OTHER CURRENT ISSUES

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For information on other current issues related to Duke Energy, see the following Notes to the Consolidated Financial Statements: Note 4, Franchised Electric, Natural Gas Transmission and Notices of Proposed Rulemaking sections; Note 16, Environmental and Litigation sections.

New Accounting Standards. SFAS No. 142, “Goodwill and Other Intangible Assets.” Duke Energy adopted SFAS No. 142 as of January 1, 2002. SFAS No. 142 requires that goodwill no longer be amortized over an estimated useful life, as previously required. Instead, goodwill amounts are subject to fair value-based impairment assessments. Duke Energy did not recognize any material impairment due to the adoption of SFAS No. 142. (For material impairments subsequent to the adoption of SFAS No. 142, see Note 9 to the Consolidated Financial Statements.) SFAS No. 142 also requires certain identifiable intangible assets to be recognized separately and amortized as appropriate upon adoption. No adjustments to intangibles were identified by Duke Energy at adoption.

The following table shows what earnings available for common stockholders and earnings per share would have been if amortization (including any related tax effects) related to goodwill that is no longer being amortized had been excluded from prior periods.

Goodwill—Adoption of SFAS No. 142

				For the years ended December 31,
				2002				2001				2000
				(in millions, except per share amounts)
		Earnings available for common stockholders
		Reported earnings available for common stockholders		$	1,021			$	1,884			$	1,757
		Add back: Goodwill amortization, net of tax			—				75				56
		Adjusted earnings available for common stockholders		$	1,021			$	1,959			$	1,813
		Basic earnings per share
		Reported earnings per share		$	1.22			$	2.45			$	2.39
		Goodwill amortization			—				0.10				0.08
		Adjusted earnings per share		$	1.22			$	2.55			$	2.47
		Diluted earnings per share
		Reported earnings per share		$	1.22			$	2.44			$	2.38
		Goodwill amortization			—				0.10				0.08
		Adjusted earnings per share		$	1.22			$	2.54			$	2.46

SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Duke Energy adopted SFAS No. 144 on January 1, 2002. The new rules supersede SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.” The new rules retain many of the fundamental recognition and measurement provisions, but significantly change the criteria for classifying an asset as held-for-sale or as a discontinued operation. (For material impairment since the adoption of SFAS No. 144, see Note 9 to the Consolidated Financial Statements.)

EITF Issue No. 02-03, “Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and for Contracts Involved in Energy Trading and Risk Management Activities.” In June 2002, the FASB’s EITF reached a partial consensus on Issue No. 02-03. The EITF concluded that, effective for periods ending after July 15, 2002, mark-to-market gains and losses on energy trading contracts (including those to be physically settled) must be shown on a net basis in the Consolidated Statements of Income. Duke Energy had previously chosen to report certain of its energy trading contracts on a gross basis, as sales in operating revenues, and to record the associated costs in operating expenses, in accordance with prevailing industry practice. The amounts in the Consolidated Statements of Income for 2001 and 2000 have been reclassified to conform to the 2002 presentation of recording all amounts on a net basis in operating revenues. The following table shows the impact of changing from gross to net presentation for energy trading activities on Duke Energy’s revenues (offsetting adjustments were made to operating expenses resulting in no impact on operating income or net income).

Revenues—Implementation of Gross vs. Net Presentation in EITF Issue No. 02-03

		For the years ended December 31,
				2001					2000
				(in millions)
		Total revenues before adjustment		$	59,106				$	48,594
		Adjustment			(40,909	)				(33,252	)
		Revenues as reported		$	18,197				$	15,342

In the calculation of net revenues, Duke Energy has continued to enhance its methodologies around the application of this complex accounting literature since the third quarter 2002 when these trading revenues were first reported on a net basis. (See Note 1 to the Consolidated Financial Statements for further discussion.)

In October 2002, the EITF, as part of their further deliberations on Issue No. 02-03, rescinded the consensus reached on Issue No. 98-10. As a result, all energy trading contracts that do not meet the definition of a derivative under SFAS No. 133, and trading inventories that previously had been recorded at fair values, will be recorded at their historical cost and reported on an accrual basis resulting in the recognition of earnings or losses at the time of contract settlement or termination. New non-derivative energy trading contracts entered into after October 25, 2002 are accounted for under the accrual accounting basis. Non-derivative energy trading contracts on the Consolidated Balance Sheet as of January 1, 2003 that existed on October 25, 2002 and inventories that were recorded at fair values will be adjusted to historical cost via a net-of-tax and minority interest cumulative effect adjustment of $125 million to $175 million as a reduction to first quarter 2003 earnings.

The EITF also reached a consensus in October 2002 on Issue No. 02-03 that, effective for periods beginning after December 15, 2002, gains and losses on all derivative instruments considered to be held for trading purposes should be shown on a net basis in the income statement. Gains and losses on non-derivative energy trading contracts should similarly be presented on a gross or net basis in connection with the guidance in Issue No. 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent.” Upon application of this presentation, comparative financial statements for prior periods should be reclassified to conform to the consensus. As discussed above, gains and losses on all energy trading contracts are currently presented on a net basis in the Consolidated Statements of Income. Duke Energy is currently assessing the new net revenue presentation requirements, which will have no impact on operating income or net income.

SFAS No. 143, “Accounting for Asset Retirement Obligations.” In June 2001, the FASB issued SFAS No. 143 which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The standard applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or normal use of the asset.

SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred, if a reasonable estimate of fair value can be made. The fair value of the liability is added to the carrying amount of the associated asset. This additional carrying amount is then depreciated over the life of the asset. The liability increases due to the passage of time based on the time value of money until the obligation is settled.

Certain of Duke Energy’s regulated operations recognize some removal costs as a component of depreciation in accordance with regulatory treatment. While these amounts will remain in accumulated depreciation, to the extent these amounts do not represent SFAS No. 143 legal retirement obligations, they will be disclosed as part of the regulatory matters footnote upon adoption of SFAS No. 143.

SFAS No. 143 was effective for fiscal years beginning after June 15, 2002, and will be adopted by Duke Energy in the first quarter of 2003. The implementation of the standard is expected to result in a net increase in total assets of approximately $855 million, consisting primarily of an increase in net property, plant and equipment of approximately $198 million and an increase in regulatory assets of approximately $659 million. Liabilities are expected to increase by approximately $870 million, which primarily represents the establishment of an asset retirement obligation liability of $1,589 million, reduced by the amount that was already recorded as a nuclear decommissioning liability of $708 million. Substantially all of the obligations are related to the regulated electric operations. Accordingly, Duke Energy filed a request on January 10, 2003 with the NCUC to defer the income statement effect of adopting SFAS No.143 for its regulated electric operations, and the accounting treatment described above reflects management’s assumption that this request will be granted. Duke Energy anticipates making a similar application with the PSCSC by March 31, 2003. For obligations related to non-regulated operations, a net-of-tax cumulative effect of a change in accounting principle adjustment of approximately $15 million is expected to be recorded in the first quarter of 2003, as a reduction in earnings.

SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” In June 2002, the FASB issued SFAS No. 146 which addresses accounting for restructuring and similar costs. SFAS No. 146 supersedes previous accounting guidance, principally EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” Duke Energy has adopted the provisions of SFAS No. 146 for any restructuring activities initiated after December 31, 2002. SFAS No. 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF Issue No. 94-3, a liability for an exit cost was recognized on the date of Duke Energy’s commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. Accordingly, SFAS No. 146 will affect the timing of recognizing future restructuring costs as well as the amounts recognized.

SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure (an amendment of FASB Statement No. 123).” In December 2002, the FASB issued SFAS No. 148, which amends SFAS No. 123, “Accounting for Stock-Based Compensation,” and provides alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation. SFAS No. 148 also amends the disclosure requirements of SFAS No. 123 and APB Opinion No. 28, “Interim Financial Reporting,” to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The provisions of SFAS No. 148 are effective for financial statements for periods ending after December 15, 2002. (See Notes 1 and 19 to the Consolidated Financial Statements for Stock-Based Compensation disclosures.)

FASB Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” In November 2002, the FASB issued FIN 45 which requires a guarantor to recognize a liability for the fair value of the obligation it assumes under certain guarantees. Additionally, FIN 45 requires a guarantor to disclose certain aspects of each guarantee, or each group of similar guarantees, including the nature of the guarantee, the maximum exposure under the guarantee, the current carrying amount of any liability for the guarantee, and any recourse provisions allowing the guarantor to recover from third parties any amounts paid under the guarantee. The disclosure provisions of FIN 45 are effective for financial statements for both interim and annual periods ending after December 15, 2002. (See Note 17 to the Consolidated Financial Statements for additional information.) The fair value measurement provisions of FIN 45 are to be applied on a prospective basis to guarantees issued or modified after December 31, 2002.

FASB Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities.” In January 2003, the FASB issued FIN 46 which requires an entity to consolidate a variable interest entity if it is the primary beneficiary of the variable interest entity’s activities. The primary beneficiary is the party that absorbs a majority of the expected losses, receives a majority of the expected residual returns, or both, of the variable interest entity’s activities. FIN 46 is applicable immediately to variable interest entities created, or interests in variable interest entities obtained, after January 31, 2003. For those variable interest entities created, or interests in variable interest entities obtained, on or before January 31, 2003, FIN 46 is required to be applied in the first fiscal year or interim period beginning after June 15, 2003. FIN 46 may be applied prospectively with a cumulative-effect adjustment as of the date it is first applied, or by restating previously issued financial statements with a cumulative-effect adjustment as of the beginning of the first year restated. FIN 46 also requires certain disclosures of an entity’s relationship with variable interest entities. Duke Energy is currently assessing FIN 46 but does not anticipate that it will have a material impact on its consolidated results of operations, cash flows or financial position.

Subsequent Events

In October 2002, Duke Energy entered into a $244 million stock purchase agreement with National Fuel Gas Company, including the assumption of approximately $58 million in debt, under which it would acquire Duke Energy’s wholly owned Empire State Pipeline. This natural gas pipeline, which originates at the U.S./Canada border and extends into New York, was acquired by Duke Energy as part of the Westcoast acquisition in March 2002 (see Note 2 to the Consolidated Financial Statements). The sale to National Fuel Gas Company closed in February 2003.

In March 2003, Duke Energy announced that it will exit the merchant finance business at DCP in an orderly manner. Duke Energy expects this exit to generate positive cash flow in 2003 and 2004.

For information on subsequent events related to litigation and contingencies refer to Note 4 to the Consolidated Financial Statements, Franchised Electric section and Note 16 to the Consolidated Financial Statements, Litigation section. For information on subsequent events related to debt and other financing matters refer to Financing Cash Flows and Liquidity—Significant Financing Activities and Other Financing Matters sections.

Forward-Looking Statements. Duke Energy’s reports, filings and other public announcements may contain or incorporate by reference statements that do not directly or exclusively relate to historical facts. Such statements are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. You can typically identify forward-looking statements by the use of forward-looking words, such as “may,” “will,” “could,” “project,” “believe,” “anticipate,” “expect,” “estimate,” “continue,” “potential,” “plan,” “forecast” and other similar words. Those statements represent Duke Energy’s intentions, plans, expectations, assumptions and beliefs about future events and are subject to risks, uncertainties and other factors. Many of those factors are outside Duke Energy’s control and could cause actual results to differ materially from the results expressed or implied by those forward-looking statements. Those factors include:

• State, federal and foreign legislative and regulatory initiatives that affect cost and investment recovery, have an impact on rate structures, and affect the speed at and degree to which competition enters the electric and natural gas industries
• The outcomes of litigation and regulatory investigations, proceedings or inquiries
• Industrial, commercial and residential growth in Duke Energy’s service territories
• The weather and other natural phenomena
• The timing and extent of changes in commodity prices, interest rates and foreign currency exchange rates
• General economic conditions, including any potential effects arising from terrorist attacks and any consequential hostilities or other hostilities
• Changes in environmental and other laws and regulations to which Duke Energy and its subsidiaries are subject or other external factors over which Duke Energy has no control
• The results of financing efforts, including Duke Energy’s ability to obtain financing on favorable terms, which can be affected by various factors, including Duke Energy’s credit ratings and general economic conditions
• Lack of improvement or further declines in the market prices of equity securities and resultant cash funding requirements for Duke Energy’s defined benefit pension plans
• The level of creditworthiness of counterparties to Duke Energy’s transactions
• The amount of collateral required to be posted from time to time in Duke Energy’s transactions
• Growth in opportunities for Duke Energy’s business units, including the timing and success of efforts to develop domestic and international power, pipeline, gathering, processing and other infrastructure projects
• The performance of electric generation, pipeline and gas processing facilities
• The extent of success in connecting natural gas supplies to gathering and processing systems and in connecting and expanding gas and electric markets and
• The effect of accounting pronouncements issued periodically by accounting standard-setting bodies

In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than Duke Energy has described. Duke Energy undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.