Future Construction Costs. The Corporation plans to maintain its regulated facilities, and pursue business expansion of its regulated operations as opportunites arise. Projected 1998 capital and investment expenditures for the Electric Operations and the Natural Gas Transmission segments, including AFUDC, are approximately $700 million and $300 million, respectively. These projections are subject to periodic review and revisions. Actual expenditures incurred may vary from such estimates due to various factors, including revised electric load estimates, business expansion opportunities, environmental matters and cost and availability of capital.

The Energy Services segment plans to spend approximately $100 million in 1998 for required capital expenditures at its existing facilities. In addition, the Corporation is seeking to significantly grow its Energy Services businesses, primarily through the Global Asset Development business unit. One opportunity includes the 520-megawatt combined cycle natural gas fired merchant generation plant in Bridgeport, Connecticut already under construction. Another growth opportunity includes the recently announced agreement to purchase from Pacific Gas & Electric Company three power plants in California. The power plants have a combined capacity of 2,645 megawatts. The purchase price is estimated at approximately $500 million and this transaction is expected to close during 1998. Other similar initiatives in 1998 will likely require significant capital and investment expenditures which will be subject to periodic review and revision and may vary significantly depending on the value-added opportunities presented.

Projected capital and investment expenditures for 1998 of the Other Operations segment are approximately $200 million. These projected capital and investment expenditures are also subject to periodic review and revision and may vary significantly depending on the value-added opportunities presented.

Nuclear Insurance. The Corporation owns and operates the McGuire and Oconee nuclear facilities with two and three nuclear reactors, respectively, and operates and has a partial ownership interest in the Catawba nuclear facility with two nuclear reactors. The Corporation maintains nuclear insurance coverage in three program areas: liability coverage; property, decontamination and decommissioning coverage; and business interruption and/or extra expense coverage. The Corporation is being reimbursed by the other joint owners of Catawba for certain expenses associated with nuclear insurance premiums paid by the Corporation.

Pursuant to the Price-Anderson Act, the Corporation is required to insure against public liability claims resulting from nuclear incidents to the full limit of liability of approximately $8.9 billion.

Primary Liability Insurance. The maximum required private primary liability insurance of $200 million has been purchased along with a like amount to cover certain worker tort claims.

Excess Liability Insurance. This policy currently provides approximately $8.7 billion of coverage through the Price-Anderson Act’s mandatory industry-wide excess secondary insurance program of risk pooling. The $8.7 billion of coverage is the sum of the current potential cumulative retrospective premium assessments of $79.3 million per licensed commercial nuclear reactor. This $8.7 billion will be increased by $79.3 million as each additional commercial nuclear reactor is licensed, or reduced by $79.3 million for certain nuclear reactors that are no longer operational and may be exempted from the risk pooling insurance program. Under this program, licensees could be assessed retrospective premiums to compensate for damages in the event of a nuclear incident at any licensed facility in the nation. If such an incident occurs and public liability damages exceed primary insurances, licensees may be assessed up to $79.3 million for each of their licensed reactors, payable at a rate not to exceed $10 million a year per licensed reactor for each incident. The $79.3 million amount is subject to indexing for inflation and may be subject to state premium taxes.

The Corporation is a member of Nuclear Electric Insurance Limited (NEIL), which provides property and business interruption insurance coverages for the Corporation’s nuclear facilities under the following three policy programs:

Primary Property Insurance. This policy provides $500 million in primary property damage coverage for each of the Corporation’s nuclear facilities.

Excess Property Insurance. This policy provides excess property, decontamination and decommissioning liability insurance in the following amounts; $2.25 billion for Catawba and $1.5 billion for each of the Oconee and McGuire Nuclear Stations.

Business Interruption Insurance. This policy provides business interruption and/or extra expense coverage resulting from an accidental outage of a nuclear unit. Each unit of the McGuire and Catawba Nuclear Stations is insured for up to approximately $3.5 million per week and the Oconee Nuclear Station units are insured for up to approximately $2.8 million per week. Coverage amounts per unit decline if more than one unit is involved in an accidental outage. Initial coverage begins after a 17-week deductible period and continues at 100 percent for 52 weeks and 80 percent for the next 104 weeks.

If NEIL’s losses ever exceed its reserves for any of the above three programs, the Corporation will be liable for assessments of up to five times the Corporation’s annual premiums. The current potential maximum assessments are as follows: Primary Property Insurance – $30 million; Excess Property Insurance – $31 million; Business Interruption Insurance – $27 million.

The other joint owners of Catawba are obligated to assume their pro rata share of any liabilities for retrospective premiums and other premium assessments resulting from the Price-Anderson Act’s excess secondary insurance program of risk pooling or the NEIL policies.

Environmental. The Corporation is subject to federal, state and local regulations regarding air and water quality, hazardous and solid waste disposal, and other environmental matters.

TETCO is currently conducting PCB (polychlorinated biphenyl) assessment and clean-up programs at certain of its compressor station sites under conditions stipulated by a U.S. Consent Decree. The programs include on- and off-site assessment, installation of on-site source control equipment and groundwater monitoring wells, and on- and off-site clean-up work. TETCO expects to complete these clean-up programs during 1998. Groundwater monitoring activities will continue at several sites beyond 1998.

In 1987, the Commonwealth of Kentucky instituted a suit in state court against TETCO, alleging improper disposal of PCBs at TETCO’s three compressor station sites in Kentucky. This suit is still pending. In 1996, TETCO completed clean-up of these sites under the U.S. Consent Decree.

The Corporation has also identified environmental contamination at certain sites on the PEPL and Trunkline systems and is undertaking clean-up programs at these sites. The contamination resulted from the past use of lubricants containing PCBs and the prior use of wastewater collection facilities and other on-site disposal areas. Soil and sediment testing, to date, has detected no significant off-site contamination. The Corporation has communicated with the Environmental Protection Agency and appropriate state regulatory agencies on these matters. Environmental clean-up programs are expected to continue until 2002.

At December 31, 1997 and 1996, the Corporation had accrued liabilities for remaining estimated clean-up costs on the TETCO, PEPL and Trunkline systems which are included in Environmental Clean-up Liabilities in the Consolidated Balance Sheets. These cost estimates represent gross clean-up costs expected to be incurred, have not been discounted or reduced by customer recoveries and do not include fines, penalties or third-party claims. Costs to be recovered from customers are included in the Consolidated Balance Sheets as of December 31, 1997 and 1996, as Regulatory Assets and Deferred Debits.

The federal and state clean-up programs are not expected to interrupt or diminish the Corporation’s ability to deliver natural gas to customers. Based on the Corporation’s experience to date and costs incurred for clean-up operations, management believes the resolution of matters relating to the environmental issues discussed above will not have a material adverse effect on results of operations or financial position of the Corporation.

Litigation. In December 1996, TETCO received notification that Marathon Oil Company (Marathon) intended to commence substitution of other gas reserves, deliverability and leases for those dedicated to a certain natural gas purchase contract (the Marathon Contract) with TETCO. In TETCO’s view, the tendered substitute gas reserves, deliverability and leases are not subject to the Marathon Contract; therefore TETCO filed a declaratory judgment action on December 17, 1996 in the U.S. District Court for the Eastern District of Louisiana seeking a ruling that Marathon’s interpretation of the Marathon Contract is incorrect. Marathon filed a counterclaim seeking a declaratory judgment enforcing its interpretation of the Marathon Contract. On January 7, 1997, Marathon filed an answer and a counterclaim to TETCO’s complaint seeking declaratory judgment enforcing its interpretation of the Marathon Contract.

On February 18, 1997, Amerada Hess Corporation (Amerada Hess) notified TETCO that it intended to commence substitution of other gas reserves, deliverability and leases for those dedicated to its natural gas purchase contract (the Amerada Hess Contract) with TETCO. On the same date, Amerada Hess also filed a petition in the District Court of Harris County, Texas, 157th Judicial District, seeking a declaratory judgment that its interpretation of the Amerada Hess Contract, which covers the same leases and reserves as the Marathon Contract, is correct. TETCO filed a declaratory judgment action with respect to Amerada Hess’ contentions in the U.S. District Court for the Eastern District of Louisiana on February 21, 1997. The two actions have been transferred to the judge presiding over the Marathon Contract matter.

On September 26, 1997, the judge presiding over the Marathon and Amerada Hess contract matters issued summary judgments in both actions in favor of TETCO. Marathon and Amerada Hess subsequently filed notices of appeal of the summary judgments. On January 5, 1998, TETCO entered into an agreement with Marathon settling all issues associated with the Marathon Contract. The potential liability of the Company associated with the Amerada Hess Contract should TETCO be contractually obligated to purchase natural gas based upon the substitute gas reserves, deliverability and leases, and the effect of transition cost recoveries pursuant to TETCO’s Order 636 settlement involves numerous complex legal and factual matters which will take a substantial period of time to resolve. However, the Corporation does not believe that Amerada Hess will prevail on its appeal of the lower court’s summary judgement. Management is of the opinion that the final disposition of this matter will not have a material adverse effect on the consolidated results of operations or financial position of the Corporation.

On April 25, 1997, a group of affiliated plaintiffs that own and/or operate various pipeline and marketing companies and partnerships primarily in Kansas filed suit against PEPL in the U.S. District Court for the Western District of Missouri. The plaintiffs allege that PEPL has engaged in unlawful and anti-competitive conduct with regard to requests for interconnects with the PEPL system for service to the Kansas City area. Asserting that PEPL has violated the antitrust laws and tortiously interfered with the plaintiffs’ contracts with third parties, the plaintiffs seek compensatory and punitive damages in unspecified amounts. Periodically, similar disputes arise with other natural gas marketers and pipeline companies concerning interconnections and other issues involving access to the Corporation’s natural gas transmission systems. Management is of the opinion that the final disposition of these proceedings will not have a material adverse effect on the consolidated results of operations or financial position of the Corporation.

The Corporation and its subsidiaries are also involved in legal, tax and regulatory proceedings before various courts, regulatory commissions and governmental agencies regarding matters arising in the ordinary course of business, some of which involve substantial amounts. Where appropriate, the Corporation has made accruals in accordance with SFAS No. 5, "Accounting for Contingencies," in order to provide for such matters. Management is of the opinion that the final disposition of these matters will not have a material adverse effect on the consolidated results of operations or financial position of the Corporation.

Other Commitments and Contingencies. The Corporation has a 10% ownership interest in TEPPCO Partners, L.P., a master limited partnership (MLP) that owns and operates a petroleum products pipeline. A subsidiary partnership of the MLP had $326.5 million in First Mortgage Notes outstanding at December 31, 1997 with recourse to the general partner, a subsidiary of the Corporation.

In January 1998, the Corporation acquired a 9.8% ownership in Alliance Pipeline. This pipeline is designed to transport natural gas from western Canada to the Chicago-area market center for distribution throughout North America. The pipeline is scheduled to begin commercial operation in late 1999, provided the necessary U.S. and Canadian regulatory approvals are secured. In addition to buying an ownership interest in the pipeline project, the Corporation has a contractual commitment for 67.25 million cubic feet per day of capacity on the line over 15 years for an estimated total of $315 million.

Periodically, the Corporation may become involved in contractual disputes with natural gas transmission customers involving potential or threatened abrogation of contracts by the customers, including for example attempted transfers of contractual obligations to less creditworthy subsidiaries of the customers. If the customers are successful, the Corporation may not receive the full value of anticipated benefits under the contracts.

In the normal course of business, certain of the Corporation’s affiliates enter into various contracts, including agreements for debt, natural gas transmission service and construction contracts, which contain certain schedule and performance requirements. Such affiliates use risk management techniques to mitigate their exposure associated with such contracts. Certain subsidiaries of the Corporation have guaranteed performance by such affiliates under some of these contracts.

Management is of the opinion that these commitments and contingencies will not have a material adverse effect on the consolidated results of operations or the financial position of the Corporation.