DUKE ENERGY CORP
8-K, 2000-03-03
ELECTRIC SERVICES
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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                 ---------------


                                    FORM 8-K

                                 CURRENT REPORT
                         PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

        Date of Report (Date of earliest event reported) Not applicable

                                 ---------------


                             DUKE ENERGY CORPORATION
             (Exact name of registrant as specified in its charter)


        North Carolina                 1-4928              56-0205520

 (State or other jurisdiction     (Commission File        (IRS Employer
      of incorporation)                Number)         Identification No.)

               526 South Church Street
              Charlotte, North Carolina                    28201-1006
       (Address of principal executive offices)            (Zip Code)


                                  (704) 594-6200
               (Registrant's telephone number, including area code)


                                 ---------------

                                 Not applicable
             (Former name or address, if changed since last report)

= = = = = = = = = = = = = = = = = = = = = = = =  = = = = = = = = = = = = = = = =



<PAGE>

Item 7.  Financial Statements and Exhibits.

         The registrant files this Form 8-K Current Report for the purpose of
filing the exhibits listed below. Exhibits 99(a) and 99(b) are expected to be
filed in identical form during March 2000, with the registrant's Form 10-K
Annual Report for the year ended December 31, 1999.

      (c)   Exhibits


            23(a) Independent Auditors' Consent

            99(a) Consolidated Financial Statements:

                     Consolidated Statements of Income and Comprehensive Income
                     for the Years Ended December 31, 1999, 1998 and 1997

                     Consolidated Statements of Cash Flows for the Years Ended
                     December 31, 1999, 1998 and 1997

                     Consolidated Balance Sheets as of December 31, 1999
                     and 1998

                     Consolidated Statements of Common Stockholders' Equity
                     for the Years Ended December 31, 1999, 1998 and 1997

                     Notes to Consolidated Financial Statements

            99(b) Management's Discussion and Analysis of Results of Operations
                  and Financial Condition


<PAGE>


                                   SIGNATURES

            Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.

                                    DUKE ENERGY CORPORATION



                                    By:
                                          Name:  David L. Hauser
                                          Title: Senior Vice President
                                                 and Treasurer


Dated:  March 3, 2000



<PAGE>


                                  EXHIBIT INDEX


Exhibit No.                   Description
- -----------                   -----------

            23(a) Independent Auditors' Consent

            99(a) Consolidated Financial Statements:

                      Consolidated Statements of Income and Comprehensive Income
                      for the Years Ended December 31, 1999, 1998 and 1997

                      Consolidated Statements of Cash Flows for the Years Ended
                      December 31, 1999, 1998 and 1997

                      Consolidated Balance Sheets as of December 31, 1999
                      and 1998

                      Consolidated Statements of Common Stockholders' Equity
                      for the Years Ended December 31, 1999, 1998 and 1997

                      Notes to Consolidated Financial Statements

            99(b) Management's Discussion and Analysis of Results of Operations
                  and Financial Condition






                                                               Exhibit No. 23(a)


INDEPENDENT AUDITOR'S CONSENT


We consent to the incorporation by reference in Registration Statement Nos.
333-79065, 333-81573 33-50543, 33-50617, 33-50715, 333-02571, 333-02575,
333-14209, 333-30263, 333-40679 and 333-59327 of Duke Energy Corporation on Form
S-3 and Registration Statement Nos. 333-29563, 333-29585, 333-29587, 333-34655,
333-12093, 333-50317 and 333-59279 of Duke Energy Corporation on Form S-8 of our
report dated February 11, 2000, appearing in this Form 8-K of Duke Energy
Corporation.

Deloitte & Touche LLP
Charlotte, North Carolina
March 3, 2000



                                                                   EXHIBIT 99(a)

                            DUKE ENERGY CORPORATION
           CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

<TABLE>
<CAPTION>
                             Years Ended December 31,
                            ----------------------------
                              1999      1998      1997
                            --------  --------  --------
                               In millions, except
                                per share amounts
<S>                         <C>       <C>       <C>
Operating Revenues
Sales, trading and
 marketing of natural gas
 and petroleum products
 (Notes 1 and 7)..........  $ 10,922  $  7,854  $  8,151
Generation, transmission
 and distribution of
 electricity (Notes 1 and
 4).......................     4,934     4,586     4,334
Trading and marketing of
 electricity (Notes 1 and
 7).......................     3,610     2,788     1,665
Transportation and storage
 of natural gas (Notes 1
 and 4)...................     1,139     1,450     1,504
Other (Note 8)..............   1,137       932       655
                            --------  --------  --------
 Total operating
  revenues................    21,742    17,610    16,309
                            --------  --------  --------
Operating Expenses
Natural gas and petroleum
 products purchased (Note
 1).......................    10,636     7,497     7,705
Net interchange and
 purchased power (Notes 1,
 4 and 5).................     3,507     2,916     1,960
Fuel used in electric
 generation (Notes 1 and
 11)......................       764       767       743
Other operation and
 maintenance (Notes 4, 11
 and 14)..................     3,701     2,738     2,721
Depreciation and
 amortization (Notes 1 and
 5).......................       968       909       841
Property and other taxes..       371       350       369
                            --------  --------  --------
 Total operating
  expenses................    19,947    15,177    14,339
                            --------  --------  --------
Operating Income..........     1,795     2,433     1,970
                            --------  --------  --------
Other Income and Expenses
Deferred returns and
 allowance for funds used
 during construction (Note
 1).......................        82        88       109
Other, net................       166       126        29
                            --------  --------  --------
 Total other income and
  expenses................       248       214       138
                            --------  --------  --------
Earnings Before Interest
 and Taxes................     2,043     2,647     2,108
Interest Expense (Notes 7
 and 10)..................       601       514       472
Minority Interests (Note
 12)......................       142        96        23
                            --------  --------  --------
Earnings Before Income
 Taxes....................     1,300     2,037     1,613
Income Taxes (Notes 1 and
 6).......................       453       777       639
                            --------  --------  --------
Income Before
 Extraordinary Item.......       847     1,260       974
Extraordinary Gain (Loss),
 net of tax...............       660        (8)       --
                            --------  --------  --------
Net Income................     1,507     1,252       974
                            --------  --------  --------
Dividends and Premiums on
 Redemptions of Preferred
 and Preference Stock
 (Note 13)................        20        21        72
                            --------  --------  --------
Earnings Available For
 Common Stockholders......     1,487     1,231       902
                            --------  --------  --------
Other Comprehensive
 Income, net of tax
Foreign currency
 translation adjustments
 (Note 1).................        (2)       --        --
                            --------  --------  --------
 Total Comprehensive
  Income..................  $  1,485  $  1,231  $    902
                            ========  ========  ========
Common Stock Data (Note 1)
Weighted average shares
 outstanding..............       365       361       360
Earnings per share (before
 extraordinary item)
 Basic....................  $   2.26  $   3.43  $   2.51
 Dilutive.................  $   2.25  $   3.42  $   2.50
Earnings per share
 Basic....................  $   4.08  $   3.41  $   2.51
 Dilutive.................  $   4.07  $   3.40  $   2.50
Dividends per share.......  $   2.20  $   2.20  $   1.90
</TABLE>

                See Notes to Consolidated Financial Statements.

                                       1
<PAGE>
                             DUKE ENERGY CORPORATION
                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                    Years Ended December 31,
                                                   ----------------------------
                                                     1999      1998      1997
                                                   --------  --------  --------
                                                          In millions
<S>                                                <C>       <C>       <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.......................................  $  1,507  $  1,252  $    974
Adjustments to reconcile net income to net cash
 provided by operating activities:
 Depreciation and amortization...................     1,151     1,055       983
 Extraordinary (gain) loss, net of tax...........      (660)        8        --
 Injuries and damages accrual....................       800        --        --
 Deferred income taxes...........................      (210)      (35)       99
 Purchased capacity levelization.................       104        88        56
 Transition cost recoveries (payments), net......        95       (28)      (36)
 (Increase) decrease in
  Receivables....................................      (659)      (18)     (266)
  Inventory......................................       (89)     (104)       (7)
  Other current assets...........................      (138)      (39)      (18)
 Increase (decrease) in
  Accounts payable...............................       477        72       239
  Taxes accrued..................................       (57)       (6)       50
  Interest accrued...............................        32        (2)      (13)
  Other current liabilities......................        73        84        15
 Other, net......................................       258         4        64
                                                   --------  --------  --------
   Net cash provided by operating activities.....     2,684     2,331     2,140
                                                   --------  --------  --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital and investment expenditures..............    (5,936)   (2,500)   (2,028)
Proceeds from sale of subsidiaries...............     1,900        --        --
Decommissioning, retirements and other...........       236        24        34
                                                   --------  --------  --------
   Net cash used in investing activities.........    (3,800)   (2,476)   (1,994)
                                                   --------  --------  --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issuance of
 Long-term debt..................................     3,221     1,357     1,618
 Guaranteed preferred beneficial interests in
  subordinated notes of Duke Energy Corporation
  or Subsidiaries................................       484       581       339
 Common stock and stock options..................       162       176        15
Payments for the redemption of
 Long-term debt..................................    (1,505)     (698)     (869)
 Common stock....................................        --        --       (25)
 Preferred and preference stock..................       (20)     (180)     (224)
Net change in notes payable and commercial paper.        58      (350)     (290)
Dividends paid...................................      (822)     (814)     (726)
Other............................................        22         6       (41)
                                                   --------  --------  --------
   Net cash provided by (used in) financing
    activities...................................     1,600        78      (203)
                                                   --------  --------  --------
Net increase (decrease) in cash and cash
 equivalents.....................................       484       (67)      (57)
Cash received from business acquisitions.........        49        38        --
Cash and cash equivalents at beginning of year...        80       109       166
                                                   --------  --------  --------
Cash and cash equivalents at end of year.........  $    613  $     80  $    109
                                                   ========  ========  ========
Supplemental Disclosures
 Cash paid for interest, net of amount
  capitalized....................................  $    541  $    490  $    476
 Cash paid for income taxes......................  $    732  $    733  $    470
</TABLE>

                See Notes to Consolidated Financial Statements.

                                       2
<PAGE>
                             DUKE ENERGY CORPORATION
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                 December 31,
                                                                ---------------
                                                                 1999    1998
                                                                ------- -------
                                                                  In millions
<S>                                                             <C>     <C>
                            ASSETS
Current Assets (Note 1)
  Cash and cash equivalents (Note 7)........................... $   613 $    80
  Receivables (Note 7).........................................   3,248   2,318
  Inventory....................................................     599     543
  Current portion of natural gas transition costs (Note 4).....      81     100
  Current portion of purchased capacity costs (Note 5).........     146      99
  Unrealized gains on mark-to-market transactions (Note 7).....   1,131   1,457
  Other (Note 7)...............................................     353     246
                                                                ------- -------
    Total current assets.......................................   6,171   4,843
                                                                ------- -------
Investments and Other Assets
  Investments in affiliates (Notes 8 and 14)...................   1,299     902
  Nuclear decommissioning trust funds (Note 11)................     703     580
  Pre-funded pension costs (Note 17)...........................     315     332
  Goodwill, net (Notes 1 and 2)................................     844     495
  Notes receivable.............................................     154     244
  Unrealized gains on mark-to-market transactions (Notes 1 and
   7)..........................................................     690     396
  Other........................................................     705     283
                                                                ------- -------
    Total investments and other assets.........................   4,710   3,232
                                                                ------- -------
Property, Plant and Equipment (Notes 1, 5, 9, 10 and 11)
  Cost.........................................................  30,436  27,128
  Less accumulated depreciation and amortization...............   9,441  10,253
                                                                ------- -------
    Net property, plant and equipment..........................  20,995  16,875
                                                                ------- -------
Regulatory Assets and Deferred Debits (Note 1)
  Purchased capacity costs (Note 5)............................     497     648
  Debt expense.................................................     223     253
  Regulatory asset related to income taxes.....................     500     506
  Natural gas transition costs (Note 4)........................       4      80
  Environmental clean-up costs (Note 14).......................      27      69
  Other........................................................     282     300
                                                                ------- -------
    Total regulatory assets and deferred debits................   1,533   1,856
                                                                ------- -------
      Total Assets............................................. $33,409 $26,806
                                                                ======= =======
</TABLE>


                See Notes to Consolidated Financial Statements.

                                       3
<PAGE>
                             DUKE ENERGY CORPORATION
                     CONSOLIDATED BALANCE SHEETS, continued

<TABLE>
<CAPTION>
                                                                December 31,
                                                               ----------------
                                                                1999     1998
                                                               -------  -------
                                                                 In millions
<S>                                                            <C>      <C>
             LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
 Accounts payable............................................. $ 2,312  $ 1,754
 Notes payable and commercial paper (Notes 7 and 10)..........     267      209
 Taxes accrued (Note 1).......................................     685      119
 Interest accrued.............................................     139      109
 Current maturities of long-term debt and preferred stock
  (Notes 10 and 13)...........................................     515      707
 Unrealized losses on mark-to-market transactions (Notes 1 and
  7)..........................................................   1,241    1,387
 Other (Notes 1 and 14).......................................     717      670
                                                               -------  -------
    Total current liabilities.................................   5,876    4,955
                                                               -------  -------
Long-term Debt (Notes 7 and 10)...............................   8,683    6,272
                                                               -------  -------
Deferred Credits and Other Liabilities (Note 1)
 Deferred income taxes (Note 6)...............................   3,402    3,705
 Investment tax credit (Note 6)...............................     225      242
 Nuclear decommissioning costs externally funded (Note 11)....     703      580
 Environmental clean-up liabilities (Note 14).................     101      148
 Unrealized losses on mark-to-market transactions (Note 7)....     438      362
 Other (Note 14)..............................................   2,099      907
                                                               -------  -------
   Total deferred credits and other liabilities...............   6,968    5,944
                                                               -------  -------
Minority Interests (Note 2)...................................   1,200      253
                                                               -------  -------
Guaranteed Preferred Beneficial Interests in Subordinated
 Notes of Duke Energy Corporation or Subsidiaries (Notes 7 and
  12).........................................................   1,404      919
                                                               -------  -------
Preferred and Preference Stock (Notes 7 and 13)
 Preferred and preference stock with sinking fund
  requirements................................................      71      104
 Preferred and preference stock without sinking fund
  requirements................................................     209      209
                                                               -------  -------
   Total preferred and preference stock.......................     280      313
                                                               -------  -------
Commitments and Contingencies (Notes 5, 11 and 14)
Common Stockholders' Equity (Notes 15 and 16)
 Common stock, no par, 1 billion shares authorized; 366
  million and 363 million shares outstanding at December 31,
  1999 and 1998, respectively.................................   4,603    4,449
 Retained earnings............................................   4,397    3,701
 Accumulated other comprehensive income.......................      (2)      --
                                                               -------  -------
   Total common stockholders' equity..........................   8,998    8,150
                                                               -------  -------
    Total Liabilities and Stockholders' Equity................ $33,409  $26,806
                                                               =======  =======
</TABLE>

                See Notes to Consolidated Financial Statements.

                                       4
<PAGE>
                             DUKE ENERGY CORPORATION
             CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                   Years Ended December 31,
                                                  ----------------------------
                                                    1999      1998      1997
                                                  --------  --------  --------
                                                         In millions
<S>                                               <C>       <C>       <C>
Common Stock
  Balance at beginning of year................... $  4,449  $  4,284  $  4,289
  Dividend reinvestment and employee benefits....      154       165        (9)
  Other capital stock transactions, net..........       --        --         4
                                                  --------  --------  --------
    Balance at end of year.......................    4,603     4,449     4,284
                                                  --------  --------  --------
Retained Earnings
  Balance at beginning of year...................    3,701     3,256     3,052
  Net income.....................................    1,507     1,252       974
  Common stock dividends.........................     (802)     (794)     (682)
  Preferred and preference stock dividends and
   premiums on redemptions (Note 13).............      (20)      (21)      (72)
  Other capital stock transactions, net..........       11         8       (16)
                                                  --------  --------  --------
    Balance at end of year.......................    4,397     3,701     3,256
                                                  --------  --------  --------
Accumulated Other Comprehensive Income
  Balance at beginning of year...................       --        --        --
  Foreign currency translation adjustments (Note
   1)............................................       (2)       --        --
                                                  --------  --------  --------
    Balance at end of year.......................       (2)       --        --
                                                  --------  --------  --------
Total Common Stockholders' Equity................ $  8,998  $  8,150  $  7,540
                                                  ========  ========  ========
</TABLE>


                 See Notes to Consolidated Financial Statements

                                       5
<PAGE>

                            DUKE ENERGY CORPORATION

                  Notes to Consolidated Financial Statements
             For the Years Ended December 31, 1999, 1998 and 1997

1. Summary of Significant Accounting Policies

  Consolidation. The consolidated financial statements include the accounts of
all of Duke Energy Corporation's majority-owned subsidiaries after the elimi-
nation of significant intercompany transactions and balances. Investments in
other entities that are not controlled by Duke Energy Corporation, but where
it has significant influence over operations, are accounted for using the eq-
uity method.

  The preparation of financial statements in conformity with generally ac-
cepted accounting principles requires management to make estimates and assump-
tions that affect the amounts reported in the financial statements and accom-
panying notes. Although these estimates are based on management's knowledge of
current and expected future events, actual results could differ from those es-
timates.

  "Duke Energy" is used in these Notes as a collective reference to Duke En-
ergy Corporation and its subsidiaries.

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

  Inventory. Inventory consists primarily of materials and supplies, gas held
for transmission, processing and sales commitments, and coal held for electric
generation. Inventory is recorded at the lower of cost or market, primarily
using the average cost method.

  Accounting for Risk Management and Commodity Trading Activities. Duke Ener-
gy, primarily through its subsidiaries, manages its exposure to risk from ex-
isting contractual commitments and provides risk management services to its
customers and suppliers through commodity derivatives, including forward con-
tracts, futures, over-the-counter swap agreements and options.

  Commodity derivatives utilized for trading purposes are accounted for using
the mark-to-market method. Under this methodology, these instruments are ad-
justed to market value, and the unrealized gains and losses are recognized in
current period income and are included in the Consolidated Statements of In-
come and Comprehensive Income as Natural Gas and Petroleum Products Purchased
or Net Interchange and Purchased Power, and in the Consolidated Balance Sheets
as Unrealized Gains or Losses on Mark-to-Market Transactions.

  Commodity derivatives such as futures, forwards, over-the-counter swap
agreements and options are also utilized for non-trading purposes to hedge the
impact of market fluctuations in the price of natural gas, electricity and
other energy-related products. To qualify as a hedge, the price movements in
the commodity derivatives must be highly correlated with the underlying hedged
commodity. Under the deferral method of accounting, gains and losses related
to commodity derivatives which qualify as hedges are recognized in income when
the underlying hedged physical transaction closes and are included in the Con-
solidated Statements of Income and Comprehensive Income as Natural Gas and Pe-
troleum Products Purchased, or Net Interchange and Purchased Power. If the
commodity derivative is no longer sufficiently correlated to the underlying
commodity, or if the underlying commodity transaction closes earlier than an-
ticipated, the deferred gains or losses are recognized in income.

  Duke Energy periodically uses interest rate swaps, accounted for under the
accrual method, to manage the interest rate characteristics associated with
outstanding debt. Interest rate differentials to be paid or received as inter-
est rates change are accrued and recognized as an adjustment to interest ex-
pense. The amount accrued as either a payable to or receivable from
counterparties is included in the Consolidated Balance Sheets as Regulatory
Assets and Deferred Debits.

                                      6
<PAGE>

                            DUKE ENERGY CORPORATION

            Notes to Consolidated Financial Statements -- Continued


1. Summary of Significant Accounting Policies -- Continued

  Duke Energy also periodically utilizes interest rate lock agreements to
hedge interest rate risk associated with new debt issuances. Under the defer-
ral method of accounting, gains or losses on such agreements, when settled,
are deferred in the Consolidated Balance Sheets as Long-term Debt and are am-
ortized in the Consolidated Statements of Income and Comprehensive Income as
an adjustment to interest expense.

  Duke Energy is exposed to foreign currency risk from investments in interna-
tional affiliates and businesses owned and operated in foreign countries. To
mitigate risks associated with foreign currency fluctuations, when possible,
contracts are denominated in or indexed to the U.S. dollar or may be hedged
through debt denominated in the foreign currency. Duke Energy also uses for-
eign currency derivatives, where possible, to hedge its risk related to for-
eign currency fluctuations. To qualify as a hedge, there must be a high degree
of correlation between price movements in the derivative and the item desig-
nated as being hedged. These derivatives are accounted for under the deferral
method previously described under commodity derivatives used for non-trading
purposes.

  Duke Energy also enters into foreign currency swap agreements to manage for-
eign currency risks associated with energy contracts denominated in foreign
currencies. These agreements are accounted for under the mark-to-market method
previously described.

  Goodwill. Goodwill represents the excess of acquisition costs over the fair
value of the net assets of an acquired business. The goodwill created by Duke
Energy's acquisitions is amortized on a straight-line basis over the useful
lives of the assets, ranging from 10 to 40 years. The amount of goodwill re-
ported on the Consolidated Balance Sheets as of December 31, 1999 and 1998,
respectively, was $844 million and $495 million, net of accumulated amortiza-
tion of $218 million and $166 million. See Note 2 to the Consolidated Finan-
cial Statements for information on significant goodwill additions.

  Property, Plant and Equipment. Property, plant and equipment are stated at
original cost. Duke Energy capitalizes all construction-related direct labor
and material costs, as well as indirect construction costs. Indirect costs in-
clude general engineering, taxes and the cost of money. The cost of renewals
and betterments that extend the useful life of property, plant and equipment
is also capitalized. The cost of repairs and replacements is charged to ex-
pense as incurred. Depreciation is generally computed using the straight-line
method. The composite weighted-average depreciation rates, excluding nuclear
fuel, were 3.73%, 3.82% and 3.67% for 1999, 1998 and 1997, respectively.

  When property, plant and equipment maintained by Duke Energy's regulated op-
erations are retired, the original cost plus the cost of retirement, less sal-
vage, is charged to accumulated depreciation and amortization. When entire
regulated operating units are sold or non-regulated properties are retired or
sold, the property and related accumulated depreciation and amortization ac-
counts are reduced, and any gain or loss is recorded in income, unless other-
wise required by the Federal Energy Regulatory Commission (FERC).

  Impairment of Long-Lived Assets. The recoverability of long-lived assets and
intangible assets are reviewed whenever events or changes in circumstances in-
dicate that the carrying amount of the asset may not be recoverable. Such
evaluation is based on various analyses, including undiscounted cash flow pro-
jections.

  Unamortized Debt Premium, Discount and Expense. Premiums, discounts and ex-
penses incurred in connection with the issuance of presently outstanding long-
term debt are amortized over the terms of the respective issues. Any call pre-
miums or unamortized expenses associated with refinancing higher-cost debt ob-
ligations used to finance regulated assets and operations are amortized con-
sistent with regulatory treatment of those items.

  Environmental Expenditures. Environmental expenditures that relate to an ex-
isting condition caused by past operations and do not contribute to current or
future revenue generation are expensed. Environmental

                                      7
<PAGE>

                            DUKE ENERGY CORPORATION

            Notes to Consolidated Financial Statements -- Continued


1. Summary of Significant Accounting Policies -- Continued

expenditures relating to current or future revenues are expensed or capital-
ized as appropriate. Liabilities are recorded when environmental assessments
and/or clean-ups are probable and the costs can be reasonably estimated. Cer-
tain of these environmental assessments and clean-up costs are expected to be
recovered from Natural Gas Transmission customers and have, therefore, been
deferred and are included in the Consolidated Balance Sheets as Environmental
Clean-up Costs.

  Cost-Based Regulation. Duke Energy's regulated operations are subject to the
provisions of Statement of Financial Accounting Standards (SFAS) No. 71, "Ac-
counting for the Effects of Certain Types of Regulation." Accordingly, certain
assets and liabilities that result from the regulated ratemaking process are
recorded that would not be recorded under generally accepted accounting prin-
ciples for non-regulated entities. These regulatory assets and liabilities are
classified in the Consolidated Balance Sheets as Regulatory Assets and De-
ferred Debits, and Deferred Credits and Other Liabilities, respectively. The
applicability of SFAS No. 71 is routinely evaluated, and factors such as regu-
latory changes and the impact of competition are considered. Discontinuing
cost-based regulation or increasing competition might require companies to re-
duce their asset balances to reflect a market basis less than cost and to
write off their associated regulatory assets. Management cannot predict the
potential impact, if any, of discontinuing cost-based regulation or increasing
competition on future financial position or consolidated results of opera-
tions. However, Duke Energy continues to position itself to effectively meet
these challenges by maintaining competitive prices.

  Common Stock Options. Duke Energy accounts for stock-based compensation us-
ing the intrinsic method of accounting. Under this method, compensation cost,
if any, is measured as the excess of the quoted market price of Duke Energy's
stock at the date of the grant over the amount an employee must pay to acquire
the stock. Restricted stock is recorded as compensation cost over the requi-
site vesting period based on the market value on the date of the grant. Pro
forma disclosures utilizing the fair value accounting method are included in
Note 16 to the Consolidated Financial Statements.

  Revenues. Revenues on sales of electricity and transportation and storage of
natural gas are recognized as service is provided. Revenues on sales of natu-
ral gas and petroleum products, as well as electricity, gas and other energy
products marketed, are recognized in the period of delivery. Receivables on
the Consolidated Balance Sheets included $207 million and $193 million as of
December 31, 1999 and 1998, respectively, for electric service that has been
provided but not yet billed to customers. When rate cases are pending final
approval, a portion of the revenues is subject to possible refund. Reserves
are established where required for such cases.

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

  Deferred Returns and Allowance for Funds Used During Construction (AFUDC).
Deferred returns represent the estimated financing costs associated with fund-
ing certain regulatory assets. These regulatory assets primarily arose from
the funding of purchased capacity costs above levels collected in rates. De-
ferred returns are non-cash items and are primarily recognized as an addition
to Purchased Capacity Costs with an offsetting credit to Other Income and Ex-
penses.

  AFUDC represents the estimated debt and equity costs of capital funds neces-
sary to finance the construction of new regulated facilities. AFUDC is a non-
cash item and is recognized as a cost of Property, Plant and Equipment, with
offsetting credits to Other Income and Expenses and to Interest Expense. After
construction is completed, Duke Energy is permitted to recover these costs,
including a fair return, through their inclusion in rate base and in the pro-
vision for depreciation.

                                      8
<PAGE>

                            DUKE ENERGY CORPORATION

            Notes to Consolidated Financial Statements -- Continued


1. Summary of Significant Accounting Policies -- Continued

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

  Foreign Currency Translation. Assets and liabilities of Duke Energy's inter-
national operations, where the local currency is the functional currency, have
been translated at year-end exchange rates, and revenues and expenses have
been translated using average exchange rates prevailing during the year. Ad-
justments resulting from translation are included in the Consolidated State-
ments of Income and Comprehensive Income as Foreign Currency Translation Ad-
justments. The financial statements of international operations, where the
U.S. dollar is the functional currency, reflect certain transactions denomi-
nated in the local currency that have been remeasured in U.S. dollars. The
remeasurement of local currencies into U.S. dollars creates gains and losses
from foreign currency transactions that are included in consolidated net in-
come.

  Income Taxes. Duke Energy and its subsidiaries file a consolidated federal
income tax return. Deferred income taxes have been provided for temporary dif-
ferences. Temporary differences occur when events and transactions recognized
for financial reporting result in taxable or tax-deductible amounts in differ-
ent periods. Investment tax credits have been deferred and are being amortized
over the estimated useful lives of the related properties.

  Earnings Per Common Share. Basic earnings per share is based on a simple
weighted average of common shares outstanding. Dilutive earnings per share re-
flects the potential dilution that could occur if securities or other agree-
ments to issue common stock, such as stock options, were exercised or con-
verted into common stock. The numerator for the calculation of basic and
dilutive earnings per share is earnings available for common stockholders.

Denominator for Earnings per Share
<TABLE>
<CAPTION>
                                                                 1999  1998 1997
                                                                 ----  ---- ----
                                                                  in millions
<S>                                                              <C>   <C>  <C>
Denominator for basic earnings per share (weighted average
 shares outstanding)............................................ 365   361  360
Assumed exercise of dilutive stock options......................  (a)    1    2
                                                                 ---   ---  ---
Denominator for dilutive earnings per share..................... 365   362  362
                                                                 ===   ===  ===
</TABLE>
- --------
(a)  While Duke Energy had dilutive stock options as of December 31, 1999, the
     amount did not round to one million.

  Extraordinary Items. In 1999, Duke Energy realized an extraordinary gain of
$660 million, or $1.82 per share, relating to the sale of certain pipeline
companies. See Note 2 to the Consolidated Financial Statements for additional
information on the extraordinary item.

  In January 1998, TEPPCO Partners, L.P. (TEPPCO), in which a subsidiary of
Duke Energy has a 2% general partner interest and a 19.1% limited partner in-
terest, redeemed certain First Mortgage Notes. A non-cash extraordinary loss
of $8 million, net of income tax of $5 million, was recorded related to costs
of the early retirement of debt. Earnings per common share for 1998 were re-
duced by $0.02 as a result of this charge.

  New Accounting Standard. In September 1998, SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," was issued. Duke Energy is re-
quired to adopt this standard by January 1, 2001. SFAS No. 133 requires that
all derivatives be recognized as either assets or liabilities and measured at
fair value, and it defines the accounting for changes in the fair value of the
derivatives depending on the intended use of the derivative. Duke Energy is
currently reviewing the expected impact of SFAS No. 133 on consolidated re-
sults of operations and financial position.


                                      9
<PAGE>

                            DUKE ENERGY CORPORATION

            Notes to Consolidated Financial Statements -- Continued


1. Summary of Significant Accounting Policies -- Continued

  Reclassifications. Certain amounts have been reclassified in the Consoli-
dated Financial Statements to conform to the current presentation.

2. Business Combinations, Acquisitions and Dispositions

  Business Combinations: PanEnergy Corp (PanEnergy). On June 18, 1997, Duke
Power Company (Duke Power) changed its name to Duke Energy Corporation and
completed a stock-for-stock merger with PanEnergy (the merger). PanEnergy was
involved in the gathering, processing, transportation and storage of natural
gas; the production of natural gas liquids (NGLs); and the marketing of natural
gas, electricity and other energy-related products. Pursuant to the merger
agreement, Duke Energy issued 158.3 million shares of its common stock in
exchange for all of the outstanding common stock of PanEnergy. Accordingly, each
share of PanEnergy common stock outstanding was converted into the right to
receive 1.0444 shares of Duke Energy's common stock. In addition, each
outstanding option to purchase PanEnergy common stock became an option to
purchase common stock of Duke Energy, adjusted accordingly. The merger was
accounted for as a pooling of interests; therefore, the Consolidated Financial
Statements and other financial information included in this Annual Report for
periods prior to the merger include the combined historical financial results of
Duke Power and PanEnergy.

  Business Acquisitions: For acquisitions accounted for using the purchase
method, assets and liabilities have been consolidated as of the purchase date
and earnings from the acquisitions have been included in consolidated earnings
of Duke Energy subsequent to the purchase date. Assets acquired and liabili-
ties assumed are recorded at their estimated fair values, and the excess of
the purchase price over the estimated fair value of the net identifiable as-
sets and liabilities acquired are recorded as goodwill.

  Dominion Resources' Hydroelectric, Natural Gas and Diesel Power Generation
Businesses. In August 1999, Duke Energy, through its wholly owned subsidiary,
Duke Energy International, LLC (Duke Energy International) reached a defini-
tive agreement with Dominion Resources, Inc. (Dominion Resources) to acquire
its portfolio of hydroelectric, natural gas and diesel power generation busi-
nesses in Argentina, Belize, Bolivia and Peru for approximately $405 million.
In October 1999, Duke Energy International completed the purchase of the busi-
nesses in Belize and Peru from Dominion Resources, as well as acquired addi-
tional ownership interests in the Peru business (Egenor) from two other par-
ties for $152 million in cash and certain other ownership interests in South
America. The purchase increased Duke Energy International's ownership in
Egenor from approximately 30% to 90%. The completion of the purchases in Ar-
gentina and Bolivia are subject to receiving appropriate governmental consents
and approvals and are expected to close by mid-2000.

  Assets and liabilities of the Belize and Peru businesses have been recorded
at preliminary fair values along with goodwill of $74 million which is being
amortized on a straight-line basis over 35 to 40 years. The final purchase
price allocation and estimated life of goodwill are subject to adjustment when
additional information concerning asset and liability valuations is finalized
and the evaluation of certain pre-acquisition contingent liabilities has been
completed.

  Companhia de Geracao de Energia Eletrica Paranapanema (Paranapanema). In Au-
gust 1999, Duke Energy International entered a series of transactions to com-
plete a $761 million purchase of a controlling voting interest and an approxi-
mate 44% economic interest in Paranapanema, an electric generating company in
Brazil. Assets and liabilities have been recorded at preliminary fair values
along with goodwill of $134 million which is being amortized on a straight-
line basis over 40 years. The final purchase price allocation and estimated
life of goodwill are subject to adjustment when additional information con-
cerning asset and liability valuations is finalized and the evaluation of cer-
tain pre-acquisition contingent liabilities has been completed.

  In January 2000, Duke Energy completed a tender offer to the minority share-
holders of Paranapanema and successfully acquired an additional 51% economic
interest in the company for approximately $280 million. This

                                      10
<PAGE>

                            DUKE ENERGY CORPORATION

            Notes to Consolidated Financial Statements -- Continued


2. Business Combinations, Acquisitions and Dispositions -- Continued

increased Duke Energy's economic ownership from approximately 44% to approxi-
mately 95%. See Note 19 to the Consolidated Financial Statements.

  Union Pacific Resources' Gathering, Processing and Marketing Operations. On
March 31, 1999, Duke Energy through its wholly owned subsidiary, Duke Energy
Field Services, Inc., completed the $1.35 billion acquisition of the natural
gas gathering, processing, fractionation and NGL pipeline business from Union
Pacific Resources (UPR), as well as UPR's NGL marketing activities (collec-
tively, "the UPR acquisition"). Goodwill of $135 million has been recorded and
is being amortized on a straight-line basis over 15 to 20 years. The final
purchase price allocation and estimated life of goodwill are subject to ad-
justment pending additional information concerning asset and liability valua-
tions and the evaluation of certain pre-acquisition contingent liabilities.

Dispositions: PEPL Companies and Trunkline LNG. On March 29, 1999, wholly owned
subsidiaries of Duke Energy sold Panhandle Eastern Pipe Line Company (PEPL),
Trunkline Gas Company and additional storage related to those systems
(collectively, the PEPL Companies), which substantially comprised the Midwest
Pipelines, along with Trunkline LNG Company (Trunkline LNG) to CMS Energy
Corporation (CMS). The sales price of $2.2 billion involved cash proceeds of
$1.9 billion and CMS' assumption of existing PEPL debt of approximately $300
million. The sale resulted in an extraordinary gain of $660 million, net of
income tax of $404 million, and an increase in earnings per basic share of
$1.82. Under the terms of the agreement with CMS, Duke Energy retained certain
assets and liabilities, such as the Houston office building, certain
environmental, legal and tax liabilities, and substantially all intercompany
balances. Management believes that the retention of these items will not have a
material adverse effect on consolidated results of operations or financial
position.

Combined Operating Results of the PEPL Companies and Trunkline LNG for the
Period from January 1, 1999 through March 28, 1999 (a)

<TABLE>
<CAPTION>
                                                                     In millions
<S>                                                                  <C>
Operating Revenues..................................................    $126
Operating Expenses..................................................      57
Other Income, Net...................................................       4
                                                                        ----
 Earnings Before Interest and Taxes.................................    $ 73
                                                                        ====
</TABLE>
- --------
(a)  Excludes intercompany building rental revenue, allocated corporate ex-
     penses, building depreciation and certain other costs retained by Duke
     Energy.

  The pro forma results of operations for acquisitions and dispositions do not
materially differ from reported results.

3. Business Segments

  Duke Energy is an integrated energy and energy services provider with the
ability to offer physical delivery and management of both electricity and nat-
ural gas throughout the U.S. and abroad. Duke Energy provides these and other
services through seven business segments:

  . Electric Operations
  . Natural Gas Transmission
  . Field Services
  . Trading and Marketing
  . Global Asset Development
  . Other Energy Services
  . Real Estate Operations

                                      11
<PAGE>

                            DUKE ENERGY CORPORATION

            Notes to Consolidated Financial Statements -- Continued


3. Business Segments -- Continuted

  Electric Operations generates, transmits, distributes and sells electric en-
ergy in central and western North Carolina and the western portion of South
Carolina (doing business as Duke Power or Nantahala Power and Light). These
electric operations are subject to the rules and regulations of the FERC, the
North Carolina Utilities Commission (NCUC) and the Public Service Commission
of South Carolina (PSCSC).

  Natural Gas Transmission provides interstate transportation and storage of
natural gas for customers primarily in the Mid-Atlantic and New England
states. Until the sale of the Midwest Pipelines on March 29, 1999, Natural Gas
Transmission also provided interstate transportation and storage services in
the midwest states. See further discussion of the sale of the Midwest Pipe-
lines in Note 2 to the Consolidated Financial Statements. The interstate natu-
ral gas transmission and storage operations are subject to the rules and regu-
lations of the FERC.

  Field Services gathers, processes, transports and markets natural gas and
produces, transports and markets NGLs. Field Services operates gathering sys-
tems in western Canada and ten contiguous states that serve major gas-produc-
ing regions in the Rocky Mountain, Permian Basin, Mid-Continent and onshore
and offshore Gulf Coast areas.

  Trading and Marketing markets natural gas, electricity and other energy-re-
lated products across North America. Duke Energy owns a 60% interest in Trad-
ing and Marketing's energy trading operations, with Mobil Corporation owning a
40% minority interest. This segment also includes certain other trading activ-
ities and limited hydrocarbon exploration and production activities that are
wholly owned by Duke Energy.

  Global Asset Development develops, owns and operates energy-related facili-
ties worldwide. Global Asset Development conducts its operations primarily
through Duke Energy North America, LLC (Duke Energy North America) and Duke
Energy International.

  Other Energy Services provides engineering, consulting, construction and in-
tegrated energy solutions worldwide, primarily through Duke Engineering &
Services, Inc., Duke/Fluor Daniel and DukeSolutions, Inc.

  Real Estate Operations conducts its business through Crescent Resources,
Inc., which develops high quality commercial and residential real estate pro-
jects and manages land holdings in the southeastern U.S.

  Duke Energy's reportable segments are strategic business units that offer
different products and services and are each managed separately. The account-
ing policies for the segments are the same as those described in Note 1 to the
Consolidated Financial Statements. Management evaluates segment performance
based on earnings before interest and taxes (EBIT) after deducting minority
interests. EBIT presented in the accompanying table includes intersegment
sales accounted for at prices representative of unaffiliated party transac-
tions. Segment assets are provided as additional information in the accompany-
ing table and are net of intercompany advances, intercompany notes receivable
and investments in subsidiaries.

  Other Operations primarily includes communication services, water services
and certain unallocated corporate items.


                                      12
<PAGE>

                            DUKE ENERGY CORPORATION

            Notes to Consolidated Financial Statements -- Continued


3. Business Segments -- Continuted

Business Segment Data

<TABLE>
<CAPTION>
                                                                     Depreciation Capital and
                         Unaffiliated Intersegment  Total                and       Investment  Segment
                           Revenues     Revenues   Revenues   EBIT   Amortization Expenditures Assets
                         ------------ ------------ --------  ------  ------------ ------------ -------
                                                         In millions
<S>                      <C>          <C>          <C>       <C>     <C>          <C>          <C>
Year Ended December 31,
 1999
Electric Operations.....   $ 4,700      $    --    $ 4,700   $  856      $542        $  759    $13,133
Natural Gas
 Transmission...........     1,100          106      1,206      627       126           261      3,897
Field Services..........     2,883          707      3,590      144       131         1,630      3,565
Trading and Marketing...    11,334          459     11,793       70        12           104      4,060
Global Asset
 Development............       612          165        777      181       104         2,703      6,673
Other Energy Services...       886          103        989      (94)       14            94        612
Real Estate Operations..       233           --        233      176         9           368        983
Other Operations........        (6)          44         38       (9)       30            17      1,298
Eliminations and
 Minority Interests.....        --       (1,584)    (1,584)      92        --            --       (812)
                           -------      -------    -------   ------      ----        ------    -------
  Total Consolidated....   $21,742      $    --    $21,742   $2,043      $968        $5,936    $33,409
                           =======      =======    =======   ======      ====        ======    =======
Year Ended December 31,
 1998
Electric Operations.....   $ 4,626      $    --    $ 4,626   $1,513      $522        $  586    $12,953
Natural Gas
 Transmission...........     1,426          102      1,528      702       215           290      4,996
Field Services..........     2,094          545      2,639       76        80           304      1,893
Trading and Marketing...     8,614          171      8,785       81        11             8      3,233
Global Asset
 Development............       237           82        319       64        31         1,027      2,061
Other Energy Services...       436           85        521       10        12            41        376
Real Estate Operations..       181           --        181      142         6           217        724
Other Operations........        (4)          26         22        2        32            27        968
Eliminations and
 Minority Interests.....        --       (1,011)    (1,011)      57        --            --       (398)
                           -------      -------    -------   ------      ----        ------    -------
  Total Consolidated....   $17,610      $    --    $17,610   $2,647      $909        $2,500    $26,806
                           =======      =======    =======   ======      ====        ======    =======
Year Ended December 31,
 1997
Electric Operations.....   $ 4,401      $    --    $ 4,401   $1,282      $498        $  743    $12,958
Natural Gas
 Transmission...........     1,468          104      1,572      624       229           247      5,059
Field Services..........     2,481          574      3,055      157        71           157      1,855
Trading and Marketing...     7,411           78      7,489       23         7            18      1,857
Global Asset
 Development............       109           14        123        4         9           348        988
Other Energy Services...       343           33        376       18         6            47        223
Real Estate Operations..       124           --        124       98         4           223        594
Other Operations........       (28)          --        (28)    (120)       17           245        941
Eliminations and
 Minority Interests.....        --         (803)      (803)      22        --            --       (446)
                           -------      -------    -------   ------      ----        ------    -------
  Total Consolidated....   $16,309      $    --    $16,309   $2,108      $841        $2,028    $24,029
                           =======      =======    =======   ======      ====        ======    =======
</TABLE>

  In 1999, foreign operations consisted of 10% of consolidated revenues and
15% of consolidated long-lived assets, primarily in Canada and Latin America.
Foreign operations were not material for 1998 and 1997.


                                      13
<PAGE>

                            DUKE ENERGY CORPORATION

            Notes to Consolidated Financial Statements -- Continued


4. Regulatory Matters

  Electric Operations. The NCUC and the PSCSC approve rates for retail elec-
tric sales within their respective states. The FERC approves Electric Opera-
tions' rates for electric sales to wholesale customers. Electric sales to the
other joint owners of the Catawba Nuclear Station, which represent a majority
of Electric Operations' electric wholesale revenues, are set through contrac-
tual agreements.

  In 1997, in conjunction with its merger with PanEnergy, Duke Energy agreed
to cap the base electric rates for retail customers at existing levels through
2000, with very limited exceptions. Duke Energy also agreed to freeze rates,
except for the market-based rates, for transmission and wholesale electric
sales. In addition, Duke Energy agreed to a cap on the rates charged to the
other joint owners of Catawba Nuclear Station under the interconnection agree-
ments and on the reimbursement of certain costs related to administration and
general expenses and general plant costs under operation and fuel agreements.
Management believes that these agreements will not have a material adverse ef-
fect on consolidated results of operations or financial position.

  Fuel costs are reviewed semiannually in the wholesale jurisdiction and annu-
ally in the South Carolina retail jurisdiction, with provisions for reviewing
such costs in base rates. In the North Carolina retail jurisdiction, a review
of fuel costs in rates is required annually and during general rate case pro-
ceedings. All jurisdictions allow Duke Energy to adjust electric rates for
past over- or under-recovery of fuel costs. Therefore, the difference between
actual fuel costs incurred for electric operations and fuel costs recovered
through rates is reflected in revenues. The stipulation agreements related to
the merger do not apply to the fuel cost adjustments.

  Certain of Electric Operations' electric wholesale customers, excluding the
other Catawba Nuclear Station joint owners, initiated proceedings in 1995 be-
fore the FERC concerning rate-related matters. Duke Energy and nine of its
eleven wholesale customers entered into a settlement in July 1996 which re-
duced the customers' electric rates by approximately 9%. These contracts will
be in effect through 2001, subject to annual renewals thereafter. Both of the
customers that did not enter into the settlement signed agreements and began
purchasing electricity from other suppliers in 1997. Management believes that
these agreements will not have a material adverse impact on consolidated re-
sults of operations or financial position.

  In December 1997, Duke Energy filed applications with the FERC, NCUC and
PSCSC for authority to combine Nantahala Power and Light (a wholly owned sub-
sidiary) and Duke Power. Duke Energy received the necessary approvals in June,
April and February 1998, respectively. Nantahala Power and Light began opera-
tions as a division of Duke Power effective August 3, 1998.

  On December 20, 1999, the FERC issued Order 2000, which encourages transmis-
sion owners to voluntarily join Regional Transmission Organizations (RTOs) to
increase access to the nation's power grid. All public utilities that own, op-
erate, or control interstate electric transmission are required to file with
the FERC by October 15, 2000. This filing must describe the company's proposal
to join an RTO, including a description of efforts to participate, reasons for
not participating, plans for further work towards participation and/or any ob-
stacles in participation. All RTOs are to be operational by December 15, 2001.

  Natural Gas Transmission. Duke Energy's interstate natural gas pipelines
primarily provide transportation and storage services pursuant to FERC Order
636. Order 636 allows pipelines to recover eligible costs resulting from im-
plementation of the order (transition costs). In 1994, the FERC approved Texas
Eastern Transmission Corporation's (TETCO) settlement resolving regulatory is-
sues related primarily to Order 636 transition costs and a number of other is-
sues related to services prior to Order 636. Under the 1994 settlement,
TETCO's liability for transition costs was estimated based on the amount of
producers' natural gas reserves and other factors. In 1998, TETCO favorably
resolved all remaining gas purchase contracts, recognizing $39 million of in-
come ($24 million after tax). In addition, the FERC approved a settlement
filed by TETCO, which accelerates recovery of natural

                                      14
<PAGE>

                            DUKE ENERGY CORPORATION

            Notes to Consolidated Financial Statements -- Continued


4. Regulatory Matters -- Continued

gas transition costs. The 1998 settlement is not expected to have a material
adverse effect on the consolidated results of operations or financial posi-
tion.

  Global Asset Development. Three California electric generating plants, Moss
Landing, South Bay and Oakland, sell electricity under the terms of Reliabil-
ity Must Run Agreements with the California Independent System Operator, which
purchases electricity at FERC regulated rates. Moss Landing and Oakland have
entered into settlement agreements with respect to the rates to be paid to
them by the Independent System Operator. Those settlements were approved by
the FERC in January 2000. South Bay has not reached a final agreement with re-
spect to its electric rates and, therefore, its rates are subject to partial
refund or surcharge. Management believes that the final resolution of this
matter will not have a material adverse effect on consolidated results of op-
erations or financial position.

5. Joint Ownership of Generating Facilities

Joint Ownership of Catawba Nuclear Station

<TABLE>
<CAPTION>
                                                                       Ownership
Owner                                                                  Interest
- -----                                                                  ---------
<S>                                                                    <C>
North Carolina Municipal Power Agency Number 1 (NCMPA)................    37.5%
North Carolina Electric Membership Corporation (NCEMC)................  28.125%
Duke Energy Corporation...............................................    12.5%
Piedmont Municipal Power Agency (PMPA)................................    12.5%
Saluda River Electric Cooperative, Inc. (Saluda River)................   9.375%
                                                                        ------
                                                                           100%
                                                                        ======
</TABLE>

  As of December 31, 1999, $523 million of Property, Plant and Equipment and
$243 million of accumulated depreciation and amortization represented Duke
Energy's investment in Catawba Nuclear Station Units 1 and 2. Duke Energy's
share of operating costs is included in the Consolidated Statements of Income
and Comprehensive Income.

  Duke Energy entered into contractual interconnection agreements with the
other joint owners of Catawba Nuclear Station to purchase declining percent-
ages of the generating capacity and energy from the station. These purchased
power agreements became effective in 1985 and 1986. The purchased power agree-
ments were established for fifteen years for NCMPA and PMPA and ten years for
NCEMC and Saluda River.

  The portion of purchased capacity subject to levelization not recovered in
rates was deferred. Duke Energy is recovering the accumulated balance, includ-
ing returns on the deferred balance, over a period expected to end in 2004.
Jurisdictional levelizations are intended to recover total costs, including
deferred returns, and are subject to adjustments, including final true-ups.
The current levelized approved revenues are approximately $186 million.

  For the years ended December 31, 1999, 1998 and 1997, purchased capacity and
energy costs from the other joint owners was approximately $62 million, $88
million and $120 million, respectively. These amounts, after adjustments for
the costs of capacity purchased not reflected in current rates, are included
in the Consolidated Statements of Income and Comprehensive Income as Net In-
terchange and Purchased Power. As of December 31, 1999 and 1998, $643 million
and $747 million, respectively, associated with the cost of capacity purchased
but not reflected in current rates have been accumulated in the Consolidated
Balance Sheets as Purchased Capacity Costs and Current Portion of Purchased
Capacity Costs.

  The interconnection agreements also provide for supplemental power sales by
Duke Energy to the other joint owners of Catawba Nuclear Station to satisfy
their capacity and energy needs beyond the capacity and energy which they re-
tain from the station or potentially acquire in the form of other resources.
The agreements

                                      15
<PAGE>

                            DUKE ENERGY CORPORATION

            Notes to Consolidated Financial Statements -- Continued


5. Joint Ownership of Generating Facilities -- Continued

further provide the other joint owners the ability to secure such supplemental
requirements outside of these contractual agreements following an appropriate
notice period. NCEMC, Saluda River and NCMPA have given such appropriate no-
tice effective January 1, 2001. PMPA will continue to receive supplemental
power sales from Duke Energy through December 31, 2005. As the other joint
owners retain more capacity and energy from the station, or obtain additional
capacity and energy from a third party, supplemental power sales are expected
to decline. Management believes this will not have a material adverse effect
on consolidated results of operations or financial position.

6. Income Taxes

Income Tax Expense

<TABLE>
<CAPTION>
                                                         For the Years Ended
                                                             December 31,
                                                         ----------------------
                                                          1999    1998    1997
                                                         ------  ------  ------
                                                             in millions
<S>                                                      <C>     <C>     <C>
Current income taxes
  Federal............................................... $  526  $  673  $  433
  State.................................................    138     138     100
                                                         ------  ------  ------
    Total current income taxes..........................    664     811     533
                                                         ------  ------  ------
Deferred income taxes, net
  Federal...............................................   (127)    (15)    112
  State.................................................    (65)     (4)      9
                                                         ------  ------  ------
    Total deferred income taxes, net....................   (192)    (19)    121
                                                         ------  ------  ------
Investment tax credit amortization......................    (19)    (15)    (15)
                                                         ------  ------  ------
Total income tax expense................................ $  453  $  777  $  639
                                                         ======  ======  ======
</TABLE>

Income Tax Expense Reconciliation to Statutory Rate

<TABLE>
<CAPTION>
                                                         For the Years Ended
                                                             December 31,
                                                         ----------------------
                                                          1999    1998    1997
                                                         ------  ------  ------
                                                             in millions
<S>                                                      <C>     <C>     <C>
Income tax, computed at the statutory rate of 35%....... $  455  $  713  $  565
Adjustments resulting from:
  State income tax, net of federal income tax effect....     47      90      71
  Favorable resolution of tax issues....................    (30)     --      --
  Other items, net......................................    (19)    (26)      3
                                                         ------  ------  ------
    Total income tax expense............................ $  453  $  777  $  639
                                                         ------  ------  ------
Effective tax rate......................................   34.9%   38.1%   39.6%
                                                         ======  ======  ======
</TABLE>

                                      16
<PAGE>

                            DUKE ENERGY CORPORATION

            Notes to Consolidated Financial Statements -- Continued


6. Income Taxes -- Continued

Net Deferred Income Tax Liability Components

<TABLE>
<CAPTION>
                                                               December 31,
                                                              ----------------
                                                               1999     1998
                                                              -------  -------
                                                                in millions
<S>                                                           <C>      <C>
Deferred credits and other liabilities....................... $   556  $   268
Alternative minimum tax credit carryforward..................      --       30
Other........................................................       8       36
                                                              -------  -------
  Total deferred income tax assets...........................     564      334
Valuation allowance..........................................     (62)     (52)
                                                              -------  -------
  Net deferred income tax assets.............................     502      282
                                                              -------  -------
Investments and other assets.................................    (245)    (207)
Property, plant and equipment................................  (2,483)  (2,405)
Regulatory assets and deferred debits........................    (427)    (542)
Regulatory asset related to restating to pre-tax basis.......    (432)    (435)
Other........................................................      --      (69)
                                                              -------  -------
  Total deferred income tax liabilities......................  (3,587)  (3,658)
                                                              -------  -------
State deferred income tax, net of federal tax effect.........    (340)    (357)
                                                              -------  -------
Net deferred income tax liability............................ $(3,425) $(3,733)
                                                              =======  =======
</TABLE>

  The change in the net deferred income tax liability from 1998 to 1999 dif-
fers from the 1999 deferred income tax expense as a result of the removal of
net deferred income tax liabilities due to the sale of the PEPL Companies and
Trunkline LNG.

7. Risk Management and Financial Instruments

  Commodity Derivatives. Duke Energy, primarily through Trading and Marketing,
manages its exposure to risk from existing contractual commitments and pro-
vides risk management services to its customers through forward contracts,
futures, over-the-counter swap agreements and options (collectively, "commod-
ity derivatives"). Energy commodity forward contracts involve physical deliv-
ery of an energy commodity. Energy commodity futures involve the buying or
selling of natural gas, electricity or other energy-related commodities at a
fixed price. Over-the-counter swap agreements require Duke Energy to receive
or make payments based on the difference between a specified price and the ac-
tual price of the underlying commodity. Energy commodity options held to miti-
gate price risk provide the right, but not the requirement, to buy or sell en-
ergy-related commodities at a fixed price.

  Commodity Derivatives -- Trading. Duke Energy engages in the trading of com-
modity derivatives, and therefore experiences net open positions. Duke Energy
manages open positions with strict policies which limit its exposure to market
risk and require daily reporting to management of potential financial expo-
sure. These policies include statistical risk tolerance limits using histori-
cal price movements to calculate a daily earnings at risk measurement. The
weighted-average life of Duke Energy's commodity risk portfolio was approxi-
mately 20 months at December 31, 1999.

Net Gains Recognized from Trading Commodity Derivatives

<TABLE>
<CAPTION>
                                                                 1999 1998 1997
                                                                 ---- ---- ----
                                                                  in millions
<S>                                                              <C>  <C>  <C>
Natural gas..................................................... $83  $114 $34
Electricity.....................................................  41    14  (a)
</TABLE>
- --------
(a)  Not material.

                                      17
<PAGE>

                            DUKE ENERGY CORPORATION

            Notes to Consolidated Financial Statements -- Continued


7. Risk Management and Financial Instruments -- Continued

Absolute Notional Contract Quantity of Commodity Derivatives Held for Trading
Purposes

<TABLE>
<CAPTION>
                                                                  December 31,
                                                                 ---------------
                                                                  1999    1998
                                                                 ------- -------
<S>                                                              <C>     <C>
Natural gas, in billion cubic feet..............................  36,285  11,149
Electricity, in gigawatt hours.................................. 469,371 112,867
</TABLE>

Fair Values of Commodity Derivatives -- Trading

<TABLE>
<CAPTION>
                                                  1999               1998
                                           ------------------ ------------------
                                           Assets Liabilities Assets Liabilities
                                           ------ ----------- ------ -----------
                                                        in millions
<S>                                        <C>    <C>         <C>    <C>
Fair value at December 31
  Natural gas............................. $2,966   $2,855    $1,275   $1,179
  Electricity.............................  1,302    1,271       578      570
Average fair values for the year
  Natural gas.............................  2,401    2,269       805      757
  Electricity.............................    962      900       420      416
</TABLE>

  Commodity Derivatives -- Non-Trading. At December 31, 1999 and 1998, Duke
Energy held or issued several commodity derivatives, primarily in the form of
swaps, that reduce exposure to market price fluctuations for certain power and
NGL production facilities. At December 31, 1999, these commodity derivatives
extended for periods up to ten years. The gains, losses and costs related to
non-trading commodity derivatives that qualify as a hedge are not recognized
until the underlying physical transaction closes. At December 31, 1999 and
1998, Duke Energy had unrealized net gains (losses) of $(120) million and $10
million, respectively, related to non-trading commodity derivatives. The de-
termination of unrealized net gains (losses) requires judgement in interpret-
ing market data and developing estimates of fair value. Accordingly, the
unrealized net gains (losses) as of December 31, 1999 and 1998 are not neces-
sarily indicative of the amounts Duke Energy could have realized in the cur-
rent market.

Absolute Notional Contract Quantity of Commodity Derivatives Held for Non-
Trading Purposes

<TABLE>
<CAPTION>
                                                                    1999   1998
                                                                   ------ ------
<S>                                                                <C>    <C>
Natural gas, in billion cubic feet................................    592    218
Electricity, in gigawatt hours.................................... 45,877 10,618
Power capacity, in megawatt months................................ 25,950     --
Oil, in thousands of barrels...................................... 32,764  4,875
</TABLE>

  Interest Rate Derivatives. Duke Energy periodically enters into financial
derivative instruments including, but not limited to, swaps, options and trea-
sury rate agreements to manage and mitigate interest rate risk exposure re-
lated to borrowings. The notional amounts shown in the following table serve
solely as a basis for the calculation of payment streams to be exchanged.
These notional amounts are not a measure of the company's exposure through its
use of derivatives. Fair values shown in the following table represent esti-
mated amounts that Duke Energy would have received if the swaps had been set-
tled at current market rates on the respective dates.

Interest Rate Derivatives

<TABLE>
<CAPTION>
                                                 December 31,
                               -------------------------------------------------
                                         1999                     1998
                               ------------------------ ------------------------
                               Notional Fair  Contracts Notional Fair  Contracts
                               Amounts  Value  Expire   Amounts  Value  Expire
                               -------- ----- --------- -------- ----- ---------
                                              dollars in millions
<S>                            <C>      <C>   <C>       <C>      <C>   <C>
Interest rate swaps...........   $600    $ 2    2000      $300    $ 8  1999-2000
</TABLE>

                                      18
<PAGE>

                            DUKE ENERGY CORPORATION

            Notes to Consolidated Financial Statements -- Continued


7. Risk Management and Financial Instruments -- Continued

  Deferred gains on settled interest rate derivatives were not material in
1999 or 1998. Unrealized gains and losses and exposure to changes in market
condition were not material at December 31, 1999 and 1998. As a result of the
interest rate swap contracts which swap fixed rate obligations to effective
floating rates, interest expense for the relative notional amount on the Con-
solidated Statements of Income and Comprehensive Income is recognized at the
weighted average London interbank offered rate (LIBOR) for the year plus the
applicable margins.

Weighted Average Rates for Interest Rate Swaps

<TABLE>
<CAPTION>
                                                               For the Years
                                                               Ended December
                                                                    31,
                                                               ----------------
                                                               1999  1998  1997
                                                               ----  ----  ----
<S>                                                            <C>   <C>   <C>
8% Series B Swap.............................................. 5.36% 5.69% 5.78%
7.5% Series B Swap............................................ 6.42% 6.74% 6.83%
Commercial paper fixed rate swaps............................. 4.95%   --    --
</TABLE>

  Foreign Currency Derivatives. Trading and Marketing enters into foreign cur-
rency swap agreements to manage foreign currency risks associated with energy
contracts denominated in foreign currencies. As of December 31, 1999, the
agreements had a notional contract amount of approximately $762 million, be-
ginning in the year 2000 and extending to the year 2005, and had a weighted
average fixed exchange rate of 1.470 Canadian dollars to U.S. dollars. As of
December 31, 1998, the agreements had a notional contract amount of approxi-
mately $120 million, beginning in the year 2000 and extending to the year
2005, and had a weighted average fixed exchange rate of 1.472 Canadian dollars
to U.S. dollars. The fair value of foreign currency swap agreements was not
material at December 31, 1999 or 1998.

  In anticipation of the tender offer for Paranapanema (see Note 19 to the
Consolidated Financial Statements), Duke Energy entered into foreign currency
forward contracts to obtain Brazilian reais. As of December 31, 1999, the for-
ward contracts had a notional amount of $280 million at an average exchange
rate of 1.8496 Brazilian reais to U.S. dollars which approximated fair value.

  Market and Credit Risk. New York Mercantile Exchange (Exchange) traded
futures and option contracts are guaranteed by the Exchange and have nominal
credit risk. On all other transactions previously described, Duke Energy is
exposed to credit risk in the event of nonperformance by the counterparties.
For each counterparty, Duke Energy analyzes its financial condition prior to
entering into an agreement, establishes credit limits and monitors the appro-
priateness of these limits on an ongoing basis. The change in market value of
exchange-traded futures and options contracts requires daily cash settlement
in margin accounts with brokers. Swap contracts and most other over-the-
counter instruments are generally settled at the expiration of the contract
term and may be subject to margin requirements with the counterparty.

  Financial Instruments. The fair value of financial instruments is summarized
in the following table. Judgment is required in interpreting market data to
develop the estimates of fair value. Accordingly, the estimates determined as
of December 31, 1999 and 1998 are not necessarily indicative of the amounts
Duke Energy could have realized in current market exchanges. The majority of
the estimated fair value amounts were obtained from independent parties.

                                      19
<PAGE>

                            DUKE ENERGY CORPORATION

            Notes to Consolidated Financial Statements -- Continued


7. Risk Management and Financial Instruments -- Continued

Financial Instruments

<TABLE>
<CAPTION>
                                           1999                   1998
                                  ---------------------- ----------------------
                                             Approximate            Approximate
                                  Book Value Fair Value  Book Value Fair Value
                                  ---------- ----------- ---------- -----------
                                                   in millions
<S>                               <C>        <C>         <C>        <C>
Long-term debt (a)...............   $9,165     $8,891      $6,959     $7,240
Guaranteed preferred beneficial
 interests in subordinated notes
 of Duke Energy or subsidiaries..    1,404      1,207         919        937
Preferred stock (a)..............      313        303         333        346
</TABLE>
- --------
(a)  Includes current maturities.

  The fair value of cash and cash equivalents, notes receivable, notes payable
and commercial paper are not materially different from their carrying amounts
because of the short-term nature of these instruments or because the stated
rates approximate market rates.

  Guarantees made on behalf of affiliates or recourse provisions from affili-
ates have no book value associated with them, and there are no fair values
readily determinable since quoted market prices are not available.

8. Investment in Affiliates

  Investments in domestic and international affiliates which are not con-
trolled by Duke Energy but where Duke Energy has significant influence over
operations are accounted for by the equity method. These investments include
undistributed earnings of $6 million and $5 million in 1999 and 1998, respec-
tively. Duke Energy's share of net income from these affiliates is reflected
in the Consolidated Statements of Income and Comprehensive Income as Other Op-
erating Revenues.

  Natural Gas Transmission. Investments primarily include ownership interests
in natural gas pipeline joint ventures which transport gas from Canada to the
U.S. Investments include a 37.5% ownership interest in Maritimes & Northeast
Pipeline, L.L.C.

  Field Services. Investments primarily include a 37% interest in a partner-
ship which owns natural gas gathering systems in the Gulf of Mexico (Dauphin
Island Gathering Partners) and a 21.1% interest in TEPPCO.

  Global Asset Development. Global Asset Development has investments in vari-
ous natural gas and electric generation and transmission facilities in its
targeted geographic areas. Significant investments include a 50% indirect in-
terest in VMC Generating Company, a merchant electric generating company, a
36.8% indirect interest in American Ref-Fuel Company and a 25% indirect inter-
est in National Methanol Company, which owns and operates a methanol and MTBE
(methyl tertiary butyl ether) business in Jubail, Saudi Arabia.

  Other Energy Services. Investments include the participation in various con-
struction and support activities for fossil-fueled generating plants.

  Real Estate Operations. Investments include various real estate development
projects.

  Other Operations. Investments include a 20% interest in the BellSouth PCS
L.P. joint venture, which provides wireless personal communication services.

                                      20
<PAGE>

                            DUKE ENERGY CORPORATION

            Notes to Consolidated Financial Statements -- Continued


8. Investment in Affiliates -- Continued

Investment in Affiliates

<TABLE>
<CAPTION>
                                December 31, 1999             December 31, 1998            December 31, 1997
                          -----------------------------  ---------------------------- ----------------------------
                          Domestic International Total   Domestic International Total Domestic International Total
                          -------- ------------- ------  -------- ------------- ----- -------- ------------- -----
                                                                in millions
<S>                       <C>      <C>           <C>     <C>      <C>           <C>   <C>      <C>           <C>
Natural Gas
 Transmission...........    $ 67       $ 83      $  150    $104       $ 37      $141    $ 67       $ --      $ 67
Field Services..........     439         --         439     303         --       303     160         --       160
Global Asset
 Development............     425        224         649     171        223       394     174        208       382
Other Energy Services...      51          6          57      19         23        42      16         10        26
Real Estate Operations..      11         --          11       5         --         5       2         --         2
Other Operations........      (7)        --          (7)     17         --        17      36         13        49
                            ----       ----      ------    ----       ----      ----    ----       ----      ----
 Total..................    $986       $313      $1,299    $619       $283      $902    $455       $231      $686
                            ====       ====      ======    ====       ====      ====    ====       ====      ====
</TABLE>

Equity in Earnings of Investment

<TABLE>
<CAPTION>
                                                           For the years ended:
                          ----------------------------------------------------------------------------------------
                               December 31, 1999             December 31, 1998             December 31, 1997
                          ----------------------------  ----------------------------  ----------------------------
                          Domestic International Total  Domestic International Total  Domestic International Total
                          -------- ------------- -----  -------- ------------- -----  -------- ------------- -----
                                                               in millions
<S>                       <C>      <C>           <C>    <C>      <C>           <C>    <C>      <C>           <C>
Natural Gas
 Transmission...........    $ 16        $ 9      $ 25     $ 14        $ 3      $ 17     $  8        $--      $  8
Field Services..........      44         --        44        9         --         9       19         --        19
Global Asset
 Development............      47         10        57       50         18        68        8         21        29
Other Energy Services...      10          3        13        1         13        14        4          8        12
Real Estate Operations..       3         --         3       --         --        --       --         --        --
Other Operations........     (30)        --       (30)     (29)        --       (29)     (30)        --       (30)
                            ----        ---      ----     ----        ---      ----     ----        ---      ----
 Total..................    $ 90        $22      $112     $ 45        $34      $ 79     $  9        $29      $ 38
                            ====        ===      ====     ====        ===      ====     ====        ===      ====
</TABLE>

Summarized Combined Financial Information of Unconsolidated Subsidiaries

<TABLE>
<CAPTION>
                                                                December 31,
                                                            --------------------
                                                             1999   1998   1997
                                                            ------ ------ ------
                                                                in millions
<S>                                                         <C>    <C>    <C>
Balance Sheet
  Current Assets........................................... $1,544 $  848 $  642
  Noncurrent Assets........................................  7,826  7,340  5,868
  Current Liabilities......................................  1,155  1,084    758
  Noncurrent Liabilities...................................  4,727  3,884  3,257
                                                            ------ ------ ------
    Net Assets............................................. $3,488 $3,220 $2,495
                                                            ====== ====== ======
Income Statement
  Operating Revenues....................................... $3,510 $1,667 $  905
  Operating Expenses.......................................  3,104  1,166    703
    Net Income.............................................    193    263     72
</TABLE>

  Duke Energy had outstanding notes receivable from certain affiliates of $72
million and $80 million at December 31, 1999 and 1998, respectively.

                                       21
<PAGE>

                            DUKE ENERGY CORPORATION

            Notes to Consolidated Financial Statements -- Continued


9. Property, Plant and Equipment

Property, Plant and Equipment

<TABLE>
<CAPTION>
                                                                 December 31,
                                                                ---------------
                                                                 1999    1998
                                                                ------- -------
                                                                  in millions
<S>                                                             <C>     <C>
Electric utility
 Generation.................................................... $ 7,876 $ 7,670
 Transmission and distribution.................................   6,577   6,324
 General plant.................................................   1,166   1,127
 Nuclear fuel..................................................     741     554
 Construction work in progress.................................     343     328
                                                                ------- -------
   Total electric utility......................................  16,703  16,003
                                                                ------- -------
Natural gas transmission.......................................   4,473   6,194
Non-regulated generation.......................................   4,457     837
Gathering and processing.......................................   2,428   1,409
Construction work in progress..................................     881     469
Other property and equipment...................................   1,494   2,216
                                                                ------- -------
   Total Property, Plant and Equipment......................... $30,436 $27,128
                                                                ======= =======
</TABLE>

Accumulated Depreciation

<TABLE>
<CAPTION>
                                                                  December 31,
                                                                 --------------
                                                                  1999   1998
                                                                 ------ -------
                                                                  in millions
<S>                                                              <C>    <C>
Electric utility(a)............................................. $6,950 $ 6,371
Natural gas transmission........................................  1,217   2,585
Non-regulated generation........................................    493      26
Other...........................................................    781   1,271
                                                                 ------ -------
   Total Accumulated Depreciation............................... $9,441 $10,253
                                                                 ====== =======
</TABLE>
- --------
(a)  Includes amortization of nuclear fuel: 1999--$444 million; 1998--$325 mil-
     lion.

                                       22
<PAGE>

                            DUKE ENERGY CORPORATION

            Notes to Consolidated Financial Statements -- Continued


10. Debt and Credit Facilities

Long-term Debt

<TABLE>
<CAPTION>
                                                                 December 31,
                                                                --------------
                                                      Year Due   1999    1998
                                                     ---------- ------  ------
                                                                 (in millions)
<S>                                                  <C>        <C>     <C>
Duke Energy
First and refunding mortgage bonds:(a)
 7%.................................................    2000    $  200  $  200
 5 7/8%--6 5/8%..................................... 2001--2008    625     625
 6 3/4%--8.30%...................................... 2023--2025    661     678
 7%--8.95%.......................................... 2027--2033    165     165
 Mortgage bonds matured during 1999.................                --     425
Pollution control debt, 3.85%--7.75%................ 2012--2017    172     172
Notes:
 5.38%--9.21%....................................... 2009--2016    264      65
 6%--6.6%........................................... 2028--2038    500     300
Commercial paper, 5.84% and 5.28% weighted-average
 rate at December 31, 1999 and 1998, respectively...             1,000   1,200
Other debt..........................................                21      23
Duke Capital Corporation
Senior Notes:
 6 1/4%--7 1/2%..................................... 2004--2009  1,250     250
 6 3/4%--8%......................................... 2018--2019    650     150
Commercial paper, 5.91% and 5.73% weighted-average
 rate at December 31, 1999 and 1998, respectively...               500     500
Note payable to affiliate 5.03% and 4.68% weighted-
 average rate at December 31, 1999 and 1998,
 respectively.......................................                83      24
PanEnergy
Bonds:
 7 3/4%.............................................    2022       328     328
 8 5/8% Debentures..................................    2025       100     100
Notes:
 7%--9.9%, maturing serially........................ 2003--2006    395     395
 Notes matured during 1999..........................                --     114
TETCO
Notes:
 8%--10 3/8%........................................ 2000--2004    500     500
 Medium-term, Series A, 7.64% -- 9.07%.............. 2001--2012     51     100
Algonquin Gas Transmission Company
 9.13% Notes........................................    2003       100     100
Crescent Resources, Inc(b)
Construction and mortgage loans, 5.86%--7.26%....... 2000--2011     46      69
Revolving credit facilities, 5.98% weighted-average
 rate at December 31, 1998..........................    2001        --     100
Global Asset Development
Medium-term note, 7.25%.............................    2004       162      --
Credit facilities, 6.01% weighted-average rate at
 December 31, 1999..................................    2002       460      --
Notes:
 7.69%--18%......................................... 2000--2005    107      33
 7.8%............................................... 2004--2013    161      --
 6%--10%(c)......................................... 2013--2017    485      --
Capital leases...................................... 2009--2028    207      --
Notes matured during 1999...........................                --      78
Other debt of subsidiaries..........................                34     313
Unamortized debt discount and premium, net..........               (62)    (48)
                                                                ------  ------
Total long-term debt................................             9,165   6,959
Current maturities of long-term debt................              (482)   (687)
                                                                ------  ------
Total long-term portion.............................            $8,683  $6,272
                                                                ======  ======
</TABLE>
- --------
(a)   Substantially all of Electric Operations' electric plant was mortgaged.
(b)   Substantial amounts of Crescent Resources' real estate development pro-
      jects, land and buildings were pledged as collateral.
(c)   Paranapanema (Brazil) debt, principal is indexed annually to inflation.

                                       23
<PAGE>

                            DUKE ENERGY CORPORATION

            Notes to Consolidated Financial Statements -- Continued


10. Debt and Credit Facilities -- Continued

Annual Maturities

<TABLE>
<CAPTION>
                                                                     in millions
<S>                                                                  <C>
2000................................................................    $482
2001................................................................     306
2002................................................................     225
2003................................................................     601
2004................................................................     958
</TABLE>

  Annual maturities exclude $1,736 million of long-term debt that matures af-
ter 2004 which have call options whereby Duke Energy has the option to repay
the debt early. Based on the years in which Duke Energy may first exercise
their redemption options, $881 million could potentially be repaid in 2000,
$328 million in 2002, $227 million in 2003, $200 million in 2004 and $100 mil-
lion thereafter.

Credit Facilities

<TABLE>
<CAPTION>
                                    December 31, 1999      December 31, 1998
                                  ---------------------- ----------------------
                                    Credit                 Credit
                                  Facilities Outstanding Facilities Outstanding
                                  ---------- ----------- ---------- -----------
                                                   in millions
<S>                               <C>        <C>         <C>        <C>
364-day facilities (a)...........   $  823      $ 10       $  600      $ --
Three-year revolving facilities..      565       450           --        --
Four-year revolving facilities...      125        --          125       100
Five-year revolving facilities
 (a).............................    2,200        --        2,200        --
                                    ------      ----       ------      ----
  Total Consolidated.............   $3,713      $460       $2,925      $100
                                    ======      ====       ======      ====
</TABLE>
- --------
(a)  Supported commercial paper facilities.

Notes Payable and Commercial Paper

<TABLE>
<CAPTION>
                                                                December 31,
                                                               ----------------
                                                                1999     1998
                                                               -------  -------
                                                                 in millions
<S>                                                            <C>      <C>
Credit facilities outstanding................................. $   460  $   100
Note payable..................................................      86        4
Commercial paper outstanding..................................   1,764    1,905
                                                               -------  -------
                                                                 2,310    2,009
Less portion classified as long-term
  Credit facilities...........................................    (460)    (100)
  Note payable................................................     (83)      --
  Commercial paper............................................  (1,500)  (1,700)
                                                               -------  -------
Portion classified as short-term.............................. $   267  $   209
                                                               =======  =======
</TABLE>

  The weighted average interest rate on outstanding short-term notes payable
and commercial paper at December 31, 1999 and 1998 was 5.72% and 5.23%, re-
spectively.

                                      24
<PAGE>

                            DUKE ENERGY CORPORATION

            Notes to Consolidated Financial Statements -- Continued


11. Nuclear Decommissioning Costs

  Nuclear Decommissioning Costs. Estimated site-specific nuclear
decommissioning costs, including the cost of decommissioning plant components
not subject to radioactive contamination, total approximately $1.9 billion
stated in 1999 dollars based on decommissioning studies completed in 1999.
This amount includes Duke Energy's 12.5% ownership in the Catawba Nuclear Sta-
tion. The other joint owners of Catawba Nuclear Station are responsible for
decommissioning costs related to their ownership interests in the station.
Both the NCUC and the PSCSC have granted Duke Energy recovery of estimated
decommissioning costs through retail rates over the expected remaining service
periods of Duke Energy's nuclear stations. Such estimates presume each unit
will be decommissioned as soon as possible following the end of its license
life. Although subject to extension, the current operating licenses for Duke
Energy's nuclear units expire as follows: Oconee 1 and 2 -- 2013, Oconee 3 --
 2014; McGuire 1 -- 2021, McGuire 2 -- 2023; and Catawba 1 -- 2024, Catawba
2 -- 2026.

  During 1999 and 1998, Duke Energy expensed approximately $57 million which
was contributed to the external funds for decommissioning costs and accrued an
additional $6 million to the internal reserve. Nuclear units are depreciated
at an annual rate of 4.7%, of which 1.61% is for decommissioning. The balance
of the external funds as of December 31, 1999 and 1998 was $703 million and
$580 million, respectively. The balance of the internal reserve as of December
31, 1999 and 1998 was $223 million and $217 million, respectively, and is re-
flected in the Consolidated Balance Sheets as Accumulated Depreciation and Am-
ortization. Management believes that the decommissioning costs being recovered
through rates, when coupled with assumed after-tax fund earnings of 5.5% to
5.9%, are currently sufficient to provide for the cost of decommissioning.

  A provision in the Energy Policy Act of 1992 established a fund for the de-
contamination and decommissioning of the Department of Energy's (DOE) uranium
enrichment plants. Licensees are subject to an annual assessment for 15 years
based on their pro rata share of past enrichment services. The annual assess-
ment is recorded in the Consolidated Statements of Income and Comprehensive
Income as Fuel Used in Electric Generation. Duke Energy paid $10 million dur-
ing 1999 and has paid $75 million cumulatively related to its ownership inter-
ests in nuclear plants. The remaining liability and regulatory assets of $70
million and $79 million at December 31, 1999 and 1998, respectively, are re-
flected in the Consolidated Balance Sheets as Deferred Credits and Other Lia-
bilities, and Regulatory Assets and Deferred Debits, respectively.

  Spent Nuclear Fuel. Under provisions of the Nuclear Waste Policy Act of
1982, Duke Energy has entered into contracts with the DOE for the disposal of
spent nuclear fuel. The DOE failed to begin accepting the spent nuclear fuel
on January 31, 1998, the date provided by the Nuclear Waste Policy Act and by
Duke Energy's contract with the DOE. On June 8, 1998, Duke Energy filed with
the United States Court of Federal Claims a claim against the DOE for damages
in excess of $1 billion arising out of the DOE's failure to begin accepting
commercial spent nuclear fuel by January 31, 1998. Damages claimed in the suit
are intended to recover costs that Duke Energy is incurring and will continue
to incur as a result of the DOE's partial material breach of its contract with
Duke Energy, including costs associated with securing additional spent fuel
storage capacity. Duke Energy will continue to safely manage its spent nuclear
fuel until the DOE accepts it. Payments made to the DOE for disposal costs are
based on nuclear output and are included in the Consolidated Statements of In-
come and Comprehensive Income as Fuel Used in Electric Generation.

12. Guaranteed Preferred Beneficial Interests in Subordinated Notes of Duke
Energy or Subsidiaries

  Duke Energy and Duke Capital Corporation (Duke Capital) have each formed
business trusts for which they own all the respective common securities. The
trusts issue and sell preferred securities and invest the gross proceeds in
assets of the trusts. Substantially all the assets of each trust are junior
subordinated notes issued by the respective company.

                                      25
<PAGE>

                            DUKE ENERGY CORPORATION

            Notes to Consolidated Financial Statements -- Continued


12. Guaranteed Preferred Beneficial Interests in Subordinated Notes of Duke
Energy or Subsidiaries -- Continued

  Trust Preferred Securities

<TABLE>
<CAPTION>
                                       December 31,
                                       ---------------
   Issued                       Rate    1999    1998   Junior Subordinated Notes
   ------                       -----  -------  ------ -------------------------
                                        in millions
   <S>                          <C>    <C>      <C>    <C>
   Duke Energy
     1997......................   7.2% $   350  $ 350  7.2% Series A due 2037
     1999......................   7.2%     250     --  7.2% Series B due 2039
   Duke Capital
     1998...................... 7 3/8%     250    250  7 3/8% Series A due 2038
     1998...................... 7 3/8%     350    350  7 3/8% Series B due 2038
     1999...................... 8 3/8%     250     --  8 3/8% Series C due 2029
   Unamortized debt discount...            (46)   (31)
                                       -------  -----
                                       $ 1,404  $ 919
                                       =======  =====
</TABLE>

  These trust preferred securities represent preferred undivided beneficial
interests in the assets of the respective trusts. Payment of distributions on
these preferred securities is guaranteed by the respective company, but only
to the extent the trusts have funds legally and immediately available to make
such distributions. Dividends of $87 million, $44 million and $15 million re-
lated to the trust preferred securities have been included in the Consolidated
Statements of Income and Comprehensive Income as Minority Interests for the
years ended December 31, 1999, 1998 and 1997, respectively.

13. Preferred and Preference Stock

  Authorized Shares of Stock as of December 31, 1999 and 1998

<TABLE>
<CAPTION>
                                                           Par Value   Shares
                                                           --------- -----------
                                                                     in millions
   <S>                                                     <C>       <C>
   Preferred Stock........................................   $100       12.5
   Preferred Stock A......................................   $ 25       10.0
   Preference Stock.......................................   $100        1.5
</TABLE>

  As of December 31, 1999 and 1998, there were no shares of preference stock
outstanding.

  Preferred Stock with Sinking Fund Requirements

<TABLE>
<CAPTION>
                                                                 December 31,
                                          Shares Outstanding  -------------------
         Rate/Series         Year Issued at December 31, 1999   1999      1998
         -----------         ----------- -------------------- --------- ---------
                                                              dollars in millions
   <S>                       <C>         <C>                  <C>       <C>
   6.10% C (Preferred Stock
    A).....................     1992           800,000        $      20 $      20
   6.20% D (Preferred Stock
    A).....................     1992           800,000               20        20
   6.20% T.................     1992           130,000               13        13
   6.30% U.................     1992           130,000               13        13
   6.40% V.................     1992           130,000               13        13
   6.75% X.................     1993           250,000               25        25
   5.95% B (Preferred Stock
    A) (a).................     1992                --               --        20
                                                              --------- ---------
     Total.................                                   $     104 $     124
                                                              ========= =========
</TABLE>
- --------
(a)   Preferred stock series redeemed in September 1999.

                                      26
<PAGE>

                            DUKE ENERGY CORPORATION

            Notes to Consolidated Financial Statements -- Continued


13. Preferred and Preference Stock -- Continued

  The annual sinking fund requirements for 2000 through 2004 are $33 million,
$33 million, $13 million, $2 million and $2 million, respectively. Some addi-
tional redemptions are permitted at Duke Energy's option.

Preferred Stock without Sinking Fund Requirements

<TABLE>
<CAPTION>
                                                               December 31,
                                        Shares Outstanding  -------------------
       Rate/Series         Year Issued at December 31, 1999   1999      1998
       -----------         ----------- -------------------- --------- ---------
                                                            dollars in millions
<S>                        <C>         <C>                  <C>       <C>
4.50% C...................    1964            175,000       $      18 $      18
7.85% S...................    1992            300,000              30        30
7.00% W...................    1993            249,989              25        25
7.04% Y...................    1993            299,995              30        30
6.375% (Preferred Stock
 A).......................    1993          1,257,185              31        31
Auction Series A..........    1990            750,000              75        75
                                                            --------- ---------
  Total...................                                  $     209 $     209
                                                            ========= =========
</TABLE>

  The call provisions for the outstanding preferred stock specify various re-
demption prices not exceeding 104% of par value, plus accumulated dividends to
the redemption date.

  During February 1998, Duke Energy purchased approximately two million shares
of its preferred stock for $180 million. During December 1997, Duke Energy re-
deemed approximately three million shares of preferred stock for $203 million.
The premiums related to these redemptions were included in the Consolidated
Statements of Income and Comprehensive Income as Dividends and Premiums on Re-
demptions of Preferred and Preference Stock for 1997.

14. Commitments and Contingencies

  Nuclear Insurance. Duke Energy owns and operates the McGuire and Oconee Nu-
clear Stations with two and three nuclear reactors, respectively, and operates
and has a partial ownership interest in the Catawba Nuclear Station with two
nuclear reactors. Nuclear insurance coverage is maintained in three program
areas: liability coverage; property, decontamination and decommissioning cov-
erage; and business interruption and/or extra expense coverage. Certain ex-
penses associated with nuclear insurance premiums paid by Duke Energy are re-
imbursed by the other joint owners of the Catawba Nuclear Station.

  Pursuant to the Price-Anderson Act, Duke Energy is required to insure
against public liability claims resulting from nuclear incidents to the full
limit of liability of approximately $9.8 billion.

  Primary Liability Insurance. The maximum required private primary liability
insurance of $200 million has been purchased along with a like amount to cover
certain worker tort claims.

  Excess Liability Insurance. This policy currently provides approximately
$9.6 billion of coverage through the Price-Anderson Act's mandatory industry-
wide excess secondary insurance program of risk pooling. The $9.6 billion of
coverage is the sum of the current potential cumulative retrospective premium
assessments of $88 million per licensed commercial nuclear reactor. This $9.6
billion will be increased by $88 million as each additional commercial nuclear
reactor is licensed, or reduced by $88 million for certain nuclear reactors
that are no longer operational and may be exempted from the risk pooling in-
surance program. Under this program, licensees could be assessed retrospective
premiums to compensate for damages in the event of a nuclear incident at any
licensed facility in the nation. If such an incident occurs and public liabil-
ity damages exceed primary insurances, licensees may be assessed up to $88
million for each of their licensed reactors, payable at a rate not

                                      27
<PAGE>

                            DUKE ENERGY CORPORATION

            Notes to Consolidated Financial Statements -- Continued


14. Commitments and Contingencies -- Continued

to exceed $10 million a year per licensed reactor for each incident. The $88
million amount is subject to indexing for inflation and may be subject to
state premium taxes.

  Duke Energy is a member of Nuclear Electric Insurance Limited (NEIL), which
provides property and business interruption insurance coverage for Duke
Energy's nuclear facilities under the following three policy programs:

  Primary Property Insurance. This policy provides $500 million in primary
property damage coverage for each of Duke Energy's nuclear facilities.

  Excess Property Insurance. This policy provides excess property, decontami-
nation and decommissioning liability insurance in the following amounts: $2.25
billion for the Catawba Nuclear Station and $1.5 billion each for the Oconee
and McGuire Nuclear Stations.

  Business Interruption Insurance. This policy provides business interruption
and/or extra expense coverage resulting from an accidental outage of a nuclear
unit. Each unit of the McGuire and Catawba Nuclear Stations is insured for up
to approximately $4 million per week and the Oconee Nuclear Station units are
insured for up to approximately $3 million per week. Coverage amounts per unit
decline if more than one unit is involved in an accidental outage. Initial
coverage begins after a 12-week deductible period and continues at 100% for 52
weeks and 80% for the next 110 weeks.

  If NEIL's losses ever exceed its reserves for any of the above three pro-
grams, Duke Energy will be liable for assessments of up to five times its an-
nual premiums. The current potential maximum assessments are as follows: Pri-
mary Property Insurance -- $22 million; Excess Property Insurance -- $22 mil-
lion; Business Interruption Insurance -- $20 million.

  The other joint owners of the Catawba Nuclear Station are obligated to as-
sume their pro rata share of any liabilities for retrospective premiums and
other premium assessments resulting from the Price-Anderson Act's excess sec-
ondary insurance program of risk pooling or the NEIL policies.

  Environmental. Duke Energy is subject to international, federal, state and
local regulations regarding air and water quality, hazardous and solid waste
disposal and other environmental matters.

  Manufactured Gas Plants and Superfund Sites. Duke Energy was an operator of
manufactured gas plants until the early 1950s and has entered into a coopera-
tive effort with the State of North Carolina and other owners of certain for-
mer manufactured gas plant sites to investigate and, where necessary, remedi-
ate these contaminated sites. The State of South Carolina has expressed inter-
est in entering into a similar arrangement. Duke Energy is considered by regu-
lators to be a potentially responsible party and may be subject to future lia-
bility at seven federal Superfund sites and two state Superfund sites. While
the cost of remediation of the remaining sites may be substantial, Duke Energy
will share in any liability associated with remediation of contamination at
such sites with other potentially responsible parties. Management believes
that resolution of these matters will not have a material adverse effect on
consolidated results of operations or financial position.

  PCB (Polychlorinated Biphenyl) Assessment and Clean-up Programs. In June
1999, the Environmental Protection Agency (EPA) certified that TETCO, a wholly
owned subsidiary of Duke Energy, had completed clean up of PCB contaminated
sites under conditions stipulated by a U.S. Consent Decree in 1989. TETCO is
required to continue groundwater monitoring on a number of sites for at least
the next two years. The estimated cost of such monitoring is not material.

                                      28
<PAGE>

                            DUKE ENERGY CORPORATION

            Notes to Consolidated Financial Statements -- Continued


14. Commitments and Contingencies -- Continued

  Under terms of the agreement with CMS discussed in Note 2 to the Consoli-
dated Financial Statements, Duke Energy is obligated to complete clean-up of
previously identified contamination at certain agreed-upon sites on the PEPL
and Trunkline systems. These clean-up programs are expected to continue until
2001. The contamination resulted from the past use of lubricants containing
PCBs and the prior use of wastewater collection facilities and other on-site
disposal areas. Soil and sediment testing, to date, has detected no signifi-
cant off-site contamination. Duke Energy has communicated with the EPA and ap-
propriate state regulatory agencies on these matters.

  At December 31, 1999 and 1998, remaining estimated clean-up costs on the
TETCO, PEPL and Trunkline systems have been accrued and are included in the
Consolidated Balance Sheets as Other Current Liabilities and Environmental
Clean-up Liabilities. These cost estimates represent gross clean-up costs ex-
pected to be incurred, have not been discounted or reduced by customer recov-
eries and generally do not include fines, penalties or third-party claims.
Costs expected to be recovered from customers have been deferred and are in-
cluded in the Consolidated Balance Sheets as of December 31, 1999 and 1998, as
Environmental Clean-up Costs.

  The federal and state clean-up programs are not expected to interrupt or di-
minish Duke Energy's ability to deliver natural gas to customers. Based on
Duke Energy's experience to date and costs incurred for clean-up operations,
management believes the resolution of matters relating to the environmental
issues discussed above will not have a material adverse effect on consolidated
results of operations or financial position.

  Injury and Damages Claims. Duke Energy has experienced numerous claims re-
lating to damages for personal injury alleged to have arisen from the exposure
to or use of asbestos in connection with construction and maintenance activi-
ties performed by Duke Energy on its electric generation plants during the
1960s and 1970s. During 1999, Duke Energy experienced a significant increase
in the number of these claims. This increase, coupled with its cumulative ex-
perience in claims received, prompted Duke Energy to conduct a comprehensive
review which was completed in late 1999 and to record an $800 million accrual,
which is included in Other Deferred Credits and Other Liabilities in the Con-
solidated Financial Statements, to reflect the purchase of a third party in-
surance policy as well as estimated amounts for future claims not recoverable
under such policy. The insurance policy, combined with amounts covered by
self-insurance reserves, provides for claims paid up to an aggregate of $1.6
billion. Duke Energy currently believes the estimated claims relating to this
exposure will not exceed such amount. While Duke Energy is uncertain as to the
timing of when claims will be received, portions of the estimated claims may
not be received and paid for 30 or more years. Amounts reserved for injury and
damages claims were not material in 1998 and 1997.

  While Duke Energy has recorded an accrual related to this estimated liabili-
ty, such estimates cannot be made with certainty. Factors, such as the fre-
quency and magnitude of claims, could result in changes in the estimates of
the injury and damages liability and insurance recoveries. Such changes could
result in, over time, a difference from the amount currently reflected in the
financial statements. However, due to Duke Energy's insurance program related
to this liability, management believes that any changes in the estimates would
not have a material adverse affect on consolidated results of operations or
financial position.

  Litigation. Duke Energy and its subsidiaries are involved in legal, tax and
regulatory proceedings before various courts, regulatory commissions and gov-
ernmental agencies regarding performance, contracts and other matters arising
in the ordinary course of business, some of which involve substantial amounts.
Where appropriate, Duke Energy has made accruals in accordance with SFAS No.
5, "Accounting for Contingencies," to provide for such matters. Management be-
lieves that the final disposition of these proceedings will not have a mate-
rial adverse effect on consolidated results of operations or financial posi-
tion.

                                      28
<PAGE>

                            DUKE ENERGY CORPORATION

            Notes to Consolidated Financial Statements -- Continued


14. Commitments and Contingencies -- Continued

  Other Commitments and Contingencies. Periodically, Duke Energy may become
involved in contractual disputes with natural gas transmission customers in-
volving potential or threatened abrogation of contracts by the customers. If
the customers are successful, Duke Energy may not receive the full value of
anticipated benefits under the contracts.

  In the normal course of business, certain of Duke Energy's subsidiaries and
affiliates enter into various contracts for energy services that contain cer-
tain schedule and performance requirements. Certain subsidiaries of Duke En-
ergy had guaranteed performance under some of these contracts in the amount of
approximately $2.5 billion and $1.2 billion as of December 31, 1999 and 1998,
respectively. In addition, certain subsidiaries of Duke Energy have guaranteed
debt agreements of affiliates and have provided surety bonds and letters of
credit, all of which totaled approximately $853 million and $492 million as of
December 31, 1999 and 1998, respectively. The increase in the amount of these
obligations is due to the increased construction activities at Duke Energy
North America and Duke/Fluor Daniel. Management monitors and approves these
obligations and believes it is unlikely that Duke Energy would be required to
perform or otherwise incur any material losses associated with the above obli-
gations.

  Management believes that these commitments and contingencies will not have a
material adverse effect on consolidated results of operations or financial po-
sition.

  Leases. Duke Energy utilizes assets under operating leases in several areas
of operations. Consolidated rental expense amounted to $87 million, $80 mil-
lion and $92 million in 1999, 1998 and 1997, respectively. Future minimum
rental payments under Duke Energy's various operating leases for the years
2000 through 2004 are $79 million, $68 million, $58 million, $50 million and
$45 million, respectively.

15. Common Stock

  At Duke Energy's annual meeting of shareholders held on April 15, 1999,
shareholders approved an amendment to the Articles of Incorporation to in-
crease the authorized common stock from 500 million to 1 billion shares.

  In 1996, the Board of Directors authorized Duke Energy to repurchase up to
$1 billion of its common stock during the period beginning February 1996 and
ending February 2001. No repurchases of common stock were made in 1999, 1998
or 1997, and none are anticipated in the future.

16. Stock-Based Compensation

  Under Duke Energy's 1998 Stock Incentive Plan, stock options for up to fif-
teen million shares of common stock may be granted to key employees. Under the
plan, the exercise price of each option granted equals the market price of
Duke Energy's common stock on the date of grant. Vesting periods range from
one to five years with a maximum exercise term of ten years.

  Effective with Duke Energy's merger with PanEnergy Corp, each share of
PanEnergy common stock, outstanding immediately prior to the merger, was con-
verted into the right to receive 1.0444 shares of Duke Energy common stock.
Each option to purchase PanEnergy common stock, outstanding prior to the merg-
er, was assumed by Duke Energy and became exercisable upon the same terms as
under the applicable PanEnergy stock option plan and option agreement, except
that these options became options to purchase shares of Duke Energy common
stock, appropriately adjusted.

                                      29
<PAGE>

                            DUKE ENERGY CORPORATION

            Notes to Consolidated Financial Statements -- Continued


16. Stock-Based Compensation -- Continued

  Stock Option Activity

<TABLE>
<CAPTION>
                                                                     Weighted
                                                                     Average
                                                       Options    Exercise Price
                                                     ------------ --------------
                                                     in thousands
   <S>                                               <C>          <C>
   Outstanding at December 31, 1996.................    3,274          $20
     Granted........................................      388           44
     Exercised......................................     (873)          19
     Forfeited......................................      (60)          27
                                                        -----
   Outstanding at December 31, 1997.................    2,729           24
     Granted........................................    3,548           57
     Exercised......................................     (948)          21
     Forfeited......................................     (868)          57
                                                        -----
   Outstanding at December 31, 1998.................    4,461           45
     Granted........................................    5,154           54
     Exercised......................................     (428)          23
     Forfeited......................................     (375)          57
                                                        -----
   Outstanding at December 31, 1999.................    8,812           51
                                                        =====
</TABLE>

Stock Options at December 31, 1999

<TABLE>
<CAPTION>
                         Outstanding                       Exercisable
             ---------------------------------------  ------------------------
                              Weighted     Weighted                  Weighted
 Range of                     Average      Average                   Average
 Exercise                    Remaining     Exercise                  Exercise
  Prices        Number      Life (Years)    Price        Number       Price
 --------    ------------   ------------   --------   ------------   --------
             in thousands                             in thousands
<S>          <C>            <C>            <C>        <C>            <C>
$10 to $14         36           1.4          $12            36         $12
$15 to $20        728           4.0           19           728          19
$21 to $25        153           4.2           23           153          23
$26 to $31        157           6.1           27           157          27
$42 to $50      2,992           9.8           49           124          44
$51 to $59      4,443           8.6           58           582          57
$60 to $67        303           9.0           65            13          67
                -----                                    -----
  Total         8,812                                    1,793          34
                =====                                    =====
</TABLE>

  Duke Energy had 1.5 million and 2.4 million options exercisable at December
31, 1998 and 1997, with weighted average exercise prices of $22 and $21 per
option, respectively.

  The weighted-average fair value of options granted was $10, $9 and $10 per
option during 1999, 1998 and 1997, respectively. The fair value of each option
grant was estimated on the date of grant using the Black-Scholes option-pric-
ing model.

  Weighted-Average Assumptions for Option-Pricing

<TABLE>
<CAPTION>
                                                       1999     1998     1997
                                                      -------  -------  -------
   <S>                                                <C>      <C>      <C>
   Stock dividend yield..............................     4.1%     4.2%     3.5%
   Expected stock price volatility...................    18.8%    15.1%    20.7%
   Risk-free interest rates..........................     5.9%     5.6%     6.5%
   Expected option lives............................. 7 years  7 years  7 years
</TABLE>


                                      30
<PAGE>

                            DUKE ENERGY CORPORATION

            Notes to Consolidated Financial Statements -- Continued


16. Stock-Based Compensation -- Continued

  Had compensation expense for stock-based compensation been determined based
on the fair value at the grant dates, 1999 net income would have been $1,498
million, or $4.06 per basic share; 1998 net income would have been $1,250 mil-
lion, or $3.40 per basic share; and 1997 net income would have been $971 mil-
lion, or $2.50 per basic share.

  Duke Energy has the 1996 Stock Incentive Plan (the 1996 Plan) under which
two million shares of common stock were reserved for awards to employees. Re-
stricted stock grants made under the 1996 Plan vest over a period ranging be-
tween one and five years. Duke Energy awarded 65,850 restricted shares (fair
value at grant dates of approximately $4 million) in 1999 and 3,000 restricted
shares in 1998. Compensation expense for the grants is charged to earnings
over the restriction period and was not material in 1999, 1998 or 1997.

  In addition, Duke Energy granted Performance Awards under the 1998 Long-Term
Incentive Plan (the 1998 Plan), under which fifteen million shares of common
stock have been reserved for employee awards. Grants under the 1998 Plan vest
over periods ranging between one and seven years. Duke Energy awarded 493,200
shares (fair value at grant dates of $26 million) in 1999. Compensation ex-
pense for the stock grants is charged to earnings over the vesting period, and
amounted to $3 million in 1999.

17. Employee Benefit Plans

  Retirement Plans. Duke Energy and its subsidiaries maintain a non-contribu-
tory defined benefit retirement plan covering most employees with minimum
service requirements using a cash balance formula. Under a cash balance formu-
la, a plan participant accumulates a retirement benefit based upon a percent-
age, which may vary with age and years of service, of current eligible earn-
ings and current interest credits.

  On December 31, 1998, all defined benefit retirement plans maintained by
Duke Energy and its subsidiaries, except for the PanEnergy retirement plan,
were merged to form the Duke Energy Retirement Cash Balance Plan (Duke Energy
Plan). The plan merger changed the benefit for certain participants, from a
formula based primarily on benefit accrual service and highest average earn-
ings, to a cash balance formula.

  Through December 31, 1998, the PanEnergy retirement plan provided retirement
benefits (i) for eligible employees of certain subsidiaries that are generally
based on an employee's years of benefit accrual service and highest average
eligible earnings, and (ii) for eligible employees of certain other subsidiar-
ies under a cash balance formula. In 1998, a significant amount of lump sum
payouts was made from the PanEnergy plan resulting in a settlement gain of $10
million. Effective January 1, 1999, the benefit formula under the PanEnergy
plan, for all eligible employees, was changed to a cash balance formula.

  In connection with the 1999 sale of the Midwest Pipelines to CMS, benefit
accruals under the PanEnergy plan were frozen on December 31, 1998 for all
participants who, as a result of the sale, became employees of CMS and its
subsidiaries. Once the transfer of the benefit obligation and related assets
of the affected participants to CMS was completed, the PanEnergy plan was
merged into the Duke Energy Plan.

  Duke Energy's policy is to fund amounts, as necessary, on an actuarial basis
to provide assets sufficient to meet benefits to be paid to plan participants.
On December 30, 1997, assets and related liabilities of $236 million and $204
million, respectively, for certain PanEnergy plan participants were trans-
ferred to the Duke Power plan. As a result of this transfer, no contributions
to the Duke Energy plan were necessary in 1999 or 1998.

                                      31
<PAGE>

                            DUKE ENERGY CORPORATION

            Notes to Consolidated Financial Statements -- Continued


17. Employee Benefit Plans -- Continued

  Components of Net Periodic Pension Costs

<TABLE>
<CAPTION>
                                                         For the Years Ended
                                                             December 31,
                                                         ----------------------
                                                          1999    1998    1997
                                                         ------  ------  ------
                                                             in millions
   <S>                                                   <C>     <C>     <C>
   Service cost benefit earned during the year.......... $   72  $   63  $   62
   Interest cost on projected benefit obligation........    165     169     164
   Expected return on plan assets.......................   (224)   (218)   (209)
   Amortization of prior service cost...................     (3)     (4)     (5)
   Amortization of net transition asset.................     (4)     (4)     (4)
   Recognized net actuarial loss........................     12      10      17
   Settlement gain......................................     --     (10)     --
                                                         ------  ------  ------
   Net periodic pension costs........................... $   18  $    6  $   25
                                                         ======  ======  ======
</TABLE>

  Reconciliation of Funded Status to Pre-funded Pension Costs

<TABLE>
<CAPTION>
                                                                 December 31,
                                                                 --------------
                                                                  1999    1998
                                                                 ------  ------
                                                                  in millions
   <S>                                                           <C>     <C>
   Change in Benefit Obligation
   Benefit obligation at beginning of year...................... $2,540  $2,372
   Service cost.................................................     72      63
   Interest cost................................................    165     169
   Plan amendment...............................................     --       5
   Actuarial (gain) loss........................................    (41)    141
   Transfer to CMS..............................................    (85)     --
   Benefits paid................................................   (205)   (210)
                                                                 ------  ------
   Benefit obligation at end of year............................ $2,446  $2,540
                                                                 ======  ======
   Change in Plan Assets
   Fair value of plan assets at beginning of year (a)........... $2,922  $2,725
   Actual return on plan assets.................................    491     406
   Employer contributions.......................................     (2)      1
   Transfer to CMS..............................................    (85)     --
   Benefits paid................................................   (205)   (210)
                                                                 ------  ------
   Fair value of plan assets at end of year (a)................. $3,121  $2,922
                                                                 ======  ======
   Funded status................................................ $  675  $  382
   Unrecognized net experience (gain) loss......................   (315)      2
   Unrecognized prior service cost reduction....................    (24)    (27)
   Unrecognized net transition asset............................    (21)    (25)
                                                                 ------  ------
   Pre-funded pension costs..................................... $  315  $  332
                                                                 ======  ======
</TABLE>
  --------
  (a)   Principally equity and fixed income securities.

                                       32
<PAGE>

                            DUKE ENERGY CORPORATION

            Notes to Consolidated Financial Statements -- Continued


17. Employee Benefit Plans -- Continued

  Assumptions Used for Pension Benefits Accounting (a)

<TABLE>
<CAPTION>
                                                                  1999 1998 1997
                                                                  ---- ---- ----
                                                                     Percent
   <S>                                                            <C>  <C>  <C>
   Discount rate................................................. 7.50 6.75 7.25
   Salary increase............................................... 4.50 4.67 4.15
   Expected long-term rate of return on plan assets.............. 9.25 9.25 9.25
</TABLE>
  --------
  (a)   Reflects weighted averages across all plans.

  Duke Energy also sponsors employee savings plans which cover substantially
all employees. Employer matching contributions of $68 million, $53 million and
$53 million were expensed in 1999, 1998 and 1997, respectively.

  Other Postretirement Benefits. Duke Energy and most of its subsidiaries pro-
vide certain health care and life insurance benefits for retired employees on
a contributory and non-contributory basis. Employees become eligible for these
benefits if they have met certain age and service requirements at retirement,
as defined in the plans. Under plan amendments effective late 1998 and early
1999, health care benefits for future retirees were changed to limit employer
contributions and medical coverage.

  Such benefit costs are accrued over the active service period of employees
to the date of full eligibility for the benefits. The net unrecognized transi-
tion obligation, resulting from the implementation of accrual accounting, is
being amortized over approximately 20 years.

  Components of Net Periodic Postretirement Benefit Costs

<TABLE>
<CAPTION>
                                                        For the Years Ended
                                                            December 31,
                                                        ----------------------
                                                         1999    1998    1997
                                                        ------  ------  ------
                                                            in millions
   <S>                                                  <C>     <C>     <C>
   Service cost benefit earned during the year......... $    7  $   10  $   10
   Interest cost on accumulated postretirement benefit
    obligation.........................................     40      43      46
   Expected return on plan assets......................    (21)    (18)    (19)
   Amortization of prior service cost..................      1       7       6
   Amortization of net transition obligation...........     18      16      16
   Recognized net actuarial (gain) loss................     (1)      1      (1)
                                                        ------  ------  ------
   Net periodic postretirement benefit costs........... $   44  $   59  $   58
                                                        ======  ======  ======
</TABLE>

                                      33
<PAGE>

                            DUKE ENERGY CORPORATION

            Notes to Consolidated Financial Statements -- Continued


17. Employee Benefit Plans -- Continued

  Reconciliation of Funded Status to Accrued Postretirement Benefit Costs

<TABLE>
<CAPTION>
                                                                December 31,
                                                                --------------
                                                                 1999    1998
                                                                ------  ------
                                                                 in millions
   <S>                                                          <C>     <C>
   Change in Benefit Obligation
   Accumulated postretirement benefit obligation at beginning
    of year.................................................... $  625  $  667
   Service cost................................................      7      10
   Interest cost...............................................     40      43
   Plan participants' contributions............................      7       6
   Amendments..................................................     --     (49)
   Actuarial gain..............................................    (68)     (6)
   Benefits paid...............................................    (49)    (46)
                                                                ------  ------
   Accumulated postretirement benefit obligation at end of
    year....................................................... $  562  $  625
                                                                ------  ------
   Change in Plan Assets
   Fair value of plan assets at beginning of year (a).......... $  305  $  266
   Actual return on plan assets................................     41      34
   Employer contributions......................................     23      45
   Plan participants' contributions............................      7       6
   Benefits paid...............................................    (49)    (46)
                                                                ------  ------
   Fair market value of plan assets at end of year (a)......... $  327  $  305
                                                                ------  ------
   Funded status............................................... $ (235) $ (320)
   Unrecognized prior service cost.............................      8       9
   Unrecognized net experience gain............................   (110)    (23)
   Unrecognized transition obligation..........................    229     239
                                                                ------  ------
   Accrued postretirement benefit costs........................ $ (108) $  (95)
                                                                ======  ======
</TABLE>
  --------
  (a)   Principally equity and fixed income securities.

  Assumptions Used for Postretirement Benefits Accounting (a)

<TABLE>
<CAPTION>
                                                               1999  1998  1997
                                                               ----- ----- -----
                                                                    percent
   <S>                                                         <C>   <C>   <C>
   Discount rate..............................................  7.50  6.75  7.25
   Salary increase............................................  4.50  4.67  4.33
   Expected long-term rate of return on 401(h) assets.........  9.25  9.25  9.25
   Expected long-term rate of return on RLR assets............  6.75  6.75  6.75
   Expected long-term rate of return on VEBA assets...........  9.25  9.25  9.25
   Assumed tax rate (b)....................................... 39.60 39.60 39.60
</TABLE>
  --------
  (a)   Reflects weighted averages across all plans.
  (b)   Health care portion of postretirement benefits in VEBA trusts.

  For measurement purposes, a 5.0% weighted average rate of increase in the
per capita cost of covered health care benefits was assumed for 1999. The rate
was assumed to decrease gradually to 4.75% for 2005 and remain at that level
thereafter. Assumed health care cost trend rates have a significant effect on
the amounts reported for the health care plans.


                                      34
<PAGE>

                            DUKE ENERGY CORPORATION

            Notes to Consolidated Financial Statements -- Continued


17. Employee Benefit Plans -- Continued

Sensitivity to Changes in Assumed Health Care Cost Trend Rates

<TABLE>
<CAPTION>
                                                  1-Percentage-  1-Percentage-
                                                  Point Increase Point Decrease
                                                  -------------- --------------
                                                           in millions
<S>                                               <C>            <C>
Effect on total of service and interest cost
 components......................................      $ 3            $ (2)
Effect on postretirement benefit obligation......       34             (24)
</TABLE>

18. Quarterly Financial Data (Unaudited)

<TABLE>
<CAPTION>
                                       First  Second   Third  Fourth
                                      Quarter Quarter Quarter Quarter   Total
                                      ------- ------- ------- -------  -------
                                        In millions, except per share data
<S>                                   <C>     <C>     <C>     <C>      <C>
1999
Operating revenues................... $4,160  $4,691  $6,694  $6,197   $21,742
Operating income.....................    627     531     884    (247)    1,795
EBIT.................................    683     568     908    (116)    2,043
Income before extraordinary item.....    307     288     441    (189)      847
Net income...........................    967     288     441    (189)    1,507
Earnings per share (before
 extraordinary item)
  Basic.............................. $ 0.83  $ 0.77  $ 1.20  $(0.53)  $  2.26
  Dilutive........................... $ 0.83  $ 0.77  $ 1.19  $(0.53)  $  2.25
Earnings per share
  Basic.............................. $ 2.65  $ 0.77  $ 1.20  $(0.53)  $  4.08
  Dilutive........................... $ 2.64  $ 0.77  $ 1.19  $(0.53)  $  4.07
1998
Operating revenues................... $4,115  $4,014  $5,298  $4,183   $17,610
Operating income.....................    608     549     826     450     2,433
EBIT.................................    678     582     871     516     2,647
Income before Extraordinary item.....    328     279     429     224     1,260
Net income...........................    320     279     429     224     1,252
Earnings per share before
 Extraordinary item)
  Basic.............................. $ 0.89  $ 0.76  $ 1.18  $ 0.60   $  3.43
  Dilutive........................... $ 0.89  $ 0.76  $ 1.17  $ 0.60   $  3.42
Earnings per share
  Basic.............................. $ 0.87  $ 0.76  $ 1.18  $ 0.60   $  3.41
  Dilutive........................... $ 0.87  $ 0.76  $ 1.17  $ 0.60   $  3.40
</TABLE>

19. Subsequent Events

  On December 16, 1999, Duke Energy announced that it had signed definitive
agreements to combine Duke Energy's gas gathering and processing businesses
with Phillips Petroleum's Gas Processing and Marketing unit to form a new mid-
stream company. Under the terms of the agreements, the new company will seek
to arrange approximately $2.6 billion of debt financing and, upon closing of
the transaction, will make a one-time cash distribution of $1.2 billion to
both Duke Energy and Phillips Petroleum. At closing, Duke Energy will own
about 70% of the new company and Phillips Petroleum will own about 30%. The
new company would then offer approximately 20% of its equity to the public in
2000 to reduce the debt resulting from the transaction. Such an offering is
conditional upon completion of the transaction and favorable market condi-
tions.

  On January 4, 2000, Duke Energy announced that it had entered into a defini-
tive agreement to purchase, for $386 million, 100% of the stock of El Paso En-
ergy Corporation's wholly owned subsidiary, East Tennessee

                                      35
<PAGE>

                            DUKE ENERGY CORPORATION

            Notes to Consolidated Financial Statements -- Continued


19. Subsequent Events -- Continued

Natural Gas Company, a 1,100-mile pipeline that crosses Duke Energy's TETCO
pipeline and serves the southeastern region of the U.S.

  Both transactions are subject to regulatory approval and are expected to
close in the first quarter of 2000.

  In January 2000, Duke Energy completed a tender offer to the minority share-
holders of Paranapanema and successfully acquired an additional 51% economic
interest in the company for approximately $280 million. This increases Duke
Energy's economic ownership from approximately 44% to approximately 95%.

                                      36

<PAGE>
                         Independent Auditors' Report


TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF DUKE ENERGY CORPORATION


     We have audited the consolidated balance sheets of Duke Energy Corporation
and subsidiaries (Duke Energy) as of December 31, 1999 and 1998, and the related
consolidated statements of income and comprehensive income, common stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1999. These financial statements are the responsibility of Duke Energy's
management. Our responsibility is to express an opinion on the financial
statements based on our audits.

     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Duke Energy
as of December 31, 1999 and 1998, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1999 in
conformity with generally accepted accounting principles.


/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Charlotte, North Carolina
February 11, 2000





                                                                   EXHIBIT 99(b)

  MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
                                   CONDITION

INTRODUCTION

  Management's Discussion and Analysis should be read in conjunction with the
Consolidated Financial Statements.

  Business Segments. Duke Energy Corporation (collectively with its subsidiar-
ies, "Duke Energy") is an integrated energy and energy services provider with
the ability to offer physical delivery and management of both electricity and
natural gas throughout the U.S. and abroad. Duke Energy provides these and
other services through seven business segments:

  .Electric Operations
  .Natural Gas Transmission
  .Field Services
  .Trading and Marketing
  .Global Asset Development
  .Other Energy Services
  .Real Estate Operations

  Electric Operations generates, transmits, distributes and sells electric en-
ergy in central and western North Carolina and the western portion of South
Carolina (doing business as Duke Power or 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
(NCUC) and the Public Service Commission of South Carolina (PSCSC).

  Natural Gas Transmission provides interstate transportation and storage of
natural gas for customers primarily in the Mid-Atlantic and New England
states. Until the sale of the Midwest Pipelines on March 29, 1999, Natural Gas
Transmission also provided interstate transportation and storage services in
the midwest states. See further discussion of the sale of the Midwest Pipe-
lines in Note 2 to the Consolidated Financial Statements. The interstate natu-
ral gas transmission and storage operations are subject to the rules and regu-
lations of the FERC.

  Field Services gathers, processes, transports and markets natural gas and
produces, transports and markets natural gas liquids (NGLs). Field Services
operates gathering systems in western Canada and ten contiguous states that
serve major gas-producing regions in the Rocky Mountain, Permian Basin, Mid-
Continent and onshore and offshore Gulf Coast areas.

  Trading and Marketing markets natural gas, electricity and other energy-re-
lated products across North America. Duke Energy owns a 60% interest in Trad-
ing and Marketing's energy trading operations, with Mobil Corporation owning a
40% minority interest. This segment also includes certain other trading activ-
ities and limited hydrocarbon exploration and production activities that are
wholly owned by Duke Energy.

  Global Asset Development develops, owns and operates energy-related facili-
ties worldwide. Global Asset Development conducts its operations primarily
through Duke Energy North America, LLC (Duke Energy North America) and Duke
Energy International, LLC (Duke Energy International).

  Other Energy Services provides engineering, consulting, construction and in-
tegrated energy solutions worldwide, primarily through Duke Engineering &
Services, Inc. (Duke Engineering & Services), Duke/Fluor Daniel and
DukeSolutions, Inc. (DukeSolutions).

  Real Estate Operations conducts its business through Crescent Resources,
Inc., which develops high quality commercial and residential real estate pro-
jects and manages land holdings in the southeastern U.S.

                                       1
<PAGE>

  In 1997, Duke Power Company (Duke Power) merged with PanEnergy Corp
(PanEnergy). The merger was accounted for as a pooling of interests; there-
fore, the Consolidated Financial Statements and other financial information
included in this Annual Report for periods prior to the merger include the
combined historical financial results of Duke Power and PanEnergy. See Note 2
to the Consolidated Financial Statements for additional information on the
combination.

  Business Strategy. Duke Energy's business strategy is to develop integrated
energy infrastructures in targeted regions where Duke Energy's extensive capa-
bilities in developing energy assets, operating electricity, gas and NGL
plants, optimizing commercial operations and managing risk can provide compre-
hensive energy solutions for customers and create superior value for share-
holders. Domestically, Duke Energy is aggressively investing in new merchant
power plants throughout the U.S., expanding its natural gas pipeline infra-
structure in the eastern U.S., rapidly increasing its leading position in gas
processing and NGL marketing and broadening its trading and marketing expert-
ise across the energy spectrum. Internationally, Duke Energy is currently fo-
cusing on integrated electric and gas opportunities in Australia and Latin
America and intends to implement its strategies in Europe.

  Electric Operations continues to strive to maintain low costs and competi-
tive rates for its customers and to provide high quality customer service.
Electric Operations is expected to grow moderately, consistent with historical
trends. Expansion will primarily result from continued economic growth in its
service territory.

  Natural Gas Transmission provides solid earnings growth and strengthens its
competitive position by adhering to a comprehensive strategy of selected ac-
quisitions and developing incremental projects that expand services to meet
specific customer needs. In January 2000, Natural Gas Transmission announced
that it had entered into a definitive agreement to purchase the East Tennessee
Natural Gas Company, a pipeline well positioned to serve the rapidly growing
southeastern region of the U.S. The transaction is expected to close in the
first quarter of 2000, subject to regulatory approval. For more information on
this purchase, see Note 19 to the Consolidated Financial Statements.

  Duke Energy plans to significantly grow several of its business segments:
Field Services, Trading and Marketing, Global Asset Development and Other En-
ergy Services. Restructuring of energy markets in the U.S. and abroad is pro-
viding substantial opportunities for these segments to capitalize on their
broad capabilities.

  Expansion opportunities for Field Services include the planned combination
of Duke Energy's gas gathering and processing businesses with Phillips Petro-
leum's Gas Processing and Marketing unit to form a new midstream company. The
transaction is expected to close by first quarter 2000, subject to regulatory
approval. See Note 19 to the Consolidated Financial Statements for further
discussion.

  Trading and marketing activities at Duke Energy continue to expand as Trad-
ing and Marketing provides energy supply, output marketing, risk management
and commercial optimization services to all of Duke Energy's merchant struc-
ture developments. Trading and Marketing continues to increase its customer
base for wholesale energy management services to aggregators, distribution
companies, large industrials and other marketers.

  Global Asset Development expects to continue strong earnings growth through
acquisitions, divestitures, construction of greenfield projects and expansion
of existing facilities as opportunities are extracted, evaluated and realized
through the marketplace. Duke Energy's combination of assets and capabilities
that span the energy value chain have contributed to Global Asset Develop-
ment's successful delivery of natural gas pipeline, power generation, energy
marketing and other services as demonstrated both domestically and interna-
tionally. To capture the greatest value in North America, Duke Energy North
America, through its portfolio management strategy, seeks opportunities to in-
vest in markets which have capacity needs and to divest, in whole or in part,
when significant value can be realized.

  Other Energy Services seeks to grow with various types of services including
comprehensive energy efficiencies in food, textile and government facilities.


                                       2
<PAGE>

  The strong real estate market in the Southeast continues to present substan-
tial growth opportunities for both the commercial and residential development
of Real Estate Operations. In addition to initiating development of signifi-
cant office and industrial facilities in each of its established markets, Real
Estate Operations entered a new market niche in 1999 to develop moderately
priced residential communities in Jacksonville, Florida. Real Estate Opera-
tions also announced plans to enter the multi-family market and to signifi-
cantly increase its retail development.

RESULTS OF OPERATIONS

  In 1999, earnings available for common stockholders were $1,487 million, or
$4.08 per basic share, net of an after-tax extraordinary gain of $660 million,
or $1.82 per basic share. In 1998, earnings available for common stockholders
were $1,231 million, or $3.41 per basic share, net of an after-tax extraordi-
nary loss of $8 million, or $0.02 per basic share. The increase in earnings
available for common stockholders was primarily due to the 1999 extraordinary
gain resulting from the sale of the Midwest Pipelines. This gain, along with
the factors described below that affect segment profit and loss, was partially
offset by a pre-tax $800 million charge for estimated injury and damages
claims (see Note 14 to the Consolidated Financial Statements), higher interest
expense and minority interest expense

  Earnings available for common stockholders increased $329 million in 1998
from 1997 earnings of $902 million, or $2.51 per basic share. The increase in
earnings available for common stockholders was due to the factors described
below that affect segment profit and loss. These factors were partially offset
by increased interest expense and minority interests.

  Operating income for 1999 was $1,795 million compared to $2,433 million in
1998 and $1,970 million in 1997. Earnings before interest and taxes (EBIT)
were $2,043 million, $2,647 million and $2,108 million for 1999, 1998 and
1997, respectively. Management evaluates each business segment based on an in-
ternal measure of earnings before interest and taxes, after deducting minority
interests. Operating Income and EBIT are affected by the same fluctuations for
Duke Energy and each of its business segments. The only notable difference be-
tween Operating Income and EBIT is the inclusion in EBIT of certain non-oper-
ating activities. See Note 3 to the Consolidated Financial Statements for ad-
ditional information on business segments.

  EBIT is summarized in the following table and is discussed by business seg-
ment thereafter.

EBIT by Business Segment

<TABLE>
<CAPTION>
                                                     Years Ended December 31,
                                                    ---------------------------
                                                      1999      1998     1997
                                                    --------  -------- --------
                                                           (in millions)
<S>                                                 <C>       <C>      <C>
Electric Operations................................ $    856  $  1,513 $  1,282
Natural Gas Transmission...........................      627       702      624
Field Services.....................................      144        76      157
Trading and Marketing..............................       70        81       23
Global Asset Development...........................      181        64        4
Other Energy Services..............................      (94)       10       18
Real Estate Operations.............................      176       142       98
Other Operations...................................       (9)        2     (120)
Minority Interests.................................       92        57       22
                                                    --------  -------- --------
Consolidated EBIT.................................. $  2,043  $  2,647 $  2,108
                                                    ========  ======== ========
</TABLE>

  Other Operations primarily include communication services, water services
and certain unallocated corporate costs. Included in the amounts discussed
hereafter are intercompany transactions that are eliminated in the Consoli-
dated Financial Statements.


                                       3
<PAGE>

Electric Operations

<TABLE>
<CAPTION>
                                                 Years Ended December 31,
                                            -----------------------------------
                                               1999        1998        1997
                                            ----------- ----------- -----------
                                             (In millions, except where noted)
<S>                                         <C>         <C>         <C>
Operating Revenues......................... $     4,700 $     4,626 $     4,401
Operating Expenses.........................       3,966       3,228       3,221
                                            ----------- ----------- -----------
Operating Income...........................         734       1,398       1,180
Other Income, Net of Expenses..............         122         115         102
                                            ----------- ----------- -----------
EBIT....................................... $       856 $     1,513 $     1,282
                                            =========== =========== ===========
Sales -- GWh (a)...........................      81,548      82,011      77,935
</TABLE>
- --------
(a)   Gigawatt-hours.

  In 1999, EBIT for Electric Operations decreased $657 million compared to
1998, primarily due to an $800 million charge for estimated injury and damages
claims. See Note 14 to the Consolidated Financial Statements for additional
information related to this charge. Partially offsetting this decrease was a
2.8% increase in the number of customers in the Electric Operations' service
territory during 1999, and the absence of 1998 severance and other costs re-
lated to closing Electric Operations' merchandising business.

  In 1998, EBIT for Electric Operations increased $231 million as compared to
1997, primarily due to a 5.2% increase in gigawatt-hour sales. Gigawatt-hour
sales increased as a result of warmer spring and summer weather conditions
during 1998 and a 2.5% growth in the number of customers in the Electric Oper-
ations' service territory. EBIT also increased due to the absence of 1997 sev-
erance costs, however this was substantially offset by 1998 costs related to
the closing of Electric Operations' merchandising business.

Natural Gas Transmission

<TABLE>
<CAPTION>
                                                 Years Ended December 31,
                                            -----------------------------------
                                               1999        1998        1997
                                            ----------- ----------- -----------
                                             (In millions, except where noted)
<S>                                         <C>         <C>         <C>
Operating Revenues......................... $     1,206 $     1,528 $     1,572
Operating Expenses.........................         615         864         964
                                            ----------- ----------- -----------
Operating Income...........................         591         664         608
Other Income, Net of Expenses..............          36          38          16
                                            ----------- ----------- -----------
EBIT....................................... $       627 $       702 $       624
                                            =========== =========== ===========
Throughput -- TBtu (a).....................       1,893       2,593       2,862
</TABLE>
- --------
(a)   Trillion British thermal units.

  EBIT for Natural Gas Transmission decreased $75 million in 1999 compared to
1998. As a result of the sale of the Midwest Pipelines to CMS Energy Corpora-
tion (CMS) on March 29, 1999, EBIT for the Midwest Pipelines decreased $156
million compared to 1998's full year of operation. For the Northeast Pipe-
lines, EBIT increased $81 million compared to 1998, primarily as a result of
increased earnings from market-expansion projects and joint ventures, higher
throughput and lower operating expenses. A gain of $24 million resulting from
the sale of Duke Energy's interest in the Alliance Pipeline project and bene-
fits totaling $38 million related to the completion of certain PCB (polychlo-
rinated biphenyl) and soil clean-up programs below estimates also increased
EBIT in 1999. Partially offsetting these contributions to EBIT were the non-
recurrence of the 1998 favorable resolution of regulatory issues related to
gas supply realignment cost issues ("GSR issues") and a 1998 refund from a
state property tax ruling.

  In 1998, EBIT for Natural Gas Transmission increased $78 million compared to
1997. EBIT for the Northeast Pipelines increased $56 million in 1998 over
1997, primarily as a result of the favorable resolution of

                                       4
<PAGE>

GSR issues, favorable state property tax rulings and increased market expan-
sion projects. These increases were partially offset by a decrease in through-
put primarily as a result of mild winter weather.

  For the Midwest Pipelines, 1998 EBIT increased $22 million compared to 1997,
primarily due to a gain on the sale of the general partner interests in North-
ern Border Partners, L.P. and non-recurring 1997 litigation expenses. These
increases were partially offset by the favorable resolution of certain regula-
tory matters in 1997, which was reflected as additional revenue and other in-
come.

Field Services

<TABLE>
<CAPTION>
                                                Years Ended December 31,
                                           ------------------------------------
                                              1999         1998        1997
                                           -----------  ----------- -----------
                                            (In millions, except where noted)
<S>                                        <C>          <C>         <C>
Operating Revenues........................ $     3,590  $     2,639 $     3,055
Operating Expenses........................       3,444        2,598       2,898
                                           -----------  ----------- -----------
Operating Income..........................         146           41         157
Other Income, Net of Expenses.............          (2)          35          --
                                           -----------  ----------- -----------
EBIT...................................... $       144  $        76 $       157
                                           ===========  =========== ===========
Natural Gas Gathered and
 Processed/Transported, TBtu/d (a)........         5.1          3.6         3.4
NGL Production, MBbl/d (b)................       192.4        110.2       108.2
Natural Gas Marketed, TBtu/d..............         0.5          0.4         0.4
Average Natural Gas Price per MMBtu (c)... $      2.27  $      2.11 $      2.59
Average NGL Price per Gallon (d).......... $      0.34  $      0.26 $      0.35
</TABLE>
- --------
(a)   Trillion British thermal units per day.
(b)   Thousand barrels per day.
(c)   Million British thermal units.
(d)   Does not reflect results of commodity hedges.

  In 1999, EBIT for Field Services increased $68 million compared to 1998. A
significant portion of the increase resulted from the March 31, 1999 acquisi-
tion of the natural gas gathering, processing, fractionation and NGL pipeline
business from Union Pacific Resources (UPR), (collectively, the "UPR acquisi-
tion"). For more information on the UPR acquisition, see Note 2 to the Consol-
idated Financial Statements. Improved average NGL prices, which were up $0.08
per gallon, or 30.8% from the prior year, also contributed to the increase in
EBIT. Partially offsetting these increases were $34 million in 1998 of gains
on sales of assets, which were included in other income.

  EBIT for Field Services decreased $81 million in 1998 from 1997, primarily
due to a decrease in average NGL prices of approximately $0.09 per gallon, or
25.7%. The decrease in EBIT was partially offset by $34 million of gains on
sales of assets, which were included in other income.

  On December 16, 1999, Duke Energy announced that it had signed definitive
agreements with Phillips Petroleum to form a new midstream gas gathering and
processing company. See Note 19 to the Consolidated Financial Statements for
further discussion.

                                       5
<PAGE>

Trading and Marketing

<TABLE>
<CAPTION>
                                                  Years Ended December 31,
                                              ----------------------------------
                                                 1999        1998       1997
                                              ----------- ----------------------
                                              (In millions, except where noted)
<S>                                           <C>         <C>        <C>
Operating Revenues........................... $    11,793 $    8,785 $    7,489
Operating Expenses...........................      11,724      8,665      7,446
                                              ----------- ---------- ----------
Operating Income.............................          69        120         43
Other Income, Net of Expenses................          43          2          1
Minority Interest Expense....................          42         41         21
                                              ----------- ---------- ----------
EBIT......................................... $        70 $       81 $       23
                                              =========== ========== ==========
Natural Gas Marketed, TBtu/d.................        10.5        8.0        6.9
Electricity Marketed, GWh....................     109,634     98,991     64,650
</TABLE>

  In 1999, EBIT for Trading and Marketing decreased $11 million from 1998. The
decrease resulted primarily from lower natural gas trading margins, partially
offset by higher electricity trading margins as well as margins associated
with other trading activities and sales of natural gas interests associated
with drilling activities.

  EBIT for Trading and Marketing increased $58 million in 1998 compared to
1997. The increase resulted primarily from increased trading margins and elec-
tricity margins, partially offset by increased expenses due to business
growth. Electricity volumes marketed increased primarily as a result of ac-
quiring the remaining 50% ownership interest in the Duke/Louis Dreyfus, L.L.C.
(D/LD) joint venture in June 1997.

Global Asset Development

<TABLE>
<CAPTION>
                                                Years Ended December 31,
                                           -----------------------------------
                                              1999        1998        1997
                                           ----------- ----------- -----------
                                            (In millions, except where noted)
<S>                                        <C>         <C>         <C>
Operating Revenues........................ $       777 $       319 $       123
Operating Expenses........................         571         261         129
                                           ----------- ----------- -----------
Operating Income..........................         206          58          (6)
Other Income, Net of Expenses.............          25          22          11
Minority Interest Expense.................          50          16           1
                                           ----------- ----------- -----------
EBIT...................................... $       181 $        64 $         4
                                           =========== =========== ===========
Proportional Megawatt Capacity Owned (a)..       8,773       6,041       3,912
Proportional Maximum Pipeline Capacity
 (a), MMcf/d (b)..........................         309         124          --
</TABLE>
- --------
(a)   Includes under construction or under contract.
(b)   Million cubic feet per day.

  In 1999, EBIT for Global Asset Development increased $117 million compared
to 1998. The increase includes $99 million in income from the sale of partial
interests in four generating stations in the U.S. as a result of executing its
domestic portfolio management strategy. Earnings from new projects in Latin
America and Australia also contributed $63 million to the increase. Partially
offsetting these increases were higher operating expenses and increased devel-
opment costs associated with business expansion.

  EBIT for Global Asset Development increased $60 million in 1998 over 1997.
The increase resulted primarily from business expansion and acquisitions, in-
cluding the July 1998 acquisition of three electric generating stations in
California and the December 1997 acquisition of an indirect 32.5% ownership
interest in American Ref-Fuel Company. An expansion to the PT Puncakjaya power
generation facility in Indonesia also contributed to the increase in EBIT dur-
ing 1998. The increase in EBIT was partially offset by decreased earnings re-
sulting from lower prices at National Methanol Company, a methanol and MTBE
(methyl tertiary butyl ether) business in Saudi Arabia.

                                       6
<PAGE>

Other Energy Services

<TABLE>
<CAPTION>
                                                     Years Ended December 31,
                                                     ---------------------------
                                                       1999      1998    1997
                                                     ---------  ----------------
                                                            In millions
<S>                                                  <C>        <C>     <C>
Operating Revenues.................................. $     989  $   521 $   376
Operating Expenses..................................     1,083      511     353
                                                     ---------  ------- -------
Operating Income....................................       (94)      10      23
Other Income, Net of Expenses.......................        --       --      (5)
                                                     ---------  ------- -------
EBIT................................................ $     (94) $    10 $    18
                                                     =========  ======= =======
</TABLE>

  In 1999, EBIT for Other Energy Services decreased $104 million compared to
1998. The decrease was primarily due to charges of $38 million and $35 million
at Duke Engineering & Services and DukeSolutions, respectively. These charges,
which include costs associated with repositioning the companies to focus on
growth markets, included expenses related to severance, office closings and
write-offs of uncollectable accounts. Increased development activity at
DukeSolutions and decreased earnings from projects of Duke Engineering & Serv-
ices also contributed to lower EBIT. EBIT for Other Energy Services decreased
$8 million in 1998 compared to 1997, primarily due to reduced earnings of Duke
Engineering & Services.

Real Estate Operations

<TABLE>
<CAPTION>
                                                       Years Ended December 31,
                                                      --------------------------
                                                        1999     1998     1997
                                                      -------- -------- --------
                                                             In millions
<S>                                                   <C>      <C>      <C>
Operating Revenues................................... $    233 $    181 $    124
Operating Expenses...................................       57       39       26
                                                      -------- -------- --------
EBIT................................................. $    176 $    142 $     98
                                                      ======== ======== ========
</TABLE>

  In 1999, EBIT for Real Estate Operations increased $34 million compared to
1998. The increase was primarily due to increased residential developed lot
sales, land sales and commercial project sales, partially offset by decreased
lake lot sales. EBIT for Real Estate Operations increased $44 million in 1998
over 1997, primarily as a result of increased commercial project sales, lake
lot sales and land sales, including a gain on the sale of land in the Jocassee
Gorges region of South Carolina.

Other Operations

  EBIT for Other Operations decreased $11 million in 1999 compared to 1998,
primarily as a result of the resolution of certain contingent items during
1998. EBIT for Other Operations increased $122 million in 1998 compared to
1997, primarily as a result of the absence of $71 million of non-recurring
1997 merger-related costs and the favorable resolution of certain contingent
items in 1998, partially offset by a 1997 gain on the sale of Duke Energy's
ownership interest in the Midland Cogeneration Venture.

Other Impacts on Earnings Available for Common Stockholders

  Interest expense increased $87 million in 1999 compared to 1998, and $42
million in 1998 compared to 1997 due to higher average debt balances outstand-
ing, resulting from acquisitions and expansion.

  Minority interests increased $46 million in 1999 compared to 1998, and $73
million in 1998 compared to 1997. The increases were due primarily to regular
distributions paid on new issuances of Duke Energy's trust preferred securi-
ties. For more information on issuances of trust preferred securities, see
Note 12 to the Consolidated Financial Statements. Excluding these dividends,
minority interests related primarily to Global Asset Development's 1999 in-
vestments and Trading and Marketing's joint venture with Mobil Corporation.
For more information regarding acquisitions and new projects, see Notes 2 and
8 to the Consolidated Financial Statements.

                                       7
<PAGE>

  Duke Energy's effective income tax rate was approximately 35%, 38% and 40%
for 1999, 1998 and 1997, respectively. The decrease in 1999 from 1998 was pri-
marily due to the favorable resolution of several income tax issues and the
utilization of certain capital loss carryforwards due to the sale of the Mid-
west Pipelines. Favorable resolution of income tax issues also resulted in a
decline in the effective tax rate in 1998 from 1997. Duke Energy expects its
ongoing effective tax rate to approximate 38%.

  The sale of the Midwest Pipelines to CMS closed on March 29, 1999 and re-
sulted in a $660 million extraordinary gain, net of income tax of $404 mil-
lion. For further discussion on the sale, see Note 2 to the Consolidated Fi-
nancial Statements.

  In January 1998, TEPPCO Partners, L.P., in which Duke Energy has a 21.1%
ownership interest, redeemed certain First Mortgage Notes which resulted in
Duke Energy recording a non-cash extraordinary loss of $8 million, net of in-
come tax of $5 million, related to its share of costs of the early retirement
of debt.

  In December 1997, Duke Energy redeemed four issues of preferred stock and
commenced a tender offer to purchase a portion of six additional issues of
preferred stock. Premiums related to these redemptions were included in the
Consolidated Statements of Income and Comprehensive Income in 1997 as Divi-
dends and Premiums on Redemptions of Preferred and Preference Stock.

LIQUIDITY AND CAPITAL RESOURCES

Operating Cash Flows

  Net cash provided by operations was $2,684 million in 1999, $2,331 million
in 1998 and $2,140 million in 1997. In each of these years, the increase in
cash was primarily due to net income resulting from business expansion.

  On August 29, 1998, the FERC approved a settlement from Texas Eastern Trans-
mission Corporation (TETCO), a subsidiary of Duke Energy, which accelerates
recovery of natural gas transition costs. The order was effective October 1,
1998 and includes a rate moratorium until 2004. Net cash flows from operations
are not expected to change for the first two years after implementation; how-
ever, after the natural gas transition costs are fully recovered, cash flows
from operations are expected to decrease on an annual basis. For more informa-
tion concerning the settlement, see Note 4 to the Consolidated Financial
Statements.

  In late 1999, Duke Energy established an accrual for estimated injury and
damages claims. Duke Energy expects to fund approximately $350 million, which
is comprised of an insurance policy premium and estimated claim activity over
the next year, primarily through new debt issuances. Management believes that
the long-term cash requirements of the projected liability will not have a ma-
terial effect on Duke Energy's liquidity or cash flows. See Note 14 to the
Consolidated Financial Statements for further discussion.

Investing Cash Flows

  Capital and investment expenditures were approximately $5.9 billion in 1999
compared to approximately $2.5 billion in 1998. The increase primarily re-
sulted from business expansion for the Field Services and Global Asset Devel-
opment segments. Business expansion for Field Services included the $1.35 bil-
lion acquisition of the natural gas gathering, processing, fractionation and
NGL pipeline business from UPR along with its natural gas and NGL marketing
activities. International business expansion for Global Asset Development in-
cluded $1.7 billion for multiple acquisitions in Latin America, western Aus-
tralia and New Zealand. In 1999, Global Asset Development also began construc-
tion of multiple power generation plants in North America and continued capi-
tal expenditures on projects initiated prior to 1999. Expenditures related to
these activities were partially funded by $1.9 billion in cash proceeds from
the sale of Panhandle Eastern Pipe Line Company (PEPL), Trunkline Gas Company
(Trunkline) and additional storage related to those systems, which substan-
tially comprised the Midwest Pipelines, along with Trunkline LNG Company. For
additional information concerning acquisitions and dispositions, see Note 2 to
the Consolidated Financial Statements.

                                       8
<PAGE>

  Capital and investment expenditures in 1998 increased $472 million from $2.0
billion in 1997 primarily due to business expansion by Global Asset Develop-
ment. This included the $501 million purchase of three electric generating
stations in California and the completion of the first phase of Bridgeport En-
ergy, a power generation plant in Connecticut. Business expansion for Natural
Gas Transmission and Field Services also contributed to the increase in capi-
tal and investment expenditures. The increase was partially offset by de-
creased expenditures for Electric Operations, primarily as a result of steam
generator replacements at certain of its nuclear plants in 1997, and by the
acquisition of the remaining 50% ownership of the D/LD joint venture in June
1997.

  Projected 2000 capital and investment expenditures for Electric Operations,
including allowance for funds used during construction, are approximately $900
million. These projections include expenditures for existing plants, including
refurbishment and upgrades related to the Oconee Nuclear Station's application
for a 20-year renewal of its operating license, which is expected to receive
approval from the Nuclear Regulatory Commission in 2000.

  Projected 2000 capital and investment expenditures for Natural Gas Transmis-
sion, including allowance for funds used during construction, are approxi-
mately $600 million. These projections include expansion of the Maritimes &
Northeast Pipeline, which delivers natural gas to markets in the Canadian
Maritimes provinces and the northeastern U.S. from a supply basin offshore of
Nova Scotia, and the planned $386 million purchase of the East Tennessee Natu-
ral Gas Company, which is expected to close in the first quarter of 2000 and
is contingent upon regulatory approval. For further discussion on this pur-
chase, see Note 19 to the Consolidated Financial Statements.

  Duke Energy plans to continue to significantly grow several of its business
segments: Field Services, Global Asset Development, Trading and Marketing and
Other Energy Services. Expansion plans for Field Services include the combina-
tion of Duke Energy's gas gathering and processing businesses with Phillips
Petroleum's Gas Processing and Marketing unit to form a new midstream company.
The transaction is expected to close by first quarter 2000 and is subject to
regulatory approval. See Note 19 to the Consolidated Financial Statements for
additional information.

  Projected 2000 capital and investment expenditures for Global Asset Develop-
ment are approximately $3.6 billion. Expansion opportunities for Global Asset
Development's domestic division, Duke Energy North America, include the con-
tinuation of various greenfield projects across the U.S. Expansion plans for
Global Asset Development's international division, Duke Energy International,
include completing the purchase of Dominion Resources, Inc.'s portfolio of hy-
droelectric, natural gas and diesel power generation businesses in Argentina
and Bolivia (see Note 2 to the Consolidated Financial Statements) and the Jan-
uary 2000 completion of the tender offer for additional ownership interests in
Companhia de Geracao de Energia Eletrica Paranapanema (Paranapanema) (see Note
19 to the Consolidated Financial Statements). Duke Energy International will
also continue to focus on its regional target areas in Australia and Latin
America for further expansion opportunities and intends to implement its
strategies in Europe.

  Projected 2000 capital and investment expenditures for Trading and Marketing
are approximately $200 million. This includes expenditures related to Trading
and Marketing's new subsidiary, Duke Energy Hydrocarbons, which was formed in
the second quarter of 1999 to invest capital in limited hydrocarbon explora-
tion and production prospects through non-operating working interests. Duke
Energy's intent is to produce natural gas to partially offset the short gas
position of Duke Energy's power generation assets and to increase production
volumes that will be beneficial to Field Services, Trading and Marketing, and
Natural Gas Transmission.

  Projected 2000 capital and investment expenditures for Other Energy Servic-
es, Real Estate Operations and Other Operations are approximately $200 mil-
lion, $400 million and $250 million, respectively.

  All projected capital and investment expenditures for the above segments 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 eco-
nomic trends.

                                       9
<PAGE>

Financing Cash Flows

  Duke Energy's consolidated capital structure at December 31, 1999, including
short-term debt, was 44% debt, 6% minority interests, 7% trust preferred secu-
rities, 1% preferred stock and 42% common equity. Fixed charges coverage, cal-
culated using the Securities and Exchange Commission method, was 2.9 times,
4.7 times and 4.1 times for 1999, 1998 and 1997, respectively.

  Duke Energy's business expansion opportunities, along with dividends, debt
repayments and operating and investing requirements, are expected to be funded
by cash from operations, external financing, common stock issuances and the
proceeds from certain asset sales.

  During 1999, Duke Energy and its subsidiary, Duke Capital Corporation (Duke
Capital), issued a total of $1.9 billion of Senior Notes. The proceeds were
used for general corporate purposes, including reducing commercial paper in-
debtedness incurred in connection with acquisitions of electric power generat-
ing assets in Latin America. Global Asset Development, through its Australian
subsidiary, borrowed approximately $450 million under new financing arrange-
ments, including a combined commercial paper and medium-term note program,
bank facilities and non-recourse financing for certain western Australian as-
sets. These new Global Asset Development financings are denominated in either
Australian or New Zealand dollars. Issuances from the combined commercial pa-
per and medium-term note program and the bank facilities were used to refund
bridge financing of assets obtained during 1998 and 1999 and to fund on-going
construction expenditures for the Eastern Gas Pipeline and future projects in
Australia. Global Asset Development also assumed approximately $430 million of
non-recourse debt, denominated in Brazilian reais, in relation to the acquisi-
tion of Paranapanema (see Note 2 to the Consolidated Financial Statements) and
borrowed $380 million under a new bank facility to refinance the California
generating assets. For additional information regarding debt, see Note 10 to
the Consolidated Financial Statements.

  Also during the year, Duke Energy's and Duke Capital's business trusts,
which are treated as wholly owned subsidiaries for financial reporting purpos-
es, issued a total of $500 million of trust preferred securities. See Note 12
to the Consolidated Financial Statements for additional information on trust
preferred securities.

  Under its commercial paper facilities, Duke Energy had the ability to borrow
up to $2.8 billion at both December 31, 1999 and 1998. The commercial paper
facilities consisted of $1.25 billion for Duke Energy and $1.55 billion for
Duke Capital. At December 31, 1999, Global Asset Development also had avail-
able an approximately $500 million combined commercial paper and medium-term
note program. Duke Energy's various bank credit facilities totaled approxi-
mately $3.7 billion (including approximately $320 million related to foreign
facilities) at December 31, 1999 and $2.9 billion at December 31, 1998. At De-
cember 31, 1999, approximately $1.8 billion was outstanding under the commer-
cial paper facilities and approximately $460 million of borrowings were out-
standing under the bank credit facilities. Certain of the credit facilities
support the issuance of commercial paper, therefore, the issuance of commer-
cial paper reduces the amount available under these credit facilities (see
Note 10 to the Consolidated Financial Statements).

  As of December 31, 1999, Duke Energy and its subsidiaries had the ability to
issue up to $2.15 billion aggregate principal amount of debt and other securi-
ties under shelf registrations filed with the Securities and Exchange Commis-
sion. Effective January 7, 2000, the amount available was increased by $1.5
billion. Such securities may be issued as First and Refunding Mortgage Bonds,
Senior Notes, Subordinated Notes or Preferred Securities.

  On December 16, 1999, Duke Energy announced that it had signed definitive
agreements to combine Duke Energy's gas gathering and processing businesses
with Phillips Petroleum's Gas Processing and Marketing unit to form a new mid-
stream company. The new company will seek to arrange approximately $2.6 bil-
lion of debt financing and, upon closing of the transaction, will make a one-
time cash distribution of $1.2 billion to both Duke Energy and Phillips Petro-
leum. The new company would then offer approximately 20% of its equity to the
public in 2000 to reduce the debt resulting from the transaction. Such an of-
fering is conditional upon completion of the transaction and favorable market
conditions. For additional information, see Note 19 to the Consolidated Finan-
cial Statements.

                                      10
<PAGE>

  To maintain financial flexibility and reduce the amount of financing needed
for growth opportunities, Duke Energy's Board of Directors adopted a dividend
policy in June 1998 that targets 50% of earnings paid out in dividends on com-
mon stock. The Board of Directors intends to maintain dividends at the current
quarterly rate of $0.55 per share until the target payout ratio is reached at
which time it intends to re-evaluate its dividend policy.

  In April 1999, Duke Energy's shareholders approved an amendment to the Arti-
cles of Incorporation to increase the authorized common stock from 500 million
to 1 billion shares. This increase in authorized stock will provide Duke En-
ergy with added flexibility in effecting financings, stock splits or stock
dividends, stock plans and other transactions and arrangements involving the
use of common stock.

  Duke Energy InvestorChoice Plan, a stock dividend reinvestment plan, allows
investors to reinvest dividends in new issuances of common stock and to pur-
chase common stock directly from Duke Energy. Issuances under this plan were
not material in 1999, 1998 or 1997.

  Duke Energy used authorized but unissued shares of its common stock to meet
1999 and 1998 employee benefit plan contribution requirements. This practice
is expected to continue in 2000.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Risk Policies

  Duke Energy is exposed to market risks associated with interest rates, com-
modity prices, equity prices and foreign exchange rates. Comprehensive risk
management policies have been established by the Corporate Risk Management
Committee (CRMC) to monitor and control these market risks. The CRMC is
chaired by the Chief Financial Officer and is comprised of senior executives.
The CRMC has responsibility for oversight of interest rate risk, foreign cur-
rency risk, credit risk and energy risk management, including approval of en-
ergy financial exposure limits.

Interest Rate Risk

  Duke Energy is exposed to risk resulting from changes in interest rates as a
result of its issuance of variable-rate debt, fixed-rate debt and trust pre-
ferred securities, commercial paper and auction market preferred stock, as
well as interest rate swaps and interest rate lock agreements. Duke Energy
manages its interest rate exposure by limiting its variable-rate and fixed-
rate exposures to certain percentages of total capitalization, as set by poli-
cy, and by monitoring the effects of market changes in interest rates. Duke
Energy may also enter into financial derivative instruments including, but not
limited to, swaps, options and treasury rate agreements to manage and mitigate
interest rate risk exposure. See Notes 1, 7, 10, 12 and 13 to the Consolidated
Financial Statements for additional information.

  Based on a sensitivity analysis as of December 31, 1999, it was estimated
that if market interest rates average 1% higher (lower) in 2000 than in 1999,
earnings before income taxes would decrease (increase) by approximately $24
million. Comparatively, based on a sensitivity analysis as of December 31,
1998, had interest rates averaged 1% higher (lower) in 1999 than in 1998, it
was estimated that earnings before income taxes would have decreased (in-
creased) by approximately $23 million. These amounts were determined by con-
sidering the impact of the hypothetical interest rates on the variable-rate
securities outstanding as of December 31, 1999 and 1998. In the event of a
significant change in interest rates, management would likely take actions to
manage its exposure to the change. However, due to the uncertainty of the spe-
cific actions that would be taken and their possible effects, the sensitivity
analysis assumes no changes in Duke Energy's financial structure.

Commodity Price Risk

  Duke Energy, substantially through its subsidiaries, is exposed to the im-
pact of market fluctuations in the price of natural gas, electricity and natu-
ral gas liquid products marketed and purchased. Duke Energy employs

                                      11
<PAGE>

established policies and procedures to manage its risks associated with these
market fluctuations using various commodity derivatives, including forward
contracts, futures, swaps and options. Market risks associated with commodity
derivatives held for purposes other than trading were not material at December
31, 1999 and 1998. See Notes 1 and 7 to the Consolidated Financial Statements
for additional information.

  The risk in the commodity trading portfolio is measured on a daily basis
utilizing a Value-at-Risk model to determine the maximum potential one-day fa-
vorable or unfavorable Daily Earnings at Risk (DER). The DER is monitored
daily in comparison to established thresholds. Other measures are also uti-
lized to monitor the risk in the commodity trading portfolio on a monthly and
annual basis.

  The DER computations are based on a historical simulation, which utilizes
price movements over a specified period to simulate forward price curves in
the energy markets to estimate the favorable or unfavorable impact of one-
day's price movement on the existing portfolio. The historical simulation em-
phasizes the most recent market activity, which is considered the most rele-
vant predictor of immediate future market movements for natural gas, electric-
ity and petroleum products. The DER computations utilize several key assump-
tions, including a 95% confidence level for the resultant price movement and
the holding period specified for the calculation. Duke Energy's DER calcula-
tion includes commodity derivative instruments held for trading purposes. The
estimated potential one-day favorable or unfavorable impact on earnings before
income taxes related to commodity derivatives held for trading purposes at De-
cember 31, 1999 and 1998 was approximately $10 million. The average estimated
potential one-day favorable or unfavorable impact on earnings before income
taxes related to commodity derivatives held for trading purposes was approxi-
mately $11 million and $5 million during 1999 and 1998, respectively. The in-
crease in average 1999 amounts compared to 1998 is a result of an increase in
the authorized energy financial exposure limit in 1998, which was approved by
the CRMC. Changes in markets inconsistent with historical trends could cause
actual results to exceed predicted limits.

  Subsidiaries of Duke Energy are also exposed to market fluctuations in the
prices of NGLs related to their ongoing gathering and processing operating ac-
tivities. Duke Energy closely monitors the risks associated with NGL price
changes on its future operations, and where appropriate, uses crude oil and
natural gas commodity instruments to hedge NGL prices. Based on a sensitivity
analysis as of December 31, 1999, it was estimated that if NGL prices average
one cent per gallon less in 2000, earnings before income taxes would decrease
by approximately $6 million, after considering the effect of Duke Energy's
commodity hedge positions. Comparatively, based on sensitivity analysis as of
December 31, 1998, if NGL prices would have averaged one cent per gallon less
in 1999, it was estimated that earnings before income taxes would have de-
creased by approximately $8 million.

Equity Price Risk

  Duke Energy maintains trust funds, as required by the Nuclear Regulatory
Commission, to fund certain costs of nuclear decommissioning. (See Note 11 to
the Consolidated Financial Statements.) As of December 31, 1999 and 1998,
these funds were invested primarily in domestic and international equity secu-
rities, fixed-rate, fixed-income securities and cash and cash equivalents.
Management believes that its exposure to fluctuations in equity prices or in-
terest rates will not materially affect consolidated results of operations.
See further discussion in the Current Issues, Nuclear Decommissioning Costs
section of Management's Discussion and Analysis.

Foreign Operations Risk

  Duke Energy is exposed to foreign currency risk, sovereign risk and other
foreign operations risk that arise from investments in international affili-
ates and businesses owned and operated in foreign countries. To mitigate risks
associated with foreign currency fluctuations, when possible, contracts are
denominated in or indexed to the U.S. dollar or may be hedged through debt de-
nominated in the foreign currency. Duke Energy also uses foreign currency de-
rivatives, where possible, to manage its risk related to foreign currency
fluctuations. To monitor its currency exchange rate risks, Duke Energy uses
sensitivity analysis, which measures the impact of a devaluation of the for-
eign currencies to which it has exposure.

                                      12
<PAGE>

  At December 31, 1999, Duke Energy's primary foreign currency exchange rate
exposures were the Brazilian real, the Australian dollar and the Canadian dol-
lar. Exposures to other foreign currencies were not material. Based on the
sensitivity analysis at December 31, 1999, a 10% devaluation in the currency
exchange rates in Brazil would reduce Duke Energy's financial position by ap-
proximately $65 million and would not significantly affect Duke Energy's con-
solidated results of operations or cash flows over the next twelve months.
Based on the sensitivity analysis at December 31, 1999, a 10% devaluation in
other foreign currencies were insignificant to Duke Energy's consolidated re-
sults of operations, financial position or cash flows. Exposures to foreign
currency risks were not material to consolidated results of operations, finan-
cial position or cash flows during 1998.

CURRENT ISSUES

Electric Competition. Wholesale Competition. The Energy Policy Act of 1992
(EPACT) and the FERC's subsequent rulemaking activities have established the
regulatory framework to open the wholesale energy market to competition. EPACT
amended provisions of the Public Utility Holding Company Act of 1935 and the
Federal Power Act to remove certain barriers to a competitive wholesale market.
EPACT permits utilities to participate in the development of independent
electric generating plants for sales to wholesale customers, and also permits
the FERC to order transmission access for third parties to transmission
facilities owned by another entity. It does not, however, permit the FERC to
issue an order requiring transmission access to retail customers. The FERC,
responsible in large measure for implementation of EPACT, has moved vigorously
to implement its mandate, interpreting the statute broadly and issuing orders
for third-party transmission service and a number of rules of general
applicability, including Orders 888 and 889.

  Open-access transmission for wholesale customers as defined by the FERC's
final rules provides energy suppliers, including Duke Energy, with opportuni-
ties to sell and deliver capacity and energy at market-based prices. Duke En-
ergy and several of its non-regulated subsidiaries have been granted authority
by the FERC to act as power marketers. Electric Operations obtained from the
FERC open-access rule the rights to sell capacity and energy at market-based
rates from its own assets. Open access provides another supply option through
which Electric Operations can purchase at attractive rates a portion of capac-
ity and energy requirements resulting in lower overall costs to customers.
Open access also provides Electric Operations' existing wholesale customers
with competitive opportunities to seek other suppliers for their capacity and
energy requirements.

  On December 20, 1999, the FERC issued its Order No. 2000 regarding Regional
Transmission Organizations (RTOs). In its order, the FERC stressed the volun-
tary nature of RTO participation by utilities and sets minimum characteristics
and functions that must be met by utilities that participate in an RTO. The
order provides for an open, flexible structure for RTOs to meet the needs of
the market, and provides for the possibility of incentive ratemaking and other
benefits for utilities that participate in an RTO.

  The characteristics for acceptable RTOs include independence from market
participants, operational control over a region of sufficient scope to support
efficient and nondiscriminatory markets, and exclusive authority to maintain
short-term reliability. The order requires each utility subject to the juris-
diction of the FERC and not already in a FERC-approved RTO to make a filing by
October 15, 2000, that either proposes participation in an RTO that will be in
operation no later than December 15, 2001, or provides a status report on the
utility's progress towards participation in an RTO.

  Because Order No. 2000 has just been issued, and may be revised in certain
respects, management cannot estimate its effect on future consolidated results
of operations or financial position.

  Retail Competition. Currently, Electric Operations operates as a vertically
integrated, investor-owned utility with exclusive rights to supply electricity
in a franchised service territory--a 20,000-square-mile service territory in
the Carolinas. In its retail business, the NCUC and the PSCSC regulate Elec-
tric Operations' service and rates.

                                      13
<PAGE>

  Electric industry restructuring is being addressed in all 50 states and in
the District of Columbia. These restructurings will likely impact all entities
owning electric generating assets. The NCUC and the PSCSC are studying the
merits of restructuring the electric utility industry in the Carolinas. During
1999, three electric utility restructuring bills were filed in South Caroli-
na's House of Representatives. All three bills would introduce competition
while allowing utilities to recover stranded costs, and have transition and
phase-in periods ranging from five to six years. A task force formed by the
South Carolina Senate is also examining issues related to deregulation of the
state's electric utility business. This task force will prepare a report for
review, discussion and possible legislative action by the state's Senate Judi-
ciary Committee and General Assembly as a whole.

  In May 1997, North Carolina passed a bill that established a study commis-
sion to examine whether competition should be implemented in the state. Mem-
bers of this commission include legislators, customers, utilities and a member
of an environmental group. The study commission expects to issue its report to
the General Assembly in 2000.

  One of the significant issues the study commission must address is the ap-
proximately $6 billion of debt issued by the two North Carolina municipal
agencies (North Carolina Municipal Power Agency Number 1 and the North Caro-
lina Eastern Municipal Agency). This debt is related to their joint ownership
of generation assets with Duke Energy and Carolina Power & Light (CP&L). The
municipal power agencies' member municipalities currently have electric rates
higher than either Duke Energy or CP&L and are facing significant rate in-
creases in the future to service the debt. As a result, the power agencies'
debt and electric rates are economic development issues for the 51 power
agency municipalities and, by extension, for the state as a whole.

  On October 26 and 27, 1999, at the request of the study commission, four
proposals were submitted to resolve the municipal debt issue, one of which was
a joint Duke Energy-CP&L proposal. The study commission expects to include a
recommendation to resolve the municipal debt issue in its report to the Gen-
eral Assembly in 2000.

  More than a dozen bills on electric restructuring have been introduced in
the last session of Congress. On October 27, 1999 the U.S. House Commerce Sub-
committee on Energy and Power voted to move H.R. 2944, "The Electricity Compe-
tition and Reliability Act," to the full Commerce Committee. The primary re-
structuring issues addressed include repeal of major provisions of the Public
Utility Holding Company Act and the Public Utility Regulatory Policies Act,
reliability, transmission, nuclear decommissioning and state authority.

  Currently, the electric utility industry is predominantly regulated on a ba-
sis designed to recover the cost of providing electric power to customers. If
cost-based regulation were to be discontinued in the industry for any reason,
including competitive pressure on the cost-based prices of electricity, prof-
its could be reduced and electric utilities might be required to reduce their
asset balances to reflect a market basis less than cost. Discontinuance of
cost-based regulation would also require affected utilities to write off their
associated regulatory assets. Duke Energy's regulatory assets are included in
the Consolidated Balance Sheets. The portion of these regulatory assets re-
lated to Electric Operations is approximately $1.4 billion, including primar-
ily purchased capacity costs, debt expense and deferred taxes related to regu-
latory assets. Duke Energy is recovering substantially all of these regulatory
assets through its current wholesale and retail electric rates and would at-
tempt to continue to recover these assets during a transition to competition.
In addition, Duke Energy would seek to recover the costs of its electric gen-
erating facilities in excess of the market price of power at the time of tran-
sition.

  Duke Energy supports a properly managed and orderly transition to competi-
tive generation and retail services in the electric industry. However, trans-
forming the current regulated industry into efficient, competitive generation
and retail electric markets is a complex undertaking, which will require a
carefully considered transition to a restructured electric industry. The key
to effective retail competition is fairness among customers, service providers
and investors. Duke Energy intends to continue to work with customers, legis-
lators and regulators to address all the important issues. Management cur-
rently cannot predict the impact, if any, of these competitive forces on fu-
ture consolidated results of operations or financial position.

                                      14
<PAGE>

Natural Gas Competition. Wholesale Competition. On July 29, 1998, the FERC
issued a Notice of Proposed Rulemaking (NOPR) on short-term natural gas
transportation services, which proposed an integrated package of revisions to
its regulations governing interstate natural gas pipelines. "Short term" has
been defined in the NOPR as all transactions of less than one year. Under the
proposed approach, cost-based regulation would be eliminated for short-term
transportation and replaced by regulatory policies intended to maximize
competition in the short-term transportation market, mitigate the ability of
companies to exercise residual monopoly power and provide opportunities for
greater flexibility in providing pipeline services. The proposed changes include
initiatives to revise pipeline scheduling procedures, receipt and delivery point
policies and penalty policies, and require pipelines to auction short-term
capacity. Other proposed changes would improve the FERC's reporting
requirements, permit pipelines to negotiate rates and terms of services, and
revise certain rate and certificate policies that affect competition.

  In conjunction with the NOPR, the FERC also issued a Notice of Inquiry (NOI)
on its pricing policies in the existing long-term market and pricing policies
for new capacity. The FERC seeks comments on whether its policies are biased
toward either short-term or long-term service, provide accurate price signals
and the right incentives for pipelines to provide optimal transportation serv-
ices and construct facilities that meet future demand and do not result in
over building and excess capacity. Comments on the NOPR and NOI were due in
April 1999. On September 15, 1999, the FERC issued a new policy statement on
certifying new interstate capacity in response to comments filed on the cer-
tificate issues raised in the NOPR.

  Because the ultimate resolution of these issues is unknown, management can-
not estimate the effects of these matters on future consolidated results of
operations or financial position.

  Retail Competition. Changes in regulation to allow retail competition could
affect Duke Energy's natural gas transportation contracts with local gas dis-
tribution companies. Natural gas retail deregulation is in the very early
stages of development and management cannot estimate the effects of this mat-
ter on future consolidated results of operations or financial position.

  Nuclear Decommissioning Costs. Duke Energy's estimated site-specific nuclear
decommissioning costs total approximately $1.9 billion stated in 1999 dollars
based on decommissioning studies completed in 1999. This estimate includes the
cost of decommissioning plant components not subject to radioactive contamina-
tion. Duke Energy contributes to an external decommissioning trust fund and
maintains an internal reserve to fund these costs.

  The balance of the external funds as of December 31, 1999 and 1998 was $703
million and $580 million, respectively. The balance of the internal reserve as
of December 31, 1999 and 1998 was $223 million and $217 million, respectively,
and is reflected in the Consolidated Balance Sheets as Accumulated Deprecia-
tion and Amortization.

  Both the NCUC and the PSCSC have granted Duke Energy recovery of estimated
decommissioning costs through retail rates over the expected remaining service
periods of its nuclear plants. Management believes that funding of the
decommissioning costs will not have a material adverse effect on consolidated
results of operations or financial position. See Note 11 to the Consolidated
Financial Statements for additional information.

  As of December 31, 1999 and 1998, the external decommissioning trust fund
was invested primarily in domestic and international equity securities, fixed-
rate, fixed-income securities and cash and cash equivalents. Maintaining a
portfolio that includes long-term equity investments maximizes the returns to
be utilized to fund nuclear decommissioning, which in the long-term will bet-
ter correlate to inflationary increases in decommissioning costs. However, the
equity securities included in Duke Energy's portfolio are exposed to price
fluctuations in equity markets, and the fixed-rate, fixed-income securities
are exposed to changes in interest rates.

  Duke Energy actively monitors its portfolio by benchmarking the performance
of its investments against certain indexes and by maintaining, and periodi-
cally reviewing, established target allocation percentages of the

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assets in its trusts. Because the accounting for nuclear decommissioning rec-
ognizes that costs are recovered through the Electric Operations segment's
rates, fluctuations in equity prices or interest rates do not affect consoli-
dated results of operations.

  Environmental. Duke Energy is subject to international, federal, state and
local regulations regarding air and water quality, hazardous and solid waste
disposal and other environmental matters.

  Manufactured Gas Plants and Superfund Sites. Duke Energy was an operator of
manufactured gas plants until the early 1950s and has entered into a coopera-
tive effort with the State of North Carolina and other owners of certain for-
mer manufactured gas plant sites to investigate and, where necessary, remedi-
ate these contaminated sites. The State of South Carolina has expressed inter-
est in entering into a similar arrangement. Duke Energy is considered by regu-
lators to be a potentially responsible party and may be subject to future lia-
bility at seven federal Superfund sites and two state Superfund sites. While
the cost of remediation of the remaining sites may be substantial, Duke Energy
will share in any liability associated with remediation of contamination at
such sites with other potentially responsible parties. Management believes
that resolution of these matters will not have a material adverse effect on
consolidated results of operations or financial position.

  PCB (Polychlorinated Biphenyl) Assessment and Clean-up Programs. In June
1999, the Environmental Protection Agency (EPA) certified that TETCO, a wholly
owned subsidiary of Duke Energy, had completed clean up of PCB contaminated
sites under conditions stipulated by a U.S. Consent Decree in 1989. TETCO is
required to continue groundwater monitoring on a number of sites for at least
the next two years. The estimated cost of such monitoring is not material.

  Under terms of the agreement with CMS discussed in Note 2 to the Consoli-
dated Financial Statements, Duke Energy is obligated to complete clean-up of
previously identified contamination at certain agreed-upon sites on the PEPL
and Trunkline systems. These clean-up programs are expected to continue until
2001. The contamination resulted from the past use of lubricants containing
PCBs and the prior use of wastewater collection facilities and other on-site
disposal areas. Soil and sediment testing, to date, has detected no signifi-
cant off-site contamination. Duke Energy has communicated with the EPA and ap-
propriate state regulatory agencies on these matters.

  At December 31, 1999 and 1998, remaining estimated clean-up costs on the
TETCO, PEPL and Trunkline systems were accrued and included in the Consoli-
dated Balance Sheets as Other Current Liabilities and Environmental Clean-up
Liabilities. These cost estimates represent gross clean-up costs expected to
be incurred, have not been discounted or reduced by customer recoveries and
generally do not include fines, penalties or third-party claims. Costs ex-
pected to be recovered from customers have been deferred and are included in
the Consolidated Balance Sheets as Environmental Clean-up Costs.

  The federal and state clean-up programs are not expected to interrupt or di-
minish Duke Energy's ability to deliver natural gas to customers. Based on
Duke Energy's experience to date and costs incurred for clean-up operations,
management believes the resolution of matters relating to the environmental
issues discussed above will not have a material adverse effect on consolidated
results of operations or financial position.

  Air Quality Control. The Clean Air Act Amendments of 1990 require a two-
phase reduction by electric utilities in aggregate annual emissions of sulfur
dioxide and nitrogen oxide by 2000. Duke Energy currently meets all require-
ments of Phase I. Duke Energy supports the national objective of protecting
air quality in the most cost-effective manner, and has already reduced
emissions by operating plants efficiently, using nuclear and hydroelectric
generation and implementing various compliance strategies. To meet Phase II
requirements by 2000, Duke Energy's current strategy includes using low-sulfur
coal, purchasing sulfur dioxide emission allowances and installing low-nitro-
gen oxide burners and emission monitoring equipment. Construction activities
needed to comply with Phase II requirements will be completed in the spring of
2000, allowing compliance with year 2000 Phase II requirements. Additional an-
nual operating expenses of approximately $25 million for low-sulfur coal pre-
miums, emission allowance purchases and other compliance activities will occur
after 2000. This

                                      16
<PAGE>

strategy is contingent upon developments in future markets for emission allow-
ances, low-sulfur coal, future regulatory and legislative actions and advances
in clean air technologies.

  In October 1998, the EPA issued a final ruling on regional ozone control
which requires revised State Implementation Plans for 22 eastern states and
the District of Columbia. This EPA ruling is being challenged in court by var-
ious states, industry and other interests, including the states of North Caro-
lina and South Carolina and Duke Energy. In May 1999, the court ordered that
no state need submit a plan "pending further order of the court." The EPA has
undertaken other ozone-related actions having virtually identical goals. These
actions have likewise been challenged by the same or similar parties. The res-
olution of the October 1998 action is expected to resolve these other ozone-
related actions as well. The North Carolina Environmental Management Commis-
sion is considering several competing proposals to reduce utility emissions of
nitrogen oxide. A proposed rule is anticipated in March 2000 with a final rule
in September 2000. Depending on the resolution of these matters, costs to Duke
Energy may range from approximately $100 million to $600 million for addi-
tional capital improvements.

  In October 1999, the EPA sent Duke Energy a request seeking information on
Duke Power's repair and maintenance of its coal-fired plants since 1978. This
is part of the EPA's New Source Reviews (NSR) enforcement initiative, in which
the EPA claims that utilities and others have committed widespread violations
of the Clean Air Act permitting requirements for the past quarter century. In
November 1999, the EPA filed suit against seven utilities and issued an admin-
istrative order to Tennessee Valley Authority alleging numerous NSR permitting
violations. The EPA's allegations run counter to previous EPA guidance regard-
ing the applicability of the NSR permitting requirements. Duke Power, along
with several other utilities, has routinely undertaken the type of repair, re-
placement, and maintenance projects that the EPA now claims are illegal. A
suit has not been instituted against Duke Energy, and while it is too early to
predict any consequences, Duke Energy believes that all of its electric gener-
ation units are properly permitted and have been properly maintained. Because
this matter is in its most preliminary stage with respect to Duke Energy, man-
agement cannot estimate the effects of these matters on future consolidated
results of operations or financial position.

  In December 1997, the United Nations held negotiations in Kyoto, Japan to
determine how to minimize global warming caused by, among other things, carbon
dioxide emissions from fossil-fired generating facilities and methane from
natural gas operations. Further negotiations in November 1998 resulted in a
work plan to complete the operational details of the Kyoto agreement by late
2000. If this initiative is adopted in its current form, it could have far
reaching implications to Duke Energy and the entire energy industry. Because
this matter is in the early stages of discussion, management cannot estimate
the effects on future consolidated results of operations or financial posi-
tion.

  Litigation and Contingencies. For information concerning litigation and
other commitments and contingencies, see Note 14 to the Consolidated Financial
Statements.

  Year 2000 Readiness Program. Duke Energy did not experience any disruption
to its operations resulting from the transition to the year 2000. Duke Energy
completed its year 2000 readiness program at all of its business units in No-
vember 1999. Systems will continue to be monitored throughout the year, with
special attention given to the leap year transition. The total cost of the
program, including internal labor as well as incremental costs such as con-
sulting and contract costs, was approximately $58 million. These costs exclude
replacement systems that, in addition to being Year 2000 ready, provided sig-
nificantly enhanced capabilities which benefit operations in future periods.

  New Accounting Standard. In September 1998, Statement of Financial Account-
ing Standard (SFAS) No. 133, "Accounting for Derivative Instruments and Hedg-
ing Activities," was issued. Duke Energy is required to adopt this standard by
January 1, 2001. SFAS No. 133 requires that all derivatives be recognized as
either assets or liabilities and measured at fair value, and it defines the
accounting for changes in the fair value of the derivatives depending on the
intended use of the derivative. Duke Energy is currently reviewing the ex-
pected impact of SFAS No. 133 on consolidated results of operations and finan-
cial position.

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<PAGE>

  Subsequent Events. On December 16, 1999, Duke Energy announced that it had
signed definitive agreements to combine Duke Energy's gas gathering and
processing businesses with Phillips Petroleum's Gas Processing and Marketing
unit to form a new midstream company. Under the terms of the agreements, the
new company will seek to arrange approximately $2.6 billion of debt financing
and, upon closing of the transaction, will make a one-time cash distribution
of $1.2 billion to both Duke Energy and Phillips Petroleum. At closing, Duke
Energy will own about 70% of the new company and Phillips Petroleum will own
about 30%. The new company would then offer approximately 20% of its equity to
the public in 2000 to reduce the debt resulting from the transaction. Such an
offering is conditional upon completion of the transaction and favorable mar-
ket conditions.

  On January 4, 2000, Duke Energy announced that it had entered into a defini-
tive agreement to purchase, for $386 million, 100% of the stock of El Paso En-
ergy Corporation's wholly owned subsidiary, East Tennessee Natural Gas Compa-
ny, a 1,100-mile pipeline that crosses Duke Energy's TETCO pipeline and serves
the southeastern region of the U.S.

  Both transactions are subject to regulatory approval and are expected to
close in the first quarter of 2000.

  In January 2000, Duke Energy completed a tender offer to the minority share-
holders of Paranapanema and successfully acquired an additional 51% economic
interest in the company for approximately $280 million. This increased Duke
Energy's economic ownership from approximately 44% to approximately 95%.

  Forward-Looking Statements. From time to time, Duke Energy's reports, fil-
ings and other public announcements may include assumptions, projections, ex-
pectations, intentions or beliefs about future events. These statements are
intended as "forward-looking statements" under the Private Securities Litiga-
tion Reform Act of 1995. Duke Energy cautions that assumptions, projections,
expectations, intentions or beliefs about future events may and often do vary
from actual results and the differences between assumptions, projections, ex-
pectations, intentions or beliefs and actual results can be material. Accord-
ingly, there can be no assurance that actual results will not differ materi-
ally from those expressed or implied by the forward-looking statements. Some
of the factors that could cause actual achievements and events to differ mate-
rially from those expressed or implied in such forward-looking statements in-
clude state, federal and foreign legislative and regulatory initiatives that
affect cost and investment recovery, have an impact on rate structures and af-
fect the speed and degree to which competition enters the electric and natural
gas industries; industrial, commercial and residential growth in the service
territories of Duke Energy and its subsidiaries; the weather and other natural
phenomena; the timing and extent of changes in commodity prices, interest
rates and foreign currency exchange rates; changes in environmental and other
laws and regulations to which Duke Energy and its subsidiaries are subject or
other external factors over which Duke Energy has no control; the results of
financing efforts, including Duke Energy's ability to obtain financing on fa-
vorable terms, which can be affected by Duke Energy's credit rating and gen-
eral economic conditions; growth in opportunities for Duke Energy's business
units; and the effect of accounting policies issued periodically by accounting
standard-setting bodies.

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