REPORT OF THE COMPENSATION COMMITTEE

The Committee’s Responsibilities
The Compensation Committee of the Board of Directors is composed entirely of nonemployee directors. The Compensation Committee is responsible for setting and administering policies which govern Duke Energy’s executive compensation programs. The purpose of this report is to summarize the compensation philosophy and policies that the Compensation Committee applied in making executive compensation decisions in 1999.

Compensation Philosophy
The Compensation Committee has approved compensation programs intended to:

• Attract and retain talented executive officers and key employees by providing total compensation competitive with that of other executives employed by companies of similar size, complexity and lines of business;

• Motivate executives and key employees to achieve strong financial and operational performance;

• Emphasize performance-based compensation, which balances rewards for short-term and long-term results;

• Reward individual performance;

• Link the interests of executives with shareholders by providing a significant portion of total pay in the form of stock incentives and requiring shareholdings;

• Encourage long-term commitment to Duke Energy.

Stock Ownership Guidelines

To underscore the importance of linking executive and shareholder interests, the Board of Directors has adopted stock ownership guidelines for executive officers and other members of senior management. As initially adopted, the target level of ownership of Duke Energy Common Stock (or Common Stock equivalents) was established as a multiple of base salary. In October 1999, the Compensation Committee amended the guidelines to establish the target level of ownership as a fixed number of shares. The target level under the amended guidelines for the Chairman of the Board, President and Chief Executive Officer is 50,000 shares. The target level for the remaining members of the Policy Committee, including Messrs. Padewer, Coley, Fowler and Osborne, is 14,000 shares. Each employee subject to the guidelines is expected to achieve the ownership target by January 1, 2002, or within five years from the date on which the employee became subject to the guidelines, whichever is later. Common Stock beneficially held for an executive’s Duke Energy Retirement Savings Plan account, Common Stock equivalents earned through non-qualified deferred compensation programs and any other beneficially owned Common Stock are included in determining compliance with the guidelines. Shares that executives have the right to acquire through the exercise of stock options are not included in the calculation of stock ownership for guideline purposes.

Compensation Methodology
Each year the Compensation Committee reviews data from market surveys, proxy statements and independent consultants to assess Duke Energy’s competitive position with respect to the following three components of executive compensation:

• base salary;
• annual incentives; and
• long-term incentives.

The Compensation Committee also considers individual performance, level of responsibility, and skills and experience in making compensation decisions for each executive. In 1999, the Compensation Committee retained the consulting firm of Frederick W. Cook and Co. to conduct an overall review of Duke Energy’s existing and proposed executive compensation programs, in addition to a review of the compensation of the Chief Executive Officer.

Components of Compensation

• Base Salary: Base salaries for executives are determined based upon job responsibilities, level of experience, individual performance, comparisons to the salaries of executives in similar positions obtained from market surveys, and competitive data obtained from consultants and staff research. The goal for the base pay component is to compensate executives at a level which approximates the median salaries of individuals in comparable positions and markets. The Compensation Committee approves all salary increases for executive officers. Base pay increases were approved, effective March 1, 1999, for certain executive officers, including Messrs. Priory, Coley, Fowler and Osborne. Mr. Padewer’s base salary was set when his employment began in January 1999.

• Annual Incentives: Annual cash incentives are provided to executives to promote the achievement of performance objectives of Duke Energy and the executive’s particular business unit. In 1999, the Compensation Committee administered two annual incentive plans that permitted the granting of annual cash incentives. Policy Committee members, including the Named Executive Officers, earned incentive compensation under the Duke Energy Policy Committee Short-Term Incentive Plan, while executive officers not on the Policy Committee earned incentive compensation under the Duke Energy Short-Term Incentive Plan. Incentive opportunities for executives under both Plans are established as a percentage of base salary, using survey data for individuals in comparable positions and markets. Incentive amounts are intended to equal the median incentive amounts for individuals in comparable positions and markets when target performance is achieved. Incentive amounts may equal up to 150% of target when outstanding results are achieved.

  Awards under the Policy Committee Short-Term Incentive Plan were calculated based upon Duke Energy’s earnings per share (EPS) results. The Compensation Committee established minimum, target and maximum performance levels prior to the beginning of 1999, and participants could receive up to 150% of their short-term incentive targets. EPS performance for 1999 resulted in payments of 111% of bonus targets to the Policy Committee members, including the Named Executive Officers.

  Awards under the Duke Energy Short-Term Incentive Plan, in which executive officers other than members of the Policy Committee participated, were determined on the basis of a combination of: (1) EPS measures, (2) earnings before interest and income taxes (EBIT) measures and, in some instances, other measures unique to individual business groups, and (3) individual objectives. EPS measures, EBIT measures (and individual and business group measures, if applicable) and individual objectives determined 40%, 30% and 30%, respectively, of each executive officer’s bonus.

  Annual incentive compensation for the Named Executive Officers beginning in 2000 will be awarded under the terms of the Duke Energy 2000 Policy Committee Short-Term Incentive Plan, subject to shareholder approval of the Plan at the annual meeting. Please refer to the benefits table included in Proposal 3.

• Long-Term Incentive Compensation: The Compensation Committee has structured long-term incentive compensation to provide for an appropriate balance between rewarding performance and encouraging employee retention. Long-term incentives are granted primarily in the form of stock options. The purpose of stock options is to align compensation directly with increases in shareholder value. The number of options granted is determined by reviewing survey data to determine the annualized value of long-term incentive compensation made to other executives and management employees in comparable positions and markets (target value) and then dividing the target value by an expected present value of the option, as determined by using the Black-Scholes option pricing model. In determining the number of options to be awarded, the Compensation Committee, or, in some cases, its designee, also considers the grant recipient’s qualitative and quantitative performance, the size of stock option awards in the past, and expectations of the grant recipient’s future performance.

  In late 1999, as a component of year 2000 compensation, the Compensation Committee approved an award of non-qualified stock options (as described under "Option Grants in 1999" below) to members of the Policy Committee except Mr. Priory. In early 1999 and, as a component of year 2000 compensation, again in late 1999, the Compensation Committee approved the award of nonqualified stock options to executive officers who were not members of the Policy Committee. All 1999 stock option awards were granted under the Duke Energy 1998 Long-Term Incentive Plan.

  In providing long-term incentive compensation, Duke Energy also seeks to ensure the retention of key executives. Towards this objective, the Compensation Committee approved in August 1999 the award of performance shares (as described under "Long-Term Incentive Plan Awards in 1999" below) to certain executives under the Duke Energy 1998 Long-Term Incentive Plan, including awards to Messrs. Priory, Coley, Fowler and Osborne. These awards have an accelerated vesting feature which allows one third of the performance shares to vest upon achievement of each of three predetermined target increases in total shareholder return. However, to encourage the recipients to remain employed with Duke Energy, these awards cannot vest prior to August 2002 by reason of such accelerated vesting. If vesting does not occur earlier, the awards, with the exception of a 75,000 performance share award to Mr. Priory, will vest in August 2006. Performance shares will be forfeited upon termination of the executive’s employment to the extent not then vested.

Compliance with Section 162(m) of the Internal Revenue Code
Under Section 162(m) of the Internal Revenue Code, Duke Energy may not deduct annual compensation in excess of $1 million paid to certain employees, generally its Chief Executive Officer and its four other most highly compensated executive officers, unless that compensation qualifies as performance-based compensation. While the Compensation Committee intends to structure performance-related awards in a way that will preserve the maximum deductibility of compensation awards, the Compensation Committee may from time to time approve awards which would vest upon the passage of time or other compensation which would not result in qualification of those awards as performance-based compensation. It is not anticipated that compensation realized by any executive officer under Duke Energy plans and programs now in effect will result in a material loss of tax deductions.

Please refer to the discussion in Proposal 3 for information on the deductibility of certain compensation payable under the Duke Energy 2000 Policy Committee Short-Term Incentive Plan.

Compensation of the Chief Executive Officer
The Compensation Committee reviews annually the compensation of the Chief Executive Officer and recommends any adjustments to the Board of Directors for approval. The Chief Executive Officer participates in the same programs and receives compensation based upon the same criteria as Duke Energy’s other executive officers. However, the Chief Executive Officer’s compensation reflects the greater policy- and decision-making authority that the Chief Executive Officer holds and the higher level of responsibility he has with respect to the strategic direction of Duke Energy and its financial and operating results. For 1999, the components of Mr. Priory’s compensation were:

• Base Salary: After considering Duke Energy’s overall performance and competitive practices, the Compensation Committee recommended, and the Board of Directors approved, an 11% increase in Mr. Priory’s base salary, to $900,000, effective March 1, 1999.

• Annual Incentives: Annual incentive compensation for Mr. Priory is based solely upon EPS results. Based on 1999 EPS performance, Mr. Priory received a payment of $997,140, representing 111% of his target incentive opportunity.

• Long-Term Incentives: In August 1999, Mr. Priory received two performance share awards granted under the Duke Energy 1998 Long-Term Incentive Plan. One award, for 75,000 performance shares, permits one third of the performance shares to vest upon the achievement of each of three predetermined target increases in total shareholder return, but not prior to August 19, 2002, on this basis. Mr. Priory will forfeit any unvested portion of the award on August 19, 2006. A second award, for 50,000 performance shares, has the same accelerated vesting features. The second award will vest on August 19, 2006, to the extent not then vested or forfeited.

In July 1999, the Compensation Committee elected to schedule its annual review of Chief Executive Officer performance and compensation for February of each year, to assure thorough consideration of year-end results. Actions taken by the Board of Directors in February 2000 with respect to Mr. Priory’s 2000 compensation will be reflected in the proxy statement for the 2001 annual meeting, and will include, among other things, an award to Mr. Priory of non-qualified stock options with respect to 200,000 shares.

It is the Compensation Committee’s intention that, when taken together, the components of Mr. Priory’s pay, including base salary, annual incentives, short-term incentive opportunity and long-term incentives, will result in compensation which approximates the 50th percentile of the market when incentive plan performance expectations are met and in compensation as high as the 75th percentile of the market when incentive plan performance expectations are exceeded.

This report has been provided by the Compensation Committee.

Leo E. Linbeck, Jr., Chairman
William T. Esrey
George Dean Johnson, Jr.
Max Lennon
James G. Martin

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