U.S. Franchised Electric and Gas

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Duke Energy’s franchised electric and gas operations deliver safe, reliable and competitively priced electricity to more than 3.8 million electric customers in North Carolina, South Carolina, Ohio, Indiana and Kentucky. A diverse fuel mix of nuclear, coal-fired, hydroelectric and combustion-turbine generation provides approximately 28,000 megawatts of total generating capability. These operations also serve more than 500,000 natural gas customers in Ohio and Kentucky.

Our regulated utilities are focused on revenue growth, operational performance and continued partnerships with customers and communities. For the first time in 20 years, future demand is projected to outpace generation capacity — in the Carolinas alone, we foresee a need for 20 percent more capacity, about 4,000 megawatts, by 2015, and we are pursuing options to build both coal and nuclear generation plants. In Indiana, we are evaluating the construction of a state-of-the-art coal gasification project to replace a more than 50-year-old coal-fired plant. New generation will support our already diverse portfolio of low-cost coal and nuclear baseload generation, supplemented by hydroelectric, combustion-turbine and purchased power for peak periods.

The successful integration of our franchised electric businesses will achieve cost savings and enhance customer service and reliability across all service territories.

Ongoing segment earnings before interest and taxes (EBIT) for U.S. Franchised Electric and Gas in 2006 is expected to be approximately $1.95 billion.

2005 Highlights

Duke Power

Duke Power contributed approximately $1.5 billion in segment EBIT in 2005, slightly higher than 2004 segment EBIT of $1.47 billion due to favorable weather, strong bulk power sales and the impact of continued economic development efforts — partially offset by a charge for December ice storm expenses and by higher operating and maintenance expenses.

Population growth — and demand for Duke Power’s attractive electric rates — continue in the Piedmont Carolinas. New high-tech industries such as biotechnology and automotive research moved to the region, replacing lost business and jobs in the textile sector.

Regional growth continued to add to Duke Power’s total customer base, which grew by 43,000 customers — about a 2 percent net increase — in 2005. In July, the company set a new peak demand record of 18,687 megawatts.

To meet growing demand, Duke Power focused on new generation plans — and on operating its current generation and delivery systems as efficiently as possible. In 2005, the company’s fossil/hydro fleet set a new all-time generation record, beating the previous record by more than 2 million megawatt-hours. Duke Power’s two largest steam stations, Marshall and Belews Creek, were ranked second and third in efficiency among U.S. coal-fired stations by Electric Light & Power magazine. And our nuclear fleet achieved its second highest capacity factor ever — 93.68 percent, up from 2004’s 90.23 percent. (Capacity factor measures how much electricity the system produces as a percent of its total capability.)

In October, Duke Power confirmed it is proceeding with the federal application process for a combined construction and operating license for two Westinghouse AP1000 nuclear reactors. A potential site in South Carolina has been selected for a joint project with Southern Company.

Cinergy

Cinergy’s regulated businesses contributed approximately $645 million in adjusted EBIT in 2005, compared to approximately $586 million in 2004, while advancements in reliability and customer service were recognized by regulatory authorities and earned national recognition.

Ohio regulators approved a $51.5 million electric distribution rate increase, the first in a decade, for Cincinnati Gas & Electric Co. (CG&E). Effective in 2006, the increase recognized CG&E’s reliability improvements over the past 12 years. Kentucky regulators approved an $8.1 million natural gas distribution rate increase for Union Light, Heat and Power (ULH&P) for continued improvement of its gas distribution system. PSI Energy (PSI) reached a settlement to recover approximately $1 billion to comply with new federal clean air and mercury rules. The five-year plan will result in further significant reductions in the emissions of sulfur dioxide and nitrogen oxides as well as mercury emissions. And state and federal regulators also agreed to the transfer of approximately 1,100 megawatts of generation assets from CG&E to ULH&P to meet future customer demand.

In January 2006, the CG&E and PSI customer call centers in Ohio and Indiana were recertified by J.D. Power and Associates. Last year, Cinergy was the first energy company in the United States to be certified for providing “An Outstanding Customer Service Experience.” (Duke Power was the second.) And, for the second year in a row, Cinergy received the Edison Electric Institute’s emergency assistance award, this time for the help it gave Gulf Coast utilities in the wake of Hurricanes Katrina and Rita last fall. In December after a severe ice storm, Cinergy crews worked alongside their Duke Power counterparts in the Carolinas to restore service to 700,000 customers.