Address to Shareholders

Duke Energy Annual Meeting
April 24, 2003
Rick Priory, Chairman and CEO
Fred Fowler, President and COO
Duke Energy

I’d like to thank you again for being with us today — and for staying with us during a troubled and turbulent time.

I know that you have been concerned, angry, and frustrated by the decline of Duke Energy’s stock price. I’ve heard from many of you in recent months — both words of encouragement and hard-hitting questions. I appreciate both — and the chance to address your questions and provide the perspective that you deserve.

I’ll be straight-forward in my assessment. And without knitting silver linings from dark clouds, I’ll speak to the strengths and the positive moves that will see us through.

Last year, I had the pleasure of reporting on a banner year of achievement. But 2002 posed a much different reality — the first deep down cycle in the immature merchant energy business.

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2002 was a disappointing year all the way around. I take no pride in our financial performance. I do take responsibility — for both the events of the past and our recovery.

Many of the economic and market trials of last year began before then — and many continue today. Those factors include:

• A fragile economy, now into the third year of a bear market;
• The weight of war, threat of terrorism, and unease in the Middle East;
• The uneven, and in some cases, dysfunctional, restructuring of North American electric power markets;
• The dynamic of “headline risk” and widespread disinformation that tainted companies — in many cases undeservedly;
• And finally, upheaval within the merchant energy sector that led to credit challenges, equity pressures, and the eventual decline and demise of some companies.

That’s a bleak backdrop. But I won’t put all the blame on external events. Quite frankly, Duke Energy missed some marks:

• We failed to see the impending oversupply in merchant generation. We were aware of the development plans of our key competitors — the large merchant companies. But we missed the signals of smaller, regional developers. As a result, our merchant businesses were overexposed to the elements of a brutal pricing environment.
• We didn’t reduce our merchant energy portfolio fast enough when the tide began to turn.
• And we were slow to process the enormous impact of deteriorating wholesale energy markets. The California energy crisis, the collapse of Enron, energy trading concerns and scandals — many factors converged to take a hefty toll.

Our 2002 financials reflect the turmoil:

• Our reported year-end earnings per share were $1.22, including the effect of charges related to the ice storm, restructuring costs, and asset impairments.
• Earnings from our North American and international merchant businesses were down sharply last year, and we reported operating income of about $2.5 billion — down approximately $1.4 billion from 2001.
• Our stock price fell from a 52-week high of $39.80 to $19.54 at year-end, and is now at $16.75. Total return to shareholders in 2002 declined 48 percent.

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Those are the blunt, bottom-line realities of a tough year. But we’re a tough company. A sound and resilient company. A company built on the fundamentals of strategy, character, value and service.

We are intently focused on rebuilding value for our shareholders. I know your portfolios have been hit hard — and I want you to know that we are committed to sustaining Duke Energy as a valued investment. We also know that our record and reputation have been tarnished, and we are working hard to restore the luster of this great company.

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We didn’t predict the extent of last year’s turmoil in the merchant sector — and we can’t predict when we’ll see a recovery. We can’t predict — but we can position: Position ourselves for renewed growth when market cycles turn; position ourselves to maintain the financial ballast that will protect us during the down cycle; and position the company to recover sooner, faster and stronger than our competitors.

I am going to share with you the broad strokes of our positioning efforts, and I’ve asked Fred Fowler to drill down into our operational imperatives.

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First, we have taken immediate, disciplined steps to safeguard our financial standing. We began our efforts last summer, when we saw widening erosion within merchant energy markets.

Our commitment to maintaining a strong credit rating is longstanding. Never in my 27 years with the company have we been willing to sacrifice our credit for short-term gains. Even during the high-growth period of the late ‘90s, we preserved our strong credit profile and refused to leverage growth by allowing our credit to slip. Duke Energy’s credit stature has given us financial flexibility — and it provided a cushion that lessened the impact of new and more stringent industry credit standards.

Even in today’s environment, Duke Energy’s credit rating remains strong. And we are protecting that good standing with fierce resolve and conservative financial management. We are fortifying our balance sheet by reducing our spending, divesting non-core assets, and using the proceeds to reduce our debt.

• When we began the year, our target for 2003 net of book value of non-strategic asset sales was $600 million. We have already exceeded that goal — and should achieve approximately $1.5 billion in sales for the year. Our divestitures haven’t been “fire sale” moves. They’ve been thoughtful, deliberate decisions that do not compromise the integrity of our portfolio, our competitive position, or our long-term earnings potential. The sales of the Empire and Alliance pipelines, our interest in American Ref-Fuel, and our remaining units in Northern Border Limited Partnership — were all good, strategic moves.
• We’ve reduced capital spending to $3 billion for 2003 — down from the original plan for $6-8 billion. We’ve made some tough decisions — but they were the right decisions. And it goes without saying: none of our expenditure reductions compromise the integrity of our operations or the safety of our employees.
• We plan to lower our debt — by approximately $1.8 billion this year — and we expect to achieve a total reduction of about $5.5 billion by the end of 2005.

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There has been much concern expressed regarding Duke Energy’s dividend, so let me be clear: barring material external events beyond our control — our company, our Board and our financial plan support continued payment of our current $1.10 dividend.

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We are realigning our businesses to reflect the current environment. Much of the scaling back is occurring in our merchant energy business, which Fred will get to shortly.

Our decision to exit our finance business, Duke Capital Partners, is an example of realignment. Duke Capital Partners was a solid business, run by great people. But in today’s capital-constrained environment, we decided that it was prudent to exit the business and monetize its $350 million portfolio. To date, we’ve monetized about $75 million in assets. We expect 50 percent of the remaining portfolio will either mature or be sold before year-end, with the remainder being closed during the first half of 2004.

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The energy industry has been the subject of intense regulatory scrutiny, and we’ve been steadily working through a quagmire of regulatory and legal issues — many related to the California energy crisis. This is time-consuming work, but it is critical work as it affects our reputation and our ability to move forward decisively.

The Federal Energy Regulatory Commission recently issued a long-awaited report on the California crisis. That report exonerated Duke Energy on charges of withholding power in California and manipulating prices. One of the state’s own expert witnesses referred to Duke as a “model competitor.” That vindication was long in coming — and very sweet!

We operate by the rules in California — as we do everywhere. We’ve had a number of lawsuits dismissed, and a number of regulatory decisions that support our record of operating with diligence and integrity.

While we’ve had some recent wins, we know that the scorecard is long. We’ve got our best people working on the regulatory and legal issues that remain. And while they are focused on resolving past issues, our entire organization — 25,000 strong — is focused on the future.

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Before I turn the podium over to Fred, I want to speak to the spirit of Duke Energy. It is a spirit of resilience and resolve — honor and integrity — confidence and optimism. We know how to rally, reassemble, and move forward. We’ve lived through tough times before — that’s the advantage of a century-old company.

The men and women of Duke Energy work with tremendous resolve and commitment to keep the power plants running, the gas flowing, and the lights on.

We’ve all heard talk about business values lately. I know that such talk often falls on skeptical ears — because values are meaningless unless you see them in action. We demonstrate values every day — in the conduct of our business, in keeping our word, and in caring for the communities we serve.

We’ve had our share of challenges recently, and we’ve responded swiftly and with vigor. Our commitment to ethical business conduct is uncompromising and it is deeply held.

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It is my privilege to lead one of the industry’s finest management teams. I am pleased to have Fred Fowler serving as president and Chief Operating Officer. He brings to his role the type of strong business skills, knowledge, leadership and integrity that Duke has relied on for close to a century.

Fred will now share with you the steps we’re taking to ensure strong operational performance. Fred…

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Fred Fowler

Thank you, Rick. As you might expect, I am challenged by my new role. But, I am also pleased to stand beside Rick, our team of employees, and with you, our shareholders — united in the goal of achieving near-term recovery and lasting results.

Six years ago, Duke Energy crafted a strategy that combined the strengths of power and natural gas. We brought together a competitive base of regulated and unregulated businesses. Inherent in that strategy are balance and diversification — of business lines, commodities, fuel types and geography.

That balanced strategy has served us well, and provided shelter from the volatility of an erratic marketplace. Today we continue to pursue a business model that has the right levels of risk and reward. We didn’t have the right levels last year; you won’t get any argument here. But today we’re on the path to a business model of strong fundamentals.

One side of our portfolio encompasses Duke Power and Duke Energy Gas Transmission, which many of you here today had a hand in building. They are rock-solid businesses, delivering stable, steady earnings. They are less susceptible to volatility and market cycles. And their backbone of pipelines, power plants and wires provides muscle and stamina to our portfolio.

Our core businesses exemplify another key advantage of ours — the ability to execute and deliver first-rate results. No other company can match us there. From tackling winter storms in the Carolinas, to building out natural gas pipelines, to delivering record levels of productivity from our power plants — Duke Energy delivers strong, consistent performance.

Duke Power and Duke Energy Gas Transmission delivered admirably in 2002, and they will deliver approximately 80 percent of our operating income this year.

In the first three months of 2003, we’ve done what we do best year in and year out: deliver strong, consistent operational performance. As examples:

• We’re moving ahead on several expansion projects to meet the growing demand for natural gas in regions across North America. We’re extending our East Tennessee pipeline with the Patriot project, a 94-mile extension into North Carolina and Virginia.
• Our HubLine project will transport natural gas to the greater Boston market — increasing the reliability of natural gas in eastern Massachusetts.
• We’re constructing the Grizzly Pipeline extension in Northeastern British Columbia, which will tie new natural gas production to markets in Canada and the U.S.
• Duke Power continues to connect 40,000 new customers a year — and we’re focused on capturing more of the wholesale load in and around our service area.

That’s just a quick list of the real results and real progress we’re achieving.

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On the other side of the portfolio are our merchant energy businesses. We are dramatically recasting those businesses, reining in our exposure, and recalibrating the level of risk we’re willing to take on.

We do see value in the merchant energy business, and we’re going to continue to pursue the opportunities there. We’ve been working hard not only to scale back our merchant business, but to make sure that it is structured and managed for the long-term. Here are the four key areas we’ve addressed:

• We’ve made significant changes to our leadership team.
• We’ve developed consistent policies, practices and systems, including improvements in monitoring and reporting.
• We’ve consolidated our North American sales and marketing functions, deferred development projects, and tightened our portfolio — all aimed at minimizing exposure and maximizing efficiency.
• And we’ve discontinued proprietary trading at our North American merchant energy business, which will further reduce our risk as well as our collateral needs. We are focused on trading around hard assets. That is where our strength lies — and that is where true and sustainable value lies.

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I’m sure you’ve read that a number of companies have exited the merchant energy marketplace — some by choice. Others had no choice.

Our decision to stay in the merchant energy business isn’t based on blind stubbornness. We’re taking a long view of the future — a future that will be defined by open, competitive energy markets served by best-in-class providers.

The current oversupply will abate. Recent mothballing of planned generation and the retirement of older plants will tip the balance; and with economic recovery, we’ll see demand grow. When that happens, Duke Energy will be well-positioned to respond to both the necessity and the opportunity.

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Tough economic times are defining times — and they’re precisely the right time to strengthen relationships with customers. Customers today are looking for knowledgeable, reliable companies to provide energy services. Duke Energy fits the bill.

Duke Energy Gas Transmission has an impressive record in customer contract renewals — they’ve earned a reputation for reliability that wins them that repeat business year after year.

Duke Power, which consistently ranks high in customer satisfaction, is stepping up its marketing efforts and working to develop new products and services.

And, in every line of our business, we are focused on doing right by our customers — and doing right by our shareholders.

When you look back at the history of Duke Energy, you see a company that has overcome depressions, recessions, floods, two World Wars, energy disruptions, ice storms, and hurricanes. Each time, the company has pushed ahead — always coming out stronger than it was before.

Even when we face tough times — especially when we face tough times — our team rises to new levels. We manage to tap new reserves of our corporate core: Operational excellence. Reliability. Customer service and productivity. That’s what you can count on from Duke Energy.

We’re not standing still and we’re not losing ground. We’re working hard — and I look forward to sharing the results of those good efforts when we meet again next year.

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Rick Priory

Thank you, Fred. As much as we’d like to put the challenges of 2002 behind us, they’re front and center — and we’re facing them squarely.

We’ve done our homework and we know that we’ll continue to deal with weak market conditions through this year — and perhaps beyond. We expect earnings per share for 2003 to be in the range of $1.35 to $1.60, before the cumulative effect of two new accounting rules to be implemented this quarter. That is moderated from the dramatic growth rates of recent years, but it is respectable, attainable, and it reflects the current market environment.

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Our company, our industry, our economy — all are in transition today. At Duke Energy, we’re diligently working through these challenging times. And we’re looking ahead with the spirit that we’re known for: Value-focused. Principled and purposeful. Forward-thinking and forthright.

Despite the upheaval of last year, Duke Energy managed to stand tall — and to stand out within our industry. For the fifth consecutive year, Duke Energy was just named the most admired energy company in Fortune magazine’s annual survey. Fortune’s Most Admired measures include these important attributes: Social Responsibility, Long-term Investment Value, Employee Talent, Financial Soundness, Quality of Products and Services, Innovation, Use of Corporate Assets, and Quality of Management. And I hope you share my belief that these characteristics are the hallmarks of a sterling company.

Earlier I made a pledge to restore the luster to Duke Energy. We can do that — and we will. Duke Energy is precious metal — strong, enduring and rich in value.

Thank you for your investment — and for staying the course with us.