CHAIRMAN'S LETTER

TO OUR SHAREHOLDERS

We are living in the most exciting, opportunity-rich time in the history of energy. And your company is leading this new era by applying the brainpower of our people and a network of energy businesses and assets to create and sustain increasing shareholder value.

Customers around the corner and around the globe seek the edge that will move them forward competitively and move economies upward. That edge is energy – Duke Energy – and we’re delivering.

Consider these measures of growth achieved in the past two years:

• 911 percent growth in our unregulated power generation portfolio;
• 78 percent growth in natural gas liquids produced;
• 70 percent growth in non-utility U.S. power sales;
• 52 percent growth in gas volumes marketed;
• 50 percent growth in volumes of natural gas processed; and
• 33 percent growth in operating revenues.

In this period, your company has transformed itself from the premier "hyper-electric" to one of the master architects in the new energy economy. We have assembled the assets, resources, people and market positions that enable us to capture solid returns on our investments, identify and seize the opportunities in a dynamic energy marketplace and increase our business scope and capital efficiency through a well-designed, growing network of energy businesses.

Movement of Duke Energy’s stock price performance in 1999 did not match the bold strides of a company committed to and delivering growth. Energy stocks in general were undervalued in a market driven by relatively few high-growth technology stocks. We focused our efforts in 1999 on results and repositioning so that Duke Energy and its owners will be first in line to benefit from the reinvestment of capital as the sector strengthens. Financial analysts and business publications are becoming more bullish on the energy sector, with Duke Energy often singled out as a standout investment opportunity.

STRATEGY IN ACTION
Duke Energy has built a solid foundation and we are accelerating our strategy and delivering on our promise to our owners and customers. The basics of the strategy are straightforward: 1) We are building or acquiring energy platforms – solid, sustainable interconnected energy businesses in target markets; 2) We are actively managing the risks of our portfolio of energy businesses; 3) We are operating as a connected enterprise, bringing into play each of the Duke Energy businesses that add new value, new service, new advantages for our customers.

Events of 1999 illustrate key aspects of our strategy. 1) Duke Energy’s energy merchant strategy accelerated sharply to meet the burgeoning demand for generation in the U.S. In 1999 we started construction of 2,000 megawatts (MW) of capacity, brought 5,000 MW of capacity into operation and sold 950 MW to capture better margins and manage risks. 2) We redeployed our pipeline assets into growth markets, moving capital from the sale of our Midwest Pipelines into markets where we could capture greater shareholder value. In addition to our new Maritimes & Northeast Pipeline that brings gas from Nova Scotia to Boston, we also announced the purchase of East Tennessee Natural Gas Company. (3) We exploited consolidation of the midstream gas business, building scope and value in an important business segment. Our acquisition of UPFuels and the proposed combination of Duke Energy Field Services with Phillips Petroleum’s Gas Processing and Marketing unit underscore this strategy. 4) We replicated our value chain strategy in key international markets. In Latin America we acquired 3,100 MW of generating capacity in four countries and established our trading and marketing business in Buenos Aires, Argentina. In Australia we began construction of the Eastern Gas Pipeline, announced three major gas supply contracts in New South Wales, and made substantial strides in integrating our natural gas and power generation assets with trading and marketing capabilities, connecting our skills and services to become the country’s first energy merchant. 5) We built a comprehensive, corporatewide risk management capability through which we systematically identify and manage risks associated with energy commodity prices, credit, interest rates and foreign currency exchange. We have expanded our intellectual capital in this area to create a significant strategic advantage going forward.

EARNINGS HIGHLIGHTS
Duke Energy’s energy merchant businesses are the engine for robust earnings growth. Our diversified energy businesses can further enhance earnings as strength in certain markets offsets periodic weakness in other markets or segments. For 1999, earnings before interest and taxes (EBIT), net of minority interests, from unregulated businesses accounted for $468 million, a 25 percent increase from 1998 unregulated earnings. Combining this with solid growth in our electric operations and pipeline activities, Duke Energy delivered earnings available to common shareholders of $1,487 million, or $4.08 per basic share, for 1999.

Duke Energy Field Services (DEFS) EBIT grew to $144 million in 1999, from $76 million in 1998 – a 90 percent increase. The $1.35 billion purchase of UPFuels catapulted DEFS to the number one U.S. producer of natural gas liquids (NGL) just as prices rebounded from historic lows. In 2000, we plan to combine our gathering and processing business with Phillips Petroleum’s field services unit to create the new Duke Energy Field Services, a company about three times the size of its nearest competitor.

Duke Energy North America (DENA) and Duke Energy International (DEI) completed the acquisition and development of assets totaling $2.3 billion in 1999, and contributed $181 million in EBIT, net of minority interests, for 1999, compared to $64 million for 1998. Across North America, DENA capitalized on market timing and its commercial expertise to develop and manage a growing portfolio of wholesale generation assets, becoming a leading supplier of wholesale energy. Duke Energy International acquired quality assets that span the Latin American continent. These assets provide us with geographic diversity and fuel optionality, and create the platform for an integrated energy business. Duke Energy International is marshaling our financial strength and brainpower to advance a sound, vigorous growth strategy and supply the rapidly growing demand for gas and electricity in these countries.

Duke Energy Merchants (DEM), which encompasses Duke Energy Trading and Marketing and other businesses, strengthened its position on several fronts. It continued to add more structured, longer-term transactions and solidified its position as a top-tier natural gas and power marketer in the U. S. DEM contributed EBIT of $70 million in 1999, net of minority interests, compared to $81 million for 1998.

Duke/Fluor Daniel emerged as a market leader in 1999. Rankings by Engineering News Record revealed the partnership to be the number one U. S. contractor for engineering, procurement and construction of fossil-fueled power generation. In 1999, this partnership was awarded contracts to construct 7,600 MW of power generation at 11 plants worldwide, and had a 40 percent market share of U.S. gas-fired generation construction.

We undertook significant restructuring and repositioning of two energy services businesses in 1999 at a cost of $73 million. Both DukeSolutions and Duke Engineering & Services required these steps to position them for success in 2000 and beyond.

Our natural gas transmission business achieved strong growth through market initiatives, improved efficiency and operational excellence. Duke Energy Gas Transmission’s total EBIT of $627 million in 1999, down from $702 million in 1998, reflected the loss of earnings due to the sale of the Midwest Pipelines earlier in the year. But the Northeast Pipelines delivered excellent earnings growth, contributing EBIT of $557 million for 1999, 17 percent above 1998 EBIT of $476 million. We also agreed to acquire East Tennessee Natural Gas Company, which brings strong growth potential and enhances market opportunities for the Texas Eastern Transmission system.

Duke Power’s performance reflected sales growth combined with excellent operations and customer focus. Our nuclear system operated at a 90 percent capacity factor and was recognized for achieving the lowest fuel costs of any U. S. nuclear operator. We continued our quarter- century track record for operating the most efficient fossil-fueled power generation system in the U.S. Duke Power delivered EBIT of $1,656 million, excluding an $800 million contingency reserve made for asbestos claims related to construction of Duke Power generating facilities in the 1960s and 1970s. Duke Power EBIT was $1,513 million for 1998. Duke Energy will deal with potential asbestos liabilities prudently and responsibly, now and in the future.

Crescent Resources’ growth in residential developed lot sales and its commercial real estate portfolio drove EBIT to $176 million for 1999, a 24 percent increase over 1998. DukeNet Communications continues to be on track for profitability in 2000 and represents an exciting growth opportunity for us as our world becomes more connected.

GOING FORWARD
We are committed to achieving growth in annual earnings per share of 8 to 10 percent. Our intent is to pay dividends at the current level and then consider increasing the payout when the dividend ratio reaches 50 percent. This policy, along with our strong balance sheet, enables us to continue generating the capital required by an aggressive growth strategy.

Expect your company to take bold steps as we continue to define and shape the energy industry. Look for a more dynamic approach to managing our portfolio of assets. Look for accelerated deal flow that results in new platforms, new energy businesses and growing value for shareholders. And look for us to help set the pace for electric industry restructuring in North Carolina and South Carolina.

THE NEXT GENERATION OF ENERGY
We chose these words in 1997 when we created Duke Energy and set for ourselves the goal of redefining energy capabilities and service for a new, interconnected world. Why? Because the expectations of customers in a global economy transcend all of the old benchmarks and boundaries.

The World Wide Web is redefining the world of the 21st century, and Duke Energy is using that technology to build an electronic pathway to the next generation of business. We are advancing a strong, focused initiative to exploit the profound power of technology and e-business in every aspect of our business, with the ultimate aim of connecting with our customers and business partners how and when they want. We are putting our brainpower to work, building on the strong technical and communications infrastructure of Duke Energy.

The interconnected global economy requires an entirely new model of service and efficiency in delivering energy and energy services. And we are moving beyond the linear concept of an energy value chain toward a web of energy infrastructure, commodity markets and value-added services that will define our industry in the 21st century.

We believe Duke Energy leads the way for a new generation of energy and energy services – from the capabilities of our team to the strategic business assets that make up our ever-changing enterprise. Duke Energy has the inherent strength to deliver the growth and shareholder value to which we’re committed. Our results for 1999 speak very clearly to those goals.

Three years ago, it was a vision; today, it is a reality. Duke Energy can quickly identify and seize the opportunities created by the unshackling of economies from energy regulation and market-stifling constraints. We can increase our business scope anywhere in the world, across the energy value chain. We have moved beyond yesterday’s utility model to create a business model that connects assets, markets and customers in new ways. We are creating a growing web of businesses and business connections while delivering greater-than-ever value to markets and customers.

This new world – this next generation – is ours to create and shape. Across Duke Energy there is a strong sense that we have the drive and the brainpower and the heart to make great things happen. I can only describe it as a kind of business adrenaline that is putting all of our businesses and our people at the top of their game. Read on, and share the excitement that is Duke Energy.

RICHARD B. PRIORY
February 11 2000

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