20. Employee Benefit Plans

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Duke Energy Retirement Plans. Duke Energy and its subsidiaries maintain a non-contributory defined benefit retirement plan. It covers most U.S. employees using a cash balance formula. Under a cash balance formula, a plan participant accumulates a retirement benefit consisting of pay credits that are 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 2002, 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.

Westcoast Retirement Plans. Duke Energy acquired Westcoast on March 14, 2002 (see Note 2). The Westcoast benefit plans are reported separately due to assumption differences. The average remaining service period of the active employees covered by the pension plan is 17 years.

		Components of Net Periodic Pension Costs—as of December 31,
				Duke Energy												Westcoast
				2002				2001				2000				2002
				(in millions)
		Service cost benefit earned during    the year		$	69			$	74			$	70			$	6
		Interest cost on projected benefit    obligation			177				188				184				17
		Expected return on plan assets			(267	)			(264	)			(244	)			(19	)
		Amortization of prior service cost			(3	)			(3	)			(3	)			—
		Amortization of net transition asset			(4	)			(4	)			(4	)			—
		Special termination benefit cost			1				—				—				—
		Net periodic pension (income) costs		$	(27	)		$	(9	)		$	3			$	4

		Reconciliation of Funded Status to Pre-funded Pension Costs—as of December 31,
				Duke Energy								Westcoast
				2002				2001				2002
				(in millions)
		Change in Benefit Obligation
		Benefit obligation at beginning of year		$	2,528			$	2,586			$	324	(b)
		Service cost			69				74				6
		Interest cost			177				188				17
		Actuarial loss (gain)			73				(147	)			6
		Plan amendments			1				1				—
		Benefits paid			(178	)			(174	)			(19	)
		Special termination benefits			1				—				—
		Benefit obligation at end of year		$	2,671			$	2,528			$	334
		Change in Plan Assets
		Fair value of plan assets at beginning of year		$	2,470	(a)		$	3,038	(a)		$	291	(b)
		Actual return on plan assets			(172	)			(394	)			(27	)
		Benefits paid			(178	)			(174	)			(19	)
		Employer contributions			—				—				9
		Plan participants’ contributions			—				—				1
		Fair value of plan assets at end of year		$	2,120	(a)		$	2,470	(a)		$	255	(b)
		Funded status		$	(551	)		$	(58	)		$	(78	)
		Unrecognized net experience loss			913				400				49
		Unrecognized prior service cost			(14	)			(17	)			—
		Unrecognized net transition asset			(8	)			(12	)			—
		Contributions made after measurement date			—				—				2
		Pre-funded (accrued) pension costs		$	340			$	313			$	(27	)

Amounts recognized in the Consolidated Balance Sheets consist of:

				Duke Energy								Westcoast
				2002				2001				2002
				(in millions)
		Pre-funded cost		$	—			$	313			$	—
		Accrued pension liability			(432	)			—				(49	)
		Deferred income tax asset			302				—				8
		Accumulated other comprehensive income			470				—				14
		Net Balance Sheet presentation		$	340			$	313			$	(27	)

As of the measurement date, the market value of the Duke Energy pension plan assets was below the accumulated benefit obligation of $2,559 million, and Duke Energy was required to record a minimum pension liability of $772 million ($470 million after-tax) as calculated under SFAS No. 87 “Employers’ Accounting for Pensions.” This resulted in an increase in the pension liability of $772 million, a decrease in other comprehensive income of $470 million and an increase in deferred tax assets of $302 million.

As of the measurement date, the market value of the Westcoast pension plan assets was below the accumulated benefit obligation of $341 million, and Westcoast was required to record a minimum pension liability for U.S. reporting of $22 million ($14 million after-tax) as calculated under SFAS No. 87. This resulted in an increase in the pension liability of $22 million, a decrease in other comprehensive income of $14 million and an increase in deferred tax assets of $8 million.

		Assumptions Used for Pension Benefits Accounting
				Duke Energy												Westcoast
				2002				2001				2000				2002
				(percents)
		Discount rate			6.75				7.25				7.50				6.50
		Salary increase			5.00				4.94				4.53				3.25
		Expected long-term rate of return on    plan assets			9.25				9.25				9.25				7.75

Duke Energy also sponsors employee savings plans that cover substantially all employees. Duke Energy expensed employer matching contributions of $71 million in 2002, $69 million in 2001 and $66 million in 2000.

Duke Energy 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.

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.

Westcoast Other Post-Retirement Benefits. The average remaining service period of the active employees covered by the other retirement benefits plans is 17 years.

		Components of Net Periodic Post-Retirement Benefit Costs—as of December 31,
				Duke Energy												Westcoast
				2002				2001				2000				2002
				(in millions)
		Service cost benefit earned during    the year		$	5			$	5			$	5			$	2
		Interest cost on accumulated    post-retirement benefit obligation			50				44				43				2
		Expected return on plan assets			(24	)			(24	)			(23	)			—
		Amortization of prior service cost			1				1				1				—
		Amortization of net transition    obligation			18				18				18				—
		Plan curtailments			—				(3	)			—				—
		Net periodic post-retirement benefit    costs		$	50			$	41			$	44			$	4

		Reconciliation of Funded Status to Accrued Post-Retirement Benefit Costs
				Duke Energy								Westcoast
				2002				2001				2002
				(in millions)
		Change in Benefit Obligation
		Accumulated post-retirement benefit obligation    at beginning of year		$	712			$	614			$	45	(b)
		Service cost			5				5				2
		Interest cost			50				44				2
		Plan participants’ contributions			9				9				—
		Actuarial loss			66				104				2
		Benefits paid			(63	)			(61	)			(2	)
		Plan curtailments			—				(3	)			—
		Accumulated post-retirement benefit obligation at end of year		$	779			$	712			$	49
		Change in Plan Assets
		Fair value of plan assets at beginning of year		$	265	(a)		$	325	(a)		$	—
		Actual return on plan assets			(21	)			(40	)			—
		Employer contributions			37				32				2
		Plan participants’ contributions			9				9				—
		Benefits paid			(63	)			(61	)			(2	)
		Fair market value of plan assets at end of year		$	227	(a)		$	265	(a)		$	—
		Funded status		$	(552	)		$	(447	)		$	(49	)
		Employer contributions made after measurement date			12				11				—
		Unrecognized net experience loss			223				111				2
		Unrecognized prior service cost			3				4				—
		Unrecognized transition obligation			178				196				—
		Accrued post-retirement benefit costs		$	(136	)		$	(125	)		$	(47	)

		Assumptions Used for Post-Retirement Benefits Accounting
				Duke Energy												Westcoast
				2002				2001				2000				2002
				(percents)
		Discount rate			6.75				7.25				7.50				6.50
		Salary increase			5.00				4.94				4.53				3.25
		Expected long-term rate of return on assets			9.25				9.25				9.25				—
		Assumed tax rate (a)			39.60				39.60				39.60				—

For measurement purposes of the Duke Energy plan, the net per capita cost of covered health care benefits for participants who are not eligible for Medicare is assumed to have an initial annual rate of increase of 10.5% in 2002 that will gradually decrease to 6% in 2008. For participants who are eligible for Medicare, an initial annual rate of increase of 13.5% 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 for Duke Energy Plan

				1-Percentage- Point Increase				1-Percentage- Point Decrease
				(in millions)
		Effect on total service and interest costs			$   3				$   (3)
		Effect on post-retirement benefit obligation			51				(43)

For measurement purposes of the Westcoast plan, the net per capita cost of covered health care benefits for employees are assumed to have an initial annual rate of increase of 10% in 2002 that will gradually decrease to 5% in 2008. 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 for Westcoast Plan

				1-Percentage- Point Increase				1-Percentage- Point Decrease
				(in millions)
		Effect on total service and interest costs			$   1				$   (1)
		Effect on post-retirement benefit obligation			7				(6)

©Copyright 2003

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