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Chairman's Letter to Shareholders

Dear Fellow Shareholder:

As I sit down to write this letter, I start from a perspective I know we share. Like many of you, I am a long-term holder of Duke Energy stock, having acquired much of it over the years prior to the merger of PanEnergy and Duke Power. When I left the company in 1998 to become CEO of Australian based BHP Ltd., Duke Energy was prospering, the stock price was buoyant and the industry seemed to be entering an era of unprecedented growth and prosperity. Since returning to the U.S. and rejoining Duke, I have been amazed at how much the landscape has changed in just five short years. The thriving industry I left is like a bombed-out village. Parts of it remain and are recognizable, but other parts are missing or damaged beyond recognition. And some of the damage was self-inflicted.

The State of the Industry

In 2000, the combined market capitalization of the ten largest integrated energy firms exceeded $230 billion. By the end of 2003, their combined market cap had dropped by more than $100 billion. Today, half of that group would not even make the ten-largest list by market capitalization.

Of the companies that comprised the Interstate Natural Gas Association of America and the Edison Electric Institute at year-end 1998, more than a quarter have merged or otherwise disappeared. Several have filed for bankruptcy and still more have had their debt lowered to below investment grade. Roughly one in four has changed names, and more than 50 percent have changed their CEOs. The new breed of independent power producers has fared even worse, while many involved in energy trading have been discredited.

Changes to market dynamics and the regulatory climate have been no less dramatic. The dream of an integrated gas and power generation industry serving free and open markets with a balance of hard assets and trading has turned into a nightmare. Overly aggressive estimates of demand led power generators to add enormous chunks of new capacity just as the cycle was peaking. Traders began to confuse a bull market with brains and became the new “masters of the universe.” Many company managements aspired to be increasingly clever rather than good, and spoke of “virtual” companies without assets. The price of natural gas was all over the map, but it looked tame compared to volatility in the electric markets. By the end of 2003, liquidity in many markets had all but disappeared.

The landscape was also reshaped by regulatory and legislative action – and inaction. The rush toward deregulation halted mid-stream, leaving the industry in limbo with a mixture of state and federal laws and regulations that often conflicted and contributed to the problems. Recent focus has been to put constraints on the industry to prevent a repeat of past excesses. Unfortunately, some of these controls destroy or eliminate many of the benefits originally envisioned for an integrated energy industry.

Of course, it's not just the energy industry that has changed over the last five years. The boom and bust of the “dot coms,” the accompanying investor frenzy and the ultimate implosion of some of the largest and most respected companies in the U.S. were remarkable events to observe from the vantage point of the Sydney and London exchanges. I remember watching the regulatory and legislative response and wondering who in their right mind would agree to be the CEO of a U.S. company in that kind of environment.

My personal answer to that question is simple: Someone who believes in the company and its people.

Sizing Up Our Situation

If the industry resembles a bombed-out village, Duke is one of the few recognizable structures remaining. In hindsight, there is no denying that the company got caught up in the exuberance of the day and participated in the overbuilding of capacity. (To be honest, I often wonder to what extent I might have been sucked into that vortex if I had remained in the industry during that period.)

Obviously, Duke Energy has taken a number of major hits. The stock price at year-end was less than half of what it was at its peak. Credit ratings were reduced twice in 2003. Duke Energy North America has gone from generating profits of over $1 billion in 2001 to a position of generating losses in 2003. Many of the key strategic assumptions that drove Duke Energy in the late '90s proved incorrect, as the world evolved in far different directions. And yet, the underlying assets, the customer base and the market position of the company are sound.

Relative to many others in the industry, Duke Energy is in an enviable position. Our financial strength provided us choices and flexibility, while others had their options sharply curtailed. We've maintained operational excellence in all of our energy businesses and continued to deliver reliably to our customers. We sold non-core assets to reduce debt, but we weren't forced into a fire sale or to surrender assets vital to our future growth. Our employees, while reduced in number, are re-energized and focused on restoring shareholder value and reclaiming our place as an industry leader.

The work to restore value began in 2003, well before I arrived on the scene. The company reacted forcefully to avoid being caught by the liquidity wave that hurt so many others. In 2003, we generated net proceeds of approximately $2 billion from the sale of non-core assets. We reduced debt and trust preferred securities by $2.2 billion, net of new debt issued and including nearly $400 million of debt assumed in asset sales. We slashed our capital spending to $2.8 billion – versus our original forecast of $3.2 billion – and exited proprietary trading. We undertook a major cost-cutting effort that included significant voluntary and involuntary staff reductions. Our liquidity position is solid, and included over $1 billion in cash and cash equivalents at year-end.

The year culminated in additional dramatic steps to restructure our business portfolio. We have decided to sell our merchant plants in the southeastern U.S. and to forgo further investment in our deferred plants in the West. These actions, combined with others, such as the planned sale of our Australian assets and our exit from Europe, resulted in a $3.4 billion pre-tax write-down in the fourth quarter.

We resolved a number of regulatory and legal issues. In July, the Federal Energy Regulatory Commission (FERC) cleared Duke Energy of charges of withholding electricity from its California power plants. In September, Duke Energy Trading & Marketing announced a $28 million settlement with the Commodity Futures Trading Commission, closing the agency's investigation of natural gas price reporting. In December, we reached a settlement with FERC, ending their inquiry into our trading and marketing practices in the western U.S. market, leaving only the refund proceeding related to the California energy crisis still outstanding at FERC.

I am confident that the tough decisions we made last year will serve us well long-term -- but they didn't come without some near-term pain: We reported a net loss of $1.3 billion for 2003, or ($1.48) per share. Our fourth-quarter loss of $2 billion was the largest in company history. Ongoing earnings per share for the year, excluding special items, were $1.28, compared to $1.88 in ongoing EPS in 2002.

Our Investment Proposition

At year-end, we revised our investment proposition to emphasize income and modest growth. The high growth aspirations of the past are simply not in the best interests of our long-term investors. The Board has reaffirmed our commitment to maintain an annual dividend level of $1.10 per share.

As we go forward, our work will be guided by the charter printed on the following page. We have introduced it to our employees, as well as publicly, as the document that defines us as a company, articulates our values, and sets out our management priorities and how we will measure success. I urge you to read the charter and more about the management priorities on the pages that follow. They are the roadmap we will follow to restore our credibility, strengthen our financial performance and meet the needs of our stakeholders.

In 2004, we celebrate the 100^th anniversary of Duke Power, the first of Duke Energy's companies. We appreciate those of you who have supported us and have had confidence in us over many years. In my mind, there's no end-goal in the quest to build confidence. The most successful and enduring companies are those that continually strive to do more. When you look at Duke Energy today, I hope you see a company with a renewed sense of purpose, candor and commitment to the long term. As we enter our second hundred years, I pledge to you that Duke Energy will work harder than ever to win your investment, your business and your trust.

Sincerely,

Paul M. Anderson, Chairman of the Board and Chief Executive Officer
March 15, 2004

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Paul Anderson was appointed Chairman and Chief Executive Officer of Duke Energy effective Nov. 1, 2003. His association with the company began in 1977, when he joined Texas Eastern Corp. as Director of Corporate Planning. Anderson left the company in 1990, following the merger of Texas Eastern Corp. and Panhandle Eastern Corp. He subsequently returned to Panhandle Eastern (later named PanEnergy Corp) to become its Chairman and CEO prior to the merger with Duke Power to create Duke Energy. He served as President and Chief Operating Officer of Duke Energy until 1998, when he left to become CEO and Managing Director of BHP Ltd., an Australian based company. During his tenure at BHP, the company merged with Billiton PLC to form BHP Billiton, listed on both the London and Sydney exchanges. Mr. Anderson retired from BHP Billiton in July 2002.