INTRODUCTION

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Management’s Discussion and Analysis should be read in connection with the Consolidated Financial Statements.

Business Segments.    Duke Energy Corporation (collectively with its subsidiaries, Duke Energy), an integrated provider of energy and energy services, offers physical delivery and management of both electricity and natural gas throughout the U.S. and abroad. Duke Energy provides these and other services through the seven business segments described below.

Franchised Electric generates, transmits, distributes and sells electricity in central and western North Carolina and western South Carolina. It conducts operations primarily through Duke Power and Nantahala Power and Light. These electric operations are subject to the rules and regulations of the Federal Energy Regulatory Commission (FERC), the North Carolina Utilities Commission (NCUC) and the Public Service Commission of South Carolina (PSCSC).

Natural Gas Transmission provides transportation and storage of natural gas for customers throughout the East Coast and Southern U.S., and in Canada. Natural Gas Transmission also provides distribution service to retail customers in Ontario and Western Canada and gas gathering and processing services to customers in Western Canada. Natural Gas Transmission does business primarily through Duke Energy Gas Transmission Corporation. Duke Energy acquired Westcoast Energy Inc. (Westcoast) on March 14, 2002 (see Note 2 to the Consolidated Financial Statements). Duke Energy Gas Transmission’s natural gas transmission and storage operations in the U.S. are subject to the FERC’s and the Texas Railroad Commission’s rules and regulations, while natural gas gathering, processing, transmission, distribution and storage operations in Canada are subject to the rules and regulations of the National Energy Board, the Ontario Energy Board and the British Columbia Utilities Commission.

Field Services gathers, compresses, treats, processes, transports, trades and markets, and stores natural gas; and produces, transports, trades and markets, and stores natural gas liquids (NGLs). It conducts operations primarily through Duke Energy Field Services, LLC (DEFS), which is approximately 30% owned by ConocoPhillips and approximately 70% owned by Duke Energy. Field Services gathers natural gas from production wellheads in Western Canada and 11 contiguous states in the U.S. Those systems serve major natural gas-producing regions in the Western Canadian Sedimentary Basin, Rocky Mountain, Permian Basin, Mid-Continent and East Texas-Austin Chalk-North Louisiana areas, as well as onshore and offshore Gulf Coast areas.

Duke Energy North America (DENA) develops, operates and manages merchant power generation facilities and engages in commodity sales and services related to natural gas and electric power. DENA conducts business throughout the U.S. and Canada through Duke Energy North America, LLC and Duke Energy Trading and Marketing, LLC (DETM). DETM is approximately 40% owned by ExxonMobil Corporation and approximately 60% owned by Duke Energy. Prior to April 1, 2002, the DENA business segment was combined with Duke Energy Merchants Holdings, LLC (DEM) to form a segment called North American Wholesale Energy. In 2002, management combined DEM with the Other Energy Services segment. Previous periods have been reclassified to conform to the current presentation.

International Energy develops, operates and manages natural gas transportation and power generation facilities, and engages in sales and marketing of natural gas and electric power outside the U.S. and Canada. It conducts operations primarily through Duke Energy International, LLC and its activities target power generation in Latin America, power generation and natural gas transmission in Asia-Pacific and natural gas marketing in Northwest Europe.

Other Energy Services is composed of diverse energy businesses, operating primarily through DEM, Duke/Fluor Daniel (D/FD) and Energy Delivery Services (EDS). DEM engages in commodity buying and selling, and risk management and financial services in non-regulated energy commodity markets other than physical natural gas and power (such as petroleum products). D/FD provides comprehensive engineering, procurement, construction, commissioning and operating plant services for fossil-fueled electric power generating facilities worldwide. D/FD is a 50/50 partnership between Duke Energy and Fluor Enterprises, Inc., a wholly owned subsidiary of Fluor Corporation. EDS is an engineering, construction, maintenance and technical services firm specializing in electric transmission and distribution lines and substation projects. It was formed in the second quarter of 2002 from the transmission and distribution services component of Duke Engineering & Services, Inc. (DE&S). This component was excluded from the sale of DE&S to Framatome ANP, Inc. on May 1, 2002. Other Energy Services also retained other portions of DE&S that were not part of the sale, as well as a portion of DukeSolutions, Inc. (DukeSolutions) that was not sold on May 1, 2002 to Ameresco, Inc. DE&S and DukeSolutions were included in Other Energy Services through the date of their sales. (See Note 2 to the Consolidated Financial Statements for additional information on the sales of DE&S and DukeSolutions.)

Duke Ventures is composed of other diverse businesses, operating primarily through Crescent Resources, LLC (Crescent), DukeNet Communications, LLC (DukeNet) and Duke Capital Partners, LLC (DCP). Crescent develops high-quality commercial, residential and multi-family real estate projects, and manages land holdings primarily in the Southeastern and Southwestern U.S. DukeNet develops and manages fiber optic communications systems for wireless, local and long distance communications companies; and selected educational, governmental, financial and health care entities. DCP, a wholly owned merchant finance company, provides debt and equity capital and financial advisory services primarily to the energy industry. In March 2003, Duke Energy announced that it will exit the merchant finance business at DCP in an orderly manner.

Business Strategy.    Duke Energy’s business strategy is to develop integrated energy businesses in targeted regions where Duke Energy’s capabilities in developing energy assets; operating power plants, NGL plants and natural gas pipelines; optimizing commercial operations; and managing risk can provide comprehensive energy solutions for customers and create value for shareholders.

The energy industry and Duke Energy are experiencing a number of challenges, including the substantial imbalance between supply and demand for electricity, the pace of economic recovery, and regulatory and legal uncertainties. In response to these current challenges, Duke Energy is focusing on reducing risks and restructuring its business to be well positioned as the energy marketplace regains its health and vigor. Duke Energy’s current goals include: positive net cash generation, investing in its strongest business sectors, sizing its businesses to market realities, addressing merchant energy issues, strengthening relationships with customers, and reducing regulatory and legal uncertainty. Duke Energy’s business model provides diversification between stable, less cyclical businesses like Franchised Electric, Natural Gas Transmission and Duke Ventures and the traditionally higher-growth and more cyclical energy merchant businesses like DENA, International Energy and Field Services.

Franchised Electric continues to increase its customer base, maintain low costs and deliver high-quality customer service in the Piedmont Carolinas. Expansion will primarily result from continued growth in the residential and general service sectors, partially offset by a continuing decline in the textile industry. While Franchised Electric’s revenues are expected to grow, earnings are expected to remain consistent with 2002, as this expected revenue growth and reduced operating expenses offset the increased amortization expense associated with the North Carolina Clean Air legislation. (See Note 16 to the Consolidated Financial Statements for additional information.)

Natural Gas Transmission plans to continue earnings growth by developing expanded services and incremental projects that meet increasing customer needs. Pipeline growth will be driven by customer expansions in the current market area. Growth will also come from additions to the distribution customer base at Union Gas Limited (Union Gas), a wholly owned subsidiary of Duke Energy and Westcoast, and through expansion of natural gas storage. Earnings for 2003 will benefit from inclusion of a full year of Westcoast earnings and the continued emphasis on operational efficiency.

Field Services has developed significant size and scope in natural gas gathering and processing and NGL marketing and plans to focus on organic growth.

DENA has invested in energy assets in U.S. and Canadian markets, and provides energy supply, structured origination, risk management and commercial optimization services to large energy customers, energy aggregators and other wholesale companies. Generation oversupply, low spark spreads and volatility, as well as the lack of an economic recovery will delay good returns for the merchant energy business in the near term. In response to market conditions, DENA will continue to seek opportunities to reduce the company’s exposure to merchant energy, and may divest certain assets, in whole or in part, when value can be realized. DENA continues to view the energy sales and marketing business as a vital component of a healthy wholesale energy marketplace, and its energy sales and marketing activity will be focused primarily on its asset positions.

International Energy’s current strategy is focused on maximizing the returns and cash flow from its current portfolio of energy businesses by creating organic growth through its sales and marketing efforts in all regions, optimizing the output and efficiency of its various facilities, controlling and reducing costs and divesting selected assets.

Other Energy Services will continue to provide customers with a variety of engineering, operating, procurement and construction services in areas related to energy assets.

Duke Ventures plans moderate growth, primarily through its real estate business by developing regional opportunities and by applying extensive experience to new project development.

Duke Energy’s business strategy and growth expectations may vary significantly depending on many factors, including, but not limited to, the pace and direction of industry restructuring, regulatory constraints, acquisition and divestiture opportunities, market volatility and economic trends. However, Duke Energy’s growth expectations do not rely on progress in deregulation in North Carolina and South Carolina.