Liquidity and Capital Resources - 2003 Annual Report - Duke Energy
Duke Energy

Liquidity and Capital Resources

Known Trends and Uncertainties

Duke Energy relies primarily upon cash flows from operations, as well as borrowings and the sale of assets to fund its liquidity and capital requirements. A material adverse change in operations or available financing may impact Duke Energy's ability to fund its current liquidity and capital resource requirements. The relatively stable operating cash flows of the Franchised Electric and Natural Gas Transmission businesses currently comprise a substantial portion of Duke Energy's cash flow from operations and it is anticipated to continue as such for the next several years.

Duke Energy currently anticipates net cash provided by operating activities in 2004 to be approximately $4.0 billion. In addition to net cash provided by operating activities, Duke Energy also expects to generate approximately $1.5 billion of proceeds from asset sales in 2004, including approximately $900 million of debt that is intended to be transferred in connection with the sales transaction and subsequently retired. Achievement of these projected amounts is subject to a number of factors, including, but not limited to, regulatory constraints, economic trends, divestiture opportunities and market volatility. The 2004 asset sales principally include International Energy's Australian operations, including its related debt, and DENA's Southeast merchant generation plants. Management anticipates either an initial public offering or the sale of the Australian operations by mid-2004, and the sale of merchant generation plants by the end of 2004.

Duke Energy's projected 2004 capital and investment expenditures are approximately $2.2 billion. Duke Energy is focusing on reducing risk and restructuring its business for future success, including opportunities to reduce further projected capital and investment expenditures. Duke Energy will invest in its strongest business sectors with an overall focus on positive net cash generation. Based on this goal, approximately 65% of total projected 2004 capital expenditures are projected to be allocated to Natural Gas Transmission and Franchised Electric. Total projected capital and investment expenditures include approximately $1.5 billion for maintenance and upgrades of existing plants, pipelines, and infrastructure to serve load growth. Additionally, Duke Energy has approximately $0.3 billion in capital and investment expenditures designated for Crescent. Expenditures at Crescent and Natural Gas Transmission constitute the majority of the expansion capital planned in 2004 by Duke Energy.

In 2004, Duke Energy expects to continue to pay down overall debt by approximately $3.5 billion to $4.0 billion, which includes approximately $900 million for Australian dollar denominated debt that is intended to be transferred in connection with the sale transaction and subsequently retired, through the settlement of the forward stock purchase component of the outstanding Equity Units in May and November 2004 totaling $1,625 million, asset sales, and cash from operations. The reductions in debt are expected to consist of debt maturities, the early retirement of all economically callable debt, and other reductions. Additionally, Duke Energy expects to obtain some funding through common stock issuances in its InvestorDirect Choice Plan (a stock purchase and dividend reinvestment plan) and employee benefits.

Duke Energy monitors compliance with all debt covenants and restrictions, and does not currently believe that it will be in violation or breach of its debt covenants. However, circumstances could arise that may alter that view. If and when management had a belief that such potential breach could exist, appropriate action will be taken to mitigate any such issue. Duke Energy also maintains an active dialogue with the credit rating agencies, and believes that the current credit ratings have stabilized as evidenced by the Stable Outlook ratings of the agencies that are retained to rate Duke Energy and its subsidiaries, excluding DETM. DETM remains on Negative Outlook at Standard and Poor's (S&P) pending the effective wind-down of it operations, which management anticipates will be completed by mid-2004.

Operating Cash Flows

Net cash provided by operating activities was $3,929 million in 2003 compared to $4,547 million in 2002, a decrease of $618 million. The decrease in cash provided by operating activities was due primarily to lower cash settlements from trading and hedging activities, and less cash flows in 2003 from changes in working capital, principally accounts payables and accounts receivable. Additionally, in 2003, Duke Energy made a voluntary contribution of $181 million to its U.S. defined benefit pension plan. No contributions to the Duke Energy defined pension plan were made in 2002 or 2001. No decision for the U.S. plan on 2004 contributions has been reached due to significant uncertainty around pending U.S. Congressional action over required interest rates used to determine minimum funding requirements. Also, Duke Energy made contributions to the Westcoast retirement plans (Westcoast plans) of approximately $11 million in 2003 and $9 million in 2002. Duke Energy anticipates that it will make contributions of approximately $27 million to the Westcoast plans in 2004.

Net cash provided by operating activities was $4,547 million in 2002 compared to $4,357 million in 2001, an increase of $190 million. The increase in cash provided by operating activities was due primarily to higher cash earnings plus changes in working capital from 2001. Although net income significantly decreased in 2002 (see Results of Operation for further discussion) many of the items affecting net income were non-cash. Non-cash items affecting earnings included an increase in depreciation expense, primarily due to the acquisition of Westcoast; non-cash impairment charges for goodwill (at International Energy), project sites (primarily at DENA) and property plant and equipment; and higher deferred tax expense.

Investing Cash Flows

Cash used in investing activities was $931 million in 2003 compared to $6,809 million in 2002, a decrease of $5,878 million. Additionally, cash used in investing activities was $6,809 million in 2002 compared to $6,043 million in 2001, an increase of $766 million. The primary use of cash related to investing activities is capital and investment expenditures, which are detailed by business segment in the following table.

Capital and Investment Expenditures by Business Segment(a)

Years Ended December 31,
2003   2002   2001
(in millions)
Franchised Electric $

1,030

   $

1,269

   $

1,115
Natural Gas Transmission  

766

    

2,878

    

748
Field Services  

211

    

309

    

587
Duke Energy North America  

277

    

2,013

    

3,213
International Energy  

71

    

412

    

442
Other Operations  

319

    

491

    

845
Other(b)  

87

    

(23)

    

90
Cash acquired in acquisitions  

—

    

(77)

    

(17)
Total consolidated $

2,761

   $

7,272

   $

7,023

(a)   Amounts include the acquisition of Westcoast in 2002

(b)   Amounts include deferral in the consolidation of fifty percent of the profit earned by D/FD for the construction of DENA's merchant generation plants, which is associated with Duke Energy's ownership.

Capital and investment expenditures decreased $4,511 million in 2003 compared to 2002. The decrease was due primarily to the 2002 acquisition of Westcoast for $1,707 million, net of cash acquired, and lower investments in generating facilities at DENA, resulting from the downturn in the merchant energy portion of its business, the most significant of which are due to deferred construction on the Moapa, Grays Harbor, and Luna facilities of $621 million, decreases in expenditures for the Marshall, Sandersville, and Moss Landing facilities of $380 million, and a decrease in turbine purchases of $434 million. Capital and investment expenditures also decreased in 2003 due to a decrease in plant construction costs at Franchised Electric primarily due to a decrease of approximately $250 million in expenditures related to environmental equipment at its coal-fired plants and the Mill Creek combustion turbine plant, which was completed in 2003; a decrease in plant construction costs at International Energy of $268 million, primarily in Australia; a decrease in investments in Natural Gas Transmission's 50% interest in Gulfstream of $226 million; and a reduction in investments at Other Operations (primarily related to DCP).

The decrease in investing cash flow in 2003 when compared to 2002 was also impacted by the increase in proceeds from the sale of equity investments and other assets, and sales of and collections on notes receivable of $1,450 million. The increased proceeds were primarily due to the sale of DENA's 50% ownership interest in Ref Fuel; Natural Gas Transmission's sale of its wholly owned Empire State Pipeline, sale of its investment in the Alliance Pipeline and the associated Aux Sable liquids plant, Foothills Pipe Lines, Ltd, and Vector Pipelines L.P.; Field Services' sale of assets to Crosstex Energy Services, L.P. & ScissorTail Energy, LLC, and Duke Energy's sale of the TEPPCO Partners, L.P. Class B units; DEM's sale of DE Hydrocarbons LLC; International Energy's sale of its 85.7% majority interest in P.T. Puncakjaya Power, sale of its European gas marketing business, and sale of its French generating facility; and the monetization of various investments at DCP.

Capital and investment expenditures increased $249 million in 2002 compared to 2001. The increase was due primarily to cash used in the acquisition of Westcoast of $1,707 million, net of cash acquired, partially offset by decreases in capital expenditures and investment expenditures. Capital expenditures decreased when compared to 2001 due to a decrease in DENA investments in generating facilities of approximately $1,030 million, as a result of management's revised outlook for the merchant energy portion of its business, and a decrease in acquisitions of businesses and assets of approximately $375 million when compared to 2001. These decreases in capital expenditures were partially offset by an increase in plant construction costs at Franchised Electric of approximately $185 million primarily due to expenditures at the Mill Creek combustion turbine plant and related to environmental equipment at coal-fired plants; and an increase in investments in property plant and equipment of approximately $520 million at Natural Gas Transmission due primarily to increased expansion and maintenance projects related to the Westcoast, Algonquin Gas Transmission Company, East Tennessee Natural Gas Company, and Texas Eastern Transmission LP (Texas Eastern) systems, along with the Maritimes & Northeast Pipeline (M&N Pipeline) expansion costs after its consolidation in 2002. Investment activities also decreased when compared to 2001, due primarily to reduced investments at Other Operations (primarily related to a decrease of approximately $110 million in notes receivable at DCP) and a decrease of approximately $205 million in expenditures for Natural Gas Transmission's investment in Gulfstream. The remaining decrease of approximately $440 million is associated with a decrease in capital and investment expenditures throughout Duke Energy's segments.

In June 2002, the state of North Carolina passed new clean air legislation that includes provisions that freeze electric utility rates from June 20, 2002 (the effective date of the statute) to December 31, 2007 (rate freeze period), subject to certain conditions, in order for certain 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. The legislation permits Duke Energy the flexibility to vary the amortization schedule for recording of compliance costs. During the rate freeze period, Duke Energy is expected to recover a minimum of 70% of the total estimated costs of compliance. (See Note 17 to the Consolidated Financial Statements.) As part of this legislation Duke Energy will spend an estimated total of $1.5 billion over the next ten years to install pollution controls in its coal-fired plants. Duke Energy expects to incur approximately $80 million of total capital costs associated with this legislation in 2004.

All projected capital and investment expenditures are subject to periodic review and revision and may vary significantly depending on a number of factors, including, but not limited to, industry restructuring, regulatory constraints, acquisition opportunities, market volatility and economic trends.

Financing Cash Flows and Liquidity

Duke Energy's consolidated capital structure as of December 31, 2003, including short-term debt, was 58% debt, 37% common equity and 5% minority interests. Fixed charges coverage ratio, calculated using SEC guidelines, was 2.2 times for 2002 and 3.9 times for 2001. Earnings were inadequate to cover fixed charges by $1,706 million for the year ended December 31, 2003 as a result of approximately $3.5 billion in non-cash impairment charges incurred in 2003.

Cash flows from financing activities decreased $5,503 million to net cash used in financing activities of $2,657 million in 2003 from net cash provided by financing activities of $2,846 million in 2002. This change was due primarily to the net reduction of outstanding long-term debt, trust preferred securities, and notes payable and commercial paper during 2003 as compared to the same period in 2002 when Duke Energy acquired Westcoast and financed other business expansion projects. This change was also due to a reduction in the issuance of common stock in 2003, compared to 2002, when Duke Energy issued 54.5 million shares of common stock in a public offering, the proceeds of which were used to repay commercial paper that had been issued to fund a portion of the consideration for the Westcoast acquisition. This change in cash flows from financing activities was aligned with Duke Energy's strategy to reduce outstanding debt and strengthen the balance sheet.

Cash flows provided by financing activities were $2,846 million in 2002 and $1,354 million in 2001, an increase of $1,492 million. This change was due primarily to the net increase in outstanding long-term debt as a result of the 2002 Westcoast acquisition.

During 2003, cash from operations and the sale of assets was adequate for funding Duke Energy's cash requirements such as capital expenditures, dividend payments and permanently retiring a portion of scheduled debt maturities.

Significant Financing Activities.     During 2003, Duke Energy issued $500 million of 3.75% first and refunding mortgage bonds due in 2008 in a private placement transaction exempt from registration under Rule 144A of the Securities Act of 1933, as amended (Securities Act). Pursuant to a registration agreement, Duke Energy registered an exchange with the holders of identical bonds under the Securities Act on a registration statement filed with the SEC. This registration statement was declared effective and the exchange offer was completed during the third quarter of 2003 with substantially all of the private bonds exchanged for registered bonds. There were no proceeds to Duke Energy from the exchange. The proceeds of the offering of the private bonds were used to repay short-term debt, to replace $100 million of Duke Energy's first and refunding mortgage bonds that matured in February 2003, to repay approximately $200 million of an intercompany loan from Duke Capital and for general corporate purposes.

Also in 2003, Duke Energy completed a $700 million offering of 1.75% convertible senior notes due in 2023. In connection with the offering, the underwriters exercised an option to purchase an additional $70 million of convertible senior notes to cover any over allotments. Each of these senior notes is convertible to Duke Energy common stock at a premium of 40% above the May 1, 2003 closing common stock market price of $16.85 per share. Upon conversion, the senior notes are potentially convertible into approximately 32.6 million shares of common stock. The conversion of these senior notes into shares of Duke Energy common stock is contingent on the occurrence of certain events during specified periods. These events include whether the price of Duke Energy common stock reaches specified thresholds, the credit rating of Duke Energy falls below certain thresholds, the holders put the senior notes back to Duke Energy, the convertible notes are called for redemption by Duke Energy, or specified transactions have occurred. The conditions that permit such conversion were not satisfied as of December 31, 2003. Holders of the senior notes may require Duke Energy to purchase all or a portion of their senior notes for cash on May 15, 2007, May 15, 2012, and May 15, 2017, at a price equal to the principal amount of the senior notes plus accrued interest, if any. Duke Energy may redeem for cash all or a portion of the senior notes at any time on or after May 20, 2007, at a price equal to the sum of the issue price plus accrued interest, if any, on the redemption date. The net proceeds of the offering were used for general corporate purposes, including the reduction of outstanding commercial paper.

During 2003, Duke Energy completed a securitization of certain accounts receivable through Duke Energy Receivables Finance Company, LLC (DERF), a newly formed, bankruptcy remote, special purpose subsidiary. DERF is a wholly owned limited liability company with a separate legal existence from its parent, and its assets are not intended to be generally available to creditors of Duke Energy. As a result of the securitization, Duke Energy sold, and will continue to sell on a daily basis to DERF, certain accounts receivable arising from the sale of electricity and/or related services as part of Duke Energy's franchised electric business. The proceeds from the initial sale of the accounts receivable to DERF were used for general corporate purposes in its franchised electric business, which included the repayment of outstanding commercial paper. In order to fund its purchases of accounts receivable, DERF entered into a two-year $300 million secured credit facility, with a commercial paper conduit administered by Citicorp North America, Inc. The credit facility and related securitization documentation contain several covenants, including covenants with respect to the accounts receivable held by DERF as well as a covenant requiring that the ratio of Duke Energy consolidated indebtedness to Duke Energy consolidated capitalization not exceed 65%. As of December 31, 2003, the interest rate associated with the credit facility, which is based on commercial paper rates, was 1.5% and $300 million was outstanding under the credit facility. The securitization transaction was not structured to meet the criteria for sale treatment under SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," and accordingly is reflected as a secured borrowing in the Consolidated Financial Statements. As of December 31, 2003, the $300 million outstanding balance of the credit facility was secured by approximately $446 million of accounts receivable held by DERF. The obligations of DERF under the credit facility are non-recourse to Duke Energy.

Additionally, during 2003, Duke Energy issued $200 million of 4.50% first and refunding mortgage bonds due in 2010, and $500 million of 5.30% first and refunding mortgage bonds due in 2015. The proceeds from the first mortgage bond issuances were used for general corporate purposes, to repay commercial paper, and to redeem (1) at 102% of their aggregate principal amount, $200 million of 6.875% first and refunding mortgage bonds due in 2023, (2) at 101.785% of their aggregate principal amount, $150 million of 6.75% first and refunding mortgage bonds due in 2025 and (3) at 102.35% of their aggregate principal amount, $150 million of 7.0% first and refunding mortgage bonds due in 2033. The loss of approximately $23 million from the redemption of the first and refunding mortgage bonds will be deferred over the life of the 5.30% first and refunding mortgage bond issuance. Duke Energy also issued $300 million of 4.20% senior unsecured notes due in 2008, and $250 million of senior unsecured floating rate notes (based on the three-month LIBOR plus 0.45%) due in 2005. The net proceeds from the note issuances were used for general corporate purposes, including the repayment of commercial paper.

During 2003, PanEnergy Corp (PanEnergy), a wholly owned subsidiary of Duke Energy, called $328 million of 7.75% bonds due in 2022. The bonds were redeemed at 102% of their aggregate principal amount. The pre-tax loss of approximately $13 million on the early extinguishment of the debt was recorded as Interest Expense in the Consolidated Statements of Operations.

In June 2003, prior to the implementation of SFAS No. 150, Duke Capital redeemed $250 million of its 7.375% trust preferred securities due in 2038. The redemption price for this issuance was approximately $250 million, and an approximate loss of $8 million on the early extinguishment of the trust preferred securities was recorded as Dividends and Premiums on Redemption of Preferred and Preference Stock in the Consolidated Statements of Operations. In December 2003, subsequent to the implementation of SFAS No. 150, Duke Capital redeemed $350 million of its 7.375% trust preferred securities due in 2038. The redemption price for this issuance was approximately $350 million, and an approximate loss of $10 million on the early extinguishment of the trust preferred securities was recorded as Interest Expense in the Consolidated Statements of Operations.

During 2003, $1,000 million of commercial paper that had been included in Long-term Debt on the December 31, 2002 Consolidated Balance Sheet was reclassified as Notes Payable and Commercial Paper. This reclassification reflects Duke Energy's intention to no longer maintain a significant outstanding long-term portion of commercial paper. As of December 31, 2003, $150 million of commercial paper was included in Long-term Debt.

Also, in 2003, as a result of International Energy's Australian operations being classified as discontinued operations, $883 million of debt related to those operations was reclassified from Notes Payable and Commercial Paper and Long-term Debt to Current and Non-Current Liabilities Associated with Assets Held for Sale on the December 31, 2003 Consolidated Balance Sheet. For additional information about discontinued operations see Note 12 to the Consolidated Financial Statements.

In February 2004, Duke Capital remarketed $875 million of its 5.87% senior notes due in 2006. As a result of the remarketing, the interest rate on the notes was reset to 4.302%. The remarketing was required under the terms of the Equity Units originally issued by Duke Energy in March 2001. Proceeds from the remarketed senior notes were used to purchase U.S. Treasury securities being held by a collateral agent to satisfy the forward stock purchase contracts component of the Equity Units. In May 2004, Duke Energy intends to receive $875 million from the collateral agent, and to issue approximately 22.5 million shares of Duke Energy common stock pursuant to the forward stock purchase contracts. Additionally, in February 2004, Duke Capital issued $200 million of 4.37% senior unsecured notes due in 2009 and $288 million of 5.50% senior unsecured notes due in 2014 in exchange for $475 million of the principal amount of the remarketed senior notes. After the exchange, $400 million of the principal amount of the remarketed senior notes remained outstanding.

Also, in February 2004, Duke Energy announced that on March 26, 2004, it will redeem the entire issue of 7.20% Duke Energy debt to an affiliate due in 2037. The redemption price will be approximately $360 million, and the redemption is not anticipated to have a material impact on Duke Energy's Consolidated Statements of Operations.

For additional information about Duke Energy's financing activities, and the impact of the 2003 adoption of SFAS No. 150 and FIN 46 (Revised December 2003) (FIN 46R), "Consolidation of Variable Interest Entities—An Interpretation of ARB No. 51," see Notes 14, 15 and 16 to the Consolidated Financial Statements.

Available Credit Facilities and Restrictive Debt Covenants.    During 2003, Duke Energy, Duke Capital, Westcoast, Union Gas, DEFS and Duke Australia Finance Pty Ltd. (a wholly owned subsidiary of Duke Energy) replaced portions of their expiring credit facilities, thereby reducing the total amount of credit facilities available by approximately $2.2 billion. The majority of the credit facilities support commercial paper programs. The issuance of commercial paper, letters of credit and other borrowings reduces the amount available under the credit facilities.

Duke Energy's credit agreements contain various financial and other covenants. Failure to meet those covenants beyond applicable grace periods could result in acceleration of due dates of certain borrowings and/or termination of the agreements. As of December 31, 2003, Duke Energy was in compliance with those covenants. In addition, certain of the agreements contain cross-acceleration provisions that may allow for acceleration of payments or termination of the agreements upon: (1) nonpayment or (2) acceleration of other significant indebtedness of the applicable borrower or certain of its subsidiaries. None of the credit agreements contain material adverse change clauses.

For information on Duke Energy's credit facilities as of December 31, 2003, see Note 14 to the Consolidated Financial Statements.

Duke Energy has approximately $2,900 million of credit facilities which expire in 2004. It is Duke Energy's intent to resyndicate less than the total $2,900 million of expiring credit facilities.

Credit Ratings.     In March 2003, Moody's Investors Service (Moody's) placed its long-term and short-term ratings of Duke Energy, Duke Capital and DEFS, and its long-term ratings of Texas Eastern and PanEnergy, on Review for Potential Downgrade. In June 2003, Moody's lowered its long-term rating of Duke Energy, its long-term and short-term ratings of Duke Capital, and its long-term ratings of Texas Eastern and PanEnergy one ratings level. Moody's actions were prompted by concerns regarding leverage ratios and cash flow coverage metrics at Duke Energy, and uncertainties associated with cash flow contributions from DENA and Duke Energy International, LLC. Moody's concluded its actions by placing Duke Energy, Duke Capital, Texas Eastern and PanEnergy on Stable Outlook. In September 2003, Moody's confirmed its long and short-term ratings of DEFS and placed DEFS on Stable Outlook, concluding its Review for Potential Downgrade.

In June 2003, S&P lowered its long-term ratings of Duke Energy, Duke Capital and its subsidiaries (with the exception of Maritimes & Northeast Pipeline, LLC and Maritimes & Northeast Pipeline, LP (collectively, M&N Pipeline) and DEFS) one ratings level. In addition, S&P lowered its Canadian commercial paper ratings of Westcoast and Union Gas one ratings level. S&P's actions were based on concern about Duke Energy's ability to strengthen its financial profile during the remainder of 2003 and in 2004, and its ability to absorb any further weakening in operating cash flows, while still meeting its debt reduction targets. S&P concluded its actions by leaving Duke Energy and its subsidiaries, excluding M&N Pipeline and DEFS, on Negative Outlook. In February 2004, S&P again lowered its long-term ratings of Duke Energy and its subsidiaries, with the exception M&N Pipeline, DEFS and DETM one ratings level. S&P's actions were based upon Duke Energy's weaker than anticipated financial performance in 2003 and the execution risk associated with Duke Energy's 2004 debt reduction plans. Additionally, S&P noted that Duke Energy's continuation of trading and marketing activities around merchant generation assets will continue to expose Duke Energy to market risk and the need to dedicate material liquidity to support such activities. At the conclusion of S&P's actions, Duke Energy, Duke Capital and its subsidiaries all have a Stable Outlook, with the exception of DETM, which remains on Negative Outlook.

The following table summarizes the March 1, 2004 credit ratings from the rating agencies, retained by Duke Energy to rate its securities, its principal funding subsidiaries and its trading and marketing subsidiary DETM.

Credit Ratings Summary as of March 1, 2004

  Standard and Poor's Moody's Investor Service Dominion Bond Rating Service (DBRS)
Duke Energy(a) BBB Baa1 Not Applicable
Duke Capital LLC(a) BBB- Baa3 Not Applicable
Duke Energy Field Services(a) BBB Baa2 Not Applicable
Texas Eastern Transmission, LP(a) BBB Baa2 Not Applicable
Westcoast Energy Inc.(a) BBB Not applicable A(low)
Union Gas Limited(a) BBB Not applicable A
Maritimes & Northeast Pipeline, LLC(b) A A1 A(d)
Maritimes & Northeast Pipeline, LP(b) A A1 A
Duke Energy Trading and Marketing, LLC(c) BBB- Not applicable Not applicable

(a)   Represents senior unsecured credit rating

(b)   Represents senior secured credit rating

(c)   Represents corporate credit rating

(d)   In August 2003, DBRS initiated a rating on Maritimes & Northeast Pipeline, LLC.

Duke Energy's credit ratings are dependent on, among other factors, the ability to generate sufficient cash to fund Duke Energy's capital and investment expenditures and dividends, while strengthening the balance sheet through debt reductions. If, as a result of market conditions or other factors affecting Duke Energy's business, Duke Energy is unable to execute its business plan or if its earnings outlook materially deteriorates, Duke Energy's ratings could be further affected.

Duke Energy and its subsidiaries are required to post collateral under certain trading and marketing and other contracts. Typically, the amount of the collateral is dependent upon Duke Energy's economic position at points in time during the life of a contract and the credit rating of the subsidiary obligated under the collateral agreement. Business activity by DENA generates the majority of Duke Energy's collateral requirements. DENA frequently transacts through DETM or Duke Energy Marketing America, a wholly owned subsidiary of Duke Capital.

A reduction in DETM's credit rating to below investment grade as of December 31, 2003 would have resulted in Duke Capital posting additional collateral of up to approximately $220 million. Additionally, in the event of a reduction in DETM's credit rating to below investment grade, collateral agreements may require the segregation of cash held as collateral to be placed in escrow. As of December 31, 2003, Duke Capital would have been required to escrow approximately $150 million of such cash collateral held if DETM's credit rating had been reduced to below investment grade. Amounts above reflect Duke Energy's 60% ownership of DETM and the allocation of collateral to DENA for contracts executed by DETM on its behalf.

A reduction in the credit rating of Duke Capital to below investment grade as of December 31, 2003 would have resulted in Duke Capital posting additional collateral of up to approximately $510 million. The amount of cash held as collateral that would have been required to be segregated into escrow due to a Duke Capital downgrade to below investment grade was less than $10 million. Additionally, in the event of a reduction in Duke Capital's credit rating to below investment grade, certain interest rate and foreign exchange swap agreements may require settlement payments due to the termination of the agreements. As of December 31, 2003, Duke Capital could have been required to pay up to $100 million in such settlement payments if Duke Capital's credit rating had been reduced to below investment grade. Duke Capital would fund any additional collateral requirements through a combination of cash on hand and the use of credit facilities.

If credit ratings for Duke Energy or its affiliates fall below investment grade there is likely to be a negative impact on its working capital and terms of trade that is not possible to quantify fully in addition to the posting of additional collateral and segregation of cash described above.

Acceleration Clauses.     Duke Energy may be required to repay certain debt should its credit ratings fall to a certain level at S&P or Moody's. As of December 31, 2003, Duke Energy had $19 million of senior unsecured notes which mature serially through 2012 that may be required to be repaid if Duke Energy's senior unsecured debt ratings fall below BBB- at S&P or Baa3 at Moody's, and $30 million of senior unsecured notes which mature serially through 2016 that may be required to be repaid if Duke Energy's senior unsecured debt ratings fall below BBB at S&P or Baa2 at Moody's. As of March 1, 2004, Duke Energy's senior unsecured credit rating was BBB at S&P and Baa1 at Moody's.

Other Financing Matters.     As of December 31, 2003, Duke Energy and its subsidiaries had effective SEC shelf registrations for up to $1,950 million in gross proceeds from debt and other securities. Subsequent to December 31, 2003, these SEC shelf registrations have been reduced by $488 million as a result of the senior unsecured notes issued by Duke Capital in February 2004. Additionally, as of December 31, 2003, Duke Energy had access to 700 million Canadian dollars (U.S. $542 million) available under Canadian shelf registrations for issuances in the Canadian market. A shelf registration is effective in Canada for a 25-month period. Of the total amount available under Canadian shelf registrations, 200 million Canadian dollars will expire in June 2004 and 500 million Canadian dollars will expire in November 2005.

Duke Energy's Board of Directors adopted a dividend policy in 2000 that maintains dividends at the current quarterly rate of $0.275 per share, subject to the discretion of the Board of Directors. Duke Energy has paid quarterly cash dividends for 77 consecutive years. Dividends on common and preferred stocks in 2004 are expected to be paid on March 16, June 16, September 16 and December 16, subject to the discretion of the Board of Directors.

Duke Energy's InvestorDirect Choice Plan allows investors to reinvest dividends in common stock and to purchase common stock directly from Duke Energy. Issuances under this plan were $111 million in 2003, $105 million in 2002 and $100 million in 2001.

Duke Energy also sponsors employee savings plans that cover substantially all employees. Issuances of common stock under these plans were $156 million in 2003, $188 million in 2002 and $170 million in 2001. Duke Energy also issues authorized but unissued shares of its common stock to meet other employee benefit requirements. Issuances of common stock to meet other employee benefit requirements were approximately $20 million for 2003, approximately $50 million for 2002 and approximately $60 million for 2001. This practice is expected to continue in 2004. (See Notes 20 and 21 to the Consolidated Financial Statements for additional information on stock-based compensation and employee benefit plans.)

Off-Balance Sheet Arrangements

Duke Energy and certain of its subsidiaries enter into guarantee arrangements in the normal course of business to facilitate commercial transactions with third parties. These arrangements include financial and performance guarantees, stand-by letters of credit, debt guarantees, surety bonds and indemnifications. These arrangements are largely entered into by Duke Capital. See Note 18 to the Consolidated Financial Statements, "Guarantees and Indemnifications," for further details of the guarantee arrangements.

Most of the guarantee arrangements entered into by Duke Energy enhance the credit standing of certain subsidiaries, non-consolidated entities or less than wholly-owned entities, enabling them to conduct business. As such, these guarantee arrangements involve elements of performance and credit risk, which are not included on the Consolidated Balance Sheets. The possibility of Duke Energy or Duke Capital having to honor its contingencies is largely dependent upon the future operations of the subsidiaries, investees and other third parties, or the occurrence of certain future events.

Issuance of these guarantee arrangements is not required for the majority of Duke Energy's operations. Thus, if Duke Energy discontinued issuing these guarantee arrangements, there would not be a material impact to the consolidated results of operations, cash flows or financial position.

As discussed in Note 1 to the Consolidated Financial Statements, "Summary of Significant Accounting Policies," Duke Energy has a variable interest in, but is not the primary beneficiary of, Duke COGEMA Stone & Webster, LLC (DCS) due to certain guarantee obligations as discussed in Note 18, "Guarantees and Indemnifications." This guarantee obligation is an off-balance sheet arrangement. Duke Energy's maximum exposure to loss as a result of its variable interest in DCS cannot be quantified.

Duke Energy does not have any material off-balance sheet financing entities or structures, except for normal operating lease arrangements and guarantee arrangements. For additional information on these commitments, see Notes 17 and 18 to the Consolidated Financial Statements.

Contractual Obligations

Duke Energy enters into contracts that require payment of cash at certain specified periods, based on certain specified minimum quantities and prices. The following table summarizes Duke Energy's contractual cash obligations for each of the periods presented. The table below excludes all amounts classified as current liabilities on the Consolidated Balance Sheets, other than current maturities of long-term debt. The majority of current liabilities on the Consolidated Balance Sheets will be paid in cash in 2004.

Contractual Obligations as of December 31, 2003

  Payments Due By Period
Total   Less than 1 year (2004)   2-3 Years (2005 & 2006)   4-5 Years (2007 & 2008)   More than 5 Years (Beyond 2008)
(in millions)
Long-term debt(a) $ 34,922   $ 2,484   $ 7,460   $ 3,739   $ 21,239
Capital leases(a)   367     15     193     36     123
Operating leases(b)   508     98     127     76     207
Purchase Obligations:                            
Firm capacity payments(c)   2,917     444     560     444     1,469
Energy commodity contracts(d)   15,923     8,034     5,413     1,391     1,085
Other purchase obligations(e)   4,561     1,120     1,264     376     1,801
Other long-term liabilities on the
   Consolidated Balance Sheets(f)		   544     133     212     199     —
Total contractual cash obligations $ 59,742   $ 12,328   $ 15,229   $ 6,261   $ 25,924

(a)   See Note 14 to the Consolidated Financial Statements. Amount also includes interest payments over life of debt.

(b)   See Note 17 to the Consolidated Financial Statements.

(c)   Includes firm capacity payments that provide Duke Energy with uninterrupted firm access to natural gas transportation and storage, electricity transmission capacity, refining capacity and the option to convert natural gas to electricity at third-party owned facilities (tolling arrangements) in some natural gas and power locations throughout North America. Also includes firm capacity payments under electric power agreements entered into to meet Franchised Electric's native load requirements.

(d)   Includes contractual obligations to purchase physical quantities of power, natural gas and NGLs. Amount includes certain normal purchases, energy derivates and hedges per SFAS No. 133. For contracts where the price paid is based on an index, the amount is based on forward market prices at December 31, 2003. For certain of these amounts, Duke Energy may net settle rather than paying cash. Amount excludes contracts to purchase commodities that do not require delivery of physical quantities and also are expected to net settle.

(e)   Includes purchase commitments for coal, nuclear fuel supply contracts, outsourcing of certain real estate services, contracts for software, telephone, data and consulting or advisory services. Amount also includes contractual obligations for engineering, procurement and construction costs for nuclear plant refurbishments, environmental projects on fossil facilities, pipeline and real estate projects, and major maintenance of certain merchant plants. Amount excludes certain open purchase orders for services that are provided on demand, and the timing of the purchase can not be determined.

(f)   Includes expected retirement plan contributions for 2004 (see Note 21 to the Consolidated Financial Statements), certain executive benefits, Department of Energy assessment fee (see Note 4 to the Consolidated Financial Statements), and asset retirement obligations which are contractually committed and contributions to the nuclear decommissioning trust fund (see Note 7 to the Consolidated Financial Statements). Duke Energy has not determined these amounts beyond 2008. The majority of asset retirement obligations is not yet contractually committed, and thus is excluded. Amount excludes reserves for litigation, environmental remediation, asbestos-related injuries and damages claims and self-insurance claims (see Note 17 to the Consolidated Financial Statements) because Duke Energy is uncertain as to the timing of when cash payments will be required. Additionally, amount excludes annual insurance premiums that are necessary to operate the business, including nuclear insurance (see Note 17 to the Consolidated Financial Statements), funding of other post-employment benefits (see Note 21 to the Consolidated Financial Statements) and regulatory credits (see Note 4 to the Consolidated Financial Statements) because the amount and timing of the cash payments are uncertain. Also amount excludes Deferred Income Taxes and Investment Tax Credits on the Consolidated Balance Sheets since cash payments for income taxes are determined based primarily on taxable income for each discrete fiscal year. Liabilities Associated with Assets Held for Sale (see Note 12 to the Consolidated Financial Statements) are also excluded as Duke Energy expects these liabilities will be assumed by the buyer upon sale of the assets.