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Duke Energy North America
Reducing Merchant Risk

Our goal for DENA in 2004 was to stabilize the business. We accomplished that through asset sales and cost efficiencies, and by moving from a commodity trading model to a stronger focus on marketing energy to customers from our own assets. An anticipated $300 million ongoing segment EBIT loss came in at $288 million, including unanticipated mark-to-market losses of $25 million. A team of employees committed to controlling costs and optimizing resources made it possible to achieve our financial goal.

Major accomplishments:

• The sale of our fleet of eight merchant plants in the southeast United States came sooner than many predicted. Completed in August, the sale boosted Duke Energy’s 2004 divestiture proceeds by approximately $975 million, including about $500 million in tax benefits and a note receivable of approximately $50 million.

Production technicians Mike Armstrong, Benny King and Steve Anderson ensure that the Washington Energy Facility in southeastern Ohio operates safely and reliably. The plant has had no recordable injuries since it opened in 2001.

• We sold two partially completed plants in 2004 (Luna in New Mexico and Moapa in Nevada), as well as surplus turbines and related equipment. Proceeds from those transactions totaled approximately $600 million, including about $270 million in tax benefits. At year-end, we signed an agreement to sell a third deferred-construction plant (Grays Harbor in Washington state).
• We mitigated our earnings volatility by significantly reducing the exposure to fluctuating commodity prices associated with our mark-to-market portfolio.
• DENA strengthened its position in long-term gas storage capacity, providing flexibility to fuel our own plants as well as serve other customers.
• Duke Energy’s settlement of refund proceedings and other litigation related to the 2000-2001 western U.S. energy crisis cleared the way for some of the large utilities in those markets to return as DENA customers.
• DENA’s Lee facility in Illinois added “black start” capability in 2004 that will allow the unit to start without any outside electrical supply. Even during a blackout, it can be brought into service to help ensure the stability and reliability of the electric grid in the Midwest.
• We made substantial progress on winding down the Duke Energy Trading and Marketing joint venture with ExxonMobil. By the end of 2004, we had completed or signed transactions to sell about 90 percent of that business.

Success at DENA is measured in relative terms. We are determined to reduce DENA’s losses and return the business to profitability. We expect to cut our ongoing EBIT loss nearly in half in 2005, to approximately $150 million. By the end of 2006, on an ongoing basis, we anticipate breaking even, and we look forward to being profitable again in 2007.

We will continue to control costs and manage our portfolio with smart business decisions. We have strong assets in growing areas, and energy demand continues to grow. We intend to be a strong player in the merchant energy market.

As in the rest of Duke Energy, we are renewing our emphasis on safety. Many of our plants have perfect safety records. We are challenging ourselves to spread that zero-injury culture across our entire fleet.

— Bobby Evans, President and Chief Executive Officer, Duke Energy Americas

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

Operating Data

	2004		2003		2002		2001		2000
Duke Energy North America
Actual plant production, gigawatt-hours	21,884		24,046		24,962		20,516		18,523
Proportional capacity in operation, megawattsa	9,890		15,820		14,157		6,799		5,134
a Represents share of capacity owned by DENA.