Duke Energy Annual Report 2001

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Notes to Consolidated Financial Statements for the
Years Ended December 31, 2001, 2000 and 1999

18. EMPLOYEE BENEFIT PLANS

RETIREMENT PLANS Duke Energy and its subsidiaries maintain a non-contributory defined benefit retirement plan. It covers most employees with minimum service requirements using a cash balance formula. Under a cash balance formula, a plan participant accumulates a retirement benefit based upon a percentage (which may vary with age and years of service) of current eligible earnings and current interest credits.

Duke Energy’s policy is to fund amounts on an actuarial basis to provide assets sufficient to meet benefits to be paid to plan participants. No contributions to the Duke Energy plan were necessary in 2001 or 2000. The net unrecognized transition asset, resulting from the implementation of accrual accounting, is amortized over approximately 20 years. Investment gains or losses are amortized over five years.

	1.	Summary of Significant Accounting Policies
	2.	Business Acquisitions and Dispositions
	3.	Business Segments
	4.	Regulatory Matters
	5.	Joint Ownership of Generating Facilities
	6.	Income Taxes
	7.	Derivative Instruments, Hedging Activities and Credit Risk
	8.	Investment in Affiliates and Related Party Transactions
	9.	Property, Plant and Equipment
	10.	Debt and Credit Facilities
	11.	Nuclear Decommissioning Costs
	12.	Guaranteed Preferred Beneficial Interests in Subordinated Notes of Duke Energy or Subsidiaries
	13.	Minority Interest Financing
	14.	Preferred and Preference Stock
	15.	Commitments and Contingencies
	16.	Common Stock and Equity Offerings
	17.	Stock-Based Compensation
	18.	Employee Benefit Plans
	19.	Quarterly Financial Data (Unaudited)
	20.	Subsequent Event

COMPONENTS OF NET PERIODIC PENSION COSTS
	Years Ended December 31
In millions			2001			2000			1999

Service cost benefit earned during the year		$	74		$	70		$	72
Interest cost on projected benefit obligation			188			184			165
Expected return on plan assets			(264	)		(244	)		(224	)
Amortization of prior service cost			(3	)		(3	)		(3	)
Amortization of net transition asset			(4	)		(4	)		(4	)
Recognized net actuarial loss			–			–			12

Net periodic pension costs		$	(9	)	$	3		$	18

RECONCILIATION OF FUNDED STATUS TO PRE-FUNDED PENSION COSTS	December 31
In millions			2001			2000

CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year		$	2,586		$	2,446
Service cost			74			70
Interest cost			188			184
Actuarial (gain) loss			(147	)		16
Plan amendments			1			–
Benefits paid			(174	)		(130	)

Benefit obligation at end of year		$	2,528		$	2,586

CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year^a		$	3,038		$	3,121
Actual return on plan assets			(394	)		47
Benefits paid			(174	)		(130	)

Fair value of plan assets at end of year^a		$	2,470		$	3,038

Funded status		$	(58	)	$	452
Unrecognized net experience loss (gain)			400			(110	)
Unrecognized prior service cost reduction			(17	)		(22	)
Unrecognized net transition asset			(12	)		(16	)

Pre-funded pension costs		$	313		$	304

^a Principally equity and fixed-income securities. For measurement purposes, plan assets were valued as of September 30.

ASSUMPTIONS USED FOR PENSION BENEFITS ACCOUNTING^a
Percent	2001	2000	1999

Discount rate	7.25	7.50	7.50
Salary increase	4.94	4.53	4.50
Expected long-term rate of return on plan assets	9.25	9.25	9.25

^a Reflects weighted averages across all plans

Duke Energy also sponsors employee savings plans that cover substantially all employees. Duke Energy expensed employer matching contributions of $69 million in 2001, $66 million in 2000 and $68 million in 1999.

OTHER POST-RETIREMENT BENEFITS Duke Energy and most of its subsidiaries provide some health care and life insurance benefits for retired employees on a contributory and non-contributory basis. Employees are eligible for these benefits if they have met age and service requirements at retirement, as defined in the plans. Under plan amendments effective late 1998 and early 1999, health care benefits for future retirees were changed to limit employer contributions and medical coverage.

These benefit costs are accrued over an employee’s active service period to the date of full benefits eligibility. The net unrecognized transition obligation, resulting from accrual accounting, is amortized over approximately 20 years.

COMPONENTS OF NET PERIODIC POST-RETIREMENT BENEFIT COSTS
	Years Ended December 31
In millions			2001			2000			1999

Service cost benefit earned during the year		$	5		$	5		$	7
Interest cost on accumulated post-retirement benefit obligation			44			43			40
Expected return on plan assets			(24	)		(23	)		(21	)
Amortization of prior service cost			1			1			1
Amortization of net transition obligation			18			18			18
Recognized net actuarial gain			–			–			(1	)
Plan curtailments			(3	)		–			–

Net periodic post-retirement benefit costs		$	41		$	44		$	44

RECONCILIATION OF FUNDED STATUS TO ACCRUED POST-RETIREMENT BENEFIT COSTS	December 31
In millions			2001			2000

CHANGE IN BENEFIT OBLIGATION
Accumulated post-retirement benefit obligation at beginning of year		$	614		$	562
Service cost			5			5
Interest cost			44			43
Plan participants’ contributions			9			7
Actuarial loss			104			39
Benefits paid			(61	)		(42	)
Plan curtailments			(3	)		–

Accumulated post-retirement benefit obligation at end of year		$	712		$	614

CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year^a		$	325		$	327
Actual return on plan assets			(40	)		8
Employer contributions			32			25
Plan participants’ contributions			9			7
Benefits paid			(61	)		(42	)

Fair market value of plan assets at end of year^a		$	265		$	325

Funded status		$	(447	)	$	(289	)
Employer contributions			11			9
Unrecognized net experience loss (gain)			111			(56	)
Unrecognized prior service cost			4			5
Unrecognized transition obligation			196			214

Accrued post-retirement benefit costs		$	(125	)	$	(117	)

^a Principally equity and fixed-income securities. For measurement purposes, plan assets were valued as of September 30.

ASSUMPTIONS USED FOR POST-RETIREMENT BENEFITS ACCOUNTING^a
Percent	2001	2000	1999

Discount rate	7.25	7.50	7.50
Salary increase	4.94	4.53	4.50
Expected long-term rate of return on assets	9.25	9.25	9.25
Assumed tax rate^b	39.60	39.60	39.60

^a Reflects weighted averages across all plans
^b Applicable to the health care portion of funded post-retirement benefits

For measurement purposes, the net per capita cost of covered health care benefits for employees who have not retired are assumed to have an initial annual rate increase of 11.5% in 2002 that will gradually decrease to 6% in 2008. For employees that have retired, an initial annual rate of increase of 14.5% in 2002 will gradually decrease to 6% in 2011. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans.


SENSITIVITY TO CHANGES IN ASSUMED HEALTH CARE COST TREND RATES In millions	1-Percentage- Point Increase			1-Percentage- Point Decrease

Effect on total service and interest costs		$	2		$	(2	)
Effect on post-retirement benefit obligation			47			(40	)