Keeping Our Focus in a Time Like No Other

Annual Meeting of Shareholders
Rick Priory
Chairman, President and CEO
Duke Energy

Charlotte, N.C.

2001 truly was “a time like no other.”

The events of the past 12 months have changed us. September 11th will forever be etched in our minds. It was a shocking wake-up call to our nation’s vulnerability—a reality we would rather not think about. But as business leaders and citizens of the world, this is the new reality—and we must plan for it.

Other realities, like the softening global and U.S. economies, pale in comparison to 9/11 and a world at war. But economic downturns remind us that good times don’t just roll on forever, and that the cyclical nature of markets is a reality, as well. Each of us saw the effects of the economic slowdown differently—some saw it in our investments and some in our jobs. But this economic downturn reminds us that while we may enjoy the good times, we must all be prepared to manage through the bad times. Great companies plan for and prosper through all economic cycles.

Closer to home, the energy sector saw some of the greatest turmoil of any industry. In California, there were price spikes and power shortages—but no shortage of accusations about what went wrong. And, still no consensus on what should happen in that state in the future. I do know this: at the heart of California’s energy problem is an imbalance of supply and demand. Duke Energy is continuing to provide solutions. Fully 30 percent of the new generation that will come on-line in the state of California this summer will be from Duke Energy power plants.

As the year rolled on, commodity prices for products like electricity, oil and natural gas went on a roller coaster ride of highs and lows. Over the past year, the price for 1,000 cubic feet of natural gas has ranged from $2 to $10. Duke Energy’s ability to manage risk and hedge against price swings has helped us through this period of price volatility.

And finally in 2001, we saw two major energy companies file for bankruptcy—leaving behind disillusioned investors, employees and customers.

It’s hard to imagine that people used to call the energy business a “sleepy industry.” Now, it seems more like the “lose sleep industry.” There has been a lot of sleepless tossing and turning over the past 12 months!

But in all of the turmoil of world and industry events, I am proud to say that the employees of Duke Energy remained focused on the essentials—on performance, on a business strategy and on delivering results to you. We remained focused in a world that many times was out of focus. And, we remained focused when the noisy static of the day’s headlines was disrupting the normal flow of business.

The theme of this year’s annual report is the “Power of Focus.” Believe me, it took a lot of power to keep the focus over the past 12 months. But we did it, and I believe our 2001 results proved our mettle.

The numbers speak for themselves—ongoing earnings up 26 percent, revenues up 21 percent—all to record levels. Earnings per share have grown 13 percent annually since 1998. And, as we said when we reported on first quarter earnings earlier this month, we remain on track to meet our earnings projections for 2002—again, delivering on our promise to you as shareholders.

Now, let’s look at some other results from the past year:

Early in 2001, we successfully completed a $2 billion equity offering—the largest ever in the energy industry. In November, we were able to tap the equity markets again—this time with a successful $750 million offering.

One of the major investment banks stepped forward before that issue even hit the market and bought the entire $750 million block. I can guarantee you as sure as I’m standing here that they didn’t do it to be nice—they did it because they saw a company focused on getting the job done and wanted to share in the upside potential of your company.

Others are seeing our focus, too. We continue to be recognized for our efforts to provide value to customers and shareholders. Over the past 12 months, we were named Global Energy Company of the Year by the Financial Times; we were named to the Business Week 50 for the second year in a row—recognizing us as one of the Top 50 performers in the S&P 500; we were named the Most Admired Energy Company by Fortune magazine—the fourth year we’ve led our sector.

This external recognition confirms what I’ve known for some time: Duke Energy has the finest employee team in the industry. Hardworking, capable, committed men and women who have been recognized worldwide for their customer service, their innovation and their community involvement.

But I can assure you we are not sitting back basking in the glow of a few successes. Rather, we continue to sharpen our focus to assure that success continues.

Over the past 12 months, we have fine-tuned our strategy to build on our core strengths: gathering, processing, generating, transporting, delivering and trading energy. Last month, we completed the acquisition of Westcoast Energy—further strengthening our position as a premier natural gas pipeline company in North America. This added 6,900 miles of natural gas pipeline to Duke Energy Gas Transmission, and allows us to deliver up to 30 percent of the Canadian gas consumed in the continental United States.

Our Duke Energy North America business unit brought on line six new generating plants in time for last summer’s peak—an unprecedented accomplishment that demonstrates our ability to draw on our strengths to meet the nation’s energy needs.

Our other business units continue to build on their strengths, as well. Last year, Duke/Fluor Daniel accounted for 1 out of every 3 megawatts of natural gas-fired generation under construction in the United States. Duke Energy International is building new generation projects in Central America, and gas infrastructure projects in Australia. Duke Ventures continues to maximize our company’s assets in non-energy endeavors.

Duke Energy Gas Transmission is moving ahead with pipeline projects in the Southeast and New England. Duke Power continues to set new standards for power plant reliability and efficiency, while getting high marks for customer service. Even these mature businesses are finding new opportunities for innovation.

That innovation extends to the environment, too. Duke Energy fully supports the innovative plan being announced this morning by North Carolina Governor Mike Easley. The Governor is proposing to the legislature a plan that goes beyond federal standards limiting power plant emissions, while keeping Duke Power’s current electric rates frozen for the next five years.

Under the plan, Duke Power will reduce power plant emissions by as much as 70 percent over the next decade. We will be able to recover most of the estimated $1.5 billion necessary to achieve these emissions reductions without increasing electricity rates. Duke Power is in a position to do this because we have rigorously and efficiently managed our costs over the past decade and a half—and some items that had been included in rates will soon be paid for. The net effect of the proposal is that the rates Duke Power customers will pay for electricity through 2007 will be roughly the same as they were in 1986—some 16 years ago.

At the same time we are growing our core businesses, we have sold companies that no longer meet our strategic criteria going forward. The sale of our Duke Engineering & Services and DukeSolutions units were both announced in the first quarter of this year. Recently, we sold our remaining water operation in Anderson, South Carolina. In each case, we were able to find buyers that offered a good strategic fit for those units—and a bright future for their employees.

These divestitures were done on our timetable to meet our strategic goals. There were other companies selling assets and making deals over the past few months who were not driving the timetable. They were responding to demands from rating agencies that they reduce debt to get their balance sheets in order. The credit markets are taking a hard look at companies these days—and many times they don’t like what they see.

Tapping capital markets to fund projects is critical in the energy industry. Being able to raise funds when opportunities present themselves is a competitive advantage. The efforts of our business units to find opportunities worldwide would be clearly pointless without the ability to efficiently finance them. Some companies are losing that financing ability, and are losing their ability to react quickly in today’s marketplace. We are not.

As you’ve read in the papers, some energy companies have gotten urgent calls from the rating agencies saying, “Raise equity, sell assets and get your balance sheet in order—or we’ll cut your credit rating. And by the way—you’d better be quick about it.” That is working under someone else’s timetable. And when you’re trying to meet someone else’s timetable, you begin to lose focus on your real mission. Shareholders seldom prosper under that scenario.

Duke Energy has worked hard over the years to keep our balance sheet strong. It has been a key foundation of our business philosophy that has allowed us to move ahead of the pack in the energy industry. Strong financial management has never gone out of fashion at Duke Energy.

We expect opportunities this year for acquisitions. I want to make sure that our strong balance sheet and credit rating will allow us to get in the game when others are watching on the sidelines.

As investors, I know you’ve heard from companies selling the latest concept. Companies that make a great splash—have a snappy slogan—talk a great game. For some companies, hype and hope used to be enough. I’m glad to see a return to basics—and to see investors demanding real results.

Duke Energy has never based its future on hype and hope, but rather, on real projects, real assets and real results.

Hype and hope don’t create strong companies. Neither will they satisfy the energy needs of the world. In the United States alone, a 1 percent rise in energy demand calls for almost 10,000 megawatts of additional generating capacity. Hype and hope won’t bring new plants on line—or, build new energy infrastructure. Hard work, hard assets and an unwavering commitment to meet customers’ energy needs are what it takes.

This summer, Duke Energy will start up 11 new power plants around the country, and we have another five plants under construction that will be ready for the summer of 2003. In states like Washington, Arizona, Kentucky and Ohio—Duke Energy is doing its part to meet energy demand.

A year ago, President Bush talked of an energy crisis as he laid out his Energy Plan before the nation. Since that time, a weakened economy and relatively mild weather have convinced some people that there is no energy crisis at all—maybe there is even an energy glut.

We should not be fooled by these short-term circumstances. J. Paul Getty once said, “I buy when other people are selling.” Getty knew all about business cycles. And in our 100 years of energy experience, we’ve seen our share of cycles as well. So as the economy picks up, and as weather turns from mild to normal or severe—the demand for new generating capacity will increase.

And when that happens, we will be a step ahead. We’ll have new plants operating. We’ll have built new gas pipelines. We’ll have new projects under way. We’ll even have assets to sell to others—creating shareholder value whether we’re buying, building or selling.

Some companies follow trends. We strive to stay ahead of them.

Our solid, disciplined strategy has helped us maintain our value in a turbulent stock market. And while we’re disappointed in our return the past year, we have exceeded the performance of the overall market and our peer group.

I hope you saw in your annual report the 5-year total return chart for Duke Energy. Since 1996, total return to Duke Energy shareholders is about 100 percent. For the S&P 500, it was only about 65 percent, and for the Dow Jones Utilities Index, slightly more than 50 percent.

Every year wasn’t a winner for us. But over the long run—and that’s what we’re focused on—the trend has been better than most—and better than the overall market.

Our focus will continue to be on the long run. And we will never forget, or neglect, the business values that have guided us for almost 100 years. At Duke Energy, we believe in doing good business and operating to high standards of ethics and integrity. If there is a mistake—we correct it. If there is a disagreement—we’ll discuss it. If there is a problem—we’re going to find a solution. I’m a firm believer in getting the facts on the table and dealing with the issue at hand.

It’s no secret that the reputation of corporate America has taken a beating over the past 12 months. I don’t need to repeat the headlines—you already know them. A number of companies have not operated in their shareholders’ best interests. They have not operated in their employees’ or their customers’ best interests. Investors have lost faith. In many cases, I don’t blame them.

The current crisis in confidence requires that companies take strong action to regain the investing public’s trust. A critical step is providing more and clearer information about how we run our company and how we report our results.

Duke Energy led the industry in providing increased financial disclosure beginning with our year-end earnings report. If you thought our annual report had a few more financial pages—you’re right. We have added new information about our trading operations, our credit practices and our accounting.

Our goal is to provide as much information as possible without giving away information that hurts us in the marketplace. We want our investors to understand our business, our strategy and our growth expectations—and we want investors whose goals are aligned with our own.

Now, let me turn to my most important job at this annual meeting—to summarize for you why Duke Energy is a solid investment. As you walk out the door today, I would like you to remember three things about Duke Energy and about our future.

The first, is that the need for energy in the coming years is real. And no company is better equipped to satisfy it than Duke Energy. No company has greater knowledge; no company has a clearer vision; no company has a better ability to take projects from the drawing board and make them a reality.

Our gas pipeline projects are targeting energy markets from Australia to the Gulf Coast of Florida. Our electric generating projects are satisfying energy needs from Central America to right here in the Carolinas. We design, we build and we operate the most efficient energy assets in the industry—and that is not going to change.

The second thing to remember is that our strong balance sheet gives Duke Energy a competitive advantage in the energy industry. Companies that can see—and seize—opportunities will be leaders in this industry. Duke Energy has proven it can access the credit and capital markets to create and respond to opportunities.

Finally, Duke Energy is focused on results. You don’t have to take my word for it—the results speak for themselves. In a year in which many companies lost their focus—in which world events shook our attention—the employees of Duke Energy remained fully focused on delivering on the promises we made.

Every day wasn’t a home run. But when you look at what has been accomplished over the past five years; when you see how this company has worked to stay on track; when you re-visit what we’ve said versus what we’ve done—it should be evident that Duke Energy has succeeded because of its focus.

Knowledge, financial strength and focus—I want you to remember those attributes when you think about Duke Energy. I’m proud that you have chosen to be shareholders of Duke Energy. Whether you are a new investor, or you’ve been with us a long time—the focus of our company will always be on delivering long-term results to you.

Thank you for accepting our invitation to be with us today. And I’ll offer one additional invitation—stay with us! There is a long, exciting road ahead for Duke Energy. I invite you to join us.

Thank you.