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Duke Energy's Roadmap to Success

Duke Energy's charter sets out who we are, what we do, how we do it and how we'll know when we succeed. The purpose, values and measures of success will be constants, while the five "musts" are management's immediate priorities. These have shaped the company's financial and operational goals for 2004. As our goals are achieved and new challenges are identified, these priorities will change over time. Below we outline what we must do to provide a stable platform for future growth, and our strategy for getting there.

Deliver on our financial plan and preserve the dividend of $1.10 per share.

Duke Energy took decisive steps in 2003 to improve our financial flexibility. We cut costs, reduced debt and generated cash. We expect to pay down debt by $3.5 to $4 billion in 2004.

We are well-positioned to generate cash this year from the conversion of outstanding equity units, from operations and from asset sales. These funds will be used to reduce debt, pay the dividend and provide capital for maintenance and modest expansion.

Resize and realign our asset portfolio to reflect current and future market realities and to improve return on capital.

In 2003, Duke Energy strengthened and streamlined its portfolio of energy businesses and assets. We sold non-core assets, reduced the size and scope of our domestic merchant energy business and our international operations, and are exiting non-core businesses, including Duke Capital Partners and Duke/Fluor Daniel. These moves reduce our exposure to international and merchant risk, and focus our resources on areas that promise better returns.

A major focus for 2004 will be to complete the execution of the plans we announced for our merchant and international businesses, including the sale of our assets in the southeastern U.S. and Australia, and our exit from Europe.

Our capital investment going forward will be primarily in Duke Power, our franchised electric utility, and Duke Energy Gas Transmission (DEGT), our natural gas pipeline business – both of which deliver stable earnings and strong cash flows. We're investing in these assets to be sure they are well-maintained and we can capture appropriate and attractive high-return growth opportunities. We will also continue to invest capital in Crescent Resources, one of the country's premier real estate development companies, which contributes substantial cash to our enterprise.

Duke Energy Field Services (DEFS) continues to be one of the top players in the North American midstream natural gas sector, enjoying an approximately 20 percent market share in natural gas liquids (NGLs) production. In 2003, DEFS benefited from higher NGL prices and improved "frac spreads" (the difference between the thermal value of NGLs and natural gas). The business also worked to improve cash flow, optimize its assets, realign its contract mix to reduce the impact of commodity price fluctuations, and reduce debt. Going forward, we'll selectively pursue growth opportunities and expand and contract our DEFS asset base in response to changing market cycles.

In merchant and international operations, we are focusing on regions that we expect to yield the highest returns when energy markets improve. In the United States, we will remain in the northeastern, midwestern and western regions where demand is likely to recover sooner than in other regions, and where transmission and regulatory policies better support wholesale power markets. Internationally, we will focus on Latin America. The consolidation of Duke Energy North America (DENA) and Duke Energy International (DEI) reflects our narrowed focus and will result in greater efficiencies.

Duke Energy has an enviable portfolio of energy assets, both regulated and non-regulated. To serve its franchised territory in the Carolinas, Duke Power has the advantage of fuel diversity: nuclear, coal, hydroelectric and natural gas. Our natural gas pipelines and storage facilities are strategically situated to serve major supply basins and high-growth markets. Our merchant plants in the U.S. Northeast, Midwest and West will be well-positioned to contribute strong earnings when demand recovers.

Significantly improve execution of essential management and operating systems, reducing bureaucracy and overhead.

A top-to-bottom expectation of all businesses and corporate functions is to simplify and flatten their organizations and eliminate overlap. For example, the risk management organization now reports to the Chief Financial Officer to align the risk and finance functions and provide a single point of accountability. The role of the Chief Administrative Officer was eliminated. By creating Duke Energy Americas, we combined under one leader the administrative functions for DENA and DEI, and other efficiencies will follow.

The actions we took in 2003 to resize the business and workforce will result in permanent cost savings of more than $200 million a year, and we continue to press for increased efficiency in all areas of the business.

Build a high performance organization with clear accountabilities in which every individual accepts responsibility and is rewarded for results.

Duke Energy's new management team has clearly defined accountabilities, and their compensation is tied to their success. Foremost is achieving the company's minimum earnings per share (EPS) goal of $1.10 – without it, the 12-member executive team will receive zero short-term bonus for the year, no matter how successful they may have been in reaching other goals. The target EPS portion of the incentive plan – which triggers a 100 percent payout for that portion only – is $1.20 a share. In addition to the EPS goal, Executive Committee members and business unit leaders have specific goals that align with and support the management priorities in the charter.

Rewards will be linked to results at all levels of the organization. In 2004, most Duke Energy employees will have EPS as a component of their incentive plan. Additionally for those employees, if 2004 earnings fall below $1.10 a share, the payout for all measures will be capped at 50 percent.

The ultimate example of pay tied to performance is the compensation plan for CEO Paul Anderson. Anderson 's compensation is entirely stock-based with a provision that all shares received must be held until he leaves the company. Additionally, there is no provision for a cash severance payment should his employment be terminated by the Board of Directors before his contract ends in 2007.

If our compensation plan emphasizes accountability, so do the company's governance practices. Even before Sarbanes-Oxley was signed into law in 2002, Duke Energy's policies and practices guarded against conflict of interest, supported independent and involved oversight of management by the Board of Directors, and provided other safeguards now required by the legislation or recommended by the New York Stock Exchange.

Duke Energy is subject to regulatory codes and standards of conduct that address business activities between regulated companies and their affiliates. These rules prevent regulated businesses from subsidizing the activities of their affiliates, and prevent the affiliates from gaining an unfair advantage because of their relationship with the regulated businesses. Duke Energy complies with both the letter and the spirit of these standards and works to ensure that all employees understand and follow them.

Like ethical conduct, safety is a key aspect of successful performance. Duke Energy's long-range safety goal is simple — zero injuries, work-related illnesses and fatalities. Management and employees must continually renew their commitment to safety in order to reach that goal. Improvements in corporate-wide safety results begin by establishing accountability at every level, starting with the company's leaders. Business units are expected to set challenging safety targets, and to provide quarterly safety performance reviews. We foster a culture in which individual employees accept accountability for the safety of their co-workers, their customers, their communities and themselves.

Restore credibility and earn the trust of employees, customers, suppliers, regulators, legislators, communities and investors.

There is no doubt that our reputation has taken some hits. We are committed to restoring confidence in Duke Energy by reliably serving our customers, by delivering superior returns to investors, by being good neighbors in communities where we operate, and by providing our employees with a sense of purpose and direction.

Duke Energy is recommitting itself to creating win-win relationships with every customer we serve, and with regulatory agencies charged with representing consumer interests.

We're working hard to enhance the customer experience in every facet of Duke Energy. From ensuring natural gas delivery to a Canadian power generator during the August blackout, to helping a South Carolina hospital operate around the clock, to supplying reliable electricity to a manufacturer in Brazil – we're committed to delivering dependable and cost-effective energy and service. You'll hear directly from a few of our customers in the pages that follow.

We work openly and productively with the regulatory agencies that oversee our businesses. Duke Power, for example, has been able to work with utility commissions in North Carolina and South Carolina to develop win-win approaches to such issues as clean air legislation and the company's resulting environmental investments.

We bring more than natural gas and power to our communities. For instance, DEGT is committed to increasing aboriginal participation in its workforce in British Columbia through employment and contracting opportunities. Duke Power has renewed its commitment to economic development in the Carolinas, partnering with government and community interests to attract new industry and jobs to the region. Reflecting the company's community spirit, Duke Energy employees and retirees volunteered more than 235,000 hours to nonprofit organizations in 2003.

Duke Energy is committed to restoring its reputation as an industry leader. In all of our interactions with investors, customers, neighbors and employees, we are working hard to regain their trust.