Fred J. Fowler - Address to Shareholders

Duke Energy Annual Meeting
Fred J. Fowler
President and Chief Operating Officer
Duke Energy

Thank you, Paul.

You heard from Paul on the progress we’ve made on our financial and strategic plans over the past year. We’ve developed positive momentum, and now it’s up to each business unit to sustain that momentum by executing on their individual strategies.

When you examine each stock in your portfolio, I imagine you ask two questions:

• What plan of action does this company have?
• And, can they execute on that plan?

Paul has spelled out our plan. It’s my job to make sure our business units together deliver on that plan. So today I’d like to describe each of our business units and their priorities, and introduce their leaders. I’m sure you’d like to put a face with the name of these leaders—and also to hear why they were chosen for their roles.

Duke Power is Duke Energy’s largest and most senior business unit. It is one of the largest employers in the Carolinas, and I’m sure we have more than a handful of Duke Power retirees in the audience today.

When Duke Power was formed 100 years ago, Buck Duke lured jobs to the Carolinas on the strength of reasonably priced electricity and an ample work force. As the company celebrates its 100th anniversary, it has renewed its focus on economic development in the Carolinas—to replace manufacturing jobs that have been lost.

Many jobs—including those in the textile industry that Buck Duke first recruited here—have left the Carolinas. Today, Duke Power still offers reasonably priced rates, which are 20 percent below the national average and are basically the same as they were in 1987. These rates can be used to attract new jobs. Together with state and local officials, the power company is working to market the Carolinas and be a catalyst for economic development.

Duke Power is also working to make the air in the Carolinas cleaner. Under North Carolina’s clean air legislation—fully supported by the company—we are spending $1.5 billion at our coal-fired power plants to lower emissions below federal levels.

As far as growth, Duke Power will continue to provide solid earnings—but will be relatively flat over the next few years with potential annual EBIT growth of up to 2 percent from $1.4 billion EBIT in 2003.

Leading Duke Power is Ruth Shaw. I can sum up Ruth like this—she knows business, she knows people, she knows relationships and she knows how to get things done. Two weeks ago, Ruth pulled together leading regional officials to have a top-tier discussion on economic development in the Carolinas. Very few people would have attempted that effort; and fewer could have pulled it off. Ruth Shaw got it done. Thank you, Ruth.

Duke Energy Gas Transmission continues to make important contributions to the nation’s pipeline infrastructure. The recently completed extension of our East Tennessee Pipeline System into North Carolina and Virginia is bringing natural gas to an area of the country that had never had it before.

In New England, our Texas Eastern and Algonquin Pipelines set delivery and reliability records this January when a severe wave of cold weather hit that region.

Our customers clearly appreciate our reliability. This winter we re-signed more than 99 percent of our New England area customers whose delivery contracts could be renewed. We delivered to customers in a crunch—and they turned around and renewed their contracts. That’s what execution is all about.

We expect annual EBIT growth to be in the range of 3-5 percent over the next few years from a base of $1.2 billion. Expansion projects, operational efficiencies and cost controls will all contribute to increased earnings.

Leading Duke Energy Gas Transmission is Tom O’Connor. Tom has risen to meet every challenge that’s come his way at Duke Energy in his 17 years here. Whether it was environmental compliance or business development, Tom excelled at whatever he did. His mission today is to continue to deliver results with operations that reach from the Gulf Coast, to New England and throughout Canada. Thank you, Tom.

Duke Energy Field Services—our joint venture with ConocoPhillips is the nation’s premier midstream natural gas gatherer and producer of natural gas liquids like butane and propane.

Through a carefully mapped out strategy of acquisitions, Duke Energy built the Field Services business into the leading U.S. company in the midstream natural gas segment.

To illustrate the growth—in 1998, Field Services’ total revenue was $2.6 billion. Last year, total revenue was $8.8 billion—more than tripling in five years.

It’s important to remind you that the Field Services business tends to be cyclical and earnings can be up and down. But current market conditions are very favorable for this business, as you saw by its banner first quarter earnings results when EBIT rose by 200 percent.

Normal annual EBIT growth for Field Services should be around 8-10 percent going forward off a reported EBIT base of $192 million in 2003. Contract restructuring and continued optimization and rationalization of this very large asset base will drive Field Services earnings growth.

Leading Field Services is Bill Easter. Bill comes to us as a 30-year veteran of ConocoPhillips—tackling jobs as diverse as natural gas supply to procurement to running several of their large business units. He’s made stops in Denver, Houston … even Stockholm, Sweden. With the dramatic growth at Field Services, Bill is very busy developing the management systems needed to bring discipline and added value to the operation. Thank you, Bill.

Crescent Resources is the leading commercial real estate developer in the Carolinas. In fact, it’s one of the leading commercial real estate developers in the nation. Crescent targets key growth markets and has projects in nine states, including Florida, Georgia, Tennessee, Texas and Arizona. It’s known for its high quality commercial and residential projects.

Crescent continues to be a consistent provider of earnings and cash flow, and we should see EBIT basically flat over the next few years, with potential growth of up to 2 percent—off of a base of $150 million. Regardless, Crescent continues to deliver disciplined earnings by focusing on its existing business lines and the execution of its proven real estate development strategy.

Leading Crescent Resources is Art Fields. When Crescent went from being strictly a timber operation to become a commercial development company in the 1980s, they brought in real estate experts to take them to the next level. Art came over from Tennessee to join Crescent in 1988 and has been teaching us the fine art of real estate ever since. Thank you, Art.

Duke Energy International has successfully narrowed its focus over the past year. Last year, Duke Energy International announced that it was exiting the European market. But more important, it recently closed on the sale of its Australian assets for about $1.2 billion. This was an excellent move, and the proceeds exceeded our expectations.

Our focus now at Duke Energy International is in Latin America, where we have meaningful scale and our portfolio of assets has been generating positive returns. Our rate of return at DEI is in single digits, and our goal is to move to double-digit returns, a few hundred basis points higher than our regulated pipelines and Duke Power operation here in the U.S.

We’re confident we can increase returns at DEI. We have an impressive array of power generation assets in Central and South America and enough critical mass that we should be able to grow profits.

We combined DEI with Duke Energy North America to create what we call Duke Energy Americas to reduce overhead and increase efficiency.

Leading Duke Energy Americas is Bobby Evans. Bobby began his career at our Texas Eastern pipeline more than 30 years ago. I have worked very closely with Bobby for 15 years, and can speak for his mental toughness, his ability to tackle complex issues and his ability to produce results. Thank you, Bobby.

The other part of Duke Energy Americas is Duke Energy North America. Our top priority for DENA is clearly to return it to profitability and to reduce our exposure to the volatility of the merchant generation business. It’s no secret that we got too big in merchant generation. We built too many plants without the protection of long-term contracts. When the wholesale power market turned negative—we experienced significant downside exposure.

We’ve reduced our exposure by announcing the sale last week of our Southeast merchant plants. This will allow us to trim our merchant fleet by 5,000 megawatts—about one third of DENA’s generating capacity.

In the Southeast, we felt the over-supply of capacity and stalled deregulation would make for a long recovery in that region. By announcing this sale, DENA will be able to focus on other areas of the country—like the Western States and the Northeast—where the markets are operating on an unbundled model and we see the potential for reserve margins coming back in balance much sooner.

But our results at DENA will not look good for 2004. We have shared with Wall Street that we expect to lose about $300 million in EBIT at DENA this year—minus special items and any mark-to-market changes. Our goal is to get to break-even by the end of 2006.

As a shareholder, I know those results are unacceptable. Unfortunately, dealing with the problems at DENA is not as simple as flipping a light switch. For example, we canceled a number of power plants in the western U.S., but we still have contracts associated with those plants. The fluctuating value of those contracts—called mark-to-market if you’ve heard that accounting term—reduced our earnings by $87 million in the first quarter.

One of our top jobs at DENA is to reduce the risk in our trading operation and to eliminate these mark-to-market surprises, which many times are driven by forces outside of our control—interest rates, weather and the price of natural gas. Our first quarter earnings at DENA would have been on plan without the mark-to-market loss. So it’s our job to reduce and eliminate that earnings volatility.

Merchant generation still has a place in this country, and a place at Duke Energy—but we must make sure it is sized right for our corporation.

Overall, our mission at Duke Energy in 2004 is to reduce the risk at DENA and to build on the positive momentum we have at our other business units. That’s our plan of action.

As for execution? We have a 100-year history of operational excellence at Duke Energy. This company and its employees have proven we can execute—whether it is building a power plant, constructing a pipeline or building an office complex.

In 2004, we begin a second century of execution—delivering results at our business units that will allow shareholders, customers and employees to enjoy a new era of success.