CHAPTER 11 URANIUM PURCHASES -- A UTILITY'S PERSPECTIVE

• Jurisdiction: United States

Uranium Exploration and Development
(Apr 2006)
CHAPTER 11
URANIUM PURCHASES -- A UTILITY'S PERSPECTIVE
Timika Shafeek-Horton
Assistant General Counsel
Duke Energy Corporation
Charlotte, North Carolina
Timothy T. Breslin
Senior Engineer
Duke Energy Corporation
Charlotte, North Carolina

TIMIKA SHAFEEK-HORTON

Timika Shafeek-Horton is Assistant General Counsel for Duke Energy Corporation in Charlotte, North Carolina. She earned a B.S.B.A. in 1990 and a J.D. in 1993 at the University of North Carolina at Chapel Hill. Timika was admitted to the North Carolina Bar in 1993. She was formerly with U.S. Attorneys Offices, Middle and Western Districts of North Carolina.

Safe Harbor Statement Under the Private Securities Litigation Act of 1995

This document may contain forward looking information which is subject to risks and uncertainties that could cause actual results to be different than those contemplated, including, but not limited to:

• changes in state, federal or international regulatory environments;

• project costs;

• operational performance;

• commercial, industrial and residential growth in the Company's service territory;

• the timing and extent of changes in commodity prices, interest rates, and foreign currency exchange rates;

• general economic conditions;

• changes in environmental and other laws and regulations to which Duke Energy and its subsidiaries are subject or other external factors over which Duke Energy has no control;

• the results of financing efforts;

• the effect of accounting pronouncements;

• growth in opportunities for Duke Energy's business units, and other risks described in the Company's fourth quarter 2005 earnings release filed with the Securities and Exchange Commission on Form 8-K and other Securities and Exchange Commission filings.

[Page 11-2]

Duke Energy Corporation -- Who We Are

Duke Energy Corporation, a Delaware corporation, ("Duke Energy") is a diversified energy company with a portfolio of natural gas and electric businesses, both regulated and unregulated, and an affiliated real estate company. Duke Energy, which has its headquarters in Charlotte, NC, delivers and processes energy for customers in the Americas. Duke Energy Carolinas, LLC ("DEC"), a regulated electric business, is a subsidiary of Duke Energy. It serves more than two million customers in North Carolina and South Carolina through a diverse generation portfolio consisting of eight coal-fired stations, thirty-one hydroelectric stations, two combustion turbine stations (natural gas and fuel oil), several combustion turbine units, and three pressurized water reactor design nuclear stations. This portfolio generates approximately 19,900 megawatts. The three nuclear stations consist of seven reactors, two each at McGuire Nuclear Station and Catawba Nuclear Station and three at Oconee Nuclear Station, and represent approximately 48% of the total generation for DEC. The current fleet of nuclear stations has been licensed to operate well into the twenty-first century, and Duke Energy is evaluating the feasibility of constructing and operating another nuclear station. Nuclear generation should continue to be an important part of DEC's generating portfolio.

Given the significance of the nuclear fleet to our overall generation capability, the cost and availability of uranium and the services needed to transform the uranium into fuel for our reactors receives significant attention from our fuel management group, nuclear management, and corporate management.

Uranium Purchase Requirements

DEC's average annual requirement for U₃O₈ is approximately three and half (3.5) million pounds.¹ DEC currently fulfills these requirements by purchasing U₃O₈ and/or conversion services² from miners, service providers, and marketing organizations throughout the world. In addition to the uranium, DEC and other utilities must contract for the purchase of enrichment and fabrication services so the uranium can be used in our nuclear reactors. Our fuel management group is charged with the responsibility of managing the nuclear fuel component contracts to ensure delivery requirements at each stage of the fabrication process are satisfied. For example, if a French provider is enriching UF₆ for DEC in June of 2006, we must have a contract in place that obligates a uranium supplier to deliver the requisite amount of uranium to the enrichment facility in France in time for the enrichment to occur. This is quite a task, but our fuel management group successfully accomplishes it every year.³

[Page 11-3]

Nuclear Fuel Procurement Strategy

DEC's nuclear fuel department continually analyzes our nuclear fuel requirements, which can be affected by plant operations, core designs, fuel assembly designs, optimum tails calculations⁴ and inventory policy changes, attempting to balance the technical limitations and core economics to identify optimum reload patterns. To ensure satisfaction of the annual fuel requirements, DEC has established a procurement strategy comprised of six elements: supplier diversity, supply source diversity, staggered start dates, overlapping contract coverage periods, pricing mechanism diversity, and flexibility in quantities received from a supplier in a...