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Duke Energy North America

Profile:

Duke Energy North America operates merchant power generation facilities, and markets electricity, natural gas, energy management and related services to wholesale customers throughout North America.

Of all of Duke Energy's business units, DENA faced the toughest challenges in 2003. A period of rapid growth in merchant power markets was followed by regulatory and market upheavals and the aftershocks of Enron's collapse. An oversupply of merchant generation in many regions and low spark spreads (the difference between the cost of natural gas and the price of the electricity it generates) have prevented many DENA facilities from generating power profitably. As a result, the company made the strategic decision to exit the Southeast region in 2004, but to retain operations in the West, Northeast and Midwest regions – markets that have value for the company long-term.

Operating Data:

	2003		2002		2001		2000		1999
Duke Energy North America
Actual plant production, gigawatt-hours	24,046		24,962		20,516		18,523		11,307
Capacity in operation, megawattsa	15,820		14,157		6,799		5,134		3,532
a Represents share of capacity owned by DENA.

Performance Highlights:

• DENA reduced the scope and scale of its trading and marketing organization to align with current market conditions, limited commercial transactions to those that directly benefit DENA operations and customers, and implemented new levels of control and risk management.
• In May, DENA announced it would end proprietary (purely financial) trading, which typically represented less than 10 percent of DENA's gross margin. In 2003, DENA also began to wind down the Duke Energy Trading & Marketing joint venture, which is 60 percent owned by Duke Energy and 40 percent by ExxonMobil. DENA's stand-alone trading and marketing operation continues with a focus around the company's own assets.
• DENA sold 15 significant new tolls related to its plants. A toll is an agreement to sell all or part of the generating capacity of a power plant for a fee. Duke Energy expects tolling deals to play an increasingly important role in merchant energy, allowing DENA to capture margin at relatively low risk.
• In 2003, DENA initiated a new customer relationship program, enhancing and renewing ties with key providers and buyers in the areas where DENA plants are located.
• Consistent with its sharpened focus on its merchant natural gas-fired fleet, DENA sold its interest in American Ref-Fuel, which converts municipal solid waste into energy, and Duke Energy Hydrocarbons, which was involved in the exploration and production of natural gas and petroleum, primarily in the Gulf of Mexico.
• As DENA employees faced tough challenges in 2003, their resolve to work safely resulted in a 50 percent reduction in recordable injuries.

Strategy Going Forward:

• Selectively reduce merchant energy exposure by selling plants in the southeastern United States, and by selling DENA's interest in deferred plants in Washington, Nevada and New Mexico, or seeking a partner to fund their completion.
• Rationalize the natural gas transportation and storage business around DENA's generation assets.
• Return the base business to profitability as the market recovers.
• Retain an option for future regional growth in wholesale merchant energy.