Notes To Consolidated Financial Statements

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For the Years Ended December 31, 2002, 2001 and 2000

1. Summary of Significant Accounting Policies

Consolidation. The Consolidated Financial Statements include the accounts of Duke Energy Corporation and all majority-owned subsidiaries, after eliminating significant intercompany transactions and balances. Investments in businesses not controlled by Duke Energy Corporation, but over which it has significant influence, are accounted for using the equity method. (See Note 8 for additional information.)

Conformity with generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and notes. Although these estimates are based on management’s best available knowledge of current and expected future events, actual results could be different from those estimates.

In these Notes, “Duke Energy” refers to Duke Energy Corporation and its subsidiaries.

Cash and Cash Equivalents. All liquid investments with maturities of three months or less at the date of purchase are considered cash equivalents.

Inventory. Inventory, except inventory held for trading, consists primarily of materials and supplies, natural gas and natural gas liquid (NGL) products held in storage for transmission, processing and sales commitments, and coal held for electric generation. This inventory is recorded at the lower of cost or market value, primarily using the average cost method. Inventory held for trading is marked to market.

Inventory is summarized as follows:

		Inventory	December 31,
			2002					2001
			(in millions)
		Materials and supplies	$	873				$	790
		Petroleum products		83					77
		Coal		77					134
		Gas stored underground		71					3
		Trading MTM inventory		16					—
		Gas used in operations		14					13
		Total inventory	$	1,134				$	1,017

Accounting for Hedges and Trading Activities. All derivatives not qualifying for the normal purchases and sales exemption under Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and energy trading contracts as described in the Financial Accounting Standards Board’s (FASB) Emerging Issues Task Force (EITF) Issue No. 98-10, “Accounting for Contracts Involved in Energy Trading and Risk Management Activities,” are recorded on the Consolidated Balance Sheets at their fair value as Unrealized Gains or Unrealized Losses on Mark-to-Market and Hedging Transactions. On the date that swaps, futures, forwards, option contracts or other derivatives are entered into, Duke Energy designates the derivative as either held for trading (trading instrument); as a hedge of a forecasted transaction or future cash flows (cash flow hedge); as a hedge of a recognized asset, liability or firm commitment (fair value hedge); as a normal purchase or sale contract; or leaves the derivative undesignated and marks it to market. All energy trading contracts, as defined by EITF Issue No. 98-10, are classified as trading instruments.

For hedge contracts, Duke Energy formally assesses, both at the hedge contract’s inception and on an ongoing basis, whether the hedge contract is highly effective in offsetting changes in fair values or cash flows of hedged items.

When available, quoted market prices or prices obtained through external sources are used to verify a contract’s fair value. For contracts with a delivery location or duration for which quoted market prices are not available, fair value is determined based on pricing models developed primarily from historical and expected correlations with quoted market prices. As of December 31, 2002, 32% of the trading contracts’ fair value was determined using market prices and other external sources and 68% was determined using pricing models. As of December 31, 2001, 60% of the trading contracts’ fair value was determined using market prices and other external sources and 40% was determined using pricing models.

Values are adjusted to reflect the potential impact of liquidating the positions held in an orderly manner over a reasonable time period under current conditions. Changes in market price and management estimates directly affect the estimated fair value of these contracts. Accordingly, it is probable that such estimates may change in the near term.

Trading. Prior to settlement of any energy contract held for trading purposes, a favorable or unfavorable price movement is reported as Trading and Marketing Net Margin in the Consolidated Statements of Income. An offsetting amount is recorded as Unrealized Gains or Unrealized Losses on Mark-to-Market and Hedging Transactions on the Consolidated Balance Sheets. When a contract to sell or buy is physically settled, the fair value entries are reversed and the gross amounts invoiced to the customer or due to the counterparty are included as Trading and Marketing Net Margin in the Consolidated Statements of Income. For financial settlement, the effect on the Consolidated Statements of Income is the same as physical transactions. For all contracts, the unrealized gain or loss on the Consolidated Balance Sheets is reversed and classified as a receivable or payable account until collected or paid. See the New Accounting Standards section below for a discussion of the implications of the EITF Issue No. 02-03, “Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities,” on the accounting for trading activities subsequent to October 25, 2002.

Cash Flow Hedges. Changes in the fair value of a derivative designated and qualified as a cash flow hedge are included in the Consolidated Statements of Common Stockholders’ Equity and Comprehensive Income as Other Comprehensive Income (OCI) until earnings are affected by the hedged item. Settlement amounts and ineffective portions of cash flow hedges are removed from OCI and recorded in the Consolidated Statements of Income in the same accounts as the item being hedged. Duke Energy discontinues hedge accounting prospectively when it is determined that the derivative no longer qualifies as an effective hedge, or when it is no longer probable that the hedged transaction will occur. When hedge accounting is discontinued because the derivative no longer qualifies as an effective hedge, the derivative continues to be carried on the Consolidated Balance Sheets at its fair value, with subsequent changes in its fair value recognized in current-period earnings. Gains and losses related to discontinued hedges that were previously accumulated in OCI will remain in OCI until the underlying contract is reflected in earnings, unless it is no longer probable that the hedged transaction will occur. Gains and losses that were accumulated in OCI will be immediately recognized in current-period earnings if it is no longer probable that the hedged transaction will occur.

Fair Value Hedges. Duke Energy enters into interest rate swaps to convert some of its fixed-rate long-term debt to floating-rate long-term debt and designates such interest rate swaps as fair value hedges. Duke Energy also enters into electricity derivative instruments such as swaps, futures and forwards to manage the fair value risk associated with some of its unrecognized firm commitments to sell generated power due to changes in the market price of power. Upon designation of such derivatives as fair value hedges, prospective changes in the fair value of the derivative and the hedged item are recognized in current earnings. All components of each derivative gain or loss are included in the assessment of hedge effectiveness, unless otherwise noted.

Goodwill. Goodwill is the cost of an acquisition less the fair value of the net assets of the acquired business. Prior to January 1, 2002, Duke Energy amortized goodwill on a straight-line basis over the useful lives of the acquired assets, ranging from 10 to 40 years. The amount of goodwill reported on the Consolidated Balance Sheets as of December 31, 2001 was $1,730 million, net of accumulated amortization of $388 million. Duke Energy implemented SFAS No. 142, “Goodwill and Other Intangible Assets,” as of January 1, 2002. For information on the impact of SFAS No. 142 on goodwill and goodwill amortization, see the New Accounting Standards section of this footnote. (See Note 2 for information on significant goodwill additions and see Note 9 for information on goodwill impairments.)

The changes in the carrying amount of goodwill for the years ended December 31, 2002 and 2001 are as follows:

		Goodwill	Balance December 31, 2001				Acquired Goodwill				Impairments					Other (a)					Balance December 31, 2002
				(in millions)
		Natural Gas    Transmission	$	481			$	2,279			$	—				$	—				$	2,760
		Field Services		571				—				—					(90	)				481
		Duke Energy North    America		91				—				—					9					100
		International Energy		427				18				(194	)				(5	)				246
		Other Energy Services		6				—									(6	)				—
		Duke Ventures		—				—				—					6					6
		Other Operations		154				—				—					—					154
		Total consolidated	$	1,730			$	2,297			$	(194	)			$	(86	)			$	3,747
			Balance December 31, 2000				Acquired Goodwill				Impairments					Other (a)					Balance December 31, 2001
		Natural Gas    Transmission	$	299			$	—			$	—				$	182				$	481
		Field Services		507				82				—					(18	)				571
		Duke Energy North    America		73				—				2					16					91
		International Energy		457				6				—					(36	)				427
		Other Energy Services		48				—				(38	)				(4	)				6
		Other Operations		182				—				—					(28	)				154
		Total consolidated	$	1,566			$	88			$	(36	)			$	112				$	1,730

Property, Plant and Equipment. Property, plant and equipment are stated at historical cost less accumulated depreciation. Duke Energy capitalizes all construction-related direct labor and material costs, as well as indirect construction costs. Indirect costs include general engineering, taxes and the cost of funds used during construction. The cost of renewals and betterments that extend the useful life of property, plant and equipment is also capitalized. The cost of repairs, replacements and major maintenance projects is expensed as it is incurred. Depreciation is generally computed over the asset’s estimated useful life using the straight-line method. The composite weighted-average depreciation rates, excluding nuclear fuel, were 4.32% for 2002, 4.01% for 2001 and 3.97% for 2000.

When Duke Energy retires its regulated property, plant and equipment, it charges the original cost plus the cost of retirement, less salvage, to accumulated depreciation and amortization. When it sells entire regulated operating units, or retires or sells non-regulated properties, the cost is removed from the property account and the related accumulated depreciation and amortization accounts are reduced. Any gain or loss is recorded as income, unless otherwise required by the applicable regulatory body.

Impairment of Long-Lived Assets. Duke Energy reviews the recoverability of long-lived and intangible assets, excluding goodwill, when circumstances indicate that the carrying amount of the asset may not be recoverable. This evaluation is based on various analyses, including undiscounted cash flow projections. The carrying amount is not recoverable if it exceeds the undiscounted sum of cash flows expected to result from the use and eventual disposition of the asset. If the carrying value is not recoverable, the impairment loss is measured as the excess of the asset’s carrying value over its fair value. (See Note 9 for additional information.)

As of the acquisition date, Duke Energy allocates goodwill to a reporting unit. Duke Energy defines a reporting unit as an operating segment or one level below.

Goodwill is reviewed at least annually in accordance with SFAS No. 142.

Unamortized Debt Premium, Discount and Expense. Premiums, discounts and expenses incurred with the issuance of outstanding long-term debt are amortized over the terms of the debt issues. Any call premiums or unamortized expenses associated with refinancing higher-cost debt obligations to finance regulated assets and operations are amortized consistent with regulatory treatment of those items, where appropriate.

Environmental Expenditures. Duke Energy expenses environmental expenditures related to conditions caused by past operations that do not generate current or future revenues. Environmental expenditures related to operations that generate current or future revenues are expensed or capitalized, as appropriate. Liabilities are recorded when environmental assessments and/or cleanups are probable and the costs can be reasonably estimated.

Cost-Based Regulation. Duke Energy accounts for its regulated operations under the provisions of SFAS No. 71, “Accounting for the Effects of Certain Types of Regulation.” The economic effects of regulation can result in a regulated company recording costs that have been or are expected to be allowed in the rate-setting process in a period different from the period in which the costs would be charged to expense by an unregulated enterprise. Accordingly, Duke Energy records assets and liabilities that result from the regulated ratemaking process that would not be recorded under GAAP for non-regulated entities. These regulatory assets and liabilities are classified in the Consolidated Balance Sheets as Regulatory Assets and Deferred Debits, and Deferred Credits and Other Liabilities. (See Note 4.) Duke Energy periodically evaluates the applicability of SFAS No. 71, and considers factors such as regulatory changes and the impact of competition. If cost-based regulation ends or competition increases, companies may have to reduce their asset balances to reflect a market basis less than cost, and write-off their associated regulatory assets and liabilities.

Stock-Based Compensation. Duke Energy accounts for its stock-based compensation arrangements under the intrinsic value recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and the FASB Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation (an Interpretation of APB Opinion No. 25).” Since the exercise price for all options granted under those plans was equal to the market value of the underlying common stock on the date of grant, no compensation cost is recognized in the accompanying Consolidated Statements of Income.

Restricted stock grants, phantom stock awards and stock-based performance awards are recorded over the required vesting period as compensation cost, based on the market value on the date of the grant. The following disclosures (including Note 19) reflect the provisions of SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure (an amendment of FASB Statement No. 123).”

The following table shows what earnings available for common stockholders, earnings per share and diluted earnings per share would have been if Duke Energy had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” to all stock-based compensation awards.

		Pro Forma Stock-Based Compensation		For the years ended December 31,
				2002					2001				2000
				(in millions, except per share amounts)
		Earnings available for common stockholders, as reported		$	1,021				$	1,884			$	1,757
		Add: stock-based compensation expense included in reported    net income, net of related tax effects			9					9				7
		Deduct: total stock-based compensation expense determined    under fair value-based method for all awards, net of    related tax effects			(70	)				(31	)			(19	)
		Pro forma earnings available for common    stockholders, net of related tax effects		$	960				$	1,862			$	1,745
		Earnings per share
		Basic—as reported		$	1.22				$	2.45			$	2.39
		Basic—pro forma		$	1.15				$	2.42			$	2.37
		Diluted—as reported		$	1.22				$	2.44			$	2.38
		Diluted—pro forma		$	1.15				$	2.41			$	2.36

All 2000 outstanding common stock amounts, compensation awards and exercise prices have been adjusted to reflect the two-for-one common stock split effective January 26, 2001. (See Note 18.)

Revenues. Revenues on sales of electricity are recognized when the service is provided. Revenues from electric service provided but not yet billed are estimated each month based on the difference between territorial load and the amount billed. The allowance for doubtful accounts was $349 million as of December 31, 2002, and $265 million as of December 31, 2001. Receivables on the Consolidated Balance Sheets included $186 million as of December 31, 2002, and $177 million as of December 31, 2001, for electric service provided but not yet billed. The amount for 2001 includes a $36 million reduction in unbilled revenue receivables, resulting from a refinement in the estimates used to calculate unbilled kilowatt-hour sales.

Revenues on sales of natural gas, natural gas transportation, storage and distribution as well as sales of petroleum products are recognized when the service is provided. Revenues related to these services provided but not yet billed are estimated each month. These estimates are generally based on contract data, regulatory information, preliminary measurements and allocations, estimated distribution usage based on historical data adjusted for heating degree days, commodity prices and preliminary throughput measurements. Final bills for the current month are billed and collected in the following month. Receivables on the Consolidated Balance Sheets included $204 million as of December 31, 2002, and $80 million as of December 31, 2001, for natural gas transportation, storage and distribution services provided but not yet billed.

Long-term contracts, primarily in the Other Energy Services segment, are accounted for using the percentage-of-completion method. Under the percentage-of-completion method, sales and gross profit are recognized as the work is performed, based on the relationship between costs incurred and total estimated costs at completion. Sales and gross profit are adjusted prospectively for revisions in estimated total contract costs and contract values. When the current estimates of total contract revenue and contract cost indicate a loss, a provision for the entire loss on the contract is recorded in that period. The provision for the loss arises because estimated cost for the contract exceeds estimated revenue.

See Accounting for Hedges and Trading Activities – Trading presented earlier in this footnote for discussion of accounting policies for the recognition of revenues related to trading activities.

Nuclear Fuel. Amortization of nuclear fuel is included in the Consolidated Statements of Income as Fuel Used in Electric Generation. The amortization is recorded using the units-of-production method.

Deferred Returns and Allowance for Funds Used During Construction (AFUDC). Deferred returns, recorded in accordance with SFAS No. 71, represent the estimated financing costs associated with funding regulatory assets. These costs arise primarily from the funding of purchased capacity costs above levels collected in rates. Deferred returns are non-cash items and are primarily recognized as an addition to purchased capacity costs, which are included in Regulatory Assets and Deferred Debits on the Consolidated Balance Sheets, with an offsetting credit to Other Income and Expenses, net. The amount of deferred returns included in Other Income and Expenses, net was $24 million in 2002, $43 million in 2001 and $50 million in 2000.

AFUDC represents the estimated debt and equity costs of capital funds necessary to finance the construction of new regulated facilities. AFUDC is a non-cash item and is capitalized as a component of Property, Plant and Equipment cost, with offsetting credits to Other Income and Expenses, net and to Interest Expense. After construction is completed, Duke Energy is permitted to recover these costs, including a fair return, through inclusion in the rate base and in the depreciation provision. The total amount of AFUDC included in Other Income and Expenses, net and Interest Expense was $82 million in 2002, $39 million in 2001 and $20 million in 2000.

Rates used for capitalization of deferred returns and AFUDC by Duke Energy’s regulated operations are calculated in compliance with GAAP rules.

Foreign Currency Translation. Duke Energy translates assets and liabilities for its international operations, where the local currency is the functional currency, at year-end exchange rates. Revenues and expenses are translated using average exchange rates during the year. Foreign Currency Translation Adjustments are included in the Consolidated Statements of Common Stockholders’ Equity and Comprehensive Income. In the financial statements for international operations, where the U.S. dollar is the functional currency, transactions denominated in the local currency have been remeasured in U.S. dollars. Remeasurement resulting from foreign currency gains and losses is included in the Consolidated Statements of Income.

Income Taxes. Duke Energy and its subsidiaries file a consolidated federal income tax return and other U.S. and foreign jurisdictional returns as required. Deferred income taxes have been provided for temporary differences between the GAAP and tax carrying amounts of assets and liabilities. These differences create taxable or tax-deductible amounts for future periods. Investment tax credits have been deferred and are being amortized over the estimated useful lives of the related properties.

Excise and Other Pass-Through Taxes. Duke Energy generally presents revenues net of pass-through taxes on the Consolidated Statements of Income.

Earnings Per Common Share. Basic earnings per share is based on a weighted average of common shares outstanding. Diluted earnings per share reflects the potential dilution that could occur if securities or other agreements to issue common stock, such as stock options, stock-based performance unit awards and phantom stock awards, were exercised or converted into common stock. The numerator for the calculation of both basic and diluted earnings per share is earnings available for common stockholders. The following table shows the denominator for basic and diluted earnings per share.

		Denominator for Earnings per Share		2002					2001				2000
				(in millions)
		Denominator for basic earnings per share    (weighted-average shares outstanding) (a)			836.1					767.5				735.7
		Assumed exercise of dilutive securities or    other agreements to issue common stock			2.0					5.4				3.7
		Denominator for diluted earnings per share			838.1					772.9				739.4

The 2000 common stock amounts have been adjusted to reflect the two-for-one common stock split effective January 26, 2001. (See Note 18.)

Options, performance awards and phantom stock awards to purchase approximately 31.4 million shares of common stock as of December 31, 2002, 6.0 million shares as of December 31, 2001 and 3.3 million shares as of December 31, 2000 were not included in the computation of diluted earnings per share because the option exercise prices were greater than the average market price of the common shares during those periods.

Cumulative Effect of Change in Accounting Principle. Duke Energy adopted SFAS No. 133 as amended and interpreted on January 1, 2001. In accordance with the transition provisions of SFAS No. 133, Duke Energy recorded a net-of-tax cumulative effect adjustment of $96 million, or $0.13 per basic share, as a reduction in earnings. The net-of-tax cumulative effect adjustment reducing OCI and Common Stockholders’ Equity was $921 million. For the year ended December 31, 2001, Duke Energy reclassified as earnings $222 million of losses from OCI for derivatives included in the transition adjustment related to hedge transactions that settled. The amount reclassified out of OCI will be different from the amount included in the transition adjustment due to market price changes since January 1, 2001.

Other Comprehensive Income (Loss). The components of and changes in other comprehensive income are as follows:

				Foreign Currency Adjustments				Net Unrealized Gains on Cash Flow Hedges					Minimum Pension Liability Adjustment					Accumulated Other Comprehensive Income (Loss)
				(in millions)
		Balance as of December 31, 1999		$	(2	)		$	—				$	—					(2	)
		Other comprehensive income changes    during the year			(118	)			—					—					(118	)
		Balance as of December 31, 2000			(120	)			—					—					(120	)
		Other comprehensive income changes    during the year (net of taxes of    $(291))			(187	)			487					—					300
		Balance as of December 31, 2001			(307	)			487					—					180
		Other comprehensive income changes    during the year (net of taxes of    $331) (a)			(340	)			(65	)				(484	)				(889	)
		Balance as of December 31, 2002		$	(647	)		$	422				$	(484	)			$	(709	)

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.) 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. (See additional goodwill disclosures made earlier in this footnote.)

		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 impairments since the adoption of SFAS No. 144, see Note 9.)

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.

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 accounting 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 (unaudited) 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 North Carolina Utilities Commission (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 Public Service Commission of South Carolina (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 Stock-Based Compensation disclosures made earlier in this footnote.)

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 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.

Reclassifications. Certain prior period amounts have been reclassified to conform to current classifications.

©Copyright 2003

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