Text

1997 Annual Rept for Duke Energy Corporation & Saluda River Electric Cooperative,Inc,Financial Statements as of Dec 1997 & 1996 Together W/Auditors Rept
	ML20247L904
Person / Time
Site:	Oconee, Mcguire, Catawba, McGuire
Issue date:	12/31/1997
From:	Patricia Anderson, Priory R; DUKE POWER CO.
To:	;
Shared Package
ML15112A617	List: ML20247L904;
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at a Glame Duke Energy Corporation's diverse business units combine natural gas and electric assets in North America, South America and the Pacific Rim Uur engineering, construction and operating skills serve enesgy prodneers and consumers around the world. Our portfolio of energy services covers the energy value chain. Our technical, engineering and environ-mental services are extended to a wide range of energy and research facilities in more than 50 countries. Our diversified operations engage in real estate development, communications and water utility setsice.

Electric Operations Duke Power p

Nantahala Power & Light Company Energy Transmission

Yrtheast Pipelines Texas Eastern Transmission Corgwaticy Algonquin Gas Transmission Company-Midwest Pipelines Panhandle Eastern Pipe Line Company Trunklitie Gas Company Energy Services Duke Energy Field Services, Inc.

Duke Energy Trading and Marketing, L.L.C.

Duke Energy Power Services, LLC Duke Energy International, LLC Duke Energy Industrial Asset Development, L.L.C.

Duke Engineering & Services,Inc.

Duke / Fluor Daniel DukeSolutions, Inc.

TEPPCO Partners, L.P.

Diversilled Operations Crescent Resources,Inc.

DukeNet Communications, Inc.

Duke Water Systems, Inc.

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Waste-to Energy N Nantahala Power and Light e Diesel f,

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Integrated gas /elettric 1,%g' jp.fid

& National Methanol e International! engineenng, constru< t son, environmental

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Cont:nts b

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Our Strategy Glossary f

it is built on our assets, services and Some terms and definitions used in marketing skills.1 this report. 21 Duke Energy at a Glance Management's Discussion and Analysis This is an overview of Duke Energy's A comprehensive review of Duke worldwide ast.ets and operations.

Energy Corporation's financial inside fold-outs performance. 23 Financial Highlights Financial Statements 2

38 Letter to Our Shareholders Management Richard Priory and Paul Anderson The officers of Duke Energy outline Duke Energy's direction, Corporation and business capabilities and commitments. 3 unit presidents. 67 The Duke Difference Policy Committee These are the attributes and capabilities The exnuuve leadersnip cf 'he

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that set Duke Energy apart.

corporation with brief biographies.

Commitment to Our Customers 68 Today's customers want comprehensive energy solutions. 6 Board of Directors Commercial Capability Duke Energy combines technical and Shareholder information commercial skills that no single A brief summary of services and competitor can match today. 8 contacts available for shareholders.

Technical Leadership Back cover The Duke name stands for technical leadership in the design, operation and environmental compliance of energy-i related facilities.10

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Asset Position In a real sense it is a bellwe'ther, we believe, Duke Energy's asset base complements our skills and expenise, and it cannot as the biggest market cap, certainly among the be recreated today at any price.12 strongest managements, and one of the most j

Financial Strength aggressive and we believe most intelligent Duke Energy's Mission: To create strategies of broad-based investment in shareholder value through superior unregulated energy businesses.,

i capabilities in the production, d? livery

-Morgan Stanley and sale of energy-related products I

and services for our customers A

worldwide. 24 liridgeport - A Case Study How Duke Energy's skill, strength and speed made the Bridgeport Energy Project a reality.16 I

1997 Duke Energy Year One - Milestones These are summary highlights of Duke Energy's first year.18 I

The Duke Difference 3

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Key Strategies for Duke Energy:

Provide superior electric service to the Carolinas.

Ensure success in a deregulated environment.

Increase earnings and find new

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. Own and operate strategic energy supply assets worldwide.

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Domestic - develop and acquire significant generating and transportation assets with (j.

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geographic diversity.

International -- develop and acquire integrated energy assets with focus on Asia and Latin America.

Rank in the top five processors of natural gas in North America.

a e Supply and trade multiple forms of energy.

Develop the marketing and trading busines.s to leverage the company's assets and capabilities.

Rank in the top five marketers of both electricity and natural gas.

Provide energy-related products and services worldwide.

Provide comprehensive bundled energy solutions.

Be one of the top three providers of energy services; engineering, procurement and construction, and operating and maintenance capabilities.

Integrate the two predecessor companies to create new lines of business that leverage the best of both companies.

= Become the leading nuclear engineering and services company.

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DukeSolutions provides integrated, custom solutions that reduce costs Duke Enr.cnng & Services and improve energy efficiencyfor provides engineering and envamn.

Duke Energy Power industrial, commerrial, gm ernmental mental services worldwide, includ-Services manages and institutions! customers.

ing operanon of hydroelectric, unregulated generati>n nuclear and renewable energy and engages in electric

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environmental management, vil ment throughout the /& '\\~ ~i h:Sf.

... :.. l Duke / Fluor Danielfamily andpmcessing, and and project develop-

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plants worldwide.

l Duke Power serves approximately two million customers in a 20.0!X)-square-mile service terri-tory in North Camlina and South Carolina.

l Duke Power's three nuclearplants, eight coal-fired stations and hydroels ctric and combustion Q

turbine plants are among the most efficient in the naticn. Nantaluda Power and Light is a franchived electric utility provider.ierving afive-county area in v.estetr rolina.

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manages and operates energyfacilities worldwide.

N Duke Energy Trading and Marketing markets and trades I

ciec:ricpim'er and naturalgas Duke Energy Field Services to utilities, municipalities gathers andpmcesses natural andother large energy gas;is the nation'sfourth users:pmvides

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largest NGL producer and comprehensive a leading marketer ofnatural related services,

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gas liquids: provi.'es intrastate including risk natum! gas transportation, management end storage, andfinancial wrices totalenerg~y W

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Texas Eastern Transmission Corporation, Algonquin Gas nsmission Company, Panhandle Eastern Pipe Line Company and Trunkline Gas Company. Thefotar interstate TEPPCO pipelines access all major U.S.

Partners supply basins and deliver 12 per-transports refined cent of the natura! gas consumed pmducts andliquejied in the United States through a

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petmleum gases through 22,0(Khmile pipeline syste n to a 4,300-mile pipeline sys-markets spanning the Midwest, o

tem sets ing Midwest and Hid-Atlantic and Northeast states.

Northeast markets. Duke Energy sceves as operator Duke Energy o

and holds a 10 percent Transport & Trading mterest in this master operates crude oil and limitedpartnership, natusal gas liquida pipelines; markets and trades crude oil.

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l Financial Highlighb I

Duke Energy Corporation Years Ended December 31 In Millions, except where noted 1997a 1996a 19953 Operating Revenues.........

$16,308.9 $12,302.4 $ 9,694.7 Earnings Before Interest and Taxes (EBIT).........

2,108.1 2,294.2 2,190.5 Income Defore Extraordinary Item..................

974.4 1,091.0 1,018.1 Net Income...................

974.4 1,074.3 1,018.1

, Earnings for Common Stockholders.....

901.6 1,030.1 969.2 Common Stock Data Average Shares Outstanding....................

359.8 361.2 361.2 Basic Earnings per share (before extraordinary item) 2.51 $

2.90 $

2.68 Basic Earnings per share.............

2.51 2.85 2.68 Dividends per share....

1.90 1.57 1.50 Capitalization Common Equity 50 %

51%

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Preferred Stock..

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f Trust Preferred Securities......

27c Totsl Debt 457c 44'7o 457c SEC Fixed Charges Coverage 4.1 4.3 4.0 Total Assets

$24,028.8 $22,366.2

:0,867.9 Total Debt 6,776.8 6,295.4 6,295.0 Cash Flows from Operations.....

2,140.1 2,335.2 1,832.2 Capital and Investment Expenditures...

2,027.6 1,550.0 1,290.7 Operating Datab Electric Operations Volurnes, GWh Sales.......

77,541 76,852 76,737 Natural Gas Transmission Volurres, TBtu...........

2,862 2.939 2,703 Natural Gas Gathered / Processed, TBtu/d...........

3.4 2.9 1.9 Natural Gas Liquids Production, MBbl/d..........

103.9 76.5 54.8 Natural Gas Marketed, TBtu/d..................

6.9 5.5 3.6 Electricity Marketed, GWh*.................

64,650 4,229 513 F

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!riv an Ratings basic Earnings per shwe S & P 500 Mondy's Fitch Duff & Phelps 1997 PME Sennar Indeb cdnen AA.

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l a Fina nial information renects accounting for the merger with PanEnergy Corp as a pooling of interests. As a r:sult, the financial information gives effect to the merger as if it had occurred January 1.1995.

b Units of measure used arc gigawatt-bours (GWh). trilHon Britista thermal units (TBlu). trillion British thermal units per day l

(TBru/d) and thousand barrels per day (MHbl/d), as applicable.

C Exclud:s Electric Operations' volumes.

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l To our Duke Energy Shareholders:

On June 18,1997 we successfully completed the

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merger of Duke Power Company and PanEnergy Corp to create Duke Energy Corporation. We have joined the ranks of the world's largest energy compa-nies, ending the year with a market capitalization of

$19.9 billion. It is more than our size however, that k

4 has captured the interest of investors, analysts and

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i Energy we have forged an enterprise that is uncom-A.X; monly well equipped to grow and to serve regional,

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national and global markets.

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Richard Priory Chairman and Chief b

h This new kind of energy com-gecy,f,e ojJicer; and Paul Anderson, jghyf@g y-} pany has been met with high President and Chief Operating Officer Qg Hh Yh expectations, based on our NN4hN bij hb@is%@MAbb)d unmatched portfolio o

$p pfeayf NI' Street, our investors and our customers, we at Duke Energy QWMg ijlj share these high expectations. We are committed to exceeding I'

b e udenh.A M them in every measure of performance.

Although the creation of Duke Energy occurred at mid year, all of 1997 was characterized by our drive and determination to lead a new, emerging energy services industry. We closed the merger swiftly, and we carried the momentum through our first six months as Duke Energy.

Our executive team is in place; we are working together with a common pur-pose. We have successfully led a number of important initiatives including the launching of new businesses such as DukeSolutions ana Duke Energy Industrial Asset Development.

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In addition to traditional business expansions, we have committed more than

$1 billion to new projects that take advantage of our expanded capabilities. We:

are developing and building the 520 megawatt Bridgeport Energy Project, our first merchant power plant in the Northeast; are acquiring from PG&E Corporation the Morro Bay, Moss Landing and Oakland power plants, totaling 2,645 megawatts of capacity and providing an entree into California's deregulating electricity market; and have acquired a 32.5 percent interest in American Ref-Fuel Company, the nation's third largest waste-to-energy business - expanding our presence in the Northeast.

Rapidly changing energy markets offer tremendous growth opportunities for well positioned energy companies. Duke Energy begins with a commitment to our customers. We combine that with our commercial capability, technical leadership, asset base and financial strength. When you add all of these up in Duke Energy, the whole is much greater than the sum of the parts.

Duke Energy will grow by combining gas and electric capabilities to serve emerging, competitive energy markets. Consider these projections by the U.S. Energy Information Administration:

U.S. energy consumption will increase 27 percent from 1996 to 2020.

U.S. gas consumption will increase 46 percent from 1996 to 2020.

Gas-fired power generation will grow to 33 percent of all U.S. generation by 2020.

Worldwide energy demand will increase 50 percent over the next 20 years.

. Worldwide demand for electricity will increase by 75 percent from 1995 to 2015.

Duke Energy is equipped and deployed to serve this growth in demand, by serving the entire " energy value chain." We gather, process, transport and market natural gas. We convert uranium, coal, gas, water and waste to electricity. We develop, design, construct, own and operate power generation facilities and market the output. We market multiple forms of energy. We provide integrated energy solutions, including energy efficiency services.

Our financial goals are based on this growth potential. We will maintain finan-cial strength and flexibility, reflected in our strong credit ratings. Our goal is growth in ermings per share of 8 to 10 percent annually.

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Equa! to our commitment to growth is our rock solid commitment to servin g our existing customers. The Duke Power name, which backs up that commitment, is on offices, service trucks and power plants across the Carolinas.

i We continue to work closely with our industrial and commercial customers to provide reliable power at prices that enable them to operate competitively in their markets. We are available to residential and other customers 24 hours2.777778e-4 days 0.00667 hours 3.968254e-5 weeks 9.132e-6 months a day, seven days a week. As our customers in the Carolinas are offered greater choice among energy suppliers, we will continue to offer products and a level of service that will make Duke Power their first and best choice.

Our natural gas pipeline customers will continue pmm e - -mm a

to benefit from our work to expand access to gas M nEDM@?$U$dil[$W l

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North America,s best integrated pipelm.e system.

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a restructured electric mdustry - one that provides for fairness to all customers, ensures continued M,i @n.l #.,W, W O_ hg@.4.m a,

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system reliability and fully recognizes the interests

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Wall Street has called Duke Energy the "First Mover" in the convergence of gas and electricity. Our lead position has been established. Now we must step up the pace. We have the momentum, skill, strength and speed. Duke Energy is The Next Generation of Energy.

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g, Richard Priory Paul Anderson Chairman and President and s,

Chief Executive Officer Chief Operating Officer

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l Duke Energy combines technical and l l commercial skills that no single competitor can match today. For the City of Dover, Delaware For Providence Gas Company l Duke Energy Power Services (Power Trading and Marketing will deliver l Services) brings skills in managing the city's Providence Gas Company's (Providence) full energy assets. Duke / Fluor Daniel brings techni-gas requirements and administer all gas supply, cal expertise to improve the operations and transportation and storage agreements, enabling maintenance of Dover's two generating stations it to focus on its distribution system and cus- -lowering costs while improving reliat41%y. tomers, The result is an immediate rate reduction The city benefits from the buying po'<er and of 5 percent for Providence's Rhode Island risk management skills of Duke Ener",y Trading customers, along with a thre> year rate freeze. i ( and Marketing (Trading and Marke.mg)- Through Trading and Marketing, Providence L a top-five energy marketer. Our r,arketing skills benefits from access to the gas gathering, pro-i serve in purchasing the plants' f uels, direct cessing and supply capabilities of Duke Energy power purchases for the city, and marketing of Field Services.. As a partner in Duke Energy surplus power production. By securing the most Trading and Marketing, Mobil Corporation has cost-effective options, Duke dedicated its entire Nonh American I)ulm' Fluor Aniers 12m7 gas production for Trading and Energy can provide the City of l Dover a fixed price for electricity (['[",,' ""he Marketing's customers. In the next generation of energy, f or 10 years and create eamings gun g,y,7arj,,g,, syn j,, opportunities in a variety of energy Dover. Delaware. Impivred commercial success for customers services. "P""'k*"*d mai"'ero""- is best assured by an energy compa-hc ny with commercial strengths that <f 4 are reinforced by complementary markting services. have rude Dover:r operacon services across the entire energy both a generunng asset and value chain. a commercial asset. ( l '9

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u v s j a k.bb.. > 1 k.. .5L.b.. ..a_, .1 sy m p g n 9 m,p. m m y n.,. %yi%%>jkj :.W;U"2 9 4 % s @ v h ;'.i G n [" imba%%..s.@,J$ ' N ' > U.$l ,o.. ;. p d' t. Q34WN&g&&g^ *fg.,3.g,G The Duke name stands for technical M-yg leadership in the design, operation and environmental compliance of energy-related facilities. Dub Engineering & Services (DE&S) has Our designs for fem.iMired power plants set grown to become the world's leading nuclear global standards for quahty and competitive engineering company. We serve the global costs. Mecklenburg Cogeneration Facihty in nuclear power industry with complete plant life-Virginia is one of the cleanest, most advanced cycle capabilities - from design to operations coal plants in the U.S. We are building its sister to decommissioning. In 1997 DE&S acquired plants as part of the Irian Jaya Project in Yankee Atomic Electric Company's Nuclear Indonesia. Services Division, adding to DE&S' strong A leading Duke / fluor Daniel innovation is expertise in decontamination, decommissioning PowerSuite, which provides instant, interactive I. and fuel management for commercial nuclear communications for power projects. Owners, power plants. developers, engineers, vendors and other key DE&S is a regected contractor serving project players share real-time data and the U.S. Depanment of Energy's Brookhaven information anywhere in the National Laboratory, Idaho National world. The systern integrates Both Duke Power and Dule E"#'""'*'8 d #"'"' Engineering & Environmental Laboratory, digital imaging, computer net-have replaccd massiw l Los Ahunos National Laboratory, Hanford site, works and satellite uplinks. ,,,,,,,,,,,,y,,,,,m,f,,, and the Civilian Radioactive Waste Management Duke Eneryy's technical plants in world record rime. ~~ l System. Our global expertise also extends and engineering companies with fop Performance in '"/d5 "d"di"# d"' I to hydropower, renewable energy and the build relationships and create replacement at Duke j petroleum m. dustry. opportunities in more th.m 50 fy,,,, %,, g,f,,, Duke / Fluor Daniel's family of companies countries, while deliveting a station in 1997 combines the engineering and construction capa-growing retum to shareholders. bilities of Duke Energy and Fluor Daniel Inc. I r 8. lL

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_L AL I I b s l l Duke Energy's asset base complements our skills and expertise, and it cannot be recreated today at any price. l Duke Power's 18,000. megawatt generation system comprises an effective mix of base l load and peaking power plants, including nuclear, coal-fired, gas-fired and hydroelectric j plants, Duke Power's 12,500-mile electric transmission system, consistently ranked by l our customers among the most reliable in the U.S., combines with our generating sys-tem to serve the Carolinas and power marketing resources over a wider area. n, cocthors Bridge Station regu-Our four interstate natural gas transmission Connecting new supplies - jo,,,,,,j,,,,,,,, companies own more than 22,00() mile.; of Maritimes & Northeast Pipeline wi!! gasfor deliwry j pipeline, from the Great Plains to the Great connect the Sable Island offshore sup- /mm7hasfa3'ern Lakes, and from the Mexican border to New p!y basin with new and expanding L.'""*"'I"'"" I orporation's (Texas England.Through this system moves 12 percent markets in Canada and the Northeast. gay,7g p;p,fj,,, of the gas consumed in the U.S. Our pipelines As part of the proposed Alliance to the New wrA provide an unequaled platform for: Pipeline project, Duke will also trans. Facaldes Gmup.

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' Expansion - On the supply end, Trunkline pon natural gas from Westem Canada -in e & uch i Gas Company is increasing capacity on its to the Chicago area for distribution poputuicd. high l Terrebonne System by more than 50 percent to throughout North America. gmwth maries - l serve new production in the Gulf of Mexico. Duke Energy Field Services is one willprovide oPPortun#infor l :- On the delivery end, Duke's participation in the of the five largest systems in the U.S. additunal ymwth. Cross Bay Pipeline joint venture will connect for gathering and processing natural - Texas Eastern's pipeline with Long Island, gas and natural gas liquids. We operate expanding our ability to serve rapidly growing 16,800 miles of pipelines in nine stnes. own New York metropolitan markets. and operate 27 gas processing plants, and have Transporting gas between markets-ownership interest in 12 additional plants. Our Spectrum project will transport gas from the Duke Energy Intemational's global asset Chicago area to growing Northeast markets, pro-portfolio includes 2,800 gross MW of generation I' l viding seamless service across Duke Energy capacity, worth approximately $1 billion. l pipelines. 13 1

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hM v y ay i k L.it (UL ih 3 Li a i ~ v ,-pq,g .,-s -.. ~. ,c,- a. w. g <y y . au n,, i..we think Duke % financial'amigj / e management strength give?it'a' dest g Wee thiwinner'idecle,t %Q4 " F.% y? -3.i n y c e c n = %. L = W-u+ww _ Duke Energy's Mission: To create shareholder value through superior capabilities in the production, delivery and sale of energy-related products and services for our customers worldwide. Our traditional, regulated businesses are energy conversion facilities for industrial cus-changing, and we are increasingly active in more tomers in the U.S. and Canada. We will also competitive businesses - with greater opponu-invest in assets and projects to enhance prod-nities for growth, but greater volatility also. ucts and services for our existing customers. This evolution of our business mix parallels an Ilow Duke Energy's financial strength evolution of our investors' expectations. served an important customer, A keystone of our strategy and the engine Since 1994 Duke / Fluor Daniel International ) of our continued growth and evolution, will has performed operations and maintenance be our financial strength. Financial strength services for generation facilities serv-7he r=cr genera-d""I"Cd'### "C"i"8 is critical because: ing Pi' Freeport Indonesia mining and PT Freeport

Duke Energy Power Senices will seek oppor-milling operations in Irian Jaya, indoresia iri triar, tunities in the U.S. and Canada to develop, Indonesia. In 1996 we began engineer-Jaya comprise a own and operate electric generation projects.

ing, procurement and construction of unique large scalc. '"d"*'"'"' '"#id

Duke Enercy International will continue a three-unit,195-MW coal-fired the-fence" operation to focus on such markets as Asia and Latin station and transmission facilities t sening gold and America to develop, own and operate serve the site. In 1997 a consonium copper min.g and a

energy projects. led by Duke Energy International pur-muling oPeratiota . Duke Energy Field Senices has invested more chased the facilities under construction. For the than $1 billion during this decade in expanding customer, this frees capital for the core business. its system and will continue to develop this For Duke Energy, it expands an asset base that asset in offering integrated energy services. can be integrated with operations, maintenance,

Duke Energy Industrial Asset Development fuel procurement and other senices. With its was launched in 1997 to develop, own, man-financial strength, Duke Energy serves PT age and operate on-site electric generation and Freeport Indonesia from operations to ownership.

.5

1 Bridgeport - = from conception to completion. Duke Energy Trading and Marketing ' will securefuel suppliesfor the plant and will use our marketing expertise to Duke Energy optuni:e pricing and dispatchfor the Power Services plant's output. brings the expertise of:he owner /Jevel- ,j over to assess pro-9,g 7 ject viability and v4 ~ construct and man-age plant operaticms. { I \\ / .p' + 4 he / + ll f Duke Energy's Pipelines willpartici-pate in transporting natural gas to the plant. Duke / Fluor Daniel serves as the owners' engineer for the project and will support the plant' long-term operation. s Duke Energy Flel Services. along with Mobd Corporation's commis-ment ofits North American gas pnxiuction, will help ensure fuel supply. i l l

The Eridg port En rgy Pr: Ject l' L ShiH, Strength, op D ,, n 17n vnnw=mg l ' 'Q,g y The' mix [ofDuke Powe$tnsiglQ 7-l ^ ifinanli$ hsitiodwellpos$oned eiednic$

assets *andrenownedtec& &b Ma$@$'5M#(Eiip*WUk ic4abilisAd%nacer&qatasesdiMn

. maaaremeaua**a ***q t 1 tsetmeame=yenes(#sepoes%& Wyy

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.yw I Skill, strength and speed - that's how Duke Energy l made the Bridgeport Energy Project a reality. l Construction began in October 1997, less than four months after the Duke Power /PanEnergy merger closed and the project was announced. This sent I powerful messages about Duke Energy: . We move decisively. We marshal our diverse businesses and our people quickly. . We build effective partnerships that provide distinct project advantages. l l With our commitment to customers, our commercial capability, l technical leadership, asset position and financial strength, the whole of Duke Energy is greater than the sum of the parts. The Bridgeport Energy Project (Bridgeport) secure additional power supply for its cus-is Duke Energy's first merchant plant in the tomers as margins continue to tighten. Here's Northeast - a power market characterized by what Duke Energy brought to the project: t tightening reserve margins - a promising mar-Skill: Duke brings the full complement ket for a new, competitively priced power plant of skills - as an owner and developer; in equipped with advanced combined cycle tech-procuring and transporting fuel supplies; in nology. As a " merchant plant" Bridgeport's engineering and operations; and in marketing power will be sold by Duke Energy Trading and the output. Marketing directly to wholesale and industrial Strength: Duke Energy is financing the customers, through a spot market or through $265 million project through the strength of shoit, mid-and long-term contracts. its balance sheet. Bridgeport results from a partnership Speed: The goal for Bridgeport - take between Duke Energy Power Services and the project from conception to completion of The United Illuminating Co., an investor-owned the 340-MW Phase I in less than one year and utility based in New Haven, Conn. It will complete the 180-MW Phase 11 by mid-1999.

17

Duke En:rgy Ye:r Ons - Milastanos First Quarter Midwest and Northeast pipelines, the tors called it "the best new course" Major New York pipeline project strategic importance of Spectrum was and golf pros ranked it one of the announced. The Cross Bay Pipeline further increased by Duke's subse- " top three" courses they played in joint venture (successor to the quent investment in the Alliance 1997. Excelsior Project) will expand deliv-Pipeline Project, which will move Duke Power continued its leader-ery capability into the New York natural gas from western Canada to ship of industry restructuring ini. City metropolitan area by more than Chicago by late 1999. tlatives. Duke filed with The Public 25 percent. The project's initial phase Service Commission of South is targeted for operation for 1999. Second Quarter Carolina the company's proposal for Dauphin Island Gathering restructuring the electric industry in Partners (DIGP) to expand. the state. In North Carolina, legisla-l DIGP, of which Duke Energy Field tion created a study commission to l!fij ys Senices (Field Services) owns consider industry restructuring. Duke I [' q; 3 ~ 37.3 percent, announced expansion of CEO Richard Priory was named to its Dauphin Island Gathering System the commission. ' ' ' l ' to provide approximately 200,000 Algonquin Gas Transmission Crescent Resources (Crescent) Dth/d of natural gas gathering senice Company began service to continued Southeast expansion. to offshore producers. It will be the Connecticut Light and Power in Tampa and Orlando, Crescent's first major northern outlet for natural plant. Algonquin completed an eight-Primera and llidden River office gas from deep water offshore gas mile lateral and related facilities parks got off to strong stans. By the fields in the eastern Gulf of Mexico. ahead of schedule - providing end of 1997 more than 640,000 Phase 11 will provide another 200,000 83,000 Dth/d of firm service to the square feet of space was leased, Dth/d capacity. Middletown generation plant. under construction and planned in the Mobile Bay Processing Partners DE&S acquired Northrup, Devine two parks. In Nashville, One (MHPP) to process natural gas for and Tarbell Inc. This acquisition of Corporate Centre was fully leased Mobil Corporation and Main Pass the national hydropower and environ-and a second 150,000-square-foot Producers. The Mobile Bay process-mental engineering firm makes building was 75 percent leased. ing plant is southern Alabama's first DE&S a major provider of services in Crescent is also developing a 220-and will process up to 600,000 Dth/d. hydropower engineering, and regula-acre warehouse / distribution park in Construction began in December 1997, tory and environmental areas of water Nashville. In Atlanta, three buildings Field Services cwns 49.5 percent of resource management. are complete and a fourth is under MBPP. construction, totaling 355,000 square Millions viewed Crescent's feet. Crosstown Center, a 250-acre Sugarloaf development.The PGA mixed use development, was started BellSouth Classic on CBS brought '8 i I south of Tampa. Crescent's Duke Engineering & Services Sugarloaf residen-(DE&S) awarded a contract for tial development l California ISO. DE&S will provide y and Greg Norman-J s k (- pmject management senices in devel. Y designed golf oping the " Independent System Oper-k, course to national ator," which will dispatch electricity prominence. After Duke Power electric transmis-

I and control Califomia's power grid in 28 years at another sion crews strung 230 miles of the new deregulated framework.

club, Sugarloaf fiber optic cable for lease in Spectrum Project is announced. It hosted the event for the first time. It part to WorldCom. On another will combine newly constructed and drew millions of TV viewers and section of Duke's electric trans-existing pipelines to transpon natural more than 160,000 spectators - mission system, Duke strung a gas from Chicago to growing achieving the first-ever sellout and 104-mile section of cable that is Northeast markets. In addition to making it the largest event in Atlanta the first in the world to include enhancing integration of Duke's since the Olympics. CBS commenta-144 optical fibers. l 1 l 1 . f l

n ,.e b, M: n, fp Qjv, W& $,Wm ( @WHL 4 Q @ iQ June 18 - Duke k S '" > d 5 * 'N sland-based Providence Gas Co. It i i Power Company F win,< will administer all of Providence Gas' + ,3 _ Q ~ y and PanEnergy [ gas supply agreements and deliver its f,,;. l; Corp completed full gas requirements at a fixed price. add 75,000 barrels per day capacity, Duke began providing complete fuel , -[ their merger - ~* less than seven helping TEPPCO move toward a supply and asset management ser- -,f months after the sixth consecutive year of record vices on Oct.1. announcement. Under terms of the performance in the transportation, DukeSolutions was awarded a merger, each share of PanEnergy storage and terminating of refined $150 million Department of Corp stock was converted to the right petroleum products and liquefied Defense contract. It will improve the to receive 1.0444 shares of Duke petroleum gases. energy efficiency of federal and state Energy stock; On June 19 Rick Priory Trunkline Gas Company began a facilities in 46 states, the District of and Paul Ander<on rang the opening $52 million expansion of its Columbia and Puerto Rico. A previ-bell of the New York Stock Exchange. Terrebonne natural gas pipeline ously awarded contract wonh up to Tha ceremony launched the first full system. The project includes a new $100 million covers facilities in North Carolina, South Carolina, day of trading for le new Duke platform and J Virginia and Georgia. Energy stock. compressor 2 Duke Energy Power Services

station, (Power Services) and The United adding i,

A J,g Fourth Quarter Illuminating Company announced 500,000 J* Maritimes & Northeast Pipeline the Bridgeport Project.The $265 Dth/d capaci. 9 contint.ed to receive regulatory million,520-MW natural gas-fired ty and bring-k [,. iea approvals, keeping the project on track.'Ihe project has received all comb' ied cycle power generation ing new off-the state's largest non-nuclear power duction from ~ f. _ Canadian regulatory approvals. In the plant in Bridgeport, Conn., will be shore pro-n U.S., the FERC authorized constmc-plant. Duke will be majority owner, the Gulf of Mexico to Trunkline for transport to 8.4 Third Quarter multiple onshore markets. . lf ~ Duke Energy Field Servicet (Field Power Services and MCNIC / l Services) completed processing Power Company announced capacity expansions. Added capacity Mobile Bay Energy Project. They at the Minden, La., plant and the pro-will construct, own and operate the cessing complex at Port Arthur, Mobile Bay Energy Project, a 40-tion of a 66-mile section of the Texas, will total 175,000 Dth/d and MW natural gas cogeneration facility pipeline and issued preliminary expand services to gas producers and that will provide electric power and approval for the remainder of the facil-increase gas supply for Duke thermal energy to the Mobile Bay ities. Maritimes & Northeast is sched-Energy's pipeline systems. Field natural gas processing plant. uled to begin transporting gas in 1999 Services also acquired the Hico-Duke hnergy Trading and from Sable Island reserves, off Nova Knowles gas processing plant in Marketing (Trading and Scotia, to markets in the Canadian Lincoln Parish, La. Marketing) purchased inland Maritimes and the northeast U.S. TEPPCO Partners, LP. Pacille Energy Services Corp., a Conservationists applauded. Duke !~ (TEPPCO) completed two expan-natural gas marketer based in Energy and Crescent Resources sion projects. Combined, they will Spok me, Wash.This increaas the announced a sale and one-time gift of number of industrial customers 32,000 acres to the State of South . J if D;.,, @ ~ ; served by Duke, expands their energy Carolina, culminating what has been ffq service options and significantly called one of the nation's most signif-

$jp increases pipeline capacity Duke has icant conservation efforts. The spec-

-5 under contract in the Northwest. tacular section of the Blue Ridge 1 Trading and Marketing signed a Escarpment provides some of the ~ three-year con:ract with Rhode most dramatic scenery and ecologi-19

' v w rq - cally significant lands in the region. Duke Power customers and foun-Nature Conservancy of Texas l Duke Power completed its final dation ' shared the warmth.' More honored Duke Energy with its 1997 planned steam generator replace-than 40.000 Duke Power customers Conservation Leadership Award. ment project on Dec.18. The contributed tc Se Share the Wannth The award recognized a range of nuclear generation deputment program, which provides heating work, including educational activities, returned McGuire unit 2 to service assistance through kval social service volunteer involvement and the com-after a world record outage of only agencies and organizations. The Duke pany's environmental standards. 77 days. The outage team replaced Energy Foundation matche individ-DE&S completed its purchase of 7 , the unit's ual gifts, up to $50, up to a total of Yankee Atomic Electric Company's fou: cas- $500,000. For 1997, the Foundation Nuclear Services Division. The ) si'.. steam and Duke curtamers combined to expansion will complement DE&S' generators, give $1.2 million. strong capabilities in decontamina-installed a U.S. Department of Energy tion, decommissioning and fuel man-state-of-the-awarded five-year, $2 billion con-agement. art comput-tract to consortium that includes Mobile Bay Processing Partners er to aid plant operaton, and per-DE&S. Along with the Battelle announced a 300,000 Dth/d expan-formed extensive turbine and mainte-sion of its Mobile Bay processing nance work. Earlier in 1997 the team plant, under construction in replaced the Unit I steam generators Alabama. The expansion results in 94 days, $18 million under budget. from agreements with Coastal Oil & Power Services and United Gas Corporation and CNG Producing American Energy Corp. purchased h-1-.1-A Company, which conunitted roduc-P 50 percent ownership intenst in tion from several blocks in the Gulf American Ref-Fuel Company. The Memorial Research Institute and the of Mexico. $237 million purchase strengthens Research Foundation of the State Consortium purchased trian Jaya Duke's power generation portfolio University of New York, DE&S will generating plant. A consortium led and merchant power strategy in the manage and operate Brookhaven by Duke Energy International pur-Northeast. American Rcf-Fuelis the National Laboratory. chased the three-unit 195-MW gener-top-ranked waste-to-energy firm in DukeNet Communications contin-ating facilities being constructed by New York and New Jersey, and third ued to extend its reach. Carolinas Duke / Fluor Daniel International in larnst in the U.S. FiberNet L.L.C., a liber optic net-Indonesia to serve irr Freeport hxas Eastern Transmission work of which DukcNet is a partner, Indonesia Company's mining and Corporation begins new service for extended the network to nonhern milling operations. Duke Energy Columbia Gas Transmission and Virginia and interconnections with International owns 42.86 percent of CNG Transmission. Completed Washington, D.C. BellSouth Mobility PT Puncakjaya Power, the Indonesian facilities and new long-term capacity DCS, in which DukeNet owns a company established by the consor-leases have combined to provide the 20 percent interest, ended the year tium to own and operate the power two companies new capacity in with 121,000 subscribed customers. generating facilities. Pennsylvania as the most cost etTec-Duke / Fluor Daniel moved forward Duke Power's Bulk Power tive way for them to meet incremental on Texas and Earopean projects. Marketing Group completed first needs of their natural gas customers. Duke / Fluor Daniel began turnkey full year of sales. FERC granted Power Services announced its engineering, procurement and con-authority in 1996 for Duke to market winning bid to purchase thne struction for the 440-MW up to 2.500 MW of its temporarily power p%nts from PG&E Oxychem/Ingleside Cogeneration surplus capacity and associated ener-Corporation for $5d1 million. Plant in Texas. Also, Duke / Fluor gy at market rates in the wholesale Totaling 2,645 MW, the output fmm Daniel and Cormco Global Power bulk power market. In 1997 the group Maro Bay, Moss Landing and moved forward in developing an sold 1.9 million MWh, and has sold a Oakland power plants can be coupled alliance in the development, engi-total of 3 million MWh since April with Trading and Marketing's skills neering, procurement and construc-1996. to serve California's newly competi-tion of cogeneration and central heat-j tis e markets. ing plants in Europe. 20 i

O o sary l i Base Load Duke Power's "24-access to a regional transmission sys-Order 888 The FERC electric utih-hour-a-day" loai, or the amount of tem, providing all customers acccss to ty rule requiring public ut.lities with I electric power delivered or needed at the power exchange and clearing all interstate electric transmission facili-the lowest point of demand during the bilateral contract requests for use of ties to offer open access service to day. At Duke Power, base kiad is met the electric transmission system. Also others, thus opening wholesale power primarily by our nuclear-fueled gener-responsible for maintaining bulk elec-sales to competition. ating plants. tric system reliability. Peak Load The amount of electri-British Thermal Unit (Btu) The Jurisdictional Facilities and activi-city required during periods of high-amount of heat energy necessary to ties subject to the primary regulatory est demand. Peak periods fluctuate by raise the temperature of one pound of oversight of FERC, the Nonh season, generally occurring in the water one degree Fahrenheit. A stan-Carolina Utility Commission (NCUC) morning hours in winter and in late dard unit for measuring thermal ener-or The Public Service Commission of afternoon during the summer. At gy or heat commonly used as a gauge South Carolina (PSCSC). D4 Power, peak demand is met by for the energy content of natural gas Liquefied Natural Gas (LNG) power generated by base load sta-and other fuels. Natural gas that has been converted to tions, coal-fired uniis, hydroelectric 3 Cogeneration Facility A facility a liquid by cooling it to -260 F and stations and combustion turbine units, thst produces electric energy and use-reducing its volume by 600:1. This and by purchased power. ful thermal energy for industrial, allows large quantities of natural gas Thmughput The amount of commercial, heating or cooling pur-to be transported by tanker. natural gas transported through a I poses. Merchant Plant A power plant that pipeline system. Combined Cycle The combination sells directly to wholesale customers Transmission System (Electric) of one or more gas turbines and steam without its output necessarily being An interconnected group of electric turbines in an electric generation committed to long-term power sales transmission lines and related equip-plant. An electric generating technolo-agreements. ment for moving or transferring elec- ) gy in which electricity is produced Natural Gas A naturally occurring tric energy in bulk between points of from otherwise lost waste heat exiting mixture of hydrocarbon and non-supply and points at which it is trans-from one or more gas turbines, hydrocarbon gases found in porous formed for delivery over a distribu-Distribution The system oflines, geological formations beneath the tion system to customers, or for deliv-l transformers and switches that con-earth's surface, often in association ery to other electric transmission sys-nect the elecHe transmission system with petroleum. The principal con-

tems, to customers, such as homes and busi-stituent is methane.

Transmission System (Natural nesses, delivering electric energy at Natural Gas Liquids (NGLs) Gas) An interconnected group of nat-relatively low voltages. Liquid hydrocarbons extracted during ural gas pipelines and associated Federal Energy Regulatory the processing of natural gas. Princi-facilities for transporting natural gas C: - '-N (FERC) The agency pal commercial NGLs include in bulk between points of supply and that regulates the transportation of butanes, propane, natural gasoline oelivery points to industrial cus-electricity and natural gas in interstate and ethane. tomers, hical distribution companies, commerce and authorizes the buying Natural Gas / Power Marketer or for delivery to other natural gas and selling of energy commodities at An entity which buys and sells a transmission systems. market-based rates. commodity or commodities at either GatheringSystem Pipeline, fixed or index prices. More sophisti-processing and related facilities that cated trader / marketing entities also Units ofMeasure: access prwtuction and other sourcea ptovide comprehensive energy man-TBtu One trillion Bntish thennal units

of natural gas supplies for delivery to agement services, such as capacity.

Tutu /d One trillion British thermal units p ' tuainline transmission systems. supply, storage and price risk man-per day W Megawans.one million wans ' Generation he process of trans-agement. N Megawau-hour, one minion forming cther forms of energy, such Order 6% The FERC pipeline ser. as nuclear or fossil fuels, into electric-vice restmeturing rule that guided the ""['[Y gg. ity. Also, the amount of electric ener-natural gas industry s transition to GWh Gigawatt-hour, one billion gy produced, expressed in megawatt-unbMled, open-access pipeline wau hours of energy hours. co act transportation and related MBhl/d One thousand banela per day ) ' Independent System Operator seivices, creating a more market-Dth DeLathenn. one milhon Brus l (ISO) Ensures non-discriminatory responsive environment. (Mh/d Dekatherms per day. l21 l 1 s

Management's Discussion and Analysis of Results of Operatiosts and Financial Condition 23 Consolidated Financial Statements 38 i Notes to Consolidated Financial Statenwnts 43 1x'. :-f::t Auditors' Report 65 R::;:: " ~^4 for Financial Statements 65 Selected Financial Data and Common Stock Data by Quarter 66 e9 l J '22

Management's Discussion and Analysis of Results of Operations and Financial Condition -) Introduction "f'~m-On June 18,1997, Duke Power Company (Duke t' s j Power) changed its name to Duke Energy Corpora-A tion (the Corporation) in accordance with the terms 'M A, of a merger agreement with PwJinergy Corp .. [% (PanEnergy), nursuant to which the Corporation issued 158.3 millica shares of its common stock in ( 3 g' w exchange for all of the outstanding common stock of

J L

PanEnergy (the merger). PanEnergy was involved in the gathering, processing, transportation and storage f'# 'e of natural gas, the production of natural gas liquids and the marketing of natural gas, electricity, lique- ~ - - - Carolina (PSCSC). fied petroleum gases and related energy services. Pursuant to th-merger, each share of PanEnergy The Natural Gas Transmission segment is involved common stock outstanding was converted into the in interstate transportation and storage of natural gas right to seceive 1.0444 shares of the Corporatids for customers primarily in the Mid-Atlantic, New common stock, in addition, each outstanding option England and Midwest states. The interstate natural to purchu PanEnerg; common stock became an gas transmission t-id storage operations are dso sub-option to purchase common stock of the Corpora-Ject to the rules and regulations of the FERC. The Energy Services segment is comprised of sev-tion, adjusted accordingly. As a result of the merger, the Corporation is an eral separate business units: Field Services gathers integrated energy and energy services provider with and processes natural gas, produces and markets nat-the ability to offer physical delivery and manage-ural gas liquids and transports and trades crude oil; Trading and Marketing markets natural gas, electrici-ment of both eketricity and natural gas throughout the United States and abroad. The Corporation pro-ty and other energy-related products; Global Asset vides these services Development develops, owns and operates energy-related facihties worldwide; and Other Energy [. through four business Senices provides engineering consulting, construc-l segments: Electric - I', Operations, Natural tion and i stegrated energy solutions. ~' ' Other Operations include the real estate operations Gas Transmission.

e f Crescent Resources, Inc.. (Crescent Resources),

j s l Energy Services, and communications senices, corporate costs and inter-t Other Operations. segment eliminations. The Electric The merger was accounted for as a pooling of /'. Operations segment interests and, accordingly, the Consolidated Financial is engaged in the Statements included in this Annual Report are pre-generation, transmis-sented as if the merger was consummated as of the sion, distribution and beginning of the earliest period presented. Ponions of sale of electric ener-the following discussion provide information related gy in central and to material changes in the Corporation's consolidated western Nonh resuhs of operations and financial condition between Carolina and the the periods presented, based on the combined histori-l western portion of South Carolina. These electric calinf rm ti n f Duke Power and PanEnergy. l operations are subject to the rules and regulations of Management's Discussion and Analysis sherild be j the Federal Energy Regulatory Commission (FERC), read in c njuncti n with the Consolidated Financial j the North Carolina Utilities Commission (NCUC) Statements of the Corporation. and The Public Service Commission of South 23 l

l Results of Operations Earnings available for common stockholders of nearic o rat-ions n the Corporation decreased 12% in 1997 as compared Dutu Power 51.266.i si.404 a sla70.9 l Nantahala Power and l to 1996, from $1,030.1 million or $2.85 per share in Eight company 15.7 14.7 10.3 1996 to $901.6 million or $2.5! per share in 1997. Total acetric operations 1.281.s 1.419.5 i,381.2 The decrease was due primarily to increases in non. Natural Gas Transmission i Northeast Pipelines 420.5 399.4 370.5 recurring merger related costs, a provision for non-Midwest Pipelinen 203.9 1%.1 197.1 j recurring severance costs associated with the work Total Natural Ga4 Transmmon 624.4 595.5 567.6 force reduction in Electric Operations, premiums Enagy Services Field Senices 157.0 151.6 106.1 associated with the redemption and tender offer for Trading and Marketing 44.4 57.9 17.1 ten issues of preferred stock and higher expenses as G a t nient lj y 0 a result of increased outages at the Electric Total Energy Services 224.1 229.5 1717 Operations' nuclear stations. Partially offsetting the Crescent Resources 97.6 87.7 64.0 decrease were lower expenses in 1997 as compared ma oper*ns u19.8) (38m 4.0 Gnwhdated ENT $2,108.1 $2.2R2 52,1 % to 1996 when major storms affected the Electric Operations' distribution costs. In 1996, eamings available for common stou-Net income for 1997 is net of a full year of the holders increased 6% over 1995, from $969.2 million minority interests associated with the August 1996 or $2.68 per share in 1995 to $1,030.1 millica or joint venture with Mobil in the Trading and Market- $2.85 per share in 1996. Contributing to the increase ing operations of the Energy Services segment (see were Electric Operations

customer growth, business Note 3 to the Consolidated Financial Statements).

expansion projects placed in service in both the Included in the amounts discussed below are Natural Gas Transmission and the Energy Services intercompany transactions that do not have a segments and increased volumes in Energy Serwees material impact on consolidated earnings before due primarily to the joint venture formed with Mobil interest and taxes. Corporation (Mobil) in August 1996. Partially offset-ting the increase were expenses related to major Electric Operations storms in 1996, which affected the Electric m,,,, mm Operations' distribution costs, non-recurring merger Reventie 54,40 t.7 54,498.4 54.512.4 related costs and an extraordinary item related to the paatmg Expenses 3,221.4 3.194.8 3.203.7 operating income 1,180.3 1.303.6 1.308.7 early retirement of debt in 1996, other income. Net of Expenses 101.5 115.9 72.5 Operating income of the Corporati for 1997 was EBIT 51,281.8 $1.419.5 51.381.2 $1,970 million compared to $2,158.6 initlion in 1996 Volumes. GWh Salesa 77,541 76.852 76.737 and $2,068.3 million in 1995. Earnings oefore interest " Gigawatt-hour sales and taxes (EBIT) were $2,108.1 million, $2,294.2 mil-lion and $2.190.5 million for 1997.1996 and 1995, in 1997, camings before interest and taxes for the respectively. Operating income and eamings before Electric Operations segment declined 10% as com-interest and taxes are not materially different, and are pared to 1996 primarily as a resclt of the provision a anected by the same fluctuations for the Corporation for non-recurring severance costs associated with the and each ofits business segments. Eamings before work force reduction and the increase in nuclear interest and taxes by business segment are summa. expenses, due primarily to increased outage days. rized below, and the explanation of these results by Also contributing to the decrease were lower electric business segment are discussed thereafter. revenues, which were due primarily to mild weather Earnings Before Interest and Taxes by Business and to the South Carolina rate reduction, which was Segment is as follows: effective June 1,1996. Partially offsetting the 2;;

Natural Gas Transmission ,\\ IMiksn in Ms!!ums 1997 l4% $995 ~,L, Revenue $1.F72.1 $1.556.3 $1533.4 [$$, y-Operatir; Expenses 964.4 972.5 971.1 s A! S' / Operating income 607.7 583.8 562.3 4* 4 Other Incorta. Net of Expenses 16.7 11.7 5.3 EBIT $ 624.4 5 595.5 5 567.6 f Volumes. TBtua 2.862 2.939 2,703 g' 4 4

Trillion Bnush thmnal umts r

During 1997, the Natural Gas Transmission seg- ' ~ ment completed the organization of its operations into the Northeast Pipelines, which includes Texas 7 A ;, ?- Eastern Transmission Corporation (TETCO) and s Algonquin Gas Transmission Company (Algonquin), decrease in earnings were lower expenses m, 1997 as and the Midwest Pipelines, which includes compared to 1996 when major storms affected distri-Panhandle Eastern Pipe Line Company (PEPL) and bution costs. Trunkline Gas Company (Trunkline). Earnings Although the unusually mild weather reduced b(fore interest and taxes for the Natural Gas residential sales during the year, general service Transmission segment increased 5% in 1997 over the and industrial sales continued to show strong prior year, with increases in earnings at Nonheast growth. Residential kilowatt-hour sales, the most sensitive to weathet, declined 4.7% during the year. Textile sales increased 3.0% and other industrial + sales were up 1.3%, for a total growth in industrial sales of 2.0%. Sales to general service customers f .I i increased 0.5%. The number of customers in the 'A 'I ) l Electric Operations' service territory increased d. S 2.7% over 1996. 3 In 1996, earnings before interest and taxes for 5,, Electric Operations increased 3% over 1995 due to -f' growth in the number of residential and general ser-k vice customers and increased retail kilowatt-huir sales ' V pog ' to weather-sensitive customer classes. Increased retail c. sales were panially offset by the South Carolina rate ~' ' ~ reduction, which vm effective June 1,1996 and by a ..y 16% decrease in wholesale sales primarily due to a decrease of 24% in supplemental sales requirements Pipelines and Midwest Pipelines of 5% and 4%, to the otherjoint owners of the Catawba Nuclear respectively. Earnings before interest and taxes Station (Catawba). The effect on eamings before inter-increased primarily due to market-expansion projects est and taxes of the decrease in supplemental sales placed in service and the favorable resolution of reg-was partially offset by declines in purchased power ulatory matters in 1997 in amounts in excess of those expense from the other joint owners. resolved in 1996.The resolution of regulatory mat-For more information on the Catawba joint ters was reflected as additional revenue and other ownership, see Note 6 to the Consolidated Financial income. The increases were panially offset by cer-Statements. tain litigation expenses recorded in 1997. 25 \\

I i In 1996, earnings before interest and taxes for the Natural Gas Transmission segment increased 5% over 1995. This was primarily due to a 97c increase 2

I in throughput resulting from new pipeline expansion projects placed in service in late 1995 and due to b

. j f.- colder weather, which increased revenues. Operating c.i i, i q,.j f ;.f o expenses in 1995 included a charge for higher Order "Nb a, " $. i, ',. 636 transition cost estimates, partially offset by the f. At r - - - ' &F;.* benefit of lower-than-projected PCB (polychlorinat-r- ed biphenyl) clean-up costs (see Note 5 to the .I YY Consolidated Financial Statements). Energy Services / f Earnings before interest and taxes for the Energy Services segment in 1997 decreased slightly as com. projects and asset acquisitions, primarily the acquisi-pared to 1996, which was 327c higher than 1995 tion of assets from Mobil, contributed to the increase earnings before interest and taxes. During 1997, in revenues. Average NGL prices increased 307c, 1996 and 1915, these fluctuations were driven pri. while NGL production increased 40%. These marily by the results of operations of Field Services improvements were partially offset by increased and Trading and Ma keting. operating expenses and depreciation as a result of the Mobil asset acquisition and other projects placed in Field Senices service. A gain on the sale of an investment in l Seagull Shoreline System in 1995 caused a compara-nawi u.uum im im im e redudon in omer income. Revenue $3,054.6 $2.636.5 $1,79L4 Operating Expenses 2.897.9 2.487.1 1,694.6 Operating Incorne 156.7 149.4 96.8 Trading and Marketing other income, Net of Expenses 0.3 2.2 9.3 EBIT $ 157.0 5 151.6 $ 106.1 a,n,s i us. im im im Volumes Revenue $7,488.7 $3,8 64.0 $1,866.7 ed, d 3.4 2.9 1.9 NGL Production. MBbl/d b 103.9 76.5 54.8 Operanng income 42.7 56.3 20.0 a Tnthon Bnush thermal units per day other income, Net of Expenses 1.7 1.6 (2.9) EBIT T-44.4 $ 57.9 $ IM b Thmand twreis per day Volumes Natural Gas Marketed.TBru/d 6.9 5.5 3.6 Field Services' earnings before interest and taxes Electricity Marketed, GWh a 64,650 4.229 513 increased 4% for 1997 over 1996 primarily due to

'8""~h"""

higher volumes as a result of acquisitions in 1996. Natural gas gathered and processed volumes A wholly owned subsidiary of the Corporation increased 17% and natural gas liquids (NGL) pro-acquired the remaining 507c ownership interest in the duction increased 36%. Partially offsetting these Duke / Louis Dreyfus, L.L.C. (D/LD) joint venture in increases were higher natural gas prices, which June 1997. This acquisition, coupled with a full year increased operating expenses, and a decrease in NGL of operations of the joint venture with Mobil formed 1 prices of 8%, which decreased revenues. in August 1996, accounted for the significant increases I Earnings before interest and taxes for Field in Trading 2nd Marketing revenues, related operating Services increased 43% in 1996 as compared with expenses and volumes in 1997 over 1996. Natural gas 1995. Strong processing margins and increased gath-marketed volumes increased 25%, in addition to ering and processing volumes related to expansion j n

I increases in natural gas margins from trading activi-D/LD joint venture. This decline was partially offset ties, which were largely offset by the emerging elec-by the sale of the Corporation's ownership interest in tric power trading and marketing activities. Higher the Midland k operating expenses, driven mainly by increased per-Cogeneration 'D sonnel levels and sys-Venture in tem development 1997. gj, costs to provide the in 1996, ? 4 necessary infrastruc-eamings before .] mg y ~ ture for growth in the interest and A7 - trading and marketing taxes for Other 1. f ~ db* business, resulted in a Operations, excluding Crescent Resources, decreased decrease in earnings $42 million as compared to 1995 primarily as a l l l before interest and result of 1996 expenses related to the merger and f taxes in 1997 as com-losses related to the start-up activities of a wireless l pared to 1996, communications joint venture. l In 1996, Trading and Marketing's Other Impacts on Earnings Available for earnings before interest and taxes increased $40.8 Common Stockholders million as compared to 1995 primarily as a result of In 1997, interest expense dt. reased $27.4 million, l expanded operations due to the joint venture with or 5%, as compared to 1996 as a result of lower Mobil formed in August 1996. The increase resulted interest rates. Interest expense in 1996 decreased primarily from higher gas volumes, improved mar-2% compared with 1995 as a result oflower gins resulting from colder weather arul gas price average interest rates and lower average debt bal-volatility, and higher trading margins. Total gas vol-ances outstanding. umes marketed increased 53%. The increase in mar-Minority interests in 1997 and 1996 relate gins was panially offset by higher operating expens-primarily to the joint venture with Mobil formed in es related to the joint venture with Mobil. August 1996. On October 1,1996, a subsidiary of the l Other Operations Corporation redeemed its $150 million,10% deben-Earnings before interest and taxes for Crescent tures and its $100 million,10%% d:bentures both l Resources increased 11% in 1997 over 1996. The due 2011. The Corporation recorded a non-cash increase is primarily due to gains associated with extraordinary item of $16.7 million (net of income bulk land sales in 1997. In 1996, earnings before tax of $10.3 million) related to the unamortized dis-interest and taxes for Crescent Resources increased count on this early retirement of debt. 37% over 1995 resulting from increased developed in December 1997, the Corporation redeemed lot sales as well as bulk land sales. four issues of preferred stock and commenced Eamings before interest and taxes for Other a tender offer to purchase a portion of an additional Operations, excluding Crescent Resources, declined six issues of preferred stock. Premiums related $81.8 million in 1997 as compared to 1996. to these redemptions were included in Dividends Contributing to the decrease were merger related and Premiums on Redemptions of Preferred expenses of $71.2 million in 1997, compared to 1996 and Preference Stock in the Consolidated State-merger expenses of $13.9 million, and the 1997 ments of Income. amortization of goodwill associated with the pur-chase of the remaining 50% ownership interest of the 27

l I 1 Liquidity and Capital Resources Also in June 1997, the Corporadon signed a letter Operating Cash Flow. Operating cash flows ofinter.1 to build a $265 million. 520 megawatt com-decreased $195.1 million from 1996 to 1997. Thh bined cycic natural gas fired merchant generation decrease primarily reflects the cash impact of costs phmt in Bridgeport, Connecticut. The Corporation associated with the merger and natural gas transition will be majority owner, with the first phase of the cost recoveries. project scheduled to provide twer in mid-1998. The Operating cash flows increased $503 million from project is cunently under construction. 1995 to 1996. This increase pnmarily reflects the @[3[hh . M[ k cash impact of purcha ed capacity irrelization and natural gas transition cost recoveries. Additionally, [@ghy@Mjh.ggMm,4q, "N N 1 s improved working capital caused cash flows from @$k gy {% operations to increase in 1996. 1,, gg 4 j ?Ny Assets and liabilities recorded in the Consolidated g j$.gq[W [ A +MM Balance Sheets related to purchased capacity level-pi , j{MpdAe%jMOM $ L,gp v ization and the natum) gas transition cost recoveries s and the related cash flow impacts are effected by 'l M E YN%d state and federal regulatory initiatives and specific ff, " 'f h / Yb2h $$ agreements. For more information on the purchased h' $~M' 6 f "NU 9 capacity levelization and the natural gas transition gn [j 'b ' 3 cost recoveries, see Notes 6 and 5, respectively, to the Consolidated Financial Statements. ~ Investing Cash Flow, Capital and investment expenditures were approximately $2.0 billion in 1997 compared with approximately $1.6 billion in During December 1997, a w holly owned subsidiary 1996. Increased capital and investment expenditures of the Corporation fonned a joint venture with UAE were partially due to the acquisition of the remain-Ref-Fud LL.C. (UAE), a wholly owned subsidiary of ing 50% ownership interest in the D/LD joint ven-United American Energy Corp. The Corporation owns ture and 6e acquisition of an ownership interest in a 65% ir.terest in the joint venture, with UAE owning American Ref-Fuel Company. Additionally, a 35% minority interest. The joint venture acquired a increased Electric Operations' construction costs, 50% ownership interest m American Ref-Fuel primarily due to steam generator replacements at Company, a waste-to-energy firm. with operations pri-certain of the Corporation's nuclear plants and marily in New York and New Jersey. Thus, the increased distribution line construction and business Corporation has an indirect 32.5% ownership interest expansion for the Natural Gas Transmission seg-in American Ref-Fuel Ccmpany and provided $237 ment caused expenditures to increase. These million ofinvestment and fm' ancing to the venture, increases were partially offset by the 1996 acquisi-During 1997, the Corporation sold its ownership in tion of certain assets from Mobil. trading and marketing operations in the United The Corporation participated in the marketing of Kingdom and its equity interest in certain affiliates. electric power and natural gas through its 50% own-Proceeds from these sales were $87 million. ership interest in D/LD. On June 17,1997, the Capital and investment expenditures in 1996 Corporation, through one of its subsidiaries, acquired included the acquisition of sertain assets of Mobil the remaining 50% ownership interest in D/LD from for approximately $300 million by Field Services. affiliates of Louis Dreyfus Corp. for $247 million. The increase in capital and investment e.1penditures l The purchase price substantially represents goodwill, in 1996 over 1995 was a result of this acquisition which will be amortized over 10 years. and othe. Energy Services expansion projects, 1 28 t

l { partially offset by decreased Electric Opemtions' similar ininatives in 1998 will likely require signifi-construction costs as a result of the completion of cant capital and investment expenditures, which will certain gene.ating facilities in 1995. be subject to p-riodic review and revision and may The Corporation plam to maintain its regul.ed vary significantly depend ng on the value-added facilities and pursue business expansion of its regu-opportunities presented. l lated operations as opportunities arise. Projected Projected capital and investment expenditures for 1998 capital and investment expenditures for the 1998 of the Other Operations segment are approxi-Electric Operations and the Natural Gas Transmis-mately $200 million. These projected capital and sion segments, including allowance for funds used investment expenditures are subject to periodic j during consuuction, are approximately S700 million review and revision and may vary significantly j and $300 million. respectively. These projections are depending on the va'ue-added opportunities presented. subject to periodic review and revisions. Actual Financing Cash Flow. The Corporation's con-expenditures incurred may vary from such estimates solidated capital structure at December 31,1997, due to variour, factors, including revised electric loed including short-term debt, was 45% debt,37c pre-estimates, business expansion opportunities, emiron-fe Ted stock,507c common equity and 2% other l mental mitters and cost and availability of capital. capitalization. Fixed charges coverage, using the j The Energy Services segment plans to spend SEC method, was 4.1 times for 1997 compared ta approp.imately 4.3 and 4.0 times for 1996 and 1995, $100 milhon m F y respectively. 1998 for required [ ~ 3 capital expendi-i '"[' ~ 1 Subsequent to i tures at its existing - the merger, several . rating agencies ~~ v facilities. In addi-tion, the Corpora- -f

t. g,.

".gi reviewed and in J

g some cases revised tia is seekirg to

- _~^ . ' w. their debt ratings l significantly grow g _- . %g3 for the Corporation W its Evergy Services [# ,K. F* % v.4] and its subsidiarie 'i businesses, primar- ~; f mg PanEnergy, PEPL, ily through the ( 4 - and TETCO. As of "$;4[, 4p December 31,1997, l Gloim! Asset ~ m Development busi-Duke Energy ness unit. One .~ g - f., ' Corporation's a N ? expansion opportu-. senior indebtedness aity includes the v $209aegawatt j ratings were as foi-combined cycle Iows: AA-by Standard & Poor's natural gas fired mercham generation plam in Bridgeport, Connecticut Group and Fitch Inve.cors Service; Aa3 by Moody's already under construction. Another growth opportuni-Investors Service; and A *. by Duff & Phelps. The ty inchides the recent y armounced agreement to pur-Corporation's intent is to maintain these current l chase from Pacinc Gas & E:ectric Company three credit ratings. power plaes in Califorria. The power plants have a During August 1997, the Corporation instituted a combined capacity of 2,645 megawatts.The purchase new commercial pape: program, increasing its avail-price is estime.ted at approximately $500 million and able commercial paper facilities to $2.5 billion The the transaction is expe:ted to close during Ic/98. Other commercial paper facihties consist of $1.25 billk a 29

l ) for the Corporation and $1.25 billion for Duke Since December 31,1996, $647.6 million of the Capital Corporation (Duke Capital), a wholly owned Corporation's first and refunding mortgage bonds subsidiary of the Corporation. Duke Capital serves and $114.5 million of the Corporation's medium c.s the parent for the Corporation's business segments term notes matured or were redeemed. These retire-except the Electric Operations and certain other mena, ure funded primarily through the operations. The Corporation's total commercial paper Corporation's commercial paper facilities, f;cilities were $780 milhon at December 31,1996. During July 1996, the Corporation began purchas-These facilities are supported by various bank credit ing shares of its commen stock. In 1996, the agreements which totaled $2.7 bdlion and $1.5 bil-Corporation repurchased approximately 3.3 million lion at December 31,1997 and 1996. respectively. shares of common stock for $159 million. On As a result of the revised commsreial paper program January 28,1997, the Board of Directors amended and the related credit facilities. the Corporation ter-the program to expressly limit the number of shares minated the prior commercial paper program and authorized for repurchase under the program, from the initiation of the program through a date two g years after the consummation of the merger, to an i.llh[h,[,,, amount not to exceed 15 million shares. No repur-a chases of common stock were made in 1997, and m none are anticipued in the future. The Corporation plans to use authorized but unis-sued shares ofits common stock to meet 1998 employee benefit phm contribution requirements instead of porchasing shares on the open market. The Corporation and its subsidiaries have authority to issue up to $!.3 billion aggregate principal amount of debt and other securities under shcif registration statements filed with the Securities and Exchange a Trua pretened secant. Commission. Such securities may be issued as First ! [j"*$ and Refunding Mortgage Bonds, Senior Notes, a c=amf4udy Subordinated Debentures, er Preferred Stock. 1995 1996 1997 Dividends and debt repayments, along with oper-ating and investing requirements, are expected to be related bank facilities held by the Corporation and funded by cash from operations, debt and commer-PanEnergy. At December 31,1997, $1.7 billion of cial paper issuances and available credit facilities. As commercial paper and $93 million of bank borrow-noted previously, the Corporation is seeking to signif. ings were outstanding. icantly gmw its Energy Services businestes, which On December 8,1997, Duke Energy Capital Trust I will likely require significant additional financiag. (the Trust), a business trust whict s treated as a sub-sidiary cf the Corporation for th cial reporting pur-Quantitative and Qualitative Disclosures poses, issued $350 million ofits 7.2% trust preferred About Market Risk securities, at an 9 ! a Sion discount, representing Interest Rate Risk. The Corporation is exposed l preferred undiviued oeneficial interests in the assets of to changes in interest rates as a result of significant l the Trust. Payment of distributions on such preferred financing through its issuance of variable-rate debt, I securities is guaranteed by the Corporation, but only f xed-rate debt, commercial paper and auction mar-to the extent the Trust has funds legally and immeci-ket preferred stock, as well as fixed-to-floating inter-l ately available to make such distributions, est rate swaps. The Corporation manages its interest ] i 1 130 1 ~

rate exposure by limiting its variable-rate exposure ward price curves in the energy markets to estimate to a certain percentage of total capitalization, as set the favorable or unfavorable impact of one-day's by policy, and by monitoring the eff ects of market price movement on the existing portfolio. The VAR changes in interest rates. (See Notes 11 and 14 to the computations utilize several key assumptions, includ-Consolidated Financial Statements.) ing the confidence level for the resultant price move-l If market interest rates average l'7e more in 1998 ment and the holding period chosen for the calculation. thsn in 1997, the Corporation's interest expense, after The Corporation's calculation includes commodity j considering the effect of the interest rate swap agree-derivative instruments held for trading purposes and i ments, would increase, and income before taxes excludes the efTects of written and embedded physi-would decreve by approximately $23.6 million. This cal options in the trading portfolio. At December 31, amount has been determined by considering the 1997, the Corporation's estimated potential one-day j i impact of the hypotheticalinterest rates on the favorable or unfavorable impact on income before Corporation's variable-rate debt balances, commercial taxes, as measured by VAR, related to its commodity paper balances, auction market preferred stock bal-derivatives held for trading pur9nses was approxi-l ances and interest rate swap agreements as of mately $2 million. Changes in markets inconsistent December 31,1997. These analyses do not consider with historical trends could cause actual results to the effects of the reduced level of overall economic exceed predicted limits. Market risks associated with activity that could exist in such an environment. In the commodity derivatives held for purposes other than event of a significant change in interest rates, manage-trading were not material at December 31,1997. ment would likely take actions to further mitigate its Subsidiaries of the Corporation are also exposed exposure to the change.110 wever, due to the uncer-to market fluctuations in the price of natural gas tainty of the specific actions that would be taken and liquids (NGLs) related to their ongoing gathering their possible effects, the sensitivity analysis assumes and processing operating activith s. Because the no changes in the Corporation's financial stmeture. Corporation generally does not maintain an invento-Commodity Price Risk.The Corporation, sub-ry of NGLs or actively trade commodity derivatives stantially through its subsidi : ries, is exposed to the related to NGLs, the Corporation was not exposed to impact of market fluctuations in the price and trans-this risk at December 31,1997. Ilowever, the portation costs of natural gas, electricity and petrole-Corporation closely monitors the risks associated um products marketed and emplop established poli-witn NGL price changes on its future operations. cies and procedures to manage its risks associated Equity Price Risk.The Corporation maintains with these market fluctuations using various com-trust funds, as required by the Nuclear Regulatory modity derivatives, including futures, swaps and Comirission, to fund certain costs of nuclear decom-options. (See Note 8 to the Consolidated Financial missioning. (See Note 12 'o the Consolidated Statements.)The Corporation measures the risk in its Financial Statements.) As of December 31,1997, commodity derivative portfolio on a daily basis utiliz-these funds were invested primarily in domestic and ing a Value-at-Risk (VAR) model to determine the international equity securities, fixed-rate, fixed maximum potential one-day favorable or unfavorable income securities and cash and cash equivalents. By impact on its camings and monitors its risk in com-maintaining a portfolio that includes long-term equity parison to established thresholds.The Corporation investments, the Corporation is maximizing the also utilizes other measures to monitor the risk in its returns to be utilized to fund nuclear decommission-commodity derivative portfolio on a monthly, quar-ing, which in the long-term will better correlate to terly and annual basis. The VAR computations am inflationary increases in decommissioning costs. based on an historical simulation, which utilizes price 110 wever, the equity securities included in the movements over a specified period to simulate for-Corporation's portfolio are exposed to price fluctua-i 1 31

i tion,n equity markets, and the fixed-rate, fixed territory. In 1997, as a result of the merger, the income securities are exposed to changes in interest Corporation signed various agreements with the rates. The Corporation actively monitors its portfolio NCUC, PSCSC and the FERC in which the by benchmarking the performance of its investments Corporation agreed to cap base rates to retail and against certain indexes and by maintaining, and wholesale electric customers at existing levels through periodically reviewing, established target allocation 2000. In addition, the Corporation signed agreements percentages of the assets in its trusts to various with the otherjoint owners of Catawba providing for investment options. Because the accounting for a cap on certain rates charged under interconnection nuclear decommissioning recognizes that costs are agreements. In response to these rate agreements and l recovered through the Corporation's Electric Operations' rates, fluctua- ~ tions in equity prices or interest g rates do not affect the earnings of "*w f - m the Corporation. DM Foreign Operations Risk. The G i Corporation has investments in sev- ~ "i d!Ag ~ y I 7 ~~ y eral international operations, many of which are joint ventures. At December 31,1997, the ~ ~ Corporation had investments in l l intemational afliliates of $230.1 I l million. These investments repre-sent primarily investments in affili-l ates which own energy-related pro-l duction, generation and transmis-sion facilities. competitive pressures, the Electric Operations segment The Corporation is exposed to foreign currene;. is striving to maintain low costs and competitive rates risk, sovereign risk and other foreign operations for its customers and to provide high quality customer risks, primarily through investments in affiliates of service. The Corporation does not expect a negative $43.6 million in Asia and $100.7 million in South impact as a result of such agreements on its results of America. In order to mitigate risks associated with operations or financial position. (See funher discus-foreign currency Ductuations, the majority of con-sion in the Electric Competition section below.) tracts entered into by the Corporation or its affiliates Due to increased competition, especially for the are denominated in or indexed to the U.S. dollar. Midwest Pipelines, relatively slow growth is expecte<! Other exposures to foreign currency risk, sovereign ~, for future operations of the Corporation's Natural Gas risk or other foreign operations risk are periodically Transmission segment. The Natural Gas Transmission reviewed by management and were not material to segment continues to offer selective discounting to the Corporation's consolidated results of operations maximize revenues from existing capacity and to or financial position duries, the period. advance projects that provide expanded services to l meet the specific needs of customers. Several projects current issues have been ennounced that position the Natural Gas Operations Outh>ok. The Electric Operations seg-Transmission segment to meet increasing demand for i ment is expected to grow moderately, consistent with gas in northeast markets by providing continuous paths historical trends. Expansion will be primarily as a from new supplies in both eastern and western Canada l resuh of continued economic growth in its service in addition to tmditional domestic supply basins. .32

l l l \\ l' l l The Corporation is seeking to significantly grow based rates up to 2.500 megawatts of capacity and its Energy Services segment. Deregulation of energy energy from its own assets. Open-access provides markets in the U.S. and abroad is providing substar-another supply option through which the Corporation tial opportunities for the Energy Services business can purchase at attractive rates a ponion of capacity units to capitalize on their broad capabilities. Growth and energy requirements resulting in lower overall is expected to be achieved through acquisitions, con-costs to customers and thus improving the Corpora-struction of greenfield projects and expansion of tion's competitive position. Open-access also pro-existing facilities as value-added opportunities pre-vides the Corporation's existing wholesale customers sent themselves. with competitive opportunities to seek other suppli- { l 'I 2 strong real estate market in the southeast con-ers for their capacity and energy requirements. ) tinues to present substantial growth opponunities for Wholesale sales represented approximately l Crescent Resources. la 1997, Crescent Resources ini-9.4 percent of the Corporation's total gigawatt-hour tiated development of significant office and industrial sales for the Electric Operations segment in 1997. l facilities in each ofits established markets to capital-Supplemental sales to the other joint owners of ize on market conditions. Catawba comprised the majority of wholesale sales. Electric Competition. The Energy Policy Act of Such supplemental sales will continue to decline in 1992 (EPACT) and tb FERC's subsequent rulemak-1998 as a result of the retention of larger portions of ing activities are major drivers towards a more com-ownership entitlement by the otherjoint owners. petitive market for electric operations. EPACT amend-Two of the Catawba joint owners gave notice of their ed provisions of the Public Utility Holding d[,2Bph[Y / i l Corporation Act of 1935 (PUHCA) and Part ' j[M%'E . i' "4 ) C 11 of the Federal Power Act to remove cenain i'Mi. 1 6 barriers to electric competition. EPACT per- .L

7.,. '

oj ., p r.: ws.. ' 0, ,p mits utilities to participate in the development of independent electric generating plants for ':[ 5 p[. 3,[,[cM sales to wholesale customers, and also per-g m E*' ~ ' 9 h. ('I mits the FERC to order transmission access [ for third parties to transmission facilities f owned by another entity. It does not, however, g[' . '%i M permit the FERC to issue an order requiring ' "~ ' D,]*. g..a. transmission access to retail customers. The ~ i ' FERC, responsible in large measure for implementa-intent to end their supplemental capacity require-l tion of the EPACT, has moved vigorously to imple-ments on January 1,2001 and January 1,2002, ment its mandate, interpreting the statute broadly and respectively. In addition, as a result of the merger, issuing orders for third-party transmission senice and the other joint owners have the right to end their sup-1 a number of rules of general applicability, including plemental capacity requirements as of January 1, Orders 888 and 889. 2001 with written notice to the Corporation due by Open-access transmission for wholesale customers December 31.1999. Ar.otherjoint owner gave notice as defined by the FERC's final rules provides energy of ts intent to end its interconnection agreement suppliers, including the Corporation, with oppor-with the Corporation effective January 1,2006 (see tunities to sell and deliver capacity and energy at Note 6 to the Consolidated Financial Statements). 1 market-based prices. The Corporation and several of Competition for retail electric customers is not the Corporation's non-regulated subsidiaries were enerally allowed in the Corporation's senice teni- ] granted authority by the FERC to act as power mar-However, there are discussicas and events at j keters in late 1995. The Electric Operations obtained the nationallevel and within certain states regarding I from the FERC open-access rights to sell at market-l I 33 I

retail competition which 7v mmq7Pyr y the fmal decisions to the are resulting in changes [- '%g General Assembly of in the industry. Such South Carolina. l changes will impact all Currently, the electric entities owning electnc utility industry is pre-generating assets. dominantly regulated on During 1997, both North a basis designed to { and South Carolina have j recover the cost of pro-taken steps to address 3 viding electric power to retail competition '4 its customers. If cost-among electric utilities. 1 3 based regulation were to Carolina passed a bill ~ (k be discontinued in the In May 1997, North [ i industry, for any reason, that created a study com-including competitive mission to assess dereg-pressure on the cost-ulation of electric utilities in the state. The commis-based prices of electricity, profits could be reduced sion's report to the state General Assembly is expect-and electric utilities might be required to reduce their ed to be completed by early 1999. Members of the regulatory asset balances to reflect a market basis study commission include legislators, utility represen. less than cost. Discontinuance of cost-based regula-tatives, customers and a member of an environmental tion would also require affected utilities to write off group. their associated regulatory assets. The regulatory South Carolina has considered several proposals assets of the Corporation are included in the during 1997 to restructure the electric industry, the Consolidated Balance Sheets. The portion of these most significant of which would have provided retail regulatory assets related to electric operations is $1.7 customers with a choice of suppliers by January 1, billion, including primarily purchased capacity costs, 1998. None of these proposals has been approved. debt expense, and deferred taxes related to regulatory llowever, in May 1997, the PSCSC requested inter-assets. Currently, the Corporation is recovering sub-ested parties to file restn:cturing proposals for the stantially all of these regulatory assets through its r.lectric industry. On June 30,1997, the Corporation wholesale and cetail electric rates and would attempt filed its proposal for introducing electric competition to continue to recover these assets should cost-based in South Carolina with the PSCSC. The Corpora-regulation be discontinued. In addition, the tion's plan proposes that electric generation be Corporation would seek to recover the costs of its deregulated while transmission and distribution con-electric generating facilities in excess of the market tinue to be regulated by the FERC and the PSCSC, price of power at the time of transition. The respectively, providing for an orderly transition to Corporation seeks to move toward an orderly transi-competition that takes all stakeholder into consider-tion to retail competition that provides for considera-ation. The Corporation's plan also provides for tion of the interests of all stakeholder in the retail recovery af stranded investment. The PSCSC held electric sales arena. Management cannot predict the bearings on August 19,1997 on the various restruc-potential impact, if any, of these competitive forces turing proposals it received and presented its report on the Corporation's future financial position and to the state legislature on February 3,1998. The consolidated results of operations. report proposes a five year transition period before Nuclear Decommissioning Costs. The starting full-Dedged e.lectric competition. In addition, Corporation's estimated site-specific nuclear customers could receive two separate electric bills, decommissioning costs, including the cost of one from the distribution company, and one from the decommisdoning plant components not subject to ger.erator or supplier of electricity. The report leaves radioactive contamination, total approximately j u

l i i- $1.3 billion stated in 1994 dollars based on decom-sidiary of the Corporation,is currently conducting i missioning studies completed in 1994. In order to PCB assessment and clean-up programs at cenain of j l fund these costs, the Corp mtion contributes to an its compressor station sites under conditions stipulat-extemal decommissioning trust fund and maintains ed by a U.S. Consent Decree. The programs include an internal reserve. on-and off-site assessment, installation of on-site The balance of the external funds as of December source control equipment and groundwater monitor-31,1997 and 1996, was $471.1 million and $362.6 ing wells, and on-and off-site clean-up work. million respectively. The balance of the internal TETCO expects to complete these clean-up programs reserve as of December 31,1997 and 1996, was during 1998. Groundwater monitoring activities will I $210.8 million and $207.8 million, respectively, and continue at several sites beyond 1998. is reflected in Accumulated Depreciation and In 1987, the Commonwealth of Kentucky institut-Amortization in the Consolidated Balance Sheets. ed a suit in state court against TETCO, alleging Both the NCUC and the PSCSC have granted the improper disposal of PCBs at TETCO's three com-1 Corporation recovery of estimated decommissioning pressor station sites in Kentucky. This suit is still j costs through retail rates over the expected remaining pending. In 1996, TETCO completed clean-up of service periods of the Corporation's nuclear plants. these sites under the U.S. Consent Decree. Management is of the opinion that funding of the The Corporation has also identified environmental j decommissioning costs will not have a material contamination at certain sites on the PEPL and ) adverse effect on the consolidated results of opera-Trunkline systems and is undertaking clean-up pro-tions and financial position of the Corporation. (See grams at these sites.The contamination resulted f om Note 12 to the Consolidated Financial Statements.) the past use oflubricants containing PCBs and the Environmental. The Corporation is subject to fed-prior use of wastewater collection facilities and other j eral, state and local regulations regarding air and on-site disposal areas. Soil and sediment testing, to j water quality, hazardous and solid waste disposal and date, has detected no significant off-site contamina-i other environmental matters. tion. The Cmporation has communicated with the Manufactured Gas Plants and Superfimd Sites. Environmental Protection Agency (EPA) and appro-The Corporation was an operator of manufactured priate state regulatory agencies on these matters. gas plants until the early 1950s. The Corporation has Environmental clean-up programs are expected to entered into a cooperative effon with the State of continue until 2002. Nonh Carolina and other owners of cenain former At December 31,1997 and 1996, the Corporation manufactured gas plant sites to investigate and, where had accrued liabilities for remaining estimated necessary, remediate these contaminated sites. Tbc clean-up costs on the TETCO, PEPL and Trunkline State of South Carolina has expiessed interest m systems, which were included in Environmental entering into a similar arrangement. The Corporation Clean-up Liabilities in the Consolidated Balance is considered by regulators to be a potentially respon-Sheets. These cost estimates represent gross clean-up sible party and may be sub. ject to future liability at c sts expectM to be m.eurred, have a been a.s-nine federal Superfund sites and one state Superfund counted or reduced by customer recoveries and do site. While the cost of remediation of the remaining n t include fines, penalties or third-party claims. ~ sites may be substantial, the Corporation will share in Costs expected to be recovered from customers are any liability associated with remediation of contami-included in the Consolidated Balance Sheets as of nation at such sites with other potentially responsible December 31,1997 and 1996, as Regulatory Assets panies. Management is of the opinion that resolution and Deferred Debits. j of these matters will not have a material adverse The federal and state clean-up programs are not effect on the consolidated results of operations or expected to interrupt or diminish the Corporation's f financial position of the Corporation, PCB (Polycidorinated Biphenvi) Assessmer.t and ability to deliver natural gas to customers. Based on Clean-up Programs. TETCO, a wholly owned sub_ the Corporation's experience to date and costs l35 l

1 1 l incurred for clean-up operations, management The State is seeking a penalty and correction of the believes the resolution of matters relating to the alleged violations. environrnental issues discussed above will not have a in December 1997, the United Nations held nego-material adverse effect on the consolidated results of tiations in Kyoto, Japan to detennine how to achieve operations or financial position of the Corporation. worldwide stabilization of greenhouse gas emissions, Air Quality C<mtml. The Clean Air Act inc!uding ca2 bon dioxide emissions from fossil-fired Amendments of 1990 require a two-phase reduction generating facilities Because this matter is in the by electric utilities in aggregate annual emissions of early stages of discussion, the Corporation canriot sulfur dioxide and nitrogen oxide by 200(L The estimate the effects on future consolidated results of Corporation currently meets all requirements of operations or financial position of the Corporation. Phase I. The Corporation t.upports the national objec-Litigation and Contingencies. For infonnation tive of protecting air quality iri the most cost-effec-conceming litigation and other commitments and tive manner, and has already reduced emissions by contingencies, see Note 15 to the Consolidated operating plants dficiently, using nuclear and hydro-Financial Statements. electric generation and implementing various com-Computer Systems Changes For The Year pliance strategies. To meet Phase 11 requirements by 2000. The Corporation is incurring incremental costs 2000, the Corporation's current strategy includes to modify existing computer systems to accommo-using low-sulfur coal, purchasing sulfur dioxide date the year 2000 and beyond. The Corporation is emission allowances, and installing low-nitrogen currently making modifications to its programs and oxide burners and emission monitoring equipment. is of the opinion that remaining modifications will be { Construction activities needed to comply with Phase completed before they become pmblematic. 11 requirements are substantially complete, and Management is of the opinion that the costs associab future one-time capital costs associated with meeting ed with these modifications will not have a material Phase 11 requiremems range from $11 million to adverse effect on the consolidated resuhs of opera- $24 million. Additional annual operating expenses tions or financial position of the Corporation. of approximately $25 mi!! ion for low-sulfur coal pre-Forward-Looking Statements. From time to miums, emission allowance purchases and other time, the Corporation may make statements regard-compliance activities will occur after 2000. This ing its expectations, intent or beliefs about future strategy is contingent upon develo; ments in future events. These statements are intended as " forward-mankets for emission allowances, low-suMur coal, looking statements" under the Private Securities future regulatory and legislative actions. and Litigation Reform Act of 1995. The Corporation cau-advances in clean air technologies. tions that assumptions, projections and expectations Additionally, the Corporation would be effected about futute events may and often do vary from by a pioposed call for new State Implementa: ion actual results, the differences between assumptions, Plans (SIP) issued by the EPA to 22 states related to projections and expectations and actual resuhs can existing and new national ambient air quality stan-be material, and there cun be no assurance that the dards for ozone. Costs to the Corporation related forward-looking statements will be realized. The fol- '~ to the SIP call may range from $123 million to lowing are some of the factors that could cause actu- $517 million, depending on final EPA implementa-al achievements and events to differ materially from tion plans and schedules. those expressed or implied in such forward-looking In 1994, the State of Missouri issued a Notice statemens state and federalleg;slative and regulato-of Violation to PEPL alleging violations of Missouri ry initiatives that affect cost and mvestment recov-air pollution regulations at the Corporation's ery, have an impact on rate structures, and affect the IIoustonia compressor station. The Corporation is speed and degree to which competition enters the l in negotiations with the State to resolve this matter. electric and natural gas industries; industrial, com-3G

l l ) mercial and residential growth in the service territo-which the Corporation has no control; the results of ' ries of the Corporation and its subsidiaries: the financing efforts: growth in opportunities for the weather and other natural phenomena: the timing and Corporation's subsidiaries and diversified operations: extent of changes in commodity prices and interest and the effect of the Corporation's accounting poli-rates; changes in environmental and other laws and cies, in each case during the periods covered by the regulations to which the Corporation and its sub-forward-looking statements. sidiaries are subject or other external factors over f* a _,)y ?; ,) i,Le. s *4 n.' &(. pg:pl% ,, h, 9;y; 3. n t ~ w,. 7

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37

Consolid:ted St:tsm:nts of income i Duke Energy Corporation Years Ended December 31 (In millions, encept per share amounts) 1997 1996 1995 Opmating Revenues Na: ural gas and petroleum products (Notes 2 and 5) Sale;, trading and marketing of natural gas $ 8,150.7 $ 5,848.0 $ 3,397.2 and petroleum paoucts Transportation and storage of natural gas 1,503.5 1,522.9 1,500.6 Electric (Notes 2 and 5) Generation, transmission and distribution 4,334.5 4,436.6 4,454.6 Trading and marketing of electricity 1,664.9 77.8 9.8 Other(Note 9) 655.3 417.1 332.5 Total operating revenues 16,108.9 12,302.4 9,694.7 Operating Expenses Natural gas and petroleum products purchased (Note 2) 7,705.2 5,414.3 3.119.3 Fuel used in electric generation (Note 2) 742.8 758.5 744.2 Net interchange and purchased power (Notes 2,5 and 6) 1,960.2 456.8 480.2 Other operation and maintenance (Notes 5,12 and 15) 2,720.9 2,382.8 2,209.0 Depreciation and amortization (Notes 2 and 6) 841.0 789.4 737.1 Property and other taxes 368.8 342.0 336.6 Total operating expenses 14,338.9 10.143.8 7,626.4 Operating Income 1,970.0 2,158.6 2,068.3 Other income and Expenses Deferred returns and allowance for funds used during construction (Note 2) 109.4 104.8 113.9 Other, net 28.7 30.8 8.3 Total other income and expenses 138.1 135.6 122.2 Earnings Before Interest and Taxes 2,108.1 2,294.2 2,190.5 Interest Expense (Notes 8 and i1) 471.8 499.2 508.2 Minority Interests (Note 3) 23.0 6.2 Earnings Before income Taxes 1,613.3 1,788.8 1,682.3 Income Taxes (Notes 2 and 7) 638.9 697.8 664.2 Income Beforr Extraordinary item 974.4 1,091.0 1,018.1 Extraordinary item (net of tax) 16.7 Net Income 974.4 1.074.3 1,018.1 Dividends and Premiums on Redemptions of Preferred and Preference Stock (Note 14) 72.8 44.2 48.9 Earnings Available for Common Stockholders 901.6 $ 1.030.1 969.2 Common Stock Data (Note 2) Average shares outstanding 359.8 361.2 361.2 Earnings per share (before extraordinary item) Risic 2.51 2.90 2.68 Dilutive 2.50 2.88 2.67 Earnings per stutre i Basic 2.51 2.85 2.68 Dilutive 2.50 2.83 2.67 i Dividends per share 1.90 1.57 1.50 l See Nmes to ConmMated Financial Statements ) j38

I Consolid:ted Str.ttments cf Cnh Flows l l 1-Duke Energy Corporation Years Ended December 31 - (In millions) 1997 1996 1995 Cash Hows from Operating Activities Net income 974.4 $ 1,074.3 $ 1,018.1 Adjustments to reconcile net income to net cash provided by operating activities: J Depreciation and amortization. 982.5 964.9 953.8 Deferred income taxes and investment tax credit amortization 105.7 74.7 115.2 Purchased capacity levelization 56.4 73.5 (33.1) Transition cost recoveries (35.6) 90.9 (85.2) (Increase) Decrease in Receivables (266.5) (645.6) (286.0) Inventory (6.6) 45.1 (26.2) Other current assets (18.4) 16.7 90.5 Increase (Decrease)in Accounts payable (72.1) 576.7 53.5 Taxes accrued 50.0 (11.0) 25.7 Interest accrued (13.1) (18.5) 5.6 Other current liabilities 326.2 (10.0) 17.7 Other, net 57.2 103.5 (17.4) Net cash provided by operating activities 2,140.1 2,325.2 1,832.2 Cash Flows from Investing Activities Capital expenditures (1.323.2) (1,393.9) (1,223.0) Investment expenditures (704.4) (156.1) (67.7) 33.9 (18.2) (26.9) Decommissioning, retirements and other Net cash used in inv. sting activities (1,993.7) (1,568.2) (1,317.6) Cash Flows from Financing Activities i Proceeds from the issuance of lamg term debt 1,617.6 362.8 421.5 Guaranteed preferred beneticial interests in Corporation's subordinated notes 339.0 Common stock and stock options 14.9 11.8 16.5 Payments for the redemption of Long-term debt (868.5) (527.0) (480.9) Common stock (25.4) (159.0) Preferred stock (223.6) (100.5) Net change in notes payable and commercial paper (290.2) 159.3 193.2 Dividends paid (726.4) (609.3) (590.5) l Other (40.4) (12.1) (4.8) Net cash used in financing activities (203.0) (773.5) (545.5) (56.6) (6.5) (30.9) Net decrease in cash and cash equivalents ~ 166.0 172.5 203.4 j Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year 109.4 166.0 172.5 i l Supplemental Disclosures Cash paid for interest (net of amount capitalized) 475.9 $ 493.1 $ 481.6 Cash paid for income taxes 469.8 549.9 519.9 l Sec Notes to Consolidated Financial Statements P9 l

Consolidated Dilanco Sheets 4 Duke Energy Corporation December 31 (in millions) 1997 1996 l ASSETS l l Current Assets (Note 2) Cash and cash equivalents (Note 8) 109.4 166.0 Receivables (Note 8) 2,280.8 1,888~0 inventory 440.1 433.5 Current portion of natural gas transition costs 66.9 67.9 Cu.trent portion of purchased capacity costs 76.2 51.3 Unrealized gains on mark to market transactions (Note 8) 551.3 397.2 Other (Note 8) 160.5 142.1 Total current assets 3,685.2 3,146.0 Investments and Other Assets Investments in affiliates (Notes 9 and 15) 685.9-502.9 Nuclear decommissioning trust funds (Notes 8 and 12) 471.1 362.6 Pre-funded pension costs (Note 18) 337.5 360.6 Goodwill, net (Notes 2,3 and 7) 503.6 222.1 Notes receivable 239.6 63.5 Other 209.9 108.0 Total investments and other assets 2,447.6 1,619.7 Property, Plant and Equipment (Notes 2,6.10,11,12 and 15) Cost 25,448.1 24.468.2 Less accumulated depreciation and amortization 9,712.2 9,199.1 Net property, plant and equipment 15,735.9 15,269.1 Regulatory Assets and Deferred Debits (Note 2) Purchased capacity costs (Note 6) 759.4 840.7 Debt expense 253.1 244.0 Regulatory asset related to income taxes 511.0 493.5 Natural gas transition costs 193.7 250.0 Environmental clean-up costs 103.6 153.2 Other 339.3 350.0 Total regulatory assets and deferred debits 2,160.1 2,331.4 Total Assets. $ 24,028.8 $ 22.366.2 See Notes to Ctenolidated Nuncial Statements '40

' Csnsolid:ted Balanca Shacts December 31 Duke Energy Corporation 1997 1996 (In millions) LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable. $ 1,358.7 $ 1,286.5 169.5 459.7 Notes payable and commercial paper (Notes 8 and 11) 124.8 74.8 Taxes accmed (Note 2) 111.2 124.3 Interest accrued 35.0 84.4 Current portion of natural gas transition liabilities (Note 2) 26.4 32.4 Current portion of environmental clean-up liabilities (Notes 2 and 15) Current maturities of long-term debt (Note 1!) 77.3 350.6 Unrealized losses on mark to market transactions (Notes 2 and 8) 537.8 388.5 8343 508.3 Other (Note 2) Total current liabilities 3,275.2 3J09.5 / 6,530.0 5.485.1 Long-term Debt (Notes 8 and 11) IEfEred Credits and Other Liabilities (Note 2) - Deferred income taxes (Note 7) 3,706.5 3.568.5 Investment tax credit (Note 7) 238.9 250.1 l Nuclear decommissioning costs externally funded (Notes 8 and 12) 471.1 362.6 / 78.4 121.9 Natural gas transition liabilities 157.6 188.9 Environmental clean-up liabilities (Note 15) 1,035.1 97 LO Other Total deferred credits and other liabilities 5.687.6 5,463.0 168.3 83.4 Minority interests (Nate 3) Guaranteed Preferred Beneficial interests 339.0 in Corporation's Subordinated Notes (Notes 8 and 13) Preferred and Preference Stock. (Notes 8 and 14) 149.0 234.0 Preferred and preference stock with sinking fund requirements 340.0 450.0 Preferred and preference stock without sinking fund requirements 489.0 654.0 Total preferred and preference stock Commitments and Contingencies (Notes 6,12 and 15) [$mmon Stockholders' Equhy (Notes 16 and 17) ' Common stock, no par 500 million shares authorized; 359.8 million and 359.4 million shares outstanding at December 31,1997 and 1996 respectively 4,283.7 4.289.3 l-3,256.0 3.051.9 l Retained earnings f Total common stockholders

equity 7,539.7 7,341.2 l

Total Liabilities and Stockholders'1%uity $ 24,028.8 $ 22.366.2 I-See Noies to Consolidaico Financial State:nents i b 41

Consolid ted Statiments cf C:mmon Stockholders / Equity Duke Energy Corpar6 tion Years End:d December 31 (In millions) 1997 1996 1995 Common Stock Balance at beginning of year $4,289.3 $4.296.8 $4,275.8 Stock issued for purchase of assets 2.5 Stock repurchased (Note 16) (30.8) Dividend reinvestment and employee benefits (9.9) 23.3 18.5 Otha capital stock transactions, net 4.3 Balance at end of car 4,283.7 4,289.3 4,296.8 3 Retained Earnings Balance at beginning of year 3,051.9 2,715.7 2,292.2 Net income 974.4 1,074.3 1,018.1 Common stock dividends (682.2) (565.6) (542.2) Preferred and preference stock dividends and premiums on redemptions (Note 14) (72.8) (44.2) (48.9) Other capital stock transactions, net (15.3) (128.3) (3.5) Balance at end of year 3,256.0 3,051.9 2,715.7 Total Common Stockholders' Equity $7,539.7 $7,341.2 57,012.5

==

See Notes to Cuawlidated Finareial Staternents l I i l 6

e l

l l l l 1 I l42 I

i Notes to Consolidated Financial Stat;ments i For The Years Ended December 31,1997,1996 and 1995 j l l Note 1. Nature of Operations The Corporation provides these services through its On June 18,1997, Duke Power Company (Duke four business segments: Power) changed its name to Duke Energy Cor-Electric Operations - Generation, tratumission, poration (the Corporation) ir accordance with the distribution and sale of electric energy in central and terms of a merger agreement with PanEnergy Corp western North Carolina and the westem ponion of (PanEnergy), pursuant to which the Corporation South Carolina. Duke Energy Corporation (doing issued 158.3 million shares of its common stock in business as Duke Power) and its wholly owned sub-exchange for all of the outstanding common stock of sidiary Nantahala Power and Light Company serve PanEnergy (the merger). PanEnergy was involved in this area. These electric operations are subject to the the gathering, processing, transportation and storage rules and regulations of the Federal Energy of natural gas, the production of natural gas liquids, Regulatory Commission (FERC), the North Carolma j and the marketing of natural gas, electricity, lique-Utilities Commission (NCUC) and The Public Service fied petroleum gases and related energy services. Commission of South Carolina (PSCSC). Pursuant to the merger, each share of PanEnergy Natural Gas Transmission - Interstate transporta-common stock outstanding was converted into the tion and storage of natural gas for customers in the right to receive 1.0444 shares of the Corporation's Mid-Atlantic, New England and Midwest states. The common stock. In addition, each outstanding option interstate natural gas transtaission and storage opera-to purchase PanEnergy common stock became an tions of the Corporation's wholly owned subsidiaries option to purchase common stock of the Corpor-Texas Eastern Transmission Corporation (TETCO), ation, adjusted accordingly. The merger was account-Algonquin Gas Transmission Company (Algonquin), ed for as a pooling of interests and, accordingly, the Panhandle Eastern Pipe Line Company (PEPL), and consolidated financial statements for periods prior to Trunkline Gas Company (Trunkline) are also i;ubject the combination were restated to include the opera-to the rules and regulations of the FERC. tions of PanEnergy. Energy Services - Comprised of several separate Operating revenues and net income previously business units: Field Services - gathers and process-1 reported by the separate companies and the es natural gas, produces and markets natural gas combined amounts presented in the accompanying liquids and transport and trades crude oil; Trading consolidated financial statements for the years ended and Marketing - markets natural gas, electricity and December 31,1996 and 1995 are as follows: other energy-related products; Global Asset Development - develops, owns and operates energy-related facilities worldwide; and Other Energy 1996 Operatmg revenues 54.758.0 57.505.6 538.8 512.302.4 Services - provides engineering consulting, con-s on ad imegrad energy dion Ix r' Ei7n $tm 5 729.9 5 361.1 - 5 1.091.0 Net inome 5 729.9 5 344.4 - 5 1.074.3 Other Operations - Real estate operations of Crescent Resources, Inc., communications services, 1995 operatms revenuca 54.676 6 54.967.5 550 6 5 9.694.7 corporate costs and intersegment eliminations. Net income 5 714.5 5 303.6 51,01 h.] Note 2. Summary of Significant Accounting Policies The adjustment to operating revenues reflects a reclassification of PanEnergy's equity in earnings of Consolidation.The consolidated financial state-unconsolidated affiliates from other income to rev. ments reflect consolidation of all of the Corporation's l enues to be consister.t with the Corporation's finan. majority-owned subsidiaries after the elimination of cial statement presentation. intercompany transactions. Investments in other enti-The Corporation is an integrated energy and ener. ties that are not majority owned and where the gy services provider with the ability to offer physical Company has significant influence over operations delivery and management of both electricity and nat. are accounted for using the equity method. ural gas throughout the United States and abroad. i 14 3

) l i l The consolidated financial statements are prepared and therefore experiences net open positions. Gains in conformity with generally accepted accounting prin-and losses on derivatives utilized for trading are ree-ciples appropriate in the circumstances to reflect in all ognized in income on a current basis (the mark to material respects the substance of events and transac-market method) and are also included in Natural Gas tions which,,hould be included. In preparing these and Petroleum Products Purchased or Net statements, management makes informed judgments Interchange and Purchased Power. and estimates of the expected effects of events and Goodwill Amortization. The Corporation amor-transactions that are currently being reponed. How-tizes goodwill related to the purchases of Duke / Louis ever, actual results could differ from these estimates. Dreyfus, L.L.C. (D/LD) and Texas Eastern Corpora-Cash and Cash Equivalents. All liquid invest-tion (TEC), and certain other natural gas gathering, ments with maturities at date of purchase of three transmission and processing facilities and engineer-months or less are considered cash equivalents. ing consulting businesses on a straight-line basis Inventory. Inventory consists primarily of materi-over 10 years,40 years, and 15 years, respectively. als and supplies, gas held for transmission, process-Accumulated amortization of goodwill at December ing and sales commitments and coal held for electric 31,1997 and 1996 was $123.6 million and generation. Inventory is recorded at the lower of cost $99.7 million, respectively. or market, primariiy using the average cost method. Property, Plant and Equipment. Property, plant Commodity Derivative Instruments. The and equipment is stated at original cost. The Corporation, primarily through its subsidiaries, holds Corporation capitalizes all construction-related direct and issues instruments that reduce exposure to mar-labor and materials, as well as indirect construction ket fluctuations in the price and transportation costs costs. Indirect costs include general engineering, of natural gas, petroleum products and electric power taxes and the cost of money. The cost of renewals marketed. The Corporation uses futures, swaps and and betterments that extend the useful life of propeny options to manage and hedge price and k> cation risk is also capitalized. The cost of repairs and replace-related to market exposures. In order to qualify as a ments is charged to expense. Depreciation is generally hedge, the price movements in the commodity deriv-computed using the straight-line method. The atives must be highly correlated with the underlying Corporation's composite weighted-average deprecia-hedged commodity. Gains and losses related to com-tion rates, excluding nuclear fuel, were modity derivatives which qualify as hedges of com-3.67,3.77 and 3.97 percent for 1997,1996,and modity commitments are recognized in income when 1995, respectively. the underlying hedged physical transaction closes At the time property, plant and equipment main-(the deferral method) and are included in Natural tained by the Corporation's regulated operations are Gas and Petroleum Products Purchased or Net Inter-retired, the original cost plus the cost of retirement, change and Purchased Power in the Consolidated less salvage, is charged to accumulated depreciation Statements of Income. Gains and losses related to and amortization. When entire regulated operating such instruments, to the extent not yet settled in units are sold or non-regulated properties are retired cash, are reported as Current Assets or Liabilities, as or sold, the property and related accumulated depre-appropriate, in the Consolidated Balance Sheets until ciation and amortization accounts are reduced and recognized in income, if the derivative instrument is 4.ny gain or loss is recorded in income, unless other-no longer sufficiently correlated to the underlying wise required by the FERC. commodity, or if the underlying commodity transac-Unamortized Debt Premium, Discount and tion closes earlier than anticipated, the deferred gains Expense. Expenses incurred in connection with the or losses are recognized in income. issuance of presently outstanding !ong-term debt, l In addition to non-trading activities, the Corporation and premiums and discounts relating to such debt, also engages in the trading of commodity derivatives are amortized over the terms of the respective issues.

44 I

i

Also, any call premiums or unamortized expenses the intrinsic value method of accounting for common

i associated with refinancing higher-cost debt obliga-stock options and awards issued to employees.

tions used to finance regulated assets and operations Revenues. The Corporation recognizes revenues are amortized consistent with regulatory treatment on sales of electricity and transportation and storage 1 of these items. of natural gas as service is provided and on sales of Enthenmental Expenditums. Expenditures that natural gas and petroleum products in the period of relate to an existing condition caused by past opera. delivery. Receivables on the Consolidated Balance j tions, and do not contribute to current or future revenue Sheets included $231.6 million and $210 million as generation, are expensed. Environmental expenditures of December 31,1997 and 1996, respectively, for relating to current or future revenues are expensed or electric service that has been provided but not yet i capitalized as ap}xopriate. Liabilities are recorded billed to customers. When rate cases associated with when environmental assessments and/or clean-ups are the transportation of natural gas are pending final probable and the costs can be n asonably estimated. FERC approval, a portion of the revenues collected Cenain of these environmental assessments ard clean-by the interstate natural gas pipelines is subject to up costs have been deferred and are included in possible refund. The Corporation has established Regulatory Assets and Deferred Debits as they reserves where required for such cases. are expected to be recovered from Natural Gas Nuclear Fuel. Amortization of nuclear fuel is included in Fuel Used in Electric Generation in the Transmission customers. Cost-Based Regulation. The regulated operations Consolidated Statements of Income. The amonization of the Corporation are subject to the provisions of is recorded using the units-of-production method. Statement of Financial Accounting Standards (SFAS) Deferred Returns and Allowance for Funds f No. 71, " Accounting for the Effects of Certain Types Used During Construction (AFUDC). Deferred of Regulation." Accordingly, the Corporation records returns represent the estimated financing costs certain assets and liabilities that result from the associated with funding certain regulatory assets. i effects of the ratemaking process that would not be These regulatory assets primarily arose from the I recorded under generally accepted accounting princi-Corporation's funding of purchased capacity costs above levels collected in rates. Deferred returns are ples for non-regulated entities. The regulatory assets and regulatory liabilities of the Corporation are clas-non-cash items and are primarily recognized as an addi-sified as Regulatory Assets and Deferred Debits and tion to Purchased Capacity Costs with an offsetting Deferred Credits and Other Liabilities, respectively, credit to Other Income and Expenses. in the Consolidated Balance Sheets. The Corporation AFUDC represents the estimated debt and equity regularly evaluates the continued applicability of costs of capital funds necessary to finance the con-SFAS No. 71, considering such factors as regulatory struction of new regulated facilities. AFUDC is a non-changes and the impact of competition. Discon-cash item and is recognized as a cost of Propeny, 3 tinuance of cost-based regulation or increased com-Plant and Equipment, with offsetting credits to Other petition might require entities to reduce their asset income and Expenses and to Interest Expense. After balances to reflect a market basis less than cost and construction is completed, the Corporation is permit- ) would also require entities to write off their associated ted to recover these costs, including a fair return, regulatory assets. Management cannot predict the through their inclusion in rate base and in the provi-potential impact, if any, of discontinuance of cost-sion for depreciation. based regulation or increased competition on the Rates used for capitalization of deferred returns and Corporation's future financial position and results of AFUDC by the Corporation's regulated operations are operations. However, the Corporation continues to calculated in compliance with FERC mies, Derivative Financial Instruments. The position itself to effectively meet these challenges by maintaining prices that are competitive. Corporation uses interest rate swaps to manage the Common Stock Options. The Corporation follows interest rate characteristics of its outstanding debt. l45

Interest rate differentials to be paid or received as and 1995, respectively, ne weighted average number interest rates change are accrued and recognized as of common shares, for dilutive purposes, was 361.7 an adjustment of interest expense related to the des-million,363.5 million and 363.8 million shares for ignated debt (the accrual method). The amount 1997,1996 and 1995, respectively. payable to or receivable from counterparties related Reclassifications. Certain amounts have been to the interest rate differential is included in - reclassified in the consolidated Snancial statements to Regulatory Assets and Deferred Debits in the conform to the current presentation. Consolidated Balance Sheets. The fair values of interest rate swaps are not recognized in the financial Note 3. Business Combinations and Acquisitions statements. Duke / Louis Dreyfus, L.L.C. (D/LD). On June 17, Income Taxes. Prior to the merger, Duke Power 1997, a wholly owned subsidiary of the Corporation and PanEnergy Gled separate consolidated federal acquired the remaining 50% ownership interest in income tax retums. Subsequent to the merger, the D/LD from affiliates of Louis Dreyfus Corp. for $247 Corporation and its subsidiaries Ele a consolidated fed-million. D/LD markets electric power, natural gas and eral income tax retum. Federal income taxes have been energy-related services to utilities, municipalities and provided by the Corporation on the basis of its separate other large energy users in North America. The acqui-company income and deductions in accordance with sition was accounted for by the purchase method, and established practices of the consolidated group. the assets and liabilities and results of operations of Deferred income taxes have been provided for tem-D/LD have been consolidated in the Corporation's . porary differences. Temporary differences occur when financial statements since the date of purchase. The events and transactions recognized for fmancial report-purchase price substantially represents goodwill. ing result in taxable or tax-deductible amounts in dif-Duke /UAE L.L.C. During December 1997, a ferent periods. Duke Power's investment tax credits ' wholly owned subsidiary of the Corporation formed a have been defe: red and are being amonized over the joint venture with UAE Ref-Fuel L.L.C. (UAE), a estimated usefullives of the related properties. wholly owned subsidiary of United American Energy Earnings Per Common Share. The Financial Corp. The Corporation owns a 65% interest in the Accounting Standards Board issued SFAS No.128 " Earnings per Share" which replaces the presentation joint venture, with UAE owning a 35% minority inter-of primary and fully diluted earnings per share with est. The joint venture acquired a 50% ownership inter-basic and diluted eamings per share. Basic earnmgs est in American Ref-Fuel Company, a waste-to-energy per share is computed by dividing net earnings avail-Erm with operations primarily in New York and New able for common stockholders by the weighted aver-Jersey. Thus, the Corporation has an indirect 32.5% age number of common shares outstanding for the ownership interest in American Ref-Fuel Company year. Basic earnings per share in the Consolidated and pmvided $237 milh.on of m. vestment and financ-Statements of Income is identical to the primary ing t the venture. eamings per share previously presented for all periods. Duke Energy Trading and Marketing, L.L.C. ' Diluted earnings per share reflects the potential dilu-On August 1,1996, a wholly owned subsidiary of the tion that could occur if securities or other agreements Corporation formed a natural gas and power market-to issue common stock were exercised or converted ing joint venture with Mobil Corporation (Mobil) into common stock. Dilutive earnings per share is af6tiates. He marketing company (DETM) conducts computed based upon the weighted average number business as Duke Energy Trading and Marketing, of common shares and dilutive common equivalent L.L.C. <formerly PanEnergy Trading and Mar!'et shares outstanding. Common stock options, which Services, L.L.C.) in the United States and as Duke j are common stock equivalents, had a dilutive effect Energy Marketing L.P (formerly PanEnergy on earnings per share and increased the weighted Marketing L.P.) in Canada. The Corporation operates s average number of common shares by 1.9 million, the joint venture and owns a 60% interest, with Mobil l 2.3 million and 2.6 million shares for 1997,1996, owning a 40% minority interest. i46 l

Note 4. Business Segments Business segment financial information follows for each of the three years in the period ended December 31,1997. Other Operations include intersegment eliminations. Earnmga Before Depreciatum Unafriheted internegnwnt Total Opstating Interest ba plimas Revenues Revenues Revenues inconw & Taxes Anusudatum 1997 Electric Operations $ 4,401.7 $ 4,401.7 $1,1803 $1,241.8 $497.8 Natural Gas Transmission 1,467.8 104.3 1,572.1 607.7 624.4 229.6 Energy Services Trading and Marketing 7,411.0 77.7 7,488.7 42.7 44.4 7.0 . Field Services 2,480.5 ~ 574.1 3,054.6 156.7 157.0 71.4 Global Asset Development 109.2 14.2 123.4 (6.4) 4.5 8.7 Other Energy Services 342.8 32.8 375.6 23.2 18.2 5.8 Energy Services' Eliminations 1655.1) (655.1) Total Energy Services 10,343.5 43.7 10,387.2 216.2 224.1 92.9 4 Other Operations 95.9 (148.0) (52.1) (34.2) (22.2) 20.7 Total Consolidated _ 516 308.9 $16,308.9 $1,970.0 $2,108.1 $841.0 1996 Electric Operations $ 4.498.4 5~ $ 4.498.4 $ 1,303.6 5 1.419.5 $481.1 Natural Gas Transmission 1.470.2 86.1 1,5563 583.8 595.5 228.2 Energy Services Trading and Marketing 3,773.5 40.5 3,814.0 563 57.9 3.8 Field Services 2,215.6 420.9 2,636.5 149.4 151.6 58.7 Gkhal Asset Development 65.0 6.6 71.6 (1.2) 6.9 Other Energy Services 182.8 21.4 204.2 19.9 20.0 3.5 Energy Services

Eliminations (456.5)

(456.5) Total Energy Services 6,236 9 32.9 6,269.8 224.4 229.5 72.9 Other Operations 96 9 (119.0) (22.1) 46.8 49.7 7.2 Total Consolidated _ $12.302.4 $12.302.4 $ 2.158.6 $ 2.294.2 $789.4 1995 ' Elecilic Operations $ 4.512.4 $ 4.512.4 $ 1,308.7 $ 1,381.2 $451.2 Natural Gas Transtnission 1,480.3 53.1 1,533.4 562.3 567.6 228.5 Energy Services Trading and Marketing 1.8383 28.4 1,866.7 20.0 17.1 2.3 Field Services - 1,607.1 1843 1,791A 96.8 106.1 40.3 Global Asset Development 753 4.0 79.3 24.9 26.8 6.8 Other Energy Services 94.5 0.8 95.3 23.6 23.7 0.8 (216.9) (216.9) Energy Services' Eliminations Total Energy Services 3.615.2 0.6 3,615.8 1653 173.7 50.2 Other Operations - 86.8 (53.7) 33.1 32.0 68.0 7.2 Total Consolidated $ 9.694.7 - $ 9.694.7 $ 2.0683 $ 2.190.5 $737.1 /s Mens Captial armi lavestnwas Expenditurca identirteNe Asnets 1W1 1996 1995 1997 1996 ' Electric Operations. $ 742.6 $ 609.8 5 704.0 $12,958.5 - $12.625.2 Natural Gas Transmission 247.3 194.0 230.5 5,088.9 5,216.4 Energy Services - Tradmg and Marketing - 17.9 6.6 15.3 1,857.3 1,403.5 . Field Services 156.5 530.8 187.2 1,979.8 1,769.4 Global Asset Development - 348.3 34.8 53.5 987.6 522.3 Other Energy Services 47.2 39.1 1.0 223.2 130.1 (169.1) (247.0) Energy Services' Eliminations Total Energy Services - 569.9 - 611.3 257.0 4,878.8 3,578.3 Other Operations 467.8 134.9 99.2 1,102.6 9463 Total Consolidated $ 2,027.6 $1,550.0 $ 1.290.7 $24,028.8 $22.366.2 '47 l

i Note 5. Regulatory Matters percent of the Corporation's total regulated electric Electrie Operations. The NCUC and the PSCSC sales. The rate reduction was reDected on bills ren-approve rates for retail electric sales within their dered on or after June 1,1996. This net decrement respective states. The FERC approves the Corpora-rider reflects an interim true-up decrement adjustment tion's rates for electric sales to wholesale customers. associated with the levelization of Catawba purchased Electric sales to the otherjoint owners of the capacity costs and an interim true-up increment asso-Cataw ba Nuclear Station (Catawba), which represent ciated with amortization of the demand-side manage-a substantial majority of the Corporation's electric ment deferral account. The rate adjustment was made wholesale revenues, are set through contractual because, in the South Carolina retailjurisdiction, agreements. cumulative levelized revenues associated with the in 1997, the Corporation signed stipulation recovery of Catawba purchased capacity costs had agreements with the NCUC and the PSCSC as a result exceeded purchased capacity payments and accrual of of the merger in which the Corporatan agreed to cap deferred returns, ar.J cenain demand-side costs had the base electric rates at existing levels through 2000, exceeded the level reDected in rates. with very limited exceptions, for retail customers. The Certain of the Corporation's electric wholesale Corporation also signed an agreement with the FERC to customers, excluding the other Catawba joint ou n-freeze rates, except for the market-based rates, for the ers, initiated proceedings in 1995 before the FERC Corporation's tmnsmission and wholesale electric sales. concerning rate related matters. The Corporation and in addition, the Corporation signed agreements with the nine of its eleven wholesale customers entered into a othe ' ) int owners of Catawba providing for a cap on settlement in July 1996 which reduced the cus-the rates charged under interconnection agreements and tomers' electric rates by approximately 9 percent and on the reimbursement of cenain costs related to admin-renewed their contracts with the Corporation through istration and general expenses and general plant costs 2000. Both of the customers that did not enter into under operation and fuel agreements. Management is of the settlement have signed agreements and have the opinion that these agreements will not have a mater-begun purchasing electricity from other suppliers in ial adverse effect on the consolidated results of opera-1997. Early in 1998, the Corporation reached agree-tions or 6nancial position of the Corporation. ments, subject to FERC approval, with both of these Fuel costs are reviewed semiannually in the former customers to recover the stranded costs wholesale jurisdiction and annually in the South incurred to serve these customers. Management is of Carolina retailjurisdiction, with provisions for the opinion that these agreements will not have a changing such costs in base rates. In the North material adverse impact on the consolidated results of Carolina retail jurisdiction. a review of fuel costs in operations or fimmeial position of the Corporation. rates is required annually and during general rate Natural Gas Operations. case proceedings. Alljurisdictions allow the FERC Onler 636 and Natural Gas Transition Costs. Corporation to adjust electric rates for past over-or The Corporation's interstate natural gas pipelines pri-under-recovery of fuel costs. Therefore, the marily provide transportation and storage services pur-Corporation reflects in revenues the difference suant to FERC Order 636. Order 636 allows pipelines between actual fuel costs incurred for eketric opera-to recover eligible costs resulting from implementation tions and fuel costs recovered through rates. Tne of the order (transition costs). In 1994, the FERC stipulation agreements related to the merger do not approved TETCO's settlement resolving regulatory apply to the fuel cost adjustments. issues related primarily to Order 636 transition costs The PSCSC, on May 7,1996, ordered a rate reduc-and a number of other issues related to services prior tion in the form of a decrement rider of 0.432 cents to Order 636. TETCO's liability for transition costs is per kilowatt hour, or an average of approximately 8 estimated based on the amount of producers' natural percent. affecting Scath Carolina retail customers. gas reserves and other factors. TETCO's final and non-South Carolina retail sales represent approximately 30 appealable settlement provides for the recovery of cer-48

tain of these transition costs from customers through Note 6. Joint Ownership of Generating Facilities volumetric and reservation charges tnrough 2002 and The Corporation previously sold interests in both beyond, if necessary. Pursuant to the settlement, units of Catawba. The other owners of podions of TETCO will absorb a certain portion of the transition Catawba and supplemental information regarding their costs, the amount of which continues to be subject to g; 79;; change dependent upon natural gas prices and deliver-ability levels. In 1995, based upon producers' discover-o

o.. 6, im.

. ii. si.no, les of additional natural gas reserves,TETCO North Carolina Municipal Power A ency Number I (NCMPA) 37.5 % F mereased the estimated liabilities for transition costs North Carolina Electric Memberd.ip by $125.8 million. Under the terms of the existing set. Corporation (NCEMC) 28.125 % Pnmont Municipal Power tiement, regulatory assets were increased $85.8 million Arency (PMPA) 12.5% for amounts expected to be collected from customers c ayegEj,,ctric Cooperative.Inc. e and TETCO recognized a $40 million change to oper-ating expenses ($26 million after tax). Each owner has provided its own financing for its On July 16,1996, the U.S. Coun of Appeals for wnership interest in Catawba. the District of Columbia upheld, in general, all The Corporation retains a 12.5 percent ownership aspects of Order 636 and remanded certain issues for interest in Catawba. As of December 31,1997, funher explanation. One of the issues remanded for further explanation is whether pipelines should be $507.8 million of Property, Plant and Equipment rep-resented the Corporation's investment in Units 1 and entitled to recover 100% of gas supp1v realignment (GSR) costs. This matter is substantially mitigated

2. Accumulated depreciation and amortization of

$198.3 million associated with Catawba was record-by TETCO's transition cost settlements. The Corporation believes the exposure associated ed as of year-end 1997. The Corporation's share of l with gas purchase contract commitments is substan-Operating costs of Catawba is included in the l Consolidated Statements of Income. tially mitigated by transition cost recoveries pursuant to customer settlements, Order 636 and other mecha. In connection with the joint ownership, the nisms, and that this issue will not have a material Corporation has entered into contractual interconnect-adverse effect on consolidated results of operations tion agreements with the other joint owners to pur-l or financial position of the Corporation. chase declining percentages of the generating capaci-i Jurisdictional Transportation and Sales Rates. ty and energy from the plant. These purchased power On April 1,1992 and November 1,1992, PEPL agreements were effective beginning with the com-placed into effect, subject to refund, general rate mercial operation of each unit. Units I and 2 began increases. On February 26,1997, the FERC commercial operation in June 1985 and August approved PEPL's settlement agreement which pro-1986, respectively. The purchased power agreements { vided final resolution of refund matters and estab-were established for 15 years for NCMPA and PMPA lished prospective rates. The agreement terminated and 10 years for NCEMC and Saluda River. While other actions relating to these proceedings as well as the purchased power agreements with NCMPA and PEPL's restructuring of rates and transition cost PMPA extend for 15 years, a significant decrease in recoveries related to FERC Order 636. The settle-the percentage of capacity and energy the ment will not have a mmerial impact on future oper-Corporation is obligated to purchase occurs in the ating revenues or financial position of the lith calendar year of operation for each unit. This Corporation. significant decrease occurred in 1995 for Unit I and l As a result of the resolution of these and certain 1996 for Unit 2. other proceedings, PEPL recorded earnings before The interconnection agreements also provide for interest and taxes of $32.7 million, $8 million, and supplemental power sales by the Corporation to the $20.6 million in 1997,1996, and 1995, respectively. other joint owners. Such power sales are to satisfy l i49 l i.

l l l capacity and energy needs of the otherjoint owners are based on the fixed costs of the phmt and include !~ beyond the capacity and energy which they retain from the capital costs and fixed operating and maintenance Catawba or potentially acquire in the form of other costs. Actual purchased capacity costs for 1997 and resources. The agreements funher provide the other projected obligations throu,h 2000, the last year of joint owners the ability to secure such supplemental the purchase buy-backs, are $99.8 million, $72 mil-requirements outside of these contractual agreements lion, $52.9 million and $6.6 million, respectively. following an appropriate notice period. NCEMC and Effective in its November 1991 rate order, the Saluda River have given appropriate notice that they NCUC reaffirmed the Corporation's recovery from intend to acquire their supplemental capacity require-retail electric customers, on a levelized basis, of the ments outside of these agreements effective January 1, capital costs and fixed operating and maintenance 2001 and January 1,2002, respectively, thus relieving costs of capacity purchased from the otherjoint own-the Corporation of the obligation to serve this portion ers. The PSCSC in its November 1991 rate order of load. In addition, as a result of the merger, the other reaffirmed the Corporation's recovery on a levelized joint owners of Catawba have the right to end their basis of the capital costs of capacity purchased from supplemental capacity requirements as of January 1, the otherjoint owners. Levelization was reaffirmed 2001 with written notice to the Corporation due by through inclusion in rates approved in March 1992 by December 31,1999. As the joint owners retain more the FERC. The ponion of purchased capacity subject capacity and energy from Catawba or a third party, to levelization not currently recovered in rates is supplemental power sales are expected to decline. being deferred, and the Corporation is recording a Management is of the opinion that this will not have a deferred retum on the accumulated balance. The material adverse etTect on the consolidated results of Corporation is recovering the accumulated balance, operations or the financial position of the Corporation. including the deferred return, when the sum of the The interconnection agreements with each of the declining purchased capacity payments and accrual of otherjoint owners include provisions that the deferred retums for the current period drops below Corporation will provide generating reserves to back-the levelized revenues. Jurisdictional levelizations are stand the otherjoint owners' retained capacity in the intended to recover total costs, including deferred Catawba plant at the system average cost ofinstalled returns, and are subject to adjus'ments, including capacity. Additionally, the agreements include cenain final true-ups. The Corporation recovers the costs of reliability exchanges designed to manage outage-related purchased energy and the non-levelized portion of risks by exchanging energy entitlement between purchased capacity on a current basis. Catawba and the McGuire Nuclear Station, impacting The current levelized revenues approved in the the Corporation as well as all the otherjoint owners. Corporation's last general rate proceedings are The agreements also provide the other joint owners the $211.4 million, $94.1 million and $6.8 million for ability to terminate the interconnection agreements in Nonh Carolina retail, South Carolina retail and Other their entirety upon eight years written notice to the Wholesale (FEPsC), respectively. Purchased power Corporation. PMPA has rendered such notice effective costs, subject to levelization, are deferred based on i January 1,2006. This termination will relieve the allocation factors of approximately 62 percent. I ~* Corporation of the obligation to serve this ponion of 26 percent and 2 percent for North Carolina retail, load as well as provide the reserves associated with South Carolina retail and Other Wholesale (FERC), PMPA's retained capacity. Management is of the opin-respectively. The PSCSC, on May 7,1996, ordered a ion that this will not have a material adverse etTect on rate reduction in the form of a decrement rider for an l l l l the consolidated results of operations or the financial interim true-up adjustment. The Corporation also I position of the Corporation. recovers an allocated amount of purchased power Purchased energy cost payments are based on vari-costs in the pricing of supplemental sales made to able operating costs and are a function of the genera-the other joint owners on a current basis. tion output of Catawba. Purchased capacity payments 1

50 i

During 1996,in the North Carolina retail and the , yy,_ ,m im FERC wholesale jurisdictions, annual levelized rev-lucome tax, computed at the $564.7 5626.1 5588.8 enues exceeded purchased capacity payments and the j",t'geg;, accrual of deferred returns for the first time. In the state income tax. nci or South Carolina retail jurisdiction, cumulative lev- '*d*(("*****"**' 7lj

78j, M) o, 3

elized revenues have exceeded purchased capacity Toulincome tax expense 5638.9 5697.8 _ s664.2 payments and accrual of deferred returns-afective tax rate 39.6 % 39.0% 39.5

For the years ended December 31,1997,1996 and 1995, the Corporation recorded purchased capacity The tax cF

.s of temporary differences that and energy costs from the otherjoint owners of resulted in deferred income tax assets and liabilities, $120.1 million, $151.2 million, and $388.2 million, and a description of the significant items that created respectively. These amounts, after adjustments for the these differences as of December 31,1997 and 1996, costs of capacity purchased not reflected in current are as follows: rates, are included in Net Interchange and Purchased Power in the Consolidated Statements of Income. As ^"d** t* a Defened nedia and other habilines $ 408.4 $ 418.2 of December 31,1997 and 1996, $835.6 million and Ahernative minimum tax credit cartyrorward 30.3 72.6 $892 million, respectively, associated with the cost of other 46.3 Total deferred income tax asset 5 485 8 490 8 i capacity purchased but not reDected in current rates Valuation allowance and other tax reserves (146.1) (141.1) have been accumulated in the Consolidated Balance Net deferred income tax assets 338.9 349.7 Sheets as Purchased Capacity Costs and Current investmena and other assea (263.n (208.8) Poition of Purchased Capacity Costs. property, piant and equipment (2,357.7) (2.268.7) RcFulatory assets and deferreJ debits (623.2) (642.6) ReFulatory anet related to restatir.g to I J preaax basis (437.8) (433.2) Note 7. Income Taxes Other (5.9) Income tax expense as presented in the Consolidated Total deferred income tax habititie. (3,6s t.s) < 3.559.2) Statements of Income is summarized as follows: state dererred income tax, net or lederal tax crfect (363.61 (359.0) i Net deferred income tax liabihty $(3.706.5) S(3.568.5) A warm im m 1. l Current income taxes [d*l*l 5 $ 5y43 5dy The alternative minimum tax credit carryforward l 3, can be carried forward indefinitely. Total current income taxes $33.2 623.1 549.0 Deterred income taxes. nei In 1990, PanEnergy established a provision l Nate Y9 $.] for certain tax issues related to the purchase of TEC, which resulted in an increase in goodwill and Total deferred income taxes nei 120.s 85 3 126.4 Investment tax credit amonization (15.1) til.2) (11.2) deferred income tax liability. Following discussions I I Talineggrense 5638.9 5697.8 5664.2 with the Internal Revenue Service, PanEnergy revised its estimates in 1995 and 1996 with respect Total income tax differs from the amount comput-to these issues. As a result, the related goodwill and ) ed by applying the federal income tax rate of 35rle to deferred income tax liability were reduced by l income before income taxes. The reasons for this dif-approximately $40 million and $100 million in 1996 i fereu are as follows: and 1995, respectively. If tax benefits relating to the l valuation allowance for deferred income tax assets and other tax reserves are recognized subsequent to December 31,1997, approximately $29.4 million will be allocated as an adjustment to goodwill.

51

Note 8. Financial Ins,truments and December 31,1997 and 1996 are not necessarily Risk Management indicative of the amounts the Corporation could have Financial Instruments. In order to obtain variable realized in current market exchanges. rate financing at an attractive cost, the Corporation entered into interest rate swap agreements in which the Corporation effectively exchanged $200 million mas Aanm (Wahmded Anem dsahdmee of 8% Series B First and Refunding hiortgage Bonds A-d== An-am for Hoating rate debt at the three month London wierm ama .3i 2.s) )$ 03 Interbank Offered Rate (LIBOR) plus a.074% mar-Interest rate swaps 6 9.5 12.0 gin and $100 million of 7.5% Series B First and 7,'e"r$b# Refunding hiortgage Bonds for floating rate debt at in capmation. subordmated notes * (33*/- (356.2) three mouth LIBOR plus a 1.1272% margin. The preferred stock * (41P.01 (530.2) (684.0) (699.0) interest rate swaps expire in 1999 and 2000, respec-

ne Eduonty of the esummed far value amoums oHonNenn debt. gunm-teedFefeninNnencial mtesCm capwaam'nuNndmmed notes and tively, and rates are reset quarterly. As a result of the preferred stock were obtamed from mdependent pames.

interest rate swap contracts, interest expense on the 6 Anmountown rw imeren re.waps represeni enumsted amounts the

"""'""'"""*""'"*'"*""*"""#*d"'""*"'""'"

Consolidated Statements ofIneome is recognized at the weighted average rate for the year tied to LIBOR. The weighted average rates for 1997,1996 and 1995 The fair value of cash and cash equivalents, notes are as follows (dollars in millions): receivable, notes payable and commercial paper and nuclear decommissioning trust funds are not materi-wm,,,,.w,,n,, am ally different from their carrying amounts because of s.n ud e..m % %% = = ms the short-term nature of these instruments or the stat-8% Series B 1994 1999 $200 5.78 % 5.64 % 6,14% ed rates approximating market rates. 7.5% Series B 1995 2025 $100 6.83 % 6.69 % 7.06 % The following financial instruments have no book In 1996, TETCO received $98.6 million from the value associated with them and there are no fair val-financing of the right to collect certain Order 636 ues readily determinable since quoted market prices natural gas transition costs, with limited recourse. At are not available: guarantees made to affiliates or December 31,1997 and 1996, $52.8 million and recourse provisions from affiliates and sales agree- $87.3 million, respectively, remained outstanding related to the transition cost recovery rights and were ments for trade accounts receivables, LNG peaject included in Other Current Liabilities in the Consoli. settlement and Order 636 natural gas transition cost dated Balance Sheets. In the opinion of management, recovery. the probability that the Corporation will be required Commodity Derivative Instruments At to perform under the recourse provisions is remote. December 31,1997 and 1996, the Corporation held During 1997, the Corporation terminated its or issued several instruments that reduce exposure agreement to sell accounts receivable which was to market fluctuations relative to price and trans-entered into in 1996. Also in 1997, the LNG settle-portation costs of natural gas, electricity and petro-ment receivables sale agreement, which was entered leum products. The Corporation's market exposure, into in 1993, expired, as all the receivables were primarily within DETh1 and D/LD, arises from nat-collected. Amounts outstanding at December 31, ural gas storage inventory balances and fixed-price 1996 under these agreements were $100 million and purchase and sale commitments that extend for $29.9 million, respectively. periods of up to 9 years. The Corporation uses Fair Value of FinancialInstruments.The fair futures, swaps and options to manage and hedge value of the Corporation's financial instruments is price and location risk related to these market expo-snmmarized below. Judgment is required in inter-

sures, preting market data to develop the estimates of fair DETh1 and D/LD also provide risk management value. Accordingly, the estimates determined as of services to its customers through a variety of ener-l52 l

D gy commodity instruments including forward con-underlying physical transaction occurs. At I)ccember tracts iavolving physical delivery of an energy com. 31,1997 and 1996, the Corporation had current unrec-modity, energy commodity futures, over-the-counter ognized net gains of $13.5 million and $8.7 million, swap agreements and options. In addition to hedg-respectively, related to commodity instruments. The ing activities, the Corporation also engages in the fair value of energy commodity swaps held at trading of such instruments, and therefore experi-December 31,1997 was a liability of $158.6 million. cnces net open positions. The Corporation manages During 1997,1996 and 1995, the Corporation ree-open positiota with strict policies which limit its ognized net gains of $33.6 million, $25.4 million. and exposure to market risk and require daily reporting $10.5 million, respectively, from trading activities. to management of potential financial exposure. The values of energy commodity futures, swaps and These policies include statistical risk tolerance limits options held for trading purposes were as follows: using historical price movements to calculate a daily earnings at risk as well as a total Value-at-Risk Ansels ljah4htsee Anne,n 12.dukten (VAR) measurement. The weighted-average life of rair met nee n svin sim w33 mi Nminal met at Duember 31 2,009 1,1125 407 530 the Corporation's commodity risk portfolio was approximately 7 months at December 31.1997. Energy commodity futures involve the buying or Market and Credit Risk. New York Mercantile selling of natural gas, electricity or other energy-relat-Exchange (Exchange) traded futures and option con-ed commodities at a fixed price. Over-the-counter tracts ue guaranteed by the Exchange and have nomi-swap agreements require the Corporation to receive nal credit risk. On all other transactions described I or make payments based on the difference between a above, the Corporation is exposed to credit risk in the l specified price and the actu'al price of the underlying event of nonperfomlance by the counterparties. For commodity. The Corporation uses futures and swaps each counterparts, the Corporation analyzes the fman-l to manage margins on underlying fixed-price pur. cial condition prior to entering into an agreement, establishes credit limits and monitors the appropriate-chase or sale commitments for physical quantities of ness f these limits on an ongoing basis.'lhe change in natural gas, electricity and other energy-related com-market value of Exchange-tnided futures and options modities. Energy cormnodity options held to mitigate contracts requires daily cash settlement in margin price risk provide the right, but not the requirement, accounts with bmkers. Swap contracts and most other to buy or sell energy-related commodities at a fixed over-the-counter instruments are generally settled at price, The Corporation utilizes options to manage the expiration of the contract term and may be subject i margins and to limit overall price risk exposure. to margin requirements with the counterparts. DETM and D/LD account for these activities using "'E'"****"II" # * the mark to market method of accounting.

n investments, where the Corporation's At December 31,1997 and 1996, the Corporation ownersh.ip m domestic and international affiliates is had outstanding futures, swaps and options for an 50 percent or less, are accounted for by the equity absolute no'ional contract quantity of 4,810 billion method. These investments include undistributed i

cubic feet (tlef) and 3,475 Bef of natural gas, respec-earnings of $20.6 million la 1997 and $49.7 million l tively, some of which were in place to ofTset the risk of in 1996. The Corporation's proportionate share of net price fluctuations under fixed-price commitments for income from these affiliates for the years ended purchasing and delivering natural gas. At December December 31,1997,1996 and 1995 was $38.4 mil-L 31,1997 and 1996. outstanding futures, swaps and lion, $32.7 million, and $59.8 million, respectively. options related to electric contracts and other energy-These amounts are reilected in Other Operating related commodities were not material. The gains, loss-Revenues in the Consolidated Statements of income. es and costs related to those commodity instruments Investment in affiliates as of December 31,1997 and that qualify as a hedge are not recognized until the 1996 includes the following: l l l 53 ( t 1

1. umm 1997 in in umwn, s9n

=

t995 Natural Gas Transmission - domestic $ 67J $ 46.5 Assets Energy Services Current Aswts 5 642.0 $ 1.025.2 5 617.0 Field Services - domestic 159.8 129.6 Noncurrent Assets 5,867.8 5.660.5 5.090.2 Gk>bal Asset Devchynnent Total Assets $6,509.8 $ 6.685.7 $ 5.707.2 Domestic 174.5 14.5 International 207.8 183.5 Liabilities and Equity Other Energy Services Current Liabilities 5 757.4 5 8793 $ 468.5 Noncurrent Liabilities 3,257.2 3.461.4 3.376.0 Domestic 15.9 495 . Equity 2.495.2 2.345.0 1.862.7 laternational 9.7 1.4 Total Liabihties and Equity $6,509.8 $ 6.685.7 $ 5.707.2 Total Energy Services . 567.7 378.5 . OtherOperations Income Domestic 38.1 65 3 Operating Revenues $ 905.0 $ 3.133.2 $ 1.391.2 International 12.6 12.6 Operating Expenses 702.8 2,494.1 667.1-et lac me .4 1603 236.2 Total Oter Operations 50.7 77.9 . TotalInvestments in Afriliates $685.9 $502.9 The Corporation had outstar,: ling loans to certain Natural Gas Transmission. Investments primarily affiliates of $87.1 million and $2,9 million at include ownen. hip interests in natural gas pipeline December 31,1997 and 1996, respectively. joint ventures which transport gas from Canada to the United States. Note 10. Property, Plant and Equipment Field Services. Among other investments, Field A summary of property, plant and equipment by Services holds an interest in a partnership which classification as of December 31,1997 and 1996 is owns natural gas gathering systems in the Gulf of as follows: Mexico, a master limited partnership that owns and In AMwns 1997 19 % operates a petroleum pipch.ne, and a j..omt venture gi,c,,,, pi,,,,, 3,,y3c, that provides gathering, processing and marketing Production 5 7.575.5 $ 7.278.4 . Transmission 1.5663 1.543.7 services for natural gas producers m. Oklahoma. Distribution 4.517.5 - 4.303.9 - Global Asset Development. Global Asset G'"""3 l** 11186 30683 P Nuclear fuel 643.9 604.8 Development has investments in various natum) gas Construction work in progress-222.5 389.0 and electric generation and transmission facilities . Taal electric plant in service ,_y5,6443 15.188.1 world-wide, and in a joint ventuir that owns and

'/,"'n*2mD'A"* '" S*i'*

6,,,4.4 5.994.1 operates a methanol plant and a MTBE (methyl ter-Gathering 812J M3D . Processmg 502.4 508.4 tiary butyl ether) plant in Jubail, Saudi Arabia. underground storage 488.8 450.6 Other Energy Services. Investments include the $,U 'fp"$' *"d * E'$ 3$ participation in various Construction and support Construction work in progress 159.9 - 126.7 ' aClivities for fossil fuelCd generating plants. "*'"*' E"" E ""I i" "" #' 4 8' Other Property and Equipment 683.4 457.6 Other Operations. This segment holds invest-mal emperty. rum and Equipmem 2sm.1 a.es.2 . ments in vanous real estate development projects Em accumulated depreciation and aj.. t venture that pmvides w. less personal O,nchuling amortization of nuclear fuel: om ire i 97. $370.0 mibion; communication services. 1996 - $3633 minion). ,_ 9,712A___11_99L. Summarized comb, e. d balance sheet and income " p-roperty. plant and equipment $15,735.9 $15.269.1 Net m statement information of the entities that are account-ed for using the equity method are as follows: A summary f accumulated depreciation for propeny, plant and equipment by classification as of December 31,1997 and 1996 is as follows: In sMwas a9e? 14 % Electric Plant tu Service . $6,067.7 $5.801.8 Natural Gu Plant in Service 3.602.9 3.365.8 Orber Proferty and Equipment 41.6 31.5 Tota! Ac

==.. cumulated Depreciation $9,712.2 $.,9.199.1 l54 i / t

l Q Note 11. Debt and Credit Facilities Long-term debt outstanding as of December 31. The following credit facilities were available to 1997 and 1996 consisted of the following: the Corporation at December 31,1997 and 1996: IMhars in Mah,ms Year Due 1997 la Duke Energy Corporation

in uah,m.

im im First and refunding mortgage bonds: credu creda 5.17% 1998 $ $0.0 $ 50.0 Facilmen Outstandmg Faedam outstandmg 5.76% - 8% 1994 425.0 425.0 Arinually senewable 7% 2000 200.0 200.0 - lines of credit $ 54.0 - $16.3 $ 64.9 $ 8.6 5%% - 7.41% 2001 - 2004 600.0 600.0 400.0 6%% -7% 2005 - 2008 325.0 325.0 364-day facilities 300.0 Two-year revolving 6%% - 8.30% 2023 - 2025 878.0 878.0 facilities

40.0 -

40.0 7% - 8.95% 2027 - 2033 165.5 165.6 Four. year revolving Mortgage bonds redeemed or faciliticsh 125 0 77.0 235.0 42.0 nuitured during 1997 647.6 Pullution control bonds - Five-year revolving facilities - 2,200.0 755.0 3.58% - 7.75% 2012 - 2017 172.0 172.0 C rcial pa

r. 5 9% and Total Consolidated

$2.719.0 $93.3 $1.494.9 $50.6 0At December 31.1997 and 1996. the Corporation had $40 nulhon of pollu-December 31.1997 and log 6 tum control bonds. included in kmg-term debt. backed by the two-year respectively 800.0 130.0 revolving facahues. Other debt 25.7 27.8 b ne outstandmg balance was hicluded in kmg-term debt Duke Capital C.rp. Comnwrcial paper. 6.03% weighted-average rate at December 31,1997 800.0 The 364-day and five-year credit facilities support pg,,y the Corporation's commercial paper facilities of Bonds: 7%% 2022 328.0 32d $2.5 billion and $780 million at December 31,1997 8%% Debemures 2025 100* 100u Nue$: and 1996, respectively. Amounts outstanding under 9.55%, maturing sen. lly 1996 - 1999 27.5 41.3 a the commeleial paper facilit.ies at December 31, 9.9*. maturing serially 2000 - 2003 45.0 45.0 7% - 8%% m -2m6 4504 450n 1997 and 1996 were as follows: Notes converted or matured during 1997 124.5 I in warum, em 1m TETCO Total commercial paler outstanding $1.749.2 $324.2 Notes: tess ponion classified as short-term 149.2 194.2 8% - 10%% 2000 - 2004 $90.0 500.0' Med um Series A. . Portion classified as long-term debt $1,600.0 $130.0 l Algonquin 9.13% Naes 2001 - 2003 1904 100D In addition to amounts borrowed under the credit facilities and commercial paper facilities, the $' Notes 2004 100 4 1002 Corporation had $251.9 million of short-term bor-7.2% -7.95% Debentures 2023 - 2024 200.0 200.0 Crescent Resources.Inc.6 rowings from banks outstanding at December 31, Construction and mortgage loans. 1996. Also, at December 31,1997 and 1996, the 6.02 * - 7.10 % 1998 - 2011 116.7 76.0 Rev' 8 l Corporation had a note payable to an affiliate of ,n 5 9 igh ave Ege e $4 million and $5 million, respectively, at December 31,1997 and 1996 P*'**'Y 2*'

2#

A summary of shelt-term debt is as follows: Nantahala Power and Light Company 6.901 - 9.21% Senior Notes. twi= h Mat== I* im IW maturing serially 2011 - 2016 67.3 68.0 Amount outstanding at end of year $169.5 $459.7 $300.3 Other 1998 - 2001 .2 .4 Weighted-average rate at end of year 6.04 % 6.16 % 6.09% Unamortized debt discount and Maximum amount outstanding premium. net (45.6) (60.5) during the year $H89.1 $501.4 $409.3 .rd We a 6W 5.835.7 U "** **'""U*' 84*"" urt g $4174 $182.4 $152 8 Weighted-average interest rate far the Total kmg-term portion $6,530.0 $5,485.1 Jear - computed on a daily basis SA5% 5.92 % 6.15 % a substantially all of the corporunon's electnc plant in service was murtgaged as of December 31.1997. b substantial amnunt of Crescent Resources. Inc 's real estate devehipment prtpcts, land and buildmgs are pledged as collateral. 55

l l The annual maturities of consolidated long-term respectively. He balance of the internal reserve as of debt at December 31,1997 were $77.3 million, December 31,1997 and 1996, was $210.8 million and $612.1 million, $427 million, $403 million and $207.8 million, respectively, and is reflected in $192.5 million for 1998 through 2002, respectively. Accumulated Depreciation and Amonization in the On October 1,1996, TETCO redeemed its Consolidated Balance Sheets. Management's opinion $150 million,10% debentures and its $100 million, is that the decommissioning costs being lecovered l 10%% debentures due 2011. TETCO recorded a non-through rates, when coupled with assumed after-tax cash extraordinary item of $16.7 million (net of fund earnings of 5.5 to 5.9 percent, are currently sufD-income tax of $10.3 million) related to the unamor-cient to provide for the cost of decommissioning. tized discount on this early retirement of debt. A provision in the Energy Pelicy Act of 1992 Earnings per common share for 1996 were reduced established a fund for the decontamination and $0.05 as a result of this charge, decommissioning of the uranium enrichment plants of the Department of Energy (DOE). Licensees are Note 12. Nuclear Decommissioning Costs & subject to an annual assessment for 15 years based Spent Nuclear Fuel on their pro rata share of past enrichment services. Nuclear Decommissioning Costs. Estimated site-The annual assessment is recorded as Fuel Used in specific nuclear decommissioning costs, including Electric Generation in the Consolidated Statements the cost of decommissioning plant components not of Income. The Corporation paid $9.7 million during subject to radioactive contamination, total approxi-1997 and has paid $54.7 million cumulatively related mately $1.3 billion stated in 1994 dollars based on to its ownership interests in nuclear plants. The decommissioning studies completed in 1994. This Corporation has reflected the remaining liability and amount includes the Corporation's 12.5 percent own-regulatory asset of $87.1 million and $94.7 million ership in Catawba. The otherjoint owners of in the Consolidated Balance Sheets at December 31, Catawba are responsible for decommissioning costs 1997 and 1996, respectively, and were classified as related to their ownership interests in the station. Deferred Credits and Other Liabilities and Both the NCUC and the PSCSC have granted the Regulatory Assets and Deferred Debits. respectively. Spent Nuclear Fuel. Under provisions of the Corporation recovery of est mated decomrm.ssiomng Nudear Waste Poh.ey Act of 1982, the Corporation costs through retail rates over the expected remain-has entered into contracts with the DOE for the dis-ing service periods of the Corporation'3 nuclear posal of spent nuclear fuel. The DOE delayed in plants. Such estimates presume each unit will be accepting the waste materials on the contract date of decommissioned as soon as possible following the January 31.1998. The Corporation has satisfactory end of its license life. Although subject to extension, plans in place to provide storage of spent nuclear the current operating licenses for the Corporation's fuelif the DOE cannot accept it. Payments made to nuclear units expire as follows: Oconee I and 2 - the DOE for disposal costs are based on nuclear out-2013, Oconee 3 - 2014; McGuire ! - 2021, McGuire put and are included in Fuel Used in Electric 2023; and Catawba 1 - 2024, Catawba 2 - 2026. Generation in the Consolidated Statements of During 1997 and 1996 the Cmpomtion expensed

income, approximately $56.5 million which was contributed to the external funds for decommissioning costs and Note 13. Guaranteed Preferred Beneficial interests accrued an additional $3.0 million and $1.6 million to in Corporation's Subordmated Nofes the intemal resen'e in 1997 and 1996, respectively On December 8,1997, Duke Energy Capital Trust 1 Nuclear units are depreciated at an annual rate of 4.7 (the Trust), issued $350 million of its 7.2% trust percent, of which 1.61 percent is for decommissioning.

preferred securities, at an $11 million discount, repre-De balance of tne etternal fur;ds as of December 31, senting preferred undivided beneficial interests 1997 and 1996, was $471.1 million and $362.6 million in the assets of the Trust. Payment of distributions 156 l \\

l 1 l ) ) on such preferred securities is guaranteed by the u^= w mes." ia j Corporation, but only to the extent the Trust has funds legally and immediately available to make such distri-4E $ E s3 butions. The Trust is a statutory business trust, of 7.00% W 1993.Sa 000 50.0 50.0 7.04% Y 1993 600,000 60.0 60.0 l' which the Corporation owns all the common secun.- 6.375% (heferred Stock A) 1993 2,400.000 60.0 60.0 l Auc6m sedes A 1990 750.000 - 75.0 75.0 ties, established for the purpose of issuing and selling 5.72% D 1966 350.000 35.0 such preferred securities and investing the gross pro-6.72% E 1968 350.000 35.0 73n theremd siwk A) m2 1.6mm0 4a0 ceeds in the 7.2% Series A Junior Subordinated Notes $340.0 $450.0 Total of the Corporation due September 30,2037. Note 14. Preferred and Preference Stock During December 1997, the Corporation redeemed The following shares of stock were authorized approximately 3.2 million shares of preleved stock for with or without sinking fund requirements as of $203.4 million. On December 18,1997, the Corpora-December 31,1997 and 1996: tion also commenced a tender olTer to purchase a por-tion of six of its preferred issues totaling $315 millien. The tender offer expired on February 3,1998, with r-w-i= =ua-o acceptances limited to a maximum of 50 percent of the I Preferred Stock $100 12.5 Preferred Stock A 5 25 10.0 outstanding shares of each issue. The premiums related neference stock s100 i.5 to these redemptions were included in Dividends and Premiums on Redemptions of Preferred and Preference As of December 31,1997 and 1996, there were Stock in the Consolidated Statements of Income. no shares of preference stock outstanding. Preferred stock with sinking fund requirements as of December Note 15. Commitments and Contingencies 31,1997 and 1996, was as follows (dollars in millions): Future Construction Costs. The Corporation 2"i m!,U, plans to maintain its regulated facilities, and pursue im im business expansion of its regulated operations as e.m 5#5% B (hefened Stock A) 1992 800JiOO $ 20.0. $ 20.0 opportunities arise. Projected 1998 capital and invest-6.10% C (hefend Stock A) 1992 800,000 20.0 20.0 6.20% D (Pirfened Stock A) 1992 800.000 20.0 20.0 ment expend;tures for the Electric Operations and 6.20% T '1992-130,000 13.0 13.9 I4N . N I3N $ i[ the Natural Gas Transmission segments, including 635* x 1993 500.000-50.0 50.0 AFUDC, are approximately $700 million and $300 rnillion, respectively. These projections are subject to a5.0 7.50% R - 1992 850.00u Total 5149.0 $234.0 - penodic review and revisions. Actual expenditures

==m incurred may vary from such estimates due to vari-The annual sinking fund requirements for 1998 ous factors, including revised elecuic load estimates, through 2002 are $0, $20.0 mihion, $33.0 million, busin.as expansion opportunities, environmental $33.0 million and $13.0 million, respectively. Some matters and cost and availability of capital. additional redemptions are permitted at the-The Energy Services segment plans to spend i . Corporation's option. approximately $100 million in 1998 for rcquired capi- ' The call provisions for the outstanding preferred tal expenditures at its existing facilities. In addition. Estock. specify various redemption prices not exceed-the Corporation is seeking to significantly grow its ing 104 percent of par value, plus accumulated divi-Energy Services businesses, primarily through the ' dends to the redemption date. Global Asset Development bnsiness unit. One oppor-Pr2fe:Ted stock without sinking fund requirements tunity includes the 520-megawatt combined cycle l 1 as of December 31,1997 and 1996, was as follows natural gas fired merchant generation plant in . dollars in millions): Bridgeport, Connecticut already under construction. ( 157 i \\ _ ____ __O

l l l Another growth opponunity includes the recently increased by $79.3 million as each additionai com-announced agreement to purchase from Pacific Gas & mercial nuclear reactor is licensed, or reduced by Electric Company three power plants in CalifornY $79.3 million for certain nuclear reactors that are no The power plants have a combined capacity of 2,M5 longer operational and may be exempted from the megawatts. The purchase price is estimated at approx-risk pooling insurance program. Under this program, imately $500 million and this transaction is expected licensc.s could be assessed retrospective premiums to close during 1998. Other similar initiatives in 1998 to compensate for damages in the event of a nuclear will likely equire significant capitat and investment incident at any licensed facility in the nation. If such expenditures which will be subject to periodic review an incident occurs and public liability damages and revision and may vary significantly depending on exceed primary insurances, licensees may be assessed the value-added opportuni6 presented-up to $79.3 million for each of their licensed reactors, Projected capital and investment expenditures for payable at a rate not to exceed $10 million a year per 1998 of the Other Operations segment are approxi-licensed reactor for each incident. The $79.3 million mately $200 million. These projected capital and investment expenditures are also subject to periodic amount is subject to indexing for inflation and may be subject to state premium taxes. review and revision and may vary significantly The Corporation is a member of Nuclear Electric depending on the salue-added opportunities presented. Nuclear Insurance. The Corporation owns and Irsurance Limited (NEIL), which provides property operates the McGuire and Oconee nuclear facilities and business interruption insurance coverages for the with two and three nuclear reactors, respectively, and Corporation's nuclear facilities under the following three policy programs: operates and has a partial ownership interest in the Catawba nuclear facility with two nuclear reactors. Primary Property Insurance. This policy provides The Corporation maintains nuclear insurance cover- $500 million in primary property damage coverage age in three program areas: liability coverage; prop-for each of the Corporation's nuclear facilities. erty, decontamination and decommissioning cover-Excess Pmperty Insurance. This policy provides age; and business interruption and/or extra expense excess property, decontamm.ation and decommission-coverage. The Corporation is bem.g reimbursed by ing liability insurance in the following amounts; the otherjoint owners of Catawba for cenain expens- $1.25 billion for Catawba and $1.5 bilh.on for each of the Oconee and McGuire Nuclear Stations, es associated with nuclear m.surance prem ums paid by the Corporatic= Business IntNuPtion Insurance. This policy pro-Pursuant to the Price-Anderson Act, the vides business interruption and/or extra expense cov-Corporation is required to insure against public lia-erage resulting fr m an accidental outage of a bility claims resulting from nuclear incidents to the nuclear unit. Each unit of the McGuire and Catawba full limit of liability of approximately $8.9 billion. Nuclear Stations is insured for up to approximately Primary Liability Insurance. The maximum $3.5 millian per week and the Oconee Nuclear required private primary liability insurance of Station units are insured for up to approximately $200 million has been purchased along with a like $2.8 million per week. Coverage amounts pcr unit _{ amount to cover certain worker tort claims. decline if more than one unit is involved in an ) Execss Liability Insurance. This policy currently ccidental outage. Initial coverage begins after a provides approximately $8.7 billion of coverage 17-week deductible period and continues at 100 percent 1 through the Price Anderson Act's mandatory indus, for 52 weeks and 80 percent for the next 104 weeks. try-wide excess secondary insurance program of risk if NEllfs losses ever exceed its reserves for any pooling. The $8.7 billion of coverage is the sum of of the above three programs, the Corporation will be the current potential cumulative retrospective premi. liable for assessments of up to five times the l um assessments of $79.3 million per licensed com-Corporation's annual premiums. The current poten-l mercial nuclear reactor. This $8.7 billion will be tial maximum assessments are as follows: Primary l 58 i

l. Property Insurance - $30 million: Excess Property Liabilities in the Consolidated Balance Sheets. These Insurance - $31 million; Business Intermption cost estimates represent gross clean-up costs expected Insurance - $27 million. to be incurred, have not been discounted or reduced l The otherjoint ow-:, Aatawba are obligated by customer recoveries and do net include fines, to me their pro rata share of any liabilities for penalties or third-party claims. Costs to be recovered l retrospective premiums and other premium assess-from customers are included in the Consolidated ments resulting from the Price-Anderson Act's Balance Sheets as of December 31,1997 and 1996, excess secondary insurance program of risk pooling as Regulatory Assets and Deferred Debits. or the NEIL policies. The federal and state clean-up programs are not Environmental. The Corporation is subject to expected to interrupt or diminish the Corporation's federal, state and local regulations regarding air and ability to deliver natural gas to customers. Based on water quality, hazardous and solid waste disposal, the Corporation's experience to date and costs and other environmental matters. incurred for clean-up operations, management TETCO is currently conducting PCB (polychlori-believes the resolution of matters relating to the nated biphenyl) assessment and clean-up programs at environmental issues discussed above will not have a certain of its compressor station sites under condi-material adverse effect on results of operations or tions stipulated by a U.S. Consent Decree. The pro-financial position of the Corporation. l grams include on-and off-site assessment, installa-Litigation. In December 1996, TETCO received tion of on-site source control equipment and ground-notification that Marathon Oil Company (Marathon) water monitoring wells, and on-and off-site clean-up intended to commence substitution of other gas work. TETCO expects to complete these clean-up reserves, deliverability and leases for those dedicated programs during 1998. Groundwater monitoring to a certain natural gas purchase contract (the l activities will continue at several sites beyond 1998. Marathon Contract) with TETCO. In TETCO's view, in 1987, the Commonwealth of Kentucky instituted the tendered substitute gas reserves, deliverability l a suit in state court against TETCO, alleging and leases are not subject to the Marathon Contract; l improper disposal of PCBs at TETCO's three com-therefore TETCO filed a declaratory judgment action pressor station sites in Kentucky. This suit is still on December 17,1996 in the U.S. District Court for pending. In 1996, TETCO completed clean-up of the Eastern District of L.ouisiana seekine a ruling these sites under the U.S. Consent Decree. that Marathon's interpretation of the Marathon The Corporation has also identified environmental Contract is incorrect. Marathon filed a counterclaim contamination at certain sites on the PEPL and seeking a declaratory judgment enforcing its inter-Trunkline systems and is undertaking clean-up pro-pretation of the Marathon Contract. On January 7, grams at these sites. The contamination resulted from 1997, Marathon filed an answer and a counterclaim the past use of lubricants containing PCBs and the to TETCO's complaint secking declaratory judgment prior use of wastewater collection facilities and other enforcing its interpretation of the Marathon Contract. l on-site disposal areas. Soil and sediment testing, to On February 18,1997. Amerada Hess Corporation l., date, has detected no significant off-site contamina. (Amerada Hess) notified TETCO that it intended to tion. The Corporation has communicated with the commence substitution of other gas reserves, deliver-Environmental Protection Agency and appropriate ability and leases for those dedicated to its natural l state regulatory agencies on these matters. gas purchase contract (the Amerada Hess Contract) l Environmental clean-up programs are expected to with TETCO. On the same date, Amerada Hess also continue until 2002. filed a petition in the District Court of Harris County, At December 31,1997 and 1996, the Corporation Texas,157th Judicial District, seeking a declaratory had accrued liabilities for remaining estimated clean-judgment that its interpretation of the Amerada Hess up costs on the TETCO, PEPL and Trunkline sys-Contract, which covers the same leases and reserves tems which are included in Environmental Clean-up as the Marathon Contract, is correct. TETCO filed a ,59 I

l declaratory judgment action with respect to Amerada operations or financial position of the Corporation. liess' contentions in the U.S. District Court for the The Corporation and its subsidiaries are also J Eastern District of Louisiana on February 21,1997. involved in legal, tax and regulatory proceedings The two actions have been transferred to the judge before various courts, tegulatory commissions and presiding over the Marathon Contract matter, governmental agencies regarding matters arising in On September 26,1997, the judge presiding over the ordinary course of business, some of which the Marathon and Amerada Hess contract matters involve substantial amounts. Where appropriate, the issued mmmary judgments in both actions in favor of Corporation has made accruals in accordance with TETCO. Ma athon and Amerada Hess subsequently SFAS No. 5, " Accounting for Contingencies," in filed notices of appeal of the summaryjudgments. On order to provide for such matters. Management is of January 5,1998, TETCO entered into an agreement the opinion that the final disposition of these matters with Marathon settling all issues associated with the will not have a material adverse effect on the consol-Marathon Contract. The potential liability of the idated results of operations or financial position of Company associated with the Amerada Hess Contract the Corporation. should TETCO be contractually obligated to purchase Other Commitments and Contingencies. The natural gas based upon the substitute gas reserves, Corporation has a 107c ownership interest in TEPPCO deliverability and leases, and the effect of transition Partners, L.P., a master limited partnership (MLP) cost recoveries pursuant to TETCO's Order 636 set. that owns and operates a petroleum products tiement involves numerous complex legal and factual pipeline. A subsidiary partnership of the MLP had matters which will :ake a substantial period of time to $326.5 million in First Mortgage Notes outstanding resolve. However, the Corporation does not believe at December 31,1997 with recourse to the general that Amerada Hess will prevail on its appeal of the partner, a subsidiary of the Corporation. lower court's summaryjudgement. Management is of In January 1998, the Corporation acquired a the opinion that the fiel disposition of this matter 9.87c ownership in Alliance Pipeline. This pipeline is will not have a material adverse effect on the consoli-designed to transport natural gas from western dated results of operations or financial position of the Canada to the Chicago-area market center for distrib-Corporation. ution throughout North America. The pipeline is On April 25,1997, a group of affiliated plaintiffs scheduled to begin commercial operation in late that own and/or operate various pipeline and market-1999, provided the necessary U.S. and Canadian reg-ing companies and partnerships primarily in Kansas ulatory approvals are secured. In addition to buying an filed suit against PEPL in the U.S. District Court for ownership interest in the pipeline project, the the Western District of Missouri. The plaintiffs allege Corporation has a contractual commitment for 67.25 that PEPL has engaged in unlawful and anti-compet-million cubic feet per day of capacity on the line itive conduct with regard to requests for intercon-over 15 years for an estimated total of $315 million. nects with the PEPL system for service to the Kansas Periodically, the Corporation may become City area. Asserting that PEPL has violated the involved in contractual disputes with natural gas antitrust laws and tortiously interfered with the plain. transmission customers involving potential or threat-tiffs' contracts with third parties, the plaintiffs seek ened abrogation of contracts by the customers, compensatory and punitive damages in unspeci.ied including for example attempted transfers of contrac-j amounts. Periodically, similar disputes arise with tual obligations to less creuitworthy subsidiaries of other natural gas marketers and pipeline compenies the customers. If the customers are successful, the concerning interconnections and other issues involv-Corporation may not receive the full value of antici-ing access to the Qporation's natural gas transmis-pated benefits under the contracts. sion systems. Management is of the opinion that the in the normal course of business, cenain of the final disposition of these proceedings will not have a Corporation's affiliates enter into various contracts, l material adverse effect on the consolidated results of including agreements for debt, natural gas transmis-l

G0

l' 1-t sion service and construction umtracts, which con-option plan and option agreement, except that tain certain schedule and performance requirements. such options became an option to purchase shares of Such affiliates use risk management techniques to the Corporation's common stock, appropriately mitigate their exposure associated with such con-adjusted. Each award of restricted shares of tracts. Certain subsidiaries of the Corporation have PanEnergy common stock outstanding and not vest-guaranteed performance by r,uch affiliates under ed prior to the merger was assumed by the some of these contracts. Corporation and such restricted shares of PanEnergy Management is of the opinion that these commit. common stock were exchanged for restricted shares ments and contingencies will not have a material of the Corporation's common stock. adverse effect on the consolidated results of opera-Under the Corporation's 1996 Stock Incentive tions or the financial position of the Corporation. Plan, stock options and awards for up to two million Leases. The Corporation utilizes assets under shares of common stock may be granted ta key operating leases in several areas of operations. employees. Under the plan, the exercise price of Consolidated rental expense amoucted to $91.7 mil-each option granted equals the market price of the lion, $84.2 million, and $61.7 million in 1997,1996, Corporation's common stock on the date of grant. and 1995, respectively. Future minimum rental pay. Vesting periods range from one to five years with a ments under the Corporation's various operating maximum exercise term of 10 years. leases for the years 1998 through 2002 are $87.4 mil-In 1997, the Corporation granted 115,615 shares of lion, $763 million, $68.9 million, $66.5 million, and performance-based stock awards and 1.000 fixed stock .l $48.7 million, respectively, awards with an average grant date fair value of $44 per share. The Corporation recognized compensation Note 16. Common Stock expen'e of $4.4 million in 1997, $83 million in 1996 a On February 27,1996, the Board of Directors and none in 1995 for such stock awards. l_ l auiborized the Corporation to repurchase up to A summary af the Corporation's stock option j $1 billion of its common stock over the next five grants folicws: years. As of December 31,1996, approximately Z sjl 33 million shares had been repurchased for $159 mil- ~ 3.737 $16 -l lion. On January 28,1997, the Board of Directors outed ~ ding at oceember 31. iwa . amended the program to expressly'.imit the number yd j [3( ) l g of shares authorized for repurchase under the pro. Fcrfeited. (62: 22 mnding at recember.. iws 3.559 is u gram, from the initiation of the program through a ' Grar.ted ' 4% 28 date two years after the consummation of the merger, Exerciard (7ns 16 F"f'id (74 22 to an amount not to exceed 15 million shares. No 3$ 20 "*3* repurchases of common stock were made in 1997 Dj"8 "' Exerched (873) 19 and none are anticipated in the future, Forfeited (fA __ 27 Outstandmg at Decernber 31.1997 ' 2.729 $24 ~ Note 17. Stock Based Compensation ~"" ~~" l -j Stock Options an3 Awards. Effective with the l merger, each share of PanEnergy common stock The Corporation had 2.2 million options and p, outstanding immediately prior to the merger was 2.4 mil! ion options exercisable at December 31,1996 1 , converted into the right to receiv31.0444 shares of and 1995, with average exercise prices of $19 and the Corporation's common stock. Each option to $16 per option, respectively. Details of stock options purchase PanEnergy common stoer that was out-outstanding and options exercisable at December 31, 1997 follows: B' L standins prior to the merger was asmmed by the ~' W Corporation and became exercisable upon the same terms as under the opplicable PanEnergy stock !61 u$i1

l l c. ne, that are generally based on an employee's years of benefit accrual service and highest average nog or. Avge Avge Avge U,7 , $ $ U 2 Y e" %'% 7 " eligible earnings, and (ii) for eligible employees sto so sl4 193 3.5 si 193 sin of certain other subsidiaries under a cash balance i 5i5 :0520 966 1 5.8 18 966 18 [omm]a. , $21 to $25 40d ' 5.6 22 '808 22. The Corpor'ation's policy is to fund amounts, as 526tasti 396 e1 28 396 - 28 $41 to 5:c 366 9.1 44 - 14 42 necessary, on an actuarial basis to provide assets suf-Total -2.729 - 2371 521 ficient to meet benefits to be pa.d to plan members. i On December 30,1997 assets and related liabilities Fair Value Information. The weighted-average of $235.6 million and $204 million, respectively, fair value of options granted was !,10, $9, and $7 per for certain PanEnergy participants were transferred option during 1997.1996 and 1995, respectively. The to the Duke Power plan. As a result of this transfer, fair value of each option grant vm estimated on the no contributions to the Duke Power plan were neces-date of grant using the Black-Scholes option-pricing sary in 1997. model with the following weighted-average assump-Net periodic pension cost includes the following tions used for 1997,1996 ar'd 1995, respectively: components for the years ended December 31,1997, swek dividend yield of 3.5%,2.6% and 2.6%; expected 1996 and M95: stock price volatility of 20.7%,26% and 26%: risk-kee interest rates of 6.5%,5.7% and 7.7%; and expected option lives of seven years. Had compensa-Actuai return on pian anets s(455 3) 5(302.6) 5(413.1) Amouni deterred for recognition 246.s 110.4 237.4 tion expense for stock-based compensation been Expected return on pian asset. (20s.s> (192.23 (1717) determined based on the fair value at the grant dates, se c enent cund during the Corporation's 1997 net income would have been interee cost on projected benetit $971.4 million, or $2.50 per share; 1996' net income yp, %, '] 14] would have been $1,073.7 million, or $2.85 per sbant; "pericoic pensio c,~. i 24., 5 29.7 5 333 un and 1995 net income would have been $1,016.9 mil-lion or $2.68 per share. s A reconciliation of the funded status of the plans Note 18, Benefit Plans. o se amunts recogr.ized in the Consolidated Retirernent Plans..The Corporation and its sub-Balance Sheets as of December 31,1997 and 1996 sidiaries have mukiple non. contributory defined .

I " *S

'S benefit retirement plans covering most employees

i. u,m..

im im with minimum service requirements. Effective Accumulated herefit obligation January 1,1997, the Diike Power retirement plaa [o"*dbene t $ $" N $(2 s ed was amended to a plan under which benefits are Accuamiated benerit obtigation. = =m m _m s(2.n30.2) s(i.s ti.6.i based upon a cash ba,sance formula. Under a cash rati market uue or gan asseua 52;r2rr 52.4453 - 'Dalance foJmula, a plan participant accumulates a edjen; (j, jn r (2J (2.1 benefit based upon a percentage of cerrent salary, Uurecorded prionervice cost reduction as4s> 9 11) whicc may vary with age and yehrs of service, and U" 8 "h'd " *"et (3 m (363) intercst credits. Prior to January 1,1997, the Duke AI",NP " *"" ' 3E Poveer retirement plan benefits were based on an a riine ny e,unna raea i=onweu.ine. age-related formula which took into account years l of benefit accrual service and the employee,s high-Assuinptions used m. the Corporation,s pension ' ett average eligible ecrnings. accounting (reflectmg weighted averages across all The PanEnergy plan provides retirement benefits plans) s.nelude: (i) for eligible employees of certain subsidianes i62

l P Perrear m .tM 1996 1995 Jn Millkuu 1997 1996 1999 Discount rate 7.25 7.50 7.50 Actual return on plan assets $(45.1) $(20.5) $(29.6) Salary increase 4.15 4.80 4.81 Amount deferred for recognitica 26.4 4.2 16.2 Expected long-term rate of return Expected return on plan assets (18.7) (16.3) (13.4) on plan anets 9.25 9.18 9.18 Service cost benent earned during I I the year 10.0 8.4 7.6 I interest cost on accumulated During 1995, the Corporation, Tered to certain postretire-t benent engatim 46.2 43.3 43.5 Net amortization 20.3 19.3 16.5 i employees an Enhanced Vested Benefits program 3,, p,,;, p,,,,,,i,,,, t (EVB). The Corporation recorded an additional benent cost $ 57.8 s$47 $ 54.2 one-time expense for special termination benefits associated with the EVB of approximately $42.2 mil-A reconciliation of the funded status of the plans to hon, meluding $21.6 million of additional retirement the amounts recognized in the Consolidated Balance plan costs. Sheets as of December 31,1997 and 1996 is as follows: The Corporat. ion also sponsors employee savings plans which cover substantially all employees. ,,,y,,,,,, The Corporation expensed plan contributions of Accumulated postretirement $52.8 million, $34.8 million and $34.9 million in benefit eligatim "ly,'fi,i3i,,cti,, pi,, p,1;cip,,,, 9$3 ky6$ 1997,19% and 1995, respectively. ,i Other Postreti-ement Benefits.The Corporation otber active plan participants (181.4) (158.6) j l and most of its subsidiaries provide certain heahh Accumulated post retirement benent engatim (66 m (641.7) care and life insurance benefits for retired employees on a contributory and non-contributory basis. Fair market value of plan assets

266.2 225.3 Employees become eligible for these benefits if they

["'*cy".[",Zfp,7,'",i, 'dj have met certain age and service requirements at unrecognized transinonal obugation 255.9 273.0 retirement, as defined in the plans. Accrued postretirement benefit cost $ (76.6) $ (49.7) The Corporation accrues such benefit costs over

Pnncipany epiry and 6xed inwrne secunties the active service period of employees to the date of full eligibility for the benefits. The net unrecognized Assumptions used in the Corporation's post-transition obligation, resulting from the implementa.

retirement benefits accounting (reflecting weighted-tion of accrual accounting, is being amortized over averages ac oss all plans) include: approximately 20 years. The Corporation is using an investment account %,,, m im i. 3,93 under section 401(h) of the Internal Revenue Code, a Discount rate 7.25 7.50 7.so salary increa= - 4.33 4.s4 a retired lives reserve (RLR) and multiple voluntary Expected long-term rate c4 return employees' beneficiary association (VEBA) trusts on 40i(b) assets ,.25 9.00 9.00 under section 501(c)(9) of the Internal Revenue Expected Ing-tenn rate of return Code to partially fund postretirement benefits. The N,4i n7.'ierm rm sm r 401(h) vehicles, which provide for tax deductions for m VEBA assets - 9.25 9.50 9.50 contributions and tax-free accumulation ofinvest-("]d '** *** 3' ( 3

ment income, partially fund the Corporation's postre-The weighted-average health care cost trend rate tirement health care benefits. The Corporation uses used to estimate postretirement benefits was 735%

the RLR, which has tax attributes similar to 401(h) in 1997. Th;s rate is expected to decrease, with a j l funding, to partially fund its postretirement life 4.75% weighted-average ultimate trend rate expected insurance obligations. Certain subsidiaries use the to be achieved by 2005. The effect of a 1% increase VEBA trusts to partially fund accrued postretirement in the assumed health care cost trend rate for each heahh care benefits and fund postretirement life I'.nure year would result in a $2.4 million increase in insurance obligations. the anmial aFgregate postretirement benefit cost and Net periodic postretirement benefit cost of the a $29.5 million increase in the accermlated postre-i plans include the following components for the years tirunent benefit cbligation at December 31,1997. ended December 31,1997,1996 and 1995: ?G3

t' Note 19. 6 A i Finandal DMm (Unaudited? Ja Whaas J .70 bra second ma Founk - (*=i's'" *w a's). ouster ._,,,5weer ou c. _p Tu ,- 1997 Operating revenues . $3,785.8 $J,ll2.8 $4,820.6 . $4,589.7 $16.30s.9 Operating income 610.0 352.0 606.3 401J 1,970.0 Net income . ' 31n.7 168A 389.5 1El.6 974.4 Daxir cxtings per share $ 0.84 $ 0.43 $ d.83 5 0.41' 2.51-1996 , Operating ' eN: nun $2,859.1 $2,559.3 $3,133,4 ' $3.750.6 $12.301.4 r Operating ino.nne.. 575.7 479.2 6531. ,450.6 2,158.6. Income before ruwaviusry item 293.1 237.'s 351.2 ' 209.6 1,091.0 Netincome. 293.1 237.1 351.2 192.9' 1.074.3 Basic carnings per t.har (bercre curaordmiuy iteno. 5 0.78 5 0 62 $ 0.94 5 n.56 5 2.90 Basic urnings per 6 hare ' $, 0.78 $ 0.62 $ 0.94 5 0.51-2.85 Amounts reported on a quarterly basis are not necessarily indicative of amounts expected for the respective years due to tne effects of seasonal tengrature variations on er.ergy consumptic,n and t.he timing of mainte-nance of certain electric generating units. L

f..

] g i )- t ' l, - l L..

Independent Auditod Report R= possibility for Fin:ncirl Stat: ment 1 ) To the Board of Directors and Stockholders of The financial statements of Duke Energy Corporation are Duk: Energy Corporation prepared by management which is responsible for their Charlotte, North Camlina integrity and objectivity. The statements are prepared in con-formity with generally accepted accounting principles appro-We have audited the wasolidated balance sheets of Duke priate in the circumstances to reflect in all material respects Energy Corporation and subsidiaries (the Corporation) as of the substance of events and transactions which should be December 31,1997 and 1996, and the related consoli;iated included. The odier infonnation in the annual report is masis-statements of income, retained earnings, and ash flows for tent with the financial statements. In preparing these stato each of the three years in the period ended December 31 ments, management makes informed judgments and estimates 1997. These financial statements are the responsibility of the of the expected effects of events and transactions that are cur-Corporation's management. Our responsibility is to express mntly being reported. an opinion on the financial statements based on our audits. The Corporation's system of intemal ac, aurding control The consolidated financial statements give retroactive effect is designed to provide reasonable assurance tint assets are to the merger of Duke Power Company and PanEnergy safeguarded and transactions are executed according to I Corp. which has been accounted for as a pooling of interests management's authorization. Internal accounting controls as desribd lu Note i to the consolidated financial state-also provide reasonable assurance that transactions are ments. We did not audit the balance sheet of PanEnergy recorded properly, so that finanend Statements can be pre-Corp and subsidia:ies as of December 31,1996, or the relat-pared according to generally accepted accounting princi. ,~ i cd statements of income. cenmon stockholders' equity, and ples. In addition, the Corporation's accounting controls pro-cash flows of PanEnergy Cmp and subsidiaries for each of vide reasonable assurance that errors or irregularities which I

he two years in the period ended December 31,1996, which could be anaterial to the financial statements are prevented i

statements reficct total asms of (in millions) $8,567.8 as of or are detected by employees within a timely pericd as they Decemh r 31.1996 and total operating n venues of (in mil-perform their assigned functions. The Corporation's liens'),57,536.8 and $4 967.5 for the years ended December accounting controls are continually reviewed for effective-31,1996, and 1995. respectively. Those statements were ness. In addition, written policies, standards and procedures, audited by other nditors u hose report has been furnished to and a strong internal audit program augment the us, and our opinion, insofar as it relates to the amounts Corporation's accounting controls, meluded for PanEnergy Corp and subsidiaries for 1996, and The Board of Directors pursues its oversight role for the 1995,is based solely on the report of such other auditors. financial statements through the audit committee, which is We conducted our audits in accordance with generally compmed entirely of directors who are not employees of accepte.! auditing standards. Those standards require that the Corporation. The audit committee meets with manage-we plan and perform the audit to obtain reasonable assur-ment and intemal auditors periodically to review the work ance about whether the financial statements are free of of each group and to monitor each group's discharge of its material misstatement. An audit includes examining, on a responsibilities. The audit committee also meets periodical- . test hsis evidence supposting the amounts and disclosures ly with the Corporation's independent auditors, Deloitte & in the financial statements. An audit also includes assessing . Touche LLP. The independent auditors have free access to the at;ounting principles used and significant estimates - the audit committee and the Board of Directors to discuss made by management, as well as esaluating the overall internal accounting control, auditing and financial reporting financial statemet t presentation. We believe that our audits matters without the presence of management. and the report of the other auditors provide a reasonable l

basis for our opinion.

in our opinion, based im our audits and the irport of the i c other auders, the consolid.ned fmancial statements referred to l l alwc piment fairly, in all material ret.pects, the financial posi-JelTrey L. Boyer tion of the Corporation as of December 31.1997 and 1996, and Vice PresMent and Controller i I j the results of its operations and its cash flows for each of the t!am years in the perhxl exled December 31,1997 in confor-mity with pnerally acccltted accounting principles. & d. b Charke North Caroliro i Fehma$ 13,1993 ( ~ igg lWHP I J O L e i l L i65 i i L s l

Selected Fin ncial Data In Millions (except per share amounts) 1997a 1996a 1995* 1994* 1993a ~ Income Operating Revenues $16,308.9 $12,302.4 5 9,694.7 $ 9,115.0 $ 8,7843 Operating Expenses 14,338.9 10,143.8 7,626.4 7,309.0 7,068.6 Operating income 1,9~0 0 2,158.6 2,068.3 1,806.0 1,715.7 Other income and Expenses 138.1 135.6 122.2 101.0 137.5 Eamings Before Interest and Taxes 2,108.1 2.294.2 2,190.5 1,907.0 1,853.2 laterest Expense 471.8 499.2 508.2 484.5 526.3 Minority Interests 23.0 6.2 Earnings Before Income Taxes 1,613.3 1,788.8 1,682.3 1,422.5 1,326.9 income Taxes 638.9 697.8 664.2 558.4 528.9 locome Before Extraordinary item 974.4 1,091.0 1,018.1 864.1 798.0 Extraordinary item 16.7 Net income 974.4 1.074.3 1,018.1 864.! 798.0 Dividends and Premiums on Redemptions of Preferred and Preference Stock 72.8 44.2 48.9 49.7 52.4 Earnings for Common Stockholders $ 901.6 $ 1,030.1 $ 969.2 $ 814.4 $ 745.6 Common Stock Data Shares of common stock Year-end 359.8 359.4 361.8 360.6 359.1 Average 359.8 361.2 361.2 360.2 353.6 Basic earnings per share (before extraordinary item) $ 2.51 2.90 $ 2.68 2.26 $ 2.11 Basic eamings per share 2.31 2.85 2.68 2.26 $ 2.11 Dividends per share 1.90 1.57 1.50 $ 1.44 1.39 italance Shut Total Assets $24,028.8 $22.366.2 $20,867.9 $20,254.2 $19,717.4 Long-term Debt $ 6,530.0 $ 5,485.1 $ 5,803.0 $ 5.930.8 5 5,370.9 Preferred Stock with Sinking Fund Requirements 149.0 $ 234.0 $ 234.0 $ 279.5 $ 281.0 Common Stock Data by Quar *er Dividends Dividends 1997 Per Sharea Stock Price Range 1996 Per Shar:a Stock Price Range High Low liigh Low I rst $.40 $48 $43% First $.38 $53 $46% Second .40 48 42 % Second .39 51 % 45 % Third .55 51 % 47 % Third .40 51 % 45 % 1 Fourth .55 56h 45 % Fourth .40 49 % 43 % a Financial information reflects accountin ; for the merger with PanEnergy Corp as a pooling of interests. As a result, the financial information gives effect to the merge. as ifit had occurred January 1,1993. c i '50

Duka Energy C:rporatirn Principal Offic rs & Sub idirry Prxid:nt3 4 Office of the CEO Energy Services Finance e Richard B. Priory

James T. Hackett*

Richard J. Osborne* Chairman of the Board ar.d Group President. Energy Services Executive Vice President and Chief Financial Officer Chief Executive Officer Leonard B. Gatewood Paul M. Anderson

Executive Vice President, Paul F. Ferguson, Jr.

President ud Energy Senices Senior Vice President and Treasurer Chief Operating Officer David L Hauser Sue A. Becht Seni r Vice President, Vice President. Investor Relations Duke Pcwer Global Asset Development Jeffrey L Boyer l Wimm A. Coley* Jimmy W. Mogg Vice President and Corporate Controller President and Chief Executive Officer, Group President, Dnke Power Cary D. Flynn uke Energy Reid Senices Vice President. Tax Michael S. hckman Executive Vice President, John F. Norris, Jr. President and Chief Executive Officer, Corporate Administration Nuclear Generatim Duke Engineering & Services E. O. E.errell, III Ruth G. Shaw.. Senior Vice President, Electric Distribution Clarence L Ray, Jr. Emutive \\ ice President and President, Duke /Ruor Daniel Jimmy R. Hicks Chief Administrative Officer Senior Vice Presidern, Retail Service, d R. Sinclair Seni r Vice President, Theodore C. McMeekin Duke Energy Trading and Marketing Semor Vice lieudent, Power Generation Corporate Planning Steven M. Kessler. Sr. A. R. Mullinax g Senior Vice President, Shared Senices President' Duke Energy Industnal Asset Duke Merchandismg Development Cecil O. Smith, Jr. Seni r Vice President, N. Edward T cker, Jr. Paula G. Rosput b2fonnation Managemem Chairman and President. President. Duke Energy Power Senices Nantahala Power and Light Roberta B. Bow. man Charles L Watkins Vice President, Public Affairs Energy Transmission President, DukeSolutiens Lisa Crutchtleid j ) Bruce A.Williamson vice President, j Fred J. Fowler

President, Duke Energy International Energy Policy and Stategy l

Group President. Energy Transmission General Counsel James R. Hendricks, Jr. Steven M. Roverud Vice President, President, Midwest Pipelines Nichard W. Blackburn* Corporate Environment, Health and H. Dnglas Church Executive Vice Presidst ar'd Safety senior Vice President, ener,; C m nse; Christopher C. Rolfe ' lansmission, Northeast Pipelines and t ',orporate Engineering ihmaid E. Hatley Vice President, Vice President G vernmental Affairs Corporate Human Resources . y,,,bert B. Evans Robert S. Lilien hM ath f a e ;lor Vice Predent, h Non heast Wketing and Vice President and General Counsel. i Regulatory Aliairs Corporate and Energy Services Richard C. Ranson Richard J. Kruse, Jr. Senior Vice President, James D. Hinton Vice President and General Counsel. Diversified Operations Senior Vice President, Eicctric Transmission Gas Operations

g. gg Ellen T. Ruff President, Crescent Resources Vice President and General Counsel.

M H.S W n Electne Operations A J. WHfred Neal DukeNet Communications Vice President. Audit Services W. Edward Poe, Jr.

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52. Chairnwn and Chief Executive

55. joined Duke Power in 1966; became 47, joined Duke Power in 1975; became 00icer, joined Duke Power in 19'/4; Pasident of Duke Power Associated Vice President and Chief Financial tecame IYesident in 1994; became Enterprise Grenp in !V'4; became Officer in 1941; tecame Executive Vice Chairman and Chief Executive Officer of President of Duke Power in 1997.

President and Chief Financial 00icer in Duke Energy in 1997 1997. Fred J. Fowler Paul M. Anderson

52. joined PanEnergy in 1985; became Ruth G. Shaw 53, President and Chief Operatmg Pre ident of Trunkline in 199 d; became

50. joined Duke Power in 1992 as Vice Officer, joined PanEnergy in 1977; Presiden: of ISource Corpotution in President, Corporate Communications; became liesident in 1993; and Chief 1993; became President of Texas Eastern became Senior Vice President. Corporate Executive Officer in 1995; became in 1994; became Group President. Energy Resources in r?94; became Executive l

President and Chief Operating Officer of Transmission in 1997. Vice President and Chief Administrate i Duke Energy in 1997. Officer in 1997. James T. Ilackett Richard W. Blackburn 44, joined PanEnergy in 1996 as 56, joined Duke EnerFy in 1997 za Executive Vice ften bt for PanEncryy ~ l Executive Vice President and General Corp; became Gro p President, Energy Counsel. Prior to joining Duke Energy, Services in 1997. Pilar to joining Mr. BlacLhum was itesident and Group PanEnergy, Mr. Ilackett was Senior Vice Executive with NYNEX Worldwide President of NGC Corporation (formerly Communications and Media Group. Natural Gas Clearinghouse). i68 t /

Board of Directors I l 2 Richard 11. Priory Paul M. Anderson I

52. Chainiun of the Board and Chief Executive

'7, I. Officer. Dnke Energy Corporation. 53 President and Chief Operating Otficer, Duke Energy Corp > ration. (Chairman, Management Committee; (Management Committee; Finance Comnuttee). Fmance Committee; Nominating Committec). A PanEnergy Director since 19 2. t I A Duke Power Company Director since 1990. g l j Alex Ilernhardt, Sr. Robert J. Ilrown $5. Chairman and Cldef Executive Officer, 63, Chairman and President, H&C Associares. Inc. l Bernhardt Furniture Company. (Audit Committee; Corporate Perfonnance (Chairman, Corporate Performance Review Review Committee). A Duke Power Company i Committee; Finance Committee). A Duke Power Director since 1994. Company Director since 1991. William A. Coley William T. Farey 7

55. President. Duke Power Company 4> ', -

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58. Chairman and Chief Executive Officer, (Management Conanittec). A Duke Power Sprint Corporation.

Company Director since 1990. (Compensation Committee; Nominating Committee). A PanEnergy Director since 1985. Ann Ma3 nard Gray Dennis R. IIendrix $3, President, Diversified Publishing Group, 58 Retired Chairman and Chief Executive Officer. r l AllC Inc. ~ PanEnergy Corp. ( Audit Committee; Corpor ate Performance (Corporate Performance Review Committee; i Resicw Committee) A PanEncigy Director Nominating Committee). A PanEnerFy Director l since 1994. since 1990. 7 l I liarold S. Ilcak George Dean Johnum. Jr. 67, Retired Chairman and Chief Executis e 56, President and Chief Executise Officer. c, I Officer, American General Corguration. Extended Stay America. L (Corporate Performance Review Committee; (Chairman, Finance Committee; Compensation Finance Committee). A PanEnergy Director Committee). A Duke Power Company Director since 1978. d f since 1986. W.W. Johnum Dr. Max Lennon l 67, Chairman, Executive Committee, 4

58. President Mars lid! ColleFe-l NationsBank Corporation.

tChairman, Audit Committee; Nominating (Chainnan. Compensation Committee; Finance Committee). A Duke Power Company Director Committee). A Duke Power Company Director ~ since 1988. since 1984. gg g Leo E. Linbeck, Jr. James G. Martin 64, Chairman of the Board and Chief Executive 63, Vice President, Research and Chairman. Officer, Linbeck Corporation. Research Development Board. Carolinas (Audit Committee; Compensation Committee). Medical Center. A PanEnergy Director since 1986. (Chairman, Nominating Committee; 'g Compensation Committee). A Duke Power j Company Director since 1994. Iluck Mickel Russell M. Robinum,11

73. Retired Chainnan. Fluor / Daniel Inc.

66. Attorney-at-Law, Robinson.

(Audit Conunittee; Compensation Committee). ~ Bradshaw & liinson. P.A. A Duke Power Company Director since 1976. (Audit Committee; Corporate Perfonnance l Re.iew Committee). A Duke Power Company l Director smce 1995. l g 4{, l l l I l l. s

l ( b Duke Cd Energy Shareholder information 1 Annual Meeting Stock Purchase and Dividend Transfer 1. ent and Registrar The 1998 Annual T.Seting of Duke Reinvestment Plan Duke Ei y maintains sharehold-The Stock Purchase and Dividend er records and acts as Transfer Agent Energy Shareholders will be: Date: Thursday, April 16,1998 Reinvestment Plan is available to and Registrar for the company's com-Time: 10:00 a.m. shareholders of record, Duke Energy mon and preferred stock issues. Place: O. J. Miller Auditorium, electric customers, Duke Energy i Dividend Payment Energy Center employees and other residents of j Duke E.nergy has pa d quarterly i I 526 South Church Street North Carolina and South Caroh.na. cash dis,idends on its common stock Charlotte, North Carolina This pmvides a convem.ent way to for 71 consecutive years. Dividends buy common shares without broker-ShareWer Seded on comm n and preferred stock in age fees. Bank drafts for monthly Shareholders with questions about are expecte to N paw on: purchases of common stock as well their stock accounts, legal transfer arc , une, eptembu M as a safekeeping option for depositing requirements, address changes, common stock certificates in the Plan replacement dividend checks, are available. Bond Trustee replacement of lost certificates Direct Deposit of Dividends If you have any questions regard-or other services should call automatically credits dividends to ing your bond account, call 1-800-488-3853 or (704) 382-3853. shareholders' bank accounts on the (800) 275-2048 or write to: Written requests should be dividend payment date. The Chase Bank of Texas, N.A. addressed to: Coiporate Trust Services Investor Relations Financial Publications P. O. Box 2320 Duke Energy Corporation Duke E,nergy will furm. h to any s P. O. Box 1005 shareholder, without charge, copies of Charlotte, NC 28201 1005 the 1997 report on SEC Form 10-K, the 1997 Statistical Supplement and Visit our home page on the World an audiotape recording of excerpts Wide Web at www. duke-energy.com. from the 1997 Annual Report to Corporate Headquarters Stock Exchange Listing Shareholders. Shareholders who wish 422 South Church Street Duke Energy's common stock, to order Duke Energy's Quarterly Charlotte, NC 28202-1904 First and Refunding Mortgage Bonds Repets should fill out and mail the (704) 594-6200 and certain issues of preferred stock enclosed postage paid card. Houston Offices are listed on the New York Stock Duplicate Mailings 5400 Westheimer Court Exchange. The company's common You will receive duplicate mail. Houston, TX 77056-5310 stock trading symbol is DUK. ings of annual reports, proxy state. (715) 627-5400 ments and other shareholder mailings if your shares are registered in differ-ent accounts. If you receise such duplications, please call Investor $,I','."$,%,U,*""""l',',,"j[" m,,, Relations for instructions on eliminat- """"",w'""*"d"""""""""'"*"d"""""' to touy wit aeruntra ing the duplicate mailings or combin-g 1ha 'eraa = oriaiad ia ihe l's^ oa r-nied en- - ing your accounts. l

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ARTHUR ANDERSEN LLP Report ofIndependent Public Accountants To the Board of Directors of North Carolina Electric Membership Corporation: We have audited the accompanying balance sheets of North Carolina Electric Membership Corporation (the Company), a North Carolina corporation, as of December 31,1997 and 1996, and the related statements of operations and patronage capital and cash flows for each of the three years in the period ended December 31,1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards and the Standards for financial audits contained in Goternment Auditing Standards (1994 revision) issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly,in all material respects, the financial position of North Carolina Electric Membership Corporation as of December 31, 1997 and 1996, and the results ofits operations and its cash flows for each of the three years in the period ended December 31,1997, in conformity with generally accepted accounting principles. In accordance with Goternment Auditing Standards, we have also issued reports dated February 12,1998, on our consideration of North Carolina Electric Membership Corporation's internal control structure and compliance with laws and regulations. L Raleigh, North Carolina, February 12,1998.

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North Carolina Electric Membership Corporation Statements of Operations and Patronage Capital i For the Years Ended December 31,1997,1996 and 1995 1 (in thousands) 1997 1996 1995 Operating revenues $629,700 $650,167 $710,878 Operating expenses: Fuel and purchased power 380,980 404,451 476,846 Other production expenses 106,934 104,763 89,399 Depreciation and amortization 44,602 45,806 52,467 Administrative and general 14,378 12,257 13,124 General taxes 12,338 11,172 11,370 Federalincome taxes (2,374) 0 0 556,858 578,449 643,206 Operating margin 72,842 71,718 67,672 ' Otherincome (expense): Interest income 17,775 20,897-27,721 Other (106) (173) 463 17,669 20,724 28,184 Interest charges: Interest expense 89,539 91,446 93,980 Debt fees and expenses 972 996 1,006 90,511 92,442 94,986 Margin before cumulative effect of change in accounting principle 0 0 870 Cumulative effect of change in accounting for postretirement benefits (Note 8) 0 0 (870) Net margin 0 0 0 Patronage capital, beginning of year 22,112 22,112 22,112 Patronage capital, end of year S 22,112 $ 22,112 5 22,112-4 The accompanying notes to financial statements are an integral part of these statements.

North Carolina Electric Membership Corporation Statements of Cash Flows For the Years Ended December 31,1997,1996 and 1995 (in thousands) 1997 1996 1995 Cash flows from operating activities: Net margin 0 S 0 $ 0 Adjustments to reconcile net margin to net cash end cash equivalents provided by (used in) operating activities-Cumulative effect of change in accounting principle 0 0 870 Depreciation and amortization 45,695 46,858 53,508 Provision for deferred income taxes (2,374) 0 0 Amortization of nuclear fuel 16,259 17,374 20,998 Amortization of regulatory liability (33,634) (11,976) 0 (Amortization) collection of deferred revenues (31,447) (11,198) 7,842 Interest on decommissioning fund 4,845 3,245 7,717 Deferred charges (3,4 73) (625) (3,883) Other noncurrent assets and liabilities (2,849) 1,030 (192) Changes in other operating assets and liabilities: Accounts receivable 4,811 (55,525)_ 5,301 Interest receivable 201 3,054 (7,214) Accounts payable 7,327 (14,213) 6,709 Accrued interest 78 (21,628) (863) Other 1,551 31 511 Net cash and cash equivalents provided by (used in) operating activities 6,990 (43,573) 91,304 Cash flows from investing activities: Additions to electric plant (28,842) (38,139) (33,302) Decrease (increase) in decommissioning fund (9,845) 61,469 .(15,353) Decrease (increase) in long-term investments 84,549 (38,416) (49,181) Decrease (increase)in deferred revenue fund 31,447 11,198 (7,842) Decrease (increase) in short-term investments (55,141) 28,639 48,434 Other, net (4,147) (3,359) 2,356 Net cash and cash equivalents provided by (used in) investing activities 18,021 ~ 21,392 (54,888) Cash flows from financing activities - Principal payments of long-term debt (25,304) (28,491) (20,646) Net increase (decrease) in cash and cash equivalents (293) (50,672) 15,770 Cash and cash equivalents, beginning of year 20,798 71,470 55,700 Cash and cash equivalents, end of year S 20,505 S 20,798 $ 71,470 j Supplemental disclosure of cash flow information - Cash I paid during the year for: Interest S 89,363 $112,679 $ 94,173 Income taxes 0 1,900 1,700 The accompanying notes to financial statements are an integral part of these statements.

North Carolina Electric Membership Corporation Notes to Financial Statements December 31,1997,1996 and 1995

1. Summary of Significant Accounting Policies:

Basis of Accounting North Carolina Electric Membership Corporation (the Company) is a member-owned cooperative of 27 electric membership cooperatives (the members) in North Carolina. The Company was formed in 1949 to develop itself as the full-requirements supplier, providing power generation, wholesale electric service, and transmission, to its members who in tum service more than 650,000 homes, farms and businesses in North Carolina. The Company follows generally accepted accounting principles and the practices prescribed in the Uniform System cf Accounts of the Federal Energy Regulatory Commission (FERC) as modified and adopted by the Rural Utilities Service (RUS). Electric Plant Electric plant is stated at original cost, which is te cost of the plant when placed into service, plus the cost of subsequent additions, and indudes engineering and other indirect construction costs. The cost of renewals and betterments of property is capitalized. The cost of maintenance and repairs and replacements and renewals of items determined to be less than units of property is charged to expense when incurred. At the time properties are disposed of, the original cost plus cost of removal less salvage of such property is charged to accumulated depreciation, except in certain cases of properties sold as entireties where profit or loss is recognized. Depreciation Depreciation is computed using the straight-line method over the estimated service lives of the property as follows: Estimated Lives Catawba Nuclear Station 40 years Diesel generation equipment 30 years Load management equipment 15 years Building and improvements 35 years Furniture and fixtures 510 years Automobiles 4 years Effective January 1,1996, the Company changed its depreciation rate for the Catawba Nuclear Station (Catawba) to reflect a remaining economic life of 30 years. This change had the effect of reducing depreciation expense by approximately $8,000,000 in 1996.

The depreciation rate for the Catawba Nuclear Station includes a factor to provide for the expected cost of decommissioning the nuclear facility. In compliance with a Nuclear Regulatory Commission (NRC) regulation, amounts recovered through r:tes for estimated decommissioning costs (plus interest thereon) are maintained in separate investment accounts, l including an external trust fund. The prevision for expected decommissioning costs is charged to operations with an offsetting credit to the reserve for decommissioning. Investment earnings generated from the external trust fund and internal funds designated for decommissioning are maintained in the decommissioning fund with a corresponding increase to the reserve for decommissioning. The estimate of the expected cost for decommissioning and the corresponding decommissioning factor included in the depreciation rate are adjusted periodically to reflect changing price levels and technology. Based on a 1994 site study of expected decommissioning costs, including the costs of decontamination, dismantling and site restoration, the Company's portion of such costs is estimated to eggregate $658,300,000. The estimate assumes earnings on the internal trust fund and external trust fund of 4.5% and 6.5% respectively, as well as a future annual escalation rate of 4.5% in decommissioning costs. The deconunissioning cost estimates are based on the plant location and cost characteristics for Catawba and assume prompt dismantlement and removal of the plant from service. The actual decommissioning costs are expected to vary from the above estimates because of changes in assumed dates of decommissioning, t..anges in regulatory requirements, changes in technology, and changes in costs of labor, materials and equipment. In 1996, the Company determined that the decommissioning liability was overstated based upon the revised estimate of ultimate decommissioning costs. As a result, a regulatory liability of $73,000,000 was reported for amounts to be refunded to members. A similar amount was transferred from the decommissioning fund to long-term investments. The liability will be amortized through the year 2000 based on each member's KW and KWH billing determinants for the applicable year. Total amortization of the regulatory liability was $33,634,000 in 1997 and $11,976,000 in 1996. Regulatory Assets and Liabilities The Company currently complies with the provisions of Statement of Financial Accounting Standards (SFAS) No. 71, " Accounting for the Effects of Certain Types of Regulation," as amended by SFAS No.121, " Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," and accordingly, has recorded regulan.y assets and liabilities related to its operations. This statement imposes a stricter criterion for regulatory assets by requiring that such assets be probable of future recovery at each balance sheet date. If recovery of the regulatory assets becomes unlikely or uncertain, these accounUng standards may no longer apply. The Company periodically reviews these criteria to ensure the continuing application of SFAS No. 71 is appropriate. Based on a current evaluation of the various factors and conditions that are expected to impact future cost recovery, the Company believes that its regulatory assets are probable of future recovery in the near term.

3 Nuclear Fuel The cost of nuclear fuel, including a provision for the estimated cost of permanent storage of spent fuel,is being amortized bas.:d on core burn-up and amounted to $16,259,000 in 1997, $17,374,000 in 1996 and $20,998,000 in 1995. Final disposition of the spent fuel may require future adjustments to fuel expense. Pending ultimate disposition, sufficient storage capacity for spent fuel is available through 1008. Revenue Deferral Plan In 1991, the Company established and the RUS approved a revenue deferral plan. The plan provided for a predetermined increment to be included in rates charged to members during 1991 through 1995. Revenues collected through the revenue deferral plan were deferred and will be utilized to reduct member revenue requirements in 1996 through 2000 as authorized by the Board of Directors. The deferred revenues are allocated to members based on their KW and KWH billing determinants for the applicable year. The cash equivalent of all deferred revenues is segregated into the deferred revenue fund and will remain in such fund until it is used to reduce member revenue requirements. In accordance with this plan, $7,842,000 was collected and deferred in 1995. In 1996, the Company commenced amortization of this deferred revenue which reduced member revenue requirements by $11,198,000. Deferred revenue amortization l reduced 1997 member revenue requirements by $31,447,000. Membership Fees and Patronage Capital The Company is organized and operates as a cooperative. Its cooperative members paid a total of $700in membership fees. 1 Patronage capital is the net margin retained by the Company which is allocated to members based upon their respective purchases of power from the Company. Income Taxes The Company is a not-for-profit membership corporation subject to federal income taxes. In management's opinion, based on the applicable statutes, the Company is not subject to state income taxes. J For the years 1984 and prior, the Company claimed tax-exempt status under Section 501(c)(12) of the Intemal Revenue Code of 1954, as amended (the Code). In 1985, the Company reported as a taxable entity as a result of income received from Duke Power Company under a capacity and energy sell-back agreement applicable to Catawba Units No.1 and 2. As a taxable electric cooperative, the Company has annually allocated its income and deductions between member and nonmember activities. Any r.,c nber taxable income has been offset with a patronage l exclusion. km~-------

4 A detail of the provision for federalincome taxes m 1997,1996 and 1995 is shown as follows (in thousands): 1997 1996 1995 Current 0 SO $0 Deferred (2,374) 0 0 Income taxes charged to operations $(2,374) 50 $0 The difference between the statutory federal income tax rate on income before income taxes and accounting changes and the Company's effective income tax rate is tne result of losses from member operations which cannot be used to offset nonmember income. As discussed further in Note 9, in 1994, the Company reduced accumulated deferred federal income taxes by $30,505,000 which reflects the tax effect of the write-off of the noncurrent receivable from Duke Power Company (Duke). The tax benefit was used to reduce the regulatory asset established in conjunction with this transaction, Pursuant to a court decision, the Company has retroactively adjusted the alh> cation ofinterest income between member and nonmember sources. As a result, accumulated deferred federal income taxes were reduced by $19,198,000 with a corresponding decrease in the noncurrent receivable from membersin 199o. In 1997, the Company recorded a reduction of deferred federalincome taxes of $2,374,000 resulting from a revision ofits deferred tax liabilities. In 1996, there was no charge to current or deferred income tax expense. In 1995, deferred income tax expense of $12,753,000 was recorded as an increase in the regulatory asset, discussed further in Note 9, and accumulated deferred federalincome taxes. Such amounts will be recovered from the members through amortization of the regulatory asset in future periods.

r 5 - The components of the net deferred tax liabilities as of December 31,1997 and 1996, were as follows (in thousands): 1997 1996 Deferred tax assets-Net operatinglosses S 74,668 $ 74,849 Memberloss carryforwards 68,918 59,215 Generalbusiness credits - 101,808 101,716 Alternative minimum tix credit 9,230 9,885 Deferred revenue 8,959 19,%5 Nuclear decommissioning 14,553 12,846 Other 6,355 5,737 284,491 284,213 Less-Valuation allowance (101,808) (101,716) 182,683 182,497 Deferred tax liabilities- , Depreciation (274,574) (272,538) Regulatory asset (16,276) .(17,267) Department of Energy assessment (2,124) (2,327) Other (162) (2,537) (293,136) (294,669) Net accumulated deferred federalincome tax $(110,433) $(112,172) The Company has federal tax net operating loss carryforwards (NOLs) and unused general business credits (consisting primarily of investment tax credits) as follows (in thousands): Expiration Date Tax Credits NOLs 2000 $ 47,078 0 2001 -53,355 0 200.2 716 0 2003 333 0 2004 18 74,529 2005 28 0 2006 35 0 2007 38 0 2008 44 0 2009 46 36,620 l 2010 25 0 i 2011 27 8,295 l 2012 65 0 $101,808 $119,Y4

6 Based on the Company's historical taxable transactions and the timing of the reversal of existing temporary differences, management believes it is more likely than not that future taxable income will be sufficient to realize the benefit of the NOLs existing at December 31, 1997, before their respective expiration dates. However, as reflected in the above valuation allowance, management does not believe it is more likely than not that the tax credits will be utilized before expiration. Deferred Charges Deferred charges, other than preliminary project costs, are amortized using the straight-line method over the following estimated periods: Estimated Pezhsds Regulatory asset (see Note 9) 20 years Debt issuance costs 30 years Other 5 years Cash and Cash Equivalents The Company considers all temporary cash investments purchased with an original maturity of three months or less to be cash equivalents. Use of Estimates The preparation af finc.ncial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. New A': counting Pronouncements Effective January 1,1997, the Company adopted the provisions of SFAS No.125, " Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities," and Statement of Position 96-1," Environmental Remediation Liabilities." The adoption of these statements did not have a materialimpact on the financial position of the Company. Reclassifications Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation.

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2. Jointly Owned Electric Plant and Related Agreements:

On February 6,1981, the Company entered into (a) the Catawba Nuclear Station Purchase, Construction and Ownersidp agreement with Duke, together with (b) an Operating and Fuel Agreement and (c) an Interconnection Agreement (the Contracts). Contracts (a) and (b) basically provide for the purchase by the Company of a 56.25% undivided interest in Unit No.1 of the Catawba Nuclear Station together with a 28.125% interest in the support facilities, and for a sharing of dirert construction and operating costs in relation to the respective ownership share of the parties. The Company's totalinvestmerJn icintly owned facilitics amounted to $1,347,300,000 in 1997 and $1,343,640,000 in 1996, including capi'alized interest expense, net of related investment income. Pursuant to the Interconnection Agreement, Duke provided certain supplemental and back-up services and purchased from the Company declining portions of the capacity and energy from the Catawba Station over the first 10 years of commercial operation ending December 31,1995. Operating revenues for 1995 include $154,831,000 billed to Duke under this agreement. The cost of power purchased from Duke, as well as power purchased by the Company for its members in the Carolina Power & Light Company (CP&L) and Virginia Electric and Power Company (VEPCO) service areas, has been recorded as purchased power on the accompanying statements of operations and patronage capital.

3. Fair Value of FinancialInstruments:

A detail of the estimated fair values of the Company's financialinstruments as of December 31, 1997 and 1996, is as follows (in thousands): 1997 1996 Carrying Fair Carrying Fair Amount Value Amount Value Cash and cash equivalents S 20,505 S 20,505 S 20,798 5 20,798 Short-term investments 71,491 71,491 16,350 16,350 Long-term investments 82,662 82,662 164,116 164,116 Special deposits 36,196 36,196 31,974 31,974 Decommissioning fund 61,408 62,938 51,563 51,670 Deferred revenue fund 25,596 25,596 57,043 57,043 Long-term debt 1,158,389 1,158,389 1,183,693 1,183,693 For cash and cash equivalents the carrying amcunt approximates fair va!ue due to the short maturity of those instruments. The carrying amount of the decommissioning fund and the deferred revenue fund is determined based on the requirements of the related obligation. The special deposits fund balance is contractually determined to meet certain funding requirements. Unrealized gains or losses associated with the fair value of available-for-sale investments are transferred to the appropriate long-term or short-term investment accounts in tder to maintain a fixed fund belance. The fair value of the Company's long-term debt is estimated based on the current rates offered to the Company for debt of similar maturities.

l~ l 8 In 1994, the Company adopted SFAS No.115, " Accounting for Certain Investments in Debt. and Equity Securities." The Company's investments are classified as available for sale, trading or t held-to-maturity. Available-for-sale securities are carried at market value with unrealized gains and losses added to or deducted from equity. Trading securities are also carried at market value w' h unrealized gains and losses charged to income. Hehl-to-maturity securities a are carried at cost. All realized and unrealized gains and losses are determined using the specific identification method. As of December 31,1997 and 1996, $61,408,000 and $51,563,000, respectively, of the Decommissioning Fund has been classified as held-to-maturity. All other investments are classified as available-for-sale. - The amortized cost, gross unrealized holding gains, gross unrealized losses and fair value of available-for-sale and held-to-maturity securities by major security type at December 31,1997 and 1996, were as follows (in thousands): Gross Gross Estimated Amortized Unrealized Unrealized Fair December 31 Cost Gain Loss Value 1997-Available-for-sale securities: U.S. Government and agency securities $219,535 $1,160 $ (462) $220,233 Repurchase Agreements - 0 0 0 0 Other 16,221 0 (4) 16,217 $235,756 $1,160 $ (466) $236,450 Held-to-maturity securities: U.S. Government and agency securities $ 25,549 $ 201 $ (708) $ 25,042 Equity Investments 10,464 2,020 (48) 12,436 Demand Notes 22,404 0 0 22,404 Other 2,991 65 0 3,056 $ 61,408 $2,286 $ (756) $ 62,938 1996-Available-for-sale securities U.S. Government and agency securities $270,476 $ 276 $(2,672) $268,080 . Repurchase agreements 15,000 0 0 15,000 Other 7,206 0 (5) 7,201 $292,682 $ 276 $(2,677) $290,281 Held-to-maturity securities U.S. Government and agency securities S 27,006 33 $ (433) $ 26,606 Equity investments 9,519 675 (163) 10,031 Demand notes 11,529 0 0 11,529 Other 3,509 8 (13) 3,504 $ 51,563 $ 716 $ (609) $ 51,670 Proceeds from the sale of marketable securities were $134,968,000 and $157,410,000 in 1997 and 1996, respectively. Related net realized gains and (losses) included in income were $(375,000) and $62,000 in 1997 and 1996, respectively. - _ __a

9

4. Investments in Associated Organizations:

Investments in associated organizations are stated at cost at December 31,1997 and 1996, and were as follows (in thousands): 1997 1996 National Rural Utilities Cooperative Finance Corporation-Subordinated Term Certificate $7,040 $7,040 Capital Term Certificates 321 323 Patronage Capital Certificates 118 115 06er 1 1 57,480 $7,479 The Subordinated Term Certificate bears interest at 11.648% per annum and Capital Term Certificates bear interest at 3% to 5% per annum. These certificates are required to be maintained under the note agreement with the National Rural Utilities Cooperative Finanw Corporation (NRUCFC) in an amount at least equal to 5% of th; original debt issued or i guaranteed by NRUCFC until maturity of the related debt instruments. These investments in associated organizations are similar to compensating bank balances and are necessary in order to maintain current financing arrangements. Accordingly, carrying value approximates fair value as there is no market for these investments.

5. Special Deposits:

Special deposits consist of bond and debt service reserve funds for pollution control bonds as required by the Company's bond agreements and special reserve funds required by the Company's agreements with Duke. Bond funds serve as payment clearing accounts, and the debt service reserve funds maintain amounts equal to the maximum armual debt service of each bond issue. Bond and debt service reserve funds totaled $16,597,000 and $15,586,000 at December 31,1997 and 1996, respectively. In 1994, under the terms of its Catawba ownership agreements with Duke, as discussed in Note 2, the Company entered into an Amended Depository Agreement with Duke under which the Company was required to establish a Special Reserve Fund depository account in an amount equal to the greater of $750,000 or one percent of the Company's estimated payments to Duke under the terms of the Interconnection Agreement plus one-sixth of the Company's estimated payments to Duke under terms of tbc Operating and Fuel Agreement during the 12-month period ended December 31, IM7. The nepository account totaled $19,599,000 as of December 31,1997, and $16,388,000 as of December 31,1996.

10

6. Long-term Debt:

Long-term debt consists of mortgage notes payable to the United States of America acting through the Federal Financing Bank (FFB) and the RUS, Pollution Control Revenue Bonds and promissory notes to NRUCFC. Substantially all assets of the Company are pledged as collateral for the debt, The terms of the mortgages, notes and bonds are as follows (in thousands): 1997 1996 FFB mortgage and RUS note advances, maturing at various dates through 2019, interest rates varying from 5.00% to 10.516% (average year-end rates of 8.07% for 1997 and 1996) $1,042,978 $1,065,474 Pollution Control Revenue Bonds, maturing in 2014 with annual sinking fund requirements guaranteed by NRUCFC-Weekly series, interest payable monthly at varying rates (3.89% at December 31,1997, and 4.15% at December 31,1996) 22,550 23,100 Semiannual series, interest payable semiannually at varying rates (3.70% at December 31,1997, and 3.80% at 1 December 31,1996) 92,150 94,400 NRUCFC note advances, interest and principal payable quarterly at 8% through June 14,2023 711 719 1,158,389 1,183,693 Less - Current maturities (27,454) (25,304) $1,130,935 S1,158,389 Maturities of the long-term debt described above for the five-year period from January 1,1998, and thereafter, are summarized below (in thousands): Years Amount 1998 $ 27,454 1999 29,609 2000 24,729 2001 35,230 2002 37,988 'lhereafter 1,003,179 $1,158,389 The Company also has a $30 million line of credit with NRUCFC which was unused at December 31,1997. The interest rate a milable tmder this agreement at December 31,1997, was 6.35% This line of credit is perpet:al and is subject to withdrawal on a revolving basis as needed.

n l t

7. Employee Benefit Plans:

All employees of the Company participate in the National Rural Electric Cooperative Association (NRECA) Retirement and Security Program (the Program), a defined benefit pension plan qualified under Section 401 and tax exempt under Section 501(a) of the Code. In tids multiemployer plan, which is available to all member cooperatives of NRECA, the accumulated benefits and plan assets are not determined or allocated separately by individual employer. The Company makes annual contributions to the Program equal to the amounts accrued for pension expense, except during a period when a maratorium is in effect. A mormorium on contributions was lifted again in October 1996 at which time contributions to the Program continued. Payments to the Program for current period service cost were $453,000 in 1997, $225,000 in 1996 and $244,000 in 1995. A!! cmployees of the Company are eligible to participate in the NIECA Savings Plan, a defined contribution plan qualified under Section 401(k) and tax exempt under Section 501(a) of the Code, following the date on which they complete onc year of service. Eligible employees may make contributions to the plan of up to 15% of their salary. The Company matches employee contributions to the plan up to 3% of the employee's salary. Total company contributions to the NRECA Savings Plan were $237,000 in 1997, $230,000 in 1996 and $199,000 in 1995.

8. Other Postemployment and Postretirement Benefits:

As of January 1,1995, the Company adopted SFAS No.106, " Employers' Accounting for Postretirement Benefits Other Than Pensions." This accounting standard requires postretirement benefits to be recognized as earned by employees, rather than as paid. Prior to 1995, the cost of these benefits was recognized as an expense when premiums were paid. The Company elected to adopt this standard on an immediate recognition basis. As a result, the accumulated postretirement benefit obligation at January 1,1995, of $870,000 was recognized as a curnulative effect of change in accounting principle. The obligation has not been funded. The net postretirement benefit liability recognized by the Company, included in other noncurrent liabilities on the accompanying balance sheets,is surrunarized as follows (in thousands): 1997 1996 Retired plan participants $ 128 $ 184 Active plan participants 941 737 Unrecognized actuarial gain 431 453 Accumulated postretireinent benefit obli ;ation $1,500 $1,374 t

12 i Net postretirement benefit cost for 1997 and 1996 is included in administrative and general expenses and consists of the following components (in thousands): 1997 1996 Service cost - Benefits attributed to service during the period $103 $ 96 Interest cost en accumulated postretirement benefit obligation 63 54 Amortization of actuarial gain (23) (23) Net postretirement benefit cost 5143 $127 On January 1,1996, the Company revised certain assumptions related to the computation of the accumulated postretirement benefit obligation, resulting in a gain of $476,000 which will be deferred and amortized over 17 years under the provisions of SFAS No.106. The current year amortization of $23,000 is included as a component of net postretirement benefit cost. For measurement purposes, an 8.5% annual increase in the cost of covered health care benefits was assumed for 1997; the rate was assumed to decrease gradually to 5.0% in the year 2005 and remain at that level thereafter. Increasing the assumed health care cost trend by one percentage point in each year would increase the accumulated postretirement benefit obligation for 1997 by $203,000. The average discount rate used in determining the accumulated postretirement benefit obligation was 7% In November 1992, the Fincncial Accounting Standards Board (FASB) issued SFAS No.112, " Employers' Accounting for Postemployment Benefits." The statement requires the accrual of the expected cost of such benefits (primarily disability benefits) during the employees' years of service. The statement, adopted by the Company in 1994, resulted in a postemployment benefit obligation of $320,000 at December 31,1997. The annual incremental charge and the revision of actuarial assumptions did not have a materialimpact on the Company's fiaancial condition or results of operations.

9. Commitments and Contingencies:

Duke Power Company Settlement As discussed in Note 2, the Company and certain other parties (the Catawba buyers) own various undivided interests with Duke in Catawba. As of December 31,1993, a number of contractual disputes existed between the Catawba buyers and/or the Company and Duke, which were resolved in 1994. One dispute related to billings rendered to Duke by the Company totaling approximately $162,176,000 for income taxes accrued through December 31,1993. Duke contested the appropriateness of this amount and, therefore, had not paid any amounts billed through 1993. The other disputes related to differences among the parties on interpretation of certain provisions of the Catawba contracts.

13 y In March 1994, the Company and Duke agreed to a settlement of all outstanding disputes. Under the terms of the settlement, Duke paid the Company $75,017,000. Since the terms of the settlement provide that Duke has no further liability for income taxes, the Company wrote-off the remaining receivable balance of $87,159,000 and recorded c. regulatory asset in the amount of $56,654,000, which is net of a reduction in accumulated deferred federal income taxes of - $30,505,000. This regulatory asset is being amortized over a 20-year period in accordance with the recovery period established by the Board of Directors. Depaitment of Energy Assessment The Energy Policy Act of 1992 gave the Department of Energy (DOE) the authority to assess utilities for the decommissioning of its facilities used for the enrichment of uranium included in nuclear fuel costs. In order to decommission these facilities, the DOE estimates that it would need to charge utilities a total of $150,000,000, adjusted for inflation, annually for 15 years based on enrichment services to date. Based on preliminary estimates from Duke, the Company recorded its share of the liability. A corresponding asset was recorded as nuclear fuel and is being amortized to nuclear fuel expense over the 15-year assessment period. The estimated remaining liability at December 31,1997, of $6,067,000 is included in the accompanying balance sheets in deferred credits and other liabilities. Power Coordination Agreements and Purchased Power Commitments In 1996, the Company renegotiated the Interconnection Agreement with Duke, the Power Coordination Agreement with CP&L and the power supply contract with VEPCO. The negotiations resulted in varying contract expiration dates with more power supply flexibility at prices more closely related to market conditions. In 1996, the Company began receiving 200 MW of capacity from American Electric Power (AEP) to replace requirements previously provided by CP&L The agreement extends through -2010 and provides for fixed capacity charge ad system average energy costs. Plant Construction Agreement In 1994, the Company entered into an agreement with Black & Veatch Construction, Inc. and H. B. Zachry to build a 330 MW plus 120 MW of reserves combined-cycle natural gas fired electric generating plant. Construction of the plant was scheduled to begin in 1998. Due to changing power supply market conditions, in 1996 the Company decided to delay the construction of the generating plant indefinitely. The Company has incurred preliminary project costs of $9,421,000 through December 31,1997, which are included in deferred charges in the accompanying balance sheets.

c 14 l '10. NudearInsurance: 1 Duke main tains nudear insurance coverage on its nudear facilitier, in three areas; liability coverage, property, decontamination and decommissioning coverage, and extended accidental outagc coverage to cover increased generating costs and/or replacement power purchases. The Company, along with other joint owners of Caawba, reimburses Duke for certain expenses associated with nudar insurance premiums paid by Duke. The Price-Anderson Act provides that nuclear reactor owners insure against public liability daims msulting from nudear incidents to the fuli limit of liability c,I apprcaimately $8.9 billion. The maximum required private primary insurance of $200 million has been purchased along with a like amount for the benefit of the co-owners of Catawbe to cover certain worker tort daims. In the event of a nudear incident involving any commercial nudear facility in the country involving total public liability in excess of 5200 million, a licensee of a nudear power plant could be assused a deferred premium of up to S79.3 million (NCEMC's share is $22.3 million) for certain licensed reactors. It would be payable at a rate not to exceed $10 million (NCEMC's share is $2.8 million) per year per licensed reactor for each incident. Iiretrospective premimns were to be assessed, the Company will be responsible for its share of any retmspective premiums or other costs incurred by Duke in the event an accident occurs where liabilities exceed insurance coverage. Duke is a member of Nuclear Mutual Limited (NML) which provides $500 :nitlion in primary property damage coverage for each of Duke's nudear facilities. If NML's losses ever exceed its reserves, Duke will be liable, on a pro rata basis, for additional assessments of up to $34 million (NCEMC's share is $9.6 million). His amount repnnents five times Duke's annual premium to NML. The other joint owners of Catawba are obligated to assume their pro rata share of any liability for retrospective premiums and other premium assessments resulting from the NML policies applicable to Catawba. Duke is also a member of Nudear Electric Insuran:e Limited (NEIL) and purchases insurance through NEll's excess property, decontamination and decommissioning liability insurance program. NEIL provides excess insurance coverage of $2.25 billion for Catawba. If losses ever exceed the accumulated funds available to NEIL for the excess property, decontamination and decommissioning liability program, Duke will be liabic, on a pro rata basis, for additional assessments of up to $40 million (NCEMC's share is 511.3 million). De other jomt owners of Catawba are obligated to assume their pro rata share of any liability for retrospective premiums and other premium assessments resulting from the NEIL policies applicable to Catawba. i

i j 15 Duke participates in a NEIL program the 1 provides insurance for the increased cc,st of generation and/or purchased power resulting from an accidental outage of a nuclear unit. Catawba is insured for up to approximately $3.5 million per week, after a 21-week deductible period, with declining amounts per unit where more than one unit is involved in an accidental outage. Coverages continue at 100% for 52 weeks and 80% for the ne<t 104 weeks. If NEIL's losses for this program ever exceed its reserves, Duke will be liable, on a pro rata basis, for additional assessments of up to $27 million (NCEMC's share is $7.6 million). This amount represents five times the annual premium to NEIL for insurance for the increased cost of genciation and/or purchased power resulting from an accidental outage of a nuclear unit. The i joint owners of Catawba are obligated to assume their pro rata share of any liability for i retrospective premiums and other premiums assessments resulting from the NEIL policies applicable to the joint ownership agreements. IL Related-party Transactions: ) The Company leases office space to the North Carolina Association of Electric Cooperatives, ) Inc. (NCAEC), The Tarheel Electric Membership Association, Incorporated (TEMA) and the Electric Membership Corporation Employees' Credit Union (EMCECU) which are retated . parties. Total rental income received by the Company in 1997 was $54,000 from NCAEC, i $21,000 from TEMA and $12,000 from EMCECU. Payments are determined annually under an indefinite lease term. The Company also chargw the EMCECU a nominal fee for the use of the ) l' phone system and copy machines. NCAEC provides various services for the Company and tne j Company reimburses NCAEC for its portion of these expenses. j NCEMC also provides all staff services to NCAEC and TEMA. NCAEC and TEMA reimburse NCEMC for the related salaries and benefits. Charges to NCAEC for these services were $1,058,000 in 1997 and $1,042,000 in 1996. Ch,xges to TEMA for these services were $992,000 in 1997 and $840,000 in 1996. The Company has accounts receivable net of accounts payable with related parties at December 31,199'7 and 1996, as follows (in thousands): 1997 1996 NCAEC $274 5273 TEMA 275 246 EMCECU 1 1 $350 $520 The Company has designated $15,000,000 for loans to members related to economic development and the construction of customer owned generation. At December 31,1997 and 1996, outstand' ig loans totaling $5,477,000 and $1,784,000, respectively, have been included in i accounts recei,able and noncurrent receivables in the accompanying balance :,heets. I

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o" P ARTHUR ANDERSEN LLP i l I l Report ofIndependent Public Accountants m To the Board eiTrustees of Saluda River Electric Cooperative,Inc.: We have auditee; the accompanying balance sheets of Saluda River Electric Cooperative,Inc. (a Soudt Carolina corporation) as of December 31,1997 and 1996, and the related statements of o L operations and patranage capital deficit and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in acordance with generally accepted auditing standards and the standards for financial audits contained in Govermnent Auditing Standards (1994 revision) issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the finar.cial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation, We believe that our audits provide a reasonable basis for our opinion. In our opiniun, the finencial statements referred to above present fairly, in all material respects, the financial position of Saluda River Electric Cooperative, Inc. as of December 31,1997 and 1996, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concem. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses and has a net patronage capital deficit that raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification ofliabilities that might be necessary should the Company be unable to continue as a going concern. As explained in Note 1 of the notes to financial statements, effective January 1,1996, Saluda River Electric Cooperative,Inc. discontinued the application of Statement of Financial Accounting Standards No. 71, " Accounting for the Effects of Certain Types of Regulation."
r 2 in accordance with Government Auditing Standants, we have also issued reports dated March 6, 1998, on our consideration of Saluda River Electric Cooperative's internal control structure and its compliance with laws and regulations. b Raleigh, North Carolina,'
~~March 6,1998.~~
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Saluda River Electric Cooperative, Inc. Statements of Operations and Patronage Capital Deficit For the Years Ended December 31,1997 and 1996 (in thousands) 1997 1996 Operating revenues: Electric sales to members $113,223 $117,033 Electric sales to nonmembers 7,980 6,760 121,203 123,793 Operating expenses: Fuel and purchased power 86,224 86,370 Transmission expense 9,921 9,864 Depreciation 17,464 16,978 Administrative and general 2,530 2,0lX) Customer service expenses 43 2,356 Property taxes 4,449 4,302 Restructuring expenses 1,400 0 Federalincome taxes 515 (93) 122,546 121,777 Operating margin (loss) (1,343) 2,016 Otherincome: Interest income 4,018 6,521 Other income 349 661 3,024 9,198 Interest expense (24,113) (26,315) Margin (loss) before extraordinary item (21,089) (17,117) Extraordinary item (Note 1) 0 (6,889) Net margin (loss) (21,089) (24,006) Patmnage capital deficit, beginning of year (28,284) (4,278) Patronage capital deficit, end of year $ (49,373) S (28,284) The accompanying notes to financial statements are an integral part of these statements.
Saluda River Electric Cooperative, Inc. Statements of Cash Flows I For the Years Ended December 31,1997 and 1996 (in thousands) 1997 1996 Net loss $(21,089) $(24,006) Adjustments to reconcile net loss to cash and cash equivalents provided by (used in) operating activities-Extraordinary item 0 6,889 Depreciation and amortization 17,571 17,094 Amortization of nuclear fuel 5,667 5,577 Deferred federal income taxes 492 (167) Interest on decommissioning fund 755 926 Other (99) 62 Changes in other operating assets and liabilities: Accounts receivable 1,643 (126) Interest receivable 702 630 Materials and supplies 600 196 Prepaid expenses (204) 0 Accounts payable and accrued expenses (33) (10,048) Net cash and cash equivalents provided by (used in) operating activities 6,005 (2,973) Cash flows from investing activities: Additions to electric plant (18,316) (15,974) Proceeds from sale of fixed assets 0 52 Deposits to decommissioning fund (3,248) (3,277) Decrease in investments 48,284 30,811 (Increase) decrease in special deposits '202) 293 Net cash and cash equivalents provided by (used in) investing activities 26,518 11,905 Cash flows from financing activities: Principal payments of long-term debt $ (7,928) $(43,254) Proceeds from issuance of long-term debt 0 34,700 Net cash and cash equivalents used in financing activities (7,928) (8,554) Increase in cash and cash equivalents 24,595 378 Cash and cash equivalents, beginning of year 12,019 11,641 Cash and cash equivalents, end of year S 36,614 S 12,019 Supplemental disclosure of cash flow information - Cash paid during the year for: Interest (net of amounts capitalized of $216 in 1997 and $585 in 1996) $ 24,127 $ 29,170 Income taxes 0 275
Saluda River Electric Cooperative, Inc. Notes to Financial Statements December 31,1997 and 1996
1. Organization and Basis of Presentation Saluda River Electric Cooperative, Inc. (the Company) is a member-owned cooperative of five electric membership cooperatives (the members) in South Carolina. The Company was formed in 1958 to develop itself as the full-requirements supplier of electricity to its members who previously made independent power supply arrangements. The Company follows generally accepted accounting principles and the practices prescribed in the Uniform System of Accounts of the Federal Energy Regulatory Commission (FERC) as modified and adopted by the Rural Utilities Service (RUS).
The accompanying financial statements have been prepared on a going-concern basis which contemplates the realization of assets and satisfaction ofliabilities and commitments in the normal course of business. As reflected in the accompanying financial statements, the Company incurred a net loss of approximately $21 million for the year ended December 31, 1997, and $24 million for the year ended December 31,1996, and as of December 31,1997, had an accumulated patronage capital deficit of approximately $49 million. The Company is highly leveraged and based upon its current rates and cost structure, management has forecasted significant future losses and negative cash flows. The accompanying financial statements have been prepared assuming the Company will continue as a going concern and do not include any adjustments relating to the recoverability and classification of recorded asset amotmts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. As a result of Company's current financial position, management has been engaged in ongoing efforts to develop and implement a restructuring plan. Such efforts have included the retention of various legal and financial advisors to assist in the restructuring process and to address the Company's current financial situation. As a part of the restructuring, management and its advisors have been engaged in negotiations with the Company's secured creditors in order to modify current debt service requirements which would improve future cash flows. In addition, the Company's members agreed to restructure the Company by separating the generation and transmission businesses into independent companies. As a result, on December 1,1997, New Horizon Electric Cooperative, Inc. (New Horizon), a member-owned cooperative, was formed to provide transmission services to its members. Effective January 1,1998, the transmission assets of the Company were sold to New Horizon at the net book value of those assets as of December 31,1997. Based on an agreement between New Horizon and the Company, certain transaction costs are to be paid by the Company and for the year ended December 31,1997, these costs were not significant.
2 A summary balance sheet for New Horizon as of January 1,1998, is as follows (in thousands): f Assets-Electric plant $27,832 Construction work-in-process 7,027 34,859 Materials and supplies 1,453 Other current assets 142 Deferred charges 56 $36,510 Liabilities and equities-Membership equity 5 21 Long-term debt - Federal Financing Bank 30,472 Long-term debt - National Rural Utilities Cooperative Finance Corporation 3,298 Current payable to Saluda River Electric Cooperative, Inc. 2,478 Other current liabilities 89 Otherliabilities 152 $36,510 The purchase price was funded by the assumption of certain of the Company's debt and a cash payment of $2,478,000 to be made in 1998, which represents the net assets sold in excess of the debt transferred. The Company will remain an obligor for $3,298,000 of the debt assumed by New Horizon. Accordingly, the related debt will remain with the Company and decrease as New Horizon makes debt service payments. In connection with the restructuring, New Horizon entered into contracts to provide transmission service to its members who are responsible for the recovery of all costs incurred by New Horizon. The Company's all requirements contracts with its members were modified. However, the members remain obligated to purchase all power requirements from the Company. Additionally, the Company will lease a portion of its facilities to and provide certain administrative services for New Horizon. In return, New Horizon will pay a monthly fee of $50,000, adjusted annually. In addition, prior to 1996, the Company had complied with the provisions of Statement of Finsncial Accounting Standards (SFAS) No. 71, " Accounting for the Effects of Certain Types of Regulation." SFAS No. 71, as amended, requires that regulated rates be designed to recover the Company's costs of providing the regulated services or products. Additionally, these rates must be set at levels that can be charged to and collected from customers. Accordingly, the Company had recorded a regulatory asset related to losses incurred on reacquired debt which totaled approximately $6,889,000 at December 31,1995.
3 i Based on changes in the Company's rate structure enacted in 1996, rates are no longer designed to recover the specific costs of providing service to members. As a result, the Company discontinued the application of SFAS No. 71 effective January 1,1996. As required by SFAS No.101, " Accounting for the Discontinuance of Statement 71," the regulatory asset was written off during the year ended December 31,1996, resulting in an extraordinary noncash charge of approximately $6,889,000.
~~2. Summary of Significant Accounting Policies:~~
q Electric Plant ) Electric plant is stated at original cost, which is the cost of the plant when placed into service, plus the cost of subsequent additions, and includes engineering and other indirect construction costs. The cost of maintenance and repairs, and replacements and renewals ofitems determined to be less than units of property is charged to expense when incurred. The cost of renewals and betterments of property is capitalized, except for the cost of minor replacements which is charged to maintenance expense. At the time properties are disposed of, the original cost plus cost of removal less salvage of such property is charged to accumulated depreciation, except in certain cases of properties sold as entireties where profit or loss is recognized. Depreciation Depreciation is computed using the straight-line method over the estimated service lives of the property as follows: Estimated Lives Catawba Nuclear Station 40 years Diesel generation equipment 14 years Transmission plant 31 years Building and improvements 33 years Furniture and fixtures 5-15 years Automobiles 6 years Other general plant 6-17 years l I
4 The depreciation rate for Catawba Nuclear Station (Catawba) includes a factor to provide for l the expected cost of decommissioning the nuclear facility. The estimate of the expected costs I for decommissioning and the corresponding decommissioning factor included in the depreciation rate are adjusted periodically to reflect changing price levels and technology. ' Based on a 1994 site study of expected decommissioning costs, including the costs of decontamination, dismantling and site restoration, the Company's portion of such costs at the date of decommissioning is estimated to be approximately $242,354,000. The estimate assumes a future annual escalation rate of 5% in decommissioning costs. The decommissioning cost estimates are based on the plant location and cost characteristics for Catawba and assume prompt dismantlement and removal of the plant from service. The actual decommissioning costs are expected to vary from the above estimates because of changes in assumed dates of decommissioning, changes in regulatory requirements, changes in technology and changes in costs of labor, materials and equipment. A portion of amounts recovered through rates for estimated decommissioning costs (plus interest thereon) are maintained in an external trust fund in compliance with a Nuclear Regulatory Commission (NRC) regulation. The Company will provide for the remainder of the costs through future rates. The provision for expected decommissioning costs is charged to operations with an offsetting credit to the reserve for decommissioning. Investment earnings generated from the external trust fund are maintained in the decommissioning fund with a corresponding increase to the reserve for decommissioning. As of December 31,1997, amounts collected for decommissioning totaled approximately $35,359,000, of which $16,162,000 had been deposited in the external trust fund. In January 1998, the Company transferred the remaining $19,197,000 from cash and cash equivalents to the external decommissioning trust fund. The Company intends to fully fund its reserve for decommissioning based on collections through rates and investment earnings. Fuel Costs The cost of nuclear fuel is being amortized based on the rate of fuel usage and amounted to approximately $5,667,000 in 1997 and $5,577,000 in 1996. Final disposition of the spent fuel. may require future adjustments to fuel expense. Pending ultimate disposition, sufficient storage capacity for spent fuel is available through 2008. Membership Fees and Patronage Capital Deficit ' The Company is organized and operates as a cooperative. Patronage capital deficit is the accumulated net deficit of the Company which is allocated to members based upon their ) . mspective purchases of power from the Company. i i
l 5 l Income Tax Accounting The Company is a not-for-profit membership corporation subject to federal income taxes. In management's opinion, based on the applicable statutes, the Company is not subject to state j income taxes. For the years 1984 and prior, the Company claimed tax-exempt status under l Section 501(c)(12) of the Intemal Revenue Code of 1954, as amended (the Code). In 1985, the i Company reported as a taxable entity as a result of income received from Duke Power { Company (Duke) under a capacity and energy sell-back agreement applicable to Catawba. As a taxable electric cooperative, the Company has annually allocated its income and deductions . between member and nonmember activities. Any member taxable income has been offset with a patronage exclusion. i A detail of the (benefit) provision for federal income taxes in 1997 and 1996 is shown as follows (in thousands): i 1997 1996 Current $ 23 $ 74 Deferred 492 (167) (Benefit) provision for income taxes $515 S (93) The difference between the statutory federal income tax rate on income before income taxes and the Company's effective income tax rate is the result of losses from member operations which cannot be used to offset nonmember income. The components of the net deferred tax liabilities as of December 31,1997 and 1996, were as follows (in thousands): 1997 1996 Deferred tax assets-Net operating losses $40,056 $ 45,147 Generalbusiness credits 22,551 22,551 Alternative minimum tax credit 1,939 1,916 Other 1,852 1,713 66,398 71,327 Less-Valuation allowance (22,551) (22,551) 43,847 48,776 Deferred tax liabilities-Depreciation (85,835) (90,116) Department of Energy assessment (560) (622) j l Other (9) (103) L (86,404) (90,841) i Net deferred tax liabilities 5(42,557) $(42,065) i
6 The Company has federal tax net operating loss carryforwards (NOLs) and unused general business credits (consisting primarily of investment tax credits) at December 31,1997, as follows (in thousands): Expiration Date Tax Credits NOLs 2000 $13,599 0 2001 8,952 0 2002 0 22,736 2003 0 44,986 2004 0 35,196 2005 0 12,876 Thereafter 0 90 $22,551 $115,884 Based on the Company's historical taxable transactions and the timing of the reversal of existing temporary differences, management believes it is more likely than not that future taxable income will be sufficient to realize the benefit of the NOLs existing at December 31, 1997, before their respective expiration dates. Management also believes it is more likely than not that future taxable income will be sufficient to realize the benefit of the alternative minimum tax credits existing at December 31,1997. However, as reflected in the above valuation allowance, management does not believe it is more likely than not that the general business tax credits will be utilized before expiration. Cash and Cash Equivalents The Company considers all temporary cash investments purchased with an original maturity of three months or less to be cash equivalents. Investments with original maturities between tivee and twelve months are classified as short-term investments. New Accounting Pronouncements Effective January 1,1996, the Company adopted SFAS No.121, " Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of." SFAS No.121 requires that impairment losses on long-lived assets be recognized when an asset's carrying value exceeds its expected future cash flows before debt service. Adoption of this standard did not have a material impact on the financial position or results of operations of the Company. Effective January 1,1997, the Company adopted the provisions of SFAS No.125, " Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities," and Statement of Position 96-1," Environmental Remediation Liabilities." The adoption of these statements did not have a material impact on the financial position of the Company. Prior Year Reclassifications Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation.
L 7 l l
~~3. Jointly-Owned Electric Plant and Related Agreements:~~
On February 6,1981, the Company entered into (a) the Catawba Purchase, Construction and Ownership agreement with Duke, together with (b) an Operating and Fuel Agreement and (c) an Interconnection Agreement (the Contracts). Contracts (a) and (b) provide for the purchase by the Company of an 18.75% undivided interest in Unit No.1 of Catawba together with a 9.375% interest in the support facilities, and for a sharing of direct construction and operating costs in relation to the respective ownership share of the parties. The Company's total investment in jointly-owned facilities amounted to approximately 5450,262,000 in 1997 and $448,501,000 in 1996, including capitalized interest expense. Pursuant to the Contracts, Duke provided certain supplemental and back-up services and purchased from the Company declining portions of the capacity and energy from Catawba over the first 10 years of commercial operation. Duke's purchase of capacity and energy from the Company ended as of December 31,1995. Duke purchases 50% of the energy produced by Catawba in a nuclear reliability exchange as well as Catawba surplus energy from the Company which is included in electric sales to nonmembers in the accompanying statements of operations and patronage capital deficit. The cost of power purchased from Duke, as well as power purchased by the Company for its members from South Carolina Electric & Gas Company and Broad River Electric Cooperative, Inc., has been recorded as purchased power in the accompanying statements of operations and patronage capital deficit. The Company and Duke agreed that effective January 1,2001, it would no longer purchase supplemental capacity and energy from Duke under the existing Contract. The Company intends to replace the supplemental capacity and energy purchased from Duke at competitively bid market rates.
~~4. Fair Value of Financial Instruments:~~
l A detail of the estimated fair values of the Company's financial instruments as of December 31, 1997 and 1996, is as follows (in thousands): 1997 1996 Carrying Fair Carrying Fair Amount Value Amount Value Short-term investments S 500 $ 500 $ 505 $ 505 Long-term investments 6,405 6,405 53,932 53,932 Special deposits 4,571 4,523 4,369 4,333 Decommissioning fund 16,162 16,407 12,914 13,001 The fair values of short-term investments,long-term investments, special deposits and the decommissioning fund are estimated based on quoted market prices for the investments held in the respective funds. The fair value of long-term debt is not readily determinable.
8
~~5. Investments:~~
The Company classifies its investments as either available-for-sale, +rading or held-to-maturity. Available-for-sale securities are carried at market value with unrealized gains and losses added to or deducted from equity. Trading securities are also carried at market value with unrealized gains and losses being charged to income. Held-to-maturity securities are carried at amortized cost. All realized and unrealized gains and losses are determined using the specific identification method. As of December 31,1997, the Company did not record any unrealized losses on available for sale securities. As of December 31,1996, the Company had recorded net unrealized losses of approximately $752,000 on available-for-sale securities of approximately $53,932,000. All other investments have been classified as held-to-maturity. The amortized cost, gross unrealized holding gains, gross unrealized losses and fair value of available-for-sale and held-to-maturity securities by major security type at December 31,1997 and 1996, were as follows (in thousands): December 31,1997 Gross Gross Estimated Unrealized Unrealized Fair Cost Gain Loss Value Available-for-sale securities-U.S. Government and agency securities $6,274 $0 $0 $6,274 Cash and overnight investments 131 0 0 131 $6,405 - $0 $0 S6,405 December 31,1997 Gross Gross Estimated Unrealized Unrealized Fair _ Cost Gain Loss Value Held-to-maturity services-U.S. Government and agency securities $15,727 $178 $(50) $15,855 Corporate debt securities 1,017 46 0 1,063 Cash and overnight investments 4,489 0 0' 4,489 Commercial paper 35,485 0 0 35,485 State Government and agency sectuities 529 23 0 552 Certificates of deposit 600 0 _0_ 600 $57,847 $247 ,$g $58,044 l
I 9 December 31,1996 l-Gross Gross Estimated Unrealized Unrealized Fair Cost Gain Loss Value Available-for-sale securities-U.S. Government and agency securities $39,500 $19 $(769) $38,750 Corporate debt securities 2,594 2 0 2,596 Asset backed securities 6,741 0 (4) 6,737 Money marketinstruments 5,401 0 0 5,401 Other 448 0 0 448 $54,684 S21 $(773) $53,932 December 31,1996 Gross Gross Estimated Unrealized Unrealized Fair Cost Gain Loss Value Held-to-maturity services-U.S. Govenunent and agency securities 515,945 $59 $(36) $15,968 Commercial paper 10,30u 0 0 10,300 Other 3,562_ 28 0 3,590 $29,8,0,7 $87 S(36) $29,858 Proceeds from the sale of marketable securities were approximately $29,523,000 and $63,009,000
~~in 1997 and 1996. Related net realized (gains) losses included in operations were approximately~~
~~$(t23,000) and $48,000 in 137 and 1996, respectively.~~
~~f. Investments in Associated Organizations:~~
~ Investments in associated organizations are stated at cost at December 31,1997 and 1996, and consist of the following (in thousands): 1997 1996 National Rural Utihties Cooperative Finance Corporation-Subordinated Term Certificate $2,210 $2,210 Capital Term Certificate. 48 48 Patronage Capital Certificates 9 8 Other _ 695 507 1 52,962 $2,773 ) I l l
l' 10 } The Subordinated Term Certificates bear interest at 11.648% per an aum. These certificates are required to be nwintained under the note agreement with the Natbnal Rural Utilities Cooperative Finance Corporatio-t (NRUCFC) in an amount at least equal to 5% of the original debt issued o guaranteed by NRUCFC until maturity. These investments in associated organizations are similar to compensating bank balances and c. necessary in order to maintain current hnancing arrangements. Accordingly, there is no market for these investments.
~~7. Special Deposits:~~
Special deposits consist of debt service reserve ftmds for pollution control bonds and are maintained as required by the Company's bond agreements. The rese:ve fund was established to provide for deficiencies,if any, in the amount available to pay the principal an.1 >nterest on the bonds and to provide ior the final payments of principal and interest on the bonds. Investments in the fund accrue interest at a rate of 5.60%. 'As of December 31,1997 and 1996, substantially all of the funds were invested in U.S. Government se ~urities.
~~8. Long-term Debt:~~
. At December 31,1997 and 1996,long-term debt consists of the following (in thousands): 1997 1996 Federal Fm' ancing Bank (FFB) mortgage note advances, maturing at various dates through 2019, interest rates varying from 7.25% to 10.23% (average year-end rates of 7.67% for 1997 and 7.66% for 1996)~ $109,529 $111,856 FFB mortgage note advances, maturing in 2017, interest payable quarterly at varying rates (5.45% at December 31, 1997, and 5.21% at December 31,1996) 32,493 33,740 FFB mortgage note advances, maturing in 2002, interest payable quarterly at 6.00% at Decembcr 31 1997, and 1996 30,792 31,512 ^ Pollution Control Revenue Bonds,maturingin 2014 with - annual sinidng fund requirements beginning in 1994, . guaranteed by NRUCFC - Interest payable semiannually at varying rates (3.65% at December 31,1997 and 3.65% at w. . December 31,1996) 41,150 42,050 NRUCFC mortgage notes payable, maturing at various dates through 2017, interest payable semiannually at varying S.. ' rates (6.59% at December 31,1997, and 618% at r December 31,1996) 85,815 87,195 CoBank mortgage notes payable, maturing on December 31, 2019, interest payable quarterly at varying rates (6.26% at l December 31,1997, and 5.83% at December 31,1096) 84,780 86,134 384,559 392,487 Ixss-Current maturities S,486 7,763 4 $376,073 $384,724 _i E
11 ' Substantially all' assets of the Company are pledged as collateral for the debt. As of December 31,1997, the Company was not in compliance with certain financial covenants. A ) waiver has been obtained from RUS and NRUCFC with respect to these events of 3c [ i noncompliance fer the year ending December 31,1997, and through January 1,1999. i Maturities of the long-term debt described above for the five-year period from January 1,1998, and thereafter, are summarized below (in thousands): n, Years Amount 1998 $ 8,486 1999 7,521 H 2000 9,766 L 2001 12,230 l ' " 'i' 2002 12,449 Thereafter 334,107 l $384,559 L L
The Company also has a $12,000,000 line of credit with NRUCFC which was unused at December 31,1997 and 1996. The Company's Board of Directors has directed the NRUCFC to restrict $6,437,000 of this line of credit and to issue to Duke, on behalf of the Company, a letter of credit for a corresponding amount in accordance with the contracts discussed in Note 3. The
' interest rate available under this agreement at December 31,1997, was 6.70% This line of credit ' M . expires June 1998. L ' In January 1996, the Company mfinanced certain of its fixed rate FFB mortgage note advances L - totaling $34,700,000 with FFF mc.rtgage note advances with variable interest rates with 90-day LL repricing terms. The Company paid penalties of approximately $2,491,000 in connection with
the refinancing which were charged to interest expense in 1996.

9. Employee Benefit Plans:
SubstAntially all of the employees"of the Company participate in the National Rural Electric ,, - Coopera+ive Association (NRECA) Retirement and Security Program (the Program), a defined l' i benefit pension plan qualified under Section 401 and tax exempt under Section 501(a) of the p , i Code. In this multiemployer plan, which is available to all member cooperatives of NRECA, the accumulated benefits and plan assets are not determined or allocated separately by m 2 C individual employer. The Company makes annual contributions to the Program equal to the Lk amounts accrued for pension expense, except during'a period when a moratorium is in effect. A moratorium on contributions to the program was in effect from May 1995 through September ,l 1996, because the plan had been fully fundwi.' Payments to the Program in 1997 and 1996 were y approximately $71,000 and $30,000, respectively, for current period service cost. p 1 j i aw,, ,f i h i b
12 Substantially all employees of the Company are eligible to participate in the NRECA savings plan, a defined contribution plan qualified under Section 401(k) and tax-exempt under Section 501(a) of the Code, following the date on which they complete one year of service. Eligible employees may make contributions to the plan of up to a specified percentage of their salary. The Company matches employee contributions to the plan in amounts as determined by the Company's Board of Trustees. Total company contributions to the NRECA Savings Plan were approximately $41,000 in 1907 and $38,000 in 1996. In addition to pension benefits, certain health care benefits are provided for the Company's retired employees through participation in a noncontributory multiple-employer group benefit plan sponsored by NRECA. All employees become eligible for this coverage upon retirement if they reach normal retirement age while working for the Company. The net postretirement benefit liability recognized by the Company is summarized as follows (in thousands): 1997 1996 Retired plan participants $ 46 $ 44 Active plan participants 224 186 Accumulated postretirement benefit obligation 5270 $230 Net postretirement benefit cost for 1997 and 1996 include the following components (in thousands): 1997 1996 Service cost - Benefits attributed to service during the period $24 $23 Interest cost on accumulated postretirement benefit obligation 20 13 Other (4) 31 Net postretirement benefit cost $40 $67 For measurement purposes, a 10% annual increase in the cost of covered health care benefits was assumed for 1997; the rate was assumed to decrease gradually to 6% for 2005 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. For example, increasing the assumed health care cost trend by one percentage point in each year would increase the accumulated postretirement benefit cost for 1997 by approximately $50,000. The average discount rate used in determining the accumulated postretirement benefit obligation was 7.5% in 1997 and 1996. i i
13 10.' Department of Energy Assessment: The Energy Policy Act o.'1992 gave the Department of Encrgy (DOE) the authority to assess utilities for the decommissioning ofits facilities used for the enrichment of uranium included in l nudear fuels. In order to decommission these facilities, the DOE estimates that it would need to charge utilities a total of $150,000,000 annually for 15 years based on enrichment services . provided. Based on an estimate from Duke covering the 15 years, at December 31,1993, the Company recorded its share of the liability which totaled approximately $2,569,000. Such amount has been recorded as nuclear fuel and is being amortized to nudear fuel expense over the 15-year assessment period. The estimated remaining liability of approximately $1,810,000 is included in the accompanying balan. sheets in deferred credits and other liabilities.
~~11. NuclearInsurance:~~
Duke maintains liability, property and decontamination insurance coverage on its nudear facilities,induding Catawba. The Company has been advised by Duke that appropriate levels of primary and secondary coverage are maintained in accordance with applicable federal and state regulations. The Company reimburses Duke for its pro rata share of the cost of such insurance. In addition, the Company will be responsible for its pro rata share of any retrospective premiums or other costs incurred by Duke in the event an accident occurs where liabilities exceed insurance coverages. !}}

ML20247L904

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