective April 1,1985, as Exhibit 4 B-49). 4 B-50 -Supplemental Indenture, dated as of Starch 1,1985, supplementing said htortgage (tiled wi:h Form S-3, File No. 2-95931, effective April 1,1985, as Exhibit 4-11-50). 11151 - Supplemental Indenture, dated as of December 1,1985, supplementing said Stortgage (filed with Form S 3, File No. 33-5163, efTective hiay 2,1956, as Exhibit 4 B 51). 4 B 52 - Supplemental Indenture, dated as of April I,1986, supplementing said T Stortgage (tiled with Form S-3, File No. 33-5163, etTectise May 2,1986, as sl Exhibit 4-B 52)

• v

'4 B-53 -Supplemental indenture, dated as of hiay 1,1986, suppleraenting said Stortgage.

• 4 B-54

- Supplemental Indenture, dated as of June I,1986, supplementing said Mor1 gage. '4 B-55 - Supplemental Indenture, dated as of February 1,1987, supplementing said 51ortgage. '4-B-56 - Supplemental Indenture, dated as of February 15,1987, supplementing said hfortgage. '4 B57 -Supplemental indenture, dated as of h1 arch 1,1987, supplementing said Stortgage. 10- A - Agreement, dated Starch 6,1978. between the registrant and the North of N1 arch 1978,, pile No.1-4928). Carolina 51unici al Fower Agency No.1 (filed with 10-B - Agreement, dated as of August I,1980, between the reg.strant and Piedmont hiunicipal l'ower Agency (filed with Fctm 8 K for the month of August 1980, File No.1-4928). 10-C - Agreemeni. dated as of October 14,1980, between the registrant and North Carolina Electric hiembership Corporation (filed with Form 10-Q for the quarter ended September 30,1980, File No.1-4928). i 10-D - Agreement, dated as of October 14,1980, between the registrant and Saluda Rner Electric Cooperatnc. Inc. (filed with Form 10-Q for the quarter ended September 30.1980, File No.1-4928).

• 12

- Computation of Ratio of Earnings to Fixed Charges. '24 - Coment of Independent Auditors. 49

m EXilllllT 24 CONSENT OF INDEl'ENDENT AUDITORS Duke l'ower Company: We hereby consent to the incorporation by reference in Registration Statement No. 33-5163 on Form S 3,in l'ost EtTective Amendment No. $ to Registration Statement No. 2-79057 on Form S-3, in Post EtTective Amendment No. 4 to Registration Stateinent No. 2 81066 on Form S 3 and in l'ost. EtTective Amendment No. 5 to Registration Stat: ment No. 2-72172 on Form S-S of our opinion (which is qualified as set forth therein), dated February 13,1c487, appearing in this annual report on Form 10-K of Duke Power Company for the year ended December 31,1986. 1 1 Drt011It firsKINs & Sttts Charlotte, North Carolina March 27,1987 l O 1 O 50 _ _ _ _ _}}