FILED PERSUANT TO RULE 424(B)(5)
REGISTRATION NUMBER 333-85486
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED AUGUST 27, 2002)
[DUKE ENERGY LOGO]
$110,000,000
DUKE ENERGY CORPORATION
4.611% SENIOR NOTES DUE 2007
---------------------
We will pay interest on the Notes at a rate of 4.611% semi-annually on May
30 and November 30 of each year, beginning on May 30, 2003. We may redeem the
Notes at our option at any time and from time to time, in whole or in part, at a
redemption price equal to 100% of the principal amount of the Notes being
redeemed, plus a make-whole premium, together with accrued and unpaid interest
to the redemption date. The Notes do not have the benefit of any sinking fund.
We have authorized the placement agents to deliver a copy of this
prospectus supplement and the accompanying prospectus relating to the Notes
offered hereby to purchasers of the pass-through certificates of the Core
Investment Grade Bond Trust I. This prospectus supplement and the accompanying
prospectus relate only to Duke Energy Corporation and the Notes and do not
relate to the Core Investment Grade Bond Trust I or the pass-through
certificates. You should only rely on this prospectus supplement and the
accompanying prospectus for a description of Duke Energy Corporation and the
Notes. Our responsibilities, liabilities and obligations are limited solely to
the information contained or specifically incorporated by reference in this
prospectus supplement and the accompanying prospectus and to our obligations
under the Notes.
INVESTING IN THE NOTES INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE
S-6 OF THIS PROSPECTUS SUPPLEMENT.
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PROCEEDS TO
AGENTS' DUKE ENERGY
PRICE TO PUBLIC COMMISSION CORPORATION
--------------- ---------- ------------
Per Note(1)............................................... 100.00% 0.30% 99.70%
Total..................................................... $110,000,000 $330,000 $109,670,000
---------------
(1) Plus accrued interest, if any, from November 20, 2002, if settlement occurs
after that date.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus supplement or the accompanying
prospectus. Any representation to the contrary is a criminal offense.
We are offering these Notes ultimately to purchasers of pass-through
certificates of the Core Investment Grade Bond Trust I offered simultaneously
herewith through Core Bond Products LLC, as depositor of the Core Investment
Grade Bond Trust I, utilizing the services of Banc of America Securities LLC,
J.P. Morgan Securities Inc., Fleet Securities, Inc., HSBC Securities (USA) Inc.
and Wachovia Securities, Inc. as our agents. Each of Banc of America Securities
LLC, J.P. Morgan Securities Inc., Fleet Securities, Inc., HSBC Securities (USA)
Inc. and Wachovia Securities, Inc. is a statutory underwriter within the meaning
of the Securities Act of 1933.
We expect the Notes will be ready for delivery in book-entry form only
through the facilities of The Depository Trust Company on or about November 20,
2002.
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BANC OF AMERICA SECURITIES LLC JPMORGAN
---------------------
FLEET SECURITIES, INC.
HSBC
WACHOVIA SECURITIES
---------------------
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS NOVEMBER 15, 2002.
You should rely only on the information contained in or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone to provide you with information that is different. We are
not making an offer to sell these securities in any jurisdiction where the offer
is not permitted. You should not assume that the information provided by or
incorporated by reference in this prospectus supplement or the accompanying
prospectus is accurate as of any date other than the date of the document
containing the information.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
----
About this Prospectus Supplement............................ S-1
Forward-Looking Statements.................................. S-1
Prospectus Supplement Summary............................... S-3
Risk Factors................................................ S-6
Ratio of Earnings to Fixed Charges.......................... S-20
Use of Proceeds............................................. S-20
Capitalization.............................................. S-21
Description of the Notes.................................... S-22
General................................................... S-22
Ranking................................................... S-22
Interest.................................................. S-22
Optional Redemption....................................... S-22
Redemption Procedures..................................... S-23
Sinking Fund.............................................. S-23
Book-Entry System........................................... S-24
Plan of Distribution........................................ S-29
Experts..................................................... S-30
Legal Matters............................................... S-30
Where You Can Find More Information......................... S-31
PROSPECTUS
PAGE
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About this Prospectus....................................... 2
Duke Energy Corporation..................................... 3
Use of Proceeds............................................. 5
Recent Developments......................................... 5
The Trusts.................................................. 6
Description of the Senior Notes............................. 7
Description of the Junior Subordinated Notes................ 14
Description of the First and Refunding Mortgage Bonds....... 22
Description of the Common Stock............................. 25
Description of the Stock Purchase Contracts and the Stock
Purchase Units............................................ 28
Description of the Preferred Securities..................... 29
Description of the Guarantees............................... 29
Plan of Distribution........................................ 32
Experts..................................................... 33
Validity of the Securities.................................. 33
Where You Can Find More Information......................... 34
i
ABOUT THIS PROSPECTUS SUPPLEMENT
This document is in two parts. The first part is this prospectus
supplement, which describes the specific terms of this offering. The second
part, the accompanying prospectus, gives more general information, some of which
may not apply to this offering.
If the description of the offering varies between this prospectus
supplement and the accompanying prospectus, you should rely on the information
contained in or incorporated by reference into this prospectus supplement.
Unless we have indicated otherwise, or the context otherwise requires,
references in this prospectus supplement and the accompanying prospectus to
"Duke Energy," "we," "us" and "our" or similar terms are to Duke Energy
Corporation and its subsidiaries.
FORWARD-LOOKING STATEMENTS
This prospectus supplement and the accompanying prospectus 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 the like.
Those statements represent our intentions, plans, expectations, assumptions and
beliefs about future events and are subject to risks, uncertainties and other
factors. Many of those factors are outside our 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 our 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;
- changes in environmental and other laws and regulations to which we and
our subsidiaries are subject or other external factors over which we have
no control;
- the results of financing efforts, including our ability to obtain
financing on favorable terms, which can be affected by various factors,
including our credit ratings and general economic conditions;
- the level of creditworthiness of counterparties to our transactions;
- the amount of collateral required to be posted from time to time in our
transactions;
- growth opportunities for our 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 our electric generation, pipeline and gas processing
facilities;
- the extent of our success in connecting natural gas supplies to gathering
and processing systems and in connecting and expanding our gas and
electric markets; and
- the effect on our results of accounting principles issued periodically by
accounting standard-setting bodies.
S-1
In light of these risks, uncertainties and assumptions, the forward-looking
events referred to in this prospectus supplement and the accompanying prospectus
might not occur or might occur to a different extent or at a different time than
we have described. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
S-2
PROSPECTUS SUPPLEMENT SUMMARY
The following is qualified in its entirety by, and should be read together
with, the more detailed information, including "Risk Factors," and financial
statements included or incorporated by reference in this prospectus supplement
and the accompanying prospectus.
DUKE ENERGY CORPORATION
OVERVIEW
We are a leading integrated energy and energy services provider with the
ability to offer physical delivery and management of both electricity and
natural gas throughout the United States and in certain countries abroad. We own
and operate one of the world's largest portfolios of generating plants, one of
the nation's largest natural gas pipeline systems and an active energy trading
and marketing operation. We are also the largest producer of natural gas
liquids, or NGLs, in the United States. The services and products we provide are
offered through the following seven business segments:
Franchised Electric generates, transmits, distributes and sells electricity
in central and western North Carolina and western South Carolina. We currently
operate 20,500 megawatts (MW) of generation capacity and serve over two million
customers in the Carolinas. Franchised Electric conducts operations primarily
through Duke Power and Nantahala Power and Light.
Natural Gas Transmission provides transportation and storage of natural gas
for customers throughout the east coast and southern portion of the United
States and in Canada. Natural Gas Transmission also provides distribution
service to retail customers in Ontario, B.C. and gas gathering and processing
services to customers in British Columbia. Following our acquisition of
Westcoast Energy Inc. on March 14, 2002, we currently have approximately 19,000
miles of natural gas pipelines. Natural Gas Transmission does business primarily
through Duke Energy Gas Transmission Corporation.
Field Services gathers, processes, transports, markets and stores natural
gas and produces, transports, markets and stores NGLs. We currently produce
approximately 400 million barrels per day of natural gas liquids. Field Services
conducts operations primarily through Duke Energy Field Services, LLC, which is
approximately 30% owned by ConocoPhillips. Field Services operates gathering
systems in western Canada and 11 contiguous states in the United States. Those
systems serve major natural gas-producing regions in the Rocky Mountains,
Permian Basin, Mid-Continent, East Texas-Austin Chalk-North Louisiana, and
onshore and offshore Gulf Coast areas.
Duke Energy North America, or DENA, develops, operates and manages merchant
power generation facilities and engages in commodity sales and services related
to natural gas and electric power. Our current merchant generation portfolio
totals approximately 15,300 MW. DENA conducts business throughout the United
States and Canada through Duke Energy North America, LLC and Duke Energy Trading
and Marketing, LLC. Duke Energy Trading and Marketing is approximately 40% owned
by Exxon Mobil Corporation. Prior to April 1, 2002, the DENA business segment
was combined with Duke Energy Merchants Holdings, LLC to form a segment called
North American Wholesale Energy. As of June 30, 2002, management combined Duke
Energy Merchants Holdings with the Other Energy Services segment. Previous
periods have been reclassified to conform to the current presentation. As of
August 1, 2002, Duke Energy's North American trading and marketing functions
that were in DENA and Duke Energy Merchants Holdings, including Duke Energy
Trading and Marketing and the Canadian trading operations, were consolidated
into one group.
International Energy develops, operates and manages natural gas
transportation and power generation facilities and engages in energy trading and
marketing of natural gas and electric power outside the United States and
Canada. Our current operating portfolio includes approximately 5,300 MW of power
generation facilities and approximately 2,200 miles of natural gas pipelines.
International Energy conducts operations primarily through Duke Energy
International, LLC, or DEI, and its activities target the Latin American,
Asia-Pacific and European regions.
S-3
Other Energy Services is composed of diverse energy businesses, operating
primarily through Duke Energy Merchants Holdings, Duke/Fluor Daniel and Energy
Delivery Services. Duke Energy Merchants Holdings engages in commodity buying
and selling, and risk management and financial services in the energy commodity
markets other than natural gas and power (such as refined products, residual
fuels, crude oil and coal). Duke/ Fluor Daniel provides comprehensive
engineering, procurement, construction, commissioning and operating plant
services for fossil-fueled electric power generating facilities worldwide. It is
a 50/50 partnership between Duke Energy and Fluor Enterprises, Inc., a wholly
owned subsidiary of Fluor Corporation. Energy Delivery Services is an
engineering, construction, maintenance and technical services firm specializing
in electric transmission and distribution lines and substation projects. It was
formed in the second quarter of 2002 from the power delivery services component
of Duke Engineering & Services, Inc. This component was excluded from the sale
of Duke Engineering & Services on April 30, 2002. Other Energy Services also
retained other portions of Duke Engineering & Services that were not part of the
sale and the portion of DukeSolutions, Inc. that was not sold on May 1, 2002.
Duke Engineering & Services and DukeSolutions were included in Other Energy
Services through the date of their sale.
Duke Ventures is composed of other diverse businesses, operating primarily
through Crescent Resources, LLC, DukeNet Communications, LLC and Duke Capital
Partners, LLC. Crescent Resources develops high-quality commercial, residential
and multi-family real estate projects and manages land holdings primarily in the
southeastern and southwestern United States. DukeNet Communications develops and
manages fiber optic communications systems for wireless, local and long distance
communications companies and selected educational, governmental, financial and
health care entities. Duke Capital Partners, a wholly owned merchant banking
company, provides debt and equity capital and financial advisory services
primarily to the energy industry.
BUSINESS STRATEGY
Our strategy is to develop, operate and actively manage integrated energy
businesses in targeted regions where our extensive capabilities in developing
energy assets, operating electric power, natural gas and NGL facilities,
optimizing commercial operations and managing risk can provide comprehensive
energy solutions for our customers and create value for our shareholders. The
key elements of our strategy include:
Deliver energy and energy-related products and services to customers
worldwide. In North America, we own and operate natural gas pipeline
infrastructure, regulated and merchant power generation facilities, and natural
gas gathering and processing facilities. We also market and trade a variety of
energy commodities, including natural gas, power, NGLs and refined products. We
provide structured origination and risk management expertise to customers across
the energy spectrum. Internationally, we own and operate integrated electric and
natural gas businesses in markets such as Latin America, Asia Pacific and
Europe, where deregulation, privatization and liberalization are opening energy
markets to competition.
Actively manage our asset portfolio. We utilize a portfolio management
strategy, rather than focusing on stand-alone projects or assets, that strives
to capture the greatest value by seeking opportunities to invest in energy
assets in markets that have capacity needs and to divest other assets when
significant value can be realized. This strategy enables us to monetize certain
assets and maintain financial flexibility to pursue other attractive
opportunities. Additionally, this strategy prevents the institutionalized
ownership of any asset by encouraging us to continually optimize our asset
portfolio.
Mitigate exposure through disciplined risk management policies. Through
our enterprise risk management group, we actively manage the risks that our
business segments face. We believe managing risk at the corporate level is
consistent with the portfolio approach we use with our assets. Our risk
management policies are designed to help determine lines of business offering
attractive risk returns, assess current and future risk/return characteristics
of the enterprise and recommend appropriate strategic modifications. We actively
manage our commodity, interest rate, foreign currency and credit risks through
established policies that limit our exposure and require daily reporting to
management of potential financial exposure. Our risk management policies are
designed to mitigate our downside exposures while complementing the operations
of each of our business segments.
S-4
THE OFFERING
Issuer.................................... Duke Energy Corporation
Securities offered........................ $110,000,000 aggregate principal amount of 4.611% Senior
Notes due 2007, or the Notes.
Maturity.................................. The Notes will mature on November 30, 2007.
Interest Payment Dates.................... Interest on the Notes shall be payable semi-annually on
May 30 and November 30 of each year, beginning on May
30, 2003.
Redemption................................ We may redeem the Notes at our option at any time and
from time to time, in whole or in part, at a redemption
price equal to 100% of the principal amount of the Notes
being redeemed, plus a make-whole premium, together with
accrued and unpaid interest to the redemption date. See
"Description of the Notes -- Optional Redemption" for a
description of how the redemption price is calculated.
The Notes do not have the benefit of a sinking fund.
Ranking................................... The Notes will be our direct, unsecured and
unsubordinated obligations and will rank equal in
priority with all of our existing and future unsecured
and unsubordinated indebtedness and senior in right of
payment to all of our existing and future subordinated
indebtedness.
Certain Covenants......................... The indenture governing the Notes contains certain
covenants that, among other things, limit our ability
and the ability of certain of our subsidiaries to create
liens on our assets. See "Description of the Senior
Notes" in the accompanying prospectus.
Ratings................................... The Notes are rated A1 (on review for potential
downgrade) by Moody's Investors Service, Inc., or
Moody's; A by Standard & Poor's Rating Services, a
division of The McGraw-Hill Companies, or Standard &
Poor's; and A (on negative outlook) by Fitch Ratings, or
Fitch.
S-5
RISK FACTORS
Before purchasing the Notes you should carefully consider the following
risk factors as well as the other information contained in this prospectus
supplement, the accompanying prospectus and the information incorporated by
reference therein in order to evaluate an investment in the Notes.
RISKS RELATED TO THE MARKET CYCLE OF OUR INDUSTRY
OUR SALES AND RESULTS OF OPERATIONS MAY BE NEGATIVELY AFFECTED BY SUSTAINED LOW
LEVELS IN THE MARKET PRICES OF COMMODITIES THAT ARE BEYOND OUR CONTROL.
We sell power from our generation facilities into the spot market or other
competitive power markets on a contractual basis. We also enter into contracts
to purchase and sell electricity, natural gas and NGLs as part of our power
marketing and energy trading operations. With respect to such transactions, we
are not guaranteed any rate of return on our capital investments through
mandated rates, and our revenues and results of operations are likely to depend,
in large part, upon prevailing market prices for power in our regional markets
and other competitive markets. These market prices may fluctuate substantially
over relatively short periods of time. It is reasonable to expect that trading
margins will erode as new entrants enter the market, thus leading to an
oversupply in the market, and that there may be diminished opportunities for
gain should low prices decline further. These factors could reduce our revenues
and margins and therefore diminish our results of operations.
Low market prices for electricity, natural gas and NGLs result from
multiple factors, including:
- weather conditions;
- seasonality;
- supply of and demand for energy commodities;
- illiquid markets;
- general economic conditions, including downturns in the U.S. or other
economies which impact consumption;
- transmission or transportation constraints or inefficiencies;
- availability of competitively priced alternative energy sources;
- natural gas, crude oil, refined products and coal production levels;
- electric generation capacity;
- capacity and transmission service into, or out of, our markets;
- natural disasters, wars, embargoes and other catastrophic events; and
- federal, state and foreign energy and environmental regulation and
legislation.
RECENT DEVELOPMENTS AFFECTING THE WHOLESALE POWER AND ENERGY TRADING MARKETS
HAVE REDUCED MARKET ACTIVITY AND LIQUIDITY AND MAY CONTINUE TO ADVERSELY AFFECT
OUR RESULTS OF OPERATIONS.
As a result of the energy crisis in California, the recent decline of
natural gas prices in North America, the filing of bankruptcy by Enron
Corporation, and investigations by governmental authorities into energy trading
activities and increased litigation related to such inquiries, companies
generally in the regulated and unregulated utility businesses have been impacted
negatively. In addition, certain participants have been forced to exit from the
energy trading markets, leading to a reduction in the number of trading partners
and lower trading revenues. Recent short term depressed spot and forward
wholesale power prices during the past summer months have resulted in
substantially reduced revenues in our merchant energy business and may continue
to affect our earnings.
S-6
WE MAY NOT BE ABLE TO SUCCESSFULLY MANAGE THE RISKS ASSOCIATED WITH SELLING AND
MARKETING PRODUCTS IN THE WHOLESALE POWER MARKETS.
We purchase and sell power at the wholesale level under the Federal Energy
Regulatory Commission's, or FERC's, market-based tariffs throughout the United
States and also enter into short-term agreements to market available energy and
capacity from our generation assets with the expectation of profiting from
market price fluctuations. If we are unable to deliver firm capacity and energy
under these agreements, then we could be required to pay damages. These damages
would be based on the difference between the market price to acquire replacement
capacity or energy and the contract price of the undelivered capacity or energy.
Depending on price volatility in the wholesale energy markets, such damages
could be significant.
In the absence or upon expiration of power sales agreements, we must sell
all or a portion of the energy, capacity and other products from our facilities
into the competitive wholesale power markets. Unlike most other commodities,
electricity cannot be stored and must be produced concurrently with its use. As
a result, the wholesale power markets are subject to significant price
fluctuations over relatively short periods of time and can be unpredictable. In
addition, the price we can obtain for power sales may not change at the same
rate as changes in fuel costs. Given the volatility and potential for material
differences between actual power prices and fuel costs, if we are unable to
secure long-term purchase agreements for our power generation facilities, our
revenues would be subject to increased volatility and our financial results may
be materially adversely affected.
OUR RISK MANAGEMENT PROCEDURES MAY NOT PREVENT LOSSES.
We actively manage the commodity price risk inherent in our energy, debt
and foreign currency positions. Although we have sophisticated risk management
systems in place that use advanced methodologies to quantify risk, these systems
may not always be followed or may not always work as planned. If prices
significantly deviate from historic prices, our risk management systems may not
protect us from significant losses. Adverse changes in energy prices, interest
rates and foreign currency exchange rates may result in economic losses in our
earnings and cash flows and our balance sheet under applicable accounting rules.
Although we devote a considerable amount of management effort to our trading,
marketing and risk management systems, their effectiveness remains uncertain.
OUR HEDGING PROCEDURES MAY NOT PROTECT OUR SALES AND NET INCOME FROM
VOLATILITY.
To lower our financial exposure related to commodity price fluctuations,
our marketing, trading and risk management operations routinely enter into
contracts to hedge the value of our assets and operations. As part of this
strategy, we routinely utilize fixed-price, forward, physical purchase and sales
contracts, futures, financial swaps and option contracts traded in the
over-the-counter markets or on exchanges. However, we do not always cover the
entire exposure of our assets or our positions to market price volatility and
the coverage will vary over time. To the extent we have unhedged positions or
our hedging procedures do not work as planned, fluctuating commodity prices
could cause our sales and net income to be volatile.
WE ARE EXPOSED TO MARKET RISK AND MAY INCUR LOSSES FROM OUR MARKETING AND
TRADING OPERATIONS.
Our trading portfolios consist of contracts to buy and sell commodities,
including contracts for electricity, natural gas, NGLs and other commodities
that are settled by the delivery of the commodity or cash. If the values of
these contracts change in a direction or manner that we do not anticipate, we
could realize material losses from our trading activities.
In the past, certain marketing and trading companies have experienced
severe financial problems due to price volatility in the energy commodity
markets. In certain instances this volatility has caused companies to be unable
to deliver power that they had guaranteed under contract. These defaults
severely and adversely impacted the financial condition of these companies and,
in some cases, have resulted in losses to their trading partners.
S-7
We have marketing and trading operations which target the U.S., Canada and
Latin American, Asia-Pacific and European regions. We incur similar trading
risks and market exposures in these foreign markets. If our trading volumes in
these regions increase, we will be exposed to increased market risks.
OUR PROFITABILITY MAY DECLINE IF THE COUNTERPARTIES TO OUR TRANSACTIONS FAIL TO
PERFORM IN ACCORDANCE WITH OUR AGREEMENTS WITH THEM.
Our marketing, trading and risk management operations are exposed to the
risk that counterparties to our transactions will not perform their obligations.
Should the counterparties to these arrangements fail to perform, we might be
forced to acquire alternative hedging arrangements, honor the underlying
commitment at then-current market prices or return a significant portion of the
consideration received for unused electricity or gas under a long-term contract.
In such event, we might incur additional losses to the extent of amounts, if
any, already paid to, or received from, counterparties. In addition, in our
marketing and trading activities, we often extend credit to our trading
counterparties. Despite performing credit analysis prior to extending credit, we
are exposed to the risk that we may not be able to collect amounts owed to us.
If the counterparty to such a financing transaction fails to perform and any
collateral we have secured is inadequate, we will lose money.
In 2000 and 2001, tight supply and increased demand resulted in higher
wholesale power prices to utilities, particularly in California. At the same
time, two of the three major utilities in California operated under a retail
rate freeze. As a result, there has been significant under-recovery of costs by
these utilities, resulting in the filing by one utility under Chapter 11 of the
U.S. Bankruptcy Code. Some utilities have suspended payments to their creditors.
If any industry participants are adversely affected by the situation in
California or other similar situations that may develop in the future in other
markets, such participants may default on obligations to us, which would affect
the profitability of our marketing and trading business.
COMPETITION IN THE WHOLESALE POWER AND ENERGY TRADING MARKETS MAY ADVERSELY
AFFECT THE GROWTH AND PROFITABILITY OF OUR BUSINESS.
While companies in the regulated and unregulated utility business have been
universally negatively affected by recent events in the energy markets, it is
possible that in the future we may be vulnerable to competition from new
competitors that have greater financial resources than we do, seeking attractive
opportunities to acquire or develop energy assets or energy trading operations
both in the United States and abroad. These new competitors may include
sophisticated financial institutions, some of which are already entering the
energy trading and marketing sector, and international energy players. This
competition may adversely affect our ability to make investments or
acquisitions.
We may not be able to respond in a timely or effective manner to the many
changes intended to increase competition in the electricity industry. To the
extent competitive pressures increase and the pricing and sale of electricity
assume more characteristics of a commodity business, the economics of our
business may come under long-term pressure.
In addition, regulatory changes have also been proposed to increase access
to electricity transmission grids by utility and non-utility purchasers and
sellers of electricity. We believe that these changes could continue the
disaggregation of many vertically-integrated utilities into separate generation,
transmission, distribution and retail businesses. As a result, a significant
number of additional competitors could become active in the wholesale power
generation segment of our industry.
Although demand for electricity is generally increasing throughout the
United States, the rate of construction and development of new, more efficient
electric generation facilities may exceed increases in demand in some regional
electric markets and have an adverse impact on our results of operations. Also,
industry restructuring in regions in which we have substantial operations could
affect our operations in a manner that is difficult to predict.
S-8
OUR OPERATING RESULTS MAY FLUCTUATE ON A SEASONAL AND QUARTERLY BASIS.
Electric power generation and gas transmission are generally seasonal
businesses. In many parts of the country, demand for power peaks during the hot
summer months, with market prices also peaking at that time. In other areas,
demand for power peaks during the winter. In addition, demand for gas and other
fuels peaks during the winter, especially for our Westcoast Energy business in
Canada. As a result, our overall operating results in the future may fluctuate
substantially on a seasonal basis. The pattern of this fluctuation may change
depending on the nature and location of our facilities and pipeline systems and
the terms of power sale contracts and gas transmission arrangements we enter
into.
RISKS RELATED TO LEGAL PROCEEDINGS AND REGULATORY INVESTIGATIONS
WE MAY BE ADVERSELY AFFECTED BY LEGAL PROCEEDINGS ARISING OUT OF THE
ELECTRICITY SUPPLY SITUATION IN CALIFORNIA AND OTHER WESTERN STATES.
Litigation arising out of the California electricity supply situation has
been filed with the FERC and in California courts against sellers of energy to
the California Independent System Operator. The plaintiffs and intervenors in
these proceedings allege abuse of market power, manipulation of market prices,
unfair trade practices and violations of state antitrust laws, among other
things, and seek price caps on wholesale sales in California and other western
power markets, refunds of excess profits allegedly earned on these sales, and
other relief, including treble damages and attorneys' fees. Duke Energy and some
of its subsidiaries have been named as defendants, among other corporate and
individual defendants, in one or more of a total of 15 lawsuits brought by or on
behalf of electricity purchasers in California, with one suit filed on behalf of
a Washington State electricity purchaser. In addition to lawsuits, several
investigations and regulatory proceedings at the state and federal levels are
looking into the causes of high wholesale electricity prices in the western
United States. An investigation by the California Public Utilities Commission
recently alleged that we were among five energy companies that withheld
electricity from their California plants, resulting in sharp increases in
California electricity prices. In addition, on November 8, 2002, Duke Energy
received a subpoena from the San Francisco office of the U.S. Attorney as part
of a grand jury investigation. We cannot predict the outcome of any such
proceedings or whether the ultimate impact on us of the electricity supply
situation in California and other western states will be material.
WE MAY BE ADVERSELY AFFECTED BY REGULATORY INVESTIGATIONS AND ANY RELATED LEGAL
PROCEEDINGS RELATED TO THE ALLEGED CONDUCTING OF ANY "ROUNDTRIP" TRADES BY OUR
ENERGY TRADING BUSINESS.
Public and regulatory scrutiny of the energy industry and of the capital
markets has resulted in increased regulation being either proposed or
implemented. In particular, the activities of Enron Corporation and other energy
traders in allegedly using "roundtrip" trades which involve the prearrangement
of simultaneously executed and offsetting buy and sell trades for the purpose of
increasing reported revenues or trading volumes, or influencing prices and which
lack a legitimate business purpose, has resulted in increased public and
regulatory scrutiny. To date, we have responded to requests for information from
the FERC, related to an investigation of natural gas transactions in the western
United States and Texas markets during the years 2000 and 2001, and the
Securities and Exchange Commission, or SEC, related to an investigation of
"roundtrip" energy transactions from January 1999 to the present. We also have
received and are responding to subpoenas and supplemental requests for
information regarding gas and power trading activities from the Houston office
of the U.S. Attorney relating to a Houston grand jury inquiry, which involve the
same issues and time period covered by the SEC requests, and from the Commodity
Futures Trading Commission.
Such inquiries are ongoing and continue to adversely affect the energy
trading business as a whole. We may see these adverse effects continue as a
result of the uncertainty of these ongoing inquiries or additional inquiries by
other federal or state regulatory agencies. In addition, we cannot predict the
outcome of any of these inquiries, including the grand jury inquiry, or whether
these inquiries will lead to additional legal proceedings against us, civil or
criminal fines or penalties, or other regulatory action,
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including legislation, which may be materially adverse to the operation of our
trading business and our trading revenues and net income or increase our
operating costs in other ways.
Also, several class action lawsuits have been filed against us, and others
may be filed, claiming that investors suffered damages as a result of the
alleged roundtrip trades inflating our revenue and earnings. Such lawsuits could
lead to settlements, civil damages or other litigation costs that could
adversely affect our business.
WE MAY BE ADVERSELY AFFECTED BY REGULATORY INVESTIGATIONS RELATED TO PRICING
INFORMATION THAT WE PROVIDED TO MARKET PUBLICATIONS.
On October 25, 2002, we received a request for information from the FERC
regarding pricing information that we provided to market publications. The
FERC's request for information is an extension of its existing review of energy
trading. We had already commenced a review of our historical survey publication
data after another market participant announced in September that certain of its
employees had provided inaccurate pricing data to publications. We filed a
preliminary response to the FERC on November 8, 2002, based on our ongoing
review. We expect to file a final report in the near future. We cannot predict
the outcome of this investigation or whether this investigation will lead to
additional legal proceedings against us, civil or criminal fines or penalties,
or other regulatory action, including legislation, which may be materially
adverse to the operation of our trading business and our trading revenues and
net income or increase our operating costs in other ways.
RISKS RELATED TO THE REGULATION OF OUR BUSINESSES
ELECTRIC
OUR BUSINESSES IN NORTH AMERICA ARE SUBJECT TO COMPLEX GOVERNMENT
REGULATIONS. THE ECONOMICS, INCLUDING THE COSTS, OF OPERATING OUR GENERATING
FACILITIES MAY BE ADVERSELY AFFECTED BY CHANGES IN THESE REGULATIONS OR IN THEIR
INTERPRETATION OR IMPLEMENTATION.
The regulatory environment applicable to the electric power industry has
recently undergone substantial changes, both on a federal and a state level,
which have had a significant impact on the nature of the industry and the manner
in which its participants conduct their businesses. These changes are ongoing
and we cannot predict the future course of changes in this regulatory
environment or the ultimate effect that this changing regulatory environment
will have on our business.
We are subject to regulation by the SEC under the Public Utility Holding
Company Act, or PUHCA, and the Federal Power Act, or FPA, which regulate public
utility holding companies and their subsidiaries and place certain constraints
on the conduct of their business. The rates charged by our domestic utility
subsidiaries are approved by the FERC, the NCUC and the PSCSC. The NCUC and the
PSCSC regulate many aspects of our utility operations including siting and
construction of facilities, customer service and the rates that we can charge
customers. The FERC regulates wholesale electricity operations and transmission
rates and the state commissions regulate retail generation and distribution
rates. The Public Utility Regulatory Policies Act of 1978, or PURPA, provides
qualifying facilities with exemptions from some federal and state laws and
regulations, including PUHCA and most provisions of the FPA. The Energy Policy
Act of 1992, or the Energy Act, also provides relief from regulation under PUHCA
to "exempt wholesale generators." Maintaining the status of our facilities as
qualifying facilities or exempt wholesale generators is conditioned on those
facilities continuing to meet statutory criteria. Under current law, we are not
and will not be subject to regulation as a registered holding company under
PUHCA as long as the domestic power plants we own are qualifying facilities
under PURPA or are exempt wholesale generators. If we were subject to these
regulations, the economics and operations of our generating facilities could be
negatively affected by the increased costs associated with upgrading our
facilities and taking other actions to comply with these regulations. While we
are currently exempt from registration under PUHCA, we may lose that exemption
if we fail to comply with our exemptive order from the SEC. If we were to lose
our exemption, we would have the alternatives of registering as a holding
company which would subject us to more extensive regulation, or divesting or
changing the nature
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of some of our foreign utility holdings, including some facilities acquired in
our Westcoast Energy purchase.
Existing regulations may be revised or reinterpreted, new laws and
regulations may be adopted or become applicable to us or our facilities, and
future changes in laws and regulations may have a detrimental effect on our
business. Certain restructured markets have recently experienced supply problems
and price volatility. These supply problems and volatility have been the subject
of a significant amount of press coverage, much of which has been critical of
the restructuring initiatives. In some of these markets, including California,
proposals have been made by governmental agencies and other interested parties
to re-regulate areas of these markets which have previously been deregulated. We
cannot assure you that other proposals to re-regulate will not be made or that
legislative or other attention to the electric power restructuring process will
not cause the deregulation process to be delayed or reversed. If the current
trend towards competitive restructuring of the wholesale and retail power
markets is reversed, discontinued or delayed, our business models may be
inaccurate and we may face difficulty in growing our business and generating
revenues in accordance with our current business plans.
The FERC has proposed to broaden its regulations that restrict relations
between jurisdictional electric and natural gas companies, or "jurisdictional
companies," and marketing affiliates. The proposed rules would limit
communications between a jurisdictional company and all our affiliates engaged
in energy activities. The rulemaking is pending at the FERC and the precise
scope and effect of the rule is unclear. If adopted as proposed, the rule could
adversely affect our ability to coordinate and manage our energy activities.
OUR SALES MAY DECREASE IF WE ARE UNABLE TO GAIN ADEQUATE, RELIABLE AND
AFFORDABLE ACCESS TO TRANSMISSION AND DISTRIBUTION ASSETS DUE TO THE FERC AND
REGIONAL REGULATION OF WHOLESALE MARKET TRANSACTIONS FOR ELECTRICITY AND GAS.
We depend on transmission and distribution facilities owned and operated by
utilities and other energy companies to deliver the electricity and natural gas
we sell to the wholesale market, as well as the natural gas we purchase to
supply some of our electric generation facilities. If transmission is disrupted,
or if capacity is inadequate, our ability to sell and deliver products may be
hindered.
The FERC has issued power transmission regulations that require wholesale
electric transmission services to be offered on an open-access,
non-discriminatory basis. Although these regulations are designed to encourage
competition in wholesale market transactions for electricity, some companies
have failed to provide fair and equal access to their transmission systems or
have not provided sufficient transmission capacity to enable other companies to
transmit electric power. We cannot predict whether and to what extent the
industry will comply with these initiatives, or whether the regulations will
fully accomplish their objectives. In addition, other companies' ability to
access and compete for our existing "native-load" transmission customers may
negatively affect our business leading to declining prices for transmission
services as a result of this competition.
In addition, the independent system operators who oversee the transmission
systems in regional power markets, such as California, have in the past been
authorized to impose, and may continue to impose, price limitations and other
mechanisms to address volatility in the power markets. These types of price
limitations and other mechanisms may adversely impact the profitability of our
wholesale power marketing and trading. Given the extreme volatility and lack of
meaningful long-term price history in many of these markets and the imposition
of price limitations by regulators, independent system operators or other market
operators, we can offer no assurance that we will be able to operate profitably
in all wholesale power markets.
IN THE FUTURE, WE MAY NOT BE ABLE TO SECURE LONG-TERM PURCHASE AGREEMENTS
FOR OUR POWER GENERATION FACILITIES, AND OUR EXISTING POWER PURCHASE AGREEMENTS
MAY NOT BE ENFORCEABLE, EITHER OF WHICH WOULD SUBJECT OUR SALES TO INCREASED
VOLATILITY.
Historically, power from generation facilities has been sold under
long-term power purchase agreements pursuant to which all energy and capacity
was generally sold to a single party at fixed prices.
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Because of changes in the industry, the percentage of facilities with these
types of long-term power purchase agreements has decreased, and it is likely
that most of our facilities will operate without these agreements. Without the
benefit of long-term power purchase agreements, we cannot assure you that we
will be able to sell the power generated by our facilities or that our
facilities will be able to operate profitably.
Recently, some entities have brought litigation or regulatory proceedings
aimed at forcing the renegotiation or termination of power purchase agreements
requiring payments to owners of generating facilities that are qualifying
facilities under PURPA. Many qualifying facilities sell their electric output to
utilities and other entities pursuant to long-term contracts at prices that are
based upon the incremental cost that, at the time of contracting, it was
estimated that it would cost the utility or entity to generate or purchase the
power from another source. In some cases, these prices are now substantially in
excess of market prices. In addition, in the future, utilities and other
entities, with the approval of federal or state regulatory authorities, could
seek to abrogate their existing power purchase agreements with qualifying
facilities or with other power generators. Some of our power purchase agreements
for power generated from our independent power projects and generation assets
could be subject to similar efforts by the entities who contract to purchase
power from our facilities. If those efforts were to be successful, our sales
could decrease or be subject to increased volatility.
THE DIFFERENT REGIONAL POWER MARKETS IN WHICH WE COMPETE OR WILL COMPETE IN
THE FUTURE HAVE CHANGING REGULATORY STRUCTURES, WHICH COULD AFFECT OUR GROWTH
AND PERFORMANCE IN THESE REGIONS.
Our results are likely to be affected by differences in the market and
transmission regulatory structures in various regional power markets. Problems
or delays that may arise in the formation and operation of new regional
transmission organizations, or RTOs, may restrict our ability to sell power
produced by our generating capacity to certain markets if there is insufficient
transmission capacity otherwise available. The rules governing the various
regional power markets may also change from time to time which could affect our
costs or revenues. Because it remains unclear which companies will be
participating in the various regional power markets, or how RTOs will develop or
what regions they will cover, we are unable to assess fully the impact that
these power markets may have on our business.
Currently, Franchised Electric operates with exclusive rights to supply
electricity in a franchised service territory of 22,000 square miles in North
Carolina and South Carolina. Our financial performance in our franchised service
territory is likely to be affected by differences in the market and regulatory
structures in various regional power markets. Problems that may arise in the
formation and operation of new RTOs, may result in delayed or disputed
collection of revenues. The rules governing the various regional power markets
may also change from time to time which could affect our costs or revenues.
Because it remains unclear which companies will be participating in the various
regional power markets, or how RTOs will develop or what regions they will
cover, we are unable to assess fully the impact that these power markets may
have on our business.
THE RECENTLY ENACTED RATE FREEZE AFFECTING OUR NORTH CAROLINA UTILITY WILL
LIMIT OUR ABILITY TO PASS ON TO OUR CUSTOMERS OUR COST OF PRODUCING ELECTRICITY.
In June 2002, the State of North Carolina passed new clean air legislation
that freezes electric utility rates from June 20, 2002 to December 31, 2007, in
order for North Carolina electric utilities, including Duke Energy, to make
significant reductions in emissions of sulfur dioxide and nitrogen oxides from
the state's coal-fired power plants over the next ten years. We estimate the
cost of achieving the proposed emission reductions to be approximately $1.5
billion. While we expect to recover 70% of the total estimated costs of plant
improvements through the five-year rate freeze period, there is no guarantee
that we will recover such amount. As a result of the rate freeze, we will be
limited in the amount of revenue our North Carolina utility generates in
relation to operational costs and the amount of recovery for our costs of
emission reductions. In addition, it is unclear how the NCUC will determine how
any remaining costs will be recovered after the rate freeze period.
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GAS
OUR GAS TRANSMISSION AND STORAGE OPERATIONS ARE SUBJECT TO GOVERNMENT
REGULATIONS AND RATE PROCEEDINGS THAT COULD HAVE AN ADVERSE IMPACT ON OUR
ABILITY TO RECOVER THE COSTS OF OPERATING OUR PIPELINE FACILITIES.
Our U.S. interstate gas transmission and storage operations conducted
through Duke Energy Gas Transmission Corporation and its subsidiaries are
subject to the FERC's rules and regulations in accordance with the Natural Gas
Act of 1938 and the Natural Gas Policy Act of 1978. The FERC's regulatory
authority extends to:
- transportation of natural gas;
- rates and charges;
- construction;
- acquisition, extension or abandonment of services or facilities;
- accounts and records;
- depreciation and amortization policies; and
- operating terms and conditions of service.
The FERC has taken certain actions to strengthen market forces in the
natural gas pipeline industry which has led to increased competition throughout
the industry. In a number of key markets, interstate pipelines are now facing
competitive pressure from other major pipeline systems, enabling local
distribution companies and end users to choose a supplier or switch suppliers
based on the short-term price of gas and the cost of transportation.
In 2000, the FERC issued Order 637, which sets forth revisions to its
policies governing the regulation of interstate natural gas pipelines. Some of
our pipeline and storage companies were among several parties who filed appeals
in the District of Columbia Circuit Court of Appeals seeking court review of
various aspects of the Order. Based on the court's order, the FERC issued an
interim policy on certain of the issues remanded by the court and has requested
comments on the remanded issues. We have filed comments with the FERC, and the
matter is now pending before the FERC. We made an Order 637 compliance filing
with the FERC during 2001. The FERC issued orders approving, subject to
modifications, the pro forma tariff sheets submitted by us. However, we have
filed for rehearing of the order with respect to certain issues. The matter is
now pending before the FERC. Given the extent of the FERC's regulatory power, we
cannot give any assurance regarding the likely regulations under which we will
operate our natural gas transmission and storage business in the future or the
effect of regulation on our financial position and results of operations. In
addition, the FERC has proposed to broaden its regulations on jurisdictional
companies, as described above. The proposed rules would limit communications
between a jurisdictional company and all our affiliates engaged in energy
activities. The rulemaking is pending at the FERC and the precise scope and
effect of the rule is unclear. If adopted as proposed, the rule could adversely
affect our ability to coordinate and manage our energy activities.
Texas Eastern and Algonquin currently have in effect rate settlements
approved by FERC which prevent those companies or third parties from modifying
Texas Eastern and Algonquin's rates, except for certain allowed adjustments.
These settlements do not preclude the FERC from taking action on its own to
modify the rates. The Texas Eastern settlement will expire on December 31, 2003
and the Algonquin settlement will expire on May 1, 2003, at which time the
companies or third parties may institute actions at the FERC to modify the
companies' rates. It is not possible to determine at this time whether any such
actions would be instituted or what the outcome would be but such proceedings
could result in either Texas Eastern or Algonquin being required to adjust its
rates.
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POSSIBLE CHANGES AND DEVELOPMENTS IN THE CANADIAN REGULATORY ENVIRONMENT
COULD RESULT IN A NEGATIVE IMPACT ON WESTCOAST ENERGY'S BUSINESS AND OPERATIONS.
Through the acquisition of Westcoast Energy, we added a significant network
of mostly Canadian-based natural gas assets, including transmission pipeline,
gathering and processing facilities, storage facilities and distribution
systems. The majority of these assets are subject to various degrees of
regulation. Currently, Westcoast Energy's interprovincial gathering, processing
and transmission facilities and operations are regulated by the National Energy
Board and its storage and distribution facilities and operations are regulated
by various provincial regulatory authorities. Changes in the regulation of
Westcoast Energy's facilities and operations may be beyond its control and may
impact its capacity to conduct its business effectively and sustain or increase
profitability. Furthermore, as the regulatory environment within which Westcoast
Energy conducts its business and operates its facilities continues to evolve
from a traditional cost recovery model to a more competitive, market-based
approach, there is increasing competition among pipeline companies. We cannot
predict the timing or scope of these changes and developments in the regulatory
environment or the impact they may ultimately have on Westcoast Energy's
business and operations.
A toll settlement approved by the National Energy Board establishes methods
for setting Westcoast Energy's revenue requirements and tolls for transmission
services for a two-year period ending December 31, 2003. Upon its expiration,
Westcoast Energy may renegotiate the toll settlement and/or apply to the
National Energy Board to modify its tolls. It is not possible to predict the
impact of these alternative courses of action on Westcoast Energy's tolls for
transmission services.
Westcoast Energy's southern mainline and the Fort Nelson mainline systems
are currently fully contracted. The Fort St. John mainline continues to be
under-utilized by approximately 159 MMcf per day or 24% of its total
contractible capacity. Shippers with firm transmission service that expires on
October 31 of any year may give notice to Westcoast Energy, prior to September
30 of the previous year, to renew such service effective November 1.
Approximately 55% by volume of transmission service on the southern mainline and
40% by volume of transmission service on the northern mainline is subject to
renewal effective November 1, 2003 and the balance at varying times thereafter.
Aboriginal groups have claimed aboriginal and treaty rights over a
substantial portion of the lands on which Westcoast Energy's facilities in
British Columbia and Alberta and the gas supply areas served by those facilities
are located. The existence of these claims, which range from the assertion of
rights of limited use up to aboriginal title, has given rise to some uncertainty
regarding access to public lands for future development purposes.
RISKS RELATED TO OUR BUSINESS GENERALLY AND OUR INDUSTRY
ENVIRONMENTAL REGULATION AND LIABILITY
OUR BUSINESS WILL BE SUBJECT TO ENVIRONMENTAL LEGISLATION IN ALL
JURISDICTIONS IN WHICH IT OPERATES AND ANY CHANGES IN SUCH LEGISLATION COULD
NEGATIVELY AFFECT OUR RESULTS OF OPERATIONS.
Our operations are subject to extensive environmental regulation pursuant
to a variety of U.S., Canadian, and other federal, provincial, state and
municipal laws and regulations. Such environmental legislation imposes, among
other things, restrictions, liabilities and obligations in connection with the
generation, handling, use, storage, transportation, treatment and disposal of
hazardous substances and waste and in connection with spills, releases and
emissions of various substances into the environment. Environmental legislation
also requires that our facilities, sites and other properties associated with
our operations be operated, maintained, abandoned and reclaimed to the
satisfaction of applicable regulatory authorities.
Existing environmental regulations could also be revised or reinterpreted,
new laws and regulations could be adopted or become applicable to us or our
facilities, and future changes in environmental laws and regulations could
occur. The federal government and several states recently have proposed
increased environmental regulation of many industrial activities, including
increased regulation of air quality, water
S-14
quality and solid waste management. For example, the U.S. Environmental
Protection Agency has recently promulgated more stringent air quality standards
for particulate matter emitted from power plants and is developing new policies
concerning the protection of endangered species and sediment contamination based
on new interpretations of the Clean Water Act. In addition, certain countries in
which we operate, including Canada, may move forward on the process of adopting
the greenhouse gas emissions principles of the Kyoto Accords. With the trend
toward stricter standards, greater regulation, more extensive permit
requirements and an increase in the number and types of assets operated by us
subject to environmental regulation, we expect our environmental expenditures to
be substantial in the future.
Compliance with environmental legislation can require significant
expenditures, including expenditures for clean up costs and damages arising out
of contaminated properties, and failure to comply with environmental legislation
may result in the imposition of fines and penalties. The steps we take to bring
our facilities into compliance could be prohibitively expensive, and we may be
required to shut down or alter the operation of our facilities, which may cause
us to incur losses. Further, our regulatory rate structure and our contracts
with clients may not necessarily allow us to recover capital costs we incur to
comply with new environmental regulations such as the rate freeze being imposed
by the NCUC. Also, we may not be able to obtain or maintain from time to time
all required environmental regulatory approvals for certain development
projects. If there is a delay in obtaining any required environmental regulatory
approvals or if we fail to obtain and comply with them, the operation of our
facilities could be prevented or become subject to additional costs. Should we
fail to comply with all applicable environmental laws, we may be subject to
penalties and fines imposed against us by regulatory authorities. Although it is
not expected that the costs of complying with current environmental legislation
will have a material adverse effect on our financial condition or results of
operations, no assurance can be made that the costs of complying with
environmental legislation in the future will not have such an effect.
WE COULD INCUR MATERIAL LOSSES IF WE ARE HELD LIABLE FOR THE ENVIRONMENTAL
CONDITION OF ANY OF OUR ASSETS.
We are generally responsible for all on-site liabilities associated with
the environmental condition of our power generation facilities and natural gas
assets which we have acquired or developed, regardless of when the liabilities
arose and whether they are known or unknown. In addition, in connection with
certain acquisitions and sales of assets, we may obtain, or be required to
provide, indemnification against certain environmental liabilities. If we incur
a material liability, or the other party to a transaction fails to meet its
indemnification obligations to us, we could suffer material losses.
ACCOUNTING POLICY RISKS
POTENTIAL CHANGES IN ACCOUNTING PRACTICES FOR THE ENERGY INDUSTRY MAY CAUSE
US TO REVISE OUR FINANCIAL DISCLOSURE IN THE FUTURE, WHICH MAY CHANGE THE WAY
ANALYSTS MEASURE OUR BUSINESS OR FINANCIAL PERFORMANCE.
Recently discovered accounting irregularities in various industries have
forced regulators and legislators to take a renewed look at accounting
practices, financial disclosures, companies' relationships with their
independent auditors and retirement plan practices. While it is still unclear
what laws or regulations will develop, we cannot predict the ultimate impact of
any future changes in accounting regulations or practices in general with
respect to public companies or the energy industry or in our operations
specifically.
In addition, new accounting standards could be enacted by the Financial
Accounting Standards Board, or FASB, or the SEC which could impact the way we
are required to record revenues, assets and liabilities. For instance, Statement
of Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations," which we must implement by January 1, 2003, will require 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 can be made. Such
change in recognition could lead to an increase in our liabilities related to
certain assets, therefore reducing our overall reported assets.
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In October 2002, the FASB's Emerging Issues Task Force, or EITF, as part of
its further Issue No. 02-03 deliberations, rescinded the consensus reached in
Issue No. 98-10. As a result, all energy trading contracts that do not meet the
definition of a derivative under SFAS No. 133 will be recorded at their
historical cost and reported on an accrual basis. New contracts entered into as
of October 25, 2002 will be accounted for under the accrual accounting model.
Non-derivative energy trading contracts on the consolidated balance sheet as of
January 1, 2003 will be removed with a cumulative effect type adjustment, for
which the amount has not yet been quantified. We are currently reviewing all
open energy trading positions in our portfolio, and evaluating each under the
SFAS No. 133 definition of a derivative criterion. We are currently assessing
the provisions of Issue No. 02-03 and the rescinding of Issue No. 98-10 but have
not yet determined the impact on our results of operations, cashflows or
financial position.
Other future changes in accounting standards could lead to negative impacts
on reported earnings or increases in liabilities which in turn could affect our
reported results of operations.
FINANCING RISK
OUR BUSINESS IS DEPENDENT ON OUR ABILITY TO SUCCESSFULLY ACCESS CAPITAL
MARKETS. OUR INABILITY TO ACCESS CAPITAL MAY LIMIT OUR ABILITY TO EXECUTE OUR
BUSINESS PLAN OR PURSUE IMPROVEMENTS.
We rely on access to both short-term money markets and longer-term capital
markets as a source of liquidity for capital requirements not satisfied by the
cash flow from our operations. If we are not able to access capital at
competitive rates, our ability to implement our strategy will be adversely
affected. Certain market disruptions or a downgrade of our credit rating may
increase our cost of borrowing or adversely affect our ability to access one or
more financial markets. Such disruptions could include:
- further economic downturns;
- the bankruptcy of an unrelated energy company;
- capital market conditions generally;
- market prices for electricity and gas;
- terrorist attacks or threatened attacks on our facilities or unrelated
energy companies; or
- the overall health of the utility industry.
Restrictions on our ability to access financial markets may affect our
ability to execute our business plan as scheduled. An inability to access
capital may limit our ability to pursue improvements or acquisitions that we may
otherwise rely on for future growth.
INCREASES IN OUR LEVERAGE COULD ADVERSELY AFFECT OUR COMPETITIVE POSITION,
BUSINESS PLANNING AND FLEXIBILITY, FINANCIAL CONDITION, ABILITY TO SERVICE OUR
DEBT OBLIGATIONS AND TO PAY DIVIDENDS ON OUR COMMON STOCK, AND ABILITY TO ACCESS
CAPITAL ON FAVORABLE TERMS.
Our cash requirements arise primarily from the capital intensive nature of
our electric utilities, as well as the expansion of our diversified businesses.
In addition to operating cash flows, we rely heavily on our commercial paper and
long-term debt. Our credit lines impose various limitations that could impact
our liquidity and result in a material adverse impact on our business strategy
and our ongoing financing needs. Changes in economic conditions could result in
higher interest rates, which would increase our interest expense on our floating
rate debt and reduce funds available to us for our current plans. Additionally,
an increase in our leverage could adversely affect us by:
- increasing the cost of future debt financing;
- prohibiting the payment of dividends on our common stock or adversely
impacting our ability to pay such dividends at the current rate;
- making it more difficult for us to satisfy our existing financial
obligations;
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- limiting our ability to obtain additional financing, if we need it, for
working capital, acquisitions, debt service requirements or other
purposes;
- increasing our vulnerability to adverse economic and industry conditions;
- requiring us to dedicate a substantial portion of our cash flow from
operations to payments on our debt, which would reduce funds available to
us for operations, future business opportunities or other purposes; and
- limiting our flexibility in planning for, or reacting to, changes in our
business and the industry in which we compete.
A DOWNGRADE IN OUR CREDIT RATING COULD NEGATIVELY AFFECT OUR ABILITY TO
ACCESS CAPITAL AND/OR TO OPERATE OUR POWER AND GAS TRADING BUSINESSES.
Standard & Poor's, Moody's and Fitch rate our senior, unsecured debt at A,
A1 and A respectively. Our Moody's rating is on review for potential downgrade
and a resolution to Moody's action is expected during the fourth quarter of
2002. Our Fitch rating is on negative outlook. If Standard & Poor's, Moody's or
Fitch were to downgrade our long-term rating, particularly below investment
grade, our borrowing costs would increase which would diminish our financial
results. In addition, we would likely be required to pay a higher interest rate
in future financings, and our potential pool of investors and funding sources
would likely decrease. Further, if our short-term rating were to fall below A-1
or P-1, the current ratings assigned by Standard & Poor's and Moody's,
respectively, it may significantly limit our access to the commercial paper
market. Our Moody's short-term rating is also on review for potential downgrade.
Our ratings may be dependent on, among other things, our earnings for 2002
and the outlook for 2003. We believe that our earnings for 2003 could be below
those of 2002 without an improvement in market conditions. If, as a result of
market conditions or other factors affecting our business, we are unable to
achieve our earnings outlook or we lower our earnings outlook, our ratings could
be adversely affected.
Our power and gas trading businesses rely on our investment grade ratings.
Most of our counterparties require the creditworthiness of an investment grade
entity to stand behind transactions. If our ratings were to decline below
investment grade, our ability to profitably operate our power and gas trading
businesses would be diminished because we would likely have to deposit
collateral of cash or cash related instruments which would reduce our profits.
OPERATIONAL RISKS
IF WE DO NOT SUCCESSFULLY INTEGRATE RECENTLY ACQUIRED OR NEW ASSETS INTO
OUR OPERATIONS, WE MAY INCUR SIGNIFICANT EXPENSES AND LOSSES.
We may not be able to successfully or profitably integrate, operate,
maintain and manage our recently acquired or developed assets in a competitive
environment. Our ability to successfully integrate acquired assets into our
operations, such as Westcoast Energy, will depend on, among other things, the
adequacy of our implementation plans and the ability to achieve desired
operating efficiencies. Successful business combinations require management and
other personnel to devote significant amounts of time to integrating the
acquired business with existing operations. These efforts may distract their
attention from day-to-day business, the development or acquisition of new
properties and other business opportunities. Unexpected costs or challenges may
also arise whenever businesses with different operations and management are
combined. We will experience increased costs and losses on our investments if we
are unable to successfully integrate new assets into our operations.
OUR INVESTMENTS AND PROJECTS LOCATED OUTSIDE OF THE UNITED STATES EXPOSE US
TO RISKS RELATED TO LAWS OF OTHER COUNTRIES, TAXES, ECONOMIC CONDITIONS,
FLUCTUATIONS IN CURRENCY RATES, POLITICAL CONDITIONS AND POLICIES OF FOREIGN
GOVERNMENTS. THESE RISKS MAY DELAY OR REDUCE OUR REALIZATION OF VALUE FROM OUR
INTERNATIONAL PROJECTS.
We currently own and may acquire and/or dispose of material energy-related
investments and projects outside the United States. The economic and political
conditions in certain countries where we have
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interests or in which we may explore development, acquisition or investment
opportunities present risks of delays in construction and interruption of
business, as well as risks of war, expropriation, nationalization,
renegotiation, trade sanctions or nullification of existing contracts and
changes in law or tax policy, that are greater than in the United States. The
uncertainty of the legal environment in certain foreign countries in which we
develop or acquire projects or make investments could make it more difficult to
obtain non-recourse project or other financing on suitable terms, could
adversely affect the ability of certain customers to honor their obligations
with respect to such projects or investments and could impair our ability to
enforce our rights under agreements relating to such projects or investments.
Operations in foreign countries also can present currency exchange rate and
convertibility, inflation and repatriation risk. In certain conditions under
which we develop or acquire projects, or make investments, economic and monetary
conditions and other factors could affect our ability to convert our earnings
denominated in foreign currencies. In addition, risk from fluctuations in
currency exchange rates can arise when our foreign subsidiaries expend or borrow
funds in one type of currency but receive revenue in another. In such cases, an
adverse change in exchange rates can reduce our ability to meet expenses,
including debt service obligations. Foreign currency risk can also arise when
the revenues received by our foreign subsidiaries are not in U.S. dollars. In
such cases, a strengthening of the U.S. dollar could reduce the amount of cash
and income we receive from these foreign subsidiaries. While we believe we have
hedges and contracts in place to mitigate our most significant short-term
foreign currency exchange risks, our hedges may not be sufficient or we may have
some exposures that are not hedged which could result in losses or volatility in
our revenues.
THE LONG-TERM FINANCIAL CONDITION OF OUR U.S. AND CANADIAN NATURAL GAS
TRANSMISSION BUSINESSES ARE DEPENDENT ON THE CONTINUED AVAILABILITY OF NATURAL
GAS RESERVES.
The development of additional natural gas reserves requires significant
capital expenditures by others for exploration and development drilling and the
installation of production, gathering, storage, transportation and other
facilities and permit natural gas to be produced and delivered to our pipeline
systems. Low prices for natural gas, regulatory limitations, or the lack of
available capital for these projects could adversely affect the development of
additional reserves and production, gathering, storage and pipeline transmission
and import and export of natural gas supplies. Additional natural gas reserves
may not be developed in commercial quantities and in sufficient amounts to fill
the capacities of our pipeline systems.
GATHERING, PROCESSING AND TRANSPORTING ACTIVITIES INVOLVE NUMEROUS RISKS
THAT MAY RESULT IN ACCIDENTS AND OTHER OPERATING RISKS AND COSTS.
There are inherent in our gas gathering, processing and transporting
properties a variety of hazards and operating risks, such as leaks, explosions
and mechanical problems, that could cause substantial financial losses. In
addition, these risks could result in loss of human life, significant damage to
property, environmental pollution, impairment of our operations and substantial
losses to us. In accordance with customary industry practice, we maintain
insurance against some, but not all, of these risks and losses. The occurrence
of any of these events not fully covered by insurance could have a material
adverse effect on our financial position and results of operations. The location
of pipelines near populated areas, including residential areas, commercial
business centers and industrial sites, could increase the level of damages
resulting from these risks.
WE ARE SUBJECT TO THE RISKS OF NUCLEAR GENERATION.
Our three nuclear stations, Oconee, Catawba and McGuire subject us to the
risks of nuclear generation, which include:
- the potential harmful effects on the environment and human health
resulting from the operation of nuclear facilities and the storage,
handling and disposal of radioactive materials;
- limitations on the amounts and types of insurance commercially available
to cover losses that might arise in connection with nuclear operations;
and
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- uncertainties with respect to the technological and financial aspects of
decommissioning nuclear plants at the end of their licensed lives.
The Nuclear Regulatory Commission has broad authority under federal law to
impose licensing and safety-related requirements for the operation of nuclear
generation facilities. In the event of non-compliance, the Nuclear Regulatory
Commission has the authority to impose fines or shut down a unit, or both,
depending upon its assessment of the severity of the situation, until compliance
is achieved. Revised safety requirements promulgated by the Nuclear Regulatory
Commission could necessitate substantial capital expenditures at our nuclear
plants. In addition, although we have no reason to anticipate a serious nuclear
incident, if an incident did occur, it could have a material adverse effect on
our results of operations or financial condition. Furthermore, the
non-compliance of other nuclear facilities operators with applicable regulations
or the occurrence of a serious nuclear incident at other facilities could result
in increased regulation of the industry as a whole, which could then increase
our compliance costs and impact the results of operations of our facilities.
RECENT TERRORIST ACTIVITIES AND THE POTENTIAL FOR MILITARY AND OTHER
ACTIONS COULD ADVERSELY AFFECT OUR BUSINESS.
On September 11, 2001, the United States was the target of terrorist
attacks of unprecedented scope. The continued threat of terrorism and the impact
of retaliatory military and other action by the United States and its allies may
lead to increased political, economic and financial market instability and
volatility in prices for natural gas which could affect the market for our gas
operations. In addition, future acts of terrorism could be directed against
companies operating in the United States. In particular, nuclear generation
facilities such as our nuclear plants could be potential targets of terrorist
activities. These developments have subjected our operations to increased risks
and, depending on their ultimate magnitude, could have a material adverse effect
on our business. In particular, we may experience increased capital or operating
costs to implement increased security for our plants, including our nuclear
power plants under the Nuclear Regulatory Commission's design basis threat
requirements, such as additional physical plant security and additional security
personnel.
The insurance industry has also been disrupted by these events. As a
result, the availability of insurance covering risks we and our competitors
typically insure against may decrease. In addition, the insurance we are able to
obtain may have higher deductibles, higher premiums and more restrictive policy
terms.
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RATIO OF EARNINGS TO FIXED CHARGES
(UNAUDITED)
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------- -------------------
1997(1) 1998 1999 2000 2001 2002
------- ---- ---- ---- ---- ----
Ratio of Earnings to Fixed
Charges......................... 4.0 4.5 2.7 3.6 3.8 2.3
---------------
(1) Data reflects accounting for the stock-for-stock merger of Duke Energy and
PanEnergy Corp on June 18, 1997 as a pooling of interests. As a result, the
data gives effect to the merger as if it had occurred as of January 1, 1997.
For purposes of these ratios (a) earnings consist of income from continuing
operations before income taxes and fixed charges, and (b) fixed charges consist
of all interest deductions, the interest component of rentals and preference
security dividends of consolidated subsidiaries.
USE OF PROCEEDS
The aggregate net proceeds from the sale of the Notes will be approximately
$109.2 million, after deducting agents' commissions and related offering
expenses. Concurrently with this offering, we are offering, by separate
prospectus supplement, $400 million of our 5.625% Senior Notes due 2012 with
aggregate net proceeds to us estimated to be $397.1 million after deducting
underwriting discounts and related offering expenses. Neither offering is
conditioned on the completion of the other.
The net proceeds from the sale of the Notes and our concurrent offering of
5.625% Senior Notes due 2012 will be used to repay $300 million of our
commercial paper with additional amounts used for general corporate purposes. At
November 7, 2002, Duke Energy had $1,042 million of commercial paper
outstanding, which had a weighted average interest rate of 1.72%, maturities of
approximately three months or less and was incurred for general corporate
purposes.
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CAPITALIZATION
The following table sets forth our capitalization as of September 30, 2002:
- on an actual basis; and
- on an as adjusted basis to give effect to (i) the issuance of 54,500,000
shares of our common stock on October 1, 2002, (ii) the issuance of
$350,000,000 of our 6.45% Senior Notes due 2032 on October 8, 2002, (iii)
the issuance of $400,000,000 of our 5.625% Senior Notes due 2012 being
offered concurrently with this offering by a separate prospectus
supplement, (iv) the issuance of the Notes offered hereby and (v) the
application of the net proceeds as described under "Use of Proceeds."
You should read the information in this table together with our
consolidated financial statements and the related notes incorporated by
reference in this prospectus supplement and the accompanying prospectus.
AS OF SEPTEMBER 30, 2002
-------------------------
ACTUAL AS ADJUSTED
--------- -------------
(IN MILLIONS)
Short-term debt, including commercial paper................. $ 2,199 $ 925(1)
Long-term debt, including current maturities:
First and refunding mortgage bonds........................ 790 690(2)
Other long-term debt...................................... 3,676 3,776
5.625% Senior Notes due 2012.............................. -- 400
4.611% Senior Notes due 2007.............................. -- 110
Long-term debt of subsidiaries............................ 16,204 16,204
Total long term debt................................... 20,670 21,180
------- -------
Guaranteed preferred beneficial interests in subordinated
notes of Duke Energy or subsidiaries...................... 1,408 1,408
------- -------
Minority interests.......................................... 1,905 1,905
------- -------
Preferred and preference stock, including current sinking
fund obligations:
With sinking fund requirements............................ 38 38
Without sinking fund requirements......................... 134 134
------- -------
Total preferred stock, including current sinking fund
obligations.......................................... 172 172
------- -------
Common stockholders' equity:
Common stock, no par; 2 billion shares authorized; 836
million shares outstanding, actual and 891 million
shares outstanding, as adjusted........................ 8,176 9,150
Retained earnings........................................... 6,716 6,716
Accumulated other comprehensive income...................... (763) (763)
------- -------
Total common stockholders' equity......................... 14,129 15,103
------- -------
Total capitalization................................... $40,483 $40,693
======= =======
---------------
(1) Assumes the payment of $974 million in Duke Capital's commercial paper with
the proceeds from our common stock offering on October 1, 2002 and payment
of $300 million of Duke Energy's commercial paper with the proceeds from the
issuance of the Notes offered hereby and the concurrent offering of our
5.625% Senior Notes due 2012. This offering and the concurrent senior notes
offering are not conditioned on the completion of each other.
(2) Reflects the redemption of $100 million of Duke Energy's 7 1/2% Series B
First and Refunding Mortgage Bonds due 2025 with the proceeds of our
offering of 6.45% Senior Notes due 2032.
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DESCRIPTION OF THE NOTES
GENERAL
The following description of the terms of the Notes summarizes certain
general terms that will apply to the Notes. The Notes will be issued under a
Senior Indenture between us and JPMorgan Chase Bank (formerly known as The Chase
Manhattan Bank), as trustee, dated as of September 1, 1998, as supplemented from
time to time. This description is not complete, and we refer you to the
accompanying prospectus and the Senior Indenture. Defined terms have the
meanings assigned to them in the Senior Indenture.
Purchases of Notes or beneficial interests therein may be made in
denominations of $1,000 or any integral multiples of $1,000 in excess thereof.
Notes will be issued in an aggregate principal amount of $110,000,000.
We may from time to time, without the consent of existing holders, create
and issue further Notes having the same terms and conditions as the Notes being
offered hereby in all respects, except for issue date, issue price and, if
applicable, the first payment of interest thereon. Additional Notes issued in
this manner will be consolidated with and will form a single series with the
previously outstanding Notes of like tenor.
The Notes are rated A1 by Moody's (on review for potential downgrade), A by
Standard & Poor's and A by Fitch (on negative outlook).
As used in this prospectus supplement, business day means, with respect to
the Notes, any day, other than a Saturday or Sunday, that is neither a legal
holiday nor a day on which commercial banks are authorized or required by law,
regulation or executive order to close in The City of New York.
RANKING
The Notes will be our direct, unsecured and unsubordinated obligations. The
Notes will rank equal in priority with all of our existing and future unsecured
and unsubordinated indebtedness and senior in right of payment to all of our
existing and future subordinated debt. The First and Refunding Mortgage Bonds
are effectively senior to the Notes to the extent of the value of the properties
securing them. As of September 30, 2002, there were approximately $790 million
aggregate principal amount of First and Refunding Mortgage Bonds outstanding.
Our Senior Indenture contains no restrictions on the amount of additional
indebtedness that we may issue under it.
INTEREST
The Notes will mature on November 30, 2007 and will bear interest at a rate
of 4.611% per annum. Interest shall be payable semi-annually on May 30 and
November 30 of each year, commencing May 30, 2003. If an interest payment date
falls on a day that is not a business day, interest will be payable on the next
succeeding business day with the same force and effect as if made on such
interest payment date. Interest will be paid to the person in whose name each
Note is registered at the close of business on the fifteenth calendar day next
preceding each semi-annual interest payment date (whether or not a business
day). Interest will be calculated on the basis of a 360-day year, consisting of
twelve 30-day months, and will accrue from November 20, 2002 or from the most
recent interest payment date to which interest has been paid or duly provided
for.
OPTIONAL REDEMPTION
We will have the right to redeem the Notes, in whole or in part at any time
and from time to time, at a redemption price equal to the greater of (1) 100% of
the principal amount of the Notes to be redeemed and (2) the sum of the present
values of the remaining scheduled payments of principal and interest on such
Notes (exclusive of interest accrued to the redemption date) discounted to the
redemption date on a semiannual basis (assuming a 360-day year consisting of
twelve 30-day months) at the Treasury Rate plus
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25 basis points, plus, in either case, accrued and unpaid interest on the
principal amount being redeemed to such redemption date.
"Comparable Treasury Issue" means the United States Treasury security
selected by the Quotation Agent as having a maturity comparable to the remaining
term of the Notes to be redeemed that would be utilized, at the time of
selection and in accordance with customary financial practice, in pricing new
issues of corporate debt securities of comparable maturity to the remaining term
of such Notes.
"Comparable Treasury Price" means with respect to any redemption date for
Notes, the Reference Treasury Dealer Quotation for such redemption date.
"Quotation Agent" means the Reference Treasury Dealer appointed by us.
"Reference Treasury Dealer" means Banc of America Securities LLC and its
successors; provided, however, that if the foregoing shall cease to be a primary
U.S. Government securities dealer in New York City (a "Primary Treasury
Dealer"), we will substitute therefor another Primary Treasury Dealer.
"Reference Treasury Dealer Quotation" means, with respect to the Reference
Treasury Dealer and any redemption date, the average, as determined by the
trustee, of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) quoted in
writing to the trustee by such Reference Treasury Dealer at 5:00 p.m., New York
City time, on the third business day preceding such redemption date.
"Treasury Rate" means, with respect to any redemption date, (1) the yield,
under the heading which represents the average for the immediately preceding
week, appearing in the most recently published statistical release designated
"H.15 (519)" or any successor publication which is published weekly by the Board
of Governors of the Federal Reserve System and which establishes yields on
actively traded United States Treasury securities adjusted to constant maturity
under the caption "Treasury Constant Maturities," for the maturity corresponding
to the Comparable Treasury Issue (if no maturity is within three months before
or after the maturity date of the Notes to be redeemed, yields for the two
published maturities most closely corresponding to the Comparable Treasury Issue
shall be determined, and the Treasury Rate shall be interpolated or extrapolated
from such yields on a straight-line basis, rounding to the nearest month) or (2)
if such release (or any successor release) is not published during the week
preceding the calculation date or does not contain such yields, the rate per
year equal to the semi-annual equivalent yield to maturity of the Comparable
Treasury Issue, calculated using a price for the Comparable Treasury Issue
(expressed as a percentage of its principal amount) equal to the Comparable
Treasury Price for such redemption date. The Treasury Rate will be calculated on
the third business day preceding the redemption date.
REDEMPTION PROCEDURES
We will provide not less than 30 nor more than 60 days' notice mailed to
each registered holder of the Notes to be redeemed. If the redemption notice is
given and funds deposited as required, then interest will cease to accrue on and
after the redemption date on the Notes or portions of such Notes called for
redemption. In the event that any redemption date is not a business day, we will
pay the redemption price on the next business day without any interest or other
payment due to the delay.
SINKING FUND
There is no provision for a sinking fund applicable to the Notes.
S-23
BOOK-ENTRY SYSTEM
BOOK ENTRY INSIDE THE UNITED STATES
We have obtained the information in this section concerning The Depository
Trust Company, or DTC, and its book-entry system and procedures from sources
that we believe to be reliable, but we take no responsibility for the accuracy
of this information.
The Notes initially will be represented by one or more fully registered
global notes. Each global note will be deposited with, or on behalf of, DTC or
any successor thereto and registered in the name of Cede & Co., DTC's nominee.
You may hold your interests in the global notes in the United States
through DTC, either as a participant in such system or indirectly through
organizations which are participants in such system. So long as DTC or its
nominee is the registered owner of the global securities representing the Notes,
DTC or such nominee will be considered the sole owner and holder of the Notes
for all purposes of the Notes and the Senior Indenture. Except as provided
below, owners of beneficial interests in the Notes will not be entitled to have
the Notes registered in their names, will not receive or be entitled to receive
physical delivery of the Notes in definitive form and will not be considered the
owners or holders of the Notes under the Senior Indenture, including for
purposes of receiving any reports that we or the trustee deliver pursuant to the
Senior Indenture. Accordingly, each person owning a beneficial interest in a
Note must rely on the procedures of DTC or its nominee and, if such person is
not a participant, on the procedures of the participant through which such
person owns its interest, in order to exercise any rights of a holder of Notes.
Unless and until we issue the Notes in fully certificated form under the
limited circumstances described below under the heading "-- Certificated Notes":
- you will not be entitled to receive physical delivery of a certificate
representing your interest in the Notes;
- all references in this prospectus supplement or in the accompanying
prospectus to actions by holders will refer to actions taken by DTC upon
instructions from its direct participants; and
- all references in this prospectus supplement or the accompanying
prospectus to payments and notices to holders will refer to payments and
notices to DTC or Cede & Co., as the registered holder of the Notes, for
distribution to you in accordance with DTC procedures.
THE DEPOSITORY TRUST COMPANY
DTC will act as securities depositary for the Notes. The Notes will be
issued as fully registered notes registered in the name of Cede & Co. DTC is:
- a limited-purpose trust company organized under the New York Banking Law;
- a "banking organization" under the New York Banking Law;
- a member of the Federal Reserve System;
- a "clearing corporation" under the New York Uniform Commercial Code; and
- a "clearing agency" registered under the provision of Section 17A of the
Securities Exchange Act of 1934.
DTC holds securities that its direct participants deposit with DTC. DTC
also facilitates the settlement among direct participants of securities
transactions, such as transfers and pledges, in deposited securities through
electronic computerized book-entry changes in direct participants' accounts,
thereby eliminating the need for physical movement of securities certificates.
S-24
Direct participants of DTC include securities brokers and dealers
(including placement agents), banks, trust companies, clearing corporations, and
certain other organizations. DTC is owned by a number of its direct participants
and by The New York Stock Exchange, Inc., the American Stock Exchange, Inc. and
the National Association of Securities Dealers, Inc. Indirect participants of
DTC, such as securities brokers and dealers, banks and trust companies, can also
access the DTC system if they maintain a custodial relationship with a direct
participant.
If you are not a direct participant or an indirect participant and you wish
to purchase, sell or otherwise transfer ownership of, or other interests in, the
Notes, you must do so through a direct participant or an indirect participant.
DTC agrees with and represents to DTC participants that it will administer its
book-entry system in accordance with its rules and by-laws and requirements of
law. The SEC has on file a set of the rules applicable to DTC and its direct
participants.
Purchases of the Notes under DTC's system must be made by or through direct
participants, which will receive a credit for the Notes on DTC's records. The
ownership interest of each beneficial owner is in turn to be recorded on the
records of direct participants and indirect participants. Beneficial owners will
not receive written confirmation from DTC of their purchase, but beneficial
owners are expected to receive written confirmations providing details of the
transaction, as well as periodic statements of their holdings, from the direct
or indirect participants through which such beneficial owners entered into the
transaction. Transfers of ownership interests in the Notes are to be
accomplished by entries made on the books of direct and indirect participants
acting on behalf of beneficial owners. Beneficial owners will not receive
physical delivery of certificates representing their ownership interests in the
Notes, except as provided below in "-- Certificated Notes."
To facilitate subsequent transfers, all Notes deposited with DTC are
registered in the name of DTC's nominee, Cede & Co. The deposit of Notes with
DTC and their registration in the name of Cede & Co. has no effect on beneficial
ownership. DTC has no knowledge of the actual beneficial owners of the Notes.
DTC's records reflect only the identity of the direct participants to whose
accounts such Notes are credited, which may or may not be the beneficial owners.
The participants will remain responsible for keeping account of their holdings
on behalf of their customers.
Conveyance of notices and other communications by DTC to direct
participants, by direct participants to indirect participants and by direct and
indirect participants to beneficial owners will be governed by arrangements
among them, subject to any statutory or regulatory requirements as may be in
effect from time to time.
BOOK-ENTRY FORMAT
Under the book-entry format, the trustee will pay interest or principal
payments to Cede & Co., as nominee of DTC. DTC will forward the payment to the
direct participants, who will then forward the payment to the indirect
participants or to the beneficial owners. You may experience some delay in
receiving your payments under this system.
DTC is required to make book-entry transfers on behalf of its direct
participants and is required to receive and transmit payments of principal,
premium, if any, and interest on the Notes. Any direct participant or indirect
participant with which you have an account is similarly required to make
book-entry transfers and to receive and transmit payments with respect to Notes
on your behalf. We and the trustee have no responsibility or liability for any
aspect of the records relating to or payments made on account of beneficial
ownership interests in the Notes or for maintaining, supervising or reviewing
any records relating to such beneficial ownership interests.
The trustee will not recognize you as a holder under the Senior Indenture,
and you can only exercise the rights of a holder indirectly through DTC and its
direct participants. DTC has advised us that it will only take action regarding
a Note if one or more of the direct participants to whom the Note is credited
direct DTC to take such action. DTC can only act on behalf of its direct
participants. Your ability to
S-25
pledge Notes to indirect participants, and to take other actions, may be limited
because you will not possess a physical certificate that represents your Notes.
CERTIFICATED NOTES
Unless and until they are exchanged, in whole or in part, for Notes in
definitive form in accordance with the terms of the Notes, the Notes may not be
transferred except as a whole by DTC to a nominee of DTC; as a whole by a
nominee of DTC to DTC or another nominee of DTC; or as a whole by DTC or nominee
of DTC to a successor of DTC or a nominee of such successor.
We will issue Notes to you or your nominees, in fully certificated
registered form, rather than to DTC or its nominees, only if:
- we advise the trustee in writing that DTC is no longer willing or able to
discharge its responsibilities properly or that DTC is no longer a
registered clearing agency under the Securities Exchange Act, and the
trustee or we are unable to locate a qualified successor within 90 days;
- an event of default has occurred and is continuing under the Senior
Indenture; or
- we, at our option, elect to terminate use of the book-entry system
through DTC.
If any of the three above events occurs, DTC is required to notify all
direct participants that Notes in fully certificated registered form are
available through DTC. DTC will then surrender the global note representing the
Notes along with instructions for re-registration. The trustee will re-issue the
Notes in full certificated registered form and will recognize the registered
holders of the certificated Notes as holders under the Senior Indenture.
BOOK-ENTRY OUTSIDE THE UNITED STATES
The information in this section concerning Clearstream Banking, societe
anonyme, or Clearstream, and Euroclear Bank S.A./N.V., or the Euroclear
operator, as operator of the Euroclear System, or Euroclear, has been obtained
from sources that we believe to be reliable, but we take no responsibility for
the accuracy of this information.
Holders of trust certificates outside of the United States may own
interests in such securities through Euroclear or Clearstream. Under certain
circumstances, the Notes may be distributed to, or sold and the proceeds
therefrom distributed to, such holders as the beneficial owners of the Notes, in
which case, such distribution or sale would be effected through DTC on behalf of
Euroclear or Clearstream as participants of DTC.
CLEARSTREAM
Clearstream is incorporated as a limited liability company under Luxembourg
law. Clearstream holds securities for its customers and facilitates the
clearance and settlement of securities transactions between its customers
through electronic book-entry transfer between their accounts, thus eliminating
the need for physical movement of certificates. Clearstream provides to its
customers, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Clearstream interfaces with domestic markets in a number
of countries. Clearstream has established an electronic bridge with Euroclear to
facilitate settlement of trades between Clearstream and Euroclear.
As a registered bank in Luxembourg, Clearstream is subject to regulation by
the Luxembourg Commission for the Supervision of the Financial Sector, also
known as the Commission de Surveillance du Secteur Financier. Clearstream
customers are recognized financial institutions around the world, including
underwriters, securities brokers and dealers, banks, trust companies and
clearing corporations. In the United States, Clearstream customers are limited
to securities brokers and dealers and banks. Other institutions that maintain a
custodial relationship with a Clearstream customer may obtain indirect access to
Clearstream.
S-26
Distributions with respect to the notes held beneficially through
Clearstream will be credited to cash accounts of Clearstream customers in
accordance with its rules and procedures, to the extent received by Clearstream.
EUROCLEAR
Euroclear was created in 1968 to hold securities for its participants and
to clear and settle transactions between Euroclear participants through
simultaneous electronic book-entry delivery against payment, thus eliminating
the need for physical movement of certificates and risk from lack of
simultaneous transfers of securities and cash. Transactions may now be settled
in many currencies, including U.S. dollars and Japanese Yen. Euroclear provides
various other services, including securities lending and borrowing, and
interfaces with domestic markets in several countries.
Euroclear is operated by the Euroclear operator. Euroclear Clearance
Systems S.C. establishes policy for Euroclear on behalf of Euroclear
participants. Euroclear participants include banks, including central banks,
securities brokers and dealers and other professional financial intermediaries.
Indirect access to Euroclear is also available to other firms that clear through
or maintain a custodial relationship with a Euroclear participant, either
directly or indirectly.
Securities clearance accounts and cash accounts with the Euroclear operator
are governed by the terms and conditions governing use of Euroclear and the
related operating procedures of Euroclear and applicable Belgian law. These
terms, conditions and procedures govern transfers of securities and cash within
Euroclear, withdrawals of securities and cash from Euroclear, and receipts of
payments with respect to securities in Euroclear. All securities in Euroclear
are held on a fungible basis without attribution of specific certificates to
specific securities clearance accounts. The Euroclear operator acts under the
terms and conditions governing use of Euroclear only on behalf of Euroclear
participants and has no record of or relationship with persons holding through
Euroclear participants.
Distributions with respect to interests in global securities held
beneficially through Euroclear will be credited to the cash accounts of
Euroclear participants in accordance with Euroclear's terms and conditions and
operating procedures and applicable Belgian law, to the extent received by the
U.S. depositary for Euroclear.
Investors that acquire, hold and transfer interests in global securities by
book-entry through accounts with the Euroclear operator or any other securities
intermediary are subject to the laws and contractual provisions governing their
relationship with their intermediary, as well as the laws and contractual
provisions governing the relationship between that intermediary and each other
intermediary, if any, standing between themselves and the Euroclear operator.
Under Belgian law, investors that are credited with securities on the
records of the Euroclear operator have a co-property right in the fungible pool
of interests in securities on deposit with the Euroclear operator in an amount
equal to the amount of interests in securities credited to their accounts. In
the event of the insolvency of the Euroclear operator, Euroclear participants
would have a right under Belgian law to the return of the amount and type of
interests credited to their accounts with the Euroclear operator. If the
Euroclear operator did not have on deposit a sufficient amount of securities of
a particular type to cover the claims of all participants credited with such
interests in securities on the Euroclear operator's records, all participants
having an amount of interests in securities of such type credited to their
accounts with the Euroclear operator would have the right under Belgian law to
the return of their pro rata share of the amount of securities actually on
deposit.
Under Belgian law, the Euroclear operator is required to pass on the
benefits of ownership of any interests in securities on deposit with it, such as
dividends, voting rights and other entitlements, to any person credited with
such interests in securities on its records.
S-27
GLOBAL CLEARANCE AND SETTLEMENT PROCEDURES
Initial settlement for global securities will be made in immediately
available funds. DTC participants will conduct secondary market trading with
other DTC participants in the ordinary way in accordance with DTC rules.
Thereafter, secondary market trades will settle in immediately available funds
using DTC's same day funds settlement system.
Clearstream customers and/or Euroclear participants will conduct secondary
market trading with other Clearstream customers and/or Euroclear participants in
accordance with the rules and operating procedures of Clearstream and Euroclear.
Thereafter, secondary market trades will settle in immediately available funds.
Cross-market transfers between persons holding directly or indirectly
through DTC participants on the one hand, and directly or indirectly through
Clearstream customers or Euroclear participants, on the other, will be effected
in DTC in accordance with DTC's rules on behalf of the relevant European
international clearing system by the U.S. depositary for that system; however,
those cross-market transactions will require delivery by the counterparty in the
relevant European international clearing system of instructions to that system
in accordance with its rules and procedures and within its established deadlines
(European time). The relevant European international clearing system will, if
the transaction meets its settlement requirements, deliver instructions to the
U.S. depositary for that system to take action to effect final settlement on its
behalf by delivering or receiving interests in global securities in DTC, and
making or receiving payment in accordance with normal procedures for same-day
funds settlement applicable to DTC. Clearstream customers and Euroclear
participants may not deliver instructions directly to DTC.
Because of time-zone differences, credits of interests in global securities
received in Clearstream or Euroclear as a result of a transaction with a DTC
participant will be made during subsequent securities settlement processing and
will be credited the business day following the DTC settlement date. Those
credits or any transactions in global securities settled during that processing
will be reported to the relevant Euroclear participants or Clearstream customers
on that business day. Cash received in Clearstream or Euroclear as a result of
sales of interests in global securities by or through a Clearstream customer or
a Euroclear participant to a DTC participant will be received with value on the
DTC settlement date but will be available in the relevant Clearstream or
Euroclear cash account only as of the business day following settlement in DTC.
Although DTC, Clearstream and Euroclear have agreed to the procedures
described above in order to facilitate transfers of interests in global
securities among DTC participants, Clearstream and Euroclear, they are under no
obligation to perform those procedures and those procedures may be discontinued
at any time.
S-28
PLAN OF DISTRIBUTION
We have entered into a placement agency agreement with Banc of America
Securities LLC, J.P. Morgan Securities Inc., Fleet Securities, Inc., HSBC
Securities (USA) Inc. and Wachovia Securities, Inc. as our agents, or the
placement agents, with respect to the solicitation by the placement agents on a
reasonable efforts basis on our behalf of offers to purchase, and the issue and
sale by us of, $110,000,000 aggregate principal amount of the Notes to the Core
Investment Grade Bond Trust I, or the trust, through Core Bond Products LLC, as
depositor. Purchasers of the trust's pass-through certificates will acquire an
indirect interest in the Notes pursuant to the terms of the trust and the
pass-through certificates and, under certain circumstances, may acquire direct
interests in the Notes. The placement agents have also agreed that they will, on
behalf of the trust, use their reasonable efforts to solicit offers to purchase
the trust's pass-through certificates.
We are offering these Notes ultimately to purchasers of pass-through
certificates of the trust offered simultaneously herewith through Core Bond
Products LLC, as depositor of the trust, utilizing the services of Banc of
America Securities LLC, J.P. Morgan Securities Inc., Fleet Securities, Inc.,
HSBC Securities (USA) Inc. and Wachovia Securities, Inc. as our agents. Each of
Banc of America Securities LLC, J.P. Morgan Securities Inc., Fleet Securities,
Inc., HSBC Securities (USA) Inc. and Wachovia Securities, Inc. is a statutory
underwriter within the meaning of the Securities Act of 1933.
Pursuant to the terms and conditions contained in the placement agency
agreement, we have agreed to pay each placement agent a commission equal to
0.30% of the principal amount of each Note to be delivered to the trust.
The closing conditions for the sale of the Notes generally provide for the
delivery of officer's certificates, legal opinions and comfort letters
confirming the legality and rating of the Notes, the accuracy of our
representations and the effectiveness of our registration statement and the
absence of customary market-out conditions.
The expenses of the offering, not including the agents' commissions, are
estimated to be approximately $500,000. We have agreed to indemnify the
placement agents against certain liabilities, including liabilities under the
Securities Act of 1933.
In the ordinary course of their respective businesses, the placement agents
and/or their affiliates have in the past and may in the future provide us with
financial advisory and other services.
We have authorized the placement agents to deliver a copy of this
prospectus supplement and the accompanying prospectus relating to the Notes
offered hereby to purchasers of the trust's pass-through certificates. This
prospectus supplement and the accompanying prospectus relate only to Duke Energy
and the Notes and do not relate to the trust or the pass-through certificates.
You should rely only on this prospectus supplement and the accompanying
prospectus for a description of Duke Energy and the Notes.
We have not been involved in the creation of the trust or the preparation
of the registration statement and related prospectus relating to the offering
and sale of the trust's pass-through certificates. We are not partners or joint
venturers or in any similar relationship with the trust or any of the other
issuers whose securities may be deposited in the trust nor do we own any
interest in the trust. Accordingly, we are not assuming any responsibility for
or any liability or obligations with respect to the trust, the pass-through
certificates, the securities of any other issuer that may be deposited into the
trust or the registration statements and prospectuses relating to the
pass-through certificates or any such securities of other issuers. Our
responsibilities, liabilities and obligations are limited solely to the
information contained in or incorporated by reference in this prospectus
supplement and the accompanying prospectus and to our obligations under the
Notes.
S-29
EXPERTS
The consolidated financial statements and the related financial statement
schedule incorporated by reference in this prospectus supplement from Duke
Energy's Annual Report on Form 10-K for the year ended December 31, 2001 have
been audited by Deloitte & Touche LLP, as independent auditors, as stated in
their report, which is incorporated by reference herein, and have been so
incorporated in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters with respect to the offering of the Notes will be
passed on for us by Edward M. Marsh, Jr., Esq., who is our Deputy General
Counsel and Assistant Secretary, and by Simpson Thacher & Bartlett, New York,
New York, and for the placement agents by Sidley Austin Brown & Wood LLP, New
York, New York. In rendering their opinions, Simpson Thacher & Bartlett and
Sidley Austin Brown & Wood LLP will rely upon Mr. Marsh as to all matters of
North Carolina law. As of September 23, 2002, Mr. Marsh owned 10,512 shares of
our common stock or common stock units and options to purchase 36,350 shares,
10,800 of which were exercisable.
S-30
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports and other information with
the SEC. You may read and copy any documents that we have filed at the SEC's
Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549.
You may also obtain copies of these documents at prescribed rates from the
Public Reference Section of the SEC at its Washington address.
Please call the SEC at 1-800-SEC-0330 for further information. Our filings
are also available to the public through:
- the SEC web site at http://www.sec.gov; and
- The New York Stock Exchange
20 Broad Street
New York, New York 10005.
Information about us is also available on our web site at
http://www.duke-energy.com. Such web site is not a part of this prospectus
supplement.
The SEC allows us to "incorporate by reference" the information we file
with it, which information incorporated by reference is considered to be part of
this prospectus supplement and the accompanying prospectus, and later
information that we file with the SEC will automatically update and supersede
that information as well as the information included in this prospectus
supplement and the accompanying prospectus. We incorporate by reference the
documents listed below and any future filings made with the SEC under Sections
13(a), 13(c), 14, or 15(d) of the Securities Exchange Act of 1934 filed prior to
the termination of this offering:
- Our annual report on Form 10-K for the year ended December 31, 2001;
- Our quarterly reports on Form 10-Q for the quarters ended March 31, 2002,
June 30, 2002 and September 30, 2002; and
- Our current reports on Form 8-K filed on March 29, 2002 and April 15,
2002.
We will provide without charge a copy of these filings, other than any
exhibits unless the exhibits are specifically incorporated by reference into
this prospectus supplement. You may request your copy by writing us at the
following address or telephoning one of the following numbers:
Investor Relations Department
Duke Energy Corporation
P.O. Box 1005
Charlotte, North Carolina 28201
(704) 382-3853 or (800) 488-3853 (toll-free)
S-31
PROSPECTUS
$2,000,000,000
DUKE ENERGY CORPORATION
SENIOR NOTES
JUNIOR SUBORDINATED NOTES
FIRST AND REFUNDING MORTGAGE BONDS
COMMON STOCK
STOCK PURCHASE CONTRACTS
STOCK PURCHASE UNITS
---------------------
DUKE ENERGY CAPITAL TRUST III
DUKE ENERGY CAPITAL TRUST IV
DUKE ENERGY CAPITAL TRUST V
TRUST PREFERRED SECURITIES
GUARANTEED, TO THE EXTENT DESCRIBED HEREIN, BY
DUKE ENERGY CORPORATION
---------------------
This prospectus contains summaries of the general terms of these
securities. You will find the specific terms of these securities, and the manner
in which they are being offered, in supplements to this prospectus. You should
read this prospectus and the applicable prospectus supplement carefully before
you invest.
The Common Stock of Duke Energy is listed on the New York Stock Exchange
under the symbol "DUK."
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
This prospectus is dated August 27, 2002.
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that Duke Energy, Duke
Energy Capital Trust III, Duke Energy Capital Trust IV and Duke Energy Capital
Trust V filed with the SEC utilizing a "shelf" registration process. Under the
shelf registration process, Duke Energy may issue Senior Notes, Junior
Subordinated Notes, First and Refunding Mortgage Bonds, Common Stock, Stock
Purchase Contracts and Stock Purchase Units and the Trusts may issue Preferred
Securities in one or more offerings up to a total dollar amount of
$2,000,000,000.
This prospectus provides general descriptions of the securities Duke Energy
and the Trusts may offer. Each time securities are sold, a prospectus supplement
will provide specific information about the terms of that offering. The
prospectus supplement may also add, update or change information contained in
this prospectus. The registration statement filed with the SEC includes exhibits
that provide more details about the matters discussed in this prospectus. You
should read this prospectus, the related exhibits filed with the SEC and any
prospectus supplement, together with the additional information described under
the caption "Where You Can Find More Information."
2
DUKE ENERGY CORPORATION
Duke Energy, together with its subsidiaries, an integrated provider of
energy and energy services, offers physical delivery and management of both
electricity and natural gas throughout the United States and abroad. Duke
Energy, together with its subsidiaries, provides these and other services
through seven business segments:
o Franchised Electric
o Natural Gas Transmission
o Field Services
o North American Wholesale Energy
o International Energy
o Other Energy Services
o Duke Ventures
Franchised Electric generates, transmits, distributes and sells electricity
in central and western North Carolina and western South Carolina. It conducts
operations primarily through Duke Power and Nantahala Power and Light. These
electric operations are subject to the rules and regulations of the Federal
Energy Regulatory Commission ("FERC"), the North Carolina Utilities Commission
and the Public Service Commission of South Carolina.
Natural Gas Transmission provides transportation, storage and distribution
of natural gas for customers throughout the east coast and southern portion of
the United States and Canada. Natural Gas Transmission provides gas gathering,
processing and transportation services to customers located in British Columbia,
Canada and in the Pacific northwest region of the United States. Natural Gas
Transmission does business primarily through Duke Energy Gas Transmission
Corporation. Duke Energy acquired Westcoast Energy, Inc. on March 14, 2002.
Interstate natural gas transmission and storage operations in the United States
are subject to the FERC's rules and regulations while natural gas gathering,
processing, transmission, distribution and storage operations in Canada are
subject to the rules and regulations of the National Energy Board, the Ontario
Energy Board and the British Columbia Utilities Commission.
Field Services gathers, processes, transports, markets and stores natural
gas and produces, transports, markets and stores natural gas liquids. It
conducts operations primarily through Duke Energy Field Services, LLC, which is
approximately 30% owned by Phillips Petroleum. Field Services operates gathering
systems in western Canada and 11 contiguous states in the United States. Those
systems serve major natural gas-producing regions in the Rocky Mountains,
Permian Basin, Mid-Continent, East Texas-Austin Chalk-North Louisiana, and
onshore and offshore Gulf Coast areas.
Duke Energy North America develops, operates and manages merchant
generation facilities and engages in commodity sales and services related to
natural gas and electric power. Duke Energy North America conducts business
throughout the United States and Canada through Duke Energy North America, LLC
and Duke Energy Trading and Marketing, LLC. Duke Energy Trading and Marketing is
approximately 40% owned by Exxon Mobil Corporation. Prior to April 1, 2002, the
Duke Energy North America business segment was combined with Duke Energy
Merchants Holdings, LLC to form a segment called North American Wholesale
Energy. As of June 30, 2002, management combined Duke Energy Merchants Holdings
with the Other Energy Services segment. Management separated Duke Energy North
America for increased reporting transparency. Previous periods have been
reclassified to conform to the current presentation. As of August 1, 2002, Duke
Energy's North American trading and marketing functions currently in Duke Energy
North America and Duke Energy Merchants Holdings, including Duke Energy Trading
and Marketing and the Canadian trading operations, were consolidated into one
group.
International Energy develops, operates and manages natural gas
transportation and power generation facilities and engages in energy trading and
marketing of natural gas and electric power. It conducts
3
operations primarily through Duke Energy International, LLC and its activities
target the Latin American, Asia-Pacific and European regions.
Other Energy Services is composed of diverse energy businesses, operating
primarily through Duke Energy Merchants Holdings, Duke/Fluor Daniel and Energy
Delivery Services. Duke Energy Merchants Holdings engages in commodity buying
and selling, and risk management and financial services in the energy commodity
markets other than natural gas and power (such as refined products, liquefied
petroleum gas, residual fuels, crude oil and coal).
Duke/Fluor Daniel provides comprehensive engineering, procurement,
construction, commissioning and operating plant services for fossil-fueled
electric power generating facilities worldwide. It is a 50/50 partnership
between Duke Energy and Fluor Enterprises, Inc., a wholly owned subsidiary of
Fluor Corporation. Energy Delivery Services is an engineering, construction,
maintenance and technical services firm specializing in electric transmission
and distribution lines and substation projects. It was formed in the second
quarter of 2002 from the power delivery services component of Duke Engineering &
Services, Inc. This segment was excluded from the sale of Duke Engineering &
Services on April 30, 2002. Other Energy Services also retained the portion of
DukeSolutions, Inc. that was not sold on May 1, 2002. Duke Engineering &
Services and DukeSolutions were included in Other Energy Services through the
date of their sale.
Duke Ventures is composed of other diverse businesses, operating primarily
through Crescent Resources, LLC, DukeNet Communications, LLC and Duke Capital
Partners, LLC. Crescent Resources develops high-quality commercial, residential
and multi-family real estate projects and manages land holdings primarily in the
southeastern and southwestern United States. DukeNet Communications develops and
manages fiber optic communications systems for wireless, local and long distance
communications companies and selected educational, governmental, financial and
health care entities. Duke Capital Partners, a wholly owned merchant banking
company, provides debt and equity capital and financial advisory services
primarily to the energy industry.
The foregoing information about Duke Energy and its business segments is
only a general summary and is not intended to be comprehensive. For additional
information about Duke Energy and its business segments, you should refer to the
information described under the caption "Where You Can Find More Information."
Duke Energy is a North Carolina corporation. Its principal executive
offices are located at 526 South Church Street, Charlotte, North Carolina 28202
(telephone (704) 594-6200).
RATIO OF EARNINGS TO FIXED CHARGES
(UNAUDITED)
YEAR ENDED DECEMBER 31, SIX MONTHS
----------------------------------- ENDED JUNE 30,
1997(1) 1998 1999 2000 2001 2002
------- ---- ---- ---- ---- --------------
Ratio of Earnings to Fixed Charges.... 4.0 4.5 2.7 3.6 3.8 2.7
For purposes of this ratio (a) earnings consist of income from continuing
operations before income taxes and fixed charges, and (b) fixed charges consist
of all interest deductions, the interest component of rentals and preference
security dividends of consolidated subsidiaries.
---------------
(1) Data reflects accounting for the stock-for-stock merger of Duke Energy and
PanEnergy Corp on June 18, 1997 as a pooling of interests. As a result, the
data gives effect to the merger as if it had occurred as of January 1, 1997.
4
USE OF PROCEEDS
Unless Duke Energy states otherwise in the accompanying prospectus
supplement, Duke Energy intends to use the net proceeds from the sale of any
offered securities:
o to redeem or purchase from time to time presently outstanding securities
when it anticipates those transactions will result in an overall cost
savings;
o to repay maturing securities;
o to finance its ongoing construction program; or
o for general corporate purposes.
The proceeds from the sale of Preferred Securities by a Trust will be
invested in Junior Subordinated Notes issued by Duke Energy. Except as Duke
Energy may otherwise describe in the related prospectus supplement, Duke Energy
expects to use the net proceeds from the sale of such Junior Subordinated Notes
to the applicable Trust for the above purposes.
RECENT DEVELOPMENTS
Duke Energy adopted SFAS No. 142, "Goodwill and Other Intangible Assets,"
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 a fair-value-based annual impairment assessment.
Duke Energy did not recognize any material impairment due to the implementation
of SFAS No. 142. The standard also requires certain identifiable intangible
assets to be recognized separately and amortized as appropriate upon
reassessment. No adjustments to intangibles were identified by Duke Energy at
transition.
The following table shows what net income 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.
FOR THE YEAR ENDED
------------------------------
2001 2000 1999
-------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE
AMOUNTS)
Income Before Extraordinary Item and Cumulative Effect of
Change in Accounting Principle............................ $1,994 $1,776 $ 847
Extraordinary Gain, net of tax.............................. -- -- 660
Cumulative Effect of Change in Accounting Principle, net of
tax....................................................... (96) -- --
------ ------ ------
Reported net income....................................... 1,898 1,776 1,507
Add back: Goodwill amortization, net of tax............... 75 56 39
------ ------ ------
Adjusted net income....................................... $1,973 $1,832 $1,546
====== ====== ======
BASIC EARNINGS PER SHARE (BEFORE EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE)
Reported earnings per share............................... $ 2.58 $ 2.39 $ 1.13
Goodwill amortization..................................... 0.10 0.07 0.05
------ ------ ------
Adjusted earnings per share............................... $ 2.68 $ 2.46 $ 1.18
------ ------ ------
DILUTED EARNINGS PER SHARE (BEFORE EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE)
Reported earnings per share............................... $ 2.56 $ 2.38 $ 1.13
Goodwill amortization..................................... 0.10 0.07 0.05
------ ------ ------
Adjusted earnings per share............................... $ 2.66 $ 2.45 $ 1.18
------ ------ ------
5
FOR THE YEAR ENDED
------------------------------
2001 2000 1999
-------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE
AMOUNTS)
BASIC EARNINGS PER SHARE
Reported earnings per share............................... $ 2.45 $ 2.39 $ 2.04
Goodwill amortization..................................... 0.10 0.07 0.05
------ ------ ------
Adjusted earnings per share............................... $ 2.55 $ 2.46 $ 2.09
------ ------ ------
DILUTED EARNINGS PER SHARE
Reported earnings per share............................... $ 2.44 $ 2.38 $ 2.03
Goodwill amortization..................................... 0.10 0.07 0.05
------ ------ ------
Adjusted earnings per share............................... $ 2.54 $ 2.45 $ 2.08
------ ------ ------
THE TRUSTS
Duke Energy formed each Trust as a statutory business trust under Delaware
law. Each Trust's business is defined in a trust agreement executed by Duke
Energy, as depositor, and Chase Manhattan Bank USA, National Association
(formerly known as Chase Manhattan Bank Delaware). Each trust agreement will be
amended when Preferred Securities are issued under it and will be in
substantially the form filed as an exhibit to the registration statement, of
which this prospectus is a part. An amended trust agreement is called a "Trust
Agreement" in this prospectus.
The Preferred Securities and the Common Securities of each Trust represent
undivided beneficial interests in the assets of that Trust. The Preferred
Securities and the Common Securities together are sometimes called the "Trust
Securities" in this prospectus.
The trustees of each Trust will conduct that Trust's business and affairs.
Duke Energy, as the holder of the Common Securities of each Trust, will appoint
the trustees of that Trust. The trustees of each Trust will consist of:
o two officers of Duke Energy as Administrative Trustees;
o The JPMorgan Chase Bank as Property Trustee; and
o Chase Manhattan Bank USA, National Association as Delaware Trustee.
The prospectus supplement relating to the Preferred Securities of a Trust
will provide further information concerning that Trust.
No separate financial statements of any Trust are included in this
prospectus. Duke Energy considers that such statements would not be material to
holders of the Preferred Securities because no Trust has any independent
operations and the sole purpose of each Trust is investing the proceeds of the
sale of its Trust Securities in Junior Subordinated Notes. Duke Energy does not
expect that any of the Trusts will be filing annual, quarterly or special
reports with the SEC.
The principal place of business of each Trust will be c/o Duke Energy
Corporation, 526 South Church Street, Charlotte, North Carolina 28202, telephone
(704) 594-6200.
ACCOUNTING TREATMENT
Each Trust will be treated as a subsidiary of Duke Energy for financial
reporting purposes. Accordingly, Duke Energy's consolidated financial statements
will include the accounts of each Trust. The Preferred Securities, along with
other trust preferred securities that Duke Energy guarantees on an equivalent
basis, will be presented as a separate line item in Duke Energy's consolidated
balance sheets, entitled "Guaranteed Preferred Beneficial Interests in
Subordinated Notes of Duke Energy Corporation or
6
Subsidiaries." Duke Energy will record distributions that each Trust pays on the
Preferred Securities as an expense in its consolidated statement of income.
DESCRIPTION OF THE SENIOR NOTES
Duke Energy will issue the Senior Notes in one or more series under its
Senior Indenture dated as of September 1, 1998 between Duke Energy and JPMorgan
Chase Bank (formerly known as The Chase Manhattan Bank), as Trustee, as
supplemented from time to time. The Senior Indenture is an exhibit to the
registration statement, of which this prospectus is a part.
The Senior Notes are unsecured and unsubordinated obligations and will rank
equally with all of Duke Energy's other unsecured and unsubordinated
indebtedness. The First and Refunding Mortgage Bonds are effectively senior to
the Senior Notes to the extent of the value of the properties securing them. As
of June 30, 2002, there were approximately $790,000,000 in aggregate principal
amount of First and Refunding Mortgage Bonds outstanding.
Duke Energy conducts its non-electric operations, and certain of its
electric operations outside its service area in the Carolinas, through
subsidiaries. Accordingly, its ability to meet its obligations under the Senior
Notes is partly dependent on the earnings and cash flows of those subsidiaries
and the ability of those subsidiaries to pay dividends or to advance or repay
funds to Duke Energy. In addition, the rights that Duke Energy and its creditors
would have to participate in the assets of any such subsidiary upon the
subsidiary's liquidation or recapitalization will be subject to the prior claims
of the subsidiary's creditors. Certain of Duke Energy's subsidiaries have
incurred substantial amounts of debt in the expansion of their businesses, and
Duke Energy anticipates that certain of its subsidiaries will do so in the
future.
The following description of the Senior Notes is only a summary and is not
intended to be comprehensive. For additional information you should refer to the
Senior Indenture.
GENERAL
The Senior Indenture does not limit the amount of Senior Notes that Duke
Energy may issue under it. Duke Energy may issue Senior Notes from time to time
under the Senior Indenture in one or more series by entering into supplemental
indentures or by its Board of Directors or a duly authorized committee
authorizing the issuance. The form of supplemental indenture to the Senior
Indenture is an exhibit to the registration statement, of which this prospectus
is a part.
The Senior Notes of a series need not be issued at the same time, bear
interest at the same rate or mature on the same date.
The Senior Indenture does not protect the holders of Senior Notes if Duke
Energy engages in a highly leveraged transaction.
PROVISIONS APPLICABLE TO PARTICULAR SERIES
The prospectus supplement for a particular series of Senior Notes being
offered will disclose the specific terms related to the offering, including the
price or prices at which the Senior Notes to be offered will be issued. Those
terms may include some or all of the following:
o the title of the series;
o the total principal amount of the Senior Notes of the series;
o the date or dates on which principal is payable or the method for
determining the date or dates, and any right that Duke Energy has to
change the date on which principal is payable;
o the interest rate or rates, if any, or the method for determining the
rate or rates, and the date or dates from which interest will accrue;
7
o any interest payment dates and the regular record date for the interest
payable on each interest payment date, if any;
o whether Duke Energy may extend the interest payment periods and, if so,
the terms of the extension;
o the place or places where payments will be made;
o whether Duke Energy has the option to redeem the Senior Notes and, if so,
the terms of its redemption option;
o any obligation that Duke Energy has to redeem the Senior Notes through a
sinking fund or to purchase the Senior Notes through a purchase fund or
at the option of the holder;
o whether the provisions described under "Defeasance and Covenant
Defeasance" will not apply to the Senior Notes;
o the currency in which payments will be made if other than U.S. dollars,
and the manner of determining the equivalent of those amounts in U.S.
dollars;
o if payments may be made, at Duke Energy's election or at the holder's
election, in a currency other than that in which the Senior Notes are
stated to be payable, then the currency in which those payments may be
made, the terms and conditions of the election and the manner of
determining those amounts;
o the portion of the principal payable upon acceleration of maturity, if
other than the entire principal;
o whether the Senior Notes will be issuable as global securities and, if
so, the securities depositary;
o any changes in the events of default or covenants with respect to the
Senior Notes;
o any index or formula used for determining principal, premium or interest;
o if the principal payable on the maturity date will not be determinable on
one or more dates prior to the maturity date, the amount which will be
deemed to be such principal amount or the manner of determining it; and
o any other terms.
Unless Duke Energy states otherwise in the applicable prospectus
supplement, Duke Energy will issue the Senior Notes only in fully registered
form without coupons, and there will be no service charge for any registration
of transfer or exchange of the Senior Notes. Duke Energy may, however, require
payment to cover any tax or other governmental charge payable in connection with
any transfer or exchange. Subject to the terms of the Senior Indenture and the
limitations applicable to global securities, transfers and exchanges of the
Senior Notes may be made at JPMorgan Chase Bank, 450 West 33rd Street, New York,
New York 10001 or at any other office or agency maintained by Duke Energy for
such purpose.
The Senior Notes will be issuable in denominations of $1,000 and any
integral multiples of $1,000, unless Duke Energy states otherwise in the
applicable prospectus supplement.
Duke Energy may offer and sell the Senior Notes, including original issue
discount Senior Notes, at a substantial discount below their principal amount.
The applicable prospectus supplement will describe special United States federal
income tax and any other considerations applicable to those securities. In
addition, the applicable prospectus supplement may describe certain special
United States federal income tax or other considerations, if any, applicable to
any Senior Notes that are denominated in a currency other than U.S. dollars.
8
GLOBAL SECURITIES
Duke Energy may issue some or all of the Senior Notes as book-entry
securities. Any such book-entry securities will be represented by one or more
fully registered global securities. Duke Energy will register each global
security with or on behalf of a securities depositary identified in the
applicable prospectus supplement. Each global security will be deposited with
the securities depositary or its nominee or a custodian for the securities
depositary.
As long as the securities depositary or its nominee is the registered
holder of a global security representing Senior Notes, that person will be
considered the sole owner and holder of the global security and the Senior Notes
it represents for all purposes. Except in limited circumstances, owners of
beneficial interests in a global security:
o may not have the global security or any Senior Notes it represents
registered in their names;
o may not receive or be entitled to receive physical delivery of
certificated Senior Notes in exchange for the global security; and
o will not be considered the owners or holders of the global security or
any Senior Notes it represents for any purposes under the Senior Notes or
the Senior Indenture.
Duke Energy will make all payments of principal and any premium and
interest on a global security to the securities depositary or its nominee as the
holder of the global security. The laws of some jurisdictions require that
certain purchasers of securities take physical delivery of securities in
definitive form. These laws may impair the ability to transfer beneficial
interests in a global security.
Ownership of beneficial interests in a global security will be limited to
institutions having accounts with the securities depositary or its nominee,
which are called "participants" in this discussion, and to persons that hold
beneficial interests through participants. When a global security representing
Senior Notes is issued, the securities depositary will credit on its book entry,
registration and transfer system the principal amounts of Senior Notes the
global security represents to the accounts of its participants. Ownership of
beneficial interests in a global security will be shown only on, and the
transfer of those ownership interests will be effected only through, records
maintained by:
o the securities depositary, with respect to participants' interests; and
o any participant, with respect to interests the participant holds on
behalf of other persons.
Payments participants make to owners of beneficial interests held through
those participants will be the responsibility of those participants. The
securities depositary may from time to time adopt various policies and
procedures governing payments, transfers, exchanges and other matters relating
to beneficial interests in a global security. None of the following will have
any responsibility or liability for any aspect of the securities depositary's or
any participant's records relating to beneficial interests in a global security
representing Senior Notes, for payments made on account of those beneficial
interests or for maintaining, supervising or reviewing any records relating to
those beneficial interests:
o Duke Energy;
o the Senior Indenture Trustee; or
o an agent of either of them.
REDEMPTION
Provisions relating to the redemption of Senior Notes will be set forth in
the applicable prospectus supplement. Unless Duke Energy states otherwise in the
applicable prospectus supplement, Duke Energy may redeem Senior Notes only upon
notice mailed at least 30 but not more than 60 days before the date fixed for
redemption. Unless Duke Energy states otherwise in the applicable prospectus
supplement, that notice may state that the redemption will be conditional upon
the Senior Indenture Trustee, or the applicable paying agent, receiving
sufficient funds to pay the principal, premium and interest on those
9
Senior Notes on the date fixed for redemption and that if the Senior Indenture
Trustee or the applicable paying agent does not receive those funds, the
redemption notice will not apply, and Duke Energy will not be required to redeem
those Senior Notes.
Duke Energy will not be required to:
o issue, register the transfer of, or exchange any Senior Notes of a series
during the period beginning 15 days before the date the notice is mailed
identifying the Senior Notes of that series that have been selected for
redemption; or
o register the transfer of or exchange any Senior Note of that series
selected for redemption except the unredeemed portion of a Senior Note
being partially redeemed.
CONSOLIDATION, MERGER, CONVEYANCE OR TRANSFER
The Senior Indenture provides that Duke Energy may consolidate or merge
with or into, or convey or transfer all or substantially all of its properties
and assets to, another corporation or other entity. Any successor must, however,
assume Duke Energy's obligations under the Senior Indenture and the Senior Notes
issued under it, and Duke Energy must deliver to the Senior Indenture Trustee a
statement by certain of its officers and an opinion of counsel that affirm
compliance with all conditions in the Senior Indenture relating to the
transaction. When those conditions are satisfied, the successor will succeed to
and be substituted for Duke Energy under the Senior Indenture, and Duke Energy
will be relieved of its obligations under the Senior Indenture and the Senior
Notes.
MODIFICATION; WAIVER
Duke Energy may modify the Senior Indenture with the consent of the holders
of a majority in principal amount of the outstanding Senior Notes of all series
of Senior Notes that are affected by the modification, voting as one class. The
consent of the holder of each outstanding Senior Note affected is, however,
required to:
o change the maturity date of the principal or any installment of principal
or interest on that Senior Note;
o reduce the principal amount, the interest rate or any premium payable
upon redemption on that Senior Note;
o reduce the amount of principal due and payable upon acceleration of
maturity;
o change the currency of payment of principal, premium or interest on that
Senior Note;
o impair the right to institute suit to enforce any such payment on or
after the maturity date or redemption date;
o reduce the percentage in principal amount of Senior Notes of any series
required to modify the Senior Indenture, waive compliance with certain
restrictive provisions of the Senior Indenture or waive certain defaults;
or
o with certain exceptions, modify the provisions of the Senior Indenture
governing modifications of the Senior Indenture or governing waiver of
covenants or past defaults.
In addition, Duke Energy may modify the Senior Indenture for certain other
purposes, without the consent of any holders of Senior Notes.
The holders of a majority in principal amount of the outstanding Senior
Notes of any series may waive, for that series, Duke Energy's compliance with
certain restrictive provisions of the Senior Indenture, including the covenant
described under "Negative Pledge." The holders of a majority in principal amount
of the outstanding Senior Notes of all series under the Senior Indenture with
respect to which a default has occurred and is continuing, voting as one class,
may waive that default for all those series, except a default in the payment of
principal or any premium or interest on any Senior Note or a default with
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respect to a covenant or provision which cannot be modified without the consent
of the holder of each outstanding Senior Note of the series affected.
EVENTS OF DEFAULT
The following are events of default under the Senior Indenture with respect
to any series of Senior Notes, unless Duke Energy states otherwise in the
applicable prospectus supplement:
o failure to pay principal of or any premium on any Senior Note of that
series when due;
o failure to pay when due any interest on any Senior Note of that series
that continues for 60 days; for this purpose, the date on which interest
is due is the date on which Duke Energy is required to make payment
following any deferral of interest payments by it under the terms of
Senior Notes that permit such deferrals;
o failure to make any sinking fund payment when required for any Senior
Note of that series that continues for 60 days;
o failure to perform any covenant in the Senior Indenture (other than a
covenant expressly included solely for the benefit of other series) that
continues for 90 days after the Senior Indenture Trustee or the holders
of at least 33% of the outstanding Senior Notes of that series give Duke
Energy written notice of the default; and
o certain bankruptcy, insolvency or reorganization events with respect to
Duke Energy.
In the case of the fourth event of default listed above, the Senior Indenture
Trustee may extend the grace period. In addition, if holders of a particular
series have given a notice of default, then holders of at least the same
percentage of Senior Notes of that series, together with the Senior Indenture
Trustee, may also extend the grace period. The grace period will be
automatically extended if Duke Energy has initiated and is diligently pursuing
corrective action.
Duke Energy may establish additional events of default for a particular
series and, if established, any such events of default will be described in the
applicable prospectus supplement.
If an event of default with respect to Senior Notes of a series occurs and
is continuing, then the Senior Indenture Trustee or the holders of at least 33%
in principal amount of the outstanding Senior Notes of that series may declare
the principal amount of all Senior Notes of that series to be immediately due
and payable. However, that event of default will be considered waived at any
time after the declaration but before a judgment for payment of the money due
has been obtained if:
o Duke Energy has paid or deposited with the Senior Indenture Trustee all
overdue interest, the principal and any premium due otherwise than by the
declaration and any interest on such amounts, and any interest on overdue
interest, to the extent legally permitted, in each case with respect to
that series, and all amounts due to the Senior Indenture Trustee; and
o all events of default with respect to that series, other than the
nonpayment of the principal that became due solely by virtue of the
declaration, have been cured or waived.
The Senior Indenture Trustee is under no obligation to exercise any of its
rights or powers at the request or direction of any holders of Senior Notes
unless those holders have offered the Senior Indenture Trustee security or
indemnity against the costs, expenses and liabilities which it might incur as a
result. The holders of a majority in principal amount of the outstanding Senior
Notes of any series have, with certain exceptions, the right to direct the time,
method and place of conducting any proceedings for any remedy available to the
Senior Indenture Trustee or the exercise of any power of the Senior Indenture
Trustee with respect to those Senior Notes. The Senior Indenture Trustee may
withhold notice of any default, except a default in the payment of principal or
interest, from the holders of any series if the Senior Indenture Trustee in good
faith considers it in the interest of the holders to do so.
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The holder of any Senior Note will have an absolute and unconditional right
to receive payment of the principal, any premium and, within certain
limitations, any interest on that Senior Note on its maturity date or redemption
date and to enforce those payments.
Duke Energy is required to furnish each year to the Senior Indenture
Trustee a statement by certain of its officers to the effect that it is not in
default under the Senior Indenture or, if there has been a default, specifying
the default and its status.
PAYMENTS; PAYING AGENT
The paying agent will pay the principal of any Senior Notes only if those
Senior Notes are surrendered to it. The paying agent will pay interest on Senior
Notes issued as global securities by wire transfer to the holder of those global
securities. Unless Duke Energy states otherwise in the applicable prospectus
supplement, the paying agent will pay interest on Senior Notes that are not in
global form at its office or, at Duke Energy's option:
o by wire transfer to an account at a banking institution in the United
States that is designated in writing to the Senior Indenture Trustee at
least 16 days prior to the date of payment by the person entitled to that
interest; or
o by check mailed to the address of the person entitled to that interest as
that address appears in the security register for those Senior Notes.
Unless Duke Energy states otherwise in the applicable prospectus
supplement, the Senior Indenture Trustee will act as paying agent for that
series of Senior Notes, and the principal corporate trust office of the Senior
Indenture Trustee will be the office through which the paying agent acts. Duke
Energy may, however, change or add paying agents or approve a change in the
office through which a paying agent acts.
Any money that Duke Energy has paid to a paying agent for principal or
interest on any Senior Notes which remains unclaimed at the end of two years
after that principal or interest has become due will be repaid to Duke Energy at
its request. After repayment to Duke Energy, holders should look only to Duke
Energy for those payments.
NEGATIVE PLEDGE
While any of the Senior Notes remain outstanding, Duke Energy will not
create, or permit to be created or to exist, any mortgage, lien, pledge,
security interest or other encumbrance upon any of its property, whether owned
on or acquired after the date of the Senior Indenture, to secure any
indebtedness for borrowed money of Duke Energy, unless the Senior Notes then
outstanding are equally and ratably secured for so long as any such indebtedness
is so secured.
The foregoing restriction does not apply with respect to, among other
things:
o purchase money mortgages, or other purchase money liens, pledges,
security interests or encumbrances upon property that Duke Energy
acquired after the date of the Senior Indenture;
o mortgages, liens, pledges, security interests or other encumbrances
existing on any property at the time Duke Energy acquired it, including
those which exist on any property of an entity with which Duke Energy is
consolidated or merged or which transfers or leases all or substantially
all of its properties to Duke Energy;
o mortgages, liens, pledges, security interests or other encumbrances upon
any property of Duke Energy that existed on the date of the initial
issuance of the Senior Notes;
o pledges or deposits to secure performance in connection with bids,
tenders, contracts (other than contracts for the payment of money) or
leases to which Duke Energy is a party;
o liens created by or resulting from any litigation or proceeding which at
the time is being contested in good faith by appropriate proceedings;
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o liens incurred in connection with the issuance of bankers' acceptances
and lines of credit, bankers' liens or rights of offset and any security
given in the ordinary course of business to banks or others to secure any
indebtedness payable on demand or maturing within 12 months of the date
that such indebtedness is originally incurred;
o liens incurred in connection with repurchase, swap or other similar
agreements (including commodity price, currency exchange and interest
rate protection agreements);
o liens securing industrial revenue or pollution control bonds;
o liens, pledges, security interests or other encumbrances on any property
arising in connection with any defeasance, covenant defeasance or
in-substance defeasance of indebtedness of Duke Energy;
o liens created in connection with, and created to secure, a non-recourse
obligation;
o Bonds issued or to be issued from time to time under Duke Energy's First
and Refunding Mortgage, and the "permitted liens" specified in Duke
Energy's First and Refunding Mortgage;
o indebtedness which Duke Energy may issue in connection with its
consolidation or merger with or into any other entity, which may be its
affiliate, in exchange for or otherwise in substitution for secured
indebtedness of that entity ("Third Party Debt") which by its terms (1)
is secured by a mortgage on all or a portion of the property of that
entity, (2) prohibits that entity from incurring secured indebtedness,
unless the Third Party Debt is secured equally and ratably with such
secured indebtedness or (3) prohibits that entity from incurring secured
indebtedness;
o indebtedness of any entity which Duke Energy is required to assume in
connection with a consolidation or merger of that entity, with respect to
which any property of Duke Energy is subjected to a mortgage, lien,
pledge, security interest or other encumbrance;
o mortgages, liens, pledges, security interests or other encumbrances upon
any property that Duke Energy acquired, constructed, developed or
improved after the date of the Senior Indenture which are created before,
at the time of, or within 18 months after such acquisition -- or in the
case of property constructed, developed or improved, after the completion
of the construction, development or improvement and commencement of full
commercial operation of that property, whichever is later -- to secure or
provide for the payment of any part of its purchase price or cost;
provided that, in the case of such construction, development or
improvement, the mortgages, liens, pledges, security interests or other
encumbrances shall not apply to any property that Duke Energy owns other
than real property that is unimproved up to that time; and
o the replacement, extension or renewal of any mortgage, lien, pledge,
security interest or other encumbrance described above; or the
replacement, extension or renewal (not exceeding the principal amount of
indebtedness so secured together with any premium, interest, fee or
expense payable in connection with any such replacement, extension or
renewal) of the indebtedness so secured; provided that such replacement,
extension or renewal is limited to all or a part of the same property
that secured the mortgage, lien, pledge, security interest or other
encumbrance replaced, extended or renewed, plus improvements on it or
additions or accessions to it.
In addition, Duke Energy may create or assume any other mortgage, lien, pledge,
security interest or other encumbrance not excepted in the Senior Indenture
without Duke Energy equally and ratably securing the Senior Notes, if
immediately after that creation or assumption, the principal amount of
indebtedness for borrowed money of Duke Energy that all such other mortgages,
liens, pledges, security interests and other encumbrances secure does not exceed
an amount equal to 10% of Duke Energy's common stockholders' equity as shown on
its consolidated balance sheet for the accounting period occurring immediately
before the creation or assumption of that mortgage, lien, pledge, security
interest or other encumbrance.
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DEFEASANCE AND COVENANT DEFEASANCE
The Senior Indenture provides that Duke Energy may be:
o discharged from its obligations, with certain limited exceptions, with
respect to any series of Senior Notes, as described in the Senior
Indenture, such a discharge being called a "defeasance" in this
prospectus; and
o released from its obligations under certain restrictive covenants
especially established with respect to any series of Senior Notes,
including the covenant described under "Negative Pledge," as described in
the Senior Indenture, such a release being called a "covenant defeasance"
in this prospectus.
Duke Energy must satisfy certain conditions to effect a defeasance or covenant
defeasance. Those conditions include the irrevocable deposit with the Senior
Indenture Trustee, in trust, of money or government obligations which through
their scheduled payments of principal and interest would provide sufficient
money to pay the principal and any premium and interest on those Senior Notes on
the maturity dates of those payments or upon redemption.
Following a defeasance, payment of the Senior Notes defeased may not be
accelerated because of an event of default under the Senior Indenture. Following
a covenant defeasance, the payment of Senior Notes may not be accelerated by
reference to the covenants from which Duke Energy has been released. A
defeasance may occur after a covenant defeasance.
Under current United States federal income tax laws, a defeasance would be
treated as an exchange of the relevant Senior Notes in which holders of those
Senior Notes might recognize gain or loss. In addition, the amount, timing and
character of amounts that holders would thereafter be required to include in
income might be different from that which would be includible in the absence of
that defeasance. Duke Energy urges investors to consult their own tax advisors
as to the specific consequences of a defeasance, including the applicability and
effect of tax laws other than United States federal income tax laws.
Under current United States federal income tax law, unless accompanied by
other changes in the terms of the Senior Notes, a covenant defeasance should not
be treated as a taxable exchange.
CONCERNING THE SENIOR INDENTURE TRUSTEE
JPMorgan Chase Bank (formerly known as The Chase Manhattan Bank) is the
Senior Indenture Trustee and is also the trustee under Duke Energy's
Subordinated Indenture and the trustee under Duke Energy's First and Refunding
Mortgage. Duke Energy and certain of its affiliates maintain deposit accounts
and banking relationships with JPMorgan Chase Bank. JPMorgan Chase Bank also
serves as trustee or agent under other indentures and agreements pursuant to
which securities of Duke Energy and of certain of its affiliates are
outstanding.
The Senior Indenture Trustee will perform only those duties that are
specifically set forth in the Senior Indenture unless an event of default under
the Senior Indenture occurs and is continuing. In case an event of default
occurs and is continuing, the Senior Indenture Trustee will exercise the same
degree of care as a prudent individual would exercise in the conduct of his or
her own affairs.
DESCRIPTION OF THE JUNIOR SUBORDINATED NOTES
Duke Energy will issue the Junior Subordinated Notes in one or more series
under its Subordinated Indenture dated as of December 1, 1997 between Duke
Energy and JPMorgan Chase Bank (formerly known as The Chase Manhattan Bank), as
Trustee, as supplemented from time to time. The Subordinated Indenture is an
exhibit to the registration statement, of which this prospectus is a part.
The Junior Subordinated Notes are unsecured obligations of Duke Energy and
are junior in right of payment to "Senior Indebtedness" of Duke Energy. You will
find a description of the subordination provisions of the Junior Subordinated
Notes, including a description of Senior Indebtedness of Duke Energy, under
"Subordination."
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Duke Energy conducts its non-electric operations, and certain of its
electric operations outside its service area in the Carolinas, through
subsidiaries. Accordingly, its ability to meet its obligations under the Junior
Subordinated Notes is partly dependent on the earnings and cash flows of those
subsidiaries and the ability of those subsidiaries to pay dividends or to
advance or repay funds to Duke Energy. In addition, the rights that Duke Energy
and its creditors would have to participate in the assets of any such subsidiary
upon the subsidiary's liquidation or recapitalization will be subject to the
prior claims of the subsidiary's creditors. Certain of Duke Energy's
subsidiaries have incurred substantial amounts of debt in the expansion of their
businesses and Duke Energy anticipates that certain of its subsidiaries will do
so in the future.
The following description of the Junior Subordinated Notes is only a
summary and is not intended to be comprehensive. For additional information you
should refer to the Subordinated Indenture.
GENERAL
The Subordinated Indenture does not limit the amount of Subordinated Notes,
including Junior Subordinated Notes, that Duke Energy may issue under it. Duke
Energy may issue Subordinated Notes, including Junior Subordinated Notes, from
time to time under the Subordinated Indenture in one or more series by entering
into supplemental indentures or by its Board of Directors or a duly authorized
committee authorizing the issuance. Two forms of supplemental indenture to the
Subordinated Indenture (one with respect to Junior Subordinated Notes initially
issued to a Trust and the other with respect to Junior Subordinated Notes
initially issued to the public) are exhibits to the registration statement, of
which this prospectus is a part.
The Junior Subordinated Notes of a series need not be issued at the same
time, bear interest at the same rate or mature on the same date.
The Subordinated Indenture does not protect the holders of Junior
Subordinated Notes if Duke Energy engages in a highly leveraged transaction.
PROVISIONS APPLICABLE TO PARTICULAR SERIES
The prospectus supplement for a particular series of Junior Subordinated
Notes being offered will disclose the specific terms related to the offering,
including the price or prices at which the Junior Subordinated Notes to be
offered will be issued. Those terms may include some or all of the following:
o the title of the series;
o the total principal amount of the Junior Subordinated Notes of the
series;
o the date or dates on which principal is payable or the method for
determining the date or dates, and any right that Duke Energy has to
change the date on which principal is payable;
o the interest rate or rates, if any, or the method for determining the
rate or rates, and the date or dates from which interest will accrue;
o any interest payment dates and the regular record date for the interest
payable on each interest payment date, if any;
o whether Duke Energy may extend the interest payment periods and, if so,
the terms of the extension;
o the place or places where payments will be made;
o whether Duke Energy has the option to redeem the Junior Subordinated
Notes and, if so, the terms of its redemption option;
o any obligation that Duke Energy has to redeem the Junior Subordinated
Notes through a sinking fund or to purchase the Junior Subordinated Notes
through a purchase fund or at the option of the holder;
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o whether the provisions described under "Defeasance and Covenant
Defeasance" will not apply to the Junior Subordinated Notes;
o the currency in which payments will be made if other than U.S. dollars,
and the manner of determining the equivalent of those amounts in U.S.
dollars;
o if payments may be made, at Duke Energy's election or at the holder's
election, in a currency other than that in which the Junior Subordinated
Notes are stated to be payable, then the currency in which those payments
may be made, the terms and conditions of the election and the manner of
determining those amounts;
o the portion of the principal payable upon acceleration of maturity, if
other than the entire principal;
o whether the Junior Subordinated Notes will be issuable as global
securities and, if so, the securities depositary;
o any changes in the events of default or covenants with respect to the
Junior Subordinated Notes;
o any index or formula used for determining principal, premium or interest;
o if the principal payable on the maturity date will not be determinable on
one or more dates prior to the maturity date, the amount which will be
deemed to be such principal amount or the manner of determining it;
o the subordination of the Junior Subordinated Notes to any other of Duke
Energy's indebtedness, including other series of Subordinated Notes; and
o any other terms.
The interest rate and interest and other payment dates of each series of
Junior Subordinated Notes issued to a Trust will correspond to the rate at which
distributions will be paid and the distribution and other payment dates of the
Preferred Securities of that Trust.
Unless Duke Energy states otherwise in the applicable prospectus
supplement, Duke Energy will issue the Junior Subordinated Notes only in fully
registered form without coupons, and there will be no service charge for any
registration of transfer or exchange of the Junior Subordinated Notes. Duke
Energy may, however, require payment to cover any tax or other governmental
charge payable in connection with any transfer or exchange. Subject to the terms
of the Subordinated Indenture and the limitations applicable to global
securities, transfers and exchanges of the Junior Subordinated Notes may be made
at JPMorgan Chase Bank, 450 West 33rd Street, New York, New York 10001 or at any
other office maintained by Duke Energy for such purpose.
The Junior Subordinated Notes will be issuable in denominations of $1,000
and any integral multiples of $1,000, unless Duke Energy states otherwise in the
applicable prospectus supplement.
Duke Energy may offer and sell the Junior Subordinated Notes, including
original issue discount Junior Subordinated Notes, at a substantial discount
below their principal amount. The applicable prospectus supplement will describe
special United States federal income tax and any other considerations applicable
to those securities. In addition, the applicable prospectus supplement may
describe certain special United States federal income tax or other
considerations, if any, applicable to any Junior Subordinated Notes that are
denominated in a currency other than U.S. dollars.
GLOBAL SECURITIES
Duke Energy may issue some or all of the Junior Subordinated Notes as
book-entry securities. Any such book-entry securities will be represented by one
or more fully registered global certificates. Duke Energy will register each
global security with or on behalf of a securities depositary identified in the
applicable prospectus supplement. Each global security will be deposited with
the securities depositary or its nominee or a custodian for the securities
depositary.
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As long as the securities depositary or its nominee is the registered
holder of a global security representing Junior Subordinated Notes, that person
will be considered the sole owner and holder of the global security and the
Junior Subordinated Notes it represents for all purposes. Except in limited
circumstances, owners of beneficial interests in a global security:
o may not have the global security or any Junior Subordinated Notes it
represents registered in their names;
o may not receive or be entitled to receive physical delivery of
certificated Junior Subordinated Notes in exchange for the global
security; and
o will not be considered the owners or holders of the global security or
any Junior Subordinated Notes it represents for any purposes under the
Junior Subordinated Notes or the Subordinated Indenture.
Duke Energy will make all payments of principal and any premium and
interest on a global security to the securities depositary or its nominee as the
holder of the global security. The laws of some jurisdictions require that
certain purchasers of securities take physical delivery of securities in
definitive form. These laws may impair the ability to transfer beneficial
interests in a global security.
Ownership of beneficial interests in a global security will be limited to
institutions having accounts with the securities depositary or its nominee,
which are called "participants" in this discussion, and to persons that hold
beneficial interests through participants. When a global security representing
Junior Subordinated Notes is issued, the securities depositary will credit on
its book-entry, registration and transfer system the principal amounts of Junior
Subordinated Notes the global security represents to the accounts of its
participants. Ownership of beneficial interests in a global security will be
shown only on, and the transfer of those ownership interests will be effected
only through, records maintained by:
o the securities depositary, with respect to participants' interests; and
o any participant, with respect to interests the participant holds on
behalf of other persons.
Payments participants make to owners of beneficial interests held through
those participants will be the responsibility of those participants. The
securities depositary may from time to time adopt various policies and
procedures governing payments, transfers, exchanges and other matters relating
to beneficial interests in a global security. None of the following will have
any responsibility or liability for any aspect of the securities depositary's or
any participant's records relating to beneficial interests in a global security
representing Junior Subordinated Notes, for payments made on account of those
beneficial interests or for maintaining, supervising or reviewing any records
relating to those beneficial interests:
o Duke Energy;
o the Subordinated Indenture Trustee;
o the Trust (if the Junior Subordinated Notes are issued to a Trust); or
o any agent of any of them.
REDEMPTION
Provisions relating to the redemption of Junior Subordinated Notes will be
set forth in the applicable prospectus supplement. Unless Duke Energy states
otherwise in the applicable prospectus supplement, Duke Energy may redeem Junior
Subordinated Notes only upon notice mailed at least 30 but not more than 60 days
before the date fixed for redemption.
Duke Energy will not be required to:
o issue, register the transfer of, or exchange any Junior Subordinated
Notes of a series during the period beginning 15 days before the date the
notice is mailed identifying the Junior Subordinated Notes of that series
that have been selected for redemption; or
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o register the transfer of or exchange any Junior Subordinated Note of that
series selected for redemption except the unredeemed portion of a Junior
Subordinated Note being partially redeemed.
CONSOLIDATION, MERGER, CONVEYANCE OR TRANSFER
The Subordinated Indenture provides that Duke Energy may consolidate or
merge with or into, or convey or transfer all or substantially all of its
properties and assets to, another corporation or other entity. Any successor
must, however, assume Duke Energy's obligations under the Subordinated Indenture
and the Subordinated Notes, including the Junior Subordinated Notes, and Duke
Energy must deliver to the Subordinated Indenture Trustee a statement by certain
of its officers and an opinion of counsel that affirm compliance with all
conditions in the Subordinated Indenture relating to the transaction. When those
conditions are satisfied, the successor will succeed to and be substituted for
Duke Energy under the Subordinated Indenture, and Duke Energy will be relieved
of its obligations under the Subordinated Indenture and any Subordinated Notes,
including the Junior Subordinated Notes.
MODIFICATION; WAIVER
Duke Energy may modify the Subordinated Indenture with the consent of the
holders of a majority in principal amount of the outstanding Subordinated Notes
of all series that are affected by the modification, voting as one class. The
consent of the holder of each outstanding Subordinated Note affected is,
however, required to:
o change the maturity date of the principal or any installment of principal
or interest on that Subordinated Note;
o reduce the principal amount, the interest rate or any premium payable
upon redemption on that Subordinated Note;
o reduce the amount of principal due and payable upon acceleration of
maturity;
o change the currency of payment of principal, premium or interest on that
Subordinated Note;
o impair the right to institute suit to enforce any such payment on or
after the maturity date or redemption date;
o reduce the percentage in principal amount of Subordinated Notes of any
series required to modify the Subordinated Indenture, waive compliance
with certain restrictive provisions of the Subordinated Indenture or
waive certain defaults; or
o with certain exceptions, modify the provisions of the Subordinated
Indenture governing modifications of the Subordinated Indenture or
governing waiver of covenants or past defaults.
In addition, Duke Energy may modify the Subordinated Indenture for certain other
purposes, without the consent of any holders of Subordinated Notes, including
Junior Subordinated Notes.
The holders of a majority in principal amount of the outstanding Junior
Subordinated Notes of any series may waive, for that series, Duke Energy's
compliance with certain restrictive provisions of the Subordinated Indenture.
The holders of a majority in principal amount of the outstanding Subordinated
Notes of all series under the Subordinated Indenture with respect to which a
default has occurred and is continuing, voting as one class, may waive that
default for all those series, except a default in the payment of principal or
any premium or interest on any Subordinated Note or a default with respect to a
covenant or provision which cannot be modified without the consent of the holder
of each outstanding Subordinated Note of the series affected.
Duke Energy may not amend the Subordinated Indenture to change the
subordination of any outstanding Junior Subordinated Notes without the consent
of each holder of Senior Indebtedness that the amendment would adversely affect.
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EVENTS OF DEFAULT
The following are events of default under the Subordinated Indenture with
respect to any series of Junior Subordinated Notes, unless Duke Energy states
otherwise in the applicable prospectus supplement:
o failure to pay principal of or any premium on any Junior Subordinated
Note of that series when due;
o failure to pay when due any interest on any Junior Subordinated Note of
that series that continues for 60 days; for this purpose, the date on
which interest is due is the date on which Duke Energy is required to
make payment following any deferral of interest payments by it under the
terms of Junior Subordinated Notes that permit such deferrals;
o failure to make any sinking fund payment when required for any Junior
Subordinated Note of that series that continues for 60 days;
o failure to perform any covenant in the Subordinated Indenture (other than
a covenant expressly included solely for the benefit of other series)
that continues for 90 days after the Subordinated Indenture Trustee or
the holders of at least 33% of the outstanding Junior Subordinated Notes
of that series give Duke Energy written notice of the default; and
o certain bankruptcy, insolvency or reorganization events with respect to
Duke Energy.
In the case of the fourth event of default listed above, the Subordinated
Indenture Trustee may extend the grace period. In addition, if holders of a
particular series have given a notice of default, then holders of at least the
same percentage of Junior Subordinated Notes of that series, together with the
Subordinated Indenture Trustee, may also extend the grace period. The grace
period will be automatically extended if Duke Energy has initiated and is
diligently pursuing corrective action.
Duke Energy may establish additional events of default for a particular
series and, if established, any such events of default will be described in the
applicable prospectus supplement.
If an event of default with respect to Junior Subordinated Notes of a
series occurs and is continuing, then the Subordinated Indenture Trustee or the
holders of at least 33% in principal amount of the outstanding Junior
Subordinated Notes of that series may declare the principal amount of all Junior
Subordinated Notes of that series to be immediately due and payable. However,
that event of default will be considered waived at any time after the
declaration but before a judgment for payment of the money due has been obtained
if:
o Duke Energy has paid or deposited with the Subordinated Indenture Trustee
all overdue interest, the principal and any premium due otherwise than by
the declaration and any interest on such amounts, and any interest on
overdue interest, to the extent legally permitted, in each case with
respect to that series, and all amounts due to the Subordinated Indenture
Trustee; and
o all events of default with respect to that series, other than the
nonpayment of the principal that became due solely by virtue of the
declaration, have been cured or waived.
In the case of Junior Subordinated Notes issued to a Trust, a holder of
Preferred Securities may institute a legal proceeding directly against Duke
Energy, without first instituting a legal proceeding against the Property
Trustee of the Trust by which those Preferred Securities were issued or any
other person or entity, for enforcement of payment to that holder of principal
or interest on an equivalent amount of Junior Subordinated Notes of the related
series on or after the due dates specified in those Junior Subordinated Notes.
The Subordinated Indenture Trustee is under no obligation to exercise any
of its rights or powers at the request or direction of any holders of Junior
Subordinated Notes unless those holders have offered the Subordinated Indenture
Trustee security or indemnity against the costs, expenses and liabilities that
it might incur as a result. The holders of a majority in principal amount of the
outstanding Junior Subordinated Notes of any series have, with certain
exceptions, the right to direct the time, method and
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place of conducting any proceedings for any remedy available to the Subordinated
Indenture Trustee or the exercise of any power of the Subordinated Indenture
Trustee with respect to those Junior Subordinated Notes. The Subordinated
Indenture Trustee may withhold notice of any default, except a default in the
payment of principal or interest, from the holders of any series if the
Subordinated Indenture Trustee in good faith considers it in the interest of the
holders to do so.
The holder of any Junior Subordinated Note will have an absolute and
unconditional right to receive payment of the principal, any premium and, within
certain limitations, any interest on that Junior Subordinated Note on its
maturity date or redemption date and to enforce those payments.
Duke Energy is required to furnish each year to the Subordinated Indenture
Trustee a statement by certain of its officers to the effect that it is not in
default under the Subordinated Indenture or, if there has been a default,
specifying the default and its status.
PAYMENTS; PAYING AGENT
The paying agent will pay the principal of any Junior Subordinated Notes
only if those Junior Subordinated Notes are surrendered to it. The paying agent
will pay interest on Junior Subordinated Notes issued as global securities by
wire transfer to the holder of those global securities. Unless Duke Energy
states otherwise in the applicable prospectus supplement, the paying agent will
pay interest on Junior Subordinated Notes that are not in global form at its
office or, at Duke Energy's option:
o by wire transfer to an account at a banking institution in the United
States that is designated in writing to the Subordinated Indenture
Trustee at least 16 days prior to the date of payment by the person
entitled to that interest; or
o by check mailed to the address of the person entitled to that interest as
that address appears in the security register for those Junior
Subordinated Notes.
Unless Duke Energy states otherwise in the applicable prospectus
supplement, the Subordinated Indenture Trustee will act as paying agent for that
series of Junior Subordinated Notes, and the principal corporate trust office of
the Subordinated Indenture Trustee will be the office through which the paying
agent acts. Duke Energy may, however, change or add paying agents or approve a
change in the office through which a paying agent acts.
Any money that Duke Energy has paid to a paying agent for principal or
interest on any Junior Subordinated Notes that remains unclaimed at the end of
two years after that principal or interest has become due will be repaid to Duke
Energy at its request. After repayment to Duke Energy, holders should look only
to Duke Energy for those payments.
DEFEASANCE AND COVENANT DEFEASANCE
The Subordinated Indenture provides that Duke Energy may be:
o discharged from its obligations, with certain limited exceptions, with
respect to any series of Junior Subordinated Notes, as described in the
Subordinated Indenture, such a discharge being called a "defeasance" in
this prospectus; and
o released from its obligations under certain restrictive covenants
especially established with respect to a series of Junior Subordinated
Notes, as described in the Subordinated Indenture, such a release being
called a "covenant defeasance" in this prospectus.
Duke Energy must satisfy certain conditions to effect a defeasance or
covenant defeasance. Those conditions include the irrevocable deposit with the
Subordinated Indenture Trustee, in trust, of money or government obligations
which through their scheduled payments of principal and interest would provide
sufficient money to pay the principal and any premium and interest on those
Junior Subordinated Notes on the maturity dates of those payments or upon
redemption. Following a defeasance, payment of the Junior
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Subordinated Notes defeased may not be accelerated because of an event of
default under the Subordinated Indenture.
Under current United States federal income tax laws, a defeasance would be
treated as an exchange of the relevant Junior Subordinated Notes in which
holders of those Junior Subordinated Notes might recognize gain or loss. In
addition, the amount, timing and character of amounts that holders would
thereafter be required to include in income might be different from that which
would be includible in the absence of that defeasance. Duke Energy urges
investors to consult their own tax advisors as to the specific consequences of a
defeasance, including the applicability and effect of tax laws other than United
States federal income tax laws.
Junior Subordinated Notes issued to a Trust will not be subject to covenant
defeasance.
SUBORDINATION
Each series of Junior Subordinated Notes will be subordinate and junior in
right of payment, to the extent set forth in the Subordinated Indenture, to all
Senior Indebtedness as defined below. If:
o Duke Energy makes a payment or distribution of any of its assets to
creditors upon its dissolution, winding-up, liquidation or
reorganization, whether in bankruptcy, insolvency or otherwise;
o a default beyond any grace period has occurred and is continuing with
respect to the payment of principal, interest or any other monetary
amounts due and payable on any Senior Indebtedness; or
o the maturity of any Senior Indebtedness has been accelerated because of a
default on that Senior Indebtedness,
then the holders of Senior Indebtedness generally will have the right to receive
payment, in the case of the first instance, of all amounts due or to become due
upon that Senior Indebtedness, and, in the case of the second and third
instances, of all amounts due on the Senior Indebtedness, or Duke Energy will
make provision for those payments, before the holders of any Junior Subordinated
Notes have the right to receive any payments of principal or interest on their
Junior Subordinated Notes.
"Senior Indebtedness" means, with respect to any series of Junior
Subordinated Notes, the principal, premium, interest and any other payment in
respect of any of the following:
o all of Duke Energy's indebtedness that is evidenced by notes, debentures,
bonds or other securities Duke Energy sells for money or other
obligations for money borrowed;
o all indebtedness of others of the kinds described in the preceding
category which Duke Energy has assumed or guaranteed or which Duke Energy
has in effect guaranteed through an agreement to purchase, contingent or
otherwise; and
o all renewals, extensions or refundings of indebtedness of the kinds
described in either of the preceding two categories.
Any such indebtedness, renewal, extension or refunding, however, will not
be Senior Indebtedness if the instrument creating or evidencing it or the
assumption or guarantee of it provides that it is not superior in right of
payment to or is equal in right of payment with those Junior Subordinated Notes.
Senior Indebtedness will be entitled to the benefits of the subordination
provisions in the Subordinated Indenture irrespective of the amendment,
modification or waiver of any term of the Senior Indebtedness.
Future series of Subordinated Notes that are not Junior Subordinated Notes
may rank senior to outstanding series of Junior Subordinated Notes and would
constitute Senior Indebtedness with respect to those series.
The Subordinated Indenture does not limit the amount of Senior Indebtedness
that Duke Energy may issue. As of June 30, 2002, Duke Energy's Senior
Indebtedness totaled approximately $4,600,000,000.
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CONCERNING THE SUBORDINATED INDENTURE TRUSTEE
JPMorgan Chase Bank (formerly known as The Chase Manhattan Bank) is the
Subordinated Indenture Trustee and is also the Senior Indenture Trustee and the
trustee under Duke Energy's First and Refunding Mortgage. Duke Energy and
certain of its affiliates maintain deposit accounts and banking relationships
with JPMorgan Chase Bank. JPMorgan Chase Bank also serves as trustee or agent
under other indentures and agreements pursuant to which securities of Duke
Energy and of certain of its affiliates are outstanding.
The Subordinated Indenture Trustee will perform only those duties that are
specifically set forth in the Subordinated Indenture unless an event of default
under the Subordinated Indenture occurs and is continuing. In case an event of
default occurs and is continuing, the Subordinated Indenture Trustee will
exercise the same degree of care as a prudent individual would exercise in the
conduct of his or her own affairs.
DESCRIPTION OF THE FIRST AND REFUNDING MORTGAGE BONDS
Duke Energy will issue the First and Refunding Mortgage Bonds in one or
more series under its First and Refunding Mortgage, dated as of December 1,
1927, to JPMorgan Chase Bank (formerly known as The Chase Manhattan Bank), as
Trustee, as supplemented and amended. The First and Refunding Mortgage is
sometimes called the "Mortgage" and the First and Refunding Mortgage Bonds are
sometimes called the "Bonds" in this prospectus. The trustee under the Mortgage
is sometimes called the "Bond Trustee" in this prospectus. The Mortgage is an
exhibit to the registration statement, of which this prospectus is a part.
The following description of the Bonds is only a summary and is not
intended to be comprehensive. For additional information you should refer to the
Mortgage.
GENERAL
The amount of Bonds that Duke Energy may issue under the Mortgage is
unlimited. Duke Energy's Board of Directors will determine the terms of each
series of Bonds, including denominations, maturity, interest rate and payment
terms and whether the series will have redemption or sinking fund provisions.
Unless Duke Energy states otherwise in the applicable prospectus
supplement, Duke Energy will issue the Bonds only in fully registered form
without coupons and there will be no service charge for any transfers and
exchanges of the Bonds. Duke Energy may, however, require payment to cover any
stamp tax or other governmental charge payable in connection with any transfer
or exchange. Transfers and exchanges of the Bonds may be made at JPMorgan Chase
Bank, 450 West 33rd Street, New York, New York 10001 or at any other office
maintained by Duke Energy for such purpose.
The Bonds will be issuable in denominations of $1,000 and multiples of
$1,000, unless Duke Energy states otherwise in the applicable prospectus
supplement. The Bonds will be exchangeable for an equivalent principal amount of
Bonds of other authorized denominations of the same series.
The prospectus supplement for a particular series of Bonds will describe
the maturity, interest rate and payment terms of those Bonds and any relevant
redemption or sinking fund provisions.
SECURITY
The Mortgage creates a continuing lien to secure the payment of principal
and interest on the Bonds. All the Bonds are equally and ratably secured without
preference, priority or distinction. The lien of the Mortgage covers
substantially all of Duke Energy's properties, real, personal and mixed, and
Duke Energy's franchises, including properties acquired after the date of the
Mortgage, with certain exceptions. Those exceptions include cash, accounts
receivable, inventories of materials and supplies, merchandise held for sale,
securities that Duke Energy holds, certain after-acquired property not useful in
Duke Energy's electric business, certain after-acquired franchises and certain
after-acquired non-electric properties.
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The lien of the Mortgage is subject to certain permitted liens and to liens
that exist upon properties that Duke Energy acquired after it entered into the
Mortgage to the extent of the amounts of prior lien bonds secured by those
properties (not, however, exceeding 75% of the cost or value of those
properties) and additions to those properties. "Prior lien bonds" are bonds or
other indebtedness that are secured at the time of acquisition by a lien upon
property that Duke Energy acquires after the date of the Mortgage that becomes
subject to the lien of the Mortgage.
ISSUANCE OF ADDITIONAL BONDS
If Duke Energy satisfies the conditions in the Mortgage, the Bond Trustee
may authenticate and deliver additional Bonds in an aggregate principal amount
not exceeding:
o the amount of cash that Duke Energy has deposited with the Bond Trustee
for that purpose;
o the amount of previously authenticated and delivered Bonds or refundable
prior lien bonds that have been or are to be retired which, with certain
exceptions, Duke Energy has deposited with the Bond Trustee for that
purpose; or
o 66 2/3% of the aggregate of the net amounts of additional property
(electric) certified to the Bond Trustee after February 18, 1949.
The Bond Trustee may not authenticate and deliver any additional Bonds
under the Mortgage, other than certain types of refunding Bonds, unless Duke
Energy's available net earnings for twelve consecutive calendar months within
the immediately preceding fifteen calendar months have been at least twice the
amount of the annual interest charges on all Bonds outstanding under the
Mortgage, including the Bonds proposed to be issued, and on all outstanding
prior lien bonds that the Bond Trustee does not hold under the Mortgage.
Duke Energy may not apply to the Bond Trustee to authenticate and deliver
any Bonds (1) in an aggregate principal amount exceeding $26,000,000 on the
basis of additional property (electric) that Duke Energy acquired or constructed
prior to January 1, 1949 or (2) on the basis of Bonds or prior lien bonds paid,
purchased or redeemed prior to February 1, 1949. Duke Energy may not certify any
additional property (electric) which is subject to the lien of any prior lien
bonds for the purpose of establishing those prior lien bonds as refundable if
the aggregate principal amount of those prior lien bonds exceeds 66 2/3% of the
net amount of the additional property that is subject to the lien of such prior
lien bonds.
RELEASE PROVISIONS
The Mortgage permits Duke Energy to dispose of certain property and to take
other actions without the Bond Trustee releasing that property. The Mortgage
also permits the release of mortgaged property if Duke Energy deposits cash or
other consideration equal to the value of the mortgaged property to be released.
In certain events and within certain limitations, the Bond Trustee is required
to pay out cash that the Bond Trustee receives -- other than for the Replacement
Fund or as the basis for issuing Bonds -- upon Duke Energy's application.
Duke Energy may withdraw cash that it deposited with the Bond Trustee as
the basis for issuing Bonds in an amount equal to the principal amount of any
Bonds that it is entitled to have authenticated and delivered on the basis of
additional property (electric), on the basis of Bonds previously authenticated
and delivered or on the basis of refundable prior lien bonds.
REPLACEMENT FUND
The Mortgage requires Duke Energy to deposit with the Bond Trustee
annually, for the Replacement Fund established under the Mortgage, the sum of
the "replacement requirements" for all years beginning with 1949 and ending with
the last calendar year preceding the deposit date, less certain deductions.
Those deductions are (1) the aggregate original cost of all fixed property
(electric) retired during that time period, not exceeding the aggregate of the
gross amounts of additional property (electric) that Duke
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Energy acquired or constructed during the same period, and (2) the aggregate
amount of cash that Duke Energy deposited with the Bond Trustee up to that time,
or that Duke Energy would have been required to deposit except for permitted
reductions, under the Replacement Fund.
The "replacement requirement" for any year is 2 1/2% of the average "amount
of depreciable fixed property" (electric) owned by Duke Energy at the beginning
and end of that year, not exceeding, however, the amount Duke Energy is
permitted to charge as an operating expense for depreciation or retirement by
any governmental authority, or the amount deductible as depreciation or similar
expense for federal income tax purposes. The "amount of depreciable fixed
property" (electric) is the amount by which the sum of $192,913,385 plus the
aggregate gross amount of all depreciable additional property (electric) that
Duke Energy acquired or constructed from January 1, 1949 to the date as of which
such amount is determined exceeds the original cost of all of Duke Energy's
depreciable fixed property (electric) retired during that period or released
from the lien of the Mortgage.
Duke Energy may reduce the amount of cash at any time required to be
deposited in the Replacement Fund and may withdraw any cash that it previously
deposited that is held in the Replacement Fund:
o in an amount equal to 150% of the principal amount of Bonds previously
authenticated and delivered under the Mortgage, or refundable prior lien
bonds, deposited with the Bond Trustee and on the basis of which Duke
Energy would otherwise have been entitled to have additional Bonds
authenticated and delivered; and
o in an amount equal to 150% of the principal amount of Bonds which Duke
Energy would otherwise be entitled to have authenticated and delivered on
the basis of additional property (electric).
Upon Duke Energy's application, the Bond Trustee will apply cash that Duke
Energy deposited in the Replacement Fund and has not previously withdrawn to the
payment, purchase or redemption of Bonds issued under the Mortgage or to the
purchase of refundable prior lien bonds.
Duke Energy has never deposited any cash with the Bond Trustee for the
Replacement Fund. If Duke Energy deposits any cash in the future, it has agreed
not to apply that cash to the redemption of the Bonds as long as any Bonds then
outstanding remain outstanding.
AMENDMENTS OF THE MORTGAGE
Duke Energy may amend the Mortgage with the consent of the holders of
66 2/3% in principal amount of the Bonds, except that no such amendment may:
o affect the terms of payment of principal at maturity or of interest or
premium on any Bond;
o affect the rights of Bondholders to sue to enforce any such payment at
maturity; or
o reduce the percentage of Bonds required to consent to an amendment.
No amendment may affect the rights under the Mortgage of the holders of
less than all of the series of Bonds outstanding unless the holders of 66 2/3%
in principal amount of the Bonds of each series affected consent to the
amendment.
The covenants included in the supplemental indenture for any series of
Bonds to be issued will be solely for the benefit of the holders of those Bonds.
Duke Energy may modify any such covenant only with the consent of the holders of
66 2/3% in principal amount of those Bonds outstanding, without the consent of
Bondholders of any other series.
EVENTS OF DEFAULT
The Bond Trustee may, and at the written request of the holders of a
majority in principal amount of the outstanding Bonds will, declare the
principal of all outstanding Bonds due when any event of default
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under the Mortgage occurs. The holders of a majority in principal amount of the
outstanding Bonds may, however, waive the default and rescind the declaration if
Duke Energy cures the default.
Events of default under the Mortgage include:
o default in the payment of principal;
o default for 60 days in the payment of interest;
o default in the performance of any other covenant in the Mortgage
continuing for 60 days after the Bond Trustee or the holders of not less
than 10% in principal amount of the Bonds then outstanding give notice of
the default; and
o certain bankruptcy or insolvency events with respect to Duke Energy.
Duke Energy provides a statement by certain of its officers each year to
the Bond Trustee stating whether it has complied with the covenants of the
Mortgage.
CONCERNING THE BOND TRUSTEE
JPMorgan Chase Bank (formerly known as The Chase Manhattan Bank) is the
Bond Trustee and is also the Senior Indenture Trustee and the Subordinated
Indenture Trustee. Duke Energy and certain of its affiliates maintain deposit
accounts and banking relationships with JPMorgan Chase Bank. JPMorgan Chase Bank
also serves as trustee or agent under other indentures and agreements pursuant
to which securities of Duke Energy and of certain of its affiliates are
outstanding.
The Bond Trustee is under no obligation to exercise any of its powers at
the request of any of the holders of the Bonds unless those Bondholders have
offered to the Bond Trustee security or indemnity satisfactory to it against the
cost, expenses and liabilities it might incur as a result. The holders of a
majority in principal amount of the Bonds outstanding may direct the time,
method and place of conducting any proceeding for any remedy available to the
Bond Trustee, or the exercise of any trust or power of the Bond Trustee. The
Bond Trustee will not be liable for any action that it takes or omits to take in
good faith in accordance with any such direction.
DESCRIPTION OF THE COMMON STOCK
The following description of Duke Energy's Common Stock is only a summary
and is not intended to be comprehensive. For additional information you should
refer to the applicable provisions of the North Carolina Business Corporation
Act and Duke Energy's Restated Articles of Incorporation (Articles) and By-Laws.
The Articles and By-Laws are exhibits to the registration statement, of which
this prospectus is a part.
GENERAL
Duke Energy is authorized to issue up to 2,000,000,000 shares of Common
Stock. At June 30, 2002, approximately 832,000,000 shares of Common Stock were
outstanding. Duke Energy is also authorized to issue up to 12,500,000 shares of
Preferred Stock, 10,000,000 shares of Preferred Stock A, 20,000,000 shares of
Serial Preferred Stock and 1,500,000 shares of Preference Stock. At June 30,
2002, 2,154,984 shares of Preferred Stock, 1,257,185 shares of Preferred Stock A
and no shares of Serial Preferred Stock or Preference Stock were outstanding.
The Preferred Stock, Preferred Stock A, Serial Preferred Stock and Preference
Stock together are sometimes called the "Preferred Stocks."
DIVIDENDS
Holders of Common Stock are entitled to such dividends as may be declared
from time to time by the Board of Directors from legally available funds but
only if full dividends on all outstanding series of the Preferred Stocks for the
then current and all prior dividend periods and any required sinking fund
payments with respect to any outstanding series of such securities have been
paid or provided for.
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VOTING RIGHTS
Subject to the rights, if any, of the holders of the Preferred Stocks that
may be outstanding or as otherwise provided by law, the holders of Common Stock
have exclusive voting rights, each share being entitled to one vote. Holders of
Common Stock have noncumulative voting rights, which means that the holders of
more than 50% of the shares voting for the election of directors can elect 100%
of the directors and the holders of the remaining shares voting for the election
of directors will not be able to elect any directors.
Whenever dividends on any part of any outstanding Preferred Stock or
Preferred Stock A are in arrears in an amount equivalent to the total dividends
required to be paid on that Preferred Stock or Preferred Stock A in any period
of 12 calendar months, the holders of the Preferred Stock as a class have the
exclusive right to elect a majority of the authorized number of directors and
the holders of the Preferred Stock A as a class have the exclusive right to
elect two directors. Those rights cease whenever Duke Energy pays all accrued
and unpaid dividends in full. Whenever six quarterly dividends on any
outstanding series of the Preference Stock are in arrears or any required
sinking fund payments are in default, the holders of the Preference Stock as a
class have the exclusive right to elect two directors. This right ceases
whenever all dividends and required sinking fund obligations in default have
been paid in full or provided for. In addition, the consent of the holders of
specified percentages of any outstanding Preferred Stock, Preferred Stock A or
Preference Stock, or some or all of the holders of such classes, is required in
connection with certain increases in authorized amounts of or changes in stock
senior to the Common Stock or in connection with any sale of substantially all
of Duke Energy's assets or certain mergers.
The holders of the Serial Preferred Stock will have such voting rights as a
series or otherwise with respect to the election of directors or otherwise as
may be fixed by the Board of Directors at the time of the creation of the
series, in addition to any voting rights provided by law.
RIGHTS UPON LIQUIDATION
The holders of Common Stock are entitled in liquidation to share ratably in
the assets of Duke Energy after payment of all debts and liabilities and after
required preferential payments to the holders of outstanding Preferred Stocks.
MISCELLANEOUS
The outstanding shares of Common Stock are, and the shares of Common Stock
sold hereunder will be, upon payment for them, fully paid and nonassessable.
Holders of Common Stock have no preemptive rights and no conversion rights. The
Common Stock is not subject to redemption and is not entitled to the benefit of
any sinking fund provisions.
If so provided by the Board of Directors at the time of creation of any
series of Serial Preferred Stock, the shares of such series may be convertible
or exchangeable into shares of Common Stock or other securities of Duke Energy
or of any other corporation or other entity, upon terms fixed at the time of
creation of the series.
TRANSFER AGENT AND REGISTRAR
Duke Energy acts as transfer agent and registrar for the Common Stock.
PREFERENCE STOCK PURCHASE RIGHTS
Each share of Common Stock has attached to it a Preference Stock Purchase
Right. The Rights initially are represented only by the certificates for the
shares of Common Stock and will not trade separately from those shares unless
and until:
o ten days after it is publicly announced that a person or group (with
certain exceptions) has acquired, or has obtained the right to acquire,
the beneficial ownership of 15% or more of the outstanding Common Stock
(an "acquiring person"); or
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o ten business days (or a later date determined by Duke Energy's Board of
Directors) after the date a person or group commences, or public
announcement is made that the person or group intends to commence, a
tender or exchange offer that would result in the person or group
becoming an acquiring person.
If and when the Rights separate, each Right will entitle the holder to purchase
1/10,000 of a share of Duke Energy's Series A Participating Preference Stock for
an exercise price that is presently $190.
In the event that a person or group becomes an acquiring person, each Right
(except for Rights beneficially owned by the acquiring person or its
transferees, which Rights become void) will entitle its holder to purchase, for
the exercise price, a number of shares of Common Stock having a market value of
twice the exercise price. Also, if, after ten days following the date of the
announcement that a person or group has become an acquiring person:
o Duke Energy is involved in a merger or similar form of business
combination in which Duke Energy is not the surviving corporation or in
which Duke Energy is the surviving corporation but the Common Stock is
changed or exchanged; or
o more than 50% of Duke Energy's assets or earning power is sold or
transferred;
then each Right (except for voided Rights) will entitle its holder to purchase,
for the exercise price, a number of shares of common stock of the acquiring
company having a value of twice the exercise price. If any person or group
acquires from 15% to but excluding 50% of the outstanding Common Stock, Duke
Energy's Board of Directors may, at its option, exchange each outstanding Right
(except for those held by an acquiring person or its transferees) for one share
of Common Stock or 1/10,000 of a share of Series A Participating Preference
Stock.
Duke Energy's Board of Directors may redeem the Rights for $0.01 per Right
prior to ten business days after the date of the public announcement that a
person or group has become an acquiring person.
The Rights will not prevent a takeover of Duke Energy. However, the
existence of the Rights may cause substantial dilution to a person or group that
acquires 15% or more of the Common Stock unless the Board of Directors first
redeems those Rights.
CERTAIN ANTI-TAKEOVER MATTERS
Duke Energy's Articles and By-Laws include a number of provisions that may
have the effect of encouraging persons considering unsolicited tender offers or
other unilateral takeover proposals to negotiate with the Board of Directors
rather than pursue non-negotiated takeover attempts. Those provisions include:
CLASSIFIED BOARD OF DIRECTORS; REMOVAL OF DIRECTORS; VACANCIES
Duke Energy's Articles provide for a Board of Directors divided into three
classes, with one class being elected each year to serve for a three-year term.
As a result, at least two annual meetings of shareholders may be required for
shareholders to change a majority of the Board of Directors. Duke Energy's
shareholders may remove directors only for cause. Vacancies and newly created
directorships on the Board of Directors may be filled only by the affirmative
vote of a majority of the directors remaining in office, and no decrease in the
number of directors may shorten the term of an incumbent director. The
classification of directors and the inability of shareholders to remove
directors without cause and to fill vacancies and newly created directorships on
the Board of Directors will make it more difficult to change the composition of
the Board of Directors, but will promote continuity of existing management.
ADVANCE NOTICE REQUIREMENTS
Duke Energy's By-Laws establish advance notice procedures with regard to
shareholder proposals relating to the nomination of persons for election as
directors or new business to be brought before annual meetings of shareholders.
These procedures provide that shareholders must give timely notice of such
proposals in writing to the Secretary of Duke Energy. Generally, to be timely
with respect to an annual meeting of shareholders, notice must be received at
Duke Energy's principal executive offices not less than 90 days nor more than
120 days prior to the first anniversary date of the annual meeting for the
preceding year. The notice must contain certain information specified in the
By-Laws.
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SPECIAL MEETINGS OF SHAREHOLDERS
Neither the Articles nor the By-Laws of Duke Energy give shareholders the
right to call a special meeting of shareholders. The By-Laws provide that
special meetings of shareholders may be called only by the Board of Directors or
the Chairman of the Board.
AMENDMENT OF CHARTER AND BY-LAWS
Duke Energy's Articles require the approval of not less than 80% of the
voting power of all outstanding shares of Common Stock to amend provisions
relating to the minimum and maximum size of the Board of Directors, the
classification of the Board of Directors, the removal of directors, the filling
of vacancies and newly created directorships on the Board of Directors and the
requirement that a decrease in the number of directors constituting the Board of
Directors may not shorten the term of any incumbent director. Duke Energy's
Articles also require the affirmative vote of the holders of at least a majority
of the combined voting power of the then outstanding shares of stock of all
classes entitled to vote generally in the election of directors, voting together
as a single class, for the shareholders to adopt, amend or repeal any provisions
in the By-Laws. This voting requirement also applies to any amendment or repeal
of this provision or the adoption of any provision inconsistent with it. These
amendment provisions will make it more difficult to dilute the anti-takeover
effects of Duke Energy's Articles and By-Laws.
SERIAL PREFERRED STOCK
Serial Preferred Stock can be, and has been, used by corporations
specifically for anti-takeover purposes. For example, shares of Serial Preferred
Stock can be privately placed with purchasers who support a board of directors
in opposing a tender offer or other hostile takeover bid, or can be issued to
dilute the stock ownership and voting power of a third party seeking a merger or
other extraordinary corporate transaction. Under these and similar
circumstances, the Serial Preferred Stock can serve to perpetuate incumbent
management and can adversely affect shareholders who may want to participate in
the tender offer or other transaction.
Duke Energy's Board of Directors has adopted resolutions that state that
the Serial Preferred Stock:
a) not be used for the principal purpose of acting as an anti-takeover
device without shareholder approval; and
b) not be given supermajority voting rights except possibly with respect to
proposed amendments to the Articles of Incorporation altering materially
existing provisions of the Serial Preferred Stock or creating, or
increasing the authorized amount of, any class of stock ranking, as to
dividend or assets, prior to the Serial Preferred Stock.
DESCRIPTION OF THE STOCK PURCHASE CONTRACTS
AND THE STOCK PURCHASE UNITS
Duke Energy may issue stock purchase contracts representing contracts
obligating holders to purchase from Duke Energy, and Duke Energy to sell to the
holders, a specified number of shares of Common Stock (or a range of numbers of
shares pursuant to a predetermined formula) at a future date or dates. The price
per share of Common Stock may be fixed at the time the stock purchase contracts
are issued or may be determined by reference to a specific formula set forth in
the stock purchase contracts.
The stock purchase contracts may be issued separately or as a part of
units, often known as stock purchase units, consisting of a stock purchase
contract and either:
o Senior Notes, Junior Subordinated Notes or other debt securities of Duke
Energy or one of its subsidiaries;
o debt obligations of third parties, including U.S. Treasury securities; or
o Preferred Securities or trust preferred securities issued by trusts, all
of whose common securities are owned by Duke Energy or by subsidiaries of
Duke Energy,
securing the holder's obligations to purchase the Common Stock under the stock
purchase contracts.
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The stock purchase contracts may require Duke Energy to make periodic
payments to the holders of the stock purchase units or vice versa, and such
payments may be unsecured or prefunded on some basis. The stock purchase
contracts may require holders to secure their obligations in a specified manner
and in certain circumstances Duke Energy may deliver newly issued prepaid stock
purchase contracts, often known as prepaid securities, upon release to a holder
of any collateral securing such holder's obligations under the original stock
purchase contract.
The applicable prospectus supplement will describe the terms of any stock
purchase contracts or stock purchase units and, if applicable, prepaid
securities. The description in the applicable prospectus supplement will not
contain all of the information that you may find useful. For more information,
you should review the stock purchase contracts, the collateral arrangements and
depositary arrangements, if applicable, relating to such stock purchase
contracts or stock purchase units and, if applicable, the prepaid securities and
the document pursuant to which the prepaid securities will be issued. These
documents will be filed with the SEC promptly after the offering of such stock
purchase contracts or stock purchase units and, if applicable, prepaid
securities.
DESCRIPTION OF THE PREFERRED SECURITIES
Each Trust may issue only one series of Preferred Securities. The Trust
Agreement of each Trust will authorize the Administrative Trustees to issue the
Preferred Securities of that Trust on behalf of that Trust. For additional
information you should refer to the applicable Trust Agreement. The form of
Trust Agreement is an exhibit to the registration statement, of which this
prospectus is a part.
The prospectus supplement for a particular series of Preferred Securities
being offered will disclose the specific terms related to the offering,
including the price or prices at which the Preferred Securities to be offered
will be issued. Those terms will include some or all of the following:
o the title of the series;
o the number of Preferred Securities of the series;
o the yearly distribution rate, or the method of determining that rate, and
the date or dates on which distributions will be payable;
o the date or dates, or method of determining the date or dates, from which
distributions will be cumulative;
o the amount that will be paid out of the assets of the Trust to the
holders of the Preferred Securities upon the voluntary or involuntary
dissolution, winding-up or termination of the Trust;
o any obligation that the Trust has to purchase or redeem the Preferred
Securities, and the price at which, the period within which, and the
terms and conditions upon which the Trust will purchase or redeem them;
o any voting rights of the Preferred Securities that are in addition to
those legally required, including any right that the holders of the
Preferred Securities have to approve certain actions under or amendments
to the Trust Agreement;
o any right that the Trust has to defer distributions on the Preferred
Securities in the event that Duke Energy extends the interest payment
period on the related Junior Subordinated Notes; and
o any other rights, preferences, privileges, limitations or restrictions
upon the Preferred Securities of the series.
Duke Energy will guarantee each series of Preferred Securities to the
extent described below under the caption "Description of the Guarantees."
The applicable prospectus supplement will describe any material United
States federal income tax considerations that apply to the Preferred Securities.
DESCRIPTION OF THE GUARANTEES
Duke Energy will execute the Guarantees from time to time for the benefit
of the holders of the Preferred Securities of the respective Trusts. JPMorgan
Chase Bank will act as Guarantee Trustee under
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each Guarantee. The Guarantee Trustee will hold each Guarantee for the benefit
of the holders of the Preferred Securities to which it relates.
The following description of the Guarantees is only a summary and is not
intended to be comprehensive. The form of Guarantee is an exhibit to the
registration statement, of which this prospectus is a part.
GENERAL
Duke Energy will irrevocably and unconditionally agree under each Guarantee
to pay the Guarantee Payments that are defined below, to the extent specified in
that Guarantee, to the holders of the Preferred Securities to which the
Guarantee relates, to the extent that the Guarantee Payments are not paid by or
on behalf of the related Trust. Duke Energy is required to pay the Guarantee
Payments to the extent specified in the relevant Guarantee regardless of any
defense, right of set-off or counterclaim that Duke Energy may have or may
assert against any person.
The following payments and distributions on the Preferred Securities of a
Trust are Guarantee Payments:
o any accrued and unpaid distributions required to be paid on the Preferred
Securities of the Trust, but only to the extent that the Trust has funds
legally and immediately available for those distributions;
o the redemption price for any Preferred Securities that the Trust calls
for redemption, including all accrued and unpaid distributions to the
redemption date, but only to the extent that the Trust has funds legally
and immediately available for the payment; and
o upon a dissolution, winding-up or termination of the Trust, other than in
connection with the distribution of Junior Subordinated Notes to the
holders of Trust Securities of the Trust or the redemption of all the
Preferred Securities of the Trust, the lesser of:
o the sum of the liquidation amount and all accrued and unpaid
distributions on the Preferred Securities of the Trust to the payment
date, to the extent that the Trust has funds legally and immediately
available for the payment; and
o the amount of assets of the Trust remaining available for distribution
to holders of the Preferred Securities of the Trust in liquidation of
the Trust.
Duke Energy may satisfy its obligation to make a Guarantee Payment by
making that payment directly to the holders of the related Preferred Securities
or by causing the Trust to make the payment to those holders.
Each Guarantee will be a full and unconditional guarantee, subject to
certain subordination provisions, of the Guarantee Payments with respect to the
related Preferred Securities from the time of issuance of those Preferred
Securities, except that the Guarantee will apply to the payment of distributions
and other payments on the Preferred Securities only when the Trust has
sufficient funds legally and immediately available to make those distributions
or other payments.
IF DUKE ENERGY DOES NOT MAKE THE REQUIRED PAYMENTS ON THE JUNIOR
SUBORDINATED NOTES THAT THE PROPERTY TRUSTEE HOLDS UNDER A TRUST, THAT TRUST
WILL NOT MAKE THE RELATED PAYMENTS ON ITS PREFERRED SECURITIES.
SUBORDINATION
Duke Energy's obligations under each Guarantee will be unsecured
obligations of Duke Energy. Those obligations will rank:
o subordinate and junior in right of payment to all of Duke Energy's other
liabilities, other than obligations or liabilities that rank equal in
priority or subordinate by their terms;
o equal in priority with Duke Energy's Preferred Stock and Preferred Stock
A and similar guarantees; and
o senior to Duke Energy's Common Stock.
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Duke Energy has Preferred Stock and Preferred Stock A outstanding that will
rank equal in priority with the Guarantees and has Common Stock outstanding that
will rank junior to the Guarantees.
Each Guarantee will be a guarantee of payment and not of collection. This
means that the guaranteed party may institute a legal proceeding directly
against Duke Energy, as guarantor, to enforce its rights under the Guarantee
without first instituting a legal proceeding against any other person or entity.
The terms of the Preferred Securities will provide that each holder of the
Preferred Securities, by accepting those Preferred Securities, agrees to the
subordination provisions and other terms of the related Guarantee.
AMENDMENTS AND ASSIGNMENT
Duke Energy may amend each Guarantee without the consent of any holder of
the Preferred Securities to which that Guarantee relates if the amendment does
not materially and adversely affect the rights of those holders. Duke Energy may
otherwise amend each Guarantee with the approval of the holders of at least
66 2/3% of the outstanding Preferred Securities to which that Guarantee relates.
Termination
Each Guarantee will terminate and be of no further effect when:
o the redemption price of the Preferred Securities to which the Guarantee
relates is fully paid;
o Duke Energy distributes the related Junior Subordinated Notes to the
holders of those Preferred Securities; or
o the amounts payable upon liquidation of the related Trust are fully paid.
Each Guarantee will remain in effect or will be reinstated if at any time
any holder of the related Preferred Securities must restore payment of any sums
paid to that holder with respect to those Preferred Securities or under that
Guarantee.
EVENTS OF DEFAULT
An event of default will occur under any Guarantee if Duke Energy fails to
perform any of its payment obligations under that Guarantee. The holders of a
majority of the Preferred Securities of any series may waive any such event of
default and its consequences on behalf of all of the holders of the Preferred
Securities of that series. The Guarantee Trustee is obligated to enforce the
Guarantee for the benefit of the holders of the Preferred Securities of a series
if an event of default occurs under the related Guarantee.
The holders of a majority of the Preferred Securities to which a Guarantee
relates have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Guarantee Trustee with respect to
that Guarantee or to direct the exercise of any trust or power that the
Guarantee Trustee holds under that Guarantee. Any holder of the related
Preferred Securities may institute a legal proceeding directly against Duke
Energy to enforce that holder's rights under the Guarantee without first
instituting a legal proceeding against the Guarantee Trustee or any other person
or entity.
CONCERNING THE GUARANTEE TRUSTEE
JPMorgan Chase Bank will be the Guarantee Trustee. It is also the Property
Trustee, the Subordinated Indenture Trustee, the Senior Indenture Trustee and
the Bond Trustee. Duke Energy and certain of its affiliates maintain deposit
accounts and banking relationships with JPMorgan Chase Bank. JPMorgan Chase Bank
also serves as trustee or agent under other indentures and agreements pursuant
to which securities of Duke Energy and certain of its affiliates are
outstanding.
The Guarantee Trustee will perform only those duties that are specifically
set forth in each Guarantee unless an event of default under the Guarantee
occurs and is continuing. In case an event of default occurs and is continuing,
the Guarantee Trustee will exercise the same degree of care as a prudent
individual would exercise in the conduct of his or her own affairs. Subject to
those provisions, the Guarantee Trustee is under no obligation to exercise any
of its powers under any Guarantee at the request of any holder of
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the related Preferred Securities unless that holder offers reasonable indemnity
to the Guarantee Trustee against the costs, expenses and liabilities which it
might incur as a result.
AGREEMENTS AS TO EXPENSES AND LIABILITIES
Duke Energy will enter into an Agreement as to Expenses and Liabilities
under each Trust Agreement. Each Agreement as to Expenses and Liabilities will
provide that Duke Energy will, with certain exceptions, irrevocably and
unconditionally guarantee the full payment of any indebtedness, expenses or
liabilities of the related Trust to each person or entity to whom that Trust
becomes indebted or liable. The exceptions are the obligations of the Trust to
pay to the holders of the related Preferred Securities or other similar
interests in that Trust the amounts due to the holders under the terms of those
Preferred Securities or those similar interests.
PLAN OF DISTRIBUTION
Duke Energy and the Trusts may sell securities to one or more underwriters
or dealers for public offering and sale by them, or it may sell the securities
to investors directly or through agents. The prospectus supplement relating to
the securities being offered will set forth the terms of the offering and the
method of distribution and will identify any firms acting as underwriters,
dealers or agents in connection with the offering, including:
o the name or names of any underwriters;
o the purchase price of the securities and the proceeds to Duke Energy or
the Trusts from the sale;
o any underwriting discounts and other items constituting underwriters'
compensation;
o any public offering price;
o any discounts or concessions allowed or reallowed or paid to dealers; and
o any securities exchange or market on which the securities may be listed.
Only those underwriters identified in the prospectus supplement are deemed
to be underwriters in connection with the securities offered in the prospectus
supplement.
Duke Energy and the Trusts may distribute the securities from time to time
in one or more transactions at a fixed price or prices, which may be changed, or
at prices determined as the prospectus supplement specifies. Duke Energy may
sell securities through forward contracts or similar arrangements. In connection
with the sale of securities, underwriters, dealers or agents may be deemed to
have received compensation from Duke Energy in the form of underwriting
discounts or commissions and also may receive commissions from securities
purchasers for whom they may act as agent. Underwriters may sell the securities
to or through dealers, and such dealers may receive compensation in the form of
discounts, concessions or commissions from the underwriters or commissions from
the purchasers for whom they may act as agent.
Duke Energy may sell the securities directly or through agents it
designates from time to time. Any agent involved in the offer or sale of the
securities covered by this prospectus, other than at the market offerings of
common stock, will be named in a prospectus supplement relating to such
securities. At the market offerings of common stock may be made by agents.
Commissions payable by Duke Energy to agents will be set forth in a prospectus
supplement relating to the securities being offered. Unless otherwise indicated
in a prospectus supplement, any such agents will be acting on a best-efforts
basis for the period of their appointment.
Some of the underwriters, dealers or agents and some of their affiliates
who participate in the securities distribution may engage in other transactions
with, and perform other services for, Duke Energy and its subsidiaries or
affiliates in the ordinary course of business.
Any underwriting or other compensation which Duke Energy pays to
underwriters or agents in connection with the securities offering, and any
discounts, concessions or commissions which underwriters allow to dealers, will
be set forth in the applicable prospectus supplement. Underwriters, dealers and
agents participating in the securities distribution may be deemed to be
underwriters, and any discounts and
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commissions they receive and any profit they realize on the resale of the
securities may be deemed to be underwriting discounts and commissions under the
Securities Act of 1933. Underwriters, and their controlling persons, and agents
may be entitled, under agreements entered into with Duke Energy and the Trusts,
to indemnification against certain civil liabilities, including liabilities
under the Securities Act of 1933.
EXPERTS
The consolidated financial statements and the related financial statement
schedule incorporated in this prospectus by reference from Duke Energy's Annual
Report on Form 10-K for the year ended December 31, 2001 have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report, which is
incorporated herein by reference, and have been so incorporated in reliance upon
the report of such firm given upon their authority as experts in accounting and
auditing.
VALIDITY OF THE SECURITIES
Edward M. Marsh, Jr., Esq., who is Duke Energy's Deputy General Counsel and
Assistant Secretary, and Simpson Thacher & Bartlett, New York, New York, will
issue opinions about the validity of the securities offered by Duke Energy in
the applicable prospectus supplement for Duke Energy. Richards, Layton & Finger,
P.A., special Delaware counsel, will issue opinions about the validity of the
Preferred Securities offered in the applicable prospectus supplement for the
Trusts. Counsel named in the applicable prospectus supplement will issue
opinions about the validity of the securities offered by Duke Energy for any
underwriters.
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WHERE YOU CAN FIND MORE INFORMATION
Duke Energy files annual, quarterly and current reports and other
information with the SEC. You may read and copy any documents that are filed at
SEC Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549.
You may also obtain copies of these documents at prescribed rates from the
Public Reference Section of the SEC at its Washington address.
Please call the SEC at 1-800-SEC-0330 for further information. Duke
Energy's filings are also available to the public through:
o the SEC web site at http://www.sec.gov; and
o The New York Stock Exchange
20 Broad Street
New York, New York 10005.
Information about Duke Energy is also available on its web site at
http://www.duke-energy.com. Such web site is not a part of this prospectus.
The SEC allows Duke Energy to "incorporate by reference" the information
Duke Energy files with it, which information incorporated by reference is
considered to be part of this prospectus and any accompanying prospectus
supplement, and later information that Duke Energy files with the SEC will
automatically update and supersede that information as well as the information
included in this prospectus and any accompanying prospectus supplement. Duke
Energy incorporates by reference the documents listed below and any future
filings made with the SEC under Sections 13(a), 13(c), 14, or 15(d) of the
Securities Exchange Act of 1934 filed prior to the termination of this offering:
o Duke Energy's annual report on Form 10-K for the year ended December 31,
2001;
o Duke Energy's quarterly reports on Form 10-Q for the quarters ended March
31, 2002 and June 30, 2002; and
o Duke Energy's current reports on Form 8-K filed on March 29, 2002 and
April 15, 2002.
Duke Energy will provide without charge a copy of these filings, other than
any exhibits unless the exhibits are specifically incorporated by reference into
this prospectus. You may request your copy by writing Duke Energy at the
following address or telephoning one of the following numbers:
Investor Relations Department
Duke Energy Corporation
P.O. Box 1005
Charlotte, North Carolina 28201
(704) 382-3853 or (800) 488-3853 (toll-free)
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