Executive Summary

Duke Energy (DUK) is one of the nation’s largest electric power company serving more than 4 million U.S.

customers with 35,000 GW of generating capacity in the Midwest and Carolinas. i By 2008 revenue, they are the

10th largest investor owned utility.ii DUK was originally formed in 1917 as Wateree Electric Company, later

changing its name to Duke Power Company in 1924iii. Through CEO Jim Roger’s recent leadership has become

known for leading changes on the greenhouse gas reduction front, even though, DUK is the U.S.’s 3rd largest

producer of CO2 and 12th largest in the world.iv DUK operates a broad differentiator, where they operate to

improve their differentiation [through I and C in EQIC] and cost structure [E in EQIC], simultaneously. A thorough

analysis of the electric industry and Duke’s place within the industry is detailed in a later section.

Mission

As stated on the DUK website, the mission is to “make people’s lives better by providing gas and electric

services in a sustainable way. This constantly requires us to look for ways to improve and to reduce our impact on

the environment.v”

Objectives

Stated and/or implied objectives include (profit) achieving long-term profitability of 4-6% adjusted diluted

earnings per sharevi, (growth) expand their commercial business through wind development moving from a top 10

to top 5 as U.S. largest wind operators, (citizenship) to continue taking the utility lead in climate change, while

remaining good corporate steward, and finally (survival) to avoid bankruptcy as it looks to expand and modernize

its generation feel with capital expenditures between 2010 and 2012 of $14 billion to $15 billion.vii

Stated and/or implied strategies have included DUK completed it horizontal merger with Cinergy in April

2006.viii An additional strategy used was concentric diversification in May 2007 when DUK purchased the Austin,

Texas based Tierra Energy, a wind developer from Boston’s Energy Investor’s Funds.ix This leveraged their

commercial, overall utility industry expertise and operations in the value chain. In January 2007, DUK retrenched

by spinning off Spectra Energy, a mid-stream gas operations to allow it focus on its electric operations.x

Industry and How It Operates

While the physics of electric generation has not changed, the technological advances over the past 100

years have changed the environment. xi Currently, electric cannot be stored so much like a service industry, it

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must be generated and delivered to match customer demand. Each utilities is required to maintain a reserve

margin, similar to a safety stock in manufacturing against maintenance, planned and unplanned equipment

outages and variations in usages which can occur from changing weather, economics, etc.xii

From a value chain perspective, see attachment 1 providing an overview of the electric utility industry.

First the electric generation requires a fuel source, which could vary between coal, nuclear, natural gas, wind

energy. The fuel is changed into electricity that is sent over power lines, where electricity is lowered in voltage in

the distribution network where it is delivered to the final consumer.

The electric industry is a huge and mature industry but still fragmented as there are 3,273 traditional

utilities.xiii A map of larger electric utilities taken prior to DUK’s merger with Cinergy in April 2006 is found at

attachment 2. Historically, regulated utilities have operated as a natural monopoly. A natural monopoly created

economies of scale, more efficient service and lower prices.xiv Because the federal government considered supply

of electricity a necessity, it has long supervised the industry extremely closely from state regulators.xv

The Public Holding Act of 1935 [PUCHA] created barriers to entry preventing outsiders from constructing

and operating electric generating facilities.

xviii

xvi The utilities agreed to provide integrated electric services to retail

customers in trade for the exclusive right to operate with a given state.xvii The state regulators play a big role in

determining a utilities return, since a rate change normally requires a rate cases. The regulators have to walk a

fine line between balancing investors and customer’s best interest.xix

While there many types of electric utilities including cooperatives, municipals, state and federal utilities,

investor owned utilities like DUK make up 75% of the industries revenue and volume.xx While there had been a

movement toward competition starting in the early 1990’s, but it reversed course following un-regulated trading

issues with companies like Enron in the early 2000s. As of 2008, 14 states including Ohio, where DUK operates,

allows the customers to select alternative power suppliers.xxi

Following the repeal of PUCHA in December 2005, it was anticipated that a wave of consolidation would

take place

xxiii

xxii. However, this consolidation never materialized as two major mergers [Florida Power and Light-

Constellation and Exelon – Public Service Enterprise Group] in 2006 were terminated in trying to obtain approval

from the state regulators.

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Given its maturity with limited growth within the U.S., companies invest in wholesale energy marketing,

trading and international operations.xxiv These can add major risks [e.g. liquidity, political risks, and foreign

currency translation] to the companies over their regulated operations, increasing risk of losses and bankruptcy.xxv

Action Items

This strategy application paper will address what DUK should do to achieve their growth and profit

targets, while being a climate change leader and modernizing / de-risking its current fleet from a CO2 perspective.

And, as indicated in this strategy application, our conclusion is that DUK should continue to pursue a competitive

strategy as a broad differentiator which will allow them to remain competitive in a mature industry and allow them

to adjust should competition open up further nationally. DUK should pursue more forward integration by creating

additional joint ventures in transmission which would help to increase the wholesale energy prices and allow for

development of wind projects, which will create growth opportunities as an operator. DUK should also divest of

their Crescent Resource LLC, joint venture with Morgan Stanley since it is not DUK’s core business and DUK does

not really add value much to the business.

Financial Audit

Liquidity and Capital Structure: DUK’s overall liquidity position is stronger than the industry average

leaving room for pursue strategic opportunities and ability to weather the economic recovery, but also pointing to

a risk aversion from upper management. Even while sales have remained flat between 2007 and 2009, the net

profits have continued increasing given their cost savings initiatives (Sales: 12,731-2009, 13,207-2008, 12,720-

2007; Net Profit: 1,824-2009, 1,773-2008, 1,794-2007). It is important to note that regulated utilities often have

certain pass-through expenses (e.g. –fuel mechanisms), so rising revenues are not always indicative of improved

net profit. DUK has operated with positive net working capital, while its industry usually runs at a net working

liability (1,678-2009, 892-2008; -211-I).

Total liabilities to equity provide while increasing from 1.34 in 2007 to 1.62 in 2009 still remains well

below the 2.73 industry average. DUK is also below industry averages in total liabilities to assets (0.62-DUK; 0.73-

I). DUK has less current to total debt than the industry average (0.12-DUK, 0.15-I). All three of these ratios both

indicate management’s risk aversion.

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Performance: Another positive part in the Company's results is that the company has managed to reduce

cost of goods sold through improved fossil and nuclear plant availability (60.93%-200i9, 63.38%-2008), moving just

below the industry average (64.8). This reduction results in a 6.7% improvement in the gross profit margin

(39.07%-2009, 36.62%-2008). Improvements in gross margins create even better improvements in net margins.

The company’s return on fixed assets has declined as assets have increased, possibly the result of a

regulatory lag coming adding assets but waiting for their returns in rate cases (Return on Assets: 3.20%-2009,

3.34%-2008, 3.61%-2007; Total Assets 57,040-2009, 53,077-2008, 49,704-2007); the ratio even while declining

remains higher than the industry average at 3.2%. In the near-term, the DUK plans to offer voluntary severance

packages to some of its employees and consolidate corporate office functions to remain cost effective.xxvi DUK’s

higher than industry ROE comes from operating in favorable constructive regulatory environments [attachment 3]

and being able to squeeze costs following rate cases, where the company benefits and delaying future rate cases

(ROE: 8.39%-2009, 8.45%-2008, 8.46%-2007; 6.0% -I).

Activity (including control): The Company while not turning over fixed assets or total assets near the

industry average because DUK sales are not high for their given amount of assets (Fixed Assets Turnover 0.34-

2009, 0.91-I; Fixed Asset Turnover 0.22-2009, 0.40-I). They seem to make up for it with their higher NP as % of

sales [22.2%-2009; 3.9%-I). Over time, it may be necessary to using assets to increase turnover and revenue rather

than focusing on cost initiatives like voluntary severance to maintain current returns. Inventory turnover is 5.12x

compared to an industry average of 22.9x. Part of the increase relates to an increase in coal inventory at the end

of 2009, but part may because coal plants use different grades of coal depending on the amount it is scrubbed and

the risk adverse management fearful of stock outs.

Limits (including resource availability from external sources and improved operations): While increasing

debt is based upon equity is possible, it is overly optimistic to assume they would be able to increase debt $23.98

billion, especially given the current credit market just starting to open up. It seems more reasonable that based

on the amount of total assets to be able to increase their debt by $6.437 billion. And, currently the company is

more efficient than the industry in collecting on accounts, so there is no room for improvement here. There is

room for improvement in inventory turnover as it only turns over every 71 days against an industry average of

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every 22 days. It is overly optimistic to assume moving to the industry average, but it would seem logical that it

could show some marginal improvement.

Competitive Advantage

Efficiency: DUK has strong management and operating capabilities. DUK’s heat rates that are

consistently best in industry and when coupled with higher availability have lowered DUK’s operating costs

[attachment 4 and 5]. A heat rate is how efficiently the generator converts the fuel to electricity.xxvii

xxviii

The strong

operating capabilities are driven by a strong maintenance program, where the DUK’s management views

generating assets as long-term assets. During 2009, it was their 10th consecutive year exceeding a 90% nuclear

capacity factor.xxix

Management has a strong eye on cost containment as displayed by their exceeding their $150 million

target for O&M reductions in 2009.

xxxii

xxx This has allowed DUK to keep their operating and maintenance expense flat

for three years, absorbing inflation during the period.xxxi During 2010, DUK plans voluntary severance packages

and office consolidations to increase efficiencies. Even the cost reductions, management’s safety has trended

better because of its safety culture and as a result, it helps minimize financial impacts caused from employee and

contractor accidents and fatalities.

The utilities are operated in favorable regulatory states [attachment 3]. The two main service territories

in the Midwest and Carolinas are contiguous allowing for greater economies of scale of maintaining and serving.

Since Ohio has competition creating a quasi national [state] competitive environment, it forces DUK to constantly

improve and not become compliant from a cost perspective since switching costs are low for customers. DUK is

expanding new generation to their fleet, while the cost of capital is low.xxxiii

Quality: DUK has high quality transmission and distribution assets that result in higher service availability,

given its commitment to proactively prevent outages before they occur.xxxiv

xxxvi

Average service availability has to be

one of the most important components of power quality. Although the Southeast has the 2nd highest incidents of

lighting in the country and occasional severe weather like hurricanes, DUK averages 99.97%, well above other

utility companies because of its effective operations and high quality assets,.xxxv The other component of quality is

the number of outages experienced. DUK’s average interruption frequency ranks high amongst competitors in

low outage occurrence at 1.04.

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Innovation: First, Management like CEO Jim Rogers is forward thinkers. By being a leader in greenhouse

reduction, it gives DUK a seat at the table for shaping policies. Their ways of thinking about energy efficiency as a

5th fuel [along with coal, nuclear, natural gas and renewable energy] creates a 1st mover advantage, which could

be critical, should the industry continue shifting toward increased competition.

DUK’s pushing for smart grid will create two way communications with customers creating differentiation

and enhancing customer value. It will improve DUK’s outage detection, so customer would not need to call when

power is lost, increase service restoration following a storm, and allow for deployment of self-healing circuit. A

self-healing circuit would minimize the outage footprint by automatically switch devices on the distribution system

to restore power to as many customers as possible and isolate the trouble portion of the line. xxxvii

xxxviii

It would also

help to decrease the cost of meter reading and the costs associate with having to send personnel to the field to

connect and disconnect. Plus, it will enable customers to better optimize their energy usage and lower their

carbon footprint. Management will be able to offset its cost through a $200 million federal stimulus award, so

making it lower cost for its customers.

Management has a strong understanding of value creation. They realize their energy efficiency and

smart meter grid initiatives will push the kilowatt hours down on existing meters. DUK is already working with

their five state regulators to address ways they can grow their revenues and shift the paradigm.xxxix For example,

DUK’s Management plans on pushing for addressing the regulatory lag between cost /capital spending and

recovery as their rate base will be increasing by $8 billion through 2014.xl This will help to increase DUK’s cash

flow and earnings. Rate mechanism could also help to reduce the lag and looking at forward test years rather

than historical would help to offset the regulatory lag.

Management has been an early mover on integrated gasification combined cycle [IGCC]. This turns coal

into gas before being combusted, which helps to lower emissions of sulfur dioxide, particulate and mercury.xli This

could be a technological game changer because of the overall availability of coal particularly in the Midwest and it

provides a platform for capturing carbon dioxide.

Customer Responsiveness: Customer responsiveness serves as way of keeping states from shifting to

competition, if customer service remains high. Customer responsiveness is crucially important in states like Ohio

where competition allows customers to change suppliers given the low switching costs. The smart meter grid as

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discussed will give the customer more power over their energy usage, carbon footprint. When a storm strikes, it

will not be necessary to call the utility to let them know. Since DUK knows faster, it will increase storm restoration

times, minimize the impact on customers and leave them feeling more satisfied. Being able to cut off meters over

the phone, will make power on and off not require the use of crew, which can a times be a constraint.

DUK has strengths with its economic development department. It was named by Site Selection magazine

as one of its top 10 for the 11th straight year after helping to bring 12,000 new jobs and $3 billion in investment

over their five state service territory.

xliii

xlii Site Selection stated that what made their team differentiated was its

“power web resources [www.locationdukeenergy.com]” and their three person team of internal site consultants

that focused on various industries. Having internal consultants, allows Duke to control their quality than if it

were outsourced.

Another way of being responsible to its customers is leveraging it I/T competencies, where it provides

outage maps online to all 5 states in its service territory.xliv From a social media perspective, DUK also allows

customers to sign up for twitter updates on storms.xlv

Porter’s 5 Forces

Threat of New Entrants: Low – Even with PUCHA repealed in December 2005, state regulators in 36 states

like North Carolina, South Carolina, Indiana and Kentucky control if competitors can enter. As discussed, the

utilities exchange their provider of last resort for agreeing to be sanctioned by the state regulators The utilities

operating as utilities can less the chance of competition entering by maintain a high level of service regardless of

its lack of competition. In the other 14 states including Ohio, utilities require significant capital to build

economies of scale to spread the high fixed property plant and equipment costs. Any second mover would be

fighting with existing companies with larger market share. New companies would lack the established name,

making it expensive from a marketing perspective to capture market share.

Power of Suppliers: Medium – because as coal fleet requires specific sulfur content depending on the

portion of plants scrubbed. While most gas and coal contracts are done with long-term contracts with little spot

contracts. The nuclear is much higher as technical complexities [switching costs] of changing fuel fabrications is

sourced through a single supplier. Plus, DUK like other utilities does not possess many generating facilities outside

of natural gas /fuel oil plants that can change fuel types like a flexible manufacturer. Plus, the operating and

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maintenance work force representing 25% of the total work force is represented by unions, so there is always the

threat of a strike. xlvi

Power of Buyers: Low as residential customers is a relatively small portion each collectively. Four of the

five states are regulated so little choice/alternative for consumers. The buyers’ true power comes through their

interaction with the regulators at the state commission and power in numbers if united as a single voice. If there

were enough consistent complaints, the regulators might consider creating rules making the utility’s life more

difficult and creating more burecratic costs. For example, if customers have trouble getting through the call

center, the regulators could institute a mandatory service level that may raises its operating costs. The industrial

and commercial customers have medium power because the revenue and volume side is more significant. While

a utility could sell the excess capacity, it may be constrained by the overall economic situation and availability of

transmission to move the power.

Rivalry among Established Companies: Depends on if regulated or non-regulated/competitive

environment – Low in four regulated states [North Carolina, South Carolina, Indiana and Kentucky] where state

regulators can hold out competition. It would be high in Ohio where competition causes fierce rivalry. In Ohio,

DUK could use excess capacity to use as threat to new entrants driving down prices to a point where entry would

not be profitable. DUK could also manage the rivalry through non-price competition like the reliability of their

power. Larger utilities like DUK fill the gaps through product proliferation by targeting all aspects of the market –

residential, commercial, small commercial, municipals, governmental, street lights and industrial. In competitive

markets, existing competitors could cut prices to signal to price competitors that new entry will be met with price

cuts. DUK may even be able to price signal as long it did not appear the electric utilities were colluding.

Threat of Substitute Products: Low as no/few substitutes for power [e.g. wood stoves, producing own

renewable power] so switching costs are very high. At the present, producing your own renewable energy via a

wind turbine or solar panel is still relatively high on the cost curve making it less of a substitution threat until

technology brings the costs down.

The sixth force has been called the complementors. The gas industry would be theirs since most

customers would have both electric and gas and it could result in one bill and point of contact. There are primary

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and secondary value chain components that could be leveraged across electric and gas [e.g. supply chain,

operations, maintenance, billing collections, finance, customer service and tax].

SWOT Analysis Strengths • Management team forward thinkers [e.g. smart grid, renewable energy, energy efficiency, cap and trade,

different rate structures] and strong understanding of the value chain. • Strong operating and maintenance capabilities have led to high availability. Plants have some of the best heat

rates in the industry [attachment 5]. • Regulated operated in favorable regulatory environments [attachment 3]. • Strong economic development and consulting around businesses. • Strong management focus on cost-containments. • Even with cost-reductions, customer satisfaction levels remained significantly higher than the national

average.xlvii • For the 3rd year in a row, viewed as one of the world’s most ethical companies by Ethisphere Institute.xlviii Weaknesses • Freezing of non-operating personnel could lead to motivation issues and conflicts with unions, whom were non-

frozen. • Complexity of multiple businesses creates burecratic costs [see attachments 6 and 7]. • Limited domestic growth in industry creates propensity for more risky investments like in international, where

had to abandon Greek investment in Attiki, Greece in December 2009. xlix • Cost containment may eventually lead to long-term costs, if stripped too low [e.g. more storm repair costs from

cutting maintenance costs like tree trimming]. • Management may be slow to employ capital given their risk adverse tendencies. Opportunities • Balance sheet has room for levering expansion. • As a pioneer in greenhouse gas reduction, should have opportunity to influence national policies. • As leader in smart grid and climate change, technology may change business model creating greater

opportunities by unfreezing the traditional model shown under Porter’s 5 forces and create first mover advantages.

• As strong operator in fossil fuels and nuclear, could provide consulting services to other utilities. • Low cost nuclear fleet stands to benefit from carbon legislation. • U.S. still fragmented so bountiful merger and acquisition [M&A] opportunities. Threats • Economic recession may hinder state commission’s ability to justify legitimate rate increases or disallow prudent

fleet capital recovery. • Economic recession continues to weigh on industrial volumes. During 2009, experienced a 15% reduction. • Fuel costs are the largest and most variable operating expense and often the most uncontrollable as it is

influenced by your generation mix [e.g. coal, gas, nuclear, renewable] and availability of supply. • Disaggregation of vertically integrated utilities may result in more competitors in the wholesale power

generation segment. • Nuclear operation comes with great risks like the potential for just one nuclear incident to occur having a

material impact on their operations. • Large carbon footprint with 60% of generation coming from coal. Risk of pending carbon legislation.l • Single supplier in nuclear fuel fabrication creates concentration risk and represents nearly 39% of fuel

generation.li • Commercial international assets pose risk to other countries politics, laws, taxes, economic conditions and

foreign currency translation [e.g. December 2009 abandoned Greek investment].

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• National or regional deregulation places downward pressure on power prices which lowers wholesale margins. • Treasury yields are projected to increase so higher interest expense for fleet modernization program. • Sales may decrease without adequate, reliable, affordable access to transmission assets. • Even with bountiful M&A opportunities, regulators possess approval power and for multiple states can request

favored nation status. This may lead to more of the benefit to the consumer making mergers more apt to destroy shareholder value. Issues

DUK has several issues that to be addressed to achieve the 4-6% adjusted diluted earnings per share on

sustainable basis. The first issue that needs to address is figuring out how much cost containment can be done

before it starts creating negative consequences. For example, the cost containing initiative of freezing non-

operating personnel’s salaries, cutting discretionary travel, and not re-hiring after offering severance packages

could take a toll on employee motivation. At which point in the economic recovery should DUK shift to looking at

top line revenue and the opportunity costs of missing out on potential opportunities.

The second issue is that Duke Energy even while on the fore-front of reducing greenhouse gases, it is still

the third largest emitter of carbon in the U.S.lii The proposed legislation could potentially make it economically

unfeasible to run its coal plant crippling their generation capacity and force them to buy power to meets it

provider of last resort by purchasing power from others at a much higher costs. Generally, purchased power costs

are cost pass-through, while generating assets earn a return on the investment which increases profitability.

The third issue is in trying to mitigate their carbon risk and modernizing its fleet of generation, they need

to be very prudent with the capital spending. The economic recession pressures are making it difficult for

regulators to justify legitimate rate increase. For example, in January 2010 Florida Power and Light was only

awarded $75 million of $1.3 billion in requested rate increases in Florida.liii Without spending on capital projects, it

would be very difficult for DUK to achieve its profit objectives without turning to riskier investments.

The fourth issue is deregulation could place downward pressure on long-term power prices, which may

result in impairment charges, loss of retail customers like in Ohio, lower wholesale margins and an increased cost

of capital that increases their cost structure.

The fifth issue is domestic growth is limited, so growth many require turning to higher risk alternatives like

wholesale energy marketing, trading and international operations. As we have seen, international assets carry risk

given their having to walk away from their Greek assets in December 2009. These types of investments would

erode their credit risk, raise their cost of debt and weighted average cost of capital.

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The sixth issue is that without transmission capacity, DUK may not be able to move its power effectively

or be able to develop its wind projects that require transmission lines to move it to denser populations. It may

result in lower wholesale pricing, which lower net margins and profitability and limit their ability to develop wind

energy. The construction of lines can be very costly and requires having right of way access through other

companies’ service territories.

The seventh issue is that DUK’s broad ranging business segments create burecratic costs for reporting and

coordination. DUK has complexity from managing utilities in five states, non-regulated assets across the U.S.,

Central America, and South America and managing its joint venture real-estate land development and real estate

development company. Burecratic costs hurt their ability to be a broad differentiator by increasing their cost

structure.

Alternative Strategies

• Forward integration (Full Accept) – Create more transmission joint ventures to ensure adequate lines to more power effectively. [Note: viewing DUK primarily a power generators]

• Backward integration (Reject) – Purchase a barge company to transport coal. • Horizontal integration (Reject)-Purchase an adjacent utility company like E.ON U.S. • Diversification (Reject) – Leverage operating and maintenance capabilities to consult utilities and non-

regulated fleet operators in both coal and nuclear. • Retrenchment (Full Accept) – Sell the remaining Crescent Resources, LLC interest, which is a joint venture

land management and real estate development company with Morgan Stanley • Competitive Strategy (Full Accept) – Broad differentiator.

Evaluation and Recommendation

Forward integration (Full Accept) – DUK could practice forward integration by creating more joint

ventures to ensure more transmission lines. Since the Federal Energy Regulatory Commission {FERC] is offering

higher return on equity incentives, it would help DUK to increases its profit objective. It would help DUK to solve

the issue of transmission constraint, which would help to improve its wholesale energy prices on a long-term basis

and make it able to develop wind projects allowing it to grow into a more leading wind operator. As an extra

benefit, it also increases grid reliability for customers.

In August 2008, DUK started a joint venture with American Electric Power called Pioneer Transmission,

which began in August 2008. It could leverage the learning curve from this initial project, and use some existing

higher level management. It would use DUK strengths of managing transmission lines, which it already possesses.

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While it create another reporting entry, the burecratic costs would not be great since DUK could build on its

economies of scale. It would also provide DUK with greater buying power over its transmission pole and wire

suppliers. Since the transmission line would be a regulated asset, it would require gaining the buy-in of the FERC

and obtaining another competitor, whose service territory it ran through. This allows them to get access into

another market and share the costs and risks. The downside is you might risk giving away some of your

competitive advantage to your competitor and you lose some control over the project, which could impact its

quality. If DUK is worried about the loss of a particular advantage, they could hole it off from the rest of the

project.

From a production prospective, it would initially involve a lot of engineering design and potentially hiring

more staff and outsiders, if we did not have enough capacity and this would shift to the construction phase after

being approved. It is important to remember that building a large transmission project often takes 5 years, so it

would not prudent to overwork your employees by working them on both and risk burnout and turnover. If DUK

was able to use internal staff that normally were allocated to operations and maintenance expense, the time spent

could be capitalized and result in higher profitability. Given the 240 miles Pioneer project from Kokomo, Indiana

to Evansville, Indiana was only $1 billion in total for DUK and American Electric Power, DUK has plenty of leverage

on the balance sheet, which was estimated to be at least $6.4 billion.

Backward integration (Reject) – DUK similar to AEP could practice backward integration by purchasing a

barge company for transporting coal to theirs and other coal plants.liv This does not seem to fit with DUK strategy

of moving away from carbon based assets like fossil fuels since they have a potential huge exposure to carbon.

More of DUK’s generation has shifted from coal to nuclear.lv Integrating with barges would only make it even

harder to exit the coal industry since it is a complementary service to coal.

Horizontal integration (Reject)- Purchasing an adjacent utility like E.ON U.S. This would provide a means

for domestic growth and meeting the 4-6% growth in diluted earnings per share as it extracted operating synergies

from an adjacent service territory similar to the Cinergy transaction. Familiarity of the regulatory environment

would help Duke, but its purchase would like require some divestment of assets to clear the market power issues

in Kentucky with Duke already owning assets in Northern Kentucky. This would be rejected because E.ON U.S.

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produces 97% of its generation from coal, so it would only increase it already sizable carbon footprint and this is

not prudent given the potential threat of carbon legislation in the near-term.

Diversification (Reject) – DUK could practice diversification by leveraging their operation and

maintenance capabilities to consult other utilities and non-regulated fleet operators in coal and nuclear operation.

This would help the objective of achieving long-term growth of 4-6% in diluted earnings per share at least in the

near-term and solve the issues of limited domestic growth. Since it is more people and knowledge expertise than

assets, if it did not work out, you could always layoff these employees to minimize their risk.

The reason that it is rejected is sharing this competitive advantage allows your competitors to even the

playing field. It would improve their operations and if the markets were to move to increased competition, it could

be used against DUK. Creating a consulting arm would also add burecratic layers of reporting. Plus, revenue may

be higher in the beginning as companies are willing to move up the learning curve, but after the initial consulting,

utilities may be apt to rely on their in-house employees. This may result in a short-term revenue stream that is not

sustainable and may be detrimental in the long-run.

Retrenchment (Full Accept) – DUK could sell its Crescent Resources LLC joint venture stake with Morgan

Stanley. DUK would be able to redeploy its capital to meet long-term profit earnings objective and invest more in

wind development for growth objective. This would solve the issue of reducing their burecratic costs by lowering

their complexity and reporting structure. Management would require the involvement of human resources and

legal department given the potential people issues of separating the two entities. Management could use the

opportunity to highlight their strong electric focus, where their true value chain strengths are found. From a

marketing perspective, it would not really impact their 4 million electric customers, but certainly a strong

communication plan would need to be developed to communicate the rationale to internal and external parties.

This would not truly have any impact on the production because their true production is creation electricity, not

managing and developing real estate, which is really a separate industry. Because it is divesting, it would not

require funding, but it would be important for management to lay out the future plans for the re-deployment of

capital.

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Competitive Strategy (Full Accept) – DUK should continue its broad differentiation strategy. This helps

DUK to achieve it long-term growth objective of 4-6% earnings per share. This helps solves the issue of

recessionary pressures make it difficult for state regulators to justify rate increases by keeping the operating cost

component lower. By keeping the cost component low, it also gives Duke more of an opportunity to deploy some

of those offsets into capital expenditures by modernizing its generating fleet, which helps to de-risk the DUK partly

against the potential of carbon legislation. Having lower costs also would help to keep potential new entrants out,

if states began moving more toward competition. The second part of being a broad differentiator is also providing

differentiation or value at the same time.

Management should continue to pushing its costs containment, but should ensure that it is not negatively

impacting other quality factors like safety and system availability through monitoring of results. By DUK being a

leader in greenhouse gas reductions, it gives DUK a chance to influence the policy. Management should continue

pushing to be on the leading edge of energy efficiency, smart meter-smart grid, cap and trade and different pricing

structures. These will lead to first mover advantages like smart grid having quicker restoration times, which is a

non-price competition. These first mover advantages would be crucial should competition open up in their 4 out

of 5 states they operate [North Carolina, South Carolina, Indiana and Kentucky].

Marketing should evaluate the states they operate to determine those key differences that Duke provides

that their competitors does not, for example, lack of outage map reporting and mobile phone communication in

Kentucky. It can be used as soft justification for higher return on equity in rate cases that result in higher

profitability and also be used to capitalize on any market that would open up to competition.

Given the low cost of debt, production should be constructing already approved generating plants as

quickly and safely as possible. It provides them with a cost savings over competitors that lag and end up with

higher interest rates as treasury rates rise. Production should also continue looking at cutting edge technologies

like IGCC, which provide them with more fuel flexibility [differentiation], which allows them more flexibility in

meeting their demand at the lowest costs.

DUK should have plenty of financial capital to pursue this strategy considering they have at least $6.4

billion in capital available. It would be even more if they were able to monetize their joint-venture Crescent

Resources LLC.

14 | P a g e

Duke Energy Balance SheetSource: Mergent Online

12/31/2009 12/31/2008 12/31/2007 12/31/2006USD USD USD USD

Not Qualified Not Qualified Not Qualified Not QualifiedYes Yes Yes Yes

Millions Millions Millions Millions

Cash & Equivalents 1,542 986 678 948Short Term Investments - 51 437 1,514Cash & Equivs & ST Investments 1,542 1,037 1,115 2,462Receivables (ST) 1,741 1,653 1,767 2,256Inventories 1,515 1,135 1,012 1,358Assets Held for Sale (ST) - - 2 28Other Current Assets 968 1,448 1,029 836Total Current Assets 5,766 5,273 4,925 6,940Gross Property Plant & Equip 55,362 50,304 46,056 58,330Accumulated Depreciation 17,412 16,268 14,946 16,883Net Property Plant & Equip 37,950 34,036 31,110 41,447Receivables (LT) 130 134 153 224Assets Held for Sale (LT) - - 115 134Long Term Investments 2,201 1,909 2,625 4,080Intangible Assets 4,943 5,400 5,362 9,080Deferred LT Assets 3,517 3,748 2,461 4,243Other Assets 2,533 2,577 2,953 2,552Total Assets 57,040 53,077 49,704 68,700Accounts Payable & Accrued Exps 2,040 2,026 2,113 2,422Accounts Payable 1,390 1,477 1,585 1,686Accrued Expenses 650 549 528 736Current Debt 902 1,189 2,268 2,055Other Current Liabilities 1,146 1,130 1,327 2,136Total Current Liabilities 4,088 4,345 5,708 6,613LT Debt & Leases 16,113 13,250 9,498 18,118Deferred LT Liabilities 5,615 5,117 4,751 7,003Minority Interests 136 163 181 805Other Liabilities 9,338 9,214 8,367 10,059Total Liabilities 35,290 32,089 28,505 42,598Common Share Capital 1 1 1 1Additional Paid-In Capital 20,661 20,106 19,933 19,854Retained Earnings 1,460 1,607 1,398 5,652Accum Other Comprehensive Income -372 -726 -133 595Other Equity 0 0 0 0Total Equity 21,750 20,988 21,199 26,102Total Liabilities & Equity 57,040 53,077 49,704 68,700

Standardized Annual Balance SheetCurrencyAuditor StatusConsolidatedScale

15 | P a g e

Duke Energy Income Statement

Source: Mergent Online 12/31/2009 12/31/2008 12/31/2007 12/31/2006

USD USD USD USDNot Qualified Not Qualified Not Qualified Not Qualified

Yes Yes Yes YesMillions Millions Millions Millions

Sales Revenue 12,731 13,207 12,720 15,184Total Revenue 12,731 13,207 12,720 15,184Direct Costs 7,757 8,371 7,827 9,647Gross Profit 4,974 4,836 4,893 5,537Selling General & Admin 0 0 0 0Depreciation & Amortization 1,656 1,670 1,746 2,049Other Operating Expense 1,105 724 649 596Total Indirect Operating Costs 2,761 2,394 2,395 2,645Operating Income 2,213 2,442 2,498 2,892Interest Income -674 -611 -493 -1,063Gains on Sale of Assets 36 69 -5 291Foreign Exchange Gains 23 -20 14 8Other Non-Operating Income 581 729 324 369Total Non-Operating Income -34 167 -160 -395Earnings Before Tax 1,761 1,993 2 2,191Taxation 758 616 1 843Minority Interests 10 -4 0 61Equity Earnings 70 -102 0 732Discontinued Operations 12 16 0 -156Extraordinary Items 0 67 0 0Accounting Changes 0 0 0 0Net Income 1,075 1,362 2 1,863Preference Dividends & Similar 0 0 0 0Net Income to Common 1,085 1,362 2 1,863Average Shares Basic (Actual #) 1,293,000,000 1,265,000,000 1,260,000,000 1,170,000,000EPS Net Basic 0.83 1.08 1.19 1.59EPS Continuing Basic 0.82 1.01 1.21 1.73Average Shares Diluted (Actual #) 1,294,000,000 1,268,000,000 1,266,000,000 1,188,000,000EPS Net Diluted 0.83 1.07 1.18 1.57EPS Continuing Diluted 0.82 1.01 1.2 1.7Shares Outstanding (Actual #) 1,309,000,000 1,272,000,000 1,262,000,000 1,257,000,000

Standardized Annual Income StatementCurrencyAuditor StatusConsolidatedScale

16 | P a g e

Duke EnergyFinancial Audit Form

Y1 Y2 Y3 Y4Industry [Troys] 2009 2008 2007 2006

Millions Millions Millions Millions CommentsAssets Millions 18,881,476$ 57,040$ 53,077$ 49,704$ 68,700$ <-- shows that Duke is large and has economies of scaleSales Millions 7,704,922 12,731 13,207 12,720 15,184 <-- Revenue fell following 2006 after spin off of Spectra EnergyNet Profit Millions 300,492 2,833 3,341 3,217 2,030 <-- Net profit fell following 2006 after spin off of Spectra EnergyTotal Debt Millions 13,812,684 4,088 4,345 4,345 6,613 <-- Total debt fell following 2006 after spin off of Spectra EnergyStockholder Equity Millions 5,068,792 21,750 20,998 21,199 26,102 LIQUIDITYAbility to Meet Short Term Obligations More Liquid More Liquid Less Liquid More Liquid <-- less risk averse than competitors, leaves room for expansionCurrent Ratio CA/TCL 0.90 1.41 1.21 0.86 1.05

Net Working Capital CA-TCL (211,834) 1,678 892 (783) 327 Removes inventory liquidity More Liquid More Liquid More Liquid More Liquid

Quick Ratio (CA-INV)/TCL 0.50 1.04 0.94 0.69 0.84 <-- excluding inventory still risk averse compared to competitorsCAPITAL STRUCTURERisk & Cost of Capital ConclusionsTotal Liabilities/Equity (TCL+LTD)/SE 2.73 1.62 1.53 1.34 1.63 <-- less risk averse than competitors, leaves room for expansionTotal Liabilities/Assets (TCL+LTD)/TA 0.73 0.62 0.60 0.57 0.62 <-- less risk averse than competitors, leaves room for expansionCurrent Debt/Total Debt CD/TD [tcl/td] 0.15 0.12 0.14 0.20 0.16 <-- less risk averse than competitors, leaves room for expansionPERFORMANCELook at all ingredients

Gross Profit Margin GP/SALES 38.60% 39.07% 36.62% 38.47% 36.47%CGS % Sales COGS/SALES 61.40% 60.93% 63.38% 61.53% 63.53%NP % Sales NP/SALES 3.9% 22.25% 25.30% 25.29% 13.37% <-- earning a good profit, even with less sales for given assetsRR Assets % NP/TA 3.1% 4.97% 6.29% 6.47% 2.96%

RR Net Worth % NP/SE 6.0% 13.03% 15.91% 15.18% 7.78%Note: 2006 not comparable to other years because of spun off, midstream gas operations into new company Spectra Energy on January 3, 2007

<-- most competitors run at deficit, but the have net working capital, not net working liability

<--- recent high performance at fossil and nuclear moved their gross profit above the industry average

<-- consistently a higher return on equity - positive favorable regulatory environments

17

ACTIVITYDraw control conclusion Worse Worse Worse Worse

Inventory Turnover COGS/INV 22.9 5.12 7.38 7.73 7.10 Inventory Days O/S 365/INV TURN 16 days 71 days 49 days 47 days 51 daysDraw control conclusion Good Good Good Good

A/R Turnover SALES/AR 6.6 7.31 7.99 7.20 6.73 <-- could indicate positive credit collection policiesAR Collection (Days) 365/AR TURN 55 days 50 days 46 days 51 days 54 days

FA Turnover SALES/NFA 0.91 0.34 0.39 0.41 0.37

TA Turnover SALES/TA 0.40 0.22 0.25 0.26 0.22 LIMITSStock 23,980 <-- Not realistic given the tightening credit marketsDebt 6,437 <--- Seems more realistic given the tightened credit marketsImproved Operations 1,174 <--- Part of this may be realizable, but certainly not the total amount shown above for inventory improvement

Industry [Troys] 2009 2008 2007 2006Current Assets 10% 1,906,507 5,766 5,237 4,925 6,940 Accounts Receivable, net 9% 1,700,470 1,741 1,653 1,767 2,256 Inventory 1% 206,037 1,515 1,135 1,012 1,358 Net Fixed Assets 45% 8,435,375 37,950 34,036 31,110 41,447 Total Assets 100.000 18,881,476 57,040 53,077 49,704 68,700 Current Liabilities 15% 2,118,341 4,088 4,345 5,708 6,613 Long-Term Debt 53% 7,324,107 16,113 13,250 9,498 18,118 Total Liabilities (TD) 73% 13,812,684 35,290 32,089 28,505 42,598 Stockholder Equity 27% 5,068,792 21,750 20,998 21,199 26,102 Total Liabilities + SE 100.000 18,881,476 57,040 53,087 49,704 68,700 Sales 100 7,704,922 12,731 13,207 12,720 15,184 Cost of Goods Sold 61% 4,730,822 7,757 8,371 7,827 9,647 Sales & Admin Exp N/A N/A N/A N/A N/AGross Profit 100.0 2,974,100 4,974 4,836 4,893 5,537 Net Profit [after TAX] 300,492 1,824 1,773 1,794 2,030

Tax 36.67%

<-- used tax rate based on 4 year effective rate rate of Duke Energy [see numbers to the left] 43.04% 30.91% 34.25% 38.48%

<--- worse because fear of stock out for regulated utility; fits with conservative nature; very high increase in coal inventory at current year end

<--- Duke sales are not high when compared to the amount of fixed assets<--- Duke sales are not high when compared to the amount of fixed assets

Participants: [Numbers Provided from Mergent]

18

Limits CalculationsTotal Shareholders' Equity 21,750 20,998 21,199 26,102 SE * Industry D/E Ratio: 2.73 59,270 57,220 57,768 71,129 Subtract Total Liabilities 35,290 32,089 28,505 42,598 Amount debt can be increased based on Equity 23,980$ 25,131$ 29,263$ 28,531$ The $23,980 seems far fetched given the tight credit marketsTotal Assets 57,040 53,077 49,704 68,700 TA * Industry D/A Ratio: 0.73 41,727 38,828 36,361 50,257 Subtract Total Liabilities 35,290 32,089 28,505 42,598 Amount debt can be increased based on Assets 6,437$ 6,739$ 7,856$ 7,659$ The $6,437 seems like a realistic total given the condition of the tight credit marketsA/R Days less Industry A/R days 50 - 55 = 46 - 55 = 51 - 55 = 54 - 55 =

55 days (5) (9) (4) (1) Percentage of Company more (less) than industry -70% -117% -60% -11%Divided by Company A/R days -10.19% -20.39% -8.47% -1.42%A/R 1,741.0 1,653.0 1,767.0 2,256.0 Improved Operations Based on A/R Days (177.4)$ (337.1)$ (149.7)$ (32.0)$

Inv Days less Industry Inv days 71-16 = 49- 16 = 47- 16 = 51-16=16 days 55 33 31 35

Percentage of Company more (less) than industry 77% 67% 66% 69%Inventory 1515 1135 1012 1358Improved Operations Based on Inventory Days 1,173.6$ 764.4$ 667.5$ 932.0$

Debt Money 23,979.719 25,131.485 29,263.219 28,531.113

Based on Debt Based on Debt Based on Debt Based on Debt

Working Capital Increase (total of improved Ops) 1,173.6 764.4 667.5 932.0Part of this may be realizable, but certainly not the total amount shown above for inventory improvement

Part of this upside is realizable, but 77% appears to be too aggressive; must be other inherent reasons they lag the industry

Duke Energy collects faster than the industry, but could be more aggressive collection policy, but customers/regulators may not find it beneficial

19

Attachment 1 – Electric Value Chain

Source: http://www.wikiinvest.com/industry/Electric_Utilities Attachment 2 – Map of Larger Investor Owned, Municipal, and Governmental Electric Utilities

Note: Just Prior to Duke Energy’s completed merger with Cinergy in April 2006 Source: E.ON U.S. Corporate Development

PSD

PSD

AVAPAC

IDAPAC

PGPAC

PAC

PCG

EIX

SRE

IDA

IDA

AVA

PAC

IDA

SRP

SRP

NWECMDU

PAC

PAC

PAC

PAC

NWECMDU

BKH

PAC

UNS

PNWUNS

PNW

XEL

ILA

PNM

PNM PNM

TNPXEL

MDU

XEL OTTR

MDU

BKH

OTTR

XELNWEC

ILA

ILA

GPX

EDE

WR

EE TNP

AEP

AEP

AEP

TXU TXU

XELTNP

AEP

ETR

HOU

TNP

TNP

CNL

CNLETR ETR

ETRAEP

ETR

ETR

AEP

AEPOGE

AEP AEP

AEPOGE

EDE

ILA

GPX

ILA

AEE

AEE

AEE

ILA

ILA

AEE

LNT

LNT LNT

MECMEC

M ECM EC

OTTR

XEL

ALE

LNT

XEL

LNTWEC

WECLNTWPS

UPEN

MGEE

WECWPSWPS WEC

CMS DTE

AEP

AEEAEE

AEE

AEE

AEEAEE

AEE

EXC*

ETR

SO

SOSO

SO FPUPGN

TE

FPL

PGNDUK

SCG

D

PGNPGN DUK

AEP

CINAES

NI

VVCAEPE.ON

E.ONE.ON

AEP

DAEP

AYEAYE

AEPAEP

CIN

FEFEFE

DPLFE

FE

AYE

CEG

POM

P P LAYE

AYE

POM

PPLFE

FE

FEFE

FEFEPPLEXC*

UGI

AYE

AYE PEG*

N M KN M K

EAS

EAS

EASEAS

EAS

NGG

N G G

N G GN G G

CHG

ED KSE

CV

NU

UILNGGNST

NUNGG

NGGCV

NSTNU UTL

VECGM P

NGG

EAS

EMRAF

MAM

Austin Electric

ColoradoSprings Util.

Jacksonville Electric Authority

Los AngelesDept. of Waterand Power

Lower ColoradoRiver Authority

NPPDOPPD

Orlando Utilities CommissionSalt River Project

PNW

UNS

Santee Cooper

TVA

City Public Service Boardof San Antonio

CNP

CNP

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Attachment 3 – Duke Energy Business Model State Commission Profiles RRA Rating

Regulatory Ranking Out of 50 State Rankings

North Carolina Above Average / 2 T-1 [with 3 other states] Indiana Above Average / 3 T -5 [with 2 other states] Ohio Average / 1 T -8 [with 8 other states] South Carolina Average / 1 T -8 [with 8 other states]

Kentucky Average / 2 T-17 [with 15 other states]

Source: SNL Commission Profiles [paid subscription required] Conclusion: Geographically located in favorable regulatory environments http://www1.snl.com/interactivex/CommissionProfiles.aspx?Printable=1

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Attachment 4

22

Attachment 5

23

Attachment 6

Note: This does not even show their Commercial Assets and its complexity [see attachment 7 ]. Source: http://www.duke-energy.com/pdfs/01q09_org_chart.pdf

24

Attachment 7

Source: EEI International Utility Conference, March 15, 2010 http://www.duke-energy.com/pdfs/Slides_031510.pdf, Slide 13

25

Endnotes

i http://www.duke-energy.com/about-us/default.asp ii S&P Industry Survey – Electric Utilities - October 2009, Page 7 iiiDuke Energy History http://www.mergentonline.com.oberon.ius.edu/compdetail.asp?company2602&Page=hist... iv “Why the Coal Guy is Turning Green?” by Marc Gunther (October 14, 2009) http://www.marcgunther.com/2009/10/14/why-a-coal-guy-is-turning green/ v http://www.duke-energy.com/about-us/charter.asp vi Duke Energy Investor and Analyst Meeting. Financial Overview, February 16, 2010, Slide 6 vii Duke Energy 2009 10-K, Dated February 26, 2010, Page 36. viii Duke Energy 2009 10-K, Dated February 26, 2010, Page 36 ix Duke Energy History http://www.mergentonline.com.oberon.isu.ed/compdetail.asp?company2602&Page=hist... x Duke Energy Value Line – November 27, 2009 xi S&P Industry Survey – Electric Utilities - October 2009, Page 12 xii S&P Industry Survey – Electric Utilities -October 2009, Page 12 xiii Electric Power Industry Overview 2007. http://www.eia.doe.gov/cneaf/electricity/page/prim2/toc2.html xiv S&P Industry Survey – Electric Utilities – October 2009, Page 17 xv S&P Industry Survey – Electric Utilities – October 2009, Page 17 xvi S&P Industry Survey – Electric Utilities- October 2009, Page 9 xvii S&P Industry Survey – Electric Utilities -October 2009, Page 7 xviii http://www.wikinvest.com/Industry/Electric_Utilties and S&P Industry Survey – Electric Utilities – October 2009, Page 17 xix S&P Industry Survey – Electric Utilities - October 2009, Page 15 xx S&P Industry Survey – Electric Utilities – October 2009, Page 7 xxi Electric Power Industry Overview 2007. http://www.eia.doe.gov/cneaf/electricity/page/prim2/toc2.html xxii S&P Industry Survey – Electric Utilities -October 2009, Page 9 xxiii S&P Industry Survey – Electric Utilities - October 2009, Page 9 xxiv S&P Industry Survey – Electric Utilities – October 2009, Page 23 xxv S&P Industries Survey – Electric Utilities – October 2009, Page 23 xxvi Duke Energy 2009 10-K, Dated February 26, 2010, Page 46 xxvii http://www.energyvortex.com/energydictionary/haet_rate.html xxviii Duke Energy Corporation Investor and Analyst Meeting – Conference Call Transcript – February 16, 2010, Page 14 xxix Duke Energy Corporation Investor and Analyst Meeting – Conference Call Transcript – February 16, 2010, Page 13 xxx Duke Energy Corporation Investor and Analyst Meeting – Conference Call Transcript – February 16, 2010, Page 3 xxxi Duke Energy Corporation Investor and Analyst Meeting – Conference Call Transcript – February 16, 2010, Page 10 xxxii Duke Energy Corporation Investor and Analyst Meeting – Conference Call Transcript – February 16, 2010, Page 6 xxxiii Duke Energy Corporation Investor and Analyst Meeting – Conference Call Transcript – February 16, 2010, Page 5

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xxxiv http://www.considerthecarolinas.com/rates/service-quality.asp xxxv http://www.considerthecarolinas.com/rates/service-quality.asp xxxvi www.dukepower.com/ecdev xxxvii “New Technologies for Smart Grid” by Chris McCarthy http://www.electricenergyonline.com/?page=show_article&mag=62&article=476 xxxviii Duke Energy Corporation Investor and Analyst Meeting – Conference Call Transcript – February 16, 2010, Page 8 xxxix Duke Energy Corporation Investor and Analyst Meeting – Conference Call Transcript – February 16, 2010, Page 7 xl Duke Energy Corporation Investor and Analyst Meeting – Conference Call Transcript – February 16, 2010, Page 9 xli http://en.wikipedia/org/wiki/Integrated_gasification_combined_cycle xlii http://www.duke-energy.com/about-us/awards/asp xliii http://www.siteslection.com/features/2008/sep/Top-Utilities/ xliv http://www.duke-energy.com/news/outage-information.asp xlv http://www.duke-energy.com/news/outage-information.asp xlvi Duke Energy 2009 10-K, Dated February 26, 2010, Page 22 xlvii Duke Energy Corporation Investor and Analyst Meeting – Conference Call Transcript – February 16, 2010, Page 3 xlviii http://www.duke-energy.com/about-us/awards.asp xlix Duke Energy 2009 10-K, Dated February 26, 2010, Page 21 l Duke Energy 2009 10-K, Date February 26, 2010, Page 12 li Duke Energy 2009 10-K, Dated February 26, 2010, Pages 12 and 13 lii lii “Why the Coal Guy is Turning Green?” by Marc Gunther (October 14, 2009) http://www.marcgunther.com/2009/10/14/why-a-coal-guy-is-turning green/ liii“FPL Rate Hike Request is Turned Down” by Mary Ellen Klas (January 14, 2010) http://www.miamiherald.com/2010/01/13/1424156/fpl-rate-hike-request-is-turned-down.html liv “American Electric Power Expands Barge Operations With Acquisition of Memco Barge Line, Inc.” (July 23, 2001) http://www.aep.com/pf.aspx?title=AEP-News-Releases-AmericanElectricPow... lv Duke Energy 2009 10-K, Dated February 26, 2010, Page 12

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