21. Employee Benefit Plans

Duke Energy U.S. Retirement Plans. Duke Energy and its subsidiaries maintain a non-contributory defined benefit retirement plan. The plan covers most U.S. employees using a cash balance formula. Under a cash balance formula, a plan participant accumulates a retirement benefit consisting of pay credits that are based upon a percentage (which may vary with age and years of service) of current eligible earnings and current interest credits.

Duke Energy’s policy is to fund amounts on an actuarial basis to provide assets sufficient to meet benefits to be paid to plan participants. Duke Energy made a voluntary contribution of $181 million to its U.S. defined benefit retirement plan in 2003. No contributions to the Duke Energy plan were necessary in 2002 or 2001. No decision 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.

The net unrecognized transition asset, resulting from the implementation of accrual accounting, is amortized over approximately 20 years. Investment gains or losses are amortized over five years. Duke Energy uses a September 30 measurement date for its plan.

Westcoast Canadian Retirement Plans. The Westcoast benefit plans are reported separately due to actuarial assumption differences. Westcoast and its subsidiaries maintain contributory and non-contributory defined benefit (DB) and defined contribution (DC) retirement plans covering substantially all employees. The DB plans provide retirement benefits based on each plan participant’s years of service and final average earnings. Under the DC plans, company contributions are determined according to the terms of the plan and based on each plan participant’s age, years of service and current eligible earnings.

Westcoast policy is to fund the DB retirement plans on an actuarial basis and in accordance with Canadian pension standards legislation, in order to accumulate assets sufficient to meet benefits to be paid. Contributions to the DC retirement plans are determined in accordance with the terms of the plan. Duke Energy made contributions to the Westcoast pension plans of approximately $11 million in 2003 and $9 million dollars in 2002. Duke Energy anticipates that it will make contributions of approximately $27 million to the Westcoast plans in 2004.

The net unrecognized transition asset and actuarial gains and losses are amortized over the average remaining service period of the active employees. The average remaining service period of the active employees covered by the DB retirement plans is 13 years. Westcoast uses a September 30 measurement date for its plans.

Components of Net Periodic Pension Costs — as of December 31,

	Duke Energy U.S.						Westcoast
	2003		2002		2001		2003		2002
	(in millions)
Service cost benefit earned during the year	$	70	$	69	$	74	$	7	$	6
Interest cost on projected benefit obligation		175		177		188		23		17
Expected return on plan assets		(236)		(267)		(264)		(24)		(19)
Amortization of prior service cost		(3)		(3)		(3)		—		—
Amortization of net transition asset		(4)		(4)		(4)		—		—
Curtailment loss		—		—		—		2		—
Special termination benefit cost		—		1		—		5		—
Net periodic pension (income) costs	$	2	$	(27)	$	(9)	$	13	$	4

Reconciliation of Funded Status to Pre-funded Pension Costs
— as of December 31,

		Duke Energy U.S.				Westcoast
		2003		2002		2003		2002
	(in millions)
Change in Projected Benefit Obligation
Obligation at prior measurement date		$	2,671	$	2,528	$	334	$	324
Service cost			70		69		7		6
Interest cost			175		177		23		17
Actuarial loss			60		73		27		6
Plan amendments			4		1		—		—
Participant contributions			—		—		2		—
Benefits paid			(217)		(178)		(25)		(19)
Curtailment			—		—		2		—
Divestiture			—		—		(10)		—
Special termination benefits			—		1		—		—
Foreign currency impact			—		—		74		—
Obligation at measurement date		$	2,763	$	2,671	$	434	$	334

Change in Fair Value of Plan Assets
Plan assets at prior measurement date		$	2,120	$	2,470	$	255	$	291
Actual return on plan assets			393		(172)		35		(27)
Benefits paid			(217)		(178)		(25)		(19)
Employer contributions			181		—		11		9
Plan participants’ contributions			—		—		2		1
Divestiture			—		—		(9)		—
Foreign currency impact			—		—		55		—
Plan assets at measurement date		$	2,477	$	2,120	$	324	$	255
Funded status		$	(286)	$	(551)	$	(110)	$	(78)
Unrecognized net experience loss			816		913		79		49
Unrecognized prior service cost			(7)		(14)		—		—
Special termination benefits			—		—		(5)		—
Unrecognized net transition asset			(4)		(8)		—		—
Contributions made after measurement date			—		—		3		2
Pre-funded (accrued) pension costs		$	519	$	340	$	(33)	$	(27)

For the Duke Energy U.S. plan, the accumulated benefit obligation was $2,646 million at September 30, 2003 and $2,559 million at September 30, 2002.

For Westcoast, the accumulated benefit obligation was $394 million at September 30, 2003 and $303 million at September 30, 2002. The benefit obligation and fair value of plan assets at the beginning of the year 2002 represent balances assumed or acquired in the acquisition of Westcoast as of March 14, 2002.

Amounts recognized in the Consolidated Balance Sheets consist of:

	2003		2002		2003		2002
	Duke Energy U.S.				Westcoast
	(in millions)
Accrued pension liability	$	(170)	$	(432)	$	(70)	$	(49)
Deferred income tax asset		270		302		13		8
Accumulated other comprehensive income		419		470		21		14
Net Balance Sheet presentation	$	519	$	340	$	(36)	$	(27)

Additional Information:

	Duke Energy U.S.				Westcoast
	2003		2002		2003		2002
	(in millions)
Increase (decrease) in minimum liability included in other comprehensive income, net of tax	$	(51)	$	470	$	7	$	14

Accumulated Benefit Obligation in Excess of Plan Assets

	Duke Energy U.S.				Westcoast
	2003		2002		2003		2002
	(in millions)
Projected benefit obligation	$	2,763	$	2,671	$	432	$	324
Accumulated benefit obligation		2,646		2,559		393		295
Fair value of plan assets		2,477		2,120		323		247

Assumptions Used for Pension Benefits Accounting

	Duke Energy U.S.			Westcoast
	2003	2002	2001	2003	2002
	(percents)
Benefit Obligations
Discount rate	6.00	6.75	7.25	6.00	6.50
Salary increase	5.00	5.00	4.94	3.25	3.25
Net Periodic Benefit Cost
Discount rate	6.75	7.25	7.50	6.50	7.25
Salary increase	5.00	5.00	4.94	3.25	3.25
Expected long-term rate of return on plan assets	8.50	9.25	9.25	7.75	8.50

For the Duke Energy U.S. plan the discount rate used to determine the pension obligation is based on average investment yields for Moody’s AA long-term corporate bonds at the measurement date of September 30.

For Westcoast the discount rate used to determine the pension obligation is prescribed as the yield on Canadian corporate AA bonds at the measurement date of September 30. The yield is selected based on bonds with cash flows that match the timing and amount of the expected benefit payments under the plan.

Duke Energy also sponsors employee savings plans that cover substantially all U.S. employees. Duke Energy expensed employer matching contributions of $63 million in 2003, $71 million in 2002 and $69 million in 2001.

Plan Assets Duke Energy U.S.:

	Target Allocation			Percentage of Fair Value of Plan Assets at September 30
Asset Category	Target Allocation			2003		2002
U.S. equity securities		45	%	44	%	44	%
Non-U.S. equity securities		20		20		19
Debt securities		32		35		36
Real estate		3		1		—
Cash equivalents / other		—		—		1
Total		100	%	100	%	100	%

Duke Energy U.S. plan assets for both the pension and other post retirement benefits are maintained by a master trust. The investment objective of the master trust is to achieve reasonable returns on trust assets, subject to a prudent level of portfolio risk, for the purpose of enhancing the security of benefits for plan participants. The asset allocation targets were set after considering the investment objective and the risk profile with respect to the trust. U.S. equities are held for their high expected return. Non-U.S. equities, debt securities, and real estate are held for diversification. Investments within asset classes are to be diversified to achieve broad market participation and reduce the impact of individual managers or investments. Duke Energy regularly reviews its actual asset allocation and periodically rebalances its investments to the targeted allocation when considered appropriate.

The long-term rate of return of 8.5% as of September 30, 2003 for the Duke Energy U.S. assets was developed using a weighted average calculation of expected returns based primarily on future expected returns across asset classes considering the use of active asset managers. The weighted average returns expected by asset classes were 4.18% for U.S. equities, 1.92% for Non U.S. equities, 2.21% for fixed income securities, and 0.24% for real estate.

Plan Assets Westcoast:

Asset Category	Target Allocation			Percentage of Fair Value of Plan Assets at September 30
Asset Category	Target Allocation			2003		2002
Canadian equity securities		25	%	37	%	33	%
U.S. equity securities		20		15		13
EAFE securities(a)		20		15		14
Debt securities		35		33		40
Total		100	%	100	%	100	%

(a) EAFE — Europe, Australasia, Far East

Westcoast assets for registered pension plans are maintained by a master trust. The investment objective of the master trust is to achieve reasonable returns on trust assets, subject to a prudent level of portfolio risk, for the purpose of enhancing the security of benefits for participants. The asset allocation targets were set after considering the investment objective and the risk profile with respect to the trust. Canadian equities are held for their high expected return. Non-Canadian equities are held for their high expected return as well as diversification relative to Canadian equities and debt securities. Debt securities are also held for diversification.

The long-term rate of return of 7.5% as of September 30, 2003 for the Westcoast assets was developed using a weighted average calculation of expected returns based primarily on future expected returns across asset classes considering the use of active asset managers. The weighted average returns expected by asset classes were 3.15% for Canadian equities, 1.27% for U.S. equities, 1.41% for Europe, Australasia and Far East equities, and 1.79% for fixed income securities.

Duke Energy U.S. Other Post-Retirement Benefits. Duke Energy and most of its subsidiaries provide some health care and life insurance benefits for retired employees on a contributory and non-contributory basis. Employees are eligible for these benefits if they have met age and service requirements at retirement, as defined in the plans.

These benefit costs are accrued over an employee’s active service period to the date of full benefits eligibility. The net unrecognized transition obligation, resulting from accrual accounting, is amortized over approximately 20 years.

Westcoast Other Post-Retirement Benefits. Westcoast provides health care and life insurance benefits for retired employees on a non-contributory basis. Employees are eligible for these benefits if they have met age and service requirements at retirement, as defined in the plans. Effective December 31, 2003, a new plan was implemented for all non bargaining employees and the majority of bargaining employees retiring on and after January 1, 2006. The new plan is predominantly a defined contribution plan as compared to the existing defined benefit program.

Other post-retirement benefit costs are accrued over an employee’s active service period to the date of full benefits eligibility. The net unrecognized transition obligation, resulting from accrual accounting, is amortized over the average remaining service period of the active employees covered by the plans. The average remaining service period of the active employees is 18 years.

Components of Net Periodic Post-Retirement Benefit Costs — as of December 31,

	Duke Energy U.S.						Westcoast
	2003		2002		2001		2003		2002
	(in millions)
Service cost benefit earned during the year	$	5	$	5	$	5	$	2	$	2
Interest cost on accumulated post-retirement benefit obligation		51		50		44		4		2
Expected return on plan assets		(21)		(24)		(24)		—		—
Amortization of prior service cost		1		1		1		—		—
Amortization of net transition asset		18		18		18		—		—
Curtailment loss (gain)		21		—		(3)		1		—
Amortization of loss		5		—		—		—		—
Net periodic post-retirement benefit costs	$	80	$	50	$	41	$	7	$	4

During 2003, Duke Energy experienced workforce reductions and recognized other post-retirement employment benefits curtailments of $21 million.

Reconciliation of Funded Status to Accrued Post-Retirement Benefit Costs — as of December 31,

	Duke Energy U.S.				Westcoast
	2003		2002		2003		2002
	(in millions)
Change in Projected Benefit Obligation
Accumulated post-retirement benefit obligation at prior measurement date	$	779	$	712	$	49	$	45
Service cost		5		5		2		2
Interest cost		51		50		4		2
Plan participants’ contributions		12		9		—		—
Actuarial loss		142		66		30		2
Benefits paid		(66)		(63)		(2)		(2)
Divestiture		—		—		(2)		—
Plan curtailments		1		—		1		—
Plan amendments		—		—		(12)		—
Foreign currency impact		—		—		11		—
Accumulated post-retirement benefit obligation at measurement date	$	924	$	779	$	81	$	49

Change in Fair Value of Plan Assets
Plan assets at prior measurement date	$	227	$	265	$	—	$	—
Actual return on plan assets		32		(21)		—		—
Benefits paid		(66)		(63)		(2)		(2)
Employer contributions		37		37		2		2
Plan participants’ contributions		12		9		—		—
Plan assets at measurement date	$	242	$	227	$	—	$	—
Funded status	$	(682)	$	(552)	$	(81)	$	(49)
Employer contributions made after measurement date		11		12		1		—
Unrecognized net experience loss		346		223		32		2
Unrecognized prior service cost		2		3		(12)		—
Unrecognized transition obligation		143		178		—		—
Accrued post-retirement benefit costs	$	(180)	$	(136)	$	(60)	$	(47)

For measurement purposes, plan assets were valued as of September 30 for both the Duke Energy U.S. and Westcoast plans.

For Westcoast, the benefit obligation at the beginning of the year 2002 represent balances assumed or acquired in the acquisition of Westcoast as of March 14, 2002.

Assumptions Used for Post-Retirement Benefits Accounting

	Duke Energy U.S.			Westcoast
	2003	2002	2001	2003	2002
	(percents)
Determined Benefit Obligations
Discount rate	6.00	6.75	7.25	6.00	6.50
Salary increase	5.00	5.00	4.94	3.25	3.25
Determined Expense
Discount rate	6.75	7.25	7.50	6.50	7.25
Salary increase	5.00	5.00	4.94	3.25	3.25
Expected long-term rate of return on plan assets	8.50	9.25	9.25	—	—
Assumed tax rate(a)	39.11	39.60	39.60	—	—

(a) Applicable to the health care portion of funded post-retirement benefits

Plan Assets Duke Energy U.S.:

	Target Allocation			Percentage of Fair Value of Plan Assets at September 30
Asset Category	Target Allocation			2003		2002
U.S. equity securities		45	%	44	%	44	%
Non-U.S. equity securities		20		20		19
Debt securities		32		35		36
Real estate		3		1		—
Cash equivalents / other		—		—		1
Total		100	%	100	%	100	%

Duke Energy U.S. plan assets for both the pension and other post retirement benefits are maintained by a master trust. The investment objective of the master trust is to achieve reasonable returns on trust assets, subject to a prudent level of portfolio risk, for the purpose of enhancing the security of benefits for plan participants. The asset allocation targets were set after considering the investment objective and the risk profile with respect to the trust. U.S. equities are held for their high expected return and excess return over inflation. Non-U.S. equities, debt securities, and real estate are held for diversification. Investments within asset classes are to be diversified to achieve broad market participation and reduce the impact of individual managers or investments. Duke Energy regularly reviews its actual asset allocation and periodically rebalances its investments to the targeted allocation when considered appropriate.

Assumed Health Care Cost Trend Rates

	Duke Energy U.S.								Westcoast
	Not Medicare Eligible				Medicare Eligible				Westcoast
	2003		2002		2003		2002		2003		2002
Health care cost trend rate assumed for next year	10.50	%	10.50	%	13.50	%	13.50	%	10.00	%	10.00	%
Rate to which the cost trend is assumed to decline (the ultimate trend rate)	6.00	%	6.00	%	6.00	%	6.00	%	5.00	%	5.00	%
Year that the rate reaches the ultimate trend rate	2009		2008		2012		2011		2008		2008

Sensitivity to Changes in Assumed Health Care Cost Trend Rates Duke Energy U.S. Plan

	1-Percentage- Point Increase
	(in millions)
Effect on total service and interest costs		$	3	$	(3)
Effect on post-retirement benefit obligation			56		(48)

Sensitivity to Changes in Assumed Health Care Cost Trend Rates Westcoast Plans

	1-Percentage- Point Increase
	(in millions)
Effect on total service and interest costs		$	1	$	—
Effect on post-retirement benefit obligation			10		(9)

See Note 1 for disclosure and discussion of the Medicare Prescription Drug, Improvement and Modernization Act of 2003.