Filed Pursuant to Rule 424(b)(5)
Registration No. 333-103515
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MARCH 13, 2003)
[DUKE ENERGY LOGO]
$700,000,000
1 3/4% CONVERTIBLE SENIOR NOTES DUE 2023
---------------------
The Notes will bear interest at the rate of 1 3/4% per annum. Interest on
the Notes is payable on May 15 and November 15 of each year, beginning on
November 15, 2003. Beginning with the six-month interest period commencing on
May 15, 2007 we will pay contingent interest during a six-month interest period
if the average trading price of a Note is above a specified level as described
in this prospectus supplement.
The Notes are convertible during certain periods by holders into shares of
our common stock initially at a conversion rate of 42.3908 shares of common
stock per $1,000 principal amount of Notes (subject to adjustment in certain
events) under the following circumstances: (1) if the price of our common stock
issuable upon conversion reaches specified thresholds described in this
prospectus supplement, (2) if we call the Notes for redemption, (3) upon the
occurrence of specified corporate transactions described in this prospectus
supplement, or (4) if the credit ratings assigned to the Notes decline below the
levels specified in this prospectus supplement.
The Notes will mature on May 15, 2023, unless earlier converted, redeemed
or purchased by us. We may redeem some or all of the Notes at any time on or
after May 20, 2007. The redemption prices are described in this prospectus
supplement.
The Notes will be our direct, unsecured and unsubordinated obligations and
will rank equal in priority with all of our existing and future unsecured and
unsubordinated indebtedness and senior in right of payment to all of our
existing and future subordinated indebtedness. Holders will have the right to
require us to purchase all or a portion of their Notes in cash at a purchase
price equal to 100% of the principal amount of the Notes plus accrued and unpaid
interest including contingent interest, if any, on May 15, 2007, May 15, 2012
and May 15, 2017 or upon a fundamental change as described in this prospectus
supplement.
We have also granted the underwriters named in this prospectus supplement
an option to purchase within 13 days of the closing of the initial offering up
to an additional $70,000,000 aggregate principal amount of Notes to cover
overallotments, if any.
Our common stock is listed on the New York Stock Exchange under the symbol
"DUK." The last reported sale price of our common stock on May 1, 2003, was
$16.85 per share.
The Notes will be treated as contingent payment debt instruments that will
be subject to special United States federal income tax rules. For a discussion
of the special tax rules governing contingent payment debt instruments, see
"Certain United States Federal Income Tax Considerations."
---------------------
INVESTING IN THE NOTES INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE S-13 OF THIS PROSPECTUS SUPPLEMENT AND ON PAGE 4 OF THE ACCOMPANYING
PROSPECTUS.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus supplement or the accompanying prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
---------------------
PER NOTE TOTAL
-------- ------------
Public offering price(1).................................... 100.00% $700,000,000
Underwriting discount....................................... 2.25% $ 15,750,000
Proceeds to Duke Energy (before expenses)(1)................ 97.75% $684,250,000
---------------
(1) Plus accrued interest from May 7, 2003, if settlement occurs after that
date.
We expect the Notes will be ready for delivery in book-entry form through
the facilities of The Depository Trust Company on or about May 7, 2003.
---------------------
Joint Book-Running Managers
CITIGROUP JPMORGAN MORGAN STANLEY WACHOVIA SECURITIES
---------------------
BANC ONE CAPITAL MARKETS, INC. CREDIT SUISSE FIRST BOSTON
GOLDMAN, SACHS & CO. UBS WARBURG
ABN AMRO ROTHSCHILD LLC CIBC WORLD MARKETS DRESDNER KLEINWORT WASSERSTEIN
SCOTIA CAPITAL TD SECURITIES
MAY 1, 2003
You should rely only on the information contained in or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone to provide you with information that is different. We are
not making an offer to sell these securities in any jurisdiction where the offer
is not permitted. You should not assume that the information provided by or
incorporated by reference in this prospectus supplement or the accompanying
prospectus is accurate as of any date other than the date of the document
containing the information.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
----
About this Prospectus Supplement............................ S-1
Forward-Looking Statements.................................. S-1
Prospectus Supplement Summary............................... S-3
Risk Factors................................................ S-13
Ratio of Earnings to Fixed Charges.......................... S-15
Use of Proceeds............................................. S-15
Price Range of Common Stock................................. S-16
Dividends................................................... S-16
Capitalization.............................................. S-17
Description of the Notes.................................... S-18
Book-Entry System........................................... S-30
Certain United States Federal Income Tax Considerations..... S-33
Underwriting................................................ S-39
Legal Matters............................................... S-42
Experts..................................................... S-42
Where You Can Find More Information......................... S-43
PROSPECTUS
PAGE
----
About this Prospectus....................................... 1
Duke Energy Corporation..................................... 2
Risk Factors................................................ 4
Rate of Earnings to Fixed Charges........................... 16
Use of Proceeds............................................. 16
The Trusts.................................................. 16
Description of the Senior Notes............................. 17
Description of the Junior Subordinated Notes................ 24
Description of the First and Refunding Mortgage Bonds....... 31
Description of the Common Stock............................. 35
Description of the Stock Purchase Contracts and the Stock
Purchase Units............................................ 38
Description of the Preferred Securities..................... 38
Description of the Guarantees............................... 39
Plan of Distribution........................................ 41
Experts..................................................... 42
Validity of the Securities.................................. 42
Where You Can Find More Information......................... 43
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ABOUT THIS PROSPECTUS SUPPLEMENT
This document is in two parts. The first part is this prospectus
supplement, which describes the specific terms of this offering. The second
part, the accompanying prospectus, gives more general information, some of which
may not apply to this offering.
If the description of the offering varies between this prospectus
supplement and the accompanying prospectus, you should rely on the information
contained in or incorporated by reference into this prospectus supplement.
Unless we have indicated otherwise, or the context otherwise requires,
references in this prospectus supplement and the accompanying prospectus to
"Duke Energy," "we," "us" and "our" or similar terms are to Duke Energy
Corporation and its subsidiaries.
FORWARD-LOOKING STATEMENTS
This prospectus supplement and the accompanying prospectus contain or
incorporate by reference statements that do not directly or exclusively relate
to historical facts. Such statements are "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. You can
typically identify forward-looking statements by the use of forward-looking
words, such as "may," "will," "could," "project," "believe," "anticipate,"
"expect," "estimate," "continue," "potential," "plan," "forecast" and other
similar words. Those statements represent our intentions, plans, expectations,
assumptions and beliefs about future events and are subject to risks,
uncertainties and other factors. Many of those factors are outside our control
and could cause actual results to differ materially from the results expressed
or implied by those forward-looking statements. Those factors include:
- state, federal and foreign legislative and regulatory initiatives that
affect cost and investment recovery, have an impact on rate structures,
and affect the speed at and degree to which competition enters the
electric and natural gas industries;
- the outcomes of litigation and regulatory investigations, proceedings or
inquiries;
- industrial, commercial and residential growth in our service territories;
- the weather and other natural phenomena;
- the timing and extent of changes in commodity prices, interest rates and
foreign currency exchange rates;
- general economic conditions, including any potential effects arising from
terrorist attacks, the situation in Iraq and any consequential
hostilities or other hostilities;
- changes in environmental and other laws and regulations to which we and
our subsidiaries are subject or other external factors over which we have
no control;
- the results of financing efforts, including our ability to obtain
financing on favorable terms, which can be affected by various factors,
including our credit ratings and general economic conditions;
- lack of improvement or further declines in the market prices of equity
securities and resultant cash funding requirements for our defined
benefit pension plans;
- the level of creditworthiness of counterparties to our transactions;
- the amount of collateral required to be posted from time to time in our
transactions;
- growth in opportunities for our business units, including the timing and
success of efforts to develop domestic and international power, pipeline,
gathering, processing and other infrastructure projects;
- the performance of electric generation, pipeline and gas processing
facilities;
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- the extent of success in connecting natural gas supplies to gathering and
processing systems and in connecting and expanding gas and electric
markets; and
- the effect of accounting pronouncements issued periodically by accounting
standard-setting bodies.
In light of these risks, uncertainties and assumptions, the events
described in the forward-looking statements might not occur or might occur to a
different extent or at a different time than we have described. We undertake no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.
S-2
PROSPECTUS SUPPLEMENT SUMMARY
The following is qualified in its entirety by, and should be read together
with, the more detailed information, including "Risk Factors," in this
prospectus supplement and the accompanying prospectus, and the financial
statements incorporated by reference in this prospectus supplement and the
accompanying prospectus. Unless otherwise indicated, all of the following
assumes that the underwriters have not exercised their option to purchase
additional Notes.
DUKE ENERGY CORPORATION
OVERVIEW
Duke Energy is an integrated provider of energy and energy services that
offers physical delivery and management of both electricity and natural gas
throughout the United States and abroad. Duke Energy, together with its
subsidiaries, provides these and other services through seven business segments:
- Franchised Electric
- Natural Gas Transmission
- Field Services
- Duke Energy North America
- International Energy
- Other Energy Services
- Duke Ventures
FRANCHISED ELECTRIC generates, transmits, distributes and sells electricity
in central and western North Carolina and western South Carolina. It conducts
operations primarily through Duke Power and Nantahala Power and Light. These
electric operations are subject to the rules and regulations of the Federal
Energy Regulatory Commission, or FERC, the North Carolina Utilities Commission,
or NCUC, and the Public Service Commission of South Carolina, or PSCSC.
NATURAL GAS TRANSMISSION provides transportation and storage of natural gas
for customers throughout the east coast and southern portion of the United
States and in Canada. Natural Gas Transmission also provides distribution
service to retail customers in Ontario and Western Canada and gas gathering and
processing services to customers in Western Canada. Natural Gas Transmission
does business primarily through Duke Energy Gas Transmission Corporation. Duke
Energy acquired Westcoast Energy Inc. on March 14, 2002. Duke Energy Gas
Transmission's natural gas transmission and storage operations in the United
States are subject to the FERC's and the Texas Railroad Commission's rules and
regulations, while natural gas gathering, processing, transmission, distribution
and storage operations in Canada are subject to the rules and regulations of the
National Energy Board, the Ontario Energy Board and the British Columbia
Utilities Commission.
FIELD SERVICES gathers, compresses, treats, processes, transports, trades
and markets, and stores natural gas; and produces, transports, markets and
stores natural gas liquids, or NGLs. It conducts operations primarily through
Duke Energy Field Services, LLC, which is approximately 30% owned by
ConocoPhillips and approximately 70% owned by Duke Energy. Field Services
gathers natural gas from production wellheads in Western Canada and 11
contiguous states in the United States. Those systems serve major natural
gas-producing regions in the Western Canadian Sedimentary Basin, Rocky Mountain,
Permian Basin, Mid-Continent and East Texas-Austin Chalk-North Louisiana areas,
as well as onshore and offshore Gulf Coast areas.
DUKE ENERGY NORTH AMERICA develops, operates and manages merchant power
generation facilities and engages in commodity sales and services related to
natural gas and electric power. Duke Energy North America conducts business
throughout the United States and Canada through Duke Energy North
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America, LLC and Duke Energy Trading and Marketing, LLC. Duke Energy Trading and
Marketing is approximately 40% owned by ExxonMobil Corporation and approximately
60% owned by Duke Energy. Prior to April 1, 2002, the Duke Energy North America
business segment was combined with Duke Energy Merchants Holdings, LLC to form a
segment called North American Wholesale Energy. In 2002, management combined
Duke Energy Merchants Holdings with the Other Energy Services segment. Previous
periods have been reclassified to conform to the current presentation. In April
2003, Duke Energy announced that it would discontinue proprietary trading at
Duke Energy North America.
INTERNATIONAL ENERGY develops, operates and manages natural gas
transportation and power generation facilities, and engages in sales and
marketing of natural gas and electric power outside the United States and
Canada. It conducts operations primarily through Duke Energy International, LLC
and its activities target power generation in Latin America, power generation
and natural gas transmission in the Asia-Pacific region and natural gas
marketing in Northwest Europe.
OTHER ENERGY SERVICES is composed of diverse energy businesses, operating
primarily through Duke Energy Merchants Holdings, Duke/Fluor Daniel and Energy
Delivery Services. Duke Energy Merchants Holdings engages in commodity buying
and selling, and risk management and financial services in nonregulated energy
commodity markets other than physical natural gas and power (such as petroleum
products). In April 2003, Duke Energy announced that it would discontinue
proprietary trading at Duke Energy Merchants Holdings. Duke/Fluor Daniel
provides comprehensive engineering, procurement, construction, commissioning and
operating plant services for fossil-fueled electric power generating facilities
worldwide. Duke/Fluor Daniel is a 50/50 partnership between Duke Energy and
Fluor Enterprises, Inc., a wholly owned subsidiary of Fluor Corporation. Energy
Delivery Services is an engineering, construction, maintenance and technical
services firm specializing in electric transmission and distribution lines and
substation projects. It was formed in the second quarter of 2002 from the
transmission and distribution services component of Duke Engineering & Services,
Inc. This component was excluded from the sale of Duke Engineering & Services to
Framatome ANP, Inc. on April 30, 2002. Other Energy Services also retained other
portions of Duke Engineering & Services that were not part of the sale, as well
as a portion of DukeSolutions, Inc. that was not sold on May 1, 2002 to
Ameresco, Inc. Duke Engineering & Services and DukeSolutions were included in
Other Energy Services through the dates of their sales.
DUKE VENTURES is composed of other diverse businesses, operating primarily
through Crescent Resources, LLC, DukeNet Communications, LLC and Duke Capital
Partners, LLC. Crescent Resources develops high-quality commercial, residential
and multi-family real estate projects and manages land holdings, primarily in
the southeastern and southwestern United States. DukeNet Communications develops
and manages fiber optic communications systems for wireless, local and long
distance communications companies and selected educational, governmental,
financial and health care entities. Duke Capital Partners, a wholly owned
merchant finance company, provides debt and equity capital and financial
advisory services to the energy industry. In March 2003, Duke Energy announced
that it will exit this business in an orderly manner.
The foregoing information about Duke Energy and its business segments is
only a general summary and is not intended to be comprehensive. For additional
information about Duke Energy and its business segments, you should refer to the
information described under the caption "Where You Can Find More Information" in
this prospectus supplement.
RECENT DEVELOPMENTS
DUKE ENERGY FIRST QUARTER 2003 RESULTS
On April 30, 2003, we issued a press release announcing our unaudited first
quarter 2003 results. Duke Energy reported first quarter 2003 earnings of 25
cents per share, or $225 million in net income, compared to 48 cents per share,
or $382 million in net income in first quarter 2002. Results for first quarter
2003 included an 18 cent, or $162 million, after-tax charge for the cumulative
effect of previously
S-4
announced accounting changes. Before the effect of accounting changes, we earned
43 cents, or $387 million, in first quarter 2003.
The first quarter 2003 charge related to changes in accounting principles
was primarily due to implementation of EITF Issue No. 02-03, "Issues Involved in
Accounting for Derivative Contracts Held for Trading Purposes and for Contracts
Involved in Energy Trading and Risk Management Activities," which changes the
timing of earnings recognition for certain energy contracts. This represents an
after-tax charge of $151 million, or 17 cents per share. The remaining element
of this charge, $11 million, or 1 cent a share, is due to implementation of SFAS
No. 143, "Accounting for Asset Retirement Obligations."
Business Unit Results
Below is a reconciliation of consolidated operating income to earnings
before interest and taxes, or EBIT (in millions):
FIRST FIRST
QUARTER QUARTER
2003 2002
------- -------
Operating income............................................ $893 $668
Other income and expenses................................... 81 102
---- ----
EBIT........................................................ $974 $770
==== ====
FRANCHISED ELECTRIC. First quarter 2003 EBIT from Franchised Electric was
$454 million, an 18% increase from first quarter 2002 EBIT of $384 million.
Higher results were due to colder than normal weather during the quarter and
increased wholesale power sales. The increase was partially offset by charges of
$35 million for expenses related to 2003 severe winter storms and $17 million of
amortization expense related to the North Carolina 2002 clean air legislation.
During the quarter, the capacity utilization at Duke Power's nuclear stations
increased to 97% from 95% in first quarter 2002.
NATURAL GAS TRANSMISSION. The Natural Gas Transmission segment reported
first quarter 2003 EBIT of $423 million, a 59% increase over the $266 million in
first quarter 2002. Results included a full quarter of earnings from Westcoast
Energy, acquired in March 2002. The two additional months contributed $135
million to first quarter 2003. First quarter 2003 and 2002 results both include
gains of $14 million from the sales of Duke Energy Gas Transmission's limited
partnership interests in Northern Border Partners L.P.
DUKE ENERGY NORTH AMERICA. Duke Energy North America reported EBIT of $23
million in first quarter 2003, compared to EBIT of $54 million in first quarter
2002. The decrease was due to lower proprietary trading results, a reduction in
mark-to-market earnings due in part to changes in accounting rules and higher
depreciation expenses related to new plants, partially offset by lower general
and administrative expenses.
INTERNATIONAL ENERGY. For first quarter 2003, International Energy
reported EBIT of $54 million, compared to first quarter 2002 EBIT of $57
million. Included in Duke Energy International's first quarter 2003 EBIT is a
non-cash charge of $11 million related to the timing of revenue recognition at
the Cantarell investment in Mexico, a nitrogen-production plant which was
acquired with Westcoast Energy.
FIELD SERVICES. The Field Services business segment, which represents Duke
Energy's 70% interest in Duke Energy Field Services, reported first quarter 2003
EBIT of $33 million compared to $35 million in first quarter 2002. The effects
of significantly higher natural gas prices and hedges on the prices of NGLs
substantially offset the favorable impact of strong NGL prices during the
period.
OTHER OPERATIONS. The Other Operations segment, including Crescent
Resources, DukeNet Communications, Duke Capital Partners, Duke/Fluor Daniel,
Duke Energy Merchants and Energy Delivery Services, reported an EBIT loss of $26
million in first quarter 2003, compared to EBIT of $17 million in first quarter
2002. Results were negatively affected by charges related to the exiting of
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proprietary trading and hydrocarbons businesses at Duke Energy Merchants. During
the first quarter, Duke Energy announced that it is exiting the merchant finance
business at its wholly owned subsidiary, Duke Capital Partners, LLC.
Approximately $80 million of its portfolio has been monetized in first quarter
2003.
Interest Expense
Interest expense was $340 million for first quarter 2003, compared to $198
million for first quarter 2002. The increase was primarily due to debt related
to the Westcoast Energy acquisition, reduced capitalized interest at Duke Energy
North America and additional debt.
Cash Flow
For first quarter 2003, cash flow from operations was $1.4 billion,
compared to $0.8 billion in first quarter 2002. In 2003, we expect cash flow
from operations, which includes real estate sales at Crescent Resources,
combined with proceeds from divestitures at other business units, to more than
adequately fund capital expenditures of approximately $3 billion and the
approximately $1 billion needed to fund the $1.10 per share dividend. Our
current business plans for 2003 fully support the dividend at this level.
In 2003, we announced or completed approximately $1.1 billion in gross
proceeds from asset sales. During the quarter, we closed on asset sales of
non-strategic assets of approximately $350 million. We expect asset sales to
contribute approximately $1.5 billion in gross proceeds for 2003. Proceeds in
excess of the amounts needed to help fund capital expenditures and pay the
dividend will be available to pay down debt.
Liquidity and Capital Resources
Under various credit facilities, Duke Energy, Duke Capital and other
subsidiaries had the ability to borrow up to $5.3 billion as of March 31, 2003.
The companies had borrowings and letters of credit outstanding under these
programs of approximately $2.2 billion as of March 31, 2003, resulting in unused
capacity of approximately $3.1 billion. We also had approximately $1.1 billion
in cash and cash equivalents as of March 31, 2003. Subsequent to March 31, 2003,
a credit facility at Duke Capital of $0.5 billion matured and was replaced with
a facility of $0.25 billion.
Revenues
For first quarter 2003, revenues were $6.2 billion, up from $3.2 billion in
first quarter 2002. The key drivers for the increase include significantly
higher natural gas liquid pricing, two additional months of Westcoast
operations, greater wholesale power sales and the adoption of the final
consensus on EITF 02-03, which requires us to present revenues for certain
natural gas transactions on a gross basis in 2003. Adopting this final consensus
did not require a change to prior periods and therefore we did not change the
2002 revenue amounts.
Financial Measures
Earnings before interest and taxes, or EBIT, is the primary performance
measure used by management to evaluate company and segment performance. On a
segment basis, it includes all profits (both operating and non-operating) before
deducting interest and taxes, and is net of the minority interest expense
related to those profits. Management believes EBIT is a good indicator of each
segment's operating performance as it represents the results of our ownership
interests in operations without regard to financing methods or capital
structures. EBIT should not be considered an alternative to, or more meaningful
than, net income, operating income or cash flow as determined in accordance with
generally accepted accounting principles. Duke Energy's EBIT may not be
comparable to a similarly titled measure of another company.
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OTHER RECENT DEVELOPMENTS
In March 2003, the FERC issued Staff recommendations involving the
electricity supply situation in California and an order in the FERC's refund
proceeding related thereto. The recommendations and order address, among other
things, modifying the presiding administrative law judge's refund findings with
respect to the gas price component and certain other components of the refund
calculation contained in the judge's ruling issued in December 2002, and the
issuance of show cause orders related to certain energy trading practices. On
April 30, 2003, the FERC issued an order adopting the Staff's recommendations
for show cause filings by energy traders relating to price reporting practices.
We continue to evaluate the Staff recommendations and refund order to analyze
the impact they might have on us. Please see "Risk Factors -- Risks Related to
Legal Proceedings and Regulatory Investigations" in the accompanying prospectus
and Note 16 to our financial statements contained in our annual report for 2002
on Form 10-K for additional details related to the electricity supply situation
in California.
In a matter related to the Sonatrach arbitration, a counterparty filed suit
in March 2003 against a Duke Energy subsidiary in the District Court of Harris
County, Texas alleging that the subsidiary breached the parties' natural gas
purchase contract by failing to provide sufficient volumes of gas to the
counterparty. We contend that as a result of Sonatrach's actions in breaching
our agreements with Sonatrach, we experienced a loss of LNG supply that affected
our obligations and termination rights under the agreement with the
counterparty. The petition seeks unspecified damages. We subsequently terminated
the contract and filed a counterclaim in this Texas action. We continue to
evaluate the claims at issue in this matter and intend to vigorously defend
ourselves and pursue claims for relief. Please see Note 16 to our financial
statements contained in our annual report for 2002 on Form 10-K for additional
details related to the Sonatrach arbitration.
On April 24, 2003, we announced a quarterly cash dividend on our common
stock of $0.275 per share, payable on June 16, 2003 to shareholders of record on
May 16, 2003.
----------------------
We are incorporated in North Carolina and the address of our principal
executive offices is 526 South Church Street, Charlotte, North Carolina 28202.
Our telephone number is (704) 594-6200.
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THE OFFERING
Issuer........................ Duke Energy Corporation, a North Carolina
corporation.
Securities Offered............ $700,000,000 aggregate principal amount of
1 3/4% Convertible Senior Notes due 2023. We
have granted the underwriters an option to
purchase up to an additional $70,000,000
aggregate principal amount of Notes to cover
overallotments, if any.
Issue Price................... Each Note will be issued at a price of $1,000
per Note.
Maturity...................... May 15, 2023, unless earlier converted,
redeemed or purchased by us.
Ranking....................... The Notes will be our direct, unsecured and
unsubordinated obligations and will rank equal
in priority with all of our existing and future
unsecured and unsubordinated indebtedness and
senior in right of payment to all of our
existing and future subordinated indebtedness.
The Notes will effectively rank junior to any
of our secured indebtedness to the extent of
the assets securing such indebtedness. The
Notes will be structurally subordinated to all
liabilities of our subsidiaries.
Interest...................... 1 3/4% per annum on the principal amount,
payable semi-annually in arrears on May 15 and
November 15 of each year, beginning on November
15, 2003.
Contingent Interest........... Beginning with the six-month interest period
commencing on May 15, 2007, we will pay
contingent interest during a six-month interest
period if the average trading price of a Note
for the five trading days immediately preceding
the first day of the applicable six-month
interest period equals or exceeds 120% of the
principal amount of such Note. The amount of
contingent interest payable per Note in respect
of any six-month period will equal 0.25% of the
average trading price of such Note for the
applicable five trading day reference period.
For more information about contingent interest,
see "Description of the Notes -- Contingent
Interest."
Conversion Rights............. Holders may convert each of their Notes into
shares of our common stock only under any of
the following circumstances:
(i) during any calendar quarter after the
quarter ending June 30, 2003 (and only
during such calendar quarter) if the
last reported sale price of our common
stock for at least 20 trading days
during the period of 30 consecutive
trading days ending on the last
trading day of the previous calendar
quarter is greater than or equal to
120% of the conversion price per share
of our common stock;
(ii) if the Notes have been called for
redemption by us;
(iii) upon the occurrence of specified
corporate transactions described
under "Description of the
Notes -- Conversion Rights --
Conversion Upon Specified Corporate
Transactions"; or
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(iv) during any period that (i) the
long-term credit rating assigned to
the Notes by both Moody's Investors
Service, Inc. and Standard & Poor's
Rating Services is lower than Baa3
and BBB-, respectively, (ii) both
Moody's and Standard & Poor's no
longer rate the Notes or have
withdrawn their ratings with respect
to the Notes, or (iii) either Moody's
or Standard & Poor's no longer rate
the Notes or have withdrawn or
suspended such rating and the
remaining rating is lower than Baa3
or BBB-, as applicable.
For each $1,000 principal amount of Notes
surrendered for conversion you will receive
42.3908 shares of our common stock. This
represents an initial conversion price of
$23.59 per share of common stock based on the
issue price per Note. As described in this
prospectus supplement, the conversion rate may
be adjusted upon the occurrence of certain
events, but it will not be adjusted for accrued
and unpaid interest. You will not receive any
cash payment representing accrued and unpaid
interest upon conversion of a Note. Instead,
interest will be deemed paid by the common
stock issued to you upon conversion. Notes
called for redemption may be surrendered for
conversion prior to the close of business on
the second business day immediately preceding
the redemption date.
Sinking Fund.................. None.
Optional Redemption........... Prior to May 20, 2007, the Notes will not be
redeemable. On or after May 20, 2007, we may
redeem for cash all or part of the Notes at any
time for a price equal to 100% of the principal
amount of the Notes to be redeemed plus any
accrued and unpaid interest, including
contingent interest, if any, to but excluding
the redemption date. For more information about
redemption of the Notes at our option, see
"Description of the Notes -- Optional
Redemption."
Purchase of Notes by Us at the
Option of the Holder.......... Holders have the right to require us to
purchase all or a portion of their Notes for
cash on May 15, 2007, May 15, 2012 and May 15,
2017, each of which we refer to as a purchase
date. In each case, we will pay a purchase
price equal to 100% of the principal amount of
the Notes to be purchased plus any accrued and
unpaid interest, including contingent interest,
if any, to but excluding the purchase date. For
more information about the purchase of Notes by
us at the option of the holder, see
"Description of the Notes -- Purchase of Notes
by Us at the Option of the Holder."
Fundamental Change............ If we undergo a Fundamental Change (as defined
under "Description of the Notes -- Fundamental
Change Requires Purchase of Notes by Us at the
Option of the Holder") prior to maturity, you
will have the right, at your option, to require
us to purchase any or all of your Notes for
cash, or any portion of the principal amount
thereof that is equal to $1,000 or an integral
multiple of $1,000. The cash price we are
required to pay is
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equal to 100% of the principal amount of the
Notes to be purchased plus accrued and unpaid
interest, including contingent interest, if
any, to but excluding the Fundamental Change
purchase date. For more information about the
purchase of Notes by us at the option of the
holder following a Fundamental Change, see
"Description of the Notes -- Fundamental Change
Requires Purchase of Notes by Us at the Option
of the Holder."
Form.......................... The Notes will be issued in book-entry form and
will be represented by permanent global
certificates deposited with, or on behalf of,
The Depository Trust Company ("DTC") and
registered in the name of a nominee of DTC.
Beneficial interests in any of the Notes will
be shown on, and transfers will be effected
only through, records maintained by DTC or its
nominee and any such interest may not be
exchanged for certificated securities, except
in limited circumstances.
United States Federal Income
Tax Considerations............ The Notes and the common stock issuable upon
conversion of the Notes will be subject to
special and complex United States federal
income tax rules. Holders are urged to consult
their own tax advisors with respect to the
federal, state, local and foreign tax
consequences of purchasing, owning and
disposing of the Notes and common stock
issuable upon conversion of the Notes. See
"Risk Factors -- Risks Related to the
Notes -- You should consider the negative
United States federal income tax consequences
of owning the Notes" and "Certain United States
Federal Income Tax Considerations."
Trading....................... We have not applied and do not intend to apply
for the listing of the Notes on any securities
exchange. Our shares of common stock are traded
on the New York Stock Exchange under the symbol
"DUK."
Use of Proceeds............... We intend to use the net proceeds from the sale
of the Notes, estimated, after deducting the
underwriting discount and related offering
expenses, to be approximately $683.8 million
(approximately $752.2 million if the
underwriters exercise their overallotment
option in full) for general corporate purposes,
which may include the reduction of our
outstanding commercial paper.
S-10
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The summary consolidated financial information set forth below should be
read in conjunction with our consolidated financial statements and the related
notes and other financial and operating data incorporated by reference in this
prospectus supplement and the accompanying prospectus.
YEARS ENDED DECEMBER 31,
--------------------------------------
2002 2001 2000(1)
--------- -------------- ---------
(IN MILLIONS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF INCOME DATA:
Operating revenues(2)....................................... $15,663 $18,197 $15,342
Operating expenses(2)....................................... 13,212 14,494 12,253
Gains on sale of other assets, net.......................... 49 238 214
------- ------- -------
Operating income............................................ 2,500 3,941 3,303
Other income and expenses, net.............................. 369 315 711
Interest expense............................................ 1,110 785 911
Minority interest expense................................... 107 327 307
------- ------- -------
Earnings before income taxes................................ 1,652 3,144 2,796
Income taxes................................................ 618 1,150 1,020
------- ------- -------
Income before extraordinary item and cumulative effect of
change in accounting principle............................ 1,034 1,994 1,776
Cumulative effect of change in accounting principle, net of
tax....................................................... -- (96) --
------- ------- -------
Net income.................................................. 1,034 1,898 1,776
Preferred and preference stock dividends.................... 13 14 19
------- ------- -------
Earnings available for common stockholders.................. $ 1,021 $ 1,884(3) $ 1,757
======= ======= =======
Weighted-average common shares outstanding(4)............... 836 767 736
Earnings per common share (before cumulative effect of
change in accounting principle)(4)
Basic..................................................... $ 1.22 $ 2.58 $ 2.39
Diluted................................................... 1.22 2.56 2.38
Earnings per common share(4)
Basic..................................................... $ 1.22 $ 2.45(3) $ 2.39
Diluted................................................... 1.22 2.44(3) 2.38
Dividends per common share(4)............................... 1.10 1.10 1.10
---------------
(1) Reflects a pre-tax $407 million gain on the sale of our investment in
BellSouth PCS. The effect per basic share of common stock of this gain was
$0.34.
(2) Operating revenues and expenses have been updated to the extent required to
show the impact of the gross versus net presentation of revenues under the
partial consensus reached in June 2002 on Emerging Issues Task Force Issue
No. 02-03, "Issues Involved in Accounting for Derivative Contracts Held for
Trading and Risk Management Activities." In the calculation of net revenues,
we continued to enhance our methodologies around the application of this
complex accounting literature since the third quarter of 2002 when these
trading revenues were first reported on a net basis.
(3) Reflects a net-of-tax cumulative effect adjustment of $96 million, or $0.13
per basic share of common stock, as a reduction in earnings in accordance
with our adoption of Statement of Financial Accounting Standards No. 133.
(4) Year ended December 31, 2000 has been restated to reflect the two-for-one
common stock split effective January 26, 2001.
S-11
AS OF
DECEMBER 31,
2002
-------------
(IN MILLIONS)
CONSOLIDATED BALANCE SHEET DATA:
Total assets................................................ $60,966
Short-term debt, including commercial paper................. 915
Long-term debt, including current maturities................ 21,550
Guaranteed preferred beneficial interests in subordinated
notes of Duke Energy or subsidiaries...................... 1,408
Minority interests.......................................... 1,904
Preferred and preference stock, including current sinking
fund obligations.......................................... 159
Common stockholders' equity................................. 14,944
S-12
RISK FACTORS
Before purchasing the Notes you should carefully consider the following
risk factors as well as the risk factors contained in the accompanying
prospectus, the other information contained in this prospectus supplement and
the accompanying prospectus and the information incorporated by reference herein
and therein in order to evaluate an investment in the Notes.
RISKS RELATED TO THE NOTES
WE MAY NOT HAVE THE ABILITY TO RAISE THE FUNDS NECESSARY TO PURCHASE THE
NOTES UPON A FUNDAMENTAL CHANGE OR OTHER PURCHASE DATE, AS REQUIRED BY THE
SENIOR INDENTURE GOVERNING THE NOTES.
On May 15, 2007, May 15, 2012 and May 15, 2017, holders of the Notes may
require us to purchase their Notes for cash. In addition, holders of the Notes
also may require us to purchase their Notes upon a Fundamental Change as
described under "Description of the Notes -- Fundamental Change Requires
Purchase of Notes by Us at the Option of the Holder." A Fundamental Change also
may constitute an event of default, and result in the acceleration of the
maturity of our then existing indebtedness, under another indenture or other
agreement. We cannot assure you that we would have sufficient financial
resources, or would be able to arrange financing, to pay the purchase price for
the Notes tendered by holders. Failure by us to purchase the Notes when required
will result in an event of default with respect to the Notes.
YOU SHOULD CONSIDER THE NEGATIVE UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES OF OWNING THE NOTES.
We and each holder agree in the Senior Indenture to treat the Notes as
"contingent payment debt instruments" subject to the contingent payment debt
regulations. As a result, a holder will be required to include amounts in
income, as original issue discount, in advance of the receipt of the cash or our
common stock attributable to such income, and to accrue interest on a constant
yield to maturity basis at a rate comparable to the rate at which we would issue
a noncontingent, nonconvertible, fixed-rate debt instrument with terms and
conditions otherwise comparable to those of the Notes (which we have determined
to be 6.03%, compounded semi-annually), even though the Notes will have a
significantly lower yield to maturity. A holder will recognize taxable income
significantly in excess of the cash received while the Notes are outstanding. In
addition, a holder will recognize ordinary income, if any, upon a sale,
exchange, conversion, redemption or purchase by us of the Notes at a gain. In
computing such gain, the amount realized by a holder will include, in the case
of a conversion, the amount of any cash and the fair market value of shares of
our common stock received. Holders are urged to consult their own tax advisors
as to the United States federal, state and other tax consequences of acquiring,
owning and disposing of the Notes and shares of our common stock. See "Certain
United States Federal Income Tax Considerations."
THE TRADING PRICES FOR THE NOTES WILL BE DIRECTLY AFFECTED BY THE TRADING
PRICES OF OUR COMMON STOCK.
The trading prices of the Notes in the secondary market will be directly
affected by the trading prices of our common stock, the general level of
interest rates and our credit quality. It is impossible to predict whether the
price of our common stock or interest rates will rise or fall. Trading prices of
our common stock will be influenced by our operating results and prospects and
by economic, financial and other factors. In addition, general market
conditions, including the level of, and fluctuations in, the trading prices of
stocks generally, and sales of substantial amounts of common stock by us in the
market after the offering of the Notes, or the perception that such sales could
occur, could affect the price of our common stock. Fluctuations in interest
rates may give rise to arbitrage opportunities based upon changes in the
relative value of our common stock. Any other arbitrage could, in turn, affect
the trading prices of the Notes.
AN ACTIVE TRADING MARKET FOR THE NOTES MAY NOT DEVELOP.
The Notes comprise a new issue of securities for which there is currently
no public market. We do not plan to list the Notes on any securities exchange or
to include them in any automated quotation system. We cannot assure you that an
active trading market for the Notes will develop or as to the liquidity or
sustainability of any such market, your ability to sell the Notes or the price
at which you will
S-13
be able to sell your Notes. Future trading prices of the Notes will depend on
many factors, including, among other things, prevailing interest rates, our
operating results, the price of our common stock and the market for similar
securities.
IF YOU HOLD NOTES, YOU WILL NOT BE ENTITLED TO ANY RIGHTS WITH RESPECT TO
OUR COMMON STOCK, BUT YOU WILL BE SUBJECT TO ALL CHANGES MADE WITH RESPECT
TO OUR COMMON STOCK.
If you hold Notes, you will not be entitled to any rights with respect to
our common stock (including, without limitation, voting rights and rights to
receive any dividends or other distributions on our common stock), but you will
be subject to all changes affecting the common stock. You will only be entitled
to rights on the common stock if and when we deliver shares of common stock to
you in exchange for your Notes and in limited cases under the anti-dilution
adjustments of the Notes. For example, in the event that an amendment is
proposed to our articles of incorporation or by-laws requiring stockholder
approval and the record date for determining the stockholders of record entitled
to vote on the amendment occurs prior to delivery of the common stock, you will
not be entitled to vote on the amendment, although you will nevertheless be
subject to any changes in the powers, preferences or special rights of our
common stock.
WE MAY ISSUE ADDITIONAL SHARES OF COMMON STOCK AND THEREBY MATERIALLY AND
ADVERSELY AFFECT THE PRICE OF OUR COMMON STOCK.
We are not restricted from issuing additional common stock during the life
of the Notes and have no obligation to consider your interests for any reason.
If we issue additional shares of common stock, it may materially and adversely
affect the price of our common stock and, in turn, the price of the Notes.
OUR ARTICLES OF INCORPORATION AND BY-LAW PROVISIONS, AND SEVERAL OTHER
FACTORS, COULD LIMIT ANOTHER PARTY'S ABILITY TO ACQUIRE US AND COULD DEPRIVE
YOU OF THE OPPORTUNITY TO OBTAIN A TAKEOVER PREMIUM FOR YOUR SHARES OF
COMMON STOCK.
A number of provisions that are in our articles of incorporation and
by-laws will make it difficult for another company to acquire us and for you to
receive any related takeover premium for our common stock. See "Certain
Anti-Takeover Matters" and "Preference Stock Purchase Rights" under "Description
of the Common Stock" in the accompanying prospectus.
S-14
RATIO OF EARNINGS TO FIXED CHARGES
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
(UNAUDITED)
Ratio of Earnings to Fixed Charges.......................... 4.5 2.7 3.6 3.8 2.1
For purposes of this ratio (a) earnings consist of income from continuing
operations before income taxes and fixed charges, and (b) fixed charges consist
of all interest deductions, the interest component of rentals and preference
security dividends of consolidated subsidiaries.
USE OF PROCEEDS
The aggregate net proceeds from the sale of the Notes will be approximately
$683.8 million (approximately $752.2 million if the underwriters exercise their
overallotment option in full), after deducting the underwriting discount and
related offering expenses. The net proceeds from the sale of the Notes will be
used for general corporate purposes, which may include the reduction of our
outstanding commercial paper. At December 31, 2002, we had approximately $881
million of commercial paper outstanding which had a weighted average interest
rate of 1.6%, had weighted average days to maturity of approximately 20 days and
was incurred for general corporate purposes.
S-15
PRICE RANGE OF COMMON STOCK
Our common stock trades on the New York Stock Exchange, or NYSE, under the
symbol "DUK." The following table sets forth on a per share basis the high and
low intra-day prices for our common stock for the periods indicated.
For a more detailed discussion of our common stock, we refer you to page 35
of the accompanying prospectus.
COMMON STOCK
PRICE
---------------
HIGH LOW
------ ------
YEAR ENDED 2001:
First Quarter............................................... $43.50 $32.41
Second Quarter.............................................. 47.74 38.40
Third Quarter............................................... 42.85 34.39
Fourth Quarter.............................................. 41.35 32.22
YEAR ENDED 2002:
First Quarter............................................... 40.00 31.99
Second Quarter.............................................. 39.60 28.50
Third Quarter............................................... 31.10 17.81
Fourth Quarter.............................................. 22.00 16.42
YEAR ENDING 2003:
First Quarter............................................... 21.57 12.21
Second Quarter (through May 1, 2003)........................ 17.78 13.51
The reported last sale price of our common stock on May 1, 2003 on the NYSE
was $16.85 per share. As of March 31, 2003, there were approximately 150,000
holders of record of our common stock.
DIVIDENDS
We have paid cash dividends on our common stock without interruption since
1926. We paid a quarterly dividend of $0.275 per share in each of 2001 and 2002
and the first quarter of 2003. On April 24, 2003, we announced a quarterly cash
dividend on our common stock of $0.275 per share, payable on June 16, 2003 to
shareholders of record on May 16, 2003. Future dividends will be declared at the
discretion of our board of directors and will depend upon our future earnings,
financial condition and other factors affecting dividend policy.
We have an InvestorDirect Choice Plan pursuant to which holders of our
common stock may automatically reinvest their common stock dividends in shares
of our common stock. Holders who become participants in the plan may also make
optional cash payments (not more than $100,000 per calendar year) to be invested
in shares of our common stock. For information concerning the InvestorDirect
Choice Plan, write us at Duke Energy Corporation, Investor Relations Department,
P.O. Box 1005, Charlotte, NC 28201-1005.
S-16
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 2002:
- on an actual basis; and
- on an as adjusted basis to give effect to (i) the issuance of $500
million First and Refunding Mortgage Bonds, 3.75% Series A due 2008 on
February 25, 2003, (ii) the issuance of $200 million First and Refunding
Mortgage Bonds, 4 1/2% Series due 2010 on March 19, 2003, (iii) the
issuance of the Notes offered hereby, assuming no exercise by the
underwriters of their overallotment option to purchase additional Notes
and (iv) the application of the net proceeds from such offerings.
You should read the information in this table together with our
consolidated financial statements and the related notes incorporated by
reference in this prospectus supplement and the accompanying prospectus.
AS OF DECEMBER 31, 2002
-----------------------
ACTUAL AS ADJUSTED
-------- ------------
(IN MILLIONS)
Short-term notes payable and commercial paper............... $ 915 $ 483(1)
------- -------
Long-term debt, including current maturities:
First and refunding mortgage bonds........................ 690 1,290(2)
Other long-term debt...................................... 4,009 3,560(3)
Long-term debt of subsidiaries............................ 16,851 16,851
Notes offered hereby...................................... -- 700
------- -------
Total long-term debt................................... 21,550 22,401
------- -------
Guaranteed preferred beneficial interests in subordinated
notes of Duke Energy or subsidiaries...................... 1,408 1,408
------- -------
Minority interests.......................................... 1,904 1,904
------- -------
Preferred and preference stock, including current sinking
fund obligations:
With sinking fund requirements............................ 25 25
Without sinking fund requirements......................... 134 134
------- -------
Total preferred stock, including current sinking fund
obligations.......................................... 159 159
------- -------
Common stockholders' equity:
Common stock, no par; 2 billion shares authorized; 895
million shares outstanding............................. 9,236 9,236
Retained earnings......................................... 6,417 6,417
Accumulated other comprehensive (loss) income............. (709) (709)
------- -------
Total common stockholders' equity...................... 14,944 14,944
------- -------
Total capitalization................................. $40,880 $41,299
======= =======
---------------
(1) Assumes the repayment of commercial paper with a portion of the proceeds of
the $500 million First and Refunding Mortgage Bonds, 3.75% Series A due 2008
and a portion of the proceeds of the Notes offered hereby.
(2) Gives effect to $100 million of our First and Refunding Mortgage Bonds that
matured in February 2003, the issuance of $500 million First and Refunding
Mortgage Bonds, 3.75% Series A due 2008 and the issuance of $200 million
First and Refunding Mortgage Bonds, 4 1/2% Series due 2010.
(3) Assumes the repayment of $449 million of commercial paper classified as
long-term debt with the proceeds of the $200 million First and Refunding
Mortgage Bonds, 4 1/2% Series due 2010, and a portion of the proceeds of the
Notes offered hereby.
S-17
DESCRIPTION OF THE NOTES
GENERAL
The following description of the terms of the Notes summarizes certain
general terms that will apply to the Notes. The Notes will be issued under a
Senior Indenture between us and JPMorgan Chase Bank (formerly known as The Chase
Manhattan Bank), as trustee, dated as of September 1, 1998, as supplemented from
time to time (the "Senior Indenture"), including by the Twelfth Supplemental
Indenture, to be dated as of May 7, 2003. This description is not complete, and
we refer you to the accompanying prospectus and the Senior Indenture. Defined
terms have the meanings assigned to them in the Senior Indenture.
The Notes will mature on May 15, 2023 unless earlier converted, redeemed or
purchased. The Notes will initially be offered at a price to investors of $1,000
per Note. You have the option, subject to fulfillment of certain conditions and
during the periods described below, to convert your Notes into shares of our
common stock initially at a conversion rate of 42.3908 shares of common stock
per $1,000 principal amount of Notes. This is equivalent to an initial
conversion price of $23.59 per share of common stock based on the issue price of
the Notes. The conversion rate is subject to adjustment if certain events occur.
Upon conversion of a Note, you will receive only shares of our common stock and
a cash payment to account for fractional shares.
If any interest payment date, maturity date, redemption date or purchase
date (including upon the occurrence of a Fundamental Change, as described below)
of a Note falls on a day that is not a business day, the required payment will
be made on the next succeeding business day with the same force and effect as if
made on the date that the payment was due and no additional interest will accrue
on that payment for the period from and after the interest payment date,
maturity date, redemption date or purchase date (including upon the occurrence
of a Fundamental Change), as the case may be, to the date of that payment on the
next succeeding business day.
The Notes will be issued only in denominations of $1,000 principal amount
and integral multiples of $1,000 principal amount. Notes will be issued in an
aggregate principal amount of $700,000,000 ($770,000,000 if the underwriters
exercise in full their overallotment option to purchase additional Notes).
As used in this prospectus supplement, "business day" means, with respect
to any Note, any day, other than a Saturday or Sunday, that is neither a legal
holiday nor a day on which commercial banks are authorized or required by law,
regulation or executive order to close in The City of New York.
When we refer to "common stock," we mean Duke Energy Corporation Common
Stock (as defined in our articles of incorporation), which is the only
outstanding class of our common stock.
RANKING
The Notes will be our direct, unsecured and unsubordinated obligations. The
Notes will rank equal in priority with all of our existing and future unsecured
and unsubordinated indebtedness and senior in right of payment to all of our
existing and future subordinated indebtedness. Our First and Refunding Mortgage
Bonds are effectively senior to the Notes to the extent of the value of the
properties securing them. As of December 31, 2002, there was approximately $690
million in aggregate principal amount of First and Refunding Mortgage Bonds
outstanding and as of March 31, 2003, after giving effect to additional
issuances and maturities, approximately $1,290 million outstanding. As of
December 31, 2002, there was approximately $4,009 million of unsecured and
unsubordinated long-term indebtedness of Duke Energy outstanding. The Notes will
be structurally subordinated to all liabilities of our subsidiaries. As of
December 31, 2002, our subsidiaries had outstanding approximately $16,851
million of long-term indebtedness. Our Senior Indenture contains no restrictions
on the amount of additional indebtedness that we may issue under it.
S-18
INTEREST
The Notes will bear interest at a rate of 1 3/4% per annum. We also will
pay contingent interest on the Notes in the circumstances described under
"-- Contingent Interest." Interest, including contingent interest, if any, shall
be payable semi-annually in arrears on May 15 and November 15 of each year,
commencing November 15, 2003.
Interest, including contingent interest as described below, will be paid to
the person in whose name each Note is registered at the close of business on the
fifteenth calendar day next preceding each semi-annual interest payment date
(whether or not a business day); provided, however, interest including
contingent interest, if any, payable upon redemption or purchase by us will be
paid to the person to whom principal is payable, unless the redemption date or
purchase date, as the case may be, is an interest payment date. Interest will be
calculated on the basis of a 360-day year, consisting of twelve 30-day months,
and will accrue from May 7, 2003 or from the most recent interest payment date
to which interest has been paid or duly provided for.
CONTINGENT INTEREST
Beginning with the six-month interest period commencing on May 15, 2007, we
will pay contingent interest during a six-month interest period if the average
trading price of a Note for the five trading days immediately preceding the
first day of the applicable six-month interest period equals or exceeds 120% of
the principal amount of such Note.
During any period when contingent interest shall be payable, the contingent
interest payable per Note in respect of any six-month period will equal 0.25% of
the average trading price of such Note for the applicable five trading day
reference period.
We will notify the holders of the Notes upon a determination that they will
be entitled to receive contingent interest during a six-month interest period.
OPTIONAL REDEMPTION
No sinking fund is provided for the Notes. Prior to May 20, 2007, the Notes
will not be redeemable. On or after May 20, 2007, we may redeem for cash all or
part of the Notes at any time for a price equal to 100% of the principal amount
of the Notes to be redeemed plus any accrued and unpaid interest, including
contingent interest, if any, to but excluding the redemption date. We will
provide not less than 30 nor more than 60 days notice mailed to each registered
holder of the Notes to be redeemed. If the redemption notice is given and funds
deposited as required, then interest will cease to accrue on and after the
redemption date on the Notes or portions of such Notes called for redemption.
If we decide to redeem fewer than all of the outstanding Notes, the Trustee
will select the Notes to be redeemed (in principal amounts of $1,000 or integral
multiples thereof) by lot, or on a pro rata basis or by another method the
Trustee considers fair and appropriate.
If the Trustee selects a portion of your Notes for partial redemption and
you convert a portion of your Notes, the converted portion will be deemed to be
from the portion selected for redemption.
CONVERSION RIGHTS
Subject to the conditions and during the periods described below, holders
may convert each of their Notes into shares of our common stock initially at a
conversion rate of 42.3908 shares of common stock per $1,000 principal amount of
Notes (equivalent to an initial conversion price of $23.59 per share of common
stock based on the issue price per Note). The conversion rate and the equivalent
conversion price in effect at any given time are referred to as the "applicable
conversion rate" and the "applicable conversion price," respectively, and will
be subject to adjustment as described below. A holder may convert fewer than all
of such holder's Notes so long as the Notes converted are an integral multiple
of $1,000 principal amount.
S-19
Upon conversion of Notes, a holder will not receive any cash payment of
interest (unless such conversion occurs between a regular record date and the
interest payment date to which it relates) and we will not adjust the conversion
rate to account for accrued and unpaid interest. Our delivery to the holder of
the full number of shares of our common stock into which the Note is
convertible, together with any cash payment for such holder's fractional shares
will be deemed to satisfy our obligation to pay the principal amount of the
Note, accrued but unpaid interest, including contingent interest, if any, and
accrued original issue discount. As a result, accrued but unpaid interest,
including contingent interest, if any, and accrued original issue discount to
the conversion date is deemed to be paid in full rather than cancelled,
extinguished or forfeited. For a discussion of the tax treatment to you of
receiving our common stock upon conversion, see "Certain United States Federal
Income Tax Considerations."
If a holder converts Notes, we will pay any documentary, stamp or similar
issue or transfer tax due on the issue of shares of our common stock upon the
conversion, unless the tax is due because the holder requests the shares to be
issued or delivered to a person other than the holder, in which case the holder
will pay that tax.
If a holder wishes to exercise its conversion right, such holder must
deliver an irrevocable duly completed conversion notice, together, if the Notes
are in certificated form, with the certificated security, to the conversion
agent along with appropriate endorsements and transfer documents, if required,
and pay any transfer or similar tax, if required. The conversion agent will, on
the holder's behalf, convert the Notes into shares of our common stock. Holders
may obtain copies of the required form of the conversion notice from the
conversion agent. A certificate, or a book-entry transfer through DTC, for the
number of full shares of our common stock into which any Notes are converted,
together with a cash payment for any fractional shares, will be delivered
through the conversion agent as soon as practicable, but no later than the fifth
business day, following the conversion date.
If a holder has already delivered a purchase notice as described under
either "-- Purchase of Notes by Us at the Option of the Holder" or
"-- Fundamental Change Requires Purchase of Notes by Us at the Option of the
Holder" with respect to a Note, however, the holder may not surrender that Note
for conversion until the holder has withdrawn the purchase notice in accordance
with the Senior Indenture.
Holders of Notes at the close of business on a regular record date will
receive payment of interest payable on the corresponding interest payment date
notwithstanding the conversion of such Notes at any time after the close of
business on the applicable regular record date. Notes surrendered for conversion
by a holder during the period from the close of business on any regular record
date to the opening of business on the next interest payment date must be
accompanied by payment of an amount equal to the interest that the holder is to
receive on the Notes; provided, however, that no such payment need be made if
(1) we have specified a redemption date that is after a record date and on or
prior to the next interest payment date, (2) we have specified a purchase date
following a Fundamental Change that is during such period or (3) only to the
extent of overdue interest or overdue contingent interest, any overdue interest
or overdue contingent interest, if any, exists at the time of conversion with
respect to such Note.
Holders may surrender their Notes for conversion into shares of our common
stock prior to stated maturity in only the following circumstances.
CONVERSION UPON SATISFACTION OF SALE PRICE CONDITION
A holder may surrender any of its Notes for conversion into shares of our
common stock in any calendar quarter after the quarter ending June 30, 2003 (and
only during such calendar quarter) if the last reported sale price of our common
stock for at least 20 trading days during the period of 30 consecutive trading
days ending on the last trading day of the previous calendar quarter is greater
than or equal to 120% of the applicable conversion price per share of our common
stock on such last trading day.
The "last reported sale price" of our common stock on any date means the
closing sale price per share (or if no closing sale price is reported, the
average of the bid and asked prices or, if more than one in either case, the
average of the average bid and the average asked prices) on that date as
reported in
S-20
composite transactions for the principal U.S. securities exchange on which our
common stock is traded or, if our common stock is not listed on a U.S. national
or regional securities exchange, as reported by the Nasdaq National Market.
If our common stock is not listed for trading on a U.S. national or
regional securities exchange and not reported by the Nasdaq National Market on
the relevant date, the "last reported sale price" will be the last quoted bid
price for our common stock in the over-the-counter market on the relevant date
as reported by the National Quotation Bureau or similar organization.
If our common stock is not so quoted, the "last reported sale price" will
be the average of the mid-point of the last bid and asked prices for our common
stock on the relevant date from each of at least three nationally recognized
independent investment banking firms selected by us for this purpose.
CONVERSION UPON NOTICE OF REDEMPTION
If we call any or all of the Notes for redemption, holders may convert
Notes into our common stock at any time prior to the close of business on the
second business day immediately preceding the redemption date, even if the Notes
are not otherwise convertible at such time. If a holder already has delivered a
purchase notice with respect to a Note, however, the holder may not surrender
that Note for conversion until the holder has withdrawn the purchase notice in
accordance with the Senior Indenture.
CONVERSION UPON SPECIFIED CORPORATE TRANSACTIONS
If we elect to:
- distribute to all holders of our common stock certain rights entitling
them to purchase, for a period expiring within 45 days after the date of
the distribution, shares of our common stock at less than the last
reported sale price of a share of our common stock on the trading day
immediately preceding the declaration date of the distribution, or
- distribute to all holders of our common stock our assets, debt securities
or certain rights to purchase our securities, which distribution has a
per share value as determined by our board of directors exceeding 15% of
the last reported sale price of a share of our common stock on the
trading day immediately preceding the declaration date of the
distribution,
we must notify the holders of the Notes at least 20 business days prior to the
ex-dividend date for such distribution. Once we have given such notice, holders
may surrender their Notes for conversion at any time until the earlier of the
close of business on the business day immediately prior to the ex-dividend date
or our announcement that such distribution will not take place, even if the
Notes are not otherwise convertible at such time. No holder may exercise this
right to convert if the holder otherwise may participate in the distribution
without conversion. The ex-dividend date is the first date upon which a sale of
the common stock does not automatically transfer the right to receive the
relevant distribution from the seller of the common stock to its buyer.
In addition, if we are party to a consolidation, merger or binding share
exchange pursuant to which our common stock would be converted into cash or
property other than securities, a holder may surrender Notes for conversion at
any time from and after the date which is 15 days prior to the anticipated
effective date of the transaction until 15 days after the actual effective date
of such transaction. If we engage in certain reclassifications of our common
stock or are a party to a consolidation, merger, binding share exchange or
transfer of all or substantially all of our assets pursuant to which our common
stock is converted into cash, securities or other property, then at the
effective time of the transaction, the right to convert a Note into our common
stock will be changed into a right to convert a Note into the kind and amount of
cash, securities or other property which the holder would have received if the
holder had converted its Notes immediately prior to the applicable record date
for such transaction. If we engage in any transaction described in the preceding
sentence, the conversion rate will not be adjusted. If the transaction also
constitutes a Fundamental Change, as defined below, a holder can require us to
purchase
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all or a portion of its Notes as described below under "-- Fundamental Change
Requires Purchase of Notes by Us at the Option of the Holder."
CONVERSION UPON CREDIT RATINGS EVENT
You may surrender your Notes for conversion into our common stock prior to
maturity during any period in which (i) the long-term credit rating assigned to
the Notes by both Moody's Investors Service, Inc. and Standard & Poor's Rating
Services is lower than Baa3 and BBB-, respectively, (ii) both Moody's and
Standard & Poor's no longer rate the Notes or have withdrawn their ratings with
respect to the Notes, or (iii) either Moody's or Standard & Poor's no longer
rate the Notes or have withdrawn or suspended such rating and the remaining
rating is lower than Baa3 or BBB-, as applicable. References to Moody's and
Standard & Poor's shall include any successors to these entities.
CONVERSION RATE ADJUSTMENTS
The applicable conversion rate will be subject to adjustment, without
duplication, upon the occurrence of any of the following events:
(1) the payment of dividends or distributions of common stock on
common stock;
(2) the issuance to all holders of common stock of rights, warrants or
options (other than pursuant to any dividend reinvestment or share purchase
plans) entitling them, for a period of up to 45 days from the date of
issuance of the rights, warrants or options to subscribe for or purchase
common stock at less than the current market price thereof;
(3) subdivisions, splits and combinations of common stock;
(4) distributions to all holders of common stock of evidences of our
indebtedness, shares of capital stock, securities, cash, property or assets
(excluding any dividend or distribution covered by clause (1) or (2) above
and any dividend or distribution paid exclusively in cash); in the event
that we make a distribution to all holders of our common stock consisting
of capital stock of, or similar equity interests in, a subsidiary or other
business unit of ours, the conversion rate will be adjusted based on the
market value of the securities so distributed relative to the market value
of our common stock, in each case based on the average closing sales prices
of those securities for the 10 trading days commencing on and including the
fifth trading day after the date on which "ex-dividend trading" commences
for such dividend or distribution on the New York Stock Exchange or such
other national or regional exchange or market on which the securities are
then listed or quoted;
(5) distributions consisting exclusively of cash to all holders of
outstanding shares of common stock in an aggregate amount that, together
with (1) other all-cash distributions made within the preceding 12 months
and (2) any cash and the fair market value, as of the expiration of the
tender or exchange offer (other than consideration payable in respect of
any odd-lot tender offer) by us or any of our subsidiaries for shares of
common stock concluded within the preceding 12 months, exceeds the product
of $1.10 (appropriately adjusted from time to time for any stock dividends
on or subdivisions or combinations of our common stock) multiplied by the
number of shares of common stock outstanding on the record date for such
distribution; or
(6) the successful completion of a tender or exchange offer made by us
or any of our subsidiaries for shares of common stock which involves an
aggregate consideration that, together with (1) any cash and the fair
market value of other consideration payable in respect of any tender or
exchange offer (other than consideration payable in respect of any odd-lot
tender offer) by us or any of our subsidiaries for the common stock
concluded within the preceding 12 months and (2) the aggregate amount of
any all-cash distributions to all holders of shares of common stock within
the preceding 12 months, exceeds the product of $1.10 (appropriately
adjusted from time to time for any stock dividends on or subdivisions or
combinations of our common stock) multiplied by the number of shares of
common stock outstanding on the expiration of the tender or exchange offer.
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In addition to these adjustments, we may increase the conversion rate as
our board of directors deems advisable to avoid or diminish any income tax to
holders of our capital stock resulting from any dividend or distribution of
capital stock (or rights to acquire capital stock) or from any event treated as
such for income tax purposes. We may also, from time to time, to the extent
permitted by applicable law, increase the conversion rate by any amount for any
period of at least 20 days if our board of directors has determined that such
increase would be in our best interests. If our board of directors makes such a
determination, it will be conclusive. We will give holders of Notes at least 15
days notice of such an increase in the conversion rate. For a discussion of the
United States federal income tax treatment of an adjustment to the conversion
rate of the Notes, see "Certain United States Federal Income Tax
Considerations -- Adjustments to Interest Accruals on the Notes."
The "current market price" per share of common stock on any day means the
average of the daily closing prices for the five consecutive trading days
selected by us commencing not more than 30 trading days before, and ending not
later than, the earlier of the day in question (including upon the occurrence of
a Fundamental Change) and the day before the "ex-dividend trading" with respect
to the issuance or distribution requiring the computation. For purposes of this
paragraph, the term "ex-dividend trading," when used with respect to any
issuance or distribution, will mean the first date on which the common stock
trades regular way on the applicable exchange or in the applicable market
without the right to receive the issuance or distribution.
No adjustment to the conversion rate or the ability of a holder of a Note
to convert will be made if the holder will otherwise participate in the
distribution without conversion or in certain other cases.
The applicable conversion rate will not be adjusted:
- upon the issuance of any shares of our common stock pursuant to any
present or future plan providing for the reinvestment of dividends or
interest payable on our securities and the investment of additional
optional amounts in shares of our common stock under any plan;
- upon the issuance of any shares of our common stock or options or rights
to purchase those shares pursuant to any present or future employee,
director or consultant benefit plan or program of or assumed by us or any
of our subsidiaries;
- upon the issuance of any shares of our common stock pursuant to any
option, warrant, right or exercisable, exchangeable or convertible
security not described in the preceding bullet and outstanding as of the
date the Notes were first issued;
- for a change in the par value of the common stock; or
- for accrued and unpaid interest, including contingent interest, if any.
You will receive, upon conversion of the Notes, in addition to common
stock, the rights under our rights plan unless, prior to conversion, the rights
have expired, terminated or been redeemed or unless the rights have separated
from the common stock, in which case the conversion rate will be adjusted at the
time of separation as if we distributed to all holders of common stock, shares
of our capital stock, evidences of indebtedness or assets as described above,
subject to readjustment in the event of subsequent expiration, termination or
redemption of such rights.
Adjustments to the applicable conversion rate will be calculated to the
nearest 1/10,000th of a share. No adjustment in the applicable conversion rate
will be required unless the adjustment would require an increase or decrease of
at least 1% of the applicable conversion rate. However, any adjustments which
are not required to be made because they would have required an increase or
decrease of less than 1% will be carried forward and taken into account in any
subsequent adjustment.
PURCHASE OF NOTES BY US AT THE OPTION OF THE HOLDER
Holders have the right to require us to purchase all or a portion of their
Notes on May 15, 2007, May 15, 2012 and May 15, 2017 (each, a "purchase date").
Any Note purchased by us on a purchase
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date will be paid for in cash. We will be required to purchase any outstanding
Notes for which a holder delivers a written purchase notice to the paying agent.
This notice must be delivered during the period beginning at any time from the
opening of business on the date that is 20 business days prior to the relevant
purchase date until the close of business on the fifth business day prior to the
purchase date. If the purchase notice is given and withdrawn during such period,
we will not be obligated to purchase the related Notes. Also, as described in
the "Risk Factors" section of this prospectus supplement under the caption "We
may not have the ability to raise the funds necessary to purchase the Notes upon
a Fundamental Change or other purchase date, as required by the Senior Indenture
governing the Notes," we may not have funds sufficient to purchase the Notes
when we are required to do so.
The purchase price payable will be equal to 100% of the principal amount of
the Notes to be purchased plus any accrued and unpaid interest, including
contingent interest, if any, to but excluding the purchase date.
On or before the 20th business day prior to each purchase date, we will
provide to the Trustee, the paying agent and to all holders of the Notes at
their addresses shown in the register of the registrar, and to beneficial owners
as required by applicable law, a notice stating, among other things:
- the purchase price;
- the name and address of the paying agent and the conversion agent; and
- the procedures that holders must follow to require us to purchase their
Notes.
Simultaneously with providing such notice, we will publish a notice
containing this information in a newspaper of general circulation in The City of
New York or publish the information on our web site or through such other public
medium as we may use at that time.
A notice electing to require us to purchase your Notes must state:
- if certificated Notes have been issued, the certificate numbers of the
Notes;
- the portion of the principal amount of Notes to be purchased, in integral
multiples of $1,000; and
- that the Notes are to be purchased by us pursuant to the applicable
provisions of the Notes and the Senior Indenture.
If the Notes are not in certificated form, your notice must comply with
appropriate DTC procedures.
No Notes may be purchased at the option of holders if there has occurred
and is continuing an event of default other than an event of default that is
cured by the payment of the purchase price of the Notes.
You may withdraw any purchase notice in whole or in part by a written
notice of withdrawal delivered to the paying agent prior to the close of
business on the business day prior to the purchase date. The notice of
withdrawal must state:
- the principal amount of the withdrawn Notes;
- if certificated Notes have been issued, the certificate numbers of the
withdrawn Notes; and
- the principal amount, if any, which remains subject to the purchase
notice.
If the Notes are not in certificated form, your notice must comply with
appropriate DTC procedures.
You must either effect book-entry transfer or deliver the Notes, together
with necessary endorsements, to the office of the paying agent after delivery of
the purchase notice to receive payment of the purchase price. You will receive
payment promptly following the later of the purchase date or the time of book-
entry transfer or the delivery of the Notes. If the paying agent holds money or
securities sufficient to pay the purchase price of the Notes on the business day
following the purchase date, then:
- the Notes will cease to be outstanding and interest will cease to accrue
(whether or not book-entry transfer of the Notes is made or whether or
not the Note is delivered to the paying agent); and
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- all other rights of the holder will terminate (other than the right to
receive the purchase price upon delivery or transfer of the Notes).
FUNDAMENTAL CHANGE REQUIRES PURCHASE OF NOTES BY US AT THE OPTION OF THE HOLDER
If a Fundamental Change (as defined below in this section) occurs at any
time prior to maturity, you will have the right, at your option, to require us
to purchase any or all of your Notes for cash, or any portion of the principal
amount thereof that is equal to $1,000 or an integral multiple of $1,000. The
cash price we are required to pay is equal to 100% of the principal amount of
the Notes to be purchased plus accrued and unpaid interest, including contingent
interest, if any, to but excluding the Fundamental Change purchase date.
A "Fundamental Change" will be deemed to have occurred at the time after
the Notes are originally issued that any of the following occurs:
(1) a "person" or "group" within the meaning of Section 13(d) of the
Exchange Act other than us, our subsidiaries or our or their employee
benefit plans, files a Schedule TO or any schedule, form or report under
the Exchange Act disclosing that such person or group has become the direct
or indirect ultimate "beneficial owner," as defined in Rule 13d-3 under the
Exchange Act, of our common equity representing more than 50% of the voting
power of our common equity entitled to vote generally in the election of
directors; or
(2) consummation of any share exchange, consolidation or merger of us
or any sale, lease or other transfer in one transaction or a series of
transactions of all or substantially all of the consolidated assets of us
and our subsidiaries, taken as a whole, to any person other than us or one
or more of our subsidiaries, pursuant to which our common stock will be
converted into cash, securities or other property; provided, however, that
a transaction where the holders of our common equity immediately prior to
such transaction have directly or indirectly, more than 50% of the
aggregate voting power of all classes of common equity of the continuing or
surviving corporation or transferee entitled to vote generally in the
election of directors immediately after such event shall not be a
Fundamental Change.
A Fundamental Change will not be deemed to have occurred in respect of
either of the foregoing, however, if either:
(1) the last reported sale price of our common stock for any five
trading days within the 10 consecutive trading days ending immediately
before the later of the Fundamental Change or the public announcement
thereof, equals or exceeds 105% of the applicable conversion price of the
Notes immediately before the Fundamental Change or the public announcement
thereof, or
(2) at least 90% of the consideration, excluding cash payments for
fractional shares, in the transaction or transactions constituting the
Fundamental Change consists of shares of capital stock traded on a national
securities exchange or quoted on the Nasdaq National Market or which will
be so traded or quoted when issued or exchanged in connection with a
Fundamental Change (these securities being referred to as "publicly traded
securities") and as a result of this transaction or transactions the Notes
become convertible into such publicly traded securities, excluding cash
payments for fractional shares.
For purposes of the above paragraph the term capital stock of any person
means any and all shares (including ordinary shares or American Depositary
Shares), interests, participations, or other equivalents however designated of
corporate stock or other equity participations, including partnership interests,
whether general or limited, of such person and any rights (other than debt
securities convertible or exchangeable into an equity interest), warrants or
options to acquire an equity interest in such person.
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On or before the 30th day after the occurrence of a Fundamental Change, we
will provide to all holders of the Notes and the Trustee and paying agent a
notice of the occurrence of the Fundamental Change and of the resulting purchase
right. Such notice shall state, among other things:
- the events causing a Fundamental Change;
- the date of the Fundamental Change;
- the last date on which a holder may exercise the purchase right;
- the Fundamental Change purchase price;
- the Fundamental Change purchase date;
- the name and address of the paying agent and the conversion agent;
- the applicable conversion rate and any adjustments to the applicable
conversion rate;
- the Notes with respect to which a Fundamental Change purchase notice has
been given by the holder may be converted only if the holder withdraws
the Fundamental Change purchase notice in accordance with the terms of
the Senior Indenture; and
- the procedures that holders must follow to require us to purchase their
Notes.
Simultaneously with providing such notice, we will publish a notice
containing this information in a newspaper of general circulation in The City of
New York or publish the information on our web site or through such other public
medium as we may use at that time.
To exercise the purchase right, you must deliver prior to the close of
business on the business day immediately preceding the purchase date, subject to
extension to comply with applicable law, the Notes to be purchased, duly
endorsed for transfer, together with a written purchase notice and the form
entitled "Form of Fundamental Change Purchase Notice" on the reverse side of the
Notes duly completed, to the paying agent. Your purchase notice must state:
- if certificated, the certificate numbers of your Notes to be delivered
for purchase;
- the portion of the principal amount of Notes to be purchased, which must
be $1,000 or an integral multiple thereof; and
- that the Notes are to be purchased by us pursuant to the applicable
provisions of the Notes and the Senior Indenture.
If the Notes are not in certificated form, your notice must comply with
appropriate DTC procedures.
You may withdraw any purchase notice (in whole or in part) by a written
notice of withdrawal delivered to the paying agent prior to the close of
business on the business day prior to the Fundamental Change purchase date. The
notice of withdrawal shall state:
- the principal amount of the withdrawn Notes;
- if certificated Notes have been issued, the certificate numbers of the
withdrawn Notes; and
- the principal amount, if any, which remains subject to the purchase
notice.
If the Notes are not in certificated form, your notice must comply with
appropriate DTC procedures.
We will be required to purchase the Notes no later than 30 days after the
date of our notice of the occurrence of the relevant Fundamental Change subject
to extension to comply with applicable law. You will receive payment of the
Fundamental Change purchase price promptly following the later of the
Fundamental Change purchase date or the time of book-entry transfer or the
delivery of the Notes. If the
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paying agent holds money or securities sufficient to pay the Fundamental Change
purchase price of the Notes on the business day following the Fundamental Change
purchase date, then:
- the Notes will cease to be outstanding and interest will cease to accrue
(whether or not book-entry transfer of the Notes is made or whether or
not the Note is delivered to the paying agent); and
- all other rights of the holder will terminate (other than the right to
receive the Fundamental Change purchase price upon delivery or transfer
of the Notes).
The rights of the holders to require us to purchase their Notes upon a
Fundamental Change could discourage a potential acquirer of us. The Fundamental
Change purchase feature, however, is not the result of management's knowledge of
any specific effort to accumulate shares of our common stock, to obtain control
of us by any means or part of a plan by management to adopt a series of
anti-takeover provisions. Instead, the Fundamental Change purchase feature is a
standard term contained in other offerings of debt securities similar to the
Notes that have been marketed by the underwriters. The terms of the Fundamental
Change purchase feature resulted from negotiations between the underwriters and
us.
The term Fundamental Change is limited to specified transactions and may
not include other events that might adversely affect our financial condition. In
addition, the requirement that we offer to purchase the Notes upon a Fundamental
Change may not protect holders in the event of a highly leveraged transaction,
reorganization, merger or similar transaction involving us.
No Notes may be purchased at the option of holders upon a Fundamental
Change if there has occurred and is continuing an event of default other than an
event of default that is cured by the payment of the Fundamental Change purchase
price of the Notes.
The definition of Fundamental Change includes a phrase relating to the
conveyance, transfer, sale, lease or disposition of "all or substantially all"
of our consolidated assets. There is no precise, established definition of the
phrase "substantially all" under applicable law. Accordingly, the ability of a
holder of the Notes to require us to purchase its Notes as a result of the
conveyance, transfer, sale, lease or other disposition of less than all of our
assets may be uncertain.
If a Fundamental Change were to occur, we may not have enough funds to pay
the Fundamental Change purchase price. See "Risk Factors" under the caption "We
may not have the ability to raise the funds necessary to purchase the Notes upon
a fundamental change or other purchase date, as required by the Senior Indenture
governing the Notes." If we fail to purchase the Notes when required following a
Fundamental Change, we will be in default under the Senior Indenture. In
addition, we have, and may in the future incur, other indebtedness with similar
change in control provisions permitting our holders to accelerate or to require
us to purchase our indebtedness upon the occurrence of similar events or on some
specific dates.
MERGERS AND SALES OF ASSETS
Although the types of transactions described in the accompanying prospectus
under the heading "Description of the Senior Notes -- Consolidation, Merger,
Conveyance or Transfer" are permitted under the Senior Indenture, certain of
these transactions could constitute a Fundamental Change (as defined above)
permitting each holder to require us to purchase the Notes of such holder as
described above.
EVENTS OF DEFAULT
In addition to those events of default described in the accompanying
prospectus under the heading "Description of the Senior Notes -- Events of
Default," each of the following constitutes an event of default with respect to
the Notes:
- failure to pay principal of or any premium on any Note when due,
including upon maturity, optional redemption or purchase by us at the
option of the holder (upon the occurrence of a Fundamental Change or
exercise by a holder of its option to require us to purchase such
holder's Notes);
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- failure to pay when due any interest, including any contingent interest,
on any Note that continues for 60 days; and
- default in our obligation to satisfy our conversion obligation upon
exercise of a holder's conversion right.
In addition, the holders of at least a majority in aggregate principal
amount of the outstanding Notes may waive an existing default as described in
the Senior Indenture with respect to the Notes and its consequences, other than:
(i) any default in any payment of redemption price, purchase price or
Fundamental Change purchase price with respect to any Notes; or
(ii) any default which constitutes a failure to convert any Note in
accordance with its terms and the terms of the Senior Indenture.
MODIFICATION AND WAIVER
In addition to those provisions described in the accompanying prospectus
under the heading "Description of the Senior Notes -- Modification; Waiver," the
Senior Indenture (including the terms and conditions of the Notes) cannot be
modified or amended without the consent of the holder of each outstanding Note
to:
- reduce the redemption price, purchase price or Fundamental Change
purchase price of the Notes; and
- make any change that adversely affects the right to convert the Notes.
CALCULATIONS IN RESPECT OF NOTES
We will be responsible for making all calculations called for under the
Notes. These calculations include, but are not limited to, determinations of the
market prices of our common stock, accrued interest, including contingent
interest, if any, payable on the Notes and the conversion price of the Notes. We
will make all these calculations in good faith and, absent manifest error, our
calculations will be final and binding on holders of Notes. We will provide a
schedule of our calculations to each of the Trustee and the conversion agent,
and each of the Trustee and conversion agent is entitled to rely upon the
accuracy of our calculations without independent verification. The Trustee will
forward our calculations to any holder of Notes upon the request of that holder.
FORM, EXCHANGE, REGISTRATION AND TRANSFER
We will issue the Notes in registered form, without interest coupons.
Holders may present Notes for conversion, registration of transfer and exchange
at the office maintained by us for such purpose, which will initially be the
Corporate Trust Office of the Trustee in The City of New York.
NOTICES
Except as otherwise described herein, notice to registered holders of the
Notes will be given by mail to the addresses as they appear in the security
register. Notices will be deemed to have been given on the date of such mailing.
CONCERNING THE TRUSTEE
JPMorgan Chase Bank (formerly known as The Chase Manhattan Bank) is the
Trustee and is also the bond trustee and the subordinated indenture trustee for
Duke Energy under its first and refunding mortgage and subordinated indenture,
respectively. Duke Energy and certain of its affiliates maintain
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deposit accounts and banking relationships with JPMorgan Chase Bank. JPMorgan
Chase Bank also serves as trustee or agent under other indentures and agreements
pursuant to which securities of Duke Energy and of certain of its affiliates are
outstanding.
The Trustee is under no obligation to exercise any of its powers at the
request of any of the holders of the Notes unless those holders have offered to
the Trustee security or indemnity satisfactory to it against the cost, expenses
and liabilities it might incur as a result. The holders of a majority in
principal amount of the Notes outstanding may direct the time, method and place
of conducting any proceeding for any remedy available to the Trustee, or the
exercise of any trust or power of the Trustee. The Trustee will not be liable
for any action that it takes or omits to take in good faith in accordance with
any such direction.
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BOOK-ENTRY SYSTEM
We have obtained the information in this section concerning The Depository
Trust Company, or DTC, and its book-entry system and procedures from sources
that we believe to be reliable, but we take no responsibility for the accuracy
of this information.
The Notes initially will be represented by one or more fully registered
global notes. Each global note will be deposited with, or on behalf of, DTC or
any successor thereto and registered in the name of Cede & Co., DTC's nominee.
You may hold your interests in the global notes in the United States
through DTC, either as a participant in such system or indirectly through
organizations which are participants in such system. So long as DTC or its
nominee is the registered owner of the global securities representing the Notes,
DTC or such nominee will be considered the sole owner and holder of the Notes
for all purposes of the Notes and the Senior Indenture. Except as provided
below, owners of beneficial interests in the Notes will not be entitled to have
the Notes registered in their names, will not receive or be entitled to receive
physical delivery of the Notes in definitive form and will not be considered the
owners or holders of the Notes under the Senior Indenture, including for
purposes of receiving any reports that we or the Trustee deliver pursuant to the
Senior Indenture. Accordingly, each person owning a beneficial interest in a
Note must rely on the procedures of DTC or its nominee and, if such person is
not a participant, on the procedures of the participant through which such
person owns its interest, in order to exercise any rights of a holder of Notes.
Unless and until we issue the Notes in fully certificated form under the
limited circumstances described below under the heading "-- Certificated Notes":
- you will not be entitled to receive physical delivery of a certificate
representing your interest in the Notes;
- all references in this prospectus supplement or in the accompanying
prospectus to actions by holders will refer to actions taken by DTC upon
instructions from its direct participants; and
- all references in this prospectus supplement or the accompanying
prospectus to payments and notices to holders will refer to payments and
notices to DTC or Cede & Co., as the registered holder of the Notes, for
distribution to you in accordance with DTC procedures.
THE DEPOSITORY TRUST COMPANY
DTC will act as securities depositary for the Notes. The Notes will be
issued as fully registered notes registered in the name of Cede & Co. DTC is:
- a limited-purpose trust company organized under the New York Banking Law;
- a "banking organization" under the New York Banking Law;
- a member of the Federal Reserve System;
- a "clearing corporation" under the New York Uniform Commercial Code; and
- a "clearing agency" registered under the provision of Section 17A of the
Securities Exchange Act of 1934.
DTC holds securities that its direct participants deposit with DTC. DTC
also facilitates the settlement among direct participants of securities
transactions, such as transfers and pledges, in deposited securities through
electronic computerized book-entry changes in direct participants' accounts,
thereby eliminating the need for physical movement of securities certificates.
Direct participants of DTC include securities brokers and dealers
(including underwriters), banks, trust companies, clearing corporations, and
certain other organizations. DTC is owned by a number of its direct participants
and by The New York Stock Exchange, Inc., the American Stock Exchange, Inc. and
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the National Association of Securities Dealers, Inc. Indirect participants of
DTC, such as securities brokers and dealers, banks and trust companies, can also
access the DTC system if they maintain a custodial relationship with a direct
participant.
If you are not a direct participant or an indirect participant and you wish
to purchase, sell or otherwise transfer ownership of, or other interests in, the
Notes, you must do so through a direct participant or an indirect participant.
DTC agrees with and represents to DTC participants that it will administer its
book-entry system in accordance with its rules and by-laws and requirements of
law. The SEC has on file a set of the rules applicable to DTC and its direct
participants.
Purchases of the Notes under DTC's system must be made by or through direct
participants, which will receive a credit for the Notes on DTC's records. The
ownership interest of each beneficial owner is in turn to be recorded on the
records of direct participants and indirect participants. Beneficial owners will
not receive written confirmation from DTC of their purchase, but beneficial
owners are expected to receive written confirmations providing details of the
transaction, as well as periodic statements of their holdings, from the direct
or indirect participants through which such beneficial owners entered into the
transaction. Transfers of ownership interests in the Notes are to be
accomplished by entries made on the books of direct and indirect participants
acting on behalf of beneficial owners. Beneficial owners will not receive
physical delivery of certificates representing their ownership interests in the
Notes, except as provided below in "-- Certificated Notes."
To facilitate subsequent transfers, all Notes deposited with DTC are
registered in the name of DTC's nominee, Cede & Co. The deposit of Notes with
DTC and their registration in the name of Cede & Co. has no effect on beneficial
ownership. DTC has no knowledge of the actual beneficial owners of the Notes.
DTC's records reflect only the identity of the direct participants to whose
accounts such Notes are credited, which may or may not be the beneficial owners.
The participants will remain responsible for keeping account of their holdings
on behalf of their customers.
Conveyance of notices and other communications by DTC to direct
participants, by direct participants to indirect participants and by direct and
indirect participants to beneficial owners will be governed by arrangements
among them, subject to any statutory or regulatory requirements as may be in
effect from time to time.
BOOK-ENTRY FORMAT
Under the book-entry format, the Trustee will pay interest or principal
payments to Cede & Co., as nominee of DTC. DTC will forward the payment to the
direct participants, who will then forward the payment to the indirect
participants or to the beneficial owners. You may experience some delay in
receiving your payments under this system.
DTC is required to make book-entry transfers on behalf of its direct
participants and is required to receive and transmit payments of principal and
interest, including contingent interest, if any, on the Notes. Any direct
participant or indirect participant with which you have an account is similarly
required to make book-entry transfers and to receive and transmit payments with
respect to Notes on your behalf. We and the Trustee have no responsibility or
liability for any aspect of the records relating to or payments made on account
of beneficial ownership interests in the Notes or for maintaining, supervising
or reviewing any records relating to such beneficial ownership interests.
The Trustee will not recognize you as a holder under the Senior Indenture,
and you can only exercise the rights of a holder indirectly through DTC and its
direct participants. DTC has advised us that it will only take action regarding
a Note if one or more of the direct participants to whom the Note is credited
direct DTC to take such action. DTC can only act on behalf of its direct
participants. Your ability to pledge Notes to indirect participants, and to take
other actions, may be limited because you will not possess a physical
certificate that represents your Notes.
S-31
CERTIFICATED NOTES
Unless and until they are exchanged, in whole or in part, for Notes in
definitive form in accordance with the terms of the Notes, the Notes may not be
transferred except as a whole by DTC to a nominee of DTC; as a whole by a
nominee of DTC to DTC or another nominee of DTC; or as a whole by DTC or nominee
of DTC to a successor of DTC or a nominee of such successor.
We will issue Notes to you or your nominees, in fully certificated
registered form, rather than to DTC or its nominees, only if:
- we advise the Trustee in writing that DTC is no longer willing or able to
discharge its responsibilities properly or that DTC is no longer a
registered clearing agency under the Securities Exchange Act of 1934, and
the Trustee or we are unable to locate a qualified successor within 90
days; or
- we, at our option, elect to terminate use of the book-entry system
through DTC.
If any of the two above events occurs, DTC is required to notify all direct
participants that Notes in fully certificated registered form are available
through DTC. DTC will then surrender the global note representing the Notes
along with instructions for re-registration. The Trustee will re-issue the Notes
in full certificated registered form and will recognize the registered holders
of the certificated Notes as holders under the Senior Indenture.
S-32
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material U.S. federal income tax
consequences of the purchase, ownership, and disposition of the Notes, and where
noted, the common stock, as of the date of this prospectus supplement. Except
where noted, this summary deals only with a Note held as a capital asset by a
U.S. holder (as defined below) who purchases the Notes on original issuance at
its initial offering price, and it does not deal with special situations. For
example, this summary does not address:
- tax consequences to holders who may be subject to special tax treatment,
such as dealers in securities or currencies, traders in securities that
elect to use the mark-to-market method of accounting for their
securities, financial institutions, regulated investment companies, real
estate investment trusts, tax-exempt entities or insurance companies;
- tax consequences to persons holding the Notes as part of a hedging,
integrated, constructive sale or conversion transaction or a straddle;
- tax consequences to U.S. holders of the Notes whose "functional currency"
is not the U.S. dollar;
- alternative minimum tax consequences, if any; or
- any state, local or foreign tax consequences.
The discussion below is based upon the provisions of the Internal Revenue
Code of 1986, as amended (the Code), and regulations, rulings and judicial
decisions as of the date of this prospectus. Those authorities may be changed,
perhaps retroactively, so as to result in U.S. federal income tax consequences
different from those discussed below.
If a partnership holds the Notes, the tax treatment of a partner will
generally depend upon the status of the partner and the activities of the
partnership. If you are a partner of a partnership holding the Notes, you should
consult your own tax advisors.
No statutory or judicial authority directly addresses the treatment of the
Notes or instruments similar to the Notes for U.S. federal income tax purposes.
The Internal Revenue Service (the IRS) has issued a revenue ruling with respect
to instruments similar to the Notes. This ruling supports certain aspects of the
treatment described below. However, no rulings have been sought or are expected
to be sought from the IRS with respect to any of the U.S. federal income tax
consequences regarding this particular offering. As a result, we cannot assure
you that the IRS will agree with the tax characterizations and the tax
consequences described below.
IF YOU ARE CONSIDERING PURCHASING THE NOTES, YOU SHOULD CONSULT YOUR OWN
TAX ADVISORS CONCERNING THE U.S. FEDERAL INCOME TAX CONSEQUENCES IN LIGHT OF
YOUR PARTICULAR SITUATION AND ANY CONSEQUENCES ARISING UNDER THE LAWS OF ANY
OTHER TAXING JURISDICTION.
U.S. HOLDERS
The following discussion is a summary of certain U.S. federal income tax
consequences that will apply to you if you are a U.S. holder of Notes.
For purposes of this discussion, a U.S. holder is a beneficial owner of a
Note that is:
- a citizen or resident of the United States;
- a corporation or partnership created or organized in or under the laws of
the United States or any political subdivision of the United States;
- an estate the income of which is subject to U.S. federal income taxation
regardless of its source; or
- a trust if it (1) is subject to the primary supervision of a court within
the United States and one or more United States persons have the
authority to control all substantial decisions of the trust or (2) has a
valid election in effect under applicable U.S. Treasury regulations to be
treated as a United States person.
S-33
CLASSIFICATION OF THE NOTES
Under the Senior Indenture governing the Notes, we and each holder of the
Notes agree, for U.S. federal income tax purposes, to treat the Notes as
indebtedness that is subject to the regulations governing contingent payment
debt instruments (the Contingent Debt Regulations) in the manner described
below. The remainder of this discussion assumes that the Notes will be so
treated and does not address any possible differing treatments of the Notes.
However, the application of the Contingent Debt Regulations to instruments such
as the Notes is uncertain in several respects, and no rulings have been sought
with respect to this particular offering from the IRS or a court with respect to
any of the tax consequences discussed below. Accordingly, no assurance can be
given that the IRS or a court will agree with the treatment described herein.
Any differing treatment could affect the amount, timing and character of income,
gain or loss in respect of an investment in the Notes. In particular, a holder
might be required to accrue original issue discount at a lower rate, might not
recognize income, gain or loss upon conversion of the Notes to common stock, and
might recognize capital gain or loss upon a taxable disposition of the Notes.
HOLDERS SHOULD CONSULT THEIR TAX ADVISORS CONCERNING THE TAX TREATMENT OF
HOLDING THE NOTES.
ACCRUAL OF INTEREST
Under the Contingent Debt Regulations, actual cash payments on the Notes,
including payments of contingent interest, if any, will not be reported
separately as taxable income, but will be taken into account under the
regulations. As discussed more fully below, the effect of the Contingent Debt
Regulations will be to:
- require you, regardless of your usual method of tax accounting, to use
the accrual method with respect to the Notes;
- require you to accrue original issue discount at the comparable yield (as
described below) which will be substantially in excess of interest
payments actually received by you; and
- generally result in ordinary rather than capital treatment of any gain,
and to some extent loss, on the sale, exchange, purchase or redemption of
the Notes.
You will be required to accrue an amount of original issue discount for
U.S. federal income tax purposes, for each accrual period prior to and including
the maturity date of the Notes that equals:
- the product of (i) the adjusted issue price (as defined below) of the
Notes as of the beginning of the accrual period; and (ii) the comparable
yield (as defined below) of the Notes, adjusted for the length of the
accrual period;
- divided by the number of days in the accrual period; and
- multiplied by the number of days during the accrual period that you held
the Notes.
The issue price of a Note will be the first price at which a substantial
amount of the Notes is sold to the public, excluding sales to bond houses,
brokers or similar persons or organizations acting in the capacity of
underwriters, placement agents or wholesalers. The adjusted issue price of a
Note will be its issue price increased by any original issue discount previously
accrued on the Note, determined without regard to any adjustments to original
issue discount accruals described below, and decreased by the projected amount
of any payments previously scheduled to be made (including payments of stated
cash interest) with respect to the Notes.
Under the Contingent Debt Regulations, you will be required to include
original issue discount in income each year, regardless of your usual method of
tax accounting, based on the comparable yield of the Notes. We have determined
the comparable yield of the Notes based on the rate, as of the initial issue
date, at which we would issue a noncontingent, nonconvertible, fixed-rate debt
instrument with terms and conditions otherwise comparable to those of the Notes.
Accordingly, we have determined that the comparable yield is an annual rate of
6.03%, compounded semi-annually.
S-34
We are required to furnish to you the comparable yield and, solely for tax
purposes, a projected payment schedule that includes the actual interest
payments on the Notes and estimates the amount and timing of contingent interest
payments and the payment upon maturity of the Notes taking into account the fair
market value of the common stock that might be paid upon a conversion of the
Notes. You may obtain the projected payment schedule by submitting a written
request for it to us at the address set forth in "Where You Can Find More
Information." By purchasing the Notes, you agree in the Senior Indenture to be
bound by our determination of the comparable yield and projected payment
schedule. For U.S. federal income tax purposes, you must use the comparable
yield and the schedule of projected payments in determining your original issue
discount accruals, and the adjustments thereto described below, in respect of
the Notes.
THE COMPARABLE YIELD AND THE PROJECTED PAYMENT SCHEDULE ARE NOT PROVIDED
FOR ANY PURPOSE OTHER THAN THE DETERMINATION OF YOUR ORIGINAL ISSUE DISCOUNT AND
ADJUSTMENTS THEREOF IN RESPECT OF THE NOTES AND DO NOT CONSTITUTE A PROJECTION
OR REPRESENTATION REGARDING THE ACTUAL AMOUNT OF THE PAYMENTS ON A NOTE.
ADJUSTMENTS TO INTEREST ACCRUALS ON THE NOTES
If the actual contingent payments made on the Notes differ from the
projected contingent payments, adjustments will be made for the difference. If,
during any taxable year, you receive actual payments with respect to the Notes
for that taxable year that in the aggregate exceed the total amount of projected
payments for the taxable year, you will incur a positive adjustment equal to the
amount of such excess. Such positive adjustment will be treated as additional
original issue discount in such taxable year. For these purposes, the payments
in a taxable year include the fair market value of property (including shares of
our common stock upon a conversion of the Notes) received in that year. If you
receive in a taxable year actual payments with respect to the Notes for that
taxable year that in the aggregate are less than the amount of projected
payments for that taxable year, you will incur a negative adjustment equal to
the amount of such deficit. A negative adjustment will:
- first, reduce the amount of original issue discount required to be
accrued in that taxable year;
- second, any negative adjustments that exceed the amount of original issue
discount accrued in that taxable year will be treated as ordinary loss to
the extent of your total prior original issue discount inclusions with
respect to the Notes during prior taxable years reduced to the extent
such prior original issue discount was offset by prior negative
adjustments; and
- third, any excess negative adjustments will be treated as a regular
negative adjustment in the succeeding taxable year.
SALE, EXCHANGE, CONVERSION, PURCHASE OR REDEMPTION
Upon the sale, exchange, conversion, purchase or redemption of a Note, you
will recognize gain or loss equal to the difference between your amount realized
and your adjusted tax basis in the Notes. As a holder of a Note, you agree that
under the Contingent Debt Regulations we will report the amount realized as
including the fair market value of our stock that you receive on conversion of a
Note as a contingent payment. Any gain on a Note generally will be treated as
ordinary income. Loss from the disposition of a Note will be treated as ordinary
loss to the extent of your prior net original issue discount inclusions with
respect to the Notes not otherwise offset by prior negative adjustments. Any
loss in excess of that amount will be treated as capital loss, which will be
long-term if the Notes were held for greater than one year. The deductibility of
net capital losses by individuals and corporations is subject to limitations.
Special rules apply in determining the tax basis of a Note. Your adjusted
tax basis in a Note is generally the cost of the Note to you increased by
original issue discount (before taking into account the adjustments described
above) you previously accrued on the Notes, and reduced by the projected amount
of any payments previously scheduled to be made (including payments of stated
cash interest) with respect to the Notes.
S-35
Under this treatment, your adjusted tax basis in the common stock received
upon conversion of a Note will equal the then current fair market value of such
common stock. To determine your holding period for the common stock received
upon conversion, you will begin counting on the day after the common stock is
acquired.
Given the uncertain tax treatment of instruments such as the Notes, you
should contact your tax advisors concerning the tax treatment on conversion of a
Note and the ownership of the common stock.
CONSTRUCTIVE DISTRIBUTIONS
The conversion rate of the Notes will be adjusted in certain circumstances.
Under section 305(c) of the Code, adjustments (or failures to make adjustments)
that have the effect of increasing your proportionate interest in our assets or
earnings may in some circumstances result in a deemed distribution to you. Any
deemed distributions will be taxable as a dividend, return of capital, or
capital gain in accordance with the earnings and profits rules under the Code.
NON-U.S. HOLDERS
The following is a summary of the U.S. federal tax consequences that will
apply to you if you are a non-U.S. holder of Notes or shares of common stock.
The term "non-U.S. holder" means a beneficial owner of a Note or share of common
stock that is not a U.S. holder.
Special rules may apply to certain non-U.S. holders such as "controlled
foreign corporations," "passive foreign investment companies," "foreign personal
holding companies," corporations that accumulate earnings to avoid federal
income tax or, in certain circumstances, individuals who are U.S. expatriates.
Such non-U.S. holders should consult their own tax advisors to determine the
U.S. federal, state, local and other tax consequences that may be relevant to
them.
PAYMENTS WITH RESPECT TO THE NOTES
The 30% U.S. federal withholding tax will not apply to any payment to you
of principal or interest (including amounts taken into income under the accrual
rules described above under "-- U.S. Holders" and a payment of common stock
pursuant to a conversion) on a Note, provided that:
- you do not actually or constructively own 10% or more of the total
combined voting power of all classes of our stock that are entitled to
vote within the meaning of Section 871(h)(3) of the Code;
- you are not a controlled foreign corporation that is related to us
through stock ownership;
- you are not a bank whose receipt of interest (including original issue
discount) on a Note is described in Section 881(c)(3)(A) of the Code;
- our common stock continues to be actively traded within the meaning of
Section 871(h)(4)(C)(v)(1) of the Code;
- we are not a "United States real property holding corporation" or our
stock continues to be regularly traded on an established securities
market and you hold or held (at any time during the shorter of the five
year period preceding the disposition of your Notes or your holding
period) no more than 5% of our common stock; and
- (a) you provide your name and address, and certify, under penalties of
perjury, that you are not a United States person (which certification may
be made on an IRS Form W-8BEN (or successor form)) or (b) you hold your
Notes through certain foreign intermediaries and you satisfy the
certification requirements of applicable Treasury regulations. Special
certification rules apply to holders that are pass-through entities.
If you cannot satisfy the requirements described above, payments of
interest (including original issue discount) will be subject to the 30% U.S.
federal withholding tax, unless you provide us with a properly executed (1) IRS
Form W-8BEN (or successor form) claiming an exemption from or reduction in
S-36
withholding under the benefit of an applicable tax treaty or (2) IRS Form W-8ECI
(or successor form) stating that interest (including original issue discount)
paid on the Notes is not subject to withholding tax because it is effectively
connected with your conduct of a trade or business in the United States.
If you are engaged in a trade or business in the United States and interest
(including original issue discount) on a Note is effectively connected with the
conduct of that trade or business, you will be subject to U.S. federal income
tax on that interest on a net income basis (although exempt from the 30%
withholding tax) in the same manner as if you were a United States person as
defined under the Code. In addition, if you are a foreign corporation, you may
be subject to a "branch profits tax" equal to 30% (or lower applicable treaty
rate) of your earnings and profits for the taxable year, subject to adjustments,
that are effectively connected with your conduct of a trade or business in the
United States. For this purpose, interest (including original issue discount)
will be included in the earnings and profits of such foreign corporation.
PAYMENTS ON COMMON STOCK AND CONSTRUCTIVE DIVIDENDS
Any dividends paid to you with respect to the shares of common stock (and
any deemed dividends resulting from certain adjustments, or failure to make
adjustments, to the number of shares of common stock to be issued upon
conversion, see "-- Constructive Distributions" above) will be subject to
withholding tax at a 30% rate or such lower rate as may be specified by an
applicable income tax treaty. However, dividends that are effectively connected
with the conduct of a trade or business within the United States and, where a
tax treaty applies, are attributable to a U.S. permanent establishment, are not
subject to the withholding tax, but instead are subject to U.S. federal income
tax on a net income basis at applicable graduated individual or corporate rates.
Certain certification and disclosure requirements must be complied with in order
for effectively connected income to be exempt from withholding. Any such
effectively connected dividends received by a foreign corporation may, under
certain circumstances, be subject to an additional "branch profits tax" at a 30%
rate or such lower rate as may be specified by an applicable income tax treaty.
A non-U.S. holder of shares of common stock who wishes to claim the benefit
of an applicable treaty rate is required to satisfy applicable certification and
other requirements. If you are eligible for a reduced rate of U.S. withholding
tax pursuant to an income tax treaty, you may obtain a refund of any excess
amounts withheld by filing an appropriate claim for refund with the IRS.
SALE, EXCHANGE, REDEMPTION OR OTHER DISPOSITION OF SHARES OF COMMON STOCK
Any gain realized upon the sale, exchange, redemption or other disposition
of a share of common stock generally will not be subject to U.S. federal income
tax unless:
- that gain is effectively connected with the conduct of a trade or
business in the United States by you,
- you are an individual who is present in the United States for 183 days or
more in the taxable year of that disposition, and certain other
conditions are met, or
- we are or have been a "U.S. real property holding corporation" for U.S.
federal income tax purposes.
An individual non-U.S. holder described in the first bullet point above
will be subject to U.S. federal income tax on the net gain derived from the
sale. An individual non-U.S. holder described in the second bullet point above
will be subject to a flat 30% U.S. federal income tax on the gain derived from
the sale, which may be offset by U.S. source capital losses, even though the
holder is not considered a resident of the United States. A non-U.S. holder that
is a foreign corporation and is described in the first bullet point above will
be subject to tax on gain under regular graduated U.S. federal income tax rates
and, in addition, may be subject to a "branch profits tax" at a 30% rate or a
lower rate if so specified by an applicable income tax treaty.
S-37
We have not determined whether we are a "United States real property
holding corporation" for United States federal income tax purposes. If we are or
become a "United States real property holding corporation" and our common stock
is and continues to be regularly traded on an established securities market,
only a non-United States holder of common stock who holds or held (at any time
during the shorter of the five year period preceding the date of disposition or
the holder's holding period) more than 5% of our common stock will be subject to
United States federal income tax on the disposition of our common stock.
U.S. FEDERAL ESTATE TAX
Your estate will not be subject to United States federal estate tax on
Notes beneficially owned by you at the time of your death provided that:
- any payment to you on the Notes would be eligible for exemption from the
30% United States federal withholding tax under the rules described in
the bullet points above under "-- Payments With Respect to the Notes,"
without regard to the certification requirements of the sixth bullet
point; and
- interest on those Notes would not have been, if received at the time of
your death, effectively connected with the conduct by you of a trade or
business in the United States.
BACKUP WITHHOLDING AND INFORMATION REPORTING
If you are a U.S. holder of Notes, information reporting requirements
generally will apply to all payments we make to you and the proceeds from a sale
of a Note or share of common stock made to you, unless you are an exempt
recipient such as a corporation. A backup withholding tax will apply to those
payments if you fail to provide a taxpayer identification number, or a
certification of exempt status, or if you fail to report in full interest and
dividend income.
In general, if you are a non-U.S. holder, you will not be subject to backup
withholding with respect to payments that we make to you provided that we do not
have actual knowledge or reason to know that you are a United States person and
you have given us the certification described above under "--Payments With
Respect to the Notes." We must report annually to the IRS and to each non-U.S.
holder the amount of dividends paid to such holder and the tax withheld with
respect to such dividends, regardless of whether withholding was required.
Copies of the information returns reporting such dividends and withholding may
also be made available to the tax authorities in the country in which the
non-U.S. holder resides under the provisions of an applicable income tax treaty.
In addition, if you are a non-U.S. holder, payments of the proceeds of a
sale of a Note or share of common stock within the United States or conducted
through certain U.S.-related financial intermediaries are subject to both backup
withholding and information reporting unless you certify under penalties of
perjury that you are a non-U.S. holder (and the payor does not have actual
knowledge or reason to know that you are a United States person) or you
otherwise establish an exemption.
Any amounts withheld under the backup withholding rules will be allowed as
a refund or a credit against your U.S. federal income tax liability provided the
required information is furnished to the IRS.
S-38
UNDERWRITING
Citigroup Global Markets Inc., J.P. Morgan Securities Inc., Morgan Stanley
& Co. Incorporated and Wachovia Securities, Inc. are acting as joint
book-running managers of the offering, and as representatives of the
underwriters named below.
Subject to the terms and conditions stated in the underwriting agreement
dated the date of this prospectus supplement, each underwriter named below has
agreed severally and not jointly to purchase, and we have agreed to sell to that
underwriter, the principal amount of Notes set forth opposite the underwriter's
name.
PRINCIPAL AMOUNT
UNDERWRITER OF NOTES
----------- ----------------
Citigroup Global Markets Inc................................ $129,500,000
J.P. Morgan Securities Inc. ................................ 129,500,000
Morgan Stanley & Co. Incorporated........................... 129,500,000
Wachovia Securities, Inc. .................................. 129,500,000
Banc One Capital Markets, Inc. ............................. 28,000,000
Credit Suisse First Boston LLC.............................. 28,000,000
Goldman, Sachs & Co. ....................................... 28,000,000
UBS Warburg LLC............................................. 28,000,000
ABN AMRO Incorporated....................................... 14,000,000
CIBC World Markets Corp. ................................... 14,000,000
Dresdner Kleinwort Wasserstein Securities LLC............... 14,000,000
Scotia Capital (USA) Inc. .................................. 14,000,000
TD Securities (USA) Inc. ................................... 14,000,000
------------
Total.................................................. $700,000,000
============
The underwriting agreement provides that the obligations of the
underwriters to purchase the Notes included in this offering are subject to
approval of legal matters by counsel and to other conditions. The underwriters
are obligated to purchase all the Notes if they purchase any of the Notes.
However, the underwriters are not required to take or pay for the Notes covered
by the underwriters' overallotment option described below.
The underwriters propose to offer some of the Notes directly to the public
at the public offering price set forth on the cover page of this prospectus
supplement and some of the Notes to dealers at the public offering price less a
concession not to exceed $13.50 per Note. After the initial offering of the
Notes to the public, the underwriters may change the public offering price and
concessions.
We have granted to the underwriters an option to purchase from us within 13
days of the closing of the initial offering of the Notes up to $70,000,000
additional aggregate principal amount of Notes at the public offering price less
the underwriting discount. The underwriters may exercise the option solely for
the purpose of covering overallotments, if any, in connection with this
offering. To the extent the option is exercised, each underwriter must purchase
a principal amount of additional Notes approximately proportionate to that
underwriter's initial purchase commitment.
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The following table shows the underwriting discount that we are to pay to
the underwriters in connection with this offering. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional Notes.
PAID BY DUKE ENERGY
---------------------------
NO EXERCISE FULL EXERCISE
----------- -------------
Per Note................................................... $ 22.50 $ 22.50
Total...................................................... $15,750,000 $17,325,000
The Notes are a new issue of securities with no established trading market.
We have been advised by the underwriters that they intend to make a market in
the Notes, but they are not obligated to do so and may discontinue market making
at any time without notice. No assurance can be given as to the liquidity of any
trading market for the Notes.
We and our executive officers have each agreed, subject to certain
exceptions, that without the prior written consent of Citigroup Global Markets
Inc., J.P. Morgan Securities Inc., Morgan Stanley & Co. Incorporated and
Wachovia Securities, Inc. on behalf of the underwriters, we and our executive
officers will not, during the 60-day period after the date of this prospectus
supplement:
- offer, pledge, sell or contract to sell any Notes or shares of common
stock,
- sell any option or contract to purchase any Notes or shares of common
stock,
- purchase any option or contract to sell any Notes or shares of common
stock,
- grant any option, right or warrant for the sale of any Notes or shares of
common stock,
- lend or otherwise dispose of or transfer any Notes or shares of common
stock, or
- enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of any Notes or shares of
common stock, whether any such swap or transaction is to be settled by
delivery of shares or other securities, in cash or otherwise.
This lock-up provision applies to the Notes, shares of common stock and to
securities convertible into or exchangeable or exercisable for or repayable with
shares of common stock. It also applies to Notes and shares of common stock
owned now or later acquired by the person executing the agreement or for which
the person executing the agreement later acquires the power of disposition. This
agreement does not apply to issuances under our employee or director
compensation plans or our employee or other investment plans. Citigroup Global
Markets Inc., J.P. Morgan Securities Inc., Morgan Stanley & Co. Incorporated and
Wachovia Securities, Inc., in their sole discretion, may release any of the
securities subject to these lock-up agreements at any time without notice.
In connection with the offering, the underwriters may purchase and sell
Notes in the open market. These transactions may include overallotment,
syndicate covering transactions and stabilizing transactions. Overallotment
involves syndicate sales of Notes in excess of the principal amount of Notes to
be purchased by the underwriters in the offering, which creates a syndicate
short position. "Covered" short sales are sales of Notes made in an amount up to
the principal amount represented by the underwriters' overallotment option. In
determining the source of Notes to close out the covered syndicate short
position, the underwriters will consider, among other things, the price of Notes
available for purchase in the open market as compared to the price at which they
may purchase Notes through the overallotment option. Transactions to close out
the covered syndicate short involve either purchases of the Notes in the open
market after the distribution has been completed or the exercise of the
overallotment option. The underwriters may also make "naked" short sales of
Notes in excess of the overallotment option. The underwriters must close out any
naked short position by purchasing Notes in the open market. A naked short
position is more likely to be created if the underwriters are concerned that
there may be downward pressure on the price of the Notes in the open market
after pricing that could adversely affect investors who purchase in the
offering. Stabilizing transactions consist of bids for or purchases of Notes in
the open market while the offering is in progress.
S-40
The underwriters also may impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when, in
covering syndicate short positions or making stabilizing purchases, Notes
originally sold by that syndicate member are repurchased in order to cover
syndicate short positions or make stabilizing purchases.
Any of these activities may have the effect of preventing or retarding a
decline in the market price of the Notes. They may also cause the price of the
Notes to be higher than the price that otherwise would exist in the open market
in the absence of these transactions. The underwriters may conduct these
transactions in the over-the-counter market or otherwise. If the underwriters
commence any of these transactions, they may discontinue them at any time.
We estimate that our total expenses for this offering, exclusive of the
underwriting discount, will be $500,000. We have agreed to indemnify the
underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, or to contribute to payments the underwriters may be
required to make because of any of those liabilities.
In the ordinary course of their respective businesses, some of the
underwriters and/or their affiliates have in the past or may in the future
provide us with financial advisory, investment banking, commercial banking and
other services.
A prospectus in electronic format may be made available on the websites
maintained by one or more of the underwriters.
S-41
LEGAL MATTERS
Certain legal matters with respect to the validity of the Notes and the
offering of the Notes and the common stock issuable upon conversion will be
passed on for us by Robert T. Lucas III, Esq., who is Duke Energy's Associate
General Counsel and Assistant Secretary. Certain legal matters with respect to
the offering of the Notes and the common stock issuable upon conversion will be
passed upon for Duke Energy by Simpson Thacher & Bartlett, New York, New York,
and for the underwriters by Sidley Austin Brown & Wood LLP, New York, New York.
In rendering their opinions, Simpson Thacher & Bartlett and Sidley Austin Brown
& Wood LLP will rely upon Mr. Lucas as to all matters of North Carolina law.
EXPERTS
The consolidated financial statements and the related financial statement
schedule incorporated by reference in this prospectus supplement from Duke
Energy's Annual Report on Form 10-K for the year ended December 31, 2002 have
been audited by Deloitte & Touche LLP, as independent auditors, as stated in
their report, which is incorporated by reference herein (which report expresses
an unqualified opinion and includes an explanatory paragraph relating to the
adoption of Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" on January 1, 2001 and the
adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets" on January 1, 2002), and have been so incorporated in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
S-42
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Securities Exchange
Act of 1934 and, in accordance therewith, file annual, quarterly and current
reports, proxy statements and other information with the Securities and Exchange
Commission, or the SEC. Such reports and other information can be inspected and
copied at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington,
D.C. 20549. You may also obtain copies of these documents at prescribed rates
from the Public Reference Section of the SEC at its Washington address. Please
call the SEC at 1-800-SEC-0330 for further information.
Duke Energy's filings are also available to the public through:
- Duke Energy's web site at http://www.duke-energy.com;
- the SEC web site at http://www.sec.gov; and
- The New York Stock Exchange
20 Broad Street
New York, New York 10005.
Additional information about Duke Energy is available on its web site at
http://www.duke-energy.com. Such web site is not a part of this prospectus.
The SEC allows Duke Energy to "incorporate by reference" the information we
file with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be a part of this prospectus supplement, and information that Duke
Energy files later with the SEC will automatically update and supersede this
information. We incorporate by reference the document listed below and any
future filings made with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934 until we complete our offering of the
securities:
- Duke Energy's Annual Report on Form 10-K for the year ended December 31,
2002.
Duke Energy will provide without charge a copy of these filings, other than
any exhibits unless the exhibits are specifically incorporated by reference into
this prospectus. You may request your copy by writing Duke Energy at the
following address or telephoning one of the following numbers:
Investor Relations Department
Duke Energy Corporation
P.O. Box 1005
Charlotte, North Carolina 28201
(704) 382-3853 or (800) 488-3853 (toll-free)
S-43
PROSPECTUS
$1,500,000,000
DUKE ENERGY CORPORATION
Senior Notes
Junior Subordinated Notes
First and Refunding Mortgage Bonds
Common Stock
Stock Purchase Contracts
Stock Purchase Units
---------------------
DUKE ENERGY CAPITAL TRUST III
DUKE ENERGY CAPITAL TRUST IV
DUKE ENERGY CAPITAL TRUST V
Trust Preferred Securities
Guaranteed, to the extent described herein, by
DUKE ENERGY CORPORATION
---------------------
This prospectus contains summaries of the general terms of these
securities. You will find the specific terms of these securities, and the manner
in which they are being offered, in supplements to this prospectus. You should
read this prospectus and the applicable prospectus supplement carefully before
you invest.
The Common Stock of Duke Energy is listed on the New York Stock Exchange
under the symbol "DUK."
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
This prospectus is dated March 13, 2003.
You should rely only on the information contained in or incorporated by
reference in this prospectus. We have not authorized anyone to provide you with
information that is different. We are not making an offer to sell these
securities in any jurisdiction where the offer is not permitted. You should not
assume that the information provided by or incorporated by reference in this
prospectus is accurate as of any date other than the date of the document
containing the information.
TABLE OF CONTENTS
PROSPECTUS
PAGE
About this Prospectus....................................... 1
Duke Energy Corporation..................................... 2
Risk Factors................................................ 4
Ratio of Earnings to Fixed Charges.......................... 16
Use of Proceeds............................................. 16
The Trusts.................................................. 16
Description of the Senior Notes............................. 17
Description of the Junior Subordinated Notes................ 24
Description of the First and Refunding Mortgage Bonds....... 31
Description of the Common Stock............................. 35
Description of the Stock Purchase Contracts and the Stock
Purchase Units............................................ 38
Description of the Preferred Securities..................... 38
Description of the Guarantees............................... 39
Plan of Distribution........................................ 41
Experts..................................................... 42
Validity of the Securities.................................. 42
Where You Can Find More Information......................... 43
i
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that Duke Energy, Duke
Energy Capital Trust III, Duke Energy Capital Trust IV and Duke Energy Capital
Trust V filed with the SEC utilizing a "shelf" registration process. Under the
shelf registration process, Duke Energy may issue Senior Notes, Junior
Subordinated Notes, First and Refunding Mortgage Bonds, Common Stock, Stock
Purchase Contracts and Stock Purchase Units and the Trusts may issue Preferred
Securities in one or more offerings up to a total dollar amount of
$1,500,000,000.
This prospectus provides general descriptions of the securities Duke Energy
and the Trusts may offer. Each time securities are sold, a prospectus supplement
will provide specific information about the terms of that offering. The
prospectus supplement may also add, update or change information contained in
this prospectus. The registration statement filed with the SEC includes exhibits
that provide more details about the matters discussed in this prospectus. You
should read this prospectus, the related exhibits filed with the SEC and any
prospectus supplement, together with the additional information described under
the caption "Where You Can Find More Information."
Unless we have indicated otherwise, or the context otherwise requires,
references in this prospectus to "Duke Energy," "we," "us" and "our" or similar
terms are to Duke Energy Corporation and its subsidiaries.
1
DUKE ENERGY CORPORATION
Duke Energy, together with its subsidiaries, an integrated provider of
energy and energy services, offers physical delivery and management of both
electricity and natural gas throughout the United States and abroad. Duke
Energy, together with its subsidiaries, provides these and other services
through seven business segments:
o Franchised Electric
o Natural Gas Transmission
o Field Services
o Duke Energy North America
o International Energy
o Other Energy Services
o Duke Ventures
Franchised Electric generates, transmits, distributes and sells electricity
in central and western North Carolina and western South Carolina. It conducts
operations primarily through Duke Power and Nantahala Power and Light. These
electric operations are subject to the rules and regulations of the Federal
Energy Regulatory Commission, or FERC, the North Carolina Utilities Commission,
or NCUC, and the Public Service Commission of South Carolina, or PSCSC.
Natural Gas Transmission provides transportation and storage of natural gas
for customers throughout the east coast and southern portion of the United
States and in Canada. Natural Gas Transmission also provides distribution
service to retail customers in Ontario and British Columbia and gas gathering
and processing services to customers in British Columbia. Natural Gas
Transmission does business primarily through Duke Energy Gas Transmission
Corporation. Duke Energy acquired Westcoast Energy, Inc. on March 14, 2002.
Interstate natural gas transmission and storage operations in the United States
are subject to the FERC's rules and regulations while natural gas gathering,
processing, transmission, distribution and storage operations in Canada are
subject to the rules and regulations of the National Energy Board, the Ontario
Energy Board and the British Columbia Utilities Commission.
Field Services gathers, processes, transports, markets and stores natural
gas and produces, transports, markets and stores natural gas liquids, or NGLs.
It conducts operations primarily through Duke Energy Field Services, LLC, which
is approximately 30% owned by ConocoPhillips. Field Services operates gathering
systems in western Canada and 11 contiguous states in the United States. Those
systems serve major natural gas-producing regions in the Rocky Mountains,
Permian Basin, Mid-Continent, East Texas-Austin Chalk-North Louisiana, and
onshore and offshore Gulf Coast areas.
Duke Energy North America develops, operates and manages merchant power
generation facilities and engages in commodity sales and services related to
natural gas and electric power. Duke Energy North America conducts business
throughout the United States and Canada through Duke Energy North America, LLC
and Duke Energy Trading and Marketing, LLC. Duke Energy Trading and Marketing is
approximately 40% owned by Exxon Mobil Corporation.
International Energy develops, operates and manages natural gas
transportation and power generation facilities and engages in sales and
marketing of natural gas and electric power outside the United States and
Canada. It conducts operations primarily through Duke Energy International, LLC
and its activities target the Latin American, Asia-Pacific and European regions.
Other Energy Services is composed of diverse energy businesses, operating
primarily through Duke Energy Merchants Holdings, Duke/Fluor Daniel and Energy
Delivery Services. Duke Energy Merchants Holdings engages in commodity buying
and selling, and risk management and financial services in the energy commodity
markets other than natural gas and power (such as refined products, residual
fuels, crude oil and coal).
2
Duke/Fluor Daniel provides comprehensive engineering, procurement,
construction, commissioning and operating plant services for fossil-fueled
electric power generating facilities worldwide. It is a 50/50 partnership
between Duke Energy and Fluor Enterprises, Inc., a wholly owned subsidiary of
Fluor Corporation. Energy Delivery Services is an engineering, construction,
maintenance and technical services firm specializing in electric transmission
and distribution lines and substation projects.
Duke Ventures is composed of other diverse businesses, operating primarily
through Crescent Resources, LLC, DukeNet Communications, LLC and Duke Capital
Partners, LLC. Crescent Resources develops high-quality commercial, residential
and multi-family real estate projects and manages land holdings primarily in the
southeastern and southwestern United States. DukeNet Communications develops and
manages fiber optic communications systems for wireless, local and long distance
communications companies and selected educational, governmental, financial and
health care entities. Duke Capital Partners, a wholly owned merchant banking
company, provides debt and equity capital and financial advisory services
primarily to the energy industry.
The foregoing information about Duke Energy and its business segments is
only a general summary and is not intended to be comprehensive. For additional
information about Duke Energy and its business segments, you should refer to the
information described under the caption "Where You Can Find More Information."
Duke Energy is a North Carolina corporation. Its principal executive
offices are located at 526 South Church Street, Charlotte, North Carolina 28202
(telephone (704) 594-6200).
3
RISK FACTORS
Before purchasing any securities we offer, you should carefully consider
the following risk factors as well as the other information contained in this
prospectus, any prospectus supplement and the information incorporated by
reference herein in order to evaluate an investment in our securities.
RISKS RELATED TO THE MARKET CYCLE OF OUR INDUSTRY
OUR RESULTS OF OPERATIONS MAY BE NEGATIVELY AFFECTED BY SUSTAINED DOWNTURNS OR
SLUGGISHNESS IN THE ECONOMY, INCLUDING LOW LEVELS IN THE MARKET PRICES OF
COMMODITIES, ALL OF WHICH ARE BEYOND OUR CONTROL.
Sustained downturns or sluggishness in the economy generally affect the
markets in which we operate and negatively influence our regulated and
unregulated energy operations. Declines in demand for electricity as a result of
economic downturns in our Franchised Electric service territories will reduce
overall electricity sales and lessen our cash flows, especially as our
industrial customers reduce production and, thus, consumption of electricity.
Our Natural Gas Transmission and Field Services businesses may experience a
decline in the volume of natural gas shipped through their pipelines and
transport systems or gathered and processed at their plants, resulting in lower
revenue and cash flows, as lower economic output reduces energy demand. Although
our Franchised Electric business is subject to regulated allowable rates of
return and recovery of fuel costs under a fuel adjustment clause, and our gas
transmission is subject to mandated tariff rates, overall declines in
electricity sold or the volume of gas shipped as a result of economic downturn
or recession could reduce our revenues and cash flows, thus diminishing our
results of operations.
Our Duke Energy North America business sells power from generation
facilities into the spot market or other competitive power markets on a
contractual basis and enters into contracts to purchase and sell electricity,
natural gas and NGLs as part of our power marketing and energy trading
operations. With respect to such transactions, we are not guaranteed any rate of
return on our capital investments through mandated rates, and our revenues and
results of operations are likely to depend, in large part, upon prevailing
market prices for power, natural gas and NGLs in our regional markets and other
competitive markets. These market prices may fluctuate substantially over
relatively short periods of time. These factors could reduce our revenues and
margins and therefore diminish our results of operations.
Lower demand for the electricity we sell, for the natural gas we gather,
process and transport and in the market prices for electricity, natural gas and
NGLs result from multiple factors that affect our service territories and the
end markets where we sell electricity or ship natural gas, including:
- weather conditions;
- seasonality;
- supply of and demand for energy commodities, including any decreases in
the production of natural gas due to depressed prices for natural gas
which could negatively affect our gas transmission business due to lower
throughput and our energy trading business through lower prices;
- illiquid markets;
- general economic conditions, including downturns in the U.S. or other
economies which impact consumption;
- transmission or transportation constraints or inefficiencies which impact
our merchant energy operations;
- availability of competitively priced alternative energy sources;
- natural gas, crude oil, refined products and coal production levels;
- electric generation capacity;
- capacity and transmission service into, or out of, our markets;
- natural disasters, wars, embargoes and other catastrophic events to the
extent they affect our markets; and
- federal, state and foreign energy and environmental regulation and
legislation.
4
These market factors have led to industry-wide downturns that have resulted
in the slowing down or stopping of new construction of power plants and
announcements by us and other energy suppliers and gas pipeline companies of
plans to sell non-core assets in order to boost liquidity or strengthen balance
sheets. Proposed sales by other energy suppliers and gas pipeline companies
could increase the supply of the type of assets we are attempting to sell which
could lead to our failing to execute such asset sales or obtaining lower prices
on completed asset sales.
OUR RISK MANAGEMENT PROCEDURES MAY NOT PREVENT LOSSES.
We actively manage the risk inherent in our energy, debt and foreign
currency positions. Although we have sophisticated risk management systems in
place that use advanced methodologies to quantify risk, these systems may not
always be followed or may not always work as planned. If prices significantly
deviate from historical prices, our risk management systems may not protect us
from significant losses. Adverse changes in energy prices, interest rates and
foreign currency exchange rates may result in economic losses in our earnings
and cash flows and our balance sheet under applicable accounting rules. Although
we devote a considerable amount of management effort to our trading, marketing
and risk management systems, their effectiveness remains uncertain.
OUR HEDGING PROCEDURES MAY NOT PROTECT OUR SALES AND NET INCOME FROM
VOLATILITY.
To lower our financial exposure related to price fluctuations, our
corporate marketing, trading and risk management operations routinely enter into
contracts to hedge the value of our assets and operations. As part of this
strategy, we routinely utilize fixed-price, forward, physical purchase and sales
contracts, futures, financial swaps and option contracts traded in the
over-the-counter markets or on exchanges. However, we do not cover the entire
exposure of our assets or our positions to market price volatility and the
coverage will vary over time. To the extent we have unhedged positions or our
hedging procedures do not work as planned, fluctuating commodity prices could
cause our sales and net income to be volatile.
OUR OPERATING RESULTS MAY FLUCTUATE ON A SEASONAL AND QUARTERLY BASIS.
Electric power generation and gas transmission are generally seasonal
businesses. In most parts of the U.S. and world in which we operate, demand for
power peaks during the hot summer months, with market prices also peaking at
that time. In other areas, demand for power peaks during the winter. In
addition, demand for gas and other fuels peaks during the winter, especially for
our natural gas businesses in Canada. As a result, our overall operating results
in the future may fluctuate substantially on a seasonal basis. Further, extreme
weather conditions such as heat waves or winter storms could cause these
seasonal fluctuations to be more pronounced. The pattern of this fluctuation may
change depending on the nature and location of our facilities and pipeline
systems and the terms of power sale contracts and gas transmission arrangements
we enter into.
RECENT DEVELOPMENTS AFFECTING THE WHOLESALE POWER AND ENERGY TRADING MARKETS
HAVE REDUCED MARKET ACTIVITY AND LIQUIDITY AND MAY CONTINUE TO ADVERSELY AFFECT
OUR RESULTS OF OPERATIONS.
As a result of the energy crisis in California, the recent decline of
natural gas prices in North America, the filing of bankruptcy by Enron
Corporation, and investigations by governmental authorities into energy trading
activities and increased litigation related to these matters, companies
generally in the regulated and unregulated utility businesses have been impacted
negatively. In addition, certain participants have chosen to or have been forced
to exit from the energy trading markets, leading to a reduction in the number of
trading partners and lower trading revenues. Depressed spot and forward
wholesale power prices have resulted in substantially reduced revenues in our
merchant energy business and may continue to affect our earnings.
OUR PROFITABILITY MAY DECLINE IF THE COUNTERPARTIES TO OUR TRANSACTIONS FAIL TO
PERFORM IN ACCORDANCE WITH OUR AGREEMENTS WITH THEM.
Our marketing, trading and risk management operations are exposed to the
risk that counterparties to our transactions will not perform their obligations.
Should the counterparties to these arrangements fail to perform, we might be
forced to acquire alternative hedging arrangements, honor the underlying
commitment at then-current market prices or return a significant portion of the
consideration received for unused electricity
5
or gas under a long-term contract. In such event, we might incur additional
losses to the extent of amounts, if any, already paid to, or received from,
counterparties. In addition, in our marketing and trading activities, we often
extend credit to our trading counterparties. Despite performing credit analysis
prior to extending credit, we are exposed to the risk that we may not be able to
collect amounts owed to us. If the counterparty to such a financing transaction
fails to perform and any collateral we have secured is inadequate, we will lose
money.
WE MAY NOT BE ABLE TO SUCCESSFULLY MANAGE THE RISKS ASSOCIATED WITH SELLING AND
MARKETING PRODUCTS IN THE WHOLESALE POWER MARKETS.
We purchase and sell power at the wholesale level under the FERC's
market-based tariffs throughout the United States and also enter into short-term
agreements to market available energy and capacity from our generation assets
with the expectation of profiting from market price fluctuations. If we are
unable to deliver firm capacity and energy under these agreements, then we could
be required to pay damages. These damages would be based on the difference
between the market price to acquire replacement capacity or energy and the
contract price of the undelivered capacity or energy. Depending on price
volatility in the wholesale energy markets, such damages could be significant.
In the absence or upon expiration of power sales agreements, we must sell
all or a portion of the energy, capacity and other products from our facilities
into the competitive wholesale power markets. Unlike most other commodities,
electricity cannot be stored and must be produced concurrently with its use. As
a result, the wholesale power markets are subject to significant price
fluctuations over relatively short periods of time and can be unpredictable. In
addition, the price we can obtain for power sales may not change at the same
rate as changes in fuel costs. Given the volatility and potential for material
differences between actual power prices and fuel costs, if we are unable to
secure long-term purchase agreements for our power generation facilities, our
revenues would be subject to increased volatility and our financial results may
be materially adversely affected.
COMPETITION IN THE WHOLESALE POWER AND ENERGY TRADING MARKETS MAY ADVERSELY
AFFECT THE GROWTH AND PROFITABILITY OF OUR BUSINESS.
While companies in the regulated and unregulated utility business have been
generally negatively affected by recent events in the energy markets, it is
possible that in the future we may be vulnerable to competition from new
competitors that have greater financial resources than we do, seeking attractive
opportunities to acquire or develop energy assets or energy trading operations
both in the United States and abroad. These new competitors may include
sophisticated financial institutions, some of which are already entering the
energy trading and marketing sector, and international energy players, which may
enter regulated or unregulated utility businesses. This competition may
adversely affect our ability to make investments or acquisitions.
We may not be able to respond in a timely or effective manner to the many
changes intended to increase competition in the electricity industry. To the
extent competitive pressures increase and the pricing and sale of electricity
assume more characteristics of a commodity business, the economics of our
business may come under long-term pressure.
In addition, regulatory changes have also been proposed to increase access
to electricity transmission grids by utility and non-utility purchasers and
sellers of electricity. We believe that these changes could continue the
disaggregation of many vertically-integrated utilities into separate generation,
transmission, distribution and retail businesses. As a result, a significant
number of additional competitors could become active in the wholesale power
generation segment of our industry.
WE ARE EXPOSED TO MARKET RISK AND MAY INCUR LOSSES FROM OUR MARKETING AND
TRADING OPERATIONS.
Our trading portfolios consist of contracts to buy and sell commodities,
including contracts for electricity, natural gas, NGLs and other commodities
that are settled by the delivery of the commodity or cash. If the values of
these contracts change in a direction or manner that we do not anticipate, we
could realize material losses from our trading activities. We have marketing and
trading operations which target the U.S., Canadian, Latin American, Asia-Pacific
and European regions. We incur trading risks and market exposures in these
markets. If our trading volumes in these regions increase, we will be exposed to
increased market risks.
6
RISKS RELATED TO LEGAL PROCEEDINGS AND REGULATORY INVESTIGATIONS
Recently, in part due to the California electricity supply situation and
the failure of Enron Corporation, public and regulatory scrutiny of the energy
industry and of the capital markets have resulted in increased regulatory
investigations, new regulations being either proposed or implemented and an
increase in litigation in the industry. During this time, we have experienced a
significant increase in regulatory investigations and litigation related to our
operations, primarily with respect to the California situation, pricing
information and so-called "roundtrip" trades, each as described in greater
detail below. Future developments in these and other government investigations,
including the subpoena we have recently received from a North Carolina grand
jury related to the audit by the NCUC and PSCSC of Duke Power's regulatory
reporting from 1998 to 2000, and litigation impacting the energy industry and
us, including litigation regarding performance, contracts and other matters
arising in the ordinary course of our business and personal injury claims
alleged to have arisen from the exposure to asbestos in our plants, could be
materially adverse to us by affecting our operations and diverting our attention
and resources to addressing such actions. Furthermore, future declines in the
availability, or increases in the cost, of our insurance policies and charges to
our self-insurance reserves with respect to such litigation could cause material
liabilities and costs, which could have a material adverse effect on our results
of operations or financial position in the future.
WE MAY BE ADVERSELY AFFECTED BY LEGAL PROCEEDINGS ARISING OUT OF THE
ELECTRICITY SUPPLY SITUATION IN CALIFORNIA AND OTHER WESTERN STATES.
Litigation and administrative proceedings arising out of the California
electricity supply situation are ongoing before the FERC and in California and
several other western state courts against sellers of energy in California. Duke
Energy and some of its subsidiaries are named as defendants in a number of
lawsuits brought by or on behalf of electricity purchasers in California, with
one suit filed on behalf of a Washington State electricity purchaser. In
addition to lawsuits, several investigations and regulatory proceedings at the
state and federal levels are looking into the causes of high wholesale
electricity prices in the western United States. We cannot predict the outcome
of any such lawsuits and other proceedings or whether the ultimate impact on us
of the effects of the historical electricity supply situation in California and
other western states will be material due to any future developments.
WE MAY BE ADVERSELY AFFECTED BY REGULATORY INVESTIGATIONS RELATED TO PRICING
INFORMATION THAT WE PROVIDED TO MARKET PUBLICATIONS.
The FERC and the Commodity Futures Trading Commission, or CFTC, have
requested information from us regarding pricing information that we provided to
publications that produce price indices. We have been responding to the FERC and
CFTC, but we cannot predict the outcome of this investigation or whether this
investigation will lead to additional legal proceedings against us, civil or
criminal fines or penalties, or other regulatory action, including legislation,
which may be materially adverse to the operation of our trading business and our
trading revenues and net income or increase our operating costs in other ways.
WE MAY BE ADVERSELY AFFECTED BY REGULATORY INVESTIGATIONS AND ANY RELATED LEGAL
PROCEEDINGS RELATED TO THE ALLEGED CONDUCTING OF "ROUNDTRIP" TRADES BY OUR
ENERGY TRADING BUSINESS.
The activities of Enron Corporation and other energy traders in allegedly
using "roundtrip" trades which involve the prearrangement of simultaneously
executed and offsetting buy and sell trades for the purpose of increasing
reported revenues or trading volumes, or influencing prices and which lack a
legitimate business purpose, has resulted in increased public and regulatory
scrutiny. Various governmental and regulatory inquiries are ongoing and continue
to adversely affect the energy trading business as a whole. We may see these
adverse effects continue as a result of the uncertainty of these ongoing
inquiries or additional inquiries by other federal or state regulatory agencies.
To date, we have been investigated by, or responded to requests from, the SEC,
the FERC, the Houston office of the U.S. Attorney and the CFTC concerning these
alleged "roundtrip" trades. In addition, we cannot predict the outcome of any of
these inquiries, or whether these inquiries will lead to additional legal
proceedings against us, civil or criminal fines or penalties, or other
regulatory action, including legislation, which may be materially adverse to the
operation of our trading business and our trading revenues and net income or
increase our operating costs in other ways.
7
Also, a number of class action lawsuits have been filed against us, and
others may be filed, claiming that investors suffered damages as a result of the
alleged "roundtrip" trades inflating our revenue and earnings. While a number of
the lawsuits have been dismissed at a preliminary stage, further developments in
such lawsuits could lead to settlements, civil damages or other litigation costs
that could adversely affect our business.
RISKS RELATED TO THE REGULATION OF OUR BUSINESSES
ELECTRIC
OUR BUSINESSES IN NORTH AMERICA ARE SUBJECT TO COMPLEX GOVERNMENT
REGULATIONS. THE ECONOMICS, INCLUDING THE COSTS, OF OPERATING OUR GENERATING
FACILITIES MAY BE ADVERSELY AFFECTED BY CHANGES IN THESE REGULATIONS OR IN THEIR
INTERPRETATION OR IMPLEMENTATION.
The regulatory environment applicable to the electric power industry has
recently undergone substantial changes, both on a federal and a state level,
which have had a significant impact on the nature of the industry and the manner
in which its participants conduct their businesses. These changes are ongoing
and we cannot predict the future course of changes in this regulatory
environment or the ultimate effect that this changing regulatory environment
will have on our business.
The Public Utility Holding Company Act, or PUHCA, and the Federal Power
Act, or FPA, regulate public utility holding companies and their subsidiaries
and place certain constraints on the conduct of their business, although we are
exempt from most of the provisions of PUHCA, as discussed below. The rates
charged in our Franchised Electric business are approved by the FERC, the NCUC
and/or the PSCSC. The NCUC and the PSCSC regulate many aspects of our utility
operations including siting and construction of facilities, customer service and
the rates that we can charge customers. The FERC regulates wholesale electricity
operations and transmission rates and the state commissions regulate retail
generation and distribution rates. The Public Utility Regulatory Policies Act of
1978, or PURPA, provides qualifying facilities with exemptions from some federal
and state laws and regulations, including PUHCA and most provisions of the FPA.
The Energy Policy Act of 1992, or the Energy Act, also provides relief from
regulation under PUHCA to "exempt wholesale generators." Maintaining the status
of our facilities as qualifying facilities or exempt wholesale generators is
conditioned on those facilities continuing to meet statutory criteria. Under
current law, we are not and will not be subject to regulation as a registered
holding company under PUHCA as long as the domestic power plants we own through
subsidiaries (such as in Duke Energy North America's business) are qualifying
facilities under PURPA or are exempt wholesale generators. If we were subject to
these regulations, the economics and operations of our generating facilities
could be negatively affected by the increased costs associated with upgrading
our facilities and taking other actions to comply with these regulations. While
we are currently exempt from registration under PUHCA, we may lose that
exemption if we fail to comply with our exemptive order from the SEC. If we were
to lose our exemption, we would have the alternatives of registering as a
holding company which would subject us to more extensive regulation, or
divesting or changing the nature of some of our foreign utility holdings,
including some facilities acquired in our Westcoast Energy purchase.
Existing regulations may be revised or reinterpreted, new laws and
regulations may be adopted or become applicable to us or our facilities, and
future changes in laws and regulations may have a detrimental effect on our
business. Certain restructured markets have recently experienced supply problems
and price volatility. These supply problems and volatility have been the subject
of a significant amount of press coverage, much of which has been critical of
the restructuring initiatives. In some of these markets, including California,
proposals have been made by governmental agencies and other interested parties
to re-regulate areas of these markets which have previously been deregulated. We
cannot assure you that other proposals to re-regulate will not be made or that
legislative or other attention to the electric power restructuring process will
not cause the deregulation process to be delayed or reversed.
The FERC has proposed to broaden its regulations that restrict relations
between jurisdictional electric and natural gas companies, or "jurisdictional
companies," and marketing affiliates. The proposed rules would limit
communications between a jurisdictional company and all our affiliates engaged
in energy activities. The rulemaking is pending at the FERC and the precise
scope and effect of the rule is unclear. If adopted as proposed, the rule could
adversely affect our ability to coordinate and manage our energy activities.
8
OUR SALES MAY DECREASE IF WE ARE UNABLE TO GAIN ADEQUATE, RELIABLE AND
AFFORDABLE ACCESS TO TRANSMISSION AND DISTRIBUTION ASSETS DUE TO THE FERC AND
REGIONAL REGULATION OF WHOLESALE MARKET TRANSACTIONS FOR ELECTRICITY AND GAS.
We depend on transmission and distribution facilities owned and operated by
utilities and other energy companies to deliver the electricity and natural gas
we sell to the wholesale market, as well as the natural gas we purchase to
supply some of our electric generation facilities. If transmission is disrupted,
or if capacity is inadequate, our ability to sell and deliver products may be
hindered. The FERC's proposed restrictions upon relations between jurisdictional
companies and marketing affiliates, as described above, may also inhibit access
to energy transmission and distribution assets controlled by us.
The FERC has issued power transmission regulations that require wholesale
electric transmission services to be offered on an open-access,
non-discriminatory basis. Although these regulations are designed to encourage
competition in wholesale market transactions for electricity, some companies
have failed to provide fair and equal access to their transmission systems or
have not provided sufficient transmission capacity to enable other companies to
transmit electric power. We cannot predict whether and to what extent the
industry will comply with these initiatives, or whether the regulations will
fully accomplish their objectives. In addition, other companies' ability to
access and compete for our existing "native-load" transmission customers may
negatively affect our business leading to declining prices for transmission
services as a result of this competition.
In addition, the independent system operators who oversee the transmission
systems in regional power markets, such as California, have in the past been
authorized to impose, and may continue to impose, price limitations and other
mechanisms to address volatility in the power markets. These types of price
limitations and other mechanisms may adversely impact the profitability of our
wholesale power marketing and trading. Given the extreme volatility and lack of
meaningful long-term price history in many of these markets and the imposition
of price limitations by regulators, independent system operators or other market
operators, we can offer no assurance that we will be able to operate profitably
in all wholesale power markets.
IN THE FUTURE, WE MAY NOT BE ABLE TO SECURE LONG-TERM PURCHASE AGREEMENTS
FOR OUR POWER GENERATION FACILITIES OR OUR EXISTING POWER PURCHASE AGREEMENTS
MAY NOT BE ENFORCEABLE, EITHER OF WHICH WOULD SUBJECT OUR SALES TO INCREASED
VOLATILITY.
Historically, power from merchant generation facilities has been sold under
long-term power purchase agreements pursuant to which all energy and capacity
was generally sold to a single party at fixed prices. Because of changes in the
industry, the percentage of facilities with these types of long-term power
purchase agreements has decreased, and it is likely that most of our facilities
will operate without these agreements. Without the benefit of long-term power
purchase agreements, we cannot assure you that we will be able to sell the power
generated by our facilities or that our facilities will be able to operate
profitably.
Recently, some entities have brought litigation or regulatory proceedings
aimed at forcing the renegotiation or termination of power purchase agreements
requiring payments to owners of generating facilities that are qualifying
facilities under PURPA. Many qualifying facilities sell their electric output to
utilities and other entities pursuant to long-term contracts at prices that are
based upon the incremental cost that, at the time of contracting, it was
estimated that it would cost the utility or entity to generate or purchase the
power from another source. In some cases, these prices are now substantially in
excess of market prices. In addition, in the future, utilities and other
entities, with the approval of federal or state regulatory authorities, could
seek to abrogate their existing power purchase agreements with qualifying
facilities or with other power generators. Some of our power purchase agreements
for power generated from our independent power projects and generation assets
could be subject to similar efforts by the entities who contract to purchase
power from our facilities. If those efforts were to be successful, our sales
could decrease or be subject to increased volatility.
THE DIFFERENT REGIONAL POWER MARKETS IN WHICH WE COMPETE OR WILL COMPETE IN
THE FUTURE HAVE CHANGING REGULATORY STRUCTURES, WHICH COULD AFFECT OUR GROWTH
AND PERFORMANCE IN THESE REGIONS.
Our wholesale power and franchised electric results are likely to be
affected by differences in the market and transmission regulatory structures in
various regional power markets. Because it remains unclear which companies will
be participating in the various regional power markets, or how and when regional
transmission
9
organizations, or RTOs, will develop or what regions they will cover, we are
unable to assess fully the impact that these power markets may have on our
business.
THE RATE FREEZE AFFECTING OUR NORTH CAROLINA UTILITY WILL LIMIT OUR ABILITY
TO PASS ON TO OUR CUSTOMERS OUR COST OF PRODUCING ELECTRICITY.
In 2002, the State of North Carolina passed clean air legislation that
freezes electric utility rates until 2007, subject to certain conditions, in
order for North Carolina electric utilities, including us, to make significant
reductions in emissions of sulfur dioxide and nitrogen oxides from the state's
coal-fired power plants over the next ten years. We estimate the cost of
achieving the proposed emission reductions to be approximately $1.5 billion.
While we expect to recover 70% of the total estimated costs of plant
improvements through the five-year rate freeze period, there is no guarantee
that we will recover such amount. As a result of the rate freeze, we will be
limited in the amount of revenue our North Carolina utility generates in
relation to operational costs and the amount of recovery for our costs of
emission reductions. In addition, as the NCUC will determine how any remaining
costs will be recovered after the rate freeze period, the manner of such
recovery is unclear at this time.
GAS
OUR GAS TRANSMISSION AND STORAGE OPERATIONS ARE SUBJECT TO GOVERNMENT
REGULATIONS AND RATE PROCEEDINGS THAT COULD HAVE AN ADVERSE IMPACT ON OUR
ABILITY TO RECOVER THE COSTS OF OPERATING OUR PIPELINE FACILITIES.
Our U.S. interstate gas transmission and storage operations are subject to
the FERC's regulatory authority, which extends to:
- transportation of natural gas;
- rates and charges;
- construction;
- acquisition, extension or abandonment of services or facilities;
- accounts and records;
- depreciation and amortization policies; and
- operating terms and conditions of service.
The FERC has taken certain actions to strengthen market forces in the
natural gas pipeline industry which has led to increased competition throughout
the industry. In a number of key markets, interstate pipelines are now facing
competitive pressure from other major pipeline systems, enabling local
distribution companies and end users to choose a supplier or switch suppliers
based on the short-term price of gas and the cost of transportation.
Given the extent of the FERC's regulatory power, we cannot give any
assurance regarding the likely regulations under which we will operate our
natural gas transmission and storage business in the future or the effect of
regulation on our financial position and results of operations. In addition, the
FERC has proposed to broaden its regulations on jurisdictional companies to
limit communications between a jurisdictional company and all our affiliates
engaged in energy activities. If adopted as proposed, the rule could adversely
affect our ability to manage our energy activities.
Certain of our interstate gas transmission operations from time to time
have in effect rate settlements approved by FERC which prevent those companies
or third parties from modifying rates, except for certain allowed adjustments.
These settlements do not preclude the FERC from taking action on its own to
modify the rates. Upon expiration of the settlements, the companies or third
parties may institute actions at the FERC to modify the companies' rates. It is
not possible to determine at this time whether any such actions would be
instituted or what the outcome would be but such proceedings could result in
rate adjustments.
Recent decisions could result in the imposition of regulatory operating
terms and conditions of service on our interstate gas transmission operations
that limit our management discretion and could also increase operational risks.
In September 2002, a FERC administrative law judge ruled that El Paso Gas
Transmission Company, an interstate natural gas pipeline company, was in
violation of the Natural Gas Act for not
10
delivering sufficient gas to its California markets during 2000 and 2001 because
it had operated its interstate gas pipeline system at less than the maximum
allowable pressure for which the system is rated, engaged in inappropriate
system maintenance and delivered gas to other markets. If this ruling stands
after review by the FERC, it could be interpreted to increase the delivery
obligations and reduce the operational discretion of interstate gas pipelines,
including those we operate, and, as a result, increase operational, contractual
and litigation risks for our natural gas pipelines.
POSSIBLE CHANGES AND DEVELOPMENTS IN THE CANADIAN REGULATORY ENVIRONMENT
COULD RESULT IN A NEGATIVE IMPACT ON WESTCOAST ENERGY'S BUSINESS AND OPERATIONS.
The majority of our Canadian natural gas assets are subject to various
degrees of federal or provincial regulation. Changes in such regulation may
impact our capacity to conduct this business effectively and sustain or increase
profitability. Furthermore, as the regulatory environment within which Westcoast
Energy conducts its business and operates its facilities continues to evolve
from a traditional cost recovery model to a more competitive, market-based
approach, there is increasing competition among pipeline companies. We cannot
predict the timing or scope of these changes and developments in the regulatory
environment or the impact they may ultimately have on Westcoast Energy's
business and operations.
Aboriginal groups have claimed aboriginal and treaty rights over a
substantial portion of the lands on which our facilities in British Columbia and
Alberta and the gas supply areas served by those facilities are located. The
existence of these claims, which range from the assertion of rights of limited
use up to aboriginal title, has given rise to some uncertainty regarding access
to public lands for future development purposes.
RISKS RELATED TO OUR BUSINESS GENERALLY AND OUR INDUSTRY
FINANCING AND LIQUIDITY RISKS
OUR BUSINESS IS DEPENDENT ON OUR ABILITY TO SUCCESSFULLY ACCESS CAPITAL
MARKETS. OUR INABILITY TO ACCESS CAPITAL MAY LIMIT OUR ABILITY TO EXECUTE OUR
BUSINESS PLAN OR PURSUE IMPROVEMENTS.
We rely on access to both short-term money markets and longer-term capital
markets as a source of liquidity for capital requirements not satisfied by the
cash flow from our operations. If we are not able to access capital at
competitive rates, our ability to implement our strategy will be adversely
affected. Certain market disruptions or a downgrade of our credit rating may
increase our cost of borrowing or adversely affect our ability to access one or
more financial markets. Such disruptions could include:
- further economic downturns;
- the bankruptcy of an unrelated energy company;
- capital market conditions generally;
- market prices for electricity and gas;
- terrorist attacks or threatened attacks on our facilities or unrelated
energy companies; or
- the overall health of the utility industry.
Restrictions on our ability to access financial markets may affect our
ability to execute our business plan as scheduled. An inability to access
capital may limit our ability to pursue improvements or acquisitions that we may
otherwise rely on for future growth.
INCREASES IN OUR LEVERAGE COULD ADVERSELY AFFECT OUR COMPETITIVE POSITION,
BUSINESS PLANNING AND FLEXIBILITY, FINANCIAL CONDITION, ABILITY TO SERVICE OUR
DEBT OBLIGATIONS AND TO PAY DIVIDENDS ON OUR COMMON STOCK, AND ABILITY TO ACCESS
CAPITAL ON FAVORABLE TERMS.
Our cash requirements arise primarily from the capital intensive nature of
our electric utilities, as well as the expansion of our diversified businesses.
In addition to operating cash flows, we rely heavily on our commercial paper and
long-term debt. Our credit lines impose various limitations that could impact
our liquidity and result in a material adverse impact on our business strategy
and our ongoing financing needs. Changes in economic conditions could result in
higher interest rates, which would increase our interest
11
expense on our floating rate debt and reduce funds available to us for our
current plans. Additionally, an increase in our leverage could adversely affect
us by:
- increasing the cost of future debt financing;
- prohibiting the payment of dividends on our common stock or adversely
impacting our ability to pay such dividends at the current rate;
- making it more difficult for us to satisfy our existing financial
obligations;
- limiting our ability to obtain additional financing, if we need it, for
working capital, acquisitions, debt service requirements or other
purposes;
- increasing our vulnerability to adverse economic and industry conditions;
- requiring us to dedicate a substantial portion of our cash flow from
operations to payments on our debt, which would reduce funds available to
us for operations, future business opportunities or other purposes; and
- limiting our flexibility in planning for, or reacting to, changes in our
business and the industry in which we compete.
A DOWNGRADE IN OUR CREDIT RATING COULD NEGATIVELY AFFECT OUR ABILITY TO
ACCESS CAPITAL AND/OR TO OPERATE OUR POWER AND GAS TRADING BUSINESSES.
Standard & Poor's, Moody's and Fitch rate our senior, unsecured debt at A-,
A3 and A- respectively. Our Standard & Poor's and Fitch ratings are both on
negative outlook and our Moody's rating is on review for potential downgrade. If
Standard & Poor's, Moody's or Fitch were to downgrade our long-term rating,
particularly below investment grade, our borrowing costs would increase which
would diminish our financial results. In addition, we would likely be required
to pay a higher interest rate in future financings, and our potential pool of
investors and funding sources would likely decrease. Further, if our short-term
rating were to fall, it may significantly limit our access to the commercial
paper market.
In addition, many of our subsidiaries access debt and other capital from
various sources and carry their own credit ratings. Any downgrade or other event
negatively affecting the credit ratings of these subsidiaries could make their
costs of borrowing higher or access to funding sources more limited, which in
turn could increase the need of Duke Energy to provide liquidity in the form of
capital contributions or loans to such subsidiaries, thus reducing the liquidity
and borrowing availability of the consolidated group.
Our ratings may be dependent on, among other things, our earnings outlook
for future periods and the success of our business plan. If, as a result of
market conditions or other factors affecting our business, we are unable to
achieve our earnings outlook or we lower our earnings outlook, our ratings could
be adversely affected. The failure to meet the goals set forth in our business
plan from time to time, such as our inability to successfully execute a
significant portion of planned asset divestitures, could cause our ratings to be
lowered.
Our power and gas trading businesses rely on our investment grade ratings.
Most of our counterparties require the creditworthiness of an investment grade
entity to stand behind transactions. If our ratings were to decline below
investment grade, our ability to profitably operate our power and gas trading
businesses would be diminished because we would likely have to deposit
additional collateral of cash or cash related instruments which would reduce our
liquidity and profitability.
POOR INVESTMENT PERFORMANCE OF PENSION PLAN EQUITY HOLDINGS AND OTHER
FACTORS IMPACTING PENSION PLAN COSTS COULD UNFAVORABLY IMPACT OUR LIQUIDITY AND
RESULTS OF OPERATIONS.
Our costs of providing non-contributory defined benefit pension plans are
dependent upon a number of factors, such as the rates of return on plan assets,
discount rates, the level of interest rates used to measure the required minimum
funding levels of the plans, future government regulation and our required or
voluntary contributions made to the plans. The market value of Duke Energy's
defined benefit pension plan assets has been affected by declines in the equity
markets since the third quarter of 2000. As a result, at September 30, 2002, our
pension plan obligation exceeded the value of plan assets by $439 million.
Without a substantial recovery in the equity markets over time to increase the
value of our plan assets and depending upon the other factors impacting our
costs as listed above, we could be required to fund our plans with significant
amounts of
12
cash. Such cash funding obligations could have a material impact on our
liquidity by reducing our cash flows and negatively effect our results of
operations.
ENVIRONMENTAL REGULATION AND LIABILITY
OUR BUSINESS WILL BE SUBJECT TO ENVIRONMENTAL LEGISLATION IN ALL
JURISDICTIONS IN WHICH IT OPERATES AND ANY CHANGES IN SUCH LEGISLATION COULD
NEGATIVELY AFFECT OUR RESULTS OF OPERATIONS.
Our operations are subject to extensive environmental regulation pursuant
to a variety of U.S., Canadian, and other federal, provincial, state and
municipal laws and regulations. Such environmental legislation imposes, among
other things, restrictions, liabilities and obligations in connection with the
generation, handling, use, storage, transportation, treatment and disposal of
hazardous substances and waste and in connection with spills, releases and
emissions of various substances into the environment. Environmental legislation
also requires that our facilities, sites and other properties associated with
our operations be operated, maintained, abandoned and reclaimed to the
satisfaction of applicable regulatory authorities.
Existing environmental regulations could also be revised or reinterpreted,
new laws and regulations could be adopted or become applicable to us or our
facilities, and future changes in environmental laws and regulations could
occur. The federal government and several states recently have proposed
increased environmental regulation of many industrial activities, including
increased regulation of air quality, water quality and solid waste management.
In addition, certain countries in which we operate, including Canada, may move
forward on the process of adopting the greenhouse gas emissions principles of
the Kyoto Accords. With the trend toward stricter standards, greater regulation,
more extensive permit requirements and an increase in the number and types of
assets operated by us subject to environmental regulation, we expect our
environmental expenditures to be substantial in the future.
Compliance with environmental legislation can require significant
expenditures, including expenditures for clean up costs and damages arising out
of contaminated properties, and failure to comply with environmental legislation
may result in the imposition of fines and penalties. The steps we take to bring
our facilities into compliance could be prohibitively expensive, and we may be
required to shut down or alter the operation of our facilities, which may cause
us to incur losses. Further, our regulatory rate structure and our contracts
with clients may not necessarily allow us to recover capital costs we incur to
comply with new environmental regulations such as the rate freeze being imposed
by the NCUC. Also, we may not be able to obtain or maintain from time to time
all required environmental regulatory approvals for certain development
projects. If there is a delay in obtaining any required environmental regulatory
approvals or if we fail to obtain and comply with them, the operation of our
facilities could be prevented or become subject to additional costs. Should we
fail to comply with all applicable environmental laws, we may be subject to
penalties and fines imposed against us by regulatory authorities. Although it is
not expected that the costs of complying with current environmental legislation
will have a material adverse effect on our financial condition or results of
operations, no assurance can be made that the costs of complying with
environmental legislation in the future will not have such an effect.
WE COULD INCUR MATERIAL LOSSES IF WE ARE HELD LIABLE FOR THE ENVIRONMENTAL
CONDITION OF ANY OF OUR ASSETS.
We are generally responsible for all on-site liabilities associated with
the environmental condition of our power generation facilities and natural gas
assets which we have acquired or developed, regardless of when the liabilities
arose and whether they are known or unknown. In addition, in connection with
certain acquisitions and sales of assets, we may obtain, or be required to
provide, indemnification against certain environmental liabilities. If we incur
a material liability, or the other party to a transaction fails to meet its
indemnification obligations to us, we could suffer material losses.
ACCOUNTING POLICY RISKS
POTENTIAL CHANGES IN ACCOUNTING PRACTICES FOR THE ENERGY INDUSTRY MAY CAUSE
US TO REVISE OUR FINANCIAL DISCLOSURE IN THE FUTURE, WHICH MAY CHANGE THE WAY
ANALYSTS MEASURE OUR BUSINESS OR FINANCIAL PERFORMANCE.
Recently discovered accounting irregularities in various industries have
forced regulators and legislators to take a renewed look at accounting
practices, financial disclosures, companies' relationships with their
independent auditors and retirement plan practices. It is still unclear how some
proposed laws and regulations
13
will develop and what new laws and regulations will be promulgated. As a result,
we cannot predict the ultimate impact of any future changes in accounting
regulations or practices in general with respect to public companies or the
energy industry or in our operations specifically. In addition, new accounting
standards could be enacted by the Financial Accounting Standards Board, or FASB,
the Emerging Issues Task Force, or EITF, or the SEC which could impact the way
we are required to record revenues, assets and liabilities. These and other
future changes in accounting standards could lead to negative impacts on
reported earnings or increases in liabilities which in turn could affect our
reported results of operations.
OPERATIONAL RISKS
OUR INVESTMENTS AND PROJECTS LOCATED OUTSIDE OF THE UNITED STATES EXPOSE US
TO RISKS RELATED TO LAWS OF OTHER COUNTRIES, TAXES, ECONOMIC CONDITIONS,
FLUCTUATIONS IN CURRENCY RATES, POLITICAL CONDITIONS AND POLICIES OF FOREIGN
GOVERNMENTS. THESE RISKS MAY DELAY OR REDUCE OUR REALIZATION OF VALUE FROM OUR
INTERNATIONAL PROJECTS.
We currently own and may acquire and/or dispose of material energy-related
investments and projects outside the United States. The economic and political
conditions in certain countries where we have interests or in which we may
explore development, acquisition or investment opportunities present risks of
delays in construction and interruption of business, as well as risks of war,
expropriation, nationalization, renegotiation, trade sanctions or nullification
of existing contracts and changes in law or tax policy, that are greater than in
the United States. The uncertainty of the legal environment in certain foreign
countries in which we develop or acquire projects or make investments could make
it more difficult to obtain non-recourse project or other financing on suitable
terms, could adversely affect the ability of certain customers to honor their
obligations with respect to such projects or investments and could impair our
ability to enforce our rights under agreements relating to such projects or
investments.
Operations in foreign countries also can present currency exchange rate and
convertibility, inflation and repatriation risk. In certain conditions under
which we develop or acquire projects, or make investments, economic and monetary
conditions and other factors could affect our ability to convert our earnings
denominated in foreign currencies. In addition, risk from fluctuations in
currency exchange rates can arise when our foreign subsidiaries expend or borrow
funds in one type of currency but receive revenue in another. In such cases, an
adverse change in exchange rates can reduce our ability to meet expenses,
including debt service obligations. Foreign currency risk can also arise when
the revenues received by our foreign subsidiaries are not in U.S. dollars. In
such cases, a strengthening of the U.S. dollar could reduce the amount of cash
and income we receive from these foreign subsidiaries. While we believe we have
hedges and contracts in place to mitigate our most significant short-term
foreign currency exchange risks, our hedges may not be sufficient or we may have
some exposures that are not hedged which could result in losses or volatility in
our revenues.
THE LONG-TERM FINANCIAL CONDITION OF OUR U.S. AND CANADIAN NATURAL GAS
TRANSMISSION BUSINESSES ARE DEPENDENT ON THE CONTINUED AVAILABILITY OF NATURAL
GAS RESERVES.
The development of additional natural gas reserves requires significant
capital expenditures by others for exploration and development drilling and the
installation of production, gathering, storage, transportation and other
facilities and permit natural gas to be produced and delivered to our pipeline
systems. Low prices for natural gas, regulatory limitations, or the lack of
available capital for these projects could adversely affect the development of
additional reserves and production, gathering, storage and pipeline transmission
and import and export of natural gas supplies. Additional natural gas reserves
may not be developed in commercial quantities and in sufficient amounts to fill
the capacities of our pipeline systems.
GATHERING, PROCESSING AND TRANSPORTING ACTIVITIES INVOLVE NUMEROUS RISKS
THAT MAY RESULT IN ACCIDENTS AND OTHER OPERATING RISKS AND COSTS.
There are inherent in our gas gathering, processing and transporting
properties a variety of hazards and operating risks, such as leaks, explosions
and mechanical problems, that could cause substantial financial losses. In
addition, these risks could result in loss of human life, significant damage to
property, environmental pollution, impairment of our operations and substantial
losses to us. In accordance with customary industry practice, we maintain
insurance against some, but not all, of these risks and losses. The occurrence
of any of these events not fully covered by insurance could have a material
adverse effect on our financial position and
14
results of operations. The location of pipelines near populated areas, including
residential areas, commercial business centers and industrial sites, could
increase the level of damages resulting from these risks.
WE ARE SUBJECT TO THE RISKS OF NUCLEAR GENERATION.
Our three nuclear stations, Oconee, Catawba and McGuire, subject us to the
risks of nuclear generation, which include:
- the potential harmful effects on the environment and human health
resulting from the operation of nuclear facilities and the storage,
handling and disposal of radioactive materials;
- limitations on the amounts and types of insurance commercially available
to cover losses that might arise in connection with nuclear operations;
and
- uncertainties with respect to the technological and financial aspects of
decommissioning nuclear plants at the end of their licensed lives.
The Nuclear Regulatory Commission has broad authority under federal law to
impose licensing and safety-related requirements for the operation of nuclear
generation facilities. In the event of non-compliance, the Nuclear Regulatory
Commission has the authority to impose fines or shut down a unit, or both,
depending upon its assessment of the severity of the situation, until compliance
is achieved. Revised safety requirements promulgated by the Nuclear Regulatory
Commission could necessitate substantial capital expenditures at our nuclear
plants. In addition, although we have no reason to anticipate a serious nuclear
incident, if an incident did occur, it could have a material adverse effect on
our results of operations or financial condition. Furthermore, the
non-compliance of other nuclear facilities operators with applicable regulations
or the occurrence of a serious nuclear incident at other facilities could result
in increased regulation of the industry as a whole, which could then increase
our compliance costs and impact the results of operations of our facilities.
POTENTIAL TERRORIST ACTIVITIES OR MILITARY OR OTHER ACTIONS COULD ADVERSELY
AFFECT OUR BUSINESS.
The continued threat of terrorism and the impact of retaliatory military
and other action by the United States and its allies may lead to increased
political, economic and financial market instability and volatility in prices
for natural gas which could affect the market for our gas operations. In
addition, future acts of terrorism could be directed against companies operating
in the United States. In particular, nuclear generation facilities such as our
nuclear plants could be potential targets of terrorist activities. The potential
for terrorism has subjected our operations to increased risks and could have a
material adverse effect on our business. In particular, we may experience
increased capital or operating costs to implement increased security for our
plants, including our nuclear power plants under the Nuclear Regulatory
Commission's design basis threat requirements, such as additional physical plant
security and additional security personnel.
The insurance industry has also been disrupted by these events. As a
result, the availability of insurance covering risks we and our competitors
typically insure against may decrease. In addition, the insurance we are able to
obtain may have higher deductibles, higher premiums and more restrictive policy
terms.
15
RATIO OF EARNINGS TO FIXED CHARGES
(unaudited)
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------------------- SEPTEMBER 30,
1997(1) 1998 1999 2000 2001 2002
------- ---- ---- ---- ---- --------------
Ratio of Earnings to Fixed Charges.... 4.0 4.5 2.7 3.6 3.8 2.3
For purposes of this ratio (a) earnings consist of income from continuing
operations before income taxes and fixed charges, and (b) fixed charges consist
of all interest deductions, the interest component of rentals and preference
security dividends of consolidated subsidiaries.
---------------
(1) Data reflects accounting for the stock-for-stock merger of Duke Energy and
PanEnergy Corp on June 18, 1997 as a pooling of interests. As a result, the
data gives effect to the merger as if it had occurred as of January 1, 1997.
USE OF PROCEEDS
Unless Duke Energy states otherwise in the applicable prospectus
supplement, Duke Energy intends to use the net proceeds from the sale of any
offered securities:
o to redeem or purchase from time to time presently outstanding securities
when it anticipates those transactions will result in an overall cost
savings;
o to repay maturing securities;
o to finance its ongoing construction program; or
o for general corporate purposes.
The proceeds from the sale of Preferred Securities by a Trust will be
invested in Junior Subordinated Notes issued by Duke Energy. Except as Duke
Energy may otherwise describe in the applicable prospectus supplement, Duke
Energy expects to use the net proceeds from the sale of such Junior Subordinated
Notes to the applicable Trust for the above purposes.
THE TRUSTS
Duke Energy formed each Trust as a statutory business trust under Delaware
law. Each Trust's business is defined in a trust agreement executed by Duke
Energy, as depositor, and Chase Manhattan Bank USA, National Association
(formerly known as Chase Manhattan Bank Delaware). Each trust agreement will be
amended when Preferred Securities are issued under it and will be in
substantially the form filed as an exhibit to the registration statement, of
which this prospectus is a part. An amended trust agreement is called a "Trust
Agreement" in this prospectus.
The Preferred Securities and the Common Securities of each Trust represent
undivided beneficial interests in the assets of that Trust. The Preferred
Securities and the Common Securities together are sometimes called the "Trust
Securities" in this prospectus.
The trustees of each Trust will conduct that Trust's business and affairs.
Duke Energy, as the holder of the Common Securities of each Trust, will appoint
the trustees of that Trust. The trustees of each Trust will consist of:
o two officers of Duke Energy as Administrative Trustees;
o JPMorgan Chase Bank as Property Trustee; and
o Chase Manhattan Bank USA, National Association as Delaware Trustee.
The prospectus supplement relating to the Preferred Securities of a Trust
will provide further information concerning that Trust.
No separate financial statements of any Trust are included in this
prospectus. Duke Energy considers that such statements would not be material to
holders of the Preferred Securities because no Trust has any
16
independent operations and the sole purpose of each Trust is investing the
proceeds of the sale of its Trust Securities in Junior Subordinated Notes. Duke
Energy does not expect that any of the Trusts will be filing annual, quarterly
or special reports with the SEC.
The principal place of business of each Trust will be c/o Duke Energy
Corporation, 526 South Church Street, Charlotte, North Carolina 28202, telephone
(704) 594-6200.
Accounting Treatment
Each Trust will be treated as a subsidiary of Duke Energy for financial
reporting purposes. Accordingly, Duke Energy's consolidated financial statements
will include the accounts of each Trust. The Preferred Securities, along with
other trust preferred securities that Duke Energy guarantees on an equivalent
basis, will be presented as a separate line item in Duke Energy's consolidated
balance sheets, entitled "Guaranteed Preferred Beneficial Interests in
Subordinated Notes of Duke Energy Corporation or Subsidiaries." Duke Energy will
record distributions that each Trust pays on the Preferred Securities as an
expense in its consolidated statement of income.
DESCRIPTION OF THE SENIOR NOTES
Duke Energy will issue the Senior Notes in one or more series under its
Senior Indenture dated as of September 1, 1998 between Duke Energy and JPMorgan
Chase Bank (formerly known as The Chase Manhattan Bank), as Trustee, as
supplemented from time to time. The Senior Indenture is an exhibit to the
registration statement, of which this prospectus is a part.
The Senior Notes are unsecured and unsubordinated obligations and will rank
equally with all of Duke Energy's other unsecured and unsubordinated
indebtedness. The First and Refunding Mortgage Bonds are effectively senior to
the Senior Notes to the extent of the value of the properties securing them. As
of September 30, 2002, there were approximately $790,000,000 in aggregate
principal amount of First and Refunding Mortgage Bonds outstanding.
Duke Energy conducts its non-electric operations, and certain of its
electric operations outside its service area in the Carolinas, through
subsidiaries. Accordingly, its ability to meet its obligations under the Senior
Notes is partly dependent on the earnings and cash flows of those subsidiaries
and the ability of those subsidiaries to pay dividends or to advance or repay
funds to Duke Energy. In addition, the rights that Duke Energy and its creditors
would have to participate in the assets of any such subsidiary upon the
subsidiary's liquidation or recapitalization will be subject to the prior claims
of the subsidiary's creditors. Certain of Duke Energy's subsidiaries have
incurred substantial amounts of debt in the expansion of their businesses, and
Duke Energy anticipates that certain of its subsidiaries will do so in the
future.
The following description of the Senior Notes is only a summary and is not
intended to be comprehensive. For additional information you should refer to the
Senior Indenture.
General
The Senior Indenture does not limit the amount of Senior Notes that Duke
Energy may issue under it. Duke Energy may issue Senior Notes from time to time
under the Senior Indenture in one or more series by entering into supplemental
indentures or by its Board of Directors or a duly authorized committee
authorizing the issuance. The form of supplemental indenture to the Senior
Indenture is an exhibit to the registration statement, of which this prospectus
is a part.
The Senior Notes of a series need not be issued at the same time, bear
interest at the same rate or mature on the same date.
The Senior Indenture does not protect the holders of Senior Notes if Duke
Energy engages in a highly leveraged transaction.
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Provisions Applicable to Particular Series
The prospectus supplement for a particular series of Senior Notes being
offered will disclose the specific terms related to the offering, including the
price or prices at which the Senior Notes to be offered will be issued. Those
terms may include some or all of the following:
o the title of the series;
o the total principal amount of the Senior Notes of the series;
o the date or dates on which principal is payable or the method for
determining the date or dates, and any right that Duke Energy has to
change the date on which principal is payable;
o the interest rate or rates, if any, or the method for determining the
rate or rates, and the date or dates from which interest will accrue;
o any interest payment dates and the regular record date for the interest
payable on each interest payment date, if any;
o whether Duke Energy may extend the interest payment periods and, if so,
the terms of the extension;
o the place or places where payments will be made;
o whether Duke Energy has the option to redeem the Senior Notes and, if so,
the terms of its redemption option;
o any obligation that Duke Energy has to redeem the Senior Notes through a
sinking fund or to purchase the Senior Notes through a purchase fund or
at the option of the holder;
o whether the provisions described under "Defeasance and Covenant
Defeasance" will not apply to the Senior Notes;
o the currency in which payments will be made if other than U.S. dollars,
and the manner of determining the equivalent of those amounts in U.S.
dollars;
o if payments may be made, at Duke Energy's election or at the holder's
election, in a currency other than that in which the Senior Notes are
stated to be payable, then the currency in which those payments may be
made, the terms and conditions of the election and the manner of
determining those amounts;
o the portion of the principal payable upon acceleration of maturity, if
other than the entire principal;
o whether the Senior Notes will be issuable as global securities and, if
so, the securities depositary;
o any changes in the events of default or covenants with respect to the
Senior Notes;
o any index or formula used for determining principal, premium or interest;
o if the principal payable on the maturity date will not be determinable on
one or more dates prior to the maturity date, the amount which will be
deemed to be such principal amount or the manner of determining it;
o the date or dates after which holder may convert the Senior Notes into
shares of Duke Energy common stock and the terms for that conversion;
o the date or dates upon which the Senior Notes will be mandatorily
converted into shares of Duke Energy common stock and the terms for that
conversion;
o the terms for the attachment to Senior Notes of rights to purchase or
sell common stock or other securities of Duke Energy; and
o any other terms.
Unless Duke Energy states otherwise in the applicable prospectus
supplement, Duke Energy will issue the Senior Notes only in fully registered
form without coupons, and there will be no service charge for any registration
of transfer or exchange of the Senior Notes. Duke Energy may, however, require
payment to cover any tax or other governmental charge payable in connection with
any transfer or exchange. Subject to the terms of the Senior Indenture and the
limitations applicable to global securities, transfers and exchanges of the
Senior Notes may be made at JPMorgan Chase Bank, Institutional Trust Services, 4
New York Plaza, 15th Floor, New York, New York 10004 or at any other office or
agency maintained by Duke Energy for such purpose.
The Senior Notes will be issuable in denominations of $1,000 and any
integral multiples of $1,000, unless Duke Energy states otherwise in the
applicable prospectus supplement.
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Duke Energy may offer and sell the Senior Notes, including original issue
discount Senior Notes, at a substantial discount below their principal amount.
The applicable prospectus supplement will describe special United States federal
income tax and any other considerations applicable to those securities. In
addition, the applicable prospectus supplement may describe certain special
United States federal income tax or other considerations, if any, applicable to
any Senior Notes that are denominated in a currency other than U.S. dollars.
Global Securities
Duke Energy may issue some or all of the Senior Notes as book-entry
securities. Any such book-entry securities will be represented by one or more
fully registered global securities. Duke Energy will register each global
security with or on behalf of a securities depositary identified in the
applicable prospectus supplement. Each global security will be deposited with
the securities depositary or its nominee or a custodian for the securities
depositary.
As long as the securities depositary or its nominee is the registered
holder of a global security representing Senior Notes, that person will be
considered the sole owner and holder of the global security and the Senior Notes
it represents for all purposes. Except in limited circumstances, owners of
beneficial interests in a global security:
o may not have the global security or any Senior Notes it represents
registered in their names;
o may not receive or be entitled to receive physical delivery of
certificated Senior Notes in exchange for the global security; and
o will not be considered the owners or holders of the global security or
any Senior Notes it represents for any purposes under the Senior Notes or
the Senior Indenture.
Duke Energy will make all payments of principal and any premium and
interest on a global security to the securities depositary or its nominee as the
holder of the global security. The laws of some jurisdictions require that
certain purchasers of securities take physical delivery of securities in
definitive form. These laws may impair the ability to transfer beneficial
interests in a global security.
Ownership of beneficial interests in a global security will be limited to
institutions having accounts with the securities depositary or its nominee,
which are called "participants" in this discussion, and to persons that hold
beneficial interests through participants. When a global security representing
Senior Notes is issued, the securities depositary will credit on its book entry,
registration and transfer system the principal amounts of Senior Notes the
global security represents to the accounts of its participants. Ownership of
beneficial interests in a global security will be shown only on, and the
transfer of those ownership interests will be effected only through, records
maintained by:
o the securities depositary, with respect to participants' interests; and
o any participant, with respect to interests the participant holds on
behalf of other persons.
Payments participants make to owners of beneficial interests held through
those participants will be the responsibility of those participants. The
securities depositary may from time to time adopt various policies and
procedures governing payments, transfers, exchanges and other matters relating
to beneficial interests in a global security. None of the following will have
any responsibility or liability for any aspect of the securities depositary's or
any participant's records relating to beneficial interests in a global security
representing Senior Notes, for payments made on account of those beneficial
interests or for maintaining, supervising or reviewing any records relating to
those beneficial interests:
o Duke Energy;
o the Senior Indenture Trustee; or
o an agent of either of them.
Redemption
Provisions relating to the redemption of Senior Notes will be set forth in
the applicable prospectus supplement. Unless Duke Energy states otherwise in the
applicable prospectus supplement, Duke Energy may redeem Senior Notes only upon
notice mailed at least 30 but not more than 60 days before the date fixed for
redemption. Unless Duke Energy states otherwise in the applicable prospectus
supplement, that notice may
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state that the redemption will be conditional upon the Senior Indenture Trustee,
or the applicable paying agent, receiving sufficient funds to pay the principal,
premium and interest on those Senior Notes on the date fixed for redemption and
that if the Senior Indenture Trustee or the applicable paying agent does not
receive those funds, the redemption notice will not apply, and Duke Energy will
not be required to redeem those Senior Notes.
Duke Energy will not be required to:
o issue, register the transfer of, or exchange any Senior Notes of a series
during the period beginning 15 days before the date the notice is mailed
identifying the Senior Notes of that series that have been selected for
redemption; or
o register the transfer of or exchange any Senior Note of that series
selected for redemption except the unredeemed portion of a Senior Note
being partially redeemed.
Consolidation, Merger, Conveyance or Transfer
The Senior Indenture provides that Duke Energy may consolidate or merge
with or into, or convey or transfer all or substantially all of its properties
and assets to, another corporation or other entity. Any successor must, however,
assume Duke Energy's obligations under the Senior Indenture and the Senior Notes
issued under it, and Duke Energy must deliver to the Senior Indenture Trustee a
statement by certain of its officers and an opinion of counsel that affirm
compliance with all conditions in the Senior Indenture relating to the
transaction. When those conditions are satisfied, the successor will succeed to
and be substituted for Duke Energy under the Senior Indenture, and Duke Energy
will be relieved of its obligations under the Senior Indenture and the Senior
Notes.
Modification; Waiver
Duke Energy may modify the Senior Indenture with the consent of the holders
of a majority in principal amount of the outstanding Senior Notes of all series
of Senior Notes that are affected by the modification, voting as one class. The
consent of the holder of each outstanding Senior Note affected is, however,
required to:
o change the maturity date of the principal or any installment of principal
or interest on that Senior Note;
o reduce the principal amount, the interest rate or any premium payable
upon redemption on that Senior Note;
o reduce the amount of principal due and payable upon acceleration of
maturity;
o change the currency of payment of principal, premium or interest on that
Senior Note;
o impair the right to institute suit to enforce any such payment on or
after the maturity date or redemption date;
o reduce the percentage in principal amount of Senior Notes of any series
required to modify the Senior Indenture, waive compliance with certain
restrictive provisions of the Senior Indenture or waive certain defaults;
or
o with certain exceptions, modify the provisions of the Senior Indenture
governing modifications of the Senior Indenture or governing waiver of
covenants or past defaults.
In addition, Duke Energy may modify the Senior Indenture for certain other
purposes, without the consent of any holders of Senior Notes.
The holders of a majority in principal amount of the outstanding Senior
Notes of any series may waive, for that series, Duke Energy's compliance with
certain restrictive provisions of the Senior Indenture, including the covenant
described under "Negative Pledge." The holders of a majority in principal amount
of the outstanding Senior Notes of all series under the Senior Indenture with
respect to which a default has occurred and is continuing, voting as one class,
may waive that default for all those series, except a default in the payment of
principal or any premium or interest on any Senior Note or a default with
respect to a covenant or provision which cannot be modified without the consent
of the holder of each outstanding Senior Note of the series affected.
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Events of Default
The following are events of default under the Senior Indenture with respect
to any series of Senior Notes, unless Duke Energy states otherwise in the
applicable prospectus supplement:
o failure to pay principal of or any premium on any Senior Note of that
series when due;
o failure to pay when due any interest on any Senior Note of that series
that continues for 60 days; for this purpose, the date on which interest
is due is the date on which Duke Energy is required to make payment
following any deferral of interest payments by it under the terms of
Senior Notes that permit such deferrals;
o failure to make any sinking fund payment when required for any Senior
Note of that series that continues for 60 days;
o failure to perform any covenant in the Senior Indenture (other than a
covenant expressly included solely for the benefit of other series) that
continues for 90 days after the Senior Indenture Trustee or the holders
of at least 33% of the outstanding Senior Notes of that series give Duke
Energy written notice of the default; and
o certain bankruptcy, insolvency or reorganization events with respect to
Duke Energy.
In the case of the fourth event of default listed above, the Senior Indenture
Trustee may extend the grace period. In addition, if holders of a particular
series have given a notice of default, then holders of at least the same
percentage of Senior Notes of that series, together with the Senior Indenture
Trustee, may also extend the grace period. The grace period will be
automatically extended if Duke Energy has initiated and is diligently pursuing
corrective action.
Duke Energy may establish additional events of default for a particular
series and, if established, any such events of default will be described in the
applicable prospectus supplement.
If an event of default with respect to Senior Notes of a series occurs and
is continuing, then the Senior Indenture Trustee or the holders of at least 33%
in principal amount of the outstanding Senior Notes of that series may declare
the principal amount of all Senior Notes of that series to be immediately due
and payable. However, that event of default will be considered waived at any
time after the declaration but before a judgment for payment of the money due
has been obtained if:
o Duke Energy has paid or deposited with the Senior Indenture Trustee all
overdue interest, the principal and any premium due otherwise than by the
declaration and any interest on such amounts, and any interest on overdue
interest, to the extent legally permitted, in each case with respect to
that series, and all amounts due to the Senior Indenture Trustee; and
o all events of default with respect to that series, other than the
nonpayment of the principal that became due solely by virtue of the
declaration, have been cured or waived.
The Senior Indenture Trustee is under no obligation to exercise any of its
rights or powers at the request or direction of any holders of Senior Notes
unless those holders have offered the Senior Indenture Trustee security or
indemnity against the costs, expenses and liabilities which it might incur as a
result. The holders of a majority in principal amount of the outstanding Senior
Notes of any series have, with certain exceptions, the right to direct the time,
method and place of conducting any proceedings for any remedy available to the
Senior Indenture Trustee or the exercise of any power of the Senior Indenture
Trustee with respect to those Senior Notes. The Senior Indenture Trustee may
withhold notice of any default, except a default in the payment of principal or
interest, from the holders of any series if the Senior Indenture Trustee in good
faith considers it in the interest of the holders to do so.
The holder of any Senior Note will have an absolute and unconditional right
to receive payment of the principal, any premium and, within certain
limitations, any interest on that Senior Note on its maturity date or redemption
date and to enforce those payments.
Duke Energy is required to furnish each year to the Senior Indenture
Trustee a statement by certain of its officers to the effect that it is not in
default under the Senior Indenture or, if there has been a default, specifying
the default and its status.
21
Payments; Paying Agent
The paying agent will pay the principal of any Senior Notes only if those
Senior Notes are surrendered to it. The paying agent will pay interest on Senior
Notes issued as global securities by wire transfer to the holder of those global
securities. Unless Duke Energy states otherwise in the applicable prospectus
supplement, the paying agent will pay interest on Senior Notes that are not in
global form at its office or, at Duke Energy's option:
o by wire transfer to an account at a banking institution in the United
States that is designated in writing to the Senior Indenture Trustee at
least 16 days prior to the date of payment by the person entitled to that
interest; or
o by check mailed to the address of the person entitled to that interest as
that address appears in the security register for those Senior Notes.
Unless Duke Energy states otherwise in the applicable prospectus
supplement, the Senior Indenture Trustee will act as paying agent for that
series of Senior Notes, and the principal corporate trust office of the Senior
Indenture Trustee will be the office through which the paying agent acts. Duke
Energy may, however, change or add paying agents or approve a change in the
office through which a paying agent acts.
Any money that Duke Energy has paid to a paying agent for principal or
interest on any Senior Notes which remains unclaimed at the end of two years
after that principal or interest has become due will be repaid to Duke Energy at
its request. After repayment to Duke Energy, holders should look only to Duke
Energy for those payments.
Negative Pledge
While any of the Senior Notes remain outstanding, Duke Energy will not
create, or permit to be created or to exist, any mortgage, lien, pledge,
security interest or other encumbrance upon any of its property, whether owned
on or acquired after the date of the Senior Indenture, to secure any
indebtedness for borrowed money of Duke Energy, unless the Senior Notes then
outstanding are equally and ratably secured for so long as any such indebtedness
is so secured.
The foregoing restriction does not apply with respect to, among other
things:
o purchase money mortgages, or other purchase money liens, pledges,
security interests or encumbrances upon property that Duke Energy
acquired after the date of the Senior Indenture;
o mortgages, liens, pledges, security interests or other encumbrances
existing on any property at the time Duke Energy acquired it, including
those which exist on any property of an entity with which Duke Energy is
consolidated or merged or which transfers or leases all or substantially
all of its properties to Duke Energy;
o mortgages, liens, pledges, security interests or other encumbrances upon
any property of Duke Energy that existed on the date of the initial
issuance of the Senior Notes;
o pledges or deposits to secure performance in connection with bids,
tenders, contracts (other than contracts for the payment of money) or
leases to which Duke Energy is a party;
o liens created by or resulting from any litigation or proceeding which at
the time is being contested in good faith by appropriate proceedings;
o liens incurred in connection with the issuance of bankers' acceptances
and lines of credit, bankers' liens or rights of offset and any security
given in the ordinary course of business to banks or others to secure any
indebtedness payable on demand or maturing within 12 months of the date
that such indebtedness is originally incurred;
o liens incurred in connection with repurchase, swap or other similar
agreements (including commodity price, currency exchange and interest
rate protection agreements);
o liens securing industrial revenue or pollution control bonds;
o liens, pledges, security interests or other encumbrances on any property
arising in connection with any defeasance, covenant defeasance or
in-substance defeasance of indebtedness of Duke Energy;
22
o liens created in connection with, and created to secure, a non-recourse
obligation;
o Bonds issued or to be issued from time to time under Duke Energy's First
and Refunding Mortgage, and the "permitted liens" specified in Duke
Energy's First and Refunding Mortgage;
o indebtedness which Duke Energy may issue in connection with its
consolidation or merger with or into any other entity, which may be its
affiliate, in exchange for or otherwise in substitution for secured
indebtedness of that entity, or Third Party Debt, which by its terms (1)
is secured by a mortgage on all or a portion of the property of that
entity, (2) prohibits that entity from incurring secured indebtedness,
unless the Third Party Debt is secured equally and ratably with such
secured indebtedness or (3) prohibits that entity from incurring secured
indebtedness;
o indebtedness of any entity which Duke Energy is required to assume in
connection with a consolidation or merger of that entity, with respect to
which any property of Duke Energy is subjected to a mortgage, lien,
pledge, security interest or other encumbrance;
o mortgages, liens, pledges, security interests or other encumbrances upon
any property that Duke Energy acquired, constructed, developed or
improved after the date of the Senior Indenture which are created before,
at the time of, or within 18 months after such acquisition -- or in the
case of property constructed, developed or improved, after the completion
of the construction, development or improvement and commencement of full
commercial operation of that property, whichever is later -- to secure or
provide for the payment of any part of its purchase price or cost;
provided that, in the case of such construction, development or
improvement, the mortgages, liens, pledges, security interests or other
encumbrances shall not apply to any property that Duke Energy owns other
than real property that is unimproved up to that time; and
o the replacement, extension or renewal of any mortgage, lien, pledge,
security interest or other encumbrance described above; or the
replacement, extension or renewal (not exceeding the principal amount of
indebtedness so secured together with any premium, interest, fee or
expense payable in connection with any such replacement, extension or
renewal) of the indebtedness so secured; provided that such replacement,
extension or renewal is limited to all or a part of the same property
that secured the mortgage, lien, pledge, security interest or other
encumbrance replaced, extended or renewed, plus improvements on it or
additions or accessions to it.
In addition, Duke Energy may create or assume any other mortgage, lien, pledge,
security interest or other encumbrance not excepted in the Senior Indenture
without Duke Energy equally and ratably securing the Senior Notes, if
immediately after that creation or assumption, the principal amount of
indebtedness for borrowed money of Duke Energy that all such other mortgages,
liens, pledges, security interests and other encumbrances secure does not exceed
an amount equal to 10% of Duke Energy's common stockholders' equity as shown on
its consolidated balance sheet for the accounting period occurring immediately
before the creation or assumption of that mortgage, lien, pledge, security
interest or other encumbrance.
Defeasance and Covenant Defeasance
The Senior Indenture provides that Duke Energy may be:
o discharged from its obligations, with certain limited exceptions, with
respect to any series of Senior Notes, as described in the Senior
Indenture, such a discharge being called a "defeasance" in this
prospectus; and
o released from its obligations under certain restrictive covenants
especially established with respect to any series of Senior Notes,
including the covenant described under "Negative Pledge," as described in
the Senior Indenture, such a release being called a "covenant defeasance"
in this prospectus.
Duke Energy must satisfy certain conditions to effect a defeasance or covenant
defeasance. Those conditions include the irrevocable deposit with the Senior
Indenture Trustee, in trust, of money or government obligations which through
their scheduled payments of principal and interest would provide sufficient
money to pay the principal and any premium and interest on those Senior Notes on
the maturity dates of those payments or upon redemption.
23
Following a defeasance, payment of the Senior Notes defeased may not be
accelerated because of an event of default under the Senior Indenture. Following
a covenant defeasance, the payment of Senior Notes may not be accelerated by
reference to the covenants from which Duke Energy has been released. A
defeasance may occur after a covenant defeasance.
Under current United States federal income tax laws, a defeasance would be
treated as an exchange of the relevant Senior Notes in which holders of those
Senior Notes might recognize gain or loss. In addition, the amount, timing and
character of amounts that holders would thereafter be required to include in
income might be different from that which would be includible in the absence of
that defeasance. Duke Energy urges investors to consult their own tax advisors
as to the specific consequences of a defeasance, including the applicability and
effect of tax laws other than United States federal income tax laws.
Under current United States federal income tax law, unless accompanied by
other changes in the terms of the Senior Notes, a covenant defeasance should not
be treated as a taxable exchange.
Concerning the Senior Indenture Trustee
JPMorgan Chase Bank (formerly known as The Chase Manhattan Bank) is the
Senior Indenture Trustee and is also the trustee under Duke Energy's
Subordinated Indenture and the trustee under Duke Energy's First and Refunding
Mortgage. Duke Energy and certain of its affiliates maintain deposit accounts
and banking relationships with JPMorgan Chase Bank. JPMorgan Chase Bank also
serves as trustee or agent under other indentures and agreements pursuant to
which securities of Duke Energy and of certain of its affiliates are
outstanding.
The Senior Indenture Trustee will perform only those duties that are
specifically set forth in the Senior Indenture unless an event of default under
the Senior Indenture occurs and is continuing. In case an event of default
occurs and is continuing, the Senior Indenture Trustee will exercise the same
degree of care as a prudent individual would exercise in the conduct of his or
her own affairs.
DESCRIPTION OF THE JUNIOR SUBORDINATED NOTES
Duke Energy will issue the Junior Subordinated Notes in one or more series
under its Subordinated Indenture dated as of December 1, 1997 between Duke
Energy and JPMorgan Chase Bank (formerly known as The Chase Manhattan Bank), as
Trustee, as supplemented from time to time. The Subordinated Indenture is an
exhibit to the registration statement, of which this prospectus is a part.
The Junior Subordinated Notes are unsecured obligations of Duke Energy and
are junior in right of payment to "Senior Indebtedness" of Duke Energy. You will
find a description of the subordination provisions of the Junior Subordinated
Notes, including a description of Senior Indebtedness of Duke Energy, under
"Subordination."
Duke Energy conducts its non-electric operations, and certain of its
electric operations outside its service area in the Carolinas, through
subsidiaries. Accordingly, its ability to meet its obligations under the Junior
Subordinated Notes is partly dependent on the earnings and cash flows of those
subsidiaries and the ability of those subsidiaries to pay dividends or to
advance or repay funds to Duke Energy. In addition, the rights that Duke Energy
and its creditors would have to participate in the assets of any such subsidiary
upon the subsidiary's liquidation or recapitalization will be subject to the
prior claims of the subsidiary's creditors. Certain of Duke Energy's
subsidiaries have incurred substantial amounts of debt in the expansion of their
businesses and Duke Energy anticipates that certain of its subsidiaries will do
so in the future.
The following description of the Junior Subordinated Notes is only a
summary and is not intended to be comprehensive. For additional information you
should refer to the Subordinated Indenture.
General
The Subordinated Indenture does not limit the amount of Subordinated Notes,
including Junior Subordinated Notes, that Duke Energy may issue under it. Duke
Energy may issue Subordinated Notes,
24
including Junior Subordinated Notes, from time to time under the Subordinated
Indenture in one or more series by entering into supplemental indentures or by
its Board of Directors or a duly authorized committee authorizing the issuance.
Two forms of supplemental indenture to the Subordinated Indenture (one with
respect to Junior Subordinated Notes initially issued to a Trust and the other
with respect to Junior Subordinated Notes initially issued to the public) are
exhibits to the registration statement, of which this prospectus is a part.
The Junior Subordinated Notes of a series need not be issued at the same
time, bear interest at the same rate or mature on the same date.
The Subordinated Indenture does not protect the holders of Junior
Subordinated Notes if Duke Energy engages in a highly leveraged transaction.
Provisions Applicable to Particular Series
The prospectus supplement for a particular series of Junior Subordinated
Notes being offered will disclose the specific terms related to the offering,
including the price or prices at which the Junior Subordinated Notes to be
offered will be issued. Those terms may include some or all of the following:
o the title of the series;
o the total principal amount of the Junior Subordinated Notes of the
series;
o the date or dates on which principal is payable or the method for
determining the date or dates, and any right that Duke Energy has to
change the date on which principal is payable;
o the interest rate or rates, if any, or the method for determining the
rate or rates, and the date or dates from which interest will accrue;
o any interest payment dates and the regular record date for the interest
payable on each interest payment date, if any;
o whether Duke Energy may extend the interest payment periods and, if so,
the terms of the extension;
o the place or places where payments will be made;
o whether Duke Energy has the option to redeem the Junior Subordinated
Notes and, if so, the terms of its redemption option;
o any obligation that Duke Energy has to redeem the Junior Subordinated
Notes through a sinking fund or to purchase the Junior Subordinated Notes
through a purchase fund or at the option of the holder;
o whether the provisions described under "Defeasance and Covenant
Defeasance" will not apply to the Junior Subordinated Notes;
o the currency in which payments will be made if other than U.S. dollars,
and the manner of determining the equivalent of those amounts in U.S.
dollars;
o if payments may be made, at Duke Energy's election or at the holder's
election, in a currency other than that in which the Junior Subordinated
Notes are stated to be payable, then the currency in which those payments
may be made, the terms and conditions of the election and the manner of
determining those amounts;
o the portion of the principal payable upon acceleration of maturity, if
other than the entire principal;
o whether the Junior Subordinated Notes will be issuable as global
securities and, if so, the securities depositary;
o any changes in the events of default or covenants with respect to the
Junior Subordinated Notes;
o any index or formula used for determining principal, premium or interest;
o if the principal payable on the maturity date will not be determinable on
one or more dates prior to the maturity date, the amount which will be
deemed to be such principal amount or the manner of determining it;
o the subordination of the Junior Subordinated Notes to any other of Duke
Energy's indebtedness, including other series of Subordinated Notes;
25
o the date or dates after which holder may convert the Junior Subordinated
Notes into shares of Duke Energy common stock and the terms for that
conversion;
o the date or dates upon which the Junior Subordinated Notes will be
mandatorily converted into shares of Duke Energy common stock and the
terms for that conversion;
o the terms for the attachment to Junior Subordinated Notes of rights to
purchase or sell common stock or other securities of Duke Energy; and
o any other terms.
The interest rate and interest and other payment dates of each series of
Junior Subordinated Notes issued to a Trust will correspond to the rate at which
distributions will be paid and the distribution and other payment dates of the
Preferred Securities of that Trust.
Unless Duke Energy states otherwise in the applicable prospectus
supplement, Duke Energy will issue the Junior Subordinated Notes only in fully
registered form without coupons, and there will be no service charge for any
registration of transfer or exchange of the Junior Subordinated Notes. Duke
Energy may, however, require payment to cover any tax or other governmental
charge payable in connection with any transfer or exchange. Subject to the terms
of the Subordinated Indenture and the limitations applicable to global
securities, transfers and exchanges of the Junior Subordinated Notes may be made
at JPMorgan Chase Bank, Institutional Trust Services, 4 New York Plaza, 15th
Floor, New York, New York 10004 or at any other office maintained by Duke Energy
for such purpose.
The Junior Subordinated Notes will be issuable in denominations of $1,000
and any integral multiples of $1,000, unless Duke Energy states otherwise in the
applicable prospectus supplement.
Duke Energy may offer and sell the Junior Subordinated Notes, including
original issue discount Junior Subordinated Notes, at a substantial discount
below their principal amount. The applicable prospectus supplement will describe
special United States federal income tax and any other considerations applicable
to those securities. In addition, the applicable prospectus supplement may
describe certain special United States federal income tax or other
considerations, if any, applicable to any Junior Subordinated Notes that are
denominated in a currency other than U.S. dollars.
Global Securities
Duke Energy may issue some or all of the Junior Subordinated Notes as
book-entry securities. Any such book-entry securities will be represented by one
or more fully registered global certificates. Duke Energy will register each
global security with or on behalf of a securities depositary identified in the
applicable prospectus supplement. Each global security will be deposited with
the securities depositary or its nominee or a custodian for the securities
depositary.
As long as the securities depositary or its nominee is the registered
holder of a global security representing Junior Subordinated Notes, that person
will be considered the sole owner and holder of the global security and the
Junior Subordinated Notes it represents for all purposes. Except in limited
circumstances, owners of beneficial interests in a global security:
o may not have the global security or any Junior Subordinated Notes it
represents registered in their names;
o may not receive or be entitled to receive physical delivery of
certificated Junior Subordinated Notes in exchange for the global
security; and
o will not be considered the owners or holders of the global security or
any Junior Subordinated Notes it represents for any purposes under the
Junior Subordinated Notes or the Subordinated Indenture.
Duke Energy will make all payments of principal and any premium and
interest on a global security to the securities depositary or its nominee as the
holder of the global security. The laws of some jurisdictions require that
certain purchasers of securities take physical delivery of securities in
definitive form. These laws may impair the ability to transfer beneficial
interests in a global security.
Ownership of beneficial interests in a global security will be limited to
institutions having accounts with the securities depositary or its nominee,
which are called "participants" in this discussion, and to persons that
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hold beneficial interests through participants. When a global security
representing Junior Subordinated Notes is issued, the securities depositary will
credit on its book-entry, registration and transfer system the principal amounts
of Junior Subordinated Notes the global security represents to the accounts of
its participants. Ownership of beneficial interests in a global security will be
shown only on, and the transfer of those ownership interests will be effected
only through, records maintained by:
o the securities depositary, with respect to participants' interests; and
o any participant, with respect to interests the participant holds on
behalf of other persons.
Payments participants make to owners of beneficial interests held through
those participants will be the responsibility of those participants. The
securities depositary may from time to time adopt various policies and
procedures governing payments, transfers, exchanges and other matters relating
to beneficial interests in a global security. None of the following will have
any responsibility or liability for any aspect of the securities depositary's or
any participant's records relating to beneficial interests in a global security
representing Junior Subordinated Notes, for payments made on account of those
beneficial interests or for maintaining, supervising or reviewing any records
relating to those beneficial interests:
o Duke Energy;
o the Subordinated Indenture Trustee;
o the Trust (if the Junior Subordinated Notes are issued to a Trust); or
o any agent of any of them.
Redemption
Provisions relating to the redemption of Junior Subordinated Notes will be
set forth in the applicable prospectus supplement. Unless Duke Energy states
otherwise in the applicable prospectus supplement, Duke Energy may redeem Junior
Subordinated Notes only upon notice mailed at least 30 but not more than 60 days
before the date fixed for redemption.
Duke Energy will not be required to:
o issue, register the transfer of, or exchange any Junior Subordinated
Notes of a series during the period beginning 15 days before the date the
notice is mailed identifying the Junior Subordinated Notes of that series
that have been selected for redemption; or
o register the transfer of or exchange any Junior Subordinated Note of that
series selected for redemption except the unredeemed portion of a Junior
Subordinated Note being partially redeemed.
Consolidation, Merger, Conveyance or Transfer
The Subordinated Indenture provides that Duke Energy may consolidate or
merge with or into, or convey or transfer all or substantially all of its
properties and assets to, another corporation or other entity. Any successor
must, however, assume Duke Energy's obligations under the Subordinated Indenture
and the Subordinated Notes, including the Junior Subordinated Notes, and Duke
Energy must deliver to the Subordinated Indenture Trustee a statement by certain
of its officers and an opinion of counsel that affirm compliance with all
conditions in the Subordinated Indenture relating to the transaction. When those
conditions are satisfied, the successor will succeed to and be substituted for
Duke Energy under the Subordinated Indenture, and Duke Energy will be relieved
of its obligations under the Subordinated Indenture and any Subordinated Notes,
including the Junior Subordinated Notes.
Modification; Waiver
Duke Energy may modify the Subordinated Indenture with the consent of the
holders of a majority in principal amount of the outstanding Subordinated Notes
of all series that are affected by the modification,
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voting as one class. The consent of the holder of each outstanding Subordinated
Note affected is, however, required to:
o change the maturity date of the principal or any installment of principal
or interest on that Subordinated Note;
o reduce the principal amount, the interest rate or any premium payable
upon redemption on that Subordinated Note;
o reduce the amount of principal due and payable upon acceleration of
maturity;
o change the currency of payment of principal, premium or interest on that
Subordinated Note;
o impair the right to institute suit to enforce any such payment on or
after the maturity date or redemption date;
o reduce the percentage in principal amount of Subordinated Notes of any
series required to modify the Subordinated Indenture, waive compliance
with certain restrictive provisions of the Subordinated Indenture or
waive certain defaults; or
o with certain exceptions, modify the provisions of the Subordinated
Indenture governing modifications of the Subordinated Indenture or
governing waiver of covenants or past defaults.
In addition, Duke Energy may modify the Subordinated Indenture for certain other
purposes, without the consent of any holders of Subordinated Notes, including
Junior Subordinated Notes.
The holders of a majority in principal amount of the outstanding Junior
Subordinated Notes of any series may waive, for that series, Duke Energy's
compliance with certain restrictive provisions of the Subordinated Indenture.
The holders of a majority in principal amount of the outstanding Subordinated
Notes of all series under the Subordinated Indenture with respect to which a
default has occurred and is continuing, voting as one class, may waive that
default for all those series, except a default in the payment of principal or
any premium or interest on any Subordinated Note or a default with respect to a
covenant or provision which cannot be modified without the consent of the holder
of each outstanding Subordinated Note of the series affected.
Duke Energy may not amend the Subordinated Indenture to change the
subordination of any outstanding Junior Subordinated Notes without the consent
of each holder of Senior Indebtedness that the amendment would adversely affect.
Events of Default
The following are events of default under the Subordinated Indenture with
respect to any series of Junior Subordinated Notes, unless Duke Energy states
otherwise in the applicable prospectus supplement:
o failure to pay principal of or any premium on any Junior Subordinated
Note of that series when due;
o failure to pay when due any interest on any Junior Subordinated Note of
that series that continues for 60 days; for this purpose, the date on
which interest is due is the date on which Duke Energy is required to
make payment following any deferral of interest payments by it under the
terms of Junior Subordinated Notes that permit such deferrals;
o failure to make any sinking fund payment when required for any Junior
Subordinated Note of that series that continues for 60 days;
o failure to perform any covenant in the Subordinated Indenture (other than
a covenant expressly included solely for the benefit of other series)
that continues for 90 days after the Subordinated Indenture Trustee or
the holders of at least 33% of the outstanding Junior Subordinated Notes
of that series give Duke Energy written notice of the default; and
o certain bankruptcy, insolvency or reorganization events with respect to
Duke Energy.
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In the case of the fourth event of default listed above, the Subordinated
Indenture Trustee may extend the grace period. In addition, if holders of a
particular series have given a notice of default, then holders of at least the
same percentage of Junior Subordinated Notes of that series, together with the
Subordinated Indenture Trustee, may also extend the grace period. The grace
period will be automatically extended if Duke Energy has initiated and is
diligently pursuing corrective action.
Duke Energy may establish additional events of default for a particular
series and, if established, any such events of default will be described in the
applicable prospectus supplement.
If an event of default with respect to Junior Subordinated Notes of a
series occurs and is continuing, then the Subordinated Indenture Trustee or the
holders of at least 33% in principal amount of the outstanding Junior
Subordinated Notes of that series may declare the principal amount of all Junior
Subordinated Notes of that series to be immediately due and payable. However,
that event of default will be considered waived at any time after the
declaration but before a judgment for payment of the money due has been obtained
if:
o Duke Energy has paid or deposited with the Subordinated Indenture Trustee
all overdue interest, the principal and any premium due otherwise than by
the declaration and any interest on such amounts, and any interest on
overdue interest, to the extent legally permitted, in each case with
respect to that series, and all amounts due to the Subordinated Indenture
Trustee; and
o all events of default with respect to that series, other than the
nonpayment of the principal that became due solely by virtue of the
declaration, have been cured or waived.
In the case of Junior Subordinated Notes issued to a Trust, a holder of
Preferred Securities may institute a legal proceeding directly against Duke
Energy, without first instituting a legal proceeding against the Property
Trustee of the Trust by which those Preferred Securities were issued or any
other person or entity, for enforcement of payment to that holder of principal
or interest on an equivalent amount of Junior Subordinated Notes of the related
series on or after the due dates specified in those Junior Subordinated Notes.
The Subordinated Indenture Trustee is under no obligation to exercise any
of its rights or powers at the request or direction of any holders of Junior
Subordinated Notes unless those holders have offered the Subordinated Indenture
Trustee security or indemnity against the costs, expenses and liabilities that
it might incur as a result. The holders of a majority in principal amount of the
outstanding Junior Subordinated Notes of any series have, with certain
exceptions, the right to direct the time, method and place of conducting any
proceedings for any remedy available to the Subordinated Indenture Trustee or
the exercise of any power of the Subordinated Indenture Trustee with respect to
those Junior Subordinated Notes. The Subordinated Indenture Trustee may withhold
notice of any default, except a default in the payment of principal or interest,
from the holders of any series if the Subordinated Indenture Trustee in good
faith considers it in the interest of the holders to do so.
The holder of any Junior Subordinated Note will have an absolute and
unconditional right to receive payment of the principal, any premium and, within
certain limitations, any interest on that Junior Subordinated Note on its
maturity date or redemption date and to enforce those payments.
Duke Energy is required to furnish each year to the Subordinated Indenture
Trustee a statement by certain of its officers to the effect that it is not in
default under the Subordinated Indenture or, if there has been a default,
specifying the default and its status.
Payments; Paying Agent
The paying agent will pay the principal of any Junior Subordinated Notes
only if those Junior Subordinated Notes are surrendered to it. The paying agent
will pay interest on Junior Subordinated Notes issued as global securities by
wire transfer to the holder of those global securities. Unless Duke Energy
states
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otherwise in the applicable prospectus supplement, the paying agent will pay
interest on Junior Subordinated Notes that are not in global form at its office
or, at Duke Energy's option:
o by wire transfer to an account at a banking institution in the United
States that is designated in writing to the Subordinated Indenture
Trustee at least 16 days prior to the date of payment by the person
entitled to that interest; or
o by check mailed to the address of the person entitled to that interest as
that address appears in the security register for those Junior
Subordinated Notes.
Unless Duke Energy states otherwise in the applicable prospectus
supplement, the Subordinated Indenture Trustee will act as paying agent for that
series of Junior Subordinated Notes, and the principal corporate trust office of
the Subordinated Indenture Trustee will be the office through which the paying
agent acts. Duke Energy may, however, change or add paying agents or approve a
change in the office through which a paying agent acts.
Any money that Duke Energy has paid to a paying agent for principal or
interest on any Junior Subordinated Notes that remains unclaimed at the end of
two years after that principal or interest has become due will be repaid to Duke
Energy at its request. After repayment to Duke Energy, holders should look only
to Duke Energy for those payments.
Defeasance and Covenant Defeasance
The Subordinated Indenture provides that Duke Energy may be:
o discharged from its obligations, with certain limited exceptions, with
respect to any series of Junior Subordinated Notes, as described in the
Subordinated Indenture, such a discharge being called a "defeasance" in
this prospectus; and
o released from its obligations under certain restrictive covenants
especially established with respect to a series of Junior Subordinated
Notes, as described in the Subordinated Indenture, such a release being
called a "covenant defeasance" in this prospectus.
Duke Energy must satisfy certain conditions to effect a defeasance or
covenant defeasance. Those conditions include the irrevocable deposit with the
Subordinated Indenture Trustee, in trust, of money or government obligations
which through their scheduled payments of principal and interest would provide
sufficient money to pay the principal and any premium and interest on those
Junior Subordinated Notes on the maturity dates of those payments or upon
redemption. Following a defeasance, payment of the Junior Subordinated Notes
defeased may not be accelerated because of an event of default under the
Subordinated Indenture.
Under current United States federal income tax laws, a defeasance would be
treated as an exchange of the relevant Junior Subordinated Notes in which
holders of those Junior Subordinated Notes might recognize gain or loss. In
addition, the amount, timing and character of amounts that holders would
thereafter be required to include in income might be different from that which
would be includible in the absence of that defeasance. Duke Energy urges
investors to consult their own tax advisors as to the specific consequences of a
defeasance, including the applicability and effect of tax laws other than United
States federal income tax laws.
Junior Subordinated Notes issued to a Trust will not be subject to covenant
defeasance.
Subordination
Each series of Junior Subordinated Notes will be subordinate and junior in
right of payment, to the extent set forth in the Subordinated Indenture, to all
Senior Indebtedness as defined below. If:
o Duke Energy makes a payment or distribution of any of its assets to
creditors upon its dissolution, winding-up, liquidation or
reorganization, whether in bankruptcy, insolvency or otherwise;
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o a default beyond any grace period has occurred and is continuing with
respect to the payment of principal, interest or any other monetary
amounts due and payable on any Senior Indebtedness; or
o the maturity of any Senior Indebtedness has been accelerated because of a
default on that Senior Indebtedness,
then the holders of Senior Indebtedness generally will have the right to receive
payment, in the case of the first instance, of all amounts due or to become due
upon that Senior Indebtedness, and, in the case of the second and third
instances, of all amounts due on the Senior Indebtedness, or Duke Energy will
make provision for those payments, before the holders of any Junior Subordinated
Notes have the right to receive any payments of principal or interest on their
Junior Subordinated Notes.
"Senior Indebtedness" means, with respect to any series of Junior
Subordinated Notes, the principal, premium, interest and any other payment in
respect of any of the following:
o all of Duke Energy's indebtedness that is evidenced by notes, debentures,
bonds or other securities Duke Energy sells for money or other
obligations for money borrowed;
o all indebtedness of others of the kinds described in the preceding
category which Duke Energy has assumed or guaranteed or which Duke Energy
has in effect guaranteed through an agreement to purchase, contingent or
otherwise; and
o all renewals, extensions or refundings of indebtedness of the kinds
described in either of the preceding two categories.
Any such indebtedness, renewal, extension or refunding, however, will not
be Senior Indebtedness if the instrument creating or evidencing it or the
assumption or guarantee of it provides that it is not superior in right of
payment to or is equal in right of payment with those Junior Subordinated Notes.
Senior Indebtedness will be entitled to the benefits of the subordination
provisions in the Subordinated Indenture irrespective of the amendment,
modification or waiver of any term of the Senior Indebtedness.
Future series of Subordinated Notes that are not Junior Subordinated Notes
may rank senior to outstanding series of Junior Subordinated Notes and would
constitute Senior Indebtedness with respect to those series.
The Subordinated Indenture does not limit the amount of Senior Indebtedness
that Duke Energy may issue. As of September 30, 2002, Duke Energy's Senior
Indebtedness totaled approximately $4,466,000,000.
Concerning the Subordinated Indenture Trustee
JPMorgan Chase Bank (formerly known as The Chase Manhattan Bank) is the
Subordinated Indenture Trustee and is also the Senior Indenture Trustee and the
trustee under Duke Energy's First and Refunding Mortgage. Duke Energy and
certain of its affiliates maintain deposit accounts and banking relationships
with JPMorgan Chase Bank. JPMorgan Chase Bank also serves as trustee or agent
under other indentures and agreements pursuant to which securities of Duke
Energy and of certain of its affiliates are outstanding.
The Subordinated Indenture Trustee will perform only those duties that are
specifically set forth in the Subordinated Indenture unless an event of default
under the Subordinated Indenture occurs and is continuing. In case an event of
default occurs and is continuing, the Subordinated Indenture Trustee will
exercise the same degree of care as a prudent individual would exercise in the
conduct of his or her own affairs.
DESCRIPTION OF THE FIRST AND REFUNDING MORTGAGE BONDS
Duke Energy will issue the First and Refunding Mortgage Bonds in one or
more series under its First and Refunding Mortgage, dated as of December 1,
1927, to JPMorgan Chase Bank (formerly known as The Chase Manhattan Bank), as
Trustee, as supplemented and amended. The First and Refunding Mortgage is
sometimes called the "Mortgage" and the First and Refunding Mortgage Bonds are
sometimes called the
31
"Bonds" in this prospectus. The trustee under the Mortgage is sometimes called
the "Bond Trustee" in this prospectus. The Mortgage is an exhibit to the
registration statement, of which this prospectus is a part.
The following description of the Bonds is only a summary and is not
intended to be comprehensive. For additional information you should refer to the
Mortgage.
General
The amount of Bonds that Duke Energy may issue under the Mortgage is
unlimited. Duke Energy's Board of Directors will determine the terms of each
series of Bonds, including denominations, maturity, interest rate and payment
terms and whether the series will have redemption or sinking fund provisions or
will be convertible into shares of common stock or other securities of Duke
Energy. The Bonds may also be issued as part of the medium term note series
established under the Mortgage.
Unless Duke Energy states otherwise in the applicable prospectus
supplement, Duke Energy will issue the Bonds only in fully registered form
without coupons and there will be no service charge for any transfers and
exchanges of the Bonds. Duke Energy may, however, require payment to cover any
stamp tax or other governmental charge payable in connection with any transfer
or exchange. Transfers and exchanges of the Bonds may be made at JPMorgan Chase
Bank, Institutional Trust Services, 4 New York Plaza, 15th Floor, New York, New
York 10004 or at any other office maintained by Duke Energy for such purpose.
The Bonds will be issuable in denominations of $1,000 and multiples of
$1,000, unless Duke Energy states otherwise in the applicable prospectus
supplement. The Bonds will be exchangeable for an equivalent principal amount of
Bonds of other authorized denominations of the same series.
The prospectus supplement for a particular series of Bonds will describe
the maturity, interest rate and payment terms of those Bonds and any relevant
redemption or sinking fund provisions.
Security
The Mortgage creates a continuing lien to secure the payment of principal
and interest on the Bonds. All the Bonds are equally and ratably secured without
preference, priority or distinction. The lien of the Mortgage covers
substantially all of Duke Energy's properties, real, personal and mixed, and
Duke Energy's franchises, including properties acquired after the date of the
Mortgage, with certain exceptions. Those exceptions include cash, accounts
receivable, inventories of materials and supplies, merchandise held for sale,
securities that Duke Energy holds, certain after-acquired property not useful in
Duke Energy's electric business, certain after-acquired franchises and certain
after-acquired non-electric properties.
The lien of the Mortgage is subject to certain permitted liens and to liens
that exist upon properties that Duke Energy acquired after it entered into the
Mortgage to the extent of the amounts of prior lien bonds secured by those
properties (not, however, exceeding 75% of the cost or value of those
properties) and additions to those properties. "Prior lien bonds" are bonds or
other indebtedness that are secured at the time of acquisition by a lien upon
property that Duke Energy acquires after the date of the Mortgage that becomes
subject to the lien of the Mortgage.
Issuance of Additional Bonds
If Duke Energy satisfies the conditions in the Mortgage, the Bond Trustee
may authenticate and deliver additional Bonds in an aggregate principal amount
not exceeding:
o the amount of cash that Duke Energy has deposited with the Bond Trustee
for that purpose;
o the amount of previously authenticated and delivered Bonds or refundable
prior lien bonds that have been or are to be retired which, with certain
exceptions, Duke Energy has deposited with the Bond Trustee for that
purpose; or
o 66 2/3% of the aggregate of the net amounts of additional property
(electric) certified to the Bond Trustee after February 18, 1949.
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The Bond Trustee may not authenticate and deliver any additional Bonds
under the Mortgage, other than certain types of refunding Bonds, unless Duke
Energy's available net earnings for twelve consecutive calendar months within
the immediately preceding fifteen calendar months have been at least twice the
amount of the annual interest charges on all Bonds outstanding under the
Mortgage, including the Bonds proposed to be issued, and on all outstanding
prior lien bonds that the Bond Trustee does not hold under the Mortgage.
Duke Energy may not apply to the Bond Trustee to authenticate and deliver
any Bonds (1) in an aggregate principal amount exceeding $26,000,000 on the
basis of additional property (electric) that Duke Energy acquired or constructed
prior to January 1, 1949 or (2) on the basis of Bonds or prior lien bonds paid,
purchased or redeemed prior to February 1, 1949. Duke Energy may not certify any
additional property (electric) which is subject to the lien of any prior lien
bonds for the purpose of establishing those prior lien bonds as refundable if
the aggregate principal amount of those prior lien bonds exceeds 66 2/3% of the
net amount of the additional property that is subject to the lien of such prior
lien bonds.
Release Provisions
The Mortgage permits Duke Energy to dispose of certain property and to take
other actions without the Bond Trustee releasing that property. The Mortgage
also permits the release of mortgaged property if Duke Energy deposits cash or
other consideration equal to the value of the mortgaged property to be released.
In certain events and within certain limitations, the Bond Trustee is required
to pay out cash that the Bond Trustee receives -- other than for the Replacement
Fund or as the basis for issuing Bonds -- upon Duke Energy's application.
Duke Energy may withdraw cash that it deposited with the Bond Trustee as
the basis for issuing Bonds in an amount equal to the principal amount of any
Bonds that it is entitled to have authenticated and delivered on the basis of
additional property (electric), on the basis of Bonds previously authenticated
and delivered or on the basis of refundable prior lien bonds.
Replacement Fund
The Mortgage requires Duke Energy to deposit with the Bond Trustee
annually, for the Replacement Fund established under the Mortgage, the sum of
the "replacement requirements" for all years beginning with 1949 and ending with
the last calendar year preceding the deposit date, less certain deductions.
Those deductions are (1) the aggregate original cost of all fixed property
(electric) retired during that time period, not exceeding the aggregate of the
gross amounts of additional property (electric) that Duke Energy acquired or
constructed during the same period, and (2) the aggregate amount of cash that
Duke Energy deposited with the Bond Trustee up to that time, or that Duke Energy
would have been required to deposit except for permitted reductions, under the
Replacement Fund.
The "replacement requirement" for any year is 2 1/2% of the average "amount
of depreciable fixed property" (electric) owned by Duke Energy at the beginning
and end of that year, not exceeding, however, the amount Duke Energy is
permitted to charge as an operating expense for depreciation or retirement by
any governmental authority, or the amount deductible as depreciation or similar
expense for federal income tax purposes. The "amount of depreciable fixed
property" (electric) is the amount by which the sum of $192,913,385 plus the
aggregate gross amount of all depreciable additional property (electric) that
Duke Energy acquired or constructed from January 1, 1949 to the date as of which
such amount is determined exceeds the original cost of all of Duke Energy's
depreciable fixed property (electric) retired during that period or released
from the lien of the Mortgage.
Duke Energy may reduce the amount of cash at any time required to be
deposited in the Replacement Fund and may withdraw any cash that it previously
deposited that is held in the Replacement Fund:
o in an amount equal to 150% of the principal amount of Bonds previously
authenticated and delivered under the Mortgage, or refundable prior lien
bonds, deposited with the Bond Trustee and on the basis of which Duke
Energy would otherwise have been entitled to have additional Bonds
authenticated and delivered; and
33
o in an amount equal to 150% of the principal amount of Bonds which Duke
Energy would otherwise be entitled to have authenticated and delivered on
the basis of additional property (electric).
Upon Duke Energy's application, the Bond Trustee will apply cash that Duke
Energy deposited in the Replacement Fund and has not previously withdrawn to the
payment, purchase or redemption of Bonds issued under the Mortgage or to the
purchase of refundable prior lien bonds.
Duke Energy has never deposited any cash with the Bond Trustee for the
Replacement Fund. If Duke Energy deposits any cash in the future, it has agreed
not to apply that cash to the redemption of the Bonds as long as any Bonds then
outstanding remain outstanding.
Amendments of the Mortgage
Duke Energy may amend the Mortgage with the consent of the holders of
66 2/3% in principal amount of the Bonds, except that no such amendment may:
o affect the terms of payment of principal at maturity or of interest or
premium on any Bond;
o affect the rights of Bondholders to sue to enforce any such payment at
maturity; or
o reduce the percentage of Bonds required to consent to an amendment.
No amendment may affect the rights under the Mortgage of the holders of
less than all of the series of Bonds outstanding unless the holders of 66 2/3%
in principal amount of the Bonds of each series affected consent to the
amendment.
The covenants included in the supplemental indenture for any series of
Bonds to be issued will be solely for the benefit of the holders of those Bonds.
Duke Energy may modify any such covenant only with the consent of the holders of
66 2/3% in principal amount of those Bonds outstanding, without the consent of
Bondholders of any other series.
Events of Default
The Bond Trustee may, and at the written request of the holders of a
majority in principal amount of the outstanding Bonds will, declare the
principal of all outstanding Bonds due when any event of default under the
Mortgage occurs. The holders of a majority in principal amount of the
outstanding Bonds may, however, waive the default and rescind the declaration if
Duke Energy cures the default.
Events of default under the Mortgage include:
o default in the payment of principal;
o default for 60 days in the payment of interest;
o default in the performance of any other covenant in the Mortgage
continuing for 60 days after the Bond Trustee or the holders of not less
than 10% in principal amount of the Bonds then outstanding give notice of
the default; and
o certain bankruptcy or insolvency events with respect to Duke Energy.
Duke Energy provides a statement by certain of its officers each year to
the Bond Trustee stating whether it has complied with the covenants of the
Mortgage.
Concerning the Bond Trustee
JPMorgan Chase Bank (formerly known as The Chase Manhattan Bank) is the
Bond Trustee and is also the Senior Indenture Trustee and the Subordinated
Indenture Trustee. Duke Energy and certain of its affiliates maintain deposit
accounts and banking relationships with JPMorgan Chase Bank. JPMorgan Chase Bank
also serves as trustee or agent under other indentures and agreements pursuant
to which securities of Duke Energy and of certain of its affiliates are
outstanding.
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The Bond Trustee is under no obligation to exercise any of its powers at
the request of any of the holders of the Bonds unless those Bondholders have
offered to the Bond Trustee security or indemnity satisfactory to it against the
cost, expenses and liabilities it might incur as a result. The holders of a
majority in principal amount of the Bonds outstanding may direct the time,
method and place of conducting any proceeding for any remedy available to the
Bond Trustee, or the exercise of any trust or power of the Bond Trustee. The
Bond Trustee will not be liable for any action that it takes or omits to take in
good faith in accordance with any such direction.
DESCRIPTION OF THE COMMON STOCK
The following description of Duke Energy's Common Stock is only a summary
and is not intended to be comprehensive. For additional information you should
refer to the applicable provisions of the North Carolina Business Corporation
Act and Duke Energy's Restated Articles of Incorporation (Articles) and By-Laws.
The Articles and By-Laws are exhibits to the registration statement, of which
this prospectus is a part.
General
Duke Energy is authorized to issue up to 2,000,000,000 shares of Common
Stock. At September 30, 2002, approximately 836,000,000 shares of Common Stock
were outstanding. Duke Energy is also authorized to issue up to 12,500,000
shares of Preferred Stock, 10,000,000 shares of Preferred Stock A, 20,000,000
shares of Serial Preferred Stock and 1,500,000 shares of Preference Stock. At
September 30, 2002, approximately 1,404,984 shares of Preferred Stock, 1,257,185
shares of Preferred Stock A and no shares of Serial Preferred Stock or
Preference Stock were outstanding. The Preferred Stock, Preferred Stock A,
Serial Preferred Stock and Preference Stock together are sometimes called the
"Preferred Stocks."
Dividends
Holders of Common Stock are entitled to such dividends as may be declared
from time to time by the Board of Directors from legally available funds but
only if full dividends on all outstanding series of the Preferred Stocks for the
then current and all prior dividend periods and any required sinking fund
payments with respect to any outstanding series of such securities have been
paid or provided for.
Voting Rights
Subject to the rights, if any, of the holders of the Preferred Stocks that
may be outstanding or as otherwise provided by law, the holders of Common Stock
have exclusive voting rights, each share being entitled to one vote. Holders of
Common Stock have noncumulative voting rights, which means that the holders of
more than 50% of the shares voting for the election of directors can elect 100%
of the directors and the holders of the remaining shares voting for the election
of directors will not be able to elect any directors.
Whenever dividends on any part of any outstanding Preferred Stock or
Preferred Stock A are in arrears in an amount equivalent to the total dividends
required to be paid on that Preferred Stock or Preferred Stock A in any period
of 12 calendar months, the holders of the Preferred Stock as a class have the
exclusive right to elect a majority of the authorized number of directors and
the holders of the Preferred Stock A as a class have the exclusive right to
elect two directors. Those rights cease whenever Duke Energy pays all accrued
and unpaid dividends in full. Whenever six quarterly dividends on any
outstanding series of the Preference Stock are in arrears or any required
sinking fund payments are in default, the holders of the Preference Stock as a
class have the exclusive right to elect two directors. This right ceases
whenever all dividends and required sinking fund obligations in default have
been paid in full or provided for. In addition, the consent of the holders of
specified percentages of any outstanding Preferred Stock, Preferred Stock A or
Preference Stock, or some or all of the holders of such classes, is required in
connection with certain increases in authorized amounts of or changes in stock
senior to the Common Stock or in connection with any sale of substantially all
of Duke Energy's assets or certain mergers.
The holders of the Serial Preferred Stock will have such voting rights as a
series or otherwise with respect to the election of directors or otherwise as
may be fixed by the Board of Directors at the time of the creation of the
series, in addition to any voting rights provided by law.
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Rights Upon Liquidation
The holders of Common Stock are entitled in liquidation to share ratably in
the assets of Duke Energy after payment of all debts and liabilities and after
required preferential payments to the holders of outstanding Preferred Stocks.
Miscellaneous
The outstanding shares of Common Stock are, and the shares of Common Stock
sold hereunder will be, upon payment for them, fully paid and nonassessable.
Holders of Common Stock have no preemptive rights and no conversion rights. The
Common Stock is not subject to redemption and is not entitled to the benefit of
any sinking fund provisions.
If so provided by the Board of Directors at the time of creation of any
series of Serial Preferred Stock, the shares of such series may be convertible
or exchangeable into shares of Common Stock or other securities of Duke Energy
or of any other corporation or other entity, upon terms fixed at the time of
creation of the series.
Transfer Agent and Registrar
Duke Energy acts as transfer agent and registrar for the Common Stock.
Preference Stock Purchase Rights
Each share of Common Stock has attached to it a Preference Stock Purchase
Right. The Rights initially are represented only by the certificates for the
shares of Common Stock and will not trade separately from those shares unless
and until:
o ten days after it is publicly announced that a person or group (with
certain exceptions) has acquired, or has obtained the right to acquire,
the beneficial ownership of 15% or more of the outstanding Common Stock
(an "acquiring person"); or
o ten business days (or a later date determined by Duke Energy's Board of
Directors) after the date a person or group commences, or public
announcement is made that the person or group intends to commence, a
tender or exchange offer that would result in the person or group
becoming an acquiring person.
If and when the Rights separate, each Right will entitle the holder to purchase
1/10,000 of a share of Duke Energy's Series A Participating Preference Stock for
an exercise price that is presently $190.
In the event that a person or group becomes an acquiring person, each Right
(except for Rights beneficially owned by the acquiring person or its
transferees, which Rights become void) will entitle its holder to purchase, for
the exercise price, a number of shares of Common Stock having a market value of
twice the exercise price. Also, if, after ten days following the date of the
announcement that a person or group has become an acquiring person:
o Duke Energy is involved in a merger or similar form of business
combination in which Duke Energy is not the surviving corporation or in
which Duke Energy is the surviving corporation but the Common Stock is
changed or exchanged; or
o more than 50% of Duke Energy's assets or earning power is sold or
transferred;
then each Right (except for voided Rights) will entitle its holder to purchase,
for the exercise price, a number of shares of common stock of the acquiring
company having a value of twice the exercise price. If any person or group
acquires from 15% to but excluding 50% of the outstanding Common Stock, Duke
Energy's Board of Directors may, at its option, exchange each outstanding Right
(except for those held by an acquiring person or its transferees) for one share
of Common Stock or 1/10,000 of a share of Series A Participating Preference
Stock.
Duke Energy's Board of Directors may redeem the Rights for $0.01 per Right
prior to ten business days after the date of the public announcement that a
person or group has become an acquiring person.
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The Rights will not prevent a takeover of Duke Energy. However, the
existence of the Rights may cause substantial dilution to a person or group that
acquires 15% or more of the Common Stock unless the Board of Directors first
redeems those Rights.
Certain Anti-Takeover Matters
Duke Energy's Articles and By-Laws include a number of provisions that may
have the effect of encouraging persons considering unsolicited tender offers or
other unilateral takeover proposals to negotiate with the Board of Directors
rather than pursue non-negotiated takeover attempts. Those provisions include:
Classified Board of Directors; Removal of Directors; Vacancies
Duke Energy's Articles provide for a Board of Directors divided into three
classes, with one class being elected each year to serve for a three-year term.
As a result, at least two annual meetings of shareholders may be required for
shareholders to change a majority of the Board of Directors. Duke Energy's
shareholders may remove directors only for cause. Vacancies and newly created
directorships on the Board of Directors may be filled only by the affirmative
vote of a majority of the directors remaining in office, and no decrease in the
number of directors may shorten the term of an incumbent director. The
classification of directors and the inability of shareholders to remove
directors without cause and to fill vacancies and newly created directorships on
the Board of Directors will make it more difficult to change the composition of
the Board of Directors, but will promote continuity of existing management.
Advance Notice Requirements
Duke Energy's By-Laws establish advance notice procedures with regard to
shareholder proposals relating to the nomination of persons for election as
directors or new business to be brought before annual meetings of shareholders.
These procedures provide that shareholders must give timely notice of such
proposals in writing to the Secretary of Duke Energy. Generally, to be timely
with respect to an annual meeting of shareholders, notice must be received at
Duke Energy's principal executive offices not less than 90 days nor more than
120 days prior to the first anniversary date of the annual meeting for the
preceding year. The notice must contain certain information specified in the
By-Laws.
Special Meetings of Shareholders
Neither the Articles nor the By-Laws of Duke Energy give shareholders the
right to call a special meeting of shareholders. The By-Laws provide that
special meetings of shareholders may be called only by the Board of Directors or
the Chairman of the Board.
Amendment of Charter and By-Laws
Duke Energy's Articles require the approval of not less than 80% of the
voting power of all outstanding shares of Common Stock to amend provisions
relating to the minimum and maximum size of the Board of Directors, the
classification of the Board of Directors, the removal of directors, the filling
of vacancies and newly created directorships on the Board of Directors and the
requirement that a decrease in the number of directors constituting the Board of
Directors may not shorten the term of any incumbent director. Duke Energy's
Articles also require the affirmative vote of the holders of at least a majority
of the combined voting power of the then outstanding shares of stock of all
classes entitled to vote generally in the election of directors, voting together
as a single class, for the shareholders to adopt, amend or repeal any provisions
in the By-Laws. This voting requirement also applies to any amendment or repeal
of this provision or the adoption of any provision inconsistent with it. These
amendment provisions will make it more difficult to dilute the anti-takeover
effects of Duke Energy's Articles and By-Laws.
Serial Preferred Stock
Serial Preferred Stock can be, and has been, used by corporations
specifically for anti-takeover purposes. For example, shares of Serial Preferred
Stock can be privately placed with purchasers who support a board of directors
in opposing a tender offer or other hostile takeover bid, or can be issued to
dilute the stock ownership and voting power of a third party seeking a merger or
other extraordinary corporate transaction. Under these and similar
circumstances, the Serial Preferred Stock can serve to perpetuate incumbent
management and can adversely affect shareholders who may want to participate in
the tender offer or other transaction.
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Duke Energy's Board of Directors has adopted resolutions that state that
the Serial Preferred Stock:
a) not be used for the principal purpose of acting as an anti-takeover
device without shareholder approval; and
b) not be given supermajority voting rights except possibly with respect to
proposed amendments to the Articles of Incorporation altering materially
existing provisions of the Serial Preferred Stock or creating, or
increasing the authorized amount of, any class of stock ranking, as to
dividend or assets, prior to the Serial Preferred Stock.
DESCRIPTION OF THE STOCK PURCHASE CONTRACTS
AND THE STOCK PURCHASE UNITS
Duke Energy may issue stock purchase contracts representing contracts
obligating holders to purchase from Duke Energy, and Duke Energy to sell to the
holders, a specified number of shares of Common Stock (or a range of numbers of
shares pursuant to a predetermined formula) at a future date or dates. The price
per share of Common Stock may be fixed at the time the stock purchase contracts
are issued or may be determined by reference to a specific formula set forth in
the stock purchase contracts.
The stock purchase contracts may be issued separately or as a part of
units, often known as stock purchase units, consisting of a stock purchase
contract and either:
o Senior Notes, Junior Subordinated Notes or other debt securities of Duke
Energy or one of its subsidiaries;
o debt obligations of third parties, including U.S. Treasury securities; or
o Preferred Securities or trust preferred securities issued by trusts, all
of whose common securities are owned by Duke Energy or by subsidiaries of
Duke Energy,
securing the holder's obligations to purchase the Common Stock under the stock
purchase contracts.
The stock purchase contracts may require Duke Energy to make periodic
payments to the holders of the stock purchase units or vice versa, and such
payments may be unsecured or prefunded on some basis. The stock purchase
contracts may require holders to secure their obligations in a specified manner
and in certain circumstances Duke Energy may deliver newly issued prepaid stock
purchase contracts, often known as prepaid securities, upon release to a holder
of any collateral securing such holder's obligations under the original stock
purchase contract.
The applicable prospectus supplement will describe the terms of any stock
purchase contracts or stock purchase units and, if applicable, prepaid
securities. The description in the applicable prospectus supplement will not
contain all of the information that you may find useful. For more information,
you should review the stock purchase contracts, the collateral arrangements and
depositary arrangements, if applicable, relating to such stock purchase
contracts or stock purchase units and, if applicable, the prepaid securities and
the document pursuant to which the prepaid securities will be issued. These
documents will be filed with the SEC promptly after the offering of such stock
purchase contracts or stock purchase units and, if applicable, prepaid
securities.
DESCRIPTION OF THE PREFERRED SECURITIES
Each Trust may issue only one series of Preferred Securities. The Trust
Agreement of each Trust will authorize the Administrative Trustees to issue the
Preferred Securities of that Trust on behalf of that Trust. For additional
information you should refer to the applicable Trust Agreement. The form of
Trust Agreement is an exhibit to the registration statement, of which this
prospectus is a part.
The prospectus supplement for a particular series of Preferred Securities
being offered will disclose the specific terms related to the offering,
including the price or prices at which the Preferred Securities to be offered
will be issued. Those terms will include some or all of the following:
o the title of the series;
o the number of Preferred Securities of the series;
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o the yearly distribution rate, or the method of determining that rate, and
the date or dates on which distributions will be payable;
o the date or dates, or method of determining the date or dates, from which
distributions will be cumulative;
o the amount that will be paid out of the assets of the Trust to the
holders of the Preferred Securities upon the voluntary or involuntary
dissolution, winding-up or termination of the Trust;
o any obligation that the Trust has to purchase or redeem the Preferred
Securities, and the price at which, the period within which, and the
terms and conditions upon which the Trust will purchase or redeem them;
o any voting rights of the Preferred Securities that are in addition to
those legally required, including any right that the holders of the
Preferred Securities have to approve certain actions under or amendments
to the Trust Agreement;
o any right that the Trust has to defer distributions on the Preferred
Securities in the event that Duke Energy extends the interest payment
period on the related Junior Subordinated Notes; and
o any other rights, preferences, privileges, limitations or restrictions
upon the Preferred Securities of the series.
Duke Energy will guarantee each series of Preferred Securities to the
extent described below under the caption "Description of the Guarantees."
The applicable prospectus supplement will describe any material United
States federal income tax considerations that apply to the Preferred Securities.
DESCRIPTION OF THE GUARANTEES
Duke Energy will execute the Guarantees from time to time for the benefit
of the holders of the Preferred Securities of the respective Trusts. JPMorgan
Chase Bank will act as Guarantee Trustee under each Guarantee. The Guarantee
Trustee will hold each Guarantee for the benefit of the holders of the Preferred
Securities to which it relates.
The following description of the Guarantees is only a summary and is not
intended to be comprehensive. The form of Guarantee is an exhibit to the
registration statement, of which this prospectus is a part.
General
Duke Energy will irrevocably and unconditionally agree under each Guarantee
to pay the Guarantee Payments that are defined below, to the extent specified in
that Guarantee, to the holders of the Preferred Securities to which the
Guarantee relates, to the extent that the Guarantee Payments are not paid by or
on behalf of the related Trust. Duke Energy is required to pay the Guarantee
Payments to the extent specified in the relevant Guarantee regardless of any
defense, right of set-off or counterclaim that Duke Energy may have or may
assert against any person.
The following payments and distributions on the Preferred Securities of a
Trust are Guarantee Payments:
o any accrued and unpaid distributions required to be paid on the Preferred
Securities of the Trust, but only to the extent that the Trust has funds
legally and immediately available for those distributions;
o the redemption price for any Preferred Securities that the Trust calls
for redemption, including all accrued and unpaid distributions to the
redemption date, but only to the extent that the Trust has funds legally
and immediately available for the payment; and
o upon a dissolution, winding-up or termination of the Trust, other than in
connection with the distribution of Junior Subordinated Notes to the
holders of Trust Securities of the Trust or the redemption of all the
Preferred Securities of the Trust, the lesser of:
o the sum of the liquidation amount and all accrued and unpaid
distributions on the Preferred Securities of the Trust to the payment
date, to the extent that the Trust has funds legally and immediately
available for the payment; and
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o the amount of assets of the Trust remaining available for distribution
to holders of the Preferred Securities of the Trust in liquidation of
the Trust.
Duke Energy may satisfy its obligation to make a Guarantee Payment by
making that payment directly to the holders of the related Preferred Securities
or by causing the Trust to make the payment to those holders.
Each Guarantee will be a full and unconditional guarantee, subject to
certain subordination provisions, of the Guarantee Payments with respect to the
related Preferred Securities from the time of issuance of those Preferred
Securities, except that the Guarantee will apply to the payment of distributions
and other payments on the Preferred Securities only when the Trust has
sufficient funds legally and immediately available to make those distributions
or other payments.
IF DUKE ENERGY DOES NOT MAKE THE REQUIRED PAYMENTS ON THE JUNIOR
SUBORDINATED NOTES THAT THE PROPERTY TRUSTEE HOLDS UNDER A TRUST, THAT TRUST
WILL NOT MAKE THE RELATED PAYMENTS ON ITS PREFERRED SECURITIES.
Subordination
Duke Energy's obligations under each Guarantee will be unsecured
obligations of Duke Energy. Those obligations will rank:
o subordinate and junior in right of payment to all of Duke Energy's other
liabilities, other than obligations or liabilities that rank equal in
priority or subordinate by their terms;
o equal in priority with Duke Energy's Preferred Stock and Preferred Stock
A and similar guarantees; and
o senior to Duke Energy's Common Stock.
Duke Energy has Preferred Stock and Preferred Stock A outstanding that will
rank equal in priority with the Guarantees and has Common Stock outstanding that
will rank junior to the Guarantees.
Each Guarantee will be a guarantee of payment and not of collection. This
means that the guaranteed party may institute a legal proceeding directly
against Duke Energy, as guarantor, to enforce its rights under the Guarantee
without first instituting a legal proceeding against any other person or entity.
The terms of the Preferred Securities will provide that each holder of the
Preferred Securities, by accepting those Preferred Securities, agrees to the
subordination provisions and other terms of the related Guarantee.
Amendments and Assignment
Duke Energy may amend each Guarantee without the consent of any holder of
the Preferred Securities to which that Guarantee relates if the amendment does
not materially and adversely affect the rights of those holders. Duke Energy may
otherwise amend each Guarantee with the approval of the holders of at least
66 2/3% of the outstanding Preferred Securities to which that Guarantee relates.
Termination
Each Guarantee will terminate and be of no further effect when:
o the redemption price of the Preferred Securities to which the Guarantee
relates is fully paid;
o Duke Energy distributes the related Junior Subordinated Notes to the
holders of those Preferred Securities; or
o the amounts payable upon liquidation of the related Trust are fully paid.
Each Guarantee will remain in effect or will be reinstated if at any time
any holder of the related Preferred Securities must restore payment of any sums
paid to that holder with respect to those Preferred Securities or under that
Guarantee.
Events of Default
An event of default will occur under any Guarantee if Duke Energy fails to
perform any of its payment obligations under that Guarantee. The holders of a
majority of the Preferred Securities of any series may waive
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any such event of default and its consequences on behalf of all of the holders
of the Preferred Securities of that series. The Guarantee Trustee is obligated
to enforce the Guarantee for the benefit of the holders of the Preferred
Securities of a series if an event of default occurs under the related
Guarantee.
The holders of a majority of the Preferred Securities to which a Guarantee
relates have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Guarantee Trustee with respect to
that Guarantee or to direct the exercise of any trust or power that the
Guarantee Trustee holds under that Guarantee. Any holder of the related
Preferred Securities may institute a legal proceeding directly against Duke
Energy to enforce that holder's rights under the Guarantee without first
instituting a legal proceeding against the Guarantee Trustee or any other person
or entity.
Concerning the Guarantee Trustee
JPMorgan Chase Bank will be the Guarantee Trustee. It is also the Property
Trustee, the Subordinated Indenture Trustee, the Senior Indenture Trustee and
the Bond Trustee. Duke Energy and certain of its affiliates maintain deposit
accounts and banking relationships with JPMorgan Chase Bank. JPMorgan Chase Bank
also serves as trustee or agent under other indentures and agreements pursuant
to which securities of Duke Energy and certain of its affiliates are
outstanding.
The Guarantee Trustee will perform only those duties that are specifically
set forth in each Guarantee unless an event of default under the Guarantee
occurs and is continuing. In case an event of default occurs and is continuing,
the Guarantee Trustee will exercise the same degree of care as a prudent
individual would exercise in the conduct of his or her own affairs. Subject to
those provisions, the Guarantee Trustee is under no obligation to exercise any
of its powers under any Guarantee at the request of any holder of the related
Preferred Securities unless that holder offers reasonable indemnity to the
Guarantee Trustee against the costs, expenses and liabilities which it might
incur as a result.
Agreements as to Expenses and Liabilities
Duke Energy will enter into an Agreement as to Expenses and Liabilities
under each Trust Agreement. Each Agreement as to Expenses and Liabilities will
provide that Duke Energy will, with certain exceptions, irrevocably and
unconditionally guarantee the full payment of any indebtedness, expenses or
liabilities of the related Trust to each person or entity to whom that Trust
becomes indebted or liable. The exceptions are the obligations of the Trust to
pay to the holders of the related Preferred Securities or other similar
interests in that Trust the amounts due to the holders under the terms of those
Preferred Securities or those similar interests.
PLAN OF DISTRIBUTION
Duke Energy and the Trusts may sell securities to one or more underwriters
or dealers for public offering and sale by them, or it may sell the securities
to investors directly or through agents. The prospectus supplement relating to
the securities being offered will set forth the terms of the offering and the
method of distribution and will identify any firms acting as underwriters,
dealers or agents in connection with the offering, including:
o the name or names of any underwriters;
o the purchase price of the securities and the proceeds to Duke Energy or
the Trusts from the sale;
o any underwriting discounts and other items constituting underwriters'
compensation;
o any public offering price;
o any discounts or concessions allowed or reallowed or paid to dealers; and
o any securities exchange or market on which the securities may be listed.
Only those underwriters identified in the prospectus supplement are deemed
to be underwriters in connection with the securities offered in the prospectus
supplement.
Duke Energy and the Trusts may distribute the securities from time to time
in one or more transactions at a fixed price or prices, which may be changed, or
at prices determined as the prospectus supplement specifies. Duke Energy may
sell securities through forward contracts or similar arrangements. In connection
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with the sale of securities, underwriters, dealers or agents may be deemed to
have received compensation from Duke Energy in the form of underwriting
discounts or commissions and also may receive commissions from securities
purchasers for whom they may act as agent. Underwriters may sell the securities
to or through dealers, and such dealers may receive compensation in the form of
discounts, concessions or commissions from the underwriters or commissions from
the purchasers for whom they may act as agent.
Duke Energy may sell the securities directly or through agents it
designates from time to time. Any agent involved in the offer or sale of the
securities covered by this prospectus, other than at the market offerings of
common stock, will be named in a prospectus supplement relating to such
securities. At the market offerings of common stock may be made by agents.
Commissions payable by Duke Energy to agents will be set forth in a prospectus
supplement relating to the securities being offered. Unless otherwise indicated
in a prospectus supplement, any such agents will be acting on a best-efforts
basis for the period of their appointment.
Some of the underwriters, dealers or agents and some of their affiliates
who participate in the securities distribution may engage in other transactions
with, and perform other services for, Duke Energy and its subsidiaries or
affiliates in the ordinary course of business.
Any underwriting or other compensation which Duke Energy pays to
underwriters or agents in connection with the securities offering, and any
discounts, concessions or commissions which underwriters allow to dealers, will
be set forth in the applicable prospectus supplement. Underwriters, dealers and
agents participating in the securities distribution may be deemed to be
underwriters, and any discounts and commissions they receive and any profit they
realize on the resale of the securities may be deemed to be underwriting
discounts and commissions under the Securities Act of 1933. Underwriters, and
their controlling persons, and agents may be entitled, under agreements entered
into with Duke Energy and the Trusts, to indemnification against certain civil
liabilities, including liabilities under the Securities Act of 1933.
EXPERTS
The consolidated financial statements and the related financial statement
schedule incorporated in this prospectus by reference from Duke Energy's Annual
Report on Form 10-K for the year ended December 31, 2001 have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report, which is
incorporated herein by reference, and have been so incorporated in reliance upon
the report of such firm given upon their authority as experts in accounting and
auditing.
VALIDITY OF THE SECURITIES
Robert T. Lucas III, Esq., who is Duke Energy's Associate General Counsel
and Assistant Secretary, and Simpson Thacher & Bartlett, New York, New York,
will issue opinions about the validity of the securities offered by Duke Energy
in the applicable prospectus supplement for Duke Energy. Richards, Layton &
Finger, P.A., special Delaware counsel, will issue opinions about the validity
of the Preferred Securities offered in the applicable prospectus supplement for
the Trusts. Counsel named in the applicable prospectus supplement will issue
opinions about the validity of the securities offered by Duke Energy for any
underwriters.
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WHERE YOU CAN FIND MORE INFORMATION
Duke Energy files annual, quarterly and current reports and other
information with the SEC. You may read and copy any documents that are filed at
SEC Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549.
You may also obtain copies of these documents at prescribed rates from the
Public Reference Section of the SEC at its Washington address.
Please call the SEC at 1-800-SEC-0330 for further information. Duke
Energy's filings are also available to the public through:
o the SEC web site at http://www.sec.gov; and
o The New York Stock Exchange
20 Broad Street
New York, New York 10005.
Information about Duke Energy is also available on its web site at
http://www.duke-energy.com. Such web site is not a part of this prospectus.
The SEC allows Duke Energy to "incorporate by reference" the information
Duke Energy files with it, which information incorporated by reference is
considered to be part of this prospectus and any accompanying prospectus
supplement, and later information that Duke Energy files with the SEC will
automatically update and supersede that information as well as the information
included in this prospectus and any accompanying prospectus supplement. Duke
Energy incorporates by reference the documents listed below and any future
filings made with the SEC under Sections 13(a), 13(c), 14, or 15(d) of the
Securities Exchange Act of 1934 filed prior to the termination of this offering:
o Duke Energy's annual report on Form 10-K for the year ended December 31,
2001;
o Duke Energy's quarterly reports on Form 10-Q for the quarters ended March
31, 2002, June 30, 2002 and September 30, 2002; and
o Duke Energy's current reports on Form 8-K filed on March 29, 2002, April
15, 2002 and February 18, 2003.
Duke Energy will provide without charge a copy of these filings, other than
any exhibits unless the exhibits are specifically incorporated by reference into
this prospectus. You may request your copy by writing Duke Energy at the
following address or telephoning one of the following numbers:
Investor Relations Department
Duke Energy Corporation
P.O. Box 1005
Charlotte, North Carolina 28201
(704) 382-3853 or (800) 488-3853 (toll-free)
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