Remarks to Analysts by Fred Fowler

The six directives that Rick outlined are the near-term focus for us.

You just heard from Robert and David about the financial progress we’re making. We’re well on-plan in terms of capital and O&M spending reductions; divestitures of non-strategic assets; positive operating cash flow; and prudent debt management. Fortunately, Duke’s tradition of financial discipline means that we’ve been able to approach the current downturn from a relatively healthy position.

I’d like to make one point about our divestitures from an operations perspective—and that is we have been very deliberate—to ensure that we emerge with the right set of assets going forward. We’ve made sound portfolio moves that have both short-term and long-term strategic value. The sale of our interests in the Foothills, Empire and Alliance pipelines, our interest in American Ref-Fuel, and our remaining units in the Northern Border Limited Partnership—were all positive financial transactions that have in no way compromised our competitive or strategic position.

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We know that even as we’re tightening our financial belt, we still have to grow our business. The growth might not be as rapid as it’s been in recent years, but as you saw in the first quarter, we’re delivering solid, respectable results.

Our second strategic directive, “Invest in our strongest business sectors” points to where we see that immediate growth potential—and that’s in Duke Power and Duke Energy Gas Transmission. They’re both rock-solid businesses, delivering stable, steady earnings.

We all remember how—until very recently—the power company and pipelines were seen as stodgy, boring businesses that were a drag on overall corporate performance. That view has changed dramatically. Regulated entities like Duke Power and Duke Energy Gas Transmission are recognized in today’s market for the fortitude and flexibility they provide. They are far less susceptible to volatility and market cycles than non-regulated businesses—and that holds enormous appeal right now. Hard assets are back in favor.

Real assets to produce and deliver energy to real customers never went out of favor at Duke Energy, and we value the depth and diversity of our balanced business model.

We’re counting on Duke Power and Duke Energy Gas Transmission to deliver 80 percent of our earnings this year. And you can expect them to be strong components of our future for years to come.

That future focus is evident in our Patriot Pipeline extension on the East Tennessee system, the mainline expansion on the BC system in western Canada, and market area projects such as the Hubline and Islander East projects.

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Our future focus is also evident on the Duke Power side, as we lay the infrastructure to serve an additional 40,000 new customers this year. We’re investing in capital improvements to our coal-fired power plants in the Carolinas to install state-of-the-art emissions controls. We’re replacing the reactor vessel heads at Oconee Nuclear Station, and we’re pursuing license renewal for the McGuire and Catawba nuclear stations.

We know that you can’t cost cut your way to prosperity. You’ve got to invest in your healthiest, strongest sectors. Right now, that’s our regulated businesses. We’re moving forward and allocating our limited capital with attention to future value and near-term returns.

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It’s never easy or enjoyable to throttle back the growth engine. And Duke Energy enjoyed the rapid growth years of the late 1990s as much as anyone. But today, we’re squarely faced with our third directive: sizing our businesses to fit new market realities.

We’ve lived through boom times and bear cycles before, and when market opportunities contract, we are prepared to realign and adapt our businesses accordingly. It’s never easy—and it’s never fun. But the right decisions are often the tough ones.

We’re reducing our workforce substantially, but we’re striving to maintain the intellectual and operational muscle we’ll need long term. Much of our scaling back has been in our merchant energy business—since that is the market that has been most severely affected. You’ll hear much more about that in a few minutes.

Our decision to exit our finance business, Duke Capital Partners, is another good example of adapting to market realities. In today’s capital-constrained environment, the prudent course for us was to exit the business and monetize its portfolio.

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I know that our fourth directive is one of interest to all of you: “Addressing the issues in our merchant energy business.”

I won’t steal Rob Ladd’s thunder by drilling through the changes and refinements we’ve made in Duke Energy North America. They’ve been substantial, and begin with high-level leadership changes and a redirection from a traditional trading model to a more asset-based, customer-focused model. We’ve discontinued proprietary trading within DENA, a decision that will further reduce our risk profile and our collateral needs.

I know that merchant energy and the ancillary trading and marketing around assets have lost favor with those who don’t have the stomach for market cycles—and some have exited the merchant marketplace altogether.

Duke Energy’s decision to stay the course isn’t based on blind stubbornness. Our commitment to a workable, rational merchant energy market is based on a long and responsible view. Even in periods of low economic growth, annual power demand growth continues at a pace of 2 to 3 percent. Current oversupply conditions will abate. Recent mothballing of planned generation and the retirement of older plants will tip the balance; and with economic recovery, we’ll see demand growth pick up.

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Merchant energy may not be the popular course today—but our approach has never been dictated by market psychology. It is based on the fundamentals of supply, demand, prudent risk management and carefully vetted value creation opportunities. And we are fortunate to have the financial means and the management will to maintain our option for the upside.

I firmly believe that the strong market leaders of the future won’t be commodity players. They will be companies that have the production capacity—and are able to maximize the value of that capacity by serving customers in new and expanded ways.

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Our fifth directive is “Strengthen relationships with customers.”

Energy customers are confused, they’re frustrated, and like us, they’re struggling through some hard times, looking for relief and upside. But we believe tough times are the best time to build enduring customer relationships, so we are focused on cementing existing relationships and building new ones.

We continue to work hard to break the mold of “cookie cutter” energy services. We do that by listening intently and offering alternatives that help customers hold on to their competitiveness. Managing energy costs, optionality, and the volatility of pricing are high on our customers’ list of priorities—which means they top our list, too.

Duke Energy has a strong and enduring tradition of exceeding customer expectations and becoming a valued, trusted partner. DEGT holds strong market share across the country—even when we may not be the low-cost provider. It’s all about service—and helping customers achieve greater levels of productivity, efficiency, satisfaction and success.

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We’re making steady progress toward our final directive, “Reduce regulatory and legal risk and uncertainty.” As you might expect, most of the regulatory and legal issues confronting us today are related to the California energy market.

We are encouraged by the recent FERC report that exonerated Duke Energy on charges of withholding power in California. We are confident of our facts and are pleased that they are being recognized at long last. One of California’s own expert witnesses referred to Duke in his testimony as a “model competitor.”

We’ve had a number of other legal victories involving the western market. And we are optimistic that we will emerge from these controversies vindicated by a strong fact set and a clear record of business and operational integrity.

We’ve got plenty of our best people working on the tough regulatory and legal issues—as they should. But we’ve also got our best and brightest focused on the future.

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Rick mentioned the strong bench of leadership talent within Duke Energy, and that is truly a competitive advantage for us.

We’ve had many changes this year, and a number of folks are in new roles. I’d like to introduce you to some of the men and women on my team who you’ll be hearing from today. You’ve got their bios in your notebooks, so I’m not going to cover their resumes. I’ll just share some personal observations:

Rob Ladd, President, Duke Energy North America

Most recently, Rob served as president and CEO of Duke Capital Partners. He brings tremendous experience in the energy sector and in the finance and restructuring business. And when you think about the number of financial institutions getting into the merchant energy business, that combination of experience is serving us well. Rob is fully engaged in getting DENA on a strong course forward, and he’s able to deal with the high rate of market change—some would say chaos!—with admirable calm, reason and resolve.

Richard McGee, President, Duke Energy International

Richard McGee continues to serve as president of Duke Energy International, and like Rob, is navigating tidal waves of change and upheaval! He holds a law degree and has an impressive background in international mergers, acquisitions and development projects. Richard has refocused our international operations from an expansion mode to one of optimization of existing assets and improving returns on capital.

Jimmy Mogg, Chairman, President and CEO, Duke Energy Field Services

Most you’ve met Jimmy in the past. Under his leadership, DEFS has grown to become the leading mid-stream company in the U.S. Jimmy is a hard-nosed, no-nonsense business man who has a high degree of talent and tolerance for a very volatile business.

Tom O’Connor, President, Duke Energy Gas Transmission

Tom is new to his role, but he’s far from new to the gas business. He previously served as president of Gas Transmission’s U.S. operations. Tom has extensive background in business development, and has led the major pipeline expansion projects over the last decade, including the Maritimes & Northeast project. He really “gets” the big picture and is a true consensus builder—both within and outside the company.

Ruth Shaw, president of Duke Power Company

Duke Power is a large and important part of our enterprise—and Ruth is exactly the right individual to have at the helm! She is sharp, focused and brings a deep understanding of what our business is about and what success looks like. Ruth is widely respected throughout the Carolinas and is ideally suited to building strong relationships with important stakeholders.

I’m looking to Ruth to build on Duke Power’s strong tradition of customer and operational excellence—and to deliver new growth from the business.

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You’ll be hearing from these folks shortly. And you’ll have the chance to meet other members of our team who are with us today.

Together, we’re making sure and steady progress as we work through the directives and challenges I shared. The leaders of the business units are now going to provide specifics on what their businesses are doing to get through this current cycle and prepare for the inevitable upturn. And you’ll have a chance to ask them questions.

I hope that you leave our session with the belief that we’re making wise and prudent choices. That we have the financial and managerial backbone to endure the tough times. That we operate with integrity, diligence and unwavering commitment to customers and shareholders. And that if any company can unearth opportunity from these challenging times—that company is Duke Energy.