Duke Energy CORP (Form: 10-Q, Received: 11/07/2008 15:06:47)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2008 Or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1-32853

DUKE ENERGY CORPORATION

(Exact Name of Registrant as Specified in its Charter)


Delaware		20-2777218
(State or Other Jurisdiction of Incorporation)		(IRS Employer Identification No.)

526 South Church Street Charlotte, NC		28202-1803
(Address of Principal Executive Offices)		(Zip Code)

704-594-6200

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer x		Accelerated filer ¨
Non-accelerated filer ¨		Smaller reporting company ¨
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes ¨ No x

Indicate the number of shares outstanding of each of the Issuer’s classes of common stock, as of the latest practicable date.

Number of shares of Common Stock, par value $0.001, outstanding as of November 3, 2008 1,265,289,312

INDEX

DUKE ENERGY CORPORATION

FORM 10-Q FOR THE QUARTER ENDED

SEPTEMBER 30, 2008


Item		Page
PART I. FINANCIAL INFORMATION

1.	Financial Statements	3
	Unaudited Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2008 and 2007	3
	Unaudited Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007	4
	Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2008 and 2007	6
	Unaudited Consolidated Statements of Common Stockholders’ Equity and Comprehensive Income for the Nine Months Ended September 30, 2008 and 2007	7
	Unaudited Notes to the Consolidated Financial Statements	8

2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	52

3.	Quantitative and Qualitative Disclosures About Market Risk	69

4.	Controls and Procedures	69

PART II. OTHER INFORMATION

1.	Legal Proceedings	70

1A.	Risk Factors	70

2.	Unregistered Sales of Equity Securities and Use of Proceeds	70

4.	Submission of Matters to a Vote of Security Holders	70

6.	Exhibits	71

	Signatures	72

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

This document includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are based on management’s beliefs and assumptions. These forward-looking statements are identified by terms and phrases such as “anticipate,” “believe,” “intend,” “estimate,” “expect,” “continue,” “should,” “could,” “may,” “plan,” “project,” “predict,” “will,” “potential,” “forecast,” “target,” and similar expressions. Forward-looking statements involve risks and uncertainties that may cause actual results to be materially different from the results predicted. Factors that could cause actual results to differ materially from those indicated in any forward-looking statement include, but are not limited to:

•

State, federal and foreign legislative and regulatory initiatives, including costs of compliance with existing and future environmental requirements;

•

State, federal and foreign legislative and regulatory initiatives and rulings that affect cost and investment recovery or have an impact on rate structures;

•

Costs and effects of legal and administrative proceedings, settlements, investigations and claims;

•

Industrial, commercial and residential growth in Duke Energy Corporation’s (Duke Energy) service territories;

•

Additional competition in electric markets and continued industry consolidation;

•

Political and regulatory uncertainty in other countries in which Duke Energy conducts business;

•

The influence of weather and other natural phenomena on Duke Energy’s operations, including the economic, operational and other effects of storms, hurricanes, droughts and tornados;

•

The timing and extent of changes in commodity prices, interest rates and foreign currency exchange rates;

•

Unscheduled generation outages, unusual maintenance or repairs and electric transmission system constraints;

•

The performance of electric generation and of projects undertaken by Duke Energy’s non-regulated businesses;

•

The results of financing efforts, including Duke Energy’s ability to obtain financing on favorable terms, which can be affected by various factors, including Duke Energy’s credit ratings and general economic conditions;

•

Declines in the market prices of equity securities and resultant cash funding requirements for Duke Energy’s defined benefit pension plans;

•

The level of creditworthiness of counterparties to Duke Energy’s transactions;

•

Employee workforce factors, including the potential inability to attract and retain key personnel;

•

Growth in opportunities for Duke Energy’s business units, including the timing and success of efforts to develop domestic and international power and other projects;

•

Construction and development risks associated with the completion of Duke Energy’s capital investment projects in existing and new generation facilities, including risks related to financing, obtaining and complying with terms of permits, meeting construction budgets and schedules, and satisfying operating and environmental performance standards, as well as the ability to recover costs from ratepayers in a timely manner;

•

The effect of accounting pronouncements issued periodically by accounting standard-setting bodies; and

•

The ability to successfully complete merger, acquisition or divestiture plans.

In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than Duke Energy has described. Duke Energy undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

PART I. FINANCIAL INFORMATION

DUKE ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In millions, except per-share amounts)

Item 1.

Financial Statements.


	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
Operating Revenues
Regulated electric	$	2,603		$	2,682		$	7,115		$	6,862
Non-regulated electric, natural gas, and other		819			942			2,403			2,316
Regulated natural gas		86			64			556			511
Total operating revenues		3,508			3,688			10,074			9,689
Operating Expenses
Fuel used in electric generation and purchased power - regulated		838			843			2,279			2,014
Fuel used in electric generation and purchased power - non-regulated		495			434			1,049			1,052
Cost of natural gas and coal sold		78			52			440			394
Operation, maintenance and other		838			782			2,500			2,364
Depreciation and amortization		432			474			1,263			1,346
Property and other taxes		170			173			503			500
Impairments and other charges		82			—			82			—
Total operating expenses		2,933			2,758			8,116			7,670
Gains (Losses) on Sales of Other Assets and Other, net		2			—			53			(10	)
Operating Income		577			930			2,011			2,009
Other Income and Expenses
Equity in earnings (loss) of unconsolidated affiliates		(84	)		34			(102	)		104
Losses on sales and impairments of equity investments		(4	)		—			(4	)		—
Other income and expenses, net		33			86			182			189
Total other income and expenses		(55	)		120			76			293
Interest Expense		176			177			552			499
Minority Interest Benefit		(2	)		(4	)		(3	)		(1	)
Income From Continuing Operations Before Income Taxes		348			877			1,538			1,804
Income Tax Expense from Continuing Operations		132			304			521			595
Income From Continuing Operations		216			573			1,017			1,209
(Loss) Income From Discontinued Operations, net of tax		(1	)		34			14			48
Net Income	$	215		$	607		$	1,031		$	1,257

Common Stock Data
Weighted-average shares outstanding
Basic		1,265			1,260			1,264			1,259
Diluted		1,268			1,265			1,268			1,266
Earnings per share (from continuing operations)
Basic	$	0.17		$	0.45		$	0.81		$	0.96
Diluted	$	0.17		$	0.45		$	0.80		$	0.96
Earnings per share (from discontinued operations)
Basic	$	—		$	0.03		$	0.01		$	0.04
Diluted	$	—		$	0.03		$	0.01		$	0.03
Earnings per share
Basic	$	0.17		$	0.48		$	0.82		$	1.00
Diluted	$	0.17		$	0.48		$	0.81		$	0.99
Dividends per share	$	—		$	—		$	0.67		$	0.64

See Notes to Unaudited Consolidated Financial Statements

PART I

DUKE ENERGY CORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In millions)


	September 30, 2008		December 31, 2007
ASSETS
Current Assets
Cash and cash equivalents	$	1,876	$	678
Short-term investments		180		437
Receivables (net of allowance for doubtful accounts of $63 at September 30, 2008 and $67 at December 31, 2007)		1,656		1,767
Inventory		1,125		1,012
Assets held for sale		—		2
Other		1,015		1,020
Total current assets		5,852		4,916
Investments and Other Assets
Investments in unconsolidated affiliates		707		696
Nuclear decommissioning trust funds		1,675		1,929
Goodwill		4,705		4,642
Intangibles, net		675		720
Notes receivable		136		153
Assets held for sale		—		115
Other		3,023		2,944
Total investments and other assets		10,921		11,199
Property, Plant and Equipment
Cost		49,584		46,056
Less accumulated depreciation and amortization		16,336		14,946
Net property, plant and equipment		33,248		31,110
Regulatory Assets and Deferred Debits
Deferred debt expense		258		255
Regulatory assets related to income taxes		606		552
Other		1,884		1,654
Total regulatory assets and deferred debits		2,748		2,461
Total Assets	$	52,769	$	49,686

See Notes to Unaudited Consolidated Financial Statements

PART I

DUKE ENERGY CORPORATION

CONSOLIDATED BALANCE SHEETS—(Continued)

(Unaudited)

(In millions, except per-share amounts)


	September 30, 2008			December 31, 2007
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable	$	1,165		$	1,585
Notes payable and commercial paper		901			742
Taxes accrued		464			383
Interest accrued		206			145
Liabilities associated with assets held for sale		—			114
Current maturities of long-term debt		1,323			1,526
Other		1,001			1,203
Total current liabilities		5,060			5,698
Long-term Debt		12,695			9,498
Deferred Credits and Other Liabilities
Deferred income taxes		5,085			4,751
Investment tax credit		151			161
Liabilities associated with assets held for sale		—			3
Asset retirement obligations		2,518			2,351
Other		5,755			5,844
Total deferred credits and other liabilities		13,509			13,110
Commitments and Contingencies
Minority Interests		175			181
Common Stockholders’ Equity
Common Stock, $0.001 par value, 2 billion shares authorized; 1,265 million and 1,262 million shares outstanding at September 30, 2008 and December 31, 2007, respectively		1			1
Additional paid-in capital		19,992			19,933
Retained earnings		1,567			1,398
Accumulated other comprehensive loss		(230	)		(133	)
Total common stockholders’ equity		21,330			21,199
Total Liabilities and Common Stockholders’ Equity	$	52,769		$	49,686

See Notes to Unaudited Consolidated Financial Statements

PART I

DUKE ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In millions)


	Nine Months Ended September 30,
	2008			2007
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	1,031		$	1,257
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization (including amortization of nuclear fuel)		1,387			1,494
(Gains) losses on sales of other assets		(76	)		14
Impairments and other charges		87			—
Deferred income taxes		243			229
Minority Interest		(3	)		(1	)
Equity in loss (earnings) of unconsolidated affiliates		102			(104	)
Contributions to company-sponsored pension and other post-retirement benefit plans		—			(412	)
(Increase) decrease in
Net realized and unrealized mark-to-market and hedging transactions		(83	)		60
Receivables		53			(344	)
Inventory		(103	)		(57	)
Other current assets		62			57
Increase (decrease) in
Accounts payable		(193	)		(297	)
Taxes accrued		94			145
Other current liabilities		(167	)		(245	)
Other, assets		65			493
Other, liabilities		(22	)		176
Net cash provided by operating activities		2,477			2,465
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures		(3,211	)		(2,215	)
Investment expenditures		(13	)		(26	)
Acquisitions, net of cash acquired		(389	)		(58	)
Purchases of available-for-sale securities		(6,536	)		(18,130	)
Proceeds from sales and maturities of available-for-sale securities		6,486			18,624
Net proceeds from the sales of other assets, and sales of and collections on notes receivable		86			37
Settlement of net investment hedges and other investing derivatives		—			(10	)
Purchases of emission allowances		(36	)		(83	)
Sales of emission allowances		86			39
Change in restricted cash		58			137
Other		(15	)		(18	)
Net cash used in investing activities		(3,484	)		(1,703	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the:
Issuance of long-term debt		3,613			514
Issuance of common stock related to employee benefit plans		28			24
Payments for the redemption of:
Long-term debt		(916	)		(679	)
Convertible notes		—			(110	)
Decrease in cash overdrafts		—			(6	)
Notes payable and commercial paper		317			394
Distributions to minority interests		(2	)		(52	)
Contributions from minority interests		5			69
Cash distributed to Spectra Energy		—			(395	)
Dividends paid		(851	)		(810	)
Other		11			16
Net cash provided by (used in) financing activities		2,205			(1,035	)
Net increase (decrease) in cash and cash equivalents		1,198			(273	)
Cash and cash equivalents at beginning of period		678			948
Cash and cash equivalents at end of period	$	1,876		$	675

Supplemental Disclosures:
Significant non-cash transactions:
Distribution of Spectra Energy to shareholders	$	—		$	5,204
Accrued capital expenditures	$	235		$	244

See Notes to Unaudited Consolidated Financial Statements

PART I

DUKE ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

(Unaudited)

(In millions)


									Accumulated Other Comprehensive Income (Loss)
	Common Stock Shares	Common Stock		Additional Paid-in Capital		Retained Earnings			Foreign Currency Adjustments			Net Gains (Losses) on Cash Flow Hedges			Other			Pension and OPEB Related Adjustments to AOCI			Total
Balance December 31, 2006	1,257	$	1	$	19,854	$	5,652		$	949		$	(45	)	$	2		$	(311	)	$	26,102
Net income	—		—		—		1,257			—			—			—			—			1,257
Other Comprehensive Income
Foreign currency translation adjustments	—		—		—		—			145			—			—			—			145
Net unrealized loss on cash flow hedges ^(a)	—		—		—		—			—			(13	)		—			—			(13	)
Reclassification into earnings from cash flow hedges ^(b)	—		—		—		—			—			6			—			—			6
Pension and OPEB-related Adjustments to AOCI ^(c)	—		—		—		—			—			—			—			15			15
Other	—		—		—		—			—			—			2			(2	)		—

Total comprehensive income																						1,410
Adoption of FIN 48	—		—		—		(25	)		—			—			—			—			(25	)
Adoption of SFAS No. 158—measurement date provision ^(d)	—		—		—		(30	)		—			—			—			(22	)		(52	)
Distribution of Spectra Energy to shareholders	—		—		—		(4,597	)		(1,156	)		6			—			148			(5,599	)
Dividend reinvestment and employee benefits	3		—		45		—			—			—			—			—			45
Common stock dividends	—		—		—		(810	)		—			—			—			—			(810	)

Balance September 30, 2007	1,260	$	1	$	19,899	$	1,447		$	(62	)	$	(46	)	$	4		$	(172	)	$	21,071



Balance December 31, 2007	1,262	$	1	$	19,933	$	1,398		$	(7	)	$	(54	)	$	2		$	(74	)	$	21,199

Net income	—		—		—		1,031			—			—			—			—			1,031
Other Comprehensive Income
Foreign currency translation adjustments	—		—		—		—			(84	)		—			—			—			(84	)
Net unrealized gain on cash flow hedges ^(a)	—		—		—		—			—			6			—			—			6
Pension and OPEB-related Adjustments to AOCI ^(c)	—		—		—		—			—			—			—			5			5
Reclassification into earnings from cash flow hedges ^(b)	—		—		—		—			—			2			—			—			2
Unrealized loss on investments in auction rate securities ^(e)	—		—		—		—			—			—			(13	)		—			(13	)
Reclassification of losses on investments in auction rate securities and other available-for-sale securities into earnings ^(f)	—		—		—		—			—						4			—			4
Other ^(g)	—		—		—		—			—			—			(17	)		—			(17	)

Total comprehensive income																						934
Dividend reinvestment and employee benefits	3		—		59		—			—			—			—			—			59
Common stock dividends	—		—		—		(851	)		—			—			—			—			(851	)
Additional amounts related to the spin-off of Spectra Energy	—		—		—		(11	)		—			—			—			—			(11	)

Balance September 30, 2008	1,265	$	1	$	19,992	$	1,567		$	(91	)	$	(46	)	$	(24	)	$	(69	)	$	21,330

(a)	Net unrealized gains (losses) on cash flow hedges, net of $4 tax expense in 2008 and $8 tax benefit in 2007.

(b)	Reclassification into earnings from cash flow hedges, net of $1 tax expense in 2008 and $4 tax expense in 2007.

(c)	Net of $3 tax expense in 2008 and $6 tax expense in 2007.

(d)	Net of $34 tax benefit in 2007.

(e)	Net of $12 tax benefit in 2008.

(f)	Net of $4 tax expense in 2008.

(g)	Net of $9 tax benefit in 2008.

See Notes to Unaudited Consolidated Financial Statements

PART I

DUKE ENERGY CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

Nature of Operations and Basis of Consolidation. Duke Energy Corporation (collectively with its subsidiaries, Duke Energy) is an energy company located in the Americas. These Unaudited Consolidated Financial Statements include, after eliminating intercompany transactions and balances, the accounts of Duke Energy and all majority-owned subsidiaries where Duke Energy has control and those variable interest entities where Duke Energy is the primary beneficiary. These Unaudited Consolidated Financial Statements also reflect Duke Energy’s proportionate share of certain generation and transmission facilities in South Carolina, Ohio, Indiana and Kentucky.

On January 2, 2007, Duke Energy completed the spin-off of its natural gas businesses (Spectra Energy Corp (Spectra Energy)), including its wholly-owned subsidiary Spectra Energy Capital, LLC (Spectra Energy Capital, formerly Duke Capital LLC), and Duke Energy’s 50% interest in DCP Midstream, LLC (DCP Midstream, formerly Duke Energy Field Services, LLC), to shareholders. Assets and liabilities of entities included in the spin-off of Spectra Energy were transferred from Duke Energy on a historical cost basis on the date of the spin-off transaction. No gain or loss was recognized on the distribution of these operations to Duke Energy shareholders. Approximately $20.5 billion of assets, $14.9 billion of liabilities (which included approximately $8.6 billion of debt) and $5.6 billion of common stockholders’ equity (which included approximately $1.0 billion of accumulated other comprehensive income (AOCI)) were distributed from Duke Energy as of the date of the spin-off. As discussed further in Note 7, pursuant to the terms of convertible notes outstanding at the date of the spin-off, Duke Energy distributed approximately 2 million shares of Spectra Energy common stock to the holders of the convertible notes, resulting in a pre-tax charge of approximately $21 million during the three months ended March 31, 2007. In addition, a reduction in income tax expense of approximately $22 million was also recorded during the three months ended March 31, 2007 due to a reduction in the unitary state tax rate in 2007 as a result of the spin-off of Spectra Energy.

These Unaudited Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles (GAAP) in the United States of America (U.S.) for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, these Unaudited Consolidated Financial Statements do not include all of the information and footnotes required by GAAP in the U.S. for annual financial statements. Because the interim Unaudited Consolidated Financial Statements and Notes do not include all of the information and footnotes required by GAAP in the U.S. for annual financial statements, the Unaudited Consolidated Financial Statements and other information included in this quarterly report should be read in conjunction with the Consolidated Financial Statements and Notes in Duke Energy’s Form 10-K for the year ended December 31, 2007.

These Unaudited Consolidated Financial Statements reflect all normal recurring adjustments that are, in the opinion of management, necessary to fairly present Duke Energy’s financial position and results of operations. Amounts reported in the interim Unaudited Consolidated Statements of Operations are not necessarily indicative of amounts expected for the respective annual periods due to the effects of seasonal temperature variations on energy consumption, the timing of maintenance on electric generating units, changes in mark-to-market valuations, changing commodity prices and other factors.

Use of Estimates. To conform with GAAP in the U.S., management makes estimates and assumptions that affect the amounts reported in the Unaudited Consolidated Financial Statements and Notes. Although these estimates are based on management’s best available information at the time, actual results could differ.

Reclassifications. Certain prior period amounts on the Consolidated Balance Sheets have been reclassified in connection with the adoption of Financial Accounting Standards Board (FASB) Staff Position (FSP) No. FIN 39-1, “Amendment of FASB Interpretation No (FIN) 39, Offsetting of Amounts Related to Certain Contracts ,” (FSP No. FIN 39-1) on January 1, 2008, as discussed below, the effects of which require retrospective application to the Consolidated Balance Sheets.

Netting of Cash Collateral and Derivative Assets and Liabilities Under Master Netting Arrangements. On January 1, 2008, Duke Energy adopted FSP No. FIN 39-1. In accordance with FSP No. FIN 39-1, Duke Energy offsets fair value amounts (or amounts that approximate fair value) recognized on its Consolidated Balance Sheets related to cash collateral amounts receivable or payable against fair value amounts recognized for derivative instruments executed with the same counterparty under the same master netting agreement. Prior to the adoption of FSP No. FIN 39-1, Duke Energy offset the fair value amounts recognized for derivative instruments executed with the same counterparty under the same master netting agreement in accordance with FIN 39, “ Offsetting of Amounts Related to Certain Contracts ,” but presented cash collateral on a gross basis within the Consolidated Balance Sheets. At September 30, 2008 and December 31, 2007, Duke Energy had receivables related to the right to reclaim cash collateral of approximately $10 million and $5 million, respectively, and had payables related to obligations to return cash collateral of an insignificant amount at each balance sheet date that have been offset against net derivative positions in the Consolidated Balance Sheets. Additionally, Duke Energy had cash collateral

PART I

DUKE ENERGY CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

receivables of approximately $64 million and $15 million under master netting arrangements that have not been offset against net derivative positions at September 30, 2008 and December 31, 2007, respectively, as these amounts primarily represent initial margin deposits related to NYMEX futures contracts. Duke Energy had insignificant cash collateral payables under master netting arrangements that have not been offset against net derivative positions at September 30, 2008 and December 31, 2007.

Unbilled Revenue. Revenues on sales of electricity and gas are recognized when the service is provided. Unbilled revenues are estimated by applying an average revenue per kilowatt hour or per thousand cubic feet (Mcf) for all customers classes to the number of estimated kilowatt hours or Mcf’s delivered but not billed. The amount of unbilled revenues can vary significantly period to period as a result of factors including seasonality, weather, customer usage patterns and customer mix. Unbilled revenues, which are recorded as Receivables in Duke Energy’s Consolidated Balance Sheets at September 30, 2008 and December 31, 2007, were approximately $342 million and $380 million, respectively.

Dividend Restrictions and Unappropriated Retained Earnings. Duke Energy does not have any legal, regulatory or other restrictions on paying common stock dividends to shareholders. As further described in Note 14, certain wholly-owned subsidiaries have restrictions on paying dividends or otherwise advancing funds to Duke Energy. At September 30, 2008, an insignificant amount of Duke Energy’s consolidated Retained Earnings balance represents undistributed earnings of equity method investments.

2. Business Segments

Duke Energy operates the following business segments, which are all considered reportable business segments under Statement of Financial Accounting Standards (SFAS) No. 131, “ Disclosures about Segments of an Enterprise and Related Information ”: U.S. Franchised Electric and Gas (which consists of the regulated operations of Duke Energy Carolinas, LLC (Duke Energy Carolinas), Duke Energy Ohio, Inc. (Duke Energy Ohio), Duke Energy Indiana, Inc. (Duke Energy Indiana) and Duke Energy Kentucky, Inc. (Duke Energy Kentucky)), Commercial Power, International Energy and Crescent, which represents Duke Energy’s effective 50% interest in the Crescent JV. Duke Energy’s chief operating decision maker regularly reviews financial information about each of these business segments in deciding how to allocate resources and evaluate performance. There is no aggregation within Duke Energy’s reportable business segments.

The remainder of Duke Energy’s operations is presented as Other. While it is not considered a business segment, Other primarily includes certain corporate costs not allocated to the reportable segments, Bison Insurance Company Limited (Bison), Duke Energy’s wholly-owned, captive insurance subsidiary, and DukeNet Communications, LLC and related telecommunications businesses. Additionally, Other includes the remaining portion of the former Duke Energy North America (DENA) businesses that were not disposed of or transferred to Commercial Power, primarily Duke Energy Trading and Marketing, LLC (DETM), which management is currently in the process of winding down.

Duke Energy’s reportable segments offer different products and services and are managed separately as business units. Accounting policies for Duke Energy’s segments are the same as those described in the Notes to the Consolidated Financial Statements in Duke Energy’s Annual Report on Form 10-K for the year ended December 31, 2007. Management evaluates segment performance based on earnings before interest and taxes from continuing operations, after deducting minority interest expense related to those profits (EBIT). On a segment basis, EBIT excludes discontinued operations, represents all profits from continuing operations (both operating and non-operating) before deducting interest and taxes, and is net of the minority interest expense related to those profits. Segment EBIT includes transactions between reportable segments.

Cash, cash equivalents and short-term investments are managed centrally by Duke Energy, so the associated realized and unrealized gains and losses from foreign currency transactions and interest and dividend income on those balances are excluded from segment EBIT.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Business Segment Data ^(a)


	Unaffiliated Revenues		Intersegment Revenues			Total Revenues			Segment EBIT / Consolidated Income From Continuing Operations Before Income Taxes			Depreciation and Amortization
	(in millions)
Three Months Ended September 30, 2008
U.S. Franchised Electric and Gas	$	2,691	$	7		$	2,698		$	726		$	344
Commercial Power		495		3			498			(108	)		43
International Energy		297		—			297			77			22
Crescent		—		—			—			(124	)		—

Total reportable segments		3,483		10			3,493			571			409
Other		25		13			38			(71	)		23
Eliminations		—		(23	)		(23	)		—			—
Interest expense		—		—			—			(176	)		—
Interest income and other ^(b)		—		—			—			24			—

Total consolidated	$	3,508	$	—		$	3,508		$	348		$	432

Three Months Ended September 30, 2007
U.S. Franchised Electric and Gas	$	2,750	$	6		$	2,756		$	760		$	393
Commercial Power		640		3			643			163			44
International Energy		276		—			276			92			20
Crescent		—		—			—			10			—

Total reportable segments		3,666		9			3,675			1,025			457
Other		22		18			40			(44	)		17
Eliminations		—		(27	)		(27	)		—			—
Interest expense		—		—			—			(177	)		—
Interest income and other ^(b)		—		—			—			73			—

Total consolidated	$	3,688	$	—		$	3,688		$	877		$	474

Nine Months Ended September 30, 2008
U.S. Franchised Electric and Gas	$	7,682	$	19		$	7,701		$	1,866		$	1,009
Commercial Power		1,421		8			1,429			273			128
International Energy		920		—			920			307			64
Crescent		—		—			—			(230	)		—

Total reportable segments		10,023		27			10,050			2,216			1,201
Other		51		43			94			(230	)		62
Eliminations		—		(70	)		(70	)		—			—
Interest expense		—		—			—			(552	)		—
Interest income and other ^(b)		—		—			—			104			—

Total consolidated	$	10,074	$	—		$	10,074		$	1,538		$	1,263

Nine Months Ended September 30, 2007
U.S. Franchised Electric and Gas	$	7,386	$	18		$	7,404		$	1,786		$	1,117
Commercial Power		1,465		9			1,474			240			128
International Energy		782		—			782			283			58
Crescent		—		—			—			29			—

Total reportable segments		9,633		27			9,660			2,338			1,303
Other		56		75			131			(194	)		43
Eliminations		—		(102	)		(102	)		—			—
Interest expense		—		—			—			(499	)		—
Interest income and other ^(b)		—		—			—			159			—

Total consolidated	$	9,689	$	—		$	9,689		$	1,804		$	1,346

(a)	Segment results exclude results of entities classified as discontinued operations.

(b)	Other within Interest Income and Other includes foreign currency transaction gains and losses.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Segment Assets


	September 30, 2008		December 31, 2007
	(in millions)
U.S. Franchised Electric and Gas	$	38,702	$	35,950
Commercial Power		7,544		6,826
International Energy		3,608		3,707
Crescent ^(a)		—		206

Total reportable segments		49,854		46,689
Other		2,768		2,970
Reclassifications ^(b)		147		27

Total consolidated assets	$	52,769	$	49,686

(a)

As further discussed in Note 10, Duke Energy’s carrying value of its investment in Crescent was reduced to zero as of September 30, 2008 primarily as a result of Duke Energy recording its proportionate share of impairment charges recorded by Crescent during the three and nine months ended September 30, 2008.

(b)	Primarily represents reclassification of federal tax balances in consolidation.

3. Acquisitions and Dispositions of Businesses and Sales of Other Assets

Acquisitions. Duke Energy consolidates assets and liabilities from acquisitions as of the purchase date and includes earnings from acquisitions in consolidated earnings after the purchase date. Assets acquired and liabilities assumed are recorded at estimated fair values on the purchase date. The purchase price minus the estimated fair value of the acquired tangible and identifiable intangible assets and liabilities meeting the definition of a business as defined in Emerging Issues Task Force (EITF) Issue No. 98-3, “ Determining Whether a Nonmonetary Transaction Involves Receipt of Productive Assets or of a Business ” is recorded as goodwill. The allocation of the purchase price may be adjusted if additional, requested information is received during the allocation period, which generally does not exceed one year from the consummation date; however, it may be longer for certain income tax items.

On September 30, 2008, Duke Energy completed the purchase of a portion of Saluda River Electric Cooperative, Inc.’s ownership interest in the Catawba Nuclear Station. Under the terms of the agreement, Duke Energy paid approximately $150 million for the additional approximate 7 percent ownership interest in the Catawba Nuclear Station. Following the closing of the transaction, Duke Energy owns approximately 19 percent of the Catawba Nuclear Station. No goodwill was recorded as a result of this transaction. As the acquisition occurred on September 30, 2008, no earnings associated with the acquired portion were recorded during the three or nine months ended September 30, 2008.

In June 2008, Duke Energy announced the execution of a definitive agreement to acquire Catamount Energy Corporation (Catamount) from Diamond Castle Partners. Catamount is a leading wind power company located in Rutland, Vermont. The acquisition closed in September 2008 and expanded Duke Energy’s renewable energy portfolio to include over 300 megawatts (MW) of power generating assets, including 283 net MW in the Sweetwater wind power facility in West Texas, and 20 net MW of biomass-fueled cogeneration in New England. The acquisition also included approximately 1,750 MW of wind assets with the potential for development in the U.S. and United Kingdom. This transaction resulted in a purchase price of approximately $240 million plus the assumption of approximately $80 million of debt. The purchase accounting entries recorded upon acquisition primarily consisted of approximately $190 million of equity method investments, approximately $110 million of intangible assets related to wind development rights, approximately $70 million of goodwill, none of which is deductible for tax purposes, and approximately $80 million of debt. Management currently anticipates that there will be adjustments to the purchase accounting amounts recorded in third quarter related to this transaction; however, such adjustments are not anticipated to be significant to Duke Energy’s Consolidated Balance Sheets. See Note 9 for further discussion of the goodwill and intangible assets recorded as a result of this transaction.

In May 2007, Duke Energy acquired the wind power development assets of Energy Investor Funds from Tierra Energy. The purchase included more than 1,000 MW of wind assets in various stages of development in the Western and Southwestern U.S. and supports Duke Energy’s strategy to increase its investment in renewable energy. A significant portion of the purchase price was for intangible assets. Three of the development projects, totaling approximately 240 MW, are located in Texas and Wyoming. One of these projects went into commercial operation during the third quarter of 2008, with the other two anticipated to be in commercial operation in late 2008 and 2009.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The pro forma results of operations for Duke Energy as if the aforementioned acquisitions which closed on or prior to September 30, 2008 occurred as of the beginning of the periods presented do not materially differ from reported results.

Dispositions. In December 2006, Duke Energy Indiana agreed to sell one unit of its Wabash River Power Station (Unit 1) to Wabash Valley Power Association Inc. (WVPA). The sale was approved by the Indiana Utility Regulatory Commission (IURC), the Federal Energy Regulatory Commission (FERC), the Federal Trade Commission (FTC) and the U.S. Department of Justice (DOJ) during 2007. On December 31, 2007, Duke Energy Indiana received proceeds of approximately $114 million, which was equivalent to the net book value of Unit 1 at the time of sale. Since, pursuant to the terms of the purchase and sale agreement, the effective date of the sale was January 1, 2008, the assets of Unit 1 were reflected as Assets Held for Sale within Investments and Other Assets on the Consolidated Balance Sheets at December 31, 2007 and a corresponding liability equal to the cash received was included in Liabilities Associated with Assets Held for Sale within Current Liabilities on the Consolidated Balance Sheets at December 31, 2007. Since the sales price was equal to the net book value of Unit 1 at the transaction date, no gain or loss was recognized on the sale. The sale was completed on January 1, 2008.

Other Asset Sales. For the three months ended September 30, 2008, the sale of other assets resulted in approximately $1 million in proceeds and net pre-tax gains of approximately $2 million recorded in Gains (Losses) on Sales of Other Assets and Other, net on the Consolidated Statements of Operations. For the nine months ended September 30, 2008, the sale of other assets resulted in approximately $70 million in proceeds and net pre-tax gains of approximately $53 million recorded in Gains (Losses) on Sales of Other Assets and Other, net on the Consolidated Statements of Operations. These gains primarily relate to Commercial Power’s sales of zero cost basis emission allowances.

For the nine months ended September 30, 2007, the sale of other assets resulted in approximately $27 million in proceeds and net pre-tax losses of approximately $10 million recorded in Gains (Losses) on Sales of Other Assets and Other, net on the Consolidated Statements of Operations. These amounts primarily relate to Commercial Power’s sales of emission allowances acquired in connection with Duke Energy’s merger with Cinergy Corp. (Cinergy) in April 2006, which were written up to fair value as part of purchase accounting.

See Note 12 for dispositions related to discontinued operations.

4. Earnings Per Common Share (EPS)

Basic EPS is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted EPS is computed by dividing net income, as adjusted, by the diluted weighted-average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if securities or other agreements to issue common stock, such as stock options, stock-based performance unit awards, phantom stock awards and contingently convertible debt, were exercised, settled or converted into common stock.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table illustrates Duke Energy’s basic and diluted EPS calculations and reconciles the weighted-average number of common shares outstanding to the diluted weighted-average number of common shares outstanding for the three and nine months ended September 30, 2008 and 2007.


	Income		Average Shares	EPS
	(in millions, except per-share amounts)
Three Months Ended September 30, 2008
Income from continuing operations—basic	$	216	1,265	$	0.17

Effect of dilutive securities:
Stock options, phantom, performance and unvested stock			3

Income from continuing operations—diluted	$	216	1,268	$	0.17

Three Months Ended September 30, 2007
Income from continuing operations—basic	$	573	1,260	$	0.45

Effect of dilutive securities:
Stock options, phantom, performance and unvested stock			5

Income from continuing operations—diluted	$	573	1,265	$	0.45

Nine Months Ended September 30, 2008
Income from continuing operations—basic	$	1,017	1,264	$	0.81

Effect of dilutive securities:
Stock options, phantom, performance and unvested stock			4

Income from continuing operations—diluted	$	1,017	1,268	$	0.80

Nine Months Ended September 30, 2007
Income from continuing operations—basic	$	1,209	1,259	$	0.96

Effect of dilutive securities:
Stock options, phantom, performance and unvested stock			5
Contingently convertible debt			2

Income from continuing operations—diluted	$	1,209	1,266	$	0.96

As of September 30, 2008 and 2007, approximately 14 million and 13 million, respectively, of stock options and performance, phantom and unvested stock awards were not included in the “effect of dilutive securities” in the above table because either the option exercise prices were greater than the average market price of the common shares during those periods, or performance measures related to the awards had not yet been met.

5. Stock-Based Compensation

Duke Energy accounts for stock-based compensation under the provisions of SFAS No. 123(R), “ Share-Based Payment ” (SFAS No. 123(R)). SFAS No. 123(R) established accounting for stock-based awards exchanged for employee and certain nonemployee services. Accordingly, for employee awards, equity classified stock-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense over the requisite service period.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Duke Energy recorded pre-tax stock-based compensation expense included in Income from Continuing Operations for each of the three and nine months ended September 30, 2008 and 2007 as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2008		2007		2008		2007
	(in millions)
Stock Options	$	—	$	1	$	1	$	4
Phantom Awards		3		5		14		16
Performance Awards		5		4		18		13
Other Stock Awards		1		—		1		1

Total	$	9	$	10	$	34	$	34

The tax benefit associated with the recorded expense in Income from Continuing Operations for the three months ended September 30, 2008 and 2007 was approximately $3 million and $4 million, respectively. The tax benefit associated with the recorded expense in Income from Continuing Operations for the nine months ended September 30, 2008 and 2007 was approximately $13 million for each period.

Duke Energy’s 2006 Long-term Incentive Plan (the 2006 Plan) reserved 60 million shares of common stock for awards to employees and outside directors. The 2006 Plan superseded the 1998 Long-term Incentive Plan, as amended (the 1998 Plan), and no additional grants will be made from the 1998 Plan. Under the 2006 Plan, the exercise price of each option granted cannot be less than the market price of Duke Energy’s common stock on the date of grant and the maximum option term is 10 years. The vesting periods range from immediate to five years. The 2006 Plan allows for a maximum of 15 million shares of common stock to be issued under various stock-based awards other than options and stock appreciation rights. Payments for cash settled awards during the period were insignificant. Duke Energy has historically issued new shares upon exercising or vesting of share-based awards. In 2008, Duke Energy may use a combination of new share issuances and open market repurchases for share-based awards which are exercised or become vested; however, Duke Energy has not determined with certainty the amount of such new share issuances or open market repurchases.

Stock Option Activity


	Options (in thousands)		Weighted- Average Exercise Price
Outstanding at December 31, 2007	22,317		$	17
Exercised	(2,059	)		13
Forfeited or expired	(240	)		20

Outstanding at September 30, 2008	20,018			17

Exercisable at September 30, 2008	18,839		$	17

There were no stock options granted during the nine months ended September 30, 2008 or 2007.

On December 31, 2007, Duke Energy had approximately 20 million exercisable options with a $17 weighted-average exercise price. The total intrinsic value of options exercised (which represents the difference between the market value of Duke Energy common stock on the exercise date and the exercise price) during the nine months ended September 30, 2008 and 2007 was approximately $11 million and $14 million, respectively. Cash received from options exercised during the nine months ended September 30, 2008 and 2007 was approximately $28 million and $24 million, respectively, with a related tax benefit of approximately $4 million and $5 million, respectively. At September 30, 2008, Duke Energy had approximately $1 million of future compensation cost associated with unvested stock options which is expected to be recognized over a weighted-average period of less than one year.

Phantom Awards

Phantom stock awards issued and outstanding under the 2006 Plan generally vest over periods from immediate to three years. Phantom stock awards issued and outstanding under the 1998 Plan generally vest over periods from immediate to five years. Duke Energy

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

awarded 931,260 shares (fair value of approximately $17 million, based on the market price of Duke Energy’s common stock at the grant date) during the nine months ended September 30, 2008. Duke Energy awarded 1,115,120 shares (fair value of approximately $22 million, based on the market price of Duke Energy’s common stock at the grant date) during the nine months ended September 30, 2007.

The following table summarizes information about phantom stock awards outstanding at September 30, 2008:


	Shares (in thousands)
Number of Phantom Stock Awards:
Outstanding at December 31, 2007	2,390
Granted	931
Vested	(803	)
Forfeited	(37	)

Outstanding at September 30, 2008	2,481

At September 30, 2008, Duke Energy had approximately $16 million of unrecognized compensation cost associated with unvested phantom stock awards which is expected to be recognized over a weighted-average period of 1.9 years.

Performance Awards

Stock-based performance awards issued and outstanding under both the 2006 Plan and the 1998 Plan generally vest over three years if performance targets are met. Duke Energy awarded 2,375,445 shares (fair value of approximately $37 million) during the nine months ended September 30, 2008. Duke Energy awarded 1,534,510 shares (fair value of approximately $23 million) during the nine months ended September 30, 2007.

The following table summarizes information about stock-based performance awards outstanding at September 30, 2008:


	Shares (in thousands)
Number of Stock-based Performance Awards:
Outstanding at December 31, 2007	3,911
Granted	2,375
Vested	(739	)
Forfeited	(560	)

Outstanding at September 30, 2008	4,987

At September 30, 2008, Duke Energy had approximately $33 million of unrecognized compensation cost associated with unvested performance awards which is expected to be recognized over a weighted-average period of 1.5 years.

Other Stock Awards

Other stock awards issued and outstanding under the 1998 Plan vest over periods from three to five years. There were no other stock awards issued during the nine months ended September 30, 2008 or 2007.

The following table summarizes information about other stock awards outstanding at September 30, 2008:


	Shares (in thousands)
Number of Other Stock Awards:
Outstanding at December 31, 2007	324
Vested	(51	)
Forfeited	(40	)

Outstanding at September 30, 2008	233

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DUKE ENERGY CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

At September 30, 2008, Duke Energy had approximately $2 million of unrecognized compensation cost associated with unvested other awards which is expected to be recognized over a weighted-average period of 1.9 years.

6. Inventory

Inventory consists primarily of materials and supplies and coal held for electric generation and is recorded primarily using the average cost method.


	September 30, 2008		December 31, 2007
	(in millions)
Materials and supplies	$	673	$	555
Coal held for electric generation		351		388
Natural gas		101		69

Total inventory	$	1,125	$	1,012

7. Debt and Credit Facilities

Debt Issuances. In January 2008, Duke Energy Carolinas issued $900 million principal amount of mortgage refunding bonds, of which $400 million carries a fixed interest rate of 5.25% and matures January 15, 2018 and $500 million carries a fixed interest rate of 6.00% and matures January 15, 2038. Proceeds from the issuance were used to fund capital expenditures and for general corporate purposes, including the repayment of commercial paper. In anticipation of this debt issuance, Duke Energy Carolinas executed a series of interest rate swaps in 2007 to lock in the market interest rates at that time. The value of these interest rate swaps, which were terminated prior to issuance of the fixed rate debt, was a pre-tax loss of approximately $18 million. This amount was recorded as a component of Accumulated Other Comprehensive Loss and is being amortized as a component of interest expense over the life of the debt.

In April 2008, Duke Energy Carolinas issued $900 million principal amount of mortgage refunding bonds, of which $300 million carries a fixed interest rate of 5.10% and matures April 15, 2018 and $600 million carries a fixed interest rate of 6.05% and matures April 15, 2038. Proceeds from the issuance were used to fund capital expenditures and for general corporate purposes. In anticipation of this debt issuance, Duke Energy Carolinas executed a series of interest rate swaps in 2007 to lock in the market interest rates at that time. The value of these interest rate swaps, which were terminated prior to issuance of the fixed rate debt, was a pre-tax loss of approximately $23 million. This amount was recorded as a component of Accumulated Other Comprehensive Loss and is being amortized as a component of interest expense over the life of the debt.

In June 2008, Duke Energy issued $500 million principal amount of senior notes, of which $250 million carries a fixed interest rate of 5.65% and matures June 15, 2013 and $250 million carries a fixed interest rate of 6.25% and matures June 15, 2018. Proceeds from the issuance were used to redeem commercial paper, to fund capital expenditures in Duke Energy’s nonregulated businesses in the U.S. and for general corporate purposes.

In August 2008, Duke Energy Indiana issued $500 million principal amount of first mortgage bonds, which carry a fixed interest rate of 6.35% and matures August 15, 2038. Proceeds from this issuance were used to fund capital expenditures and for general corporate purposes, including the repayment of short-term notes and to redeem first mortgage bonds maturing in September 2008.

In October 2008, International Energy issued approximately $152 million of debt in Brazil, of which approximately $111 million matures in September 2013 and carries a variable interest rate equal to the Brazil interbank rate plus 2.15%, and approximately $41 million matures in September 2015 and carries a fixed interest rate of 11.6%, indexed annually to inflation. International Energy will use these proceeds to pre-pay existing long-term debt balances.

Available Credit Facilities. In March 2008, Duke Energy entered into an amendment to its $2.65 billion master credit facility whereby the borrowing capacity was increased by $550 million to $3.2 billion. Duke Energy has the unilateral ability under the master credit facility to increase or decrease the borrowing sublimits of each borrower, subject to maximum cap limitations, at any time. See

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table below for the borrowing sublimits at September 30, 2008 for each of the Duke Energy entities with borrowing capacity under this credit facility. The amount available under the master credit facility has been reduced by drawdowns of cash and the use of the master credit facility to backstop the issuances of commercial paper, letters of credit and pollution control bonds.

Master Credit Facility Summary as of September 30, 2008 (in millions) ^(e)


	Credit Facility Capacity		Commercial Paper		Draw Down on Credit Facility		Letters of Credit		Pollution Control Bonds		Total Amount Utilized		Available Credit Facility Capacity
Duke Energy Corporation
$3,200 multi-year syndicated ^{(a), (b), (c)} ^(d)	$	3,200	$	1,098	$	998	$	154	$	327	$	2,577	$	623

(a)	Credit facility expires June 2012. The credit facility contains an option allowing borrowing up to the full amount of the facility on the day of initial expiration for up to one year.

(b)	Credit facility contains a covenant requiring the debt-to-total capitalization ratio to not exceed 65% for each borrower.

(c)

Contains sublimits at September 30, 2008 as follows: $1,100 million for Duke Energy, $900 million for Duke Energy Carolinas, $700 million for Duke Energy Ohio, $400 million for Duke Energy Indiana and $100 million for Duke Energy Kentucky. In October 2008, Duke Energy Indiana’s sublimit was increased $50 million to $450 million and Duke Energy Ohio’s sublimit was reduced $50 million to $650 million.

(d)

In October 2008, Duke Energy terminated the participation of one of the financial institutions supplying approximately $63 million of credit commitment under its master credit facility. The total credit facility capacity under the master credit facility subsequent to this termination is approximately $3.14 billion and the borrowing sublimits under the facility were reduced on a pro rata basis.

(e)	This summary excludes certain demand facilities and committed facilities that are insignificant in size or which generally support very specific requirements, which primarily include facilities that backstop various outstanding pollution control bonds.

In September 2008, Duke Energy and its wholly owned subsidiaries, Duke Energy Carolinas, Duke Energy Ohio, Duke Energy Indiana and Duke Energy Kentucky (collectively referred to as the borrowers), borrowed a total of approximately $1 billion under Duke Energy’s master credit facility as follows:


	Amounts Borrowed Under Master Credit Facility at September 30, 2008 (in millions)
Duke Energy	$	271
Duke Energy Carolinas		257
Duke Energy Ohio		276
Duke Energy Indiana		121
Duke Energy Kentucky		73

Total	$	998

The loans under the master credit facility are revolving credit loans that bear interest at the current bank prime rate. The loan for Duke Energy has a stated maturity of June 2012, while the loans for all of the other borrowers have stated maturities of September 2009; however, the borrowers have the ability under the master credit facility to renew the loans due in September 2009 up through the date the master credit facility matures in June 2012. Except for Duke Energy Ohio, all of the borrowers have the intent and ability to refinance these obligations on a long-term basis, either through renewal of the terms of the loan through the master credit facility, which has non-cancelable terms in excess of one-year, or through issuance of long-term debt to replace the amounts drawn under the master credit facility. Accordingly, these borrowings of $722 million are reflected as Long-Term Debt on the Consolidated Balance Sheets at September 30, 2008. As Duke Energy Ohio does not have the intent to refinance its borrowings on a long-term basis, amounts outstanding at September 30, 2008 of $276 million are reflected as current liabilities in Notes Payable and Commercial Paper on the Consolidated Balance Sheets.

At September 30, 2008 and December 31, 2007, approximately $706 million and $629 million, respectively, of pollution control bonds were classified as Long-Term Debt on the Consolidated Balance Sheets. Of this amount, the master credit facility served as a backstop for approximately $429 million of these pollution control bonds (of which approximately $102 million is in the form of letters of credit), with the remaining balance backstopped by other specific credit facilities separate from the master credit facility. Additionally, at September 30, 2008 and December 31, 2007 approximately $473 million and $300 million, respectively, of commercial paper issuances were classified as Long-Term Debt on the Consolidated Balance Sheets. These pollution control bonds and commercial paper issuances, which are short-term obligations by nature, are classified as long-term due to Duke Energy’s intent and ability to utilize such

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borrowings as long-term financing. As Duke Energy’s master credit facility and other specific purpose credit facilities have non-cancelable terms in excess of one year as of the balance sheet date, Duke Energy has the ability to refinance these short-term obligations on a long-term basis.

In September 2008, Duke Energy Indiana and Duke Energy Kentucky collectively entered into a $330 million three-year letter of credit agreement with a syndicate of banks, under which Duke Energy Indiana and Duke Energy Kentucky may request the issuance of letters of credit up to $279 million and $51 million, respectively, on their behalf to support various series of variable rate demand bonds issued or to be issued on behalf of either Duke Energy Indiana or Duke Energy Kentucky. This credit facility, which is not part of Duke Energy’s master credit facility, may not be used for any purpose other than to support the variable rate demand bonds issued by Duke Energy Indiana and Duke Energy Kentucky.

Restrictive Debt Covenants. Duke Energy’s debt and credit agreements contain various financial and other covenants. Failure to meet those covenants beyond applicable grace periods could result in accelerated due dates and/or termination of the agreements. As of September 30, 2008, Duke Energy was in compliance with all covenants related to its significant debt agreements. In addition, some credit agreements may allow for acceleration of payments or termination of the agreements due to nonpayment, or the acceleration of other significant indebtedness of the borrower or some of its subsidiaries. None of the debt or credit agreements contain material adverse change clauses.

Other Matters. As discussed in Note 1, in connection with the spin-off of Spectra Energy on January 2, 2007, Duke Energy distributed approximately 2 million shares of Spectra Energy common stock to the holders of convertible notes pursuant to the antidilution provisions of the indenture agreement, resulting in a charge of approximately $21 million in the first quarter of 2008, which is recorded in Other Income and Expenses, net in the Consolidated Statements of Operations. Duke Energy repurchased all of the remaining outstanding convertible notes in 2007.

8. Employee Benefit Obligations

Qualified Pension Plans

The following table shows the components of the net periodic pension costs for the Duke Energy U.S. qualified pension plans.

Components of Net Periodic Pension Costs: Qualified Pension Costs


	Three Months Ended September 30,						Nine Months Ended September 30,
	2008 ^(a)			2007 ^(a)			2008 ^(b)			2007 ^(b)
	(in millions)
Service cost	$	23		$	24		$	69		$	74
Interest cost on projected benefit obligation		63			61			191			185
Expected return on plan assets		(86	)		(80	)		(256	)		(240	)
Amortization of prior service cost		2			3			5			6
Amortization of loss		3			8			9			22
Other		6			5			16			15

Net periodic pension costs	$	11		$	21		$	34		$	62

(a)	Net periodic qualified pension costs for the three months ended September 30, 2008 and 2007 exclude approximately $4 million and zero, respectively, of regulatory asset amortization resulting from purchase accounting associated with Duke Energy’s merger with Cinergy in April 2006.

(b)	Net periodic qualified pension costs for the nine months ended September 30, 2008 and 2007 exclude approximately $10 million and $12 million, respectively, of regulatory asset amortization resulting from purchase accounting associated with Duke Energy’s merger with Cinergy in April 2006.

Duke Energy’s policy is to fund amounts for its U.S. qualified pension plans on an actuarial basis to provide assets sufficient to meet benefit payments to be paid to plan participants. Duke Energy did not make contributions to its U.S. qualified or non-qualified pension plans during the three and nine months ended September 30, 2008 and Duke Energy does not anticipate making contributions to its qualified or non-qualified pension plans during the remainder of 2008. During the nine months ended September 30, 2007, Duke Energy made qualified pension benefit contributions of approximately $350 million to the legacy Cinergy qualified pension plans.

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Non-Qualified Pension Plans

The following table shows the components of the net periodic pension costs for the Duke Energy U.S. non-qualified pension plans.

Components of Net Periodic Pension Costs: Non-Qualified Pension Costs


	Three Months Ended September 30,					Nine Months Ended September 30,
	2008		2007			2008		2007
	(in millions)
Service cost	$	—	$	(1	)	$	1	$	3
Interest cost on projected benefit obligation		3		3			8		7
Amortization of prior service cost		1		1			2		1
Amortization of loss		—		—			1		—

Net periodic pension costs	$	4	$	3		$	12	$	11

Other Post-Retirement Benefit Plans

The following table shows the components of the net periodic post-retirement benefit costs for the Duke Energy U.S. other post-retirement benefit plans.

Components of Net Periodic Post-Retirement Benefit Costs


	Three Months Ended September 30,						Nine Months Ended September 30,
	2008 ^(a)			2007 ^(a)			2008 ^(b)			2007 ^(b)
	(in millions)
Service cost benefit	$	1		$	3		$	6		$	9
Interest cost on accumulated post—retirement benefit obligation		7			14			32			42
Expected return on plan assets		(4	)		(3	)		(12	)		(9	)
Amortization of net transition liability		3			3			8			9
Amortization of prior service (credit)/cost		(3	)		1			(6	)		3
Amortization of loss		(2	)		1			—			4

Net periodic post-retirement benefit costs	$	2		$	19		$	28		$	58

(a)

Net periodic other post-retirement benefit costs for the three months ended September 30, 2008 and 2007 excludes approximately $3 million and $4 million, respectively, of regulatory asset amortization resulting from purchase accounting associated with Duke Energy’s merger with Cinergy in April 2006.

(b)	Net periodic other post-retirement benefit costs for the nine months ended September 30, 2008 and 2007 exclude approximately $6 million and $8 million, respectively, of regulatory asset amortization resulting from purchase accounting associated with Duke Energy’s merger with Cinergy in April 2006.

Duke Energy did not make contributions to its other post-retirement plans during the three and nine months ended September 30, 2008 and Duke Energy does not anticipate making contributions to its other post-retirement plans during the remainder of 2008. During the three and nine months ended September 30, 2007, Duke Energy contributed approximately $62 million to its other post-retirement plans. Of this amount, approximately $32 million was contributed to legacy Cinergy other post-retirement plans and approximately $30 million was contributed to Duke Energy other post-retirement plans.

Duke Energy also sponsors employee savings plans that cover substantially all U.S. employees. Duke Energy made pre-tax employer matching contributions of approximately $17 million and $62 million during the three and nine months ended September 30, 2008, respectively, and approximately $17 million and $53 million during the three and nine months ended September 30, 2007, respectively.

9. Goodwill and Intangibles

Carrying Amount of Goodwill

Duke Energy evaluates the carrying amount of its recorded goodwill for impairment under the guidance of SFAS No. 142, “ Goodwill and Other Intangible Assets ” (SFAS No. 142). At a minimum, SFAS No. 142 requires a goodwill impairment test to be performed annually as of the same date each year. Duke Energy performs its annual impairment testing of goodwill in the third quarter of each year, or more

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frequently if events or circumstances occur that would indicate the probability of impairment. As the fair value of each of Duke Energy’s reporting units exceeded their respective carrying values at the date of the impairment analysis, Duke Energy did not record any impairment charges in the third quarter of 2008 as a result of its annual impairment test.

The following table shows the components of goodwill by reportable business segment at September 30, 2008 and December 31, 2007:


	Balance December 31, 2007		Changes			Balance September 30, 2008
	(in millions)
U.S. Franchised Electric and Gas	$	3,478	$	(1	)	$	3,477
Commercial Power ^(a)		871		72			943
International Energy		293		(8	)		285

Total consolidated	$	4,642	$	63		$	4,705

(a)	As discussed in Note 3, the increase in goodwill in the Commercial Power segment during the nine months ended September 30, 2008 relates to the acquisition of Catamount in September 2008.

Intangible Assets

The carrying amount and accumulated amortization of intangible assets as of September 30, 2008 and December 31, 2007 are as follows:


	September 30, 2008			December 31, 2007
	(in millions)
Emission allowances	$	292		$	426
Gas, coal and power contracts		296			296
Wind development rights		149			48
Other		75			68

Total gross carrying amount		812			838

Accumulated amortization—gas, coal and power contracts		(112	)		(94	)
Accumulated amortization—other		(25	)		(24	)

Total accumulated amortization		(137	)		(118	)

Total intangible assets, net	$	675		$	720

Emission allowances in the table above include emission allowances acquired by Duke Energy as part of the merger with Cinergy, which were recorded at fair value on the date of the merger, and emission allowances purchased by Duke Energy. Additionally, Duke Energy is allocated certain zero cost emission allowances on an annual basis. The change in the gross carrying value of emission allowances during the nine months ended September 30, 2008 is as follows:

(in millions)


Gross carrying value at January 1, 2008	$	426
Purchases of emission allowances		36
Sales and consumption of emission allowances ^(a) ^(b)		(98	)
Impairment of emission allowances ^(c)		(82	)
Other changes		10

Gross carrying value at September 30, 2008	$	292

(a)

Carrying value of emission allowances are recognized via a charge to expense when consumed. Carrying value of emission allowances sold or consumed during the three months ended September 30, 2008 and 2007 were $32 million and $66 million, respectively. Carrying value of emission allowances sold or consumed during the nine months ended September 30, 2008 and 2007 were $98 million and $224 million, respectively.

(b)	See Note 3 for a discussion of gains and losses on sales of emission allowances by Commercial Power during the three and nine months ended September 30, 2008 and 2007.

(c)	See Note 10 for discussion of impairments of the carrying value of emission allowances of approximately $82 million during the three months ended September 30, 2008.

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Amortization expense for gas, coal and power contracts and other intangible assets for the three months ended September 30, 2008 and 2007 was approximately $7 million and $15 million, respectively. Amortization expense for gas, coal and power contracts and other intangible assets for the nine months ended September 30, 2008 and 2007 was approximately $19 million and $42 million, respectively.

As discussed in Note 3, Duke Energy completed the acquisition of Catamount in September 2008, resulting in the recognition of approximately $110 million of intangible assets related to wind farm development rights. Of this amount, a portion of the intangible asset value was assigned to projects that Duke Energy has plans to dispose of through sale; however, these assets do not meet the criteria for assets held-for-sale treatment under SFAS No. 144, “ Accounting for the Impairment of Disposal of Long-Lived Assets” (SFAS No. 144). The intangible assets recorded in connection with the Catamount acquisition primarily represent land use rights and interconnection agreements. Since these intangible assets relate to development projects for which commercial operations have not commenced, amortization of the intangible asset value assigned to each of these projects will not begin until commercial operation is achieved. Duke Energy will evaluate the useful lives of these intangible assets as the projects begin commercial operations, which is anticipated by be in the years 2010 through 2012. Duke Energy currently estimates the useful lives of these projects, once in commercial operation, will be the shorter of the lease term of the land or the estimated lives of the projects, which is approximately 25 years. Until these projects reach commercial operation, Duke Energy will evaluate, as appropriate, the carrying value of these intangible assets for impairment under SFAS No. 142.

Intangible Liabilities

In connection with the merger with Cinergy in April 2006, Duke Energy recorded an intangible liability of approximately $113 million associated with the market based standard service offer (MBSSO) in Ohio, which is being recognized in earnings over the remaining regulatory period that ends on December 31, 2008. The carrying amount of this intangible liability was approximately $17 million and $67 million at September 30, 2008 and December 31, 2007, respectively. Duke Energy also recorded approximately $56 million of intangible liabilities associated with other power sale contracts in connection with the merger with Cinergy. The carrying amount of this intangible liability was approximately $18 million and $22 million at September 30, 2008 and December 31, 2007, respectively. During the three and nine months ended September 30, 2008, Duke Energy amortized approximately $18 million and $54 million, respectively, to income related to these intangible liabilities. During the three and nine months ended September 30, 2007, Duke Energy amortized approximately $15 million and $29 million, respectively, to income related to these intangible liabilities. Intangible liabilities are classified as Other within Deferred Credits and Other Liabilities on the Consolidated Balance Sheets.

10. Impairment Charges

Crescent. Duke Energy owns an effective 50% interest in Crescent and accounts for its investment in Crescent under the equity method of accounting. Crescent develops and maintains high-quality commercial, residential and multi-family real estate projects primarily in the Southeastern and Southwestern U.S. and also manages land holdings in North Carolina and South Carolina. Crescent’s results are subject to volatility due to various factors including real estate market conditions, the ability of potential customers to obtain financing, debt service requirements, the cost of construction materials, and the availability and cost of capital, among other factors. During the fourth quarter of 2007 and the first quarter of 2008, Crescent recorded impairment charges on certain of its properties, which reflected economic conditions in Crescent’s markets at the time and its management’s plans for the properties in its portfolio. Duke Energy’s proportionate pre-tax share of the impairments recorded during the fourth quarter of 2007 and the first quarter of 2008 were reflected in Duke Energy’s equity earnings in Crescent and were approximately $32 million and $11 million, respectively.

Crescent has long-term debt of approximately $1.5 billion, all of which is non-recourse to Duke Energy. Prior to the June 2008 debt amendments discussed below, approximately $1.2 billion of the long-term debt balance was term debt due in September 2012 with only very minor amounts due prior to that date. Crescent’s debt agreements had certain financial covenants that were required to be met on a quarterly basis. Due to the sustained downturn in overall economic conditions, including the real estate markets in areas in which Crescent holds properties, Crescent management determined that it could be in violation of one or more of its debt covenants in the near term absent amendments to its debt agreements. In June 2008, Crescent renegotiated amendments to its debt agreements, including modifications to certain financial covenants. Under the terms of the amended debt agreements, Crescent is still obligated to pay down the entire term loan amount of $1.2 billion by September, 2012, with cumulative repayments of $250 million through December 31, 2011, ($25 million, $50 million, $75 million, and $100 million to be paid in the periods ending December 31, 2008, 2009, 2010, and

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2011 respectively), with the remainder due in 2012. Under the terms of the new debt agreement, Crescent is required to have its properties appraised by an independent third party no later than February 28, 2009. Should the appraisals indicate that Crescent’s Loan-to-Value Ratio (Total Indebtedness/ Qualifying Assets Value) is greater than 80%, Crescent would be in violation of its debt covenants. As of September 30, 2008, Crescent maintained an overall debt balance of approximately $1.5 billion, of which approximately $300 million relates to a revolving credit facility.

In connection with the renegotiation of the debt agreements, Crescent management modified its existing business strategy to focus some of its efforts on producing near term cash flows from its non-strategic real estate projects in order to improve liquidity and reduce debt, in an environment which favors buyers. Crescent’s management continues to view the majority of its real estate projects as strategic assets. The new focus in accelerating cash flows from certain of its non-strategic assets in 2008 and 2009 may enable Crescent to meet its new and accelerated debt service obligations and ultimately improve its capitalization. Crescent’s objective with this strategy is to ultimately allow it greater financial flexibility in maximizing the long-term value of its strategic assets.

As a result of its revised business strategy to accelerate certain cash flows resulting from the June 2008 amendments to its debt agreements and the continued deterioration of the real estate and credit markets, Crescent prepared its recoverability assessments for its real estate projects as required under SFAS No. 144 as of June 30, 2008 and September 30, 2008. Under SFAS No. 144, the carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. For certain of Crescent’s assets, it was determined that projected undiscounted cash flows did not exceed the carrying value of the projects based on the revised business strategy assumptions, and an impairment loss was recorded equal to the amount by which the carrying amount of each impaired project exceeded its estimated fair value. The methods for determining fair value included independent third party appraisals and discounted cash flow models, as well as valuing certain properties based on recent offer prices for bulk-sale transactions and other price data for similar assets. During the three and nine months ended September 30, 2008, Crescent recorded impairment charges on certain of its property holdings, primarily in its residential division, of which Duke Energy’s proportionate pre-tax share was approximately $114 million and $238 million, respectively. Of the $114 million in impairment charges recorded during the three months ended September 30, 2008, approximately $45 million related to impairments triggered by the consideration of capitalized interest costs. Had capitalized interest costs been properly considered during the second quarter of 2008, this approximate $45 million of impairment charges would have been recorded during the three months ended June 30, 2008. Crescent’s impairment charges are recorded in Equity in Earnings (Loss) of Unconsolidated Affiliates in Duke Energy’s Consolidated Statements of Operations. As a result of Duke Energy recording its proportionate share of Crescent’s impairment losses, the carrying value of Duke Energy’s investment in Crescent has been reduced to zero at September 30, 2008. Beginning in the fourth quarter of 2008, in accordance with Accounting Principles Bulletin (APB) 18, “ The Equity Method of Accounting for Investments in Common Stock, ” Duke Energy plans to discontinue applying the equity method of accounting to its investment in Crescent since its investment has been reduced to zero. Accordingly, Duke Energy will not record additional losses related to its investment in Crescent. However, should Crescent begin reporting net income in future periods, Duke Energy may resume applying the equity method of accounting after its proportionate share of that net income equals the share of net losses not recognized during the period the equity method was suspended.

As a result of Duke Energy recording its proportionate share of the aforementioned impairment charges, the total amount of equity method losses recorded during the three months ended September 30, 2008 related to Crescent triggers disclosure of summarized income statement information for Crescent under the significant subsidiary rules in accordance with Rule 4-08 of Regulation S-X. Accordingly, summarized income statement information for Crescent for the three months ended September 30, 2008 and 2007 are is as follows:


	Three Months Ended September 30, 2008			Three Months Ended September 30, 2007
	(in millions)
Operating Revenues	$	38		$	123
Operating Expenses	$	286		$	103

Net (Loss) Income	$	(248	)	$	20

Auction Rate Security Investments. At December 31, 2007, Duke Energy held approximately $430 million of investments in auction rate debt securities, substantially all of which were sold at auction in January 2008 at full principal amounts. Duke Energy made additional investments in auction rate debt securities during the first quarter of 2008, which primarily consisted of investments in AAA rated student loan securities which have minimal credit risk as substantially all values are ultimately backed by the U.S. government. These securities are treated as available-for-sale securities under SFAS No. 115, “ Accounting for Certain Investments in Debt and Equity Secu rities ”

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(SFAS No. 115). During the first quarter of 2008, Duke Energy reclassified its investments in auction rate debt securities (approximately $300 million par value as of March 31, 2008) from short-term to long-term as an active market for these investments did not exist. During the second quarter of 2008, Duke Energy performed a valuation of its investment holdings (consistent with provisions of SFAS No. 157, “ Fair Value Measurements ” (SFAS No. 157)—see Note 17) and determined that the carrying value of these investments exceeded their estimated fair value by approximately $27 million. Management believed that the majority of these investments had minimal credit risk (as discussed above) and Duke Energy had the intent and ability to hold these securities until the credit markets regain liquidity or the instruments are refunded by the issuer at their stated par values or maturity. Accordingly, approximately $23 million of the decline in value was considered temporary and recorded as a component of Other Comprehensive Income. The remaining $4 million reduction in carrying value was charged to expense as management had concluded this impairment to be other-than-temporary. This conclusion was based in part on a loss in value in the underlying collateral supporting the par value of these securities, which is not supported by insurance or backed by the U.S. government. At June 30, 2008, the par value and carrying value of Duke Energy’s investments in auction rate debt securities was approximately $300 million and $273 million, respectively.

In July 2008, as a result of the redemption of an auction rate debt security by the issuer, Duke Energy received proceeds of approximately $15 million of the AAA rated student loan securities, which represented full par value plus accrued interest.

As of September 30, 2008, based on a valuation of its investment holdings during the third quarter of 2008, Duke Energy recorded an additional pre-tax charge to expense of approximately $1 million related to impairments deemed to be other-than-temporary and pre-tax income of approximately $1 million as a component of Other Comprehensive Income to adjust the carrying value of these investments to their estimated fair value. The amount recorded as a component of Other Comprehensive Income is comprised of a gain recorded as a result of the redemption of an auction rate debt security by the issuer, as discussed further below, net of additional write-downs of AAA rated student loan securities. The par value and carrying value of Duke Energy’s investments in auction rate debt securities was approximately $285 million and $258 million, respectively, at September 30, 2008.

At September 30, 2008, approximately $63 million of the investments in auction rate debt securities are classified as current assets within Short-Term Investments on the Consolidated Balance Sheets, with the remaining approximately $195 million classified as long-term investments in Other within Investments and Other Assets on the Consolidated Balance Sheets. Approximately $54 million of the investments classified as short-term either have a stated maturity within the next 12 months or Duke Energy believes are reasonably likely to be refunded within the next 12 months based on a notification of a refunding plan by the issuer. Additionally, in October 2008, as a result of the redemption of an auction rate debt security by the issuer, Duke Energy received proceeds of approximately $9 million, which represented full par value plus accrued interest. Management had concluded in the second quarter of 2008 that the carrying value of these securities was other-than-temporarily impaired and recorded an approximate $2 million pre-tax loss in earnings related to these investments. At September 30, 2008, the carrying value of this investment was written up to full par value, with a corresponding unrealized gain of approximately $2 million recorded as a component of Other Comprehensive Income in accordance with SFAS No. 115. Duke Energy will report this gain in earnings in the fourth quarter of 2008. The remaining balance at September 30, 2008 of approximately $195 million (par value of approximately $222 million) continues to be classified as long-term investments since an active market does not currently exist.

Management will continue to monitor the carrying value of its entire portfolio of investments in the future to determine if any additional other-than-temporary impairment losses should be recorded.

Emission Allowances. On July 11, 2008, the U.S. Court of Appeals for the District of Columbia issued a decision vacating the Clean Air Interstate Rule (CAIR). See Note 15 for further discussion of the decision, which resulted in sharp declines in market prices of sulfur dioxide (SO ₂ ) and nitrogen oxide (NO _x ) allowances in the third quarter of 2008 due to uncertainty associated with future federal requirements to reduce emissions. Accordingly, pursuant to SFAS No. 144, Duke Energy evaluated the carrying value of emission allowances held by its regulated and non-regulated businesses for impairment at September 30, 2008.

Prior to its repeal, the CAIR required 50% reductions in SO ₂ emissions beginning in 2010 and further 30% reductions in SO ₂ emissions in 2015 beyond specified requirements. These reductions were to be achieved by requiring the surrender of SO ₂ allowances in a ratio of two allowances per ton of SO ₂ emitted beginning in 2010, up from a current one-to-one ratio, escalating to 2.86 allowances per ton of SO ₂ emitted beginning in 2015. Taking into account these increases in emission allowance requirements under CAIR, Commercial Power’s forecasted SO ₂ emissions needed through 2037 exceeded the number of emission allowances held prior to the vacating of the CAIR. Subsequent to the decision to vacate CAIR, Commercial Power determined that it had SO ₂ allowances in excess of forecasted emissions and those allowances held in excess of forecasted emissions from future generation required an impairment evaluation. In performing the impairment evaluation for SO ₂ allowances at September 30, 2008, management compared quoted market prices for each vintage year allowance to the carrying value of the related allowances in excess of forecasted emissions through 2038. Due to the sharp decline in

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market prices of SO ₂ allowances, as discussed above, Commercial Power recorded pre-tax impairment charges of approximately $77 million related to forecasted excess SO ₂ allowances held at September 30, 2008. Additionally, Commercial Power recorded pre-tax impairment charges of approximately $5 million related to annual NO _x allowances during the three months ended September 30, 2008 as these were also affected by the decision to vacate the CAIR. These impairment charges are recorded in Impairments and Other Charges within Operating Expenses on the Consolidated Statements of Operations.

Additionally, U.S. Franchised Electric and Gas has emission allowances and certain commitments to purchase emission allowances that, based on management’s best estimate at September 30, 2008, resulted in a quantity of emission allowances in excess of the amounts projected to be utilized for operations. The excess emission allowances include forward contracts to purchase SO ₂ allowances to cover forecasted shortfalls in emission allowances necessary for operations that were entered into prior to the July 11, 2008 CAIR decision. Prior to the vacating of the CAIR, these forward contracts, which primarily settle in the fourth quarter of 2008 and 2009, qualified for the normal purchase/normal sale (NPNS) exception under SFAS No. 133, “ Accounting for Derivative Instruments and Hedging Activities ” (SFAS No. 133), as amended. However, since certain of these forward contracts can no longer be considered probable of use in the normal course of operations due to the excess over forecasted needs, in September 2008, U.S. Franchised Electric and Gas determined that these contracts no longer qualified for the NPNS exception under SFAS No. 133. At the time this determination was made, the fair value of the contracts was a liability of approximately $34 million. Since U.S. Franchised Electric and Gas anticipates regulatory recovery of the cost of these emission allowances in normal course, a corresponding regulatory asset was recorded on the Consolidated Balance Sheets at September 30, 2008. These forward contracts will continue to be marked-to-market, with an offset to the regulatory asset balance, until ultimate settlement.

Management will continue to assess the forecasted usage and carrying value of emission allowances going forward to determine if further impairment write-downs are necessary. See Note 9 for further information regarding the carrying value of emission allowances.

11. Severance

During the three months ended September 30, 2008 and 2007, Duke Energy recorded severance charges under its ongoing severance plan of an insignificant amount and $1 million, respectively. During the nine months ended September 30, 2008 and 2007, Duke Energy recorded severance charges under its ongoing severance plan of approximately $1 million and $19 million, respectively. Approximately $12 million of the charges during the nine months ended September 30, 2007 were recorded during the second quarter of 2007 and related to a voluntary termination program whereby eligible employees were provided a window during which to accept termination benefits. A total of 116 employees accepted the termination benefits during the voluntary window period, which closed June 2007.

Future severance costs under Duke Energy’s ongoing severance plan, if any, are currently not estimable.

Severance Reserve


	Balance at December 31, 2007		Provision/ Adjustments		Cash Reductions			Balance at September 30, 2008
	(in millions)
Other ^(a)	$	24	$	1	$	(15	)	$	10

(a)	Severance provisions are generally expected to be paid within one year from the date that the provision was recorded.

Post-Retirement Benefits. In July 2007, Duke Energy offered a voluntary early retirement incentive plan to approximately 1,100 eligible employees. The special termination benefit that was offered was a healthcare reimbursement account that could be used by participants for reimbursement of qualifying medical expenses. There were no severance benefits offered in connection with this plan. The window for acceptance of these voluntary termination benefits closed on August 15, 2007. During the three months ended September 30, 2007, approximately 170 employees accepted the offer and, pursuant to SFAS No. 88, “ Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits ,” Duke Energy recorded a charge of approximately $6 million related to this voluntary plan.

12. Discontinued Operations and Assets Held for Sale

Due to the expiration of certain tax credits, Commercial Power ceased all synthetic fuel (synfuel) operations as of December 31, 2007. Accordingly, the results of operations for synfuel have been reclassified to discontinued operations for the three and nine months ended September 30, 2007. See Note 15 for further information on the synfuel operations.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In February 2008, Duke Energy entered into an agreement to sell its 480 megawatt (MW) natural gas-fired peaking generating station located near Brownsville, Tennessee to Tennessee Valley Authority for approximately $55 million. This transaction, which was subject to FERC approval, closed in April 2008. This transaction resulted in Duke Energy recognizing an approximate $23 million pre-tax gain at closing.

The following table summarizes the results classified as (Loss) Income From Discontinued Operations, net of tax, in the Consolidated Statements of Operations.

Discontinued Operations (in millions)


			Operating Income (Loss)									Net Gain (Loss) on Dispositions
	Operating Revenues		Pre-tax Operating (Loss) Income			Income Tax (Benefit) Expense			Operating Income (Loss), Net of Tax			Pre-tax Income (Loss) on Dispositions			Income Tax Expense		Gain (Loss) on Dispositions, Net of Tax			(Loss) Income From Discontinued Operations, Net of Tax
Three Months Ended September 30, 2008
Commercial Power	$	1	$	1		$	2		$	(1	)	$	—		$	—	$	—		$	(1	)
International Energy		—		—			(1	)		1			—			—		—			1
Other		—		(2	)		(1	)		(1	)		—			—		—			(1	)

Total consolidated	$	1	$	(1	)	$	—		$	(1	)	$	—		$	—	$	—		$	(1	)

Three Months Ended September 30, 2007
Commercial Power	$	129	$	(43	)	$	(81	)	$	38		$	—		$	—	$	—		$	38
Other		—		(6	)		(2	)		(4	)		—			—		—			(4	)

Total consolidated	$	129	$	(49	)	$	(83	)	$	34		$	—		$	—	$	—		$	34

Nine Months Ended September 30, 2008
Commercial Power	$	5	$	1		$	(7	)	$	8		$	23		$	8	$	15		$	23
International Energy		—		(10	)		(4	)		(6	)		—			—		—			(6	)
Other		1		(5	)		(2	)		(3	)		—			—		—			(3	)

Total consolidated	$	6	$	(14	)	$	(13	)	$	(1	)	$	23		$	8	$	15		$	14

Nine Months Ended September 30, 2007
Commercial Power	$	259	$	(94	)	$	(148	)	$	54		$	(1	)	$	5	$	(6	)	$	48
International Energy		—		8			3			5			—			—		—			5
Other		—		(14	)		(4	)		(10	)		7			2		5			(5	)

Total consolidated	$	259	$	(100	)	$	(149	)	$	49		$	6		$	7	$	(1	)	$	48

The following table presents the carrying values of the major classes of Assets Held for Sale and related Liabilities Associated with Assets Held for Sale in the Consolidated Balance Sheets as of December 31, 2007, which primarily relate to Duke Energy Indiana’s Wabash River Power Station, the sale of which was completed in January 2008 (see Note 3). There were no Assets Held for Sale and related Liabilities Associated with Assets Held for Sale in the Consolidated Balance Sheets as of September 30, 2008.

Summarized Balance Sheet Information for Assets Held for Sale and Related Liabilities Associated with Assets Held for Sale (in millions)


	December 31, 2007
Current assets	$	2
Property, plant and equipment, net		115

Total assets held for sale	$	117

Current liabilities	$	114
Deferred credits and other liabilities		3

Total liabilities associated with assets held for sale	$	117

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

13. Risk Management Instruments

As discussed in Note 1, on January 1, 2008, Duke Energy adopted FSP No. FIN 39-1. In accordance with FSP No. FIN 39-1, Duke Energy offsets fair value amounts (or amounts that approximate fair value) recognized on its Consolidated Balance Sheets related to cash collateral amounts receivable or payable against fair value amounts recognized for derivative instruments executed with the same counterparty under the same master netting agreement. Amounts presented in the table below exclude cash collateral amounts which are disclosed separately in Note 1.

The following table shows the carrying value of Duke Energy’s derivative portfolio as of September 30, 2008, and December 31, 2007.

Net Derivative Portfolio Assets (Liabilities) reflected in the Consolidated Balance Sheets:


	September 30, 2008			December 31, 2007
	(in millions)
Hedging	$	(15	)	$	(34	)
Undesignated		49			39

Total	$	34		$	5

The amounts in the table above represent the combination of amounts included in the Consolidated Balance Sheets as a component of Other within Current Assets, Other within Investments and Other Assets, Other within Current Liabilities and Other within Deferred Credits and Other Liabilities.

The $19 million change in the fair value of the hedging portfolio is due primarily to the settlement of forward starting interest rate swaps at Duke Energy Carolinas and a gain on cash flow hedges at Commercial Power.

The $10 million increase in the fair value of the undesignated derivative portfolio is due primarily to unrealized mark-to-market gains within Commercial Power, which primarily consists of in-the-money contracts to purchase coal as a result of higher coal prices at September 30, 2008 as compared to December 31, 2007, partially offset by the forward contracts for SO ₂ emission allowances that no longer qualified for the NPNS exception under SFAS No. 133, as discussed further in Note 10.

During the three and nine months ended September 30, 2008, Duke Energy included in earnings approximately $119 million of pre-tax losses and approximately $35 million of pre-tax gains related to mark-to-market adjustments on derivative contracts that do not qualify for hedge accounting. Duke Energy included in earnings approximately $4 million of pre-tax gains and an insignificant amount during the three and nine months ended September 30, 2007. These amounts, which relate to the balances included within undesignated in the above table, primarily represent the mark-to-market impacts of derivative contracts used in Duke Energy’s hedging of a portion of the economic value of its generation assets in Commercial Power.

Commodity Cash Flow Hedges. As of September 30, 2008, approximately $30 million of the pre-tax unrealized net losses on derivative instruments related to commodity cash flow hedges included on the Consolidated Balance Sheet in Accumulated Other Comprehensive Loss are expected to be recognized in earnings during the next 12 months as the hedged transactions occur. However, due to the volatility of the commodities markets, the corresponding values in Accumulated Other Comprehensive Loss will likely change prior to their reclassification into earnings.

No gains or losses due to hedge ineffectiveness were recorded during the three and nine months ended September 30, 2008 and 2007, respectively. The amount recognized for transactions that no longer qualified as cash flow hedges was not significant for the three and nine months ended September 30, 2008 and 2007, respectively.

See Note 17 for additional information related to the fair value of Duke Energy’s derivative instruments.

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14. Regulatory Matters

Regulatory Merger Approvals.

On April 3, 2006, the merger between Duke Energy and Cinergy was consummated to create a newly formed company, Duke Energy Holding Corp. (subsequently renamed Duke Energy Corporation). As a condition to the merger approval, the Public Utilities Commission of Ohio (PUCO), the Kentucky Public Service Commission (KPSC), the Public Service Commission of South Carolina (PSCSC) and the North Carolina Utilities Commission (NCUC) required that certain merger related savings be shared with consumers in Ohio, Kentucky, South Carolina, and North Carolina, respectively. The commissions also required Duke Energy Holding Corp., Cinergy, Duke Energy Ohio, Duke Energy Kentucky and/or Duke Energy Carolinas to meet additional conditions. While the merger itself was not subject to approval by the IURC, the IURC approved certain affiliate agreements in connection with the merger subject to similar conditions. Key elements of these conditions include:

•

The PUCO required that Duke Energy Ohio provide (i) a rate reduction of approximately $15 million for one year to facilitate economic development in a time of increasing rates and market prices and (ii) a reduction of approximately $21 million to its gas and electric consumers in Ohio for one year, with both credits beginning January 1, 2006. During the first quarter of 2007, Duke Energy Ohio completed its merger related rate reductions and filed a report with the PUCO to terminate the merger credit riders. Approximately $2 million of the rate reductions was passed through to customers during the nine months ended September 30, 2007.

•

The KPSC required that Duke Energy Kentucky provide $8 million in rate reductions to its customers over five years, ending when new rates are established in the next rate case after January 1, 2008. Less than $1 million and approximately $2 million of the rate reduction was passed through to customers during the three and nine months ended both September 30, 2008 and 2007, respectively.

•

The PSCSC required that Duke Energy Carolinas provide a $40 million rate reduction for one year and a three-year extension to the Bulk Power Marketing (BPM) profit sharing arrangement. The rate reduction ended May 31, 2007. Approximately $16 million of the rate reduction was passed through to customers during the nine months ended September 30, 2007.

•

The NCUC required that Duke Energy Carolinas provide (i) a rate reduction of approximately $118 million for its North Carolina customers through a credit rider to existing base rates for a one-year period following the close of the merger and (ii) $12 million to support various low income, environmental, economic development and educationally beneficial programs, the cost of which was incurred in the second quarter of 2006. The rate reduction ended June 30, 2007. Approximately $62 million of the rate reduction was passed through to customers during the nine months ended September 30, 2007.

•

In its order approving Duke Energy’s merger with Cinergy, the NCUC stated that the merger will result in a significant change in Duke Energy’s organizational structure which constitutes a compelling factor that warrants a general rate review. Therefore, as a condition of its merger approval and no later than June 1, 2007, Duke Energy Carolinas was required to file a general rate case or demonstrate that Duke Energy Carolinas’ existing rates and charges should not be changed (see discussion under “Duke Energy Carolinas Rate Case” below).

•

The IURC required that Duke Energy Indiana provide a rate reduction of $40 million to its customers over a one year period and $5 million over a five year period for low-income energy assistance and clean coal technology. In April 2006, Citizens Action Coalition of Indiana, Inc., an intervenor in the merger proceeding, filed a Verified Petition for Rehearing and Reconsideration claiming that Duke Energy Indiana should be ordered to provide an additional $5 million in rate reduction to customers to be consistent with the terms of the NCUC’s order approving the merger. In May 2006, the IURC denied the petition for rehearing and reconsideration. As of April 30, 2007, Duke Energy Indiana had completed its merger related reductions and filed a notice with the IURC to terminate the merger credit rider. Approximately $13 million of the rate reduction was passed through to customers during the nine months ended September 30, 2007.

•

The FERC approved the merger without conditions.

Restrictions on the Ability of Certain Subsidiaries to Make Dividends, Advances and Loans to Duke Energy Corporation. As a condition of approving the merger of Duke Energy and Cinergy, the state utility commissions imposed conditions (the Merger Conditions) on the ability of Duke Energy Carolinas, Duke Energy Ohio, Duke Energy Kentucky and Duke Energy Indiana to transfer funds to Duke Energy through loans or advances, as well as restricted amounts available to pay dividends to Duke Energy. Duke Energy’s public

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utility subsidiaries may not transfer funds to the parent through intercompany loans or advances; however, certain subsidiaries may transfer funds to the parent by obtaining approval of the respective state regulatory commissions. Additionally, the Merger Conditions imposed the following restrictions on the ability of the public utility subsidiaries to pay cash dividends:

Duke Energy Carolinas . Under the Merger Conditions, Duke Energy Carolinas must limit cumulative distributions to Duke Energy Corporation subsequent to the merger to (i) the amount of retained earnings on the day prior to the closing of the merger, plus (ii) any future earnings recorded by Duke Energy Carolinas subsequent to the merger.

Duke Energy Ohio . Under the Merger Conditions, Duke Energy Ohio will not declare and pay dividends out of capital or unearned surplus without the prior authorization of the PUCO.

Duke Energy Kentucky . Under the Merger Conditions, Duke Energy Kentucky is required to pay dividends solely out of retained earnings and to maintain a minimum of 35% equity in its capital structure.

Duke Energy Indiana . Under the Merger Conditions, Duke Energy Indiana shall limit cumulative distributions paid subsequent to the Duke Energy-Cinergy merger to (i) the amount of retained earnings on the day prior to the closing of the merger plus (ii) any future earnings recorded by Duke Energy Indiana subsequent to the merger. In addition, Duke Energy Indiana will not declare and pay dividends out of capital or unearned surplus without prior authorization of the IURC.

Additionally, certain other subsidiaries of Duke Energy have restrictions on their ability to dividend, loan or advance funds to Duke Energy due to specific legal or regulatory restrictions, including, but not limited to, minimum working capital and tangible net worth requirements.

At September 30, 2008, Duke Energy’s consolidated subsidiaries had restricted net assets of approximately $10.7 billion that may not be transferred to Duke Energy without appropriate approval based on the aforementioned merger conditions.

U.S. Franchised Electric and Gas.

Rate Related Information . The NCUC, PSCSC, IURC and KPSC approve rates for retail electric and gas services within their states. The PUCO approves rates for retail gas and electric service within Ohio, except that non-regulated sellers of gas and electric generation also are allowed to operate in Ohio (see “Commercial Power” below). The FERC approves rates for electric sales to wholesale customers served under cost-based rates.

Used Nuclear Fuel

Under provisions of the Nuclear Waste Policy Act of 1982, Duke Energy contracted with the Department of Energy (DOE) for the disposal of used nuclear fuel. The DOE failed to begin accepting used nuclear fuel on January 31, 1998, the date specified by the Nuclear Waste Policy Act and in Duke Energy’s contract with the DOE. Duke Energy will continue to safely manage its used nuclear fuel until the DOE accepts it. In 1998, Duke Energy filed a claim with the U.S. Court of Federal Claims against the DOE related to the DOE’s failure to accept commercial used nuclear fuel by the required date. Damages claimed in the lawsuit were based upon Duke Energy’s costs incurred as a result of the DOE’s partial material breach of its contract, including the cost of securing additional used fuel storage capacity. Payments made to the DOE for expected future disposal costs are based on nuclear output and are included in the Consolidated Statements of Operations as Fuel Used in Electric Generation and Purchased Power. On March 5, 2007, Duke Energy Carolinas and the DOJ reached a settlement resolving Duke Energy’s used nuclear fuel litigation against the DOE. The agreement provided for an initial payment to Duke Energy of approximately $56 million for certain storage costs incurred through July 31, 2005, with additional amounts reimbursed annually for future storage costs. The settlement agreement resulted in a pre-tax earnings impact of approximately $26 million during the three months ended March 31, 2007, of which approximately $19 million and $7 million were recorded as an offset to Fuel Used in Electric Generation and Purchased Power, and Operation, Maintenance and Other, respectively, in the Consolidated Statements of Operations, with the remaining impact reflected within Inventory and Property, Plant and Equipment in the Consolidated Balance Sheets.

North Carolina Clean Air Act Compliance . In 2002, the state of North Carolina passed clean air legislation that froze electric utility rates from June 20, 2002 to December 31, 2007 (rate freeze period), subject to certain conditions, in order for North Carolina electric utilities, including Duke Energy Carolinas, to significantly reduce emissions of SO ₂ and NO _x from coal-fired power plants in the state. The legislation allowed electric utilities, including Duke Energy Carolinas, to accelerate the recovery of compliance costs by amortizing them over seven years (2003-2009). The legislation provided for significant flexibility in the amount of annual amortization

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recorded, allowing utilities to vary the amount amortized, within limits, although the legislation does require that a minimum of 70% of the originally estimated total cost of $1.5 billion be amortized within the rate freeze period (2002 to 2007). As discussed further below, under the Partial Settlement of the Duke Energy Carolinas rate case, effective January 1, 2008, Duke Energy Carolinas discontinued the amortization of environmental compliance costs incurred pursuant to the North Carolina clean air legislation and began capitalizing all environmental compliance costs above the cumulative amortization charge of $1.05 billion recorded by Duke Energy Carolinas associated with the North Carolina clean air legislation from inception through December 31, 2007. Of this amount, Duke Energy Carolinas’ recorded amortization expense related to this clean air legislation of $75 million and $187 million during the three and nine months ended September 30, 2007. As of September 30, 2008, cumulative expenditures totaled approximately $1,532 million, with approximately $286 million and $311 million incurred during the nine months ended September 30, 2008 and 2007, respectively, which are included within capital expenditures in Net Cash Used In Investing Activities on the Consolidated Statements of Cash Flows. In filings with the NCUC, Duke Energy Carolinas estimated the costs to comply with the legislation as approximately $1.8 billion (excluding any allowance for funds used during construction (AFUDC)). Actual costs may be higher or lower than the estimate based on changes in construction costs and Duke Energy Carolinas’ continuing analysis of its overall environmental compliance plan. As required by the legislation, the NCUC considered the reasonableness of Duke Energy Carolinas’ environmental compliance plan and the method for recovery of the remaining costs in a proceeding it initiated and consolidated with a review of Duke Energy Carolinas’ base rates (see “Duke Energy Carolinas Rate Case” below). Additionally, federal and state environmental regulations, including, among other things, CAIR, (see Note 15), and a likely federal mercury rule, could result in additional costs to reduce emissions from Duke Energy’s coal-fired power plants.

Duke Energy Carolinas Rate Case . In June 2007, Duke Energy Carolinas filed an application with the NCUC seeking authority to increase its rates and charges for electric service in North Carolina effective January 1, 2008. This application complied with a condition imposed by the NCUC in approving the Cinergy merger. On October 5, 2007, Duke Energy Carolinas filed an Agreement and Stipulation of Partial Settlement (Partial Settlement) among Duke Energy Carolinas, the North Carolina Public Staff, the North Carolina Attorney General’s Office, Carolina Utility Customers Association Inc., Carolina Industrial Group for Fair Utility Rates III and Wal-Mart Stores East LP, for consideration by the NCUC. The Partial Settlement, which included Duke Energy Carolinas and all intervening parties to the rate case, reflected agreements on all but a few issues in these matters, including two significant issues. The two significant issues related to the treatment of ongoing merger cost savings resulting from the Cinergy merger and the proposed amortization of Duke Energy Carolinas’ development costs related to GridSouth Transco, LLC (GridSouth), a Regional Transmission Organization (RTO) planned by Duke Energy Carolinas and other utility companies as a result of previous FERC rulemakings, which was suspended in 2002 and discontinued in 2005 as a result of regulatory uncertainty. The Partial Settlement and the remaining disputed issues were presented to the NCUC for a ruling.

The Partial Settlement reflected an agreed to reduction in net revenues and pre-tax cash flows of approximately $210 million and corresponding rate reductions of 12.7% to the industrial class, 5.05%—7.34% to the general class and 3.85% to the residential class of customers with an effective date of January 1, 2008. Under the Partial Settlement, effective January 1, 2008, Duke Energy Carolinas discontinued the amortization of the environmental compliance costs pursuant to North Carolina clean air legislation discussed above and began capitalizing all environmental compliance costs above the cumulative amortization charge of $1.05 billion as of December 31, 2007. Over the past five years, the average annual clean air amortization was $210 million. The Partial Settlement was designed to enable Duke Energy Carolinas to earn a rate of return of 8.57% on a North Carolina retail jurisdictional rate base and an 11% return on the common equity component of the approved capital structure, which consists of 47% debt and 53% common equity. As part of the settlement, Duke Energy Carolinas agreed to alter the then existing BPM profit sharing arrangement that included a provision to share 50% of the North Carolina retail allocation of the profits from certain wholesale sales of bulk power from Duke Energy Carolinas’ generating units at market based rates. The Partial Settlement provided for Duke Energy Carolinas to share 90% of the North Carolina retail allocation of the profits from BPM transactions beginning January 1, 2008.

The NCUC issued its Order Approving Stipulation and Deciding Non-Settled Issues (Order) on December 20, 2007. The NCUC approved the Partial Settlement in its entirety. The merger savings rider and GridSouth cost matters are discussed in detail below. For the remaining non-settled issues, the NCUC decided in Duke Energy Carolinas’ favor. With respect to the merger savings rider and GridSouth cost matters, the Order required that Duke Energy Carolinas’ test period for operating costs reflect an annualized level of the merger cost savings actually experienced in the test period in keeping with traditional principles of

ratemaking. The NCUC explained that because rates should be designed to recover a reasonable and prudent level of ongoing expenses, Duke Energy Carolinas’ annual cost of service and revenue requirement should reflect, as closely as possible, Duke Energy Carolinas’ actual costs. However, the NCUC recognized that its treatment of merger savings would not produce a fair result. Therefore, the NCUC

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preliminarily concluded that it would reconsider certain language in its 2006 merger order in order to allow it to authorize a 12-month increment rider, beginning January 2008, of approximately $80 million designed to provide a more equitable sharing of the actual merger savings achieved on an ongoing basis. Additionally, the NCUC concluded that approximately $30 million of costs incurred through June 2002 in connection with GridSouth and deferred by Duke Energy Carolinas, were reasonable and prudent and approved a ten-year amortization, retroactive to June 2002. As a result of the retroactive impact of the Order, Duke Energy Carolinas recorded an approximate $17 million charge to write-off a portion of the GridSouth costs in the fourth quarter of 2007. The NCUC did not allow Duke Energy Carolinas a return on the GridSouth investments. As a result of its decision on the non-settled issues, the NCUC ordered an additional reduction in annual revenues of approximately $54 million, offset by its preliminary authorization of a 12-month, $80 million increment rider, as discussed above. The Order ultimately resulted in an overall average rate decrease of 5% in 2008, increasing to 7% upon expiration of this one-time rate rider. On February 18, 2008, the NCUC issued an order confirming their preliminary conclusion regarding the merger savings rider and the $80 million increment rider. Duke Energy Carolinas implemented the rate rider effective January 1, 2008.

On December 12, 2007, the PSCSC directed the South Carolina Office of Regulatory Staff (ORS) to provide a written report concerning the NCUC’s resolution of Duke Energy Carolinas’ rate application and its relevance to Duke Energy Carolinas’ rates in South Carolina. On January 31, 2008, the ORS filed its report with the PSCSC, which concluded that the outcome of the North Carolina rate case had no bearing on Duke Energy Carolinas’ rates in South Carolina. The PSCSC has not taken any action with respect to the report filed by the ORS.

The NCUC has requested that the Public Staff perform a review of Duke Energy Carolinas’ pension and other post-retirement benefit plan costs, as well as Duke Energy’s funding of the plans. At this time, Duke Energy Carolinas does not anticipate that the outcome of this review will have a material impact on its financial position, results of operations or cash flows.

Duke Energy Ohio Electric Rate Filings . Duke Energy Ohio operates under a rate stabilization plan (RSP), a MBSSO approved by the PUCO in November 2004. In March 2005, the Office of the Ohio Consumers’ Counsel (OCC) appealed the PUCO’s approval of the MBSSO to the Supreme Court of Ohio which issued its decision in November 2006. It upheld the MBSSO in virtually every respect but remanded to the PUCO on two issues. The Supreme Court of Ohio ordered the PUCO to support a certain portion of its order with reasoning and record evidence and to require Duke Energy Ohio to disclose certain confidential commercial agreements with other parties previously requested by the OCC. Duke Energy Ohio has complied with the disclosure order.

In October 2007, the PUCO issued its ruling affirming the MBSSO, with certain modifications, and maintained the current price. The ruling provided for continuation of the existing rate components, including the recovery of costs related to new pollution control equipment and capacity costs associated with power purchase contracts to meet customer demand, but provided customers an enhanced opportunity to avoid certain pricing components if they are served by a competitive supplier. The ruling also attempted to modify the statutory requirement that Duke Energy Ohio transfer its generating assets to an exempt wholesale generator (EWG) and ordered Duke Energy Ohio to retain ownership for the remainder of the RSP period. The ruling also incorrectly implied that Duke Energy Ohio’s non-residential regulatory transition charge (RTC) will terminate at the end of 2008. On November 23, 2007, Duke Energy Ohio filed an application for rehearing on the portions of the PUCO’s ruling relating to whether certain pricing components may be avoided by customers, the right to transfer generating assets, and the termination date of the RTC. On December 19, 2007, the PUCO issued its Entry on Rehearing granting in part and denying in part Duke Energy Ohio’s Application for Rehearing. Among other things, the PUCO modified and clarified the applicability of various rate riders during customer shopping situations. It also clarified that the residential RTC terminates at the end of 2008 and that the non-residential RTC terminates at the end of 2010 and agreed to give further consideration to whether Duke Energy Ohio may transfer its generating assets to an EWG.

On February 15, 2008, Duke Energy Ohio filed a notice of appeal with the Ohio Supreme Court challenging a portion of the PUCO’s decision on remand regarding Duke Energy Ohio’s RSP. The October 2007 order permits non-residential customers to avoid certain charges associated with the costs of Duke Energy Ohio standing ready to serve such customers if they return after being served by another supplier. Duke Energy Ohio believes the PUCO exceeded its authority in modifying the charges that may be avoided, resulting in Duke Energy Ohio having to subsidize Ohio’s competitive electric market. Duke Energy Ohio has asked the Ohio Supreme Court to reverse the PUCO ruling and require that non-residential customers pay the charges associated with Duke Energy Ohio standing ready to serve them should they return from a competitive supplier. On March 28, 2008, Duke Energy Ohio voluntarily withdrew its appeal. The OCC filed a notice of appeal challenging the PUCO’s October 2007 decision as unlawful and unreasonable. The OCC and Ohio Partners for Affordable Energy (OPAE) also filed appeals from the PUCO’s November 20, 2007 order approving Duke Energy Ohio’s MBSSO riders. Duke Energy Ohio has intervened in each appeal. Pending the Ohio Supreme Court’s consideration of its initial appeal, the OCC requested

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that the PUCO stay implementation of the Infrastructure Maintenance Fund charge to be collected from customers approved in the October 2007 order. The Commission denied the OCC’s request and the OCC filed a similar request with the Ohio Supreme Court. On July 9, 2008, the court denied the OCC’s request to stay implementation of the Infrastructure Maintenance Fund. On April 30, 2008, the Ohio Supreme Court granted Duke Energy Ohio’s motion to intervene in the OCC’s appeal. At this time, Duke Energy Ohio cannot predict whether the Ohio Supreme Court will reverse the PUCO’s October 2007 decision. Additionally, Duke Energy Ohio cannot predict the outcome of the MBSSO rider appeal.

New legislation (SB 221) was passed on April 23, 2008 and signed by the Governor of Ohio on May 1, 2008. The new law codifies the PUCO’s authority to approve an electric utility’s standard service offer through an electric security plan (ESP), which would allow for pricing structures similar to the current MBSSO. Electric utilities are required to file an ESP and may also file an application for a market rate option (MRO) at the same time. The MRO is a price determined through a competitive bidding process. If a MRO price is approved, the utility would blend in the MBSSO or ESP price with the MRO price over a six- to ten-year period, subject to the PUCO’s discretion. SB 221 provides for the PUCO to approve non-by-passable charges for new generation, including construction work-in-process from the outset of construction, as part of an ESP. The new law grants the PUCO discretion to approve single issue rate adjustments to distribution and transmission rates and establishes new alternative energy resources (including renewable energy) portfolio standards, such that the utility’s portfolio must consist of at least 25% of these resources by 2025. SB 221 also provides a separate requirement for energy efficiency, which must reduce 22% of a utility’s load by 2025. The utility’s earnings under the ESP can be subject to an annual earnings test and the PUCO must order a refund if it finds that the utility’s earnings significantly exceed the earnings of benchmark companies with similar business and financial risks. The earnings test acts as a cap to the ESP price. SB 221 also limits the ability of a utility to transfer its designated generating assets to an EWG absent PUCO approval.

On July 31, 2008 Duke Energy Ohio filed a new generation pricing formula to be effective January 1, 2009, when the current RSP is scheduled to expire. Among other things, the plan provides pricing mechanisms for compensation related to the advanced energy, renewables and energy efficiency portfolio standards established by SB 221.

On October 27, 2008 Duke Energy Ohio filed a Stipulation and Recommendation (Stipulation) for consideration by the PUCO regarding Duke Energy Ohio’s July 31, 2008 ESP filing. The Stipulation reflects agreement on all but two issues in this proceeding and is filed with the support of most of the parties to this proceeding. In addition to the Stipulation, the ability for residential governmental aggregation customers to avoid certain charges and to receive a shopping credit will be presented to the PUCO for a ruling. Parties to this proceeding who do not support the Stipulation may litigate any, or all, issues.

The Stipulation agrees to a net increase in base generation revenues of approximately $36 million, $74 million and $98 million in 2009, 2010 and 2011, respectively, including termination of the residential and non-residential RTC. Such amounts result in a residential net rate increase of 2% in 2009 and in 2010, and a non-residential rate increase of 2% in 2009, 2010 and 2011. The Stipulation also allows the recovery of expenditures incurred to deploy SmartGrid infrastructure modernization technology on the distribution system. The recovery of such expenditures, net of savings, is subject to an annual residential revenue cap. Further, the Stipulation allows for the implementation of a new energy efficiency compensation model, referred to as Save-A-Watt, to achieve the energy efficiency mandate pursuant to the recent electric energy legislation. The criteria customers must meet to be exempt from Duke Energy Ohio’s program will also be presented to the PUCO for a ruling in this case. Also under the Stipulation, Duke Energy Ohio may defer up to $50 million of certain operation and maintenance costs incurred at the W.C. Beckjord generating station and amortize such costs over a three-year period.

The PUCO will consider the Stipulation and hear evidence beginning on November 10, 2008.

Duke Energy Ohio Gas Rate Case. In July 2007, Duke Energy Ohio filed an application with the PUCO for an increase in its base rates for gas service. Duke Energy Ohio sought an increase of approximately $34 million in revenue, or approximately 5.7%, to be effective in the spring of 2008. The application also requested approval to continue tracker recovery of costs associated with the accelerated gas main replacement program. The staff of the PUCO issued a Staff Report in December 2007 recommending an increase of approximately $14 million to $20 million in revenue. The Staff Report also recommended approval for Duke Energy Ohio to continue tracker recovery of costs associated with the accelerated gas main replacement program. On February 28, 2008, Duke Energy Ohio reached a

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settlement agreement with the PUCO Staff and all of the intervening parties on its request for an increase in natural gas base rates. The settlement called for an annual revenue increase of approximately $18 million in base revenue, or 3% over current revenue, permitted continued recovery of costs through 2018 for Duke Energy Ohio’s accelerated gas main replacement program and permitted recovery of carrying costs on gas stored underground via its monthly gas cost adjustment filing. The settlement did not resolve a proposed rate design for residential customers, which involved moving more of the fixed charges of providing gas service, such as capital investment in pipes and regulating equipment, billing and meter reading, from the per unit charges to the monthly charge. On May 28, 2008, the PUCO approved the settlement in its entirety and the proposed rate design. On June 28, 2008, the OCC and OPAE filed Applications for Rehearing opposing the rate design. On July 23, 2008 the Ohio Commission issued an Entry denying the rehearing requests of OCC and OPAE. On September 16 and 19, 2008 respectively, OCC and OPAE filed their notices of appeal to the Ohio Supreme Court opposing the residential rate design issue.

Duke Energy Ohio Electric Distribution Rate Case . On June 25, 2008, Duke Energy Ohio filed notice with the PUCO that it will seek a rate increase for electric delivery service of approximately $86 million, or 4.8% on total electric revenues, to be effective in the second quarter of 2009. Among other things, the rate request includes a proposal to increase the monthly residential customer charge from $4.50 to $10, with an offsetting reduction in the usage-based charge. This change in rate design will make customer bills more even throughout the year. Duke Energy Ohio also proposes a distribution modernization tracker that would allow smaller annual increases to reflect increased investment in the delivery system.

Duke Energy Kentucky Gas Rate Cases . In 2002, the KPSC approved Duke Energy Kentucky’s gas base rate case which included, among other things, recovery of costs associated with an accelerated gas main replacement program. The approval authorized a tracking mechanism to recover certain costs including depreciation and a rate of return on the program’s capital expenditures. The Kentucky Attorney General appealed to the Franklin Circuit Court the KPSC’s approval of the tracking mechanism as well as the KPSC’s subsequent approval of annual rate adjustments under this tracking mechanism. In 2005, both Duke Energy Kentucky and the KPSC requested that the court dismiss these cases.

In February 2005, Duke Energy Kentucky filed a gas base rate case with the KPSC requesting approval to continue the tracking mechanism and for a $14 million annual increase in base rates. A portion of the increase is attributable to recovery of the current cost of the accelerated gas main replacement program in base rates. In December 2005, the KPSC approved an annual rate increase of $8 million and re-approved the tracking mechanism through 2011. In February 2006, the Kentucky Attorney General appealed the KPSC’s order to the Franklin Circuit Court, claiming that the order improperly allows Duke Energy Kentucky to increase its rates for gas main replacement costs in between general rate cases, and also claiming that the order improperly allows Duke Energy Kentucky to earn a return on investment for the costs recovered under the tracking mechanism which permits Duke Energy Kentucky to recover its gas main replacement costs.

In August 2007, the Franklin Circuit Court consolidated all the pending appeals and ruled that the KPSC lacks legal authority to approve the gas main replacement tracking mechanism, and any other annual rate adjustments under the tracking mechanism. To date, Duke Energy Kentucky has collected approximately $9 million in annual rate adjustments under the tracking mechanism. Duke Energy Kentucky and the KPSC have appealed these cases to the Kentucky Court of Appeals and Duke Energy Kentucky continues to utilize tracking mechanisms in its billed rates to customers. At this time, Duke Energy Kentucky cannot predict the outcome of these proceedings.

Energy Efficiency . In May 2007, Duke Energy Carolinas filed an energy efficiency plan with the NCUC that recognizes energy efficiency as a reliable, valuable resource that is a fifth fuel, that should be part of the portfolio available to meet customers’ growing need for electricity along with coal, nuclear, natural gas, or renewable energy. The plan would compensate Duke Energy Carolinas for verified reductions in energy use and be available to all customer groups. The plan contains proposals for several different energy efficiency programs. Customers would pay for energy efficiency programs with an energy efficiency rider that would be included in their power bill and adjusted annually. The energy efficiency rider would be based on 90% of the avoided capacity and energy cost of generation not needed as a result of the success of Duke Energy Carolinas’ energy efficiency efforts. The plan is consistent with Duke Energy Carolinas’ public commitment to invest 1% of its annual retail revenues from the sale of electricity in energy efficiency programs subject to the appropriate regulatory treatment of Duke Energy Carolinas’ energy efficiency investments. Piedmont Natural Gas Company and Public Service Company of North Carolina, Inc. raised certain concerns regarding the incentives offered to Duke Energy Carolinas’ customers under its proposed portfolio of energy efficiency programs. In June 2008, Duke Energy Carolinas filed settlement agreements resolving all issues with these parties. Duke Energy Carolinas has not reached settlement with any of the other intervenors. The evidentiary hearing

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occurred the week of July 28, 2008 and concluded on August 18, 2008. Duke Energy Carolinas was unable to reach a settlement with any party to the proceeding. On October 7, 2008 Duke Energy Carolinas filed its proposed order and legal brief with the NCUC.

On September 28, 2007, Duke Energy Carolinas filed an application with the PSCSC seeking approval to implement new energy efficiency programs in South Carolina. Duke Energy Carolinas’ South Carolina application is based on the application filed in North Carolina. In advance of the evidentiary hearing held February 5-6, 2008, Duke Energy Carolinas reached settlement agreements with the South Carolina ORS, Wal-Mart Stores, Inc., and the South Carolina Energy Users Committee. This agreement calls for Duke Energy Carolinas to bear the cost of the programs and allow for recovery of 85% of the avoided generation charges. Duke Energy Carolinas also filed settlement agreements with Piedmont Natural Gas Company and Public Service Company of North Carolina in late June 2008, which resolve all issues between Duke Energy Carolinas and these natural gas local distribution companies. Certain environmental groups that are also intervenors in the proceeding did not join any of these settlements. In light of the settlement in Indiana and the on-going settlement discussions in Ohio as part of the ESP, as discussed further below, Duke Energy Carolinas has re-initiated settlement talks with the parties to the South Carolina proceeding.

Implementation of these plans is subject to approval from the NCUC and PSCSC.

On July 11, 2007, the PUCO approved Duke Energy Ohio’s Demand Side Management/Energy Efficiency Program (DSM Program). The DSM programs were first proposed in 2006 and were endorsed by the Duke Energy Community Partnership, which is a collaborative group made up of representatives of organizations interested in energy conservation, efficiency and assistance to low-income customers. The program costs are recouped through a cost recovery mechanism that will be adjusted annually to reflect the previous year’s activity. Duke Energy Ohio is permitted to recover lost revenues, program costs and shared savings (once the programs reach 65% of the targeted savings level) through the cost recovery mechanism based upon impact studies to be provided to the Staff of the PUCO. Duke Energy Ohio filed the Save-A-Watt Energy Efficiency Plan as part of its ESP filed with PUCO on July 31, 2008 (discussed above). A Stipulation and Recommendation for consideration by the PUCO regarding Duke Energy Ohio’s ESP filing, including implementation of Save-A-Watt, was filed on October 27, 2008. The ESP is set for hearing beginning November 3, 2008.

In October 2007, Duke Energy Indiana filed its petition with the IURC requesting approval of an alternative regulatory plan to increase its energy efficiency efforts in the state. Similar to the plans in North Carolina and South Carolina, Duke Energy Indiana seeks approval of a plan that will be available to all customer groups and will compensate Duke Energy Indiana for verified reductions in energy usage. Under the plan, customers would pay for energy efficiency programs through an energy efficiency rider that would be included in their power bill and adjusted annually through a proceeding before the IURC. The energy efficiency rider proposal is based on the avoided cost of generation not needed as a result of the success of Duke Energy Indiana’s energy efficiency programs. A number of parties have intervened in the proceeding. On May 29, 2008 Duke Energy and Vectren Energy Delivery of Indiana, Inc. filed a stipulation and settlement agreement in the proceeding. On August 1, 2008, Duke Energy Indiana reached a settlement agreement with the OUCC resolving all issues in the proceeding. The settlement agreement was filed with the IURC on August 15, 2008. On October 31, 2008, Duke Energy Indiana reached a settlement agreement with Nucor Corporation, Steel Dynamics, Inc. and the Kroger Company resolving all issues in the proceeding. The settlement agreement was filed with the IURC on November 3, 2008. Duke Energy Indiana has not reached a settlement with the other intervenors in the proceeding. An evidentiary hearing with the IURC is anticipated to occur in the first quarter of 2009.

On November 15, 2007, Duke Energy Kentucky filed its annual application to continue existing energy efficiency programs, consisting of nine residential and two commercial and industrial programs, and to true-up its gas and electric tracking mechanism for recovery of lost revenues, program costs and shared savings. On February 11, 2008, Duke Energy Kentucky filed a motion to amend its energy efficiency programs and applied to reinstitute a low income Home Energy Assistance Program. The KPSC bifurcated the proposed Home Energy Assistance Program from the other energy efficiency programs. On May 14, 2008, the KPSC approved the energy efficiency programs. On September 25, 2008, the KPSC approved Duke Energy Kentucky’s Home Energy Assistance program, making it available for customers at or below 150% of the federal poverty level.

2007 North Carolina and South Carolina Legislation . South Carolina passed new energy legislation (S 431) which became effective May 3, 2007. A key element of the legislation include expansion of the annual fuel clause mechanism to include recovery of costs of reagents (e.g., ammonia, limestone, etc.) that are consumed in the operation of Duke Energy Carolinas’ SO ₂ and NO _x control technologies. The cost of reagents for Duke Energy Carolinas in 2008 is expected to be approximately $30 million. With the enactment of this legislation, Duke Energy Carolinas will be allowed to recover the South Carolina portion of these costs, incurred on or after May 3,

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2007, through the fuel clause. The legislation also includes provisions to provide assurance of cost recovery related to a utility’s incurrence of project development costs associated with nuclear baseload generation, cost recovery assurance for construction costs associated with nuclear or coal baseload generation, and the ability to recover financing costs for new nuclear baseload generation in rates during construction. The North Carolina General Assembly also passed comprehensive energy legislation (SB 3) in July 2007 that was signed into law by the Governor on August 20, 2007. The North Carolina legislation allows utilities to recover the costs of reagents and certain purchased power costs. Like the South Carolina legislation, the North Carolina legislation provides cost recovery assurance, subject to prudency review, for nuclear project development costs as well as baseload generation construction costs. A utility may include financing costs related to construction work in progress for baseload plants in a rate case. The North Carolina legislation also establishes a renewable portfolio standard for electric utilities at 3% of energy output in 2012, rising gradually to 12.5% by 2021, and grants the NCUC authority to approve a rate rider to compensate utilities for energy efficiency programs that they implement, as well as incremental costs incurred to comply with the renewable portfolio standard. On February 29, 2008, the NCUC adopted new rules and modified existing rules to implement the legislation.

Renewable Resources . On June 6, 2008, Duke Energy Carolinas filed an application with the NCUC for approval of a Solar Photovoltaic (PV) Distributed Generation Program. The application seeks authorization to invest approximately $100 million to install approximately 850 solar PV facilities on customer rooftops and other customer and company owned property over a two-year period, resulting in a total generating capacity of 20 MW. If approved, the program would enable Duke Energy Carolinas to partially satisfy the Renewable Energy and Energy Efficiency Portfolio Standards established by SB 3. It will also enable Duke Energy Carolinas to evaluate the role of distributed generation on Duke Energy Carolinas’ electrical system and gain experience in owning and operating renewable energy resources. Because the Program involves the construction of electric generating facilities, the NCUC must issue a Certificate of Public Convenience and Necessity (CPCN) to Duke Energy Carolinas before it may proceed. On October 20, 2008, Duke Energy Carolinas filed rebuttal testimony, agreeing to reduce the size of the program to an investment of approximately $50 million to install a total generating capacity of 10 MW to address concerns raised by other parties to the proceeding. The NCUC held a hearing on this matter on October 23, 2008.

Capital Expansion Projects

Overview . U.S. Franchised Electric and Gas is engaged in planning efforts to meet projected load growth in its service territories. Capacity additions may include new nuclear, integrated gasification combined cycle (IGCC), coal facilities or gas-fired generation units. Because of the long lead times required to develop such assets, U.S. Franchised Electric and Gas is taking steps now to ensure those options are available.

William States Lee III Nuclear Station . On December 12, 2007, Duke Energy Carolinas filed an application with the Nuclear Regulatory Commission (NRC) for a combined Construction and Operating License (COL) for two Westinghouse AP1000 (advanced passive) reactors for the proposed William States Lee III Nuclear Station at a site in Cherokee County, South Carolina. Each reactor is capable of producing approximately 1,117 MW. Submitting the COL application does not commit Duke Energy Carolinas to build nuclear units. On February 25, 2008, Duke Energy Carolinas received confirmation from the NRC that its COL application has been accepted and docketed for the next stage of review. On June 27, 2008, the Blue Ridge Environmental Defense League (BREDL) filed a petition to intervene in the Lee COL proceeding before the NRC. On September 22, 2008, the Atomic Safety and Licensing Board issued a decision denying BREDL’s Petition to Intervene and Request for Hearing. BREDL did not appeal the decision. On December 7, 2007, Duke Energy Carolinas filed applications with the NCUC and the PSCSC for approval of Duke Energy Carolinas’ decision to incur development costs associated with the proposed William States Lee III Nuclear Station. The NCUC had previously approved Duke Energy’s decision to incur the North Carolina allocable share of up to $125 million in development costs through 2007. The new requests cover a total of up to $230 million in development costs through 2009, which is comprised of $70 million incurred through December 31, 2007 plus an additional $160 million of anticipated costs in 2008 and 2009. The PSCSC approved Duke Energy Carolinas’ Lee Nuclear project development cost application on June 9, 2008, and the NCUC issued its approval order on June 11, 2008. On July 24, 2008, environmental intervenors filed motions to rescind or amend the approval orders issued by the NCUC and the PSCSC, and Duke Energy Carolinas subsequently filed responses in opposition to the motions. On August 13 and August 25, 2008, the PSCSC and NCUC denied the environmental intervenor motion.

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Cliffside Unit 6 . On June 2, 2006, Duke Energy Carolinas filed an application with the NCUC for a CPCN to construct two 800 MW state of the art coal generation units at its existing Cliffside Steam Station in North Carolina. On March 21, 2007, the NCUC issued an Order allowing Duke Energy Carolinas to build one 800 MW unit. The NCUC’s Order explained the basis for its decision to approve construction of one unit, with an approved cost estimate of $1.93 billion (including AFUDC), and included certain conditions including providing for updates on construction cost estimates. A group of environmental intervenors filed a motion and supplemental motion for reconsideration in April 2007 and May 2007, respectively. The NCUC denied the motions for reconsideration in June 2007. On February 29, 2008, Duke Energy Carolinas filed its latest updated cost estimate of $1.8 billion (excluding approximately $0.6 billion of AFUDC) for the approved new Cliffside Unit 6. Duke Energy Carolinas believes that the overall cost of Cliffside Unit 6 will be reduced by approximately $125 million in federal advanced clean coal tax credits, as discussed further below. On February 20, 2008, Duke Energy Carolinas entered into an amended and restated engineering, procurement, construction and commissioning services agreement, valued at approximately $1.3 billion, with an affiliate of The Shaw Group, Inc., of which approximately $950 million relates to participation in the construction of Cliffside Unit 6, with the remainder related to a flue gas desulfurization system on an existing unit at Cliffside.

On January 29, 2008, the North Carolina Department of Environment and Natural Resources (DENR) issued a final air permit for the new Cliffside Unit 6 and on-site construction has begun. In March 2008, four contested case petitions were filed appealing the final air permit. Duke Energy has moved to intervene in all four cases and the DENR has moved to consolidate all four cases. A hearing is not expected before the second quarter of 2009. See Note 15 for a discussion of a lawsuit filed by the Southern Alliance for Clean Energy, Environmental Defense Fund, National Parks Conservation Association, Natural Resources Defenses Council, and Sierra Club (collectively referred to as Citizen Groups) related to the construction of Cliffside Unit 6.

On October 11, 2007, the environmental group N.C. Waste Awareness Reduction Network (WARN) and two individual N.C. WARN members filed a petition against the DENR contesting the issuance of a wastewater discharge permit to Duke Energy Carolinas for the Cliffside Steam Station. This matter has been settled and the dismissal and settlement document was filed with the Office of Administrative Hearings on March 4, 2008.

Based on initial review, the D.C. Circuit Court of Appeal’s February 8, 2008 decision vacating the U.S. Environmental Protection Agency’s (EPA) Clean Air Mercury Rule (CAMR) (see Note 15) should have no immediate impact on Cliffside. The North Carolina mercury emission limit is more stringent than the new source limit in CAMR. On March 5, 2008, the Southern Environmental Law Center filed a letter with the North Carolina Division of Air Quality (DAQ) on behalf of 17 environmental groups. The letter urges DAQ to reopen and modify or revoke Cliffside’s air permit because of the D.C. Circuit Court’s decision vacating CAMR. On March 19, 2008, N.C. WARN filed a contested case petition with the Office of Administrative Hearings challenging the Cliffside air permit and seeking a stay. Also in March 2008, the Southern Environmental Law Center, on behalf of several environmental organizations, several Riverkeeper organizations and Appalachian Voices filed contested case petitions. Duke Energy Carolinas moved to intervene in these three cases.

On October 14, 2008, Duke Energy Carolinas submitted revised hazardous air pollutant emissions determination documentation including revised emission source information to DAQ indicating that no maximum achievable control technology (MACT) or MACT-like requirements apply since Unit 6 has been demonstrated to be a minor source of hazardous air pollutants. On October 24, 2008, Duke Energy Carolinas filed to amend its air permit to include emission limits to assure the public of the minor source status of Cliffside Unit 6.

Dan River Steam Station and Buck Steam Station . On June 29, 2007, Duke Energy Carolinas filed with the NCUC preliminary CPCN information to construct a 620 MW combined cycle natural gas-fired generating facility at its existing Dan River Steam Station, as well as updated preliminary CPCN information to construct a 620 MW combined cycle natural gas-fired generating facility at its existing Buck Steam Station. On December 14, 2007, Duke Energy Carolinas filed CPCN applications for the two combined cycle facilities. The NCUC consolidated its consideration of the two CPCN applications and held an evidentiary hearing on the applications on March 11, 2008. The NCUC issued its order approving the CPCN applications for the Buck and Dan River combined cycle projects on June 5, 2008. On May 5, 2008, Duke Energy Carolinas entered into an engineering, construction and commissioning services agreement for the Buck combined cycle project, valued at approximately $275 million, with Shaw North Carolina, Inc.

The combined cycle natural gas-fired generating facility at the existing Buck Steam Station will affect an isolated wetland, and Duke Energy Carolinas applied for a state permit. DENR issued the permit with an unacceptable condition requiring submission of a storm water plan before engineering and project siting have determined the location of the facilities. Duke Energy Carolinas challenged the permit and the matter has been resolved; DENR has issued a new permit acceptable to Duke Energy Carolinas. On October 15, 2008 DENR issued a final construction permit authorizing construction of the Buck combined cycle natural gas-fired generating units.

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Edwardsport Integrated Gasification Combined Cycle Plant. On September 7, 2006, Duke Energy Indiana and Southern Indiana Gas and Electric Company d/b/a Vectren Energy Delivery of Indiana (Vectren) filed a joint petition with the IURC seeking a CPCN for the construction of a 630 MW IGCC power plant at Duke Energy Indiana’s Edwardsport Generating Station in Knox County, Indiana. The petition describes the applicants’ need for additional base load generating capacity and requests timely recovery of all construction and operating costs related to the proposed generating station, including financing costs, together with certain incentive ratemaking treatment. In April 2007, Duke Energy Indiana and Vectren filed a Front End Engineering and Design Study Report which included an updated estimated cost for the IGCC project of approximately $2 billion (including approximately $120 million of AFUDC). In June 2007, Vectren decided not to proceed with the CPCN petition, and in August 2007, Vectren formally withdrew its participation in the IGCC plant. In June 2007, a hearing was conducted on the CPCN petition based on Duke Energy Indiana owning 100% of the project. On November 20, 2007, the IURC issued an order granting Duke Energy Indiana a CPCN for the proposed IGCC project, approved the cost estimate of $1.985 billion and approved the timely recovery of costs related to the project. The IURC also approved Duke Energy Indiana’s proposal to initiate a proceeding in May 2008 concerning proposals for the study of partial carbon capture, sequestration and/or enhanced oil recovery for the Edwardsport IGCC Project. On January 25, 2008, Duke Energy Indiana received the final air permit from the Indiana Department of Environmental Management. The Citizens Action Coalition of Indiana, Inc., Sierra Club, Inc., Save the Valley, Inc., and Valley Watch, Inc., all intervenors in the CPCN proceeding, have appealed the IURC Order to the Indiana Court of Appeals and also appealed the air permit. The Joint Brief of the Appellants in the appeal of the CPCN case was filed on May 30, 2008 and the Duke Energy Indiana Brief of Appellee was filed on July 23, 2008 in the appeal of the IURC CPCN Order. On October 16, 2008, the Indiana Court of Appeals affirmed the IURC’s grant of Duke Energy Indiana’s CPCN petition.

On May 1, 2008, Duke Energy Indiana filed its first semi-annual IGCC Rider and ongoing review proceeding with the IURC as required under the CPCN Order issued by the IURC in November 2007, which approved the IGCC Project. In its filing, Duke Energy Indiana requested approval of a new cost estimate for the IGCC Project of $2.35 billion (including approximately $125 million of AFUDC) and for approval of plans to study carbon capture, sequestration and/or enhanced oil recovery, as required by the IURC’s November 2007 CPCN Order. An evidentiary hearing was conducted on August 25, 2008. Proposed orders were submitted by the parties in September and an order is expected later this year. Under the CPCN order and statutory provisions, Duke Energy Indiana is entitled to recover the costs reasonably incurred in reliance on the CPCN Order. Duke Energy Indiana has begun construction on the Edwardsport IGCC plant.

Federal Advanced Clean Coal Tax Credits. Duke Energy has been awarded approximately $125 million of federal advanced clean coal tax credits associated with its construction of Cliffside Unit 6 and approximately $134 million of federal advanced clean coal tax credits associated with its construction of the Edwardsport IGCC plant. Since these credits were issued, Appalachian Voices and The Canary Coalition of Sylva have filed suit in a Washington federal court attempting to block tax credits issued to Duke Energy and other utilities that are in the process of constructing clean-coal technology plants throughout the United States, citing that the DOE violated the National Environmental Protection Act in granting these credits. The groups are seeking a preliminary injunction requiring the DOE to suspend the credits until the merits of the suit can be heard. Duke Energy believes these credits were properly awarded.

Other U.S. Franchised Electric and Gas Matters

Ohio Riser Leak Investigation. In April 2005, the PUCO issued an order opening a statewide investigation into riser leaks in gas pipeline systems throughout Ohio. The investigation followed four explosions since 2000 caused by gas riser leaks, including an April 2000 explosion in Duke Energy Ohio’s service area. In November 2006, the PUCO Staff released the expert report, which concluded that certain types of risers are prone to leaks under various conditions, including over-tightening during initial installation. The PUCO Staff recommended that natural gas companies continue to monitor the situation and study the cause of any further riser leaks to determine whether further remedial action is warranted. Duke Energy Ohio has approximately 87,000 of these risers on its distribution system. If the PUCO orders natural gas companies to replace all of these risers, Duke Energy Ohio estimates a replacement cost of approximately $40 million. As part of the rate case filed in July 2007 (see “Duke Energy Ohio Gas Rate Case” above), Duke Energy Ohio requested approval from the PUCO to accelerate its riser replacement program. The riser replacement program is contained in the settlement reached with all intervenors and will be completed at the end of 2012.

City of Orangeburg, South Carolina Wholesale Sales. On June 20, 2008, Duke Energy Carolinas filed notice with the NCUC that it intends to sell electricity at wholesale under a Power Purchase Agreement dated May 23, 2008 to the City of Orangeburg, South Carolina, at the same level of firmness or reliability as it provides to its retail customers (i.e. native load priority). This notice is required by a condition imposed by the NCUC in approving the Cinergy merger. Duke Energy Carolinas requested that the NCUC accept and acknowl-

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edge the purchase power agreement without conditions. Together with the advance notice, Duke Energy Carolinas and Orangeburg filed a joint petition for a declaratory ruling that Duke Energy Carolinas’ new wholesale contracts with native load priority will be treated for ratemaking and reporting purposes in the same manner as existing wholesale contracts with native load priority. This would mean that revenues from those contracts will be allocated to the wholesale jurisdiction and costs will be allocated to the wholesale jurisdiction based on average system costs. The NCUC Public Staff has filed its objection to the advance notice and joint petition. The NCUC held a hearing on this matter on November 5, 2008.

SmartGrid and Distributed Renewable Generation Demonstration Project. On May 23, 2008, Duke Energy Indiana filed a petition with the IURC requesting approval for SmartGrid and Distributed Renewable Generation Demonstration Project investments and related costs along with a request to annually update distribution rates and include a lost revenue recovery mechanism. Hearings are anticipated to be held in February 2009.

Gibson Unit 4 Outage. In a recent fuel clause proceeding, the IURC granted a motion by the Industrial Group and Nucor Corporation to establish a subdocket to examine whether imprudence in Duke Energy Indiana’s maintenance practices led to a forced outage at Gibson Station Unit 4 during January-March 2008. The outage contributed to notably higher fuel and purchased power costs during the outage. A hearing on this subdocket proceeding is expected in January 2009. The IURC authorized Duke Energy Indiana to collect through rates the costs for which it sought recovery in the subdocket proceeding subject to refund (similar to prior subdockets) pending the outcome of this new subdocket related to maintenance practices for Gibson Station Unit 4.

Commercial Power

Reported results for Commercial Power are subject to volatility due to the over- or under-collection of certain costs, including fuel and purchased power, since Commercial Power is not subject to regulatory accounting pursuant to SFAS No. 71, “ Accounting for Certain Types of Regulation .” In addition, Commercial Power could be impacted by certain of the regulatory matters discussed above, including the Duke Energy Ohio electric rate filings.

FERC 203 Application . On April 23, 2008 (supplemented on May 6, 2008), Duke Energy Ohio and certain affiliates filed an application with the FERC requesting approval to transfer Duke Energy Ohio’s electric generating facilities, some of which are designated to serve Ohio customers, to affiliate companies. The FERC filing, if approved, does not obligate Duke Energy to make the transfer of the electric generating facilities, and does not impact Duke Energy Ohio’s current rates. On October 10, 2008, Duke Energy Ohio and affiliates filed a notice with the FERC reporting that Duke Energy Ohio is in settlement discussions with all parties in the Ohio proceeding regarding Duke Energy Ohio’s application to establish an ESP, as discussed above. Duke Energy Ohio advised the FERC that it believes that in light of those discussions good cause exists for the FERC to extend the time to consider Duke Energy Ohio’s Section 203 application. On October 17, 2008, the FERC issued an order extending the time for the FERC to act on the application by 180 additional days, and ordered Duke Energy Ohio to inform the FERC of the status of settlement discussions by November 16, 2008. The settlement in Ohio has been agreed to by most parties and was filed with the PUCO on October 27, 2008. Pursuant to the settlement, if approved by the PUCO, Duke Energy Ohio agrees to withdraw that portion of its application for approval related to the transfer of its generating facilities designated to serve Ohio customers. Acceptance of the settlement by the PUCO would constitute approval of the transfer for the remaining generating facilities.

PJM Interconnection Reliability Pricing Model (RPM) Buyers’ Complaint . On May 30, 2008, a group of public utility commissions, state consumer counsels, industrial power customers and load serving entities, known collectively as the RPM Buyers, filed a complaint at FERC. The complaint asks FERC to find that the results of the three transitional base residual auctions conducted by PJM to procure capacity for its RPM capacity market during the years 2008-2011 are unjust and unreasonable because, allegedly, they have produced excessive capacity prices, have failed to prevent suppliers from exercising market power, and have not produced benefits commensurate with costs. In their complaint, the RPM Buyers propose revised, administratively determined auction clearing prices. Certain Duke Energy Ohio revenues during the years 2008—2011 are at risk, as Duke Energy Ohio planned to supply capacity to this market. On July 11, 2008, Duke Energy Ohio filed a response to the complaint with the FERC. On September 19, 2008, the FERC issued an Order denying the Buyer’s complaint. The FERC dismissed the RPM Buyers’ complaint, finding that, for the transition auctions, no party violated PJM’s tariff and the prices determined during the auctions were in accordance with the tariff provisions governing the auctions. On October 20, 2008, the RPM buyers filed a Request for Rehearing with the FERC that raised the same issues as in the initial complaint that was denied by the FERC.

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Other Matters

Pioneer Transmission LLC Joint Venture.

On August 8, 2008, Duke Energy announced the formation of a 50-50 joint venture, called Pioneer Transmission LLC (Pioneer Transmission), with American Electric Power Company, Inc. (AEP) to build and operate 240 miles of extra-high-voltage 765-kilovolt (KV) transmission lines and related facilities in Indiana. Pioneer Transmission will be regulated by the Federal Energy Regulatory Commission (FERC). Both Duke Energy and AEP own an equal interest in the joint venture and will share equally in the project costs, which are currently estimated at approximately $1 billion, of which approximately $500 million is anticipated to be financed by Pioneer Transmission and the remaining amount split equally between Duke Energy and AEP. The joint venture will operate in Indiana as a transmission utility and is seeking rate approval for the project from the FERC in the fourth quarter of 2008. The earliest possible in-service date for the project is in 2014 or 2015.

15. Commitments and Contingencies

Environmental

Duke Energy is subject to international, federal, state and local regulations regarding air and water quality, hazardous and solid waste disposal and other environmental matters. These regulations can be changed from time to time, imposing new obligations on Duke Energy.

Remediation Activities . Duke Energy and its affiliates are responsible for environmental remediation at various contaminated sites. These include some properties that are part of ongoing Duke Energy operations, sites formerly owned or used by Duke Energy entities, and sites owned by third parties. Remediation typically involves management of contaminated soils and may involve groundwater remediation. Managed in conjunction with relevant federal, state and local agencies, activities vary with site conditions and locations, remedial requirements, complexity and sharing of responsibility. If remediation activities involve statutory joint and several liability provisions, strict liability, or cost recovery or contribution actions, Duke Energy or its affiliates could potentially be held responsible for contamination caused by other parties. In some instances, Duke Energy may share liability associated with contamination with other potentially responsible parties, and may also benefit from insurance policies or contractual indemnities that cover some or all cleanup costs. All of these sites generally are managed in the normal course of business or affiliate operations. Management, in the normal course of business, continually assesses the nature and extent of known or potential environmental-related contingencies and records liabilities when losses become probable and are reasonably estimable.

Clean Water Act 316(b) . The EPA finalized its cooling water intake structures rule in July 2004. The rule established aquatic protection requirements for existing facilities that withdraw 50 million gallons or more of water per day from rivers, streams, lakes, reservoirs, estuaries, oceans, or other U.S. waters for cooling purposes. Fourteen of the 23 coal and nuclear-fueled generating facilities in which Duke Energy is either a whole or partial owner are affected sources under that rule. On January 25, 2007, the U.S. Court of Appeals for the Second Circuit issued its opinion in Riverkeeper, Inc. v. EPA , Nos. 04-6692-ag(L) et. al. (2d Cir. 2007) remanding most aspects of the EPA’s rule back to the agency. The court effectively disallowed those portions of the rule most favorable to industry, and the decision creates a great deal of uncertainty regarding future requirements and their timing. On April 14, 2008, the U.S. Supreme Court issued an order granting review of the case and briefs were filed on July 14, 2008. Oral argument is scheduled for December 2, 2008. A decision is not likely until 2009. If the Supreme Court upholds the lower court decision, it is expected that costs will increase as a result of the court’s decision, although Duke Energy is unable to estimate its costs to comply.

Clean Air Interstate Rule (CAIR) . The EPA finalized its CAIR in May 2005. The CAIR was to have limited total annual and summertime NO _x emissions and annual SO ₂ emissions from electric generating facilities across the Eastern U.S. through a two-phased cap-and-trade program. Phase 1 was to begin in 2009 for NO _x and in 2010 for SO ₂ . Phase 2 was to begin in 2015 for both NO _x and SO ₂ . On March 25, 2008, the U.S. Court of Appeals for the District of Columbia (D.C. Circuit) heard oral argument in a case involving multiple challenges to the CAIR. On July 11, 2008, the D.C. Circuit issued its decision in North Carolina v. EPA No. 05-1244 vacating the CAIR. The EPA filed a petition for rehearing on September 24, 2008 with the D.C. Circuit asking the court to reconsider various parts of its ruling vacating CAIR. A decision is pending on that petition. Subsequent to the filing of the rehearing petitions, the D.C. Circuit ordered all Petitioners (including Duke Energy) to file briefs on the petition for rehearing. The D.C. Circuit directed the parties to address whether any party is seeking vacatur of CAIR, and whether the Court should stay its mandate until the EPA promulgates a revised rule. Duke Energy has responded to the request accordingly. The D.C. Circuit’s decision creates uncertainty regarding future NO _x and SO ₂ emission reductions requirements and their timing. Although as a result of the decision there may be a delay in the timing of federal requirements to

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reduce emissions, it is expected that electric sector emission reductions at least as stringent as those imposed by CAIR will be required in the near future, through new federal rules and/or individual state requirements. CAIR remains in effect until the Court issues its mandate, which will not be before it decides whether to grant rehearing. At this time the decision does not impact existing requirements that Duke Energy reduce its NO _x and SO ₂ emissions under North Carolina clean air legislation (see Note 14). Duke Energy’s plan in the Midwest had been to spend approximately $300 million between 2008 and 2012 (approximately $150 million in each of Ohio and Indiana) to comply with Phase 1 of CAIR and approximately $200 million in Indiana for CAIR Phase 2 compliance costs over the period 2008-2017. It has not been determined how the court’s decision will affect these planned expenditures but each of the states in which Duke Energy operates is considering adopting state regulations to address the court’s decision. The IURC issued an order in 2006 granting Duke Energy Indiana approximately $1.07 billion in rate recovery to cover its estimated Phase 1 compliance costs of CAIR/CAMR in Indiana. Duke Energy Ohio receives partial recovery of depreciation and financing costs related to environmental compliance projects for 2005-2008 through its RSP.

Duke Energy is unable to estimate the costs to comply with any new rule the EPA or states may issue as a result of this decision. See Note 10 for a discussion of the impacts of the D.C. Circuit Court’s decision to vacate CAIR on the carrying value of emission allowances.

Clean Air Mercury Rule (CAMR) . The EPA finalized its CAMR in May 2005. The CAMR was to have limited total annual mercury emissions from coal-fired power plants across the U.S. through a two-phased cap-and-trade program beginning in 2010. On February 8, 2008, the D.C. Circuit issued its opinion in New Jersey v. EPA , No. 05-1097 vacating the CAMR. Requests for rehearing were denied. The U.S. EPA and the Utility Air Regulatory Group have requested that the U.S. Supreme Court review the D.C. Circuit’s decision. The D.C. Circuit’s decision creates uncertainty regarding future mercury emission reduction requirements and their timing, but makes it fairly certain that there will be a delay in the implementation of federal mercury requirements for existing coal-fired power plants. At this point, Duke Energy is unable to estimate the costs to comply with any future mercury regulations that might result from the D.C. Circuit’s decision.

Coal Combustion Product (CCP) Management . Duke Energy currently estimates that it will spend approximately $365 million over the period 2008-2012 to install synthetic caps and liners at existing and new CCP landfills and to convert CCP handling systems from wet to dry systems.

Extended Environmental Activities and Accruals . Included in Other within Deferred Credits and Other Liabilities and Other Current Liabilities on the Consolidated Balance Sheets were total accruals related to extended environmental-related activities of approximately $53 million and $52 million as of September 30, 2008 and December 31, 2007, respectively. These accruals represent Duke Energy’s provisions for costs associated with remediation activities at some of its current and former sites, as well as other relevant environmental contingent liabilities. Management, in the normal course of business, continually assesses the nature and extent of known or potential environmental-related contingencies and records liabilities when losses become probable and are reasonably estimable.

Litigation

New Source Review (NSR) . In 1999-2000, the U.S. DOJ, acting on behalf of the EPA and joined by various citizen groups and states, filed a number of complaints and notices of violation against multiple utilities across the country for alleged violations of the NSR provisions of the Clean Air Act (CAA). Generally, the government alleges that projects performed at various coal-fired units were major modifications, as defined in the CAA, and that the utilities violated the CAA when they undertook those projects without obtaining permits and installing the best available emission controls for SO ₂ , NO _x and particulate matter. The complaints seek injunctive relief to require installation of pollution control technology on various generating units that allegedly violated the CAA, and unspecified civil penalties in amounts of up to $32,500 per day for each violation. A number of Duke Energy’s plants have been subject to these allegations. Duke Energy asserts that there were no CAA violations because the applicable regulations do not require permitting in cases where the projects undertaken are “routine” or otherwise do not result in a net increase in emissions.

In 2000, the government brought a lawsuit against Duke Energy in the U.S. District Court in Greensboro, North Carolina. The EPA claims that 29 projects performed at 25 of Duke Energy’s coal-fired units in the Carolinas violate these NSR provisions. Three environmental groups have intervened in the case. In August 2003, the trial court issued a summary judgment opinion adopting Duke Energy’s legal positions on the standard to be used for measuring an increase in emissions, and granted judgment in favor of Duke Energy. The trial court’s decision was appealed and ultimately reversed and remanded for trial by the U.S. Supreme Court. At trial, Duke Energy will continue to assert that the projects were routine or not projected to increase emissions. No trial date has been set.

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In November 1999, the U.S. brought a lawsuit in the U.S. Federal District Court for the Southern District of Indiana against Cinergy, Duke Energy Ohio, and Duke Energy Indiana alleging various violations of the CAA for various projects at six Duke Energy owned and co-owned generating stations in the Midwest. Three northeast states and two environmental groups have intervened in the case. A jury trial commenced on May 5, 2008 and jury verdict was returned on May 22, 2008. The jury found in favor of Cinergy, Duke Energy Ohio and Duke Energy Indiana on all but three units at Wabash River. The remedy phase for the three Wabash River units, originally scheduled to commence in December 2008, has been rescheduled for February 2009. Based on previous rulings by the judge in this case, the Wabash River units are not subject to civil penalties; and therefore, the remedy phase will address only the appropriate injunctive relief, which could result in Duke Energy installing additional environmental equipment or potentially ceasing operations of the units. Additionally, the plaintiffs had claimed that Duke Energy violated an Administrative Consent Order entered into in 1998 between the EPA and Cinergy relating to alleged violations of Ohio’s State Implementation Plan (SIP) provisions governing particulate matter at Duke Energy Ohio’s W.C. Beckjord Station. The judge previously granted summary judgment against Duke Energy with respect to this allegation and it will be considered during the February 2009 remedy phase as well.

Cinergy and Duke Energy Ohio have been informed by Dayton Power and Light (DP&L) that in June 2000, the EPA issued a Notice of Violation (NOV) to DP&L for alleged violations of CAA requirements at a station operated by DP&L and jointly-owned by DP&L, Columbus Southern Power Company (CSP), and Duke Energy Ohio. The NOV indicated the EPA may issue an order requiring compliance with the requirements of the Ohio SIP, or bring a civil action seeking injunctive relief and civil penalties of up to $27,500 per day for each violation. In September 2004, Marilyn Wall and the Sierra Club brought a lawsuit against Duke Energy Ohio, DP&L and CSP for alleged violations of the CAA at this same generating station. The parties reached an agreement to settle this matter in the form of a consent decree which was submitted for comment to the EPA and ultimately approved and entered by the court on October 23, 2008. The consent decree will not have a material adverse effect on Duke Energy’s consolidated results of operations, cash flows or financial position.

On April 3, 2008, the Sierra Club filed another lawsuit in the U.S. District Court for the Southern District of Indiana against Duke Energy Indiana and certain affiliated companies claiming NSR violations at the Edwardsport generating station in Knox County, Indiana. Sierra Club claims that Duke Energy violated the CAA when it undertook various unnamed maintenance projects at Edwardsport without obtaining permits and installing the best available emission controls. Sierra Club further states that it intends to file suit for additional alleged violations of the CAA and the Indiana State Implementation Plan. On June 30, 2008, defendants filed a motion to dismiss, or alternatively to stay, this litigation on jurisdictional grounds. A decision on the motion is pending. It is not possible to estimate the damages, if any, that Duke Energy might incur in connection with these matters. Ultimate resolution of these matters relating to NSR, even in settlement, could have a material adverse effect on Duke Energy’s consolidated results of operations, cash flows or financial position. However, Duke Energy will pursue appropriate regulatory treatment for any costs incurred in connection with such resolution.

Cliffside Permit . On July 16, 2008, the Southern Alliance for Clean Energy, Environmental Defense Fund, National Parks Conservation Association, Natural Resources Defenses Council, and Sierra Club (collectively referred to as Citizen Groups) filed suit in federal court alleging that Duke Energy Carolinas violated the CAA when it commenced construction of Cliffside Unit 6 at Cliffside Steam Station in Rutherford County, North Carolina without obtaining a determination that the maximum achievable control technology emission limits will be met for all prospective emissions at that plant. The Citizen Groups claim the right to injunctive relief against further construction at the plant as well as civil penalties in the amount of up to $32,500 per day for each alleged violation. The plaintiffs filed a motion for summary judgment and Duke Energy filed a motion to dismiss the complaint. Both motions were argued on October 16, 2008. In June 2008, Duke Energy Carolinas announced that it would voluntarily perform a maximum achievable technology assessment of air emission controls planned for Cliffside Unit 6. In July 2008, Duke Energy Carolinas submitted the results of the assessment to the North Carolina Department of Environment and Natural Resources. On August 8, 2008 the plaintiffs filed a motion for summary judgment and on August 11, 2008 Duke Energy Carolinas filed a motion to dismiss. It is not possible to predict with certainty whether Duke Energy Carolinas will incur any liability or to estimate the damages, if any, that Duke Energy Carolinas might incur in connection with this matter. To the extent that a court of proper jurisdiction halts construction of the plant, Duke Energy Carolinas will seek to meet customers’ need for power through other resources. In addition, Duke Energy Carolinas will seek appropriate regulatory treatment for the investment in the plant.

Carbon Dioxide (CO ₂ ) Litigation . In July 2004, the states of Connecticut, New York, California, Iowa, New Jersey, Rhode Island, Vermont, Wisconsin and the City of New York brought a lawsuit in the U.S. District Court for the Southern District of New York against Cinergy, American Electric Power Company, Inc., American Electric Power Service Corporation, The Southern Company, Tennessee Valley Authority, and Xcel Energy Inc. A similar lawsuit was filed in the U.S. District Court for the Southern District of New York against the same companies by Open Space Institute, Inc., Open Space Conservancy, Inc., and The Audubon Society of New Hampshire. These lawsuits

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allege that the defendants’ emissions of CO ₂ from the combustion of fossil fuels at electric generating facilities contribute to global warming and amount to a public nuisance. The complaints also allege that the defendants could generate the same amount of electricity while emitting significantly less CO ₂ . The plaintiffs are seeking an injunction requiring each defendant to cap its CO ₂ emissions and then reduce them by a specified percentage each year for at least a decade. In September 2005, the District Court granted the defendants’ motion to dismiss the lawsuit. The plaintiffs have appealed this ruling to the Second Circuit Court of Appeals. Oral arguments were held before the Second Circuit Court of Appeals on June 7, 2006. It is not possible to predict with certainty whether Duke Energy will incur any liability or to estimate the damages, if any, that Duke Energy might incur in connection with this matter.

Alaskan Global Warming Lawsuit . On February 26, 2008, plaintiffs filed suit against Peabody Coal and various oil and power company defendants, including Duke Energy and certain of its subsidiaries. Plaintiffs, the governing bodies of an Inupiat village in Alaska brought the action on their own behalf and on behalf of the village’s approximately 400 residents. The lawsuit alleges that defendants’ emissions of CO ₂ contributed to global warming and constitute a private and public nuisance. Plaintiffs also allege that certain defendants, including Duke Energy, conspired to mislead the public with respect to the global warming. Plaintiffs seek unspecified monetary damages, attorney’s fees and expenses. On June 30, 2008, the defendants filed a motion to dismiss on jurisdictional grounds. It is not possible to predict with certainty whether Duke Energy will incur any liability or to estimate the damages, if any, that Duke Energy might incur in connection with this matter.

Hurricane Katrina Lawsuit . In April 2006, Duke Energy and Cinergy were named in the third amended complaint of a purported class action lawsuit filed in the U.S. District Court for the Southern District of Mississippi. Plaintiffs claim that Duke Energy and Cinergy, along with numerous other utilities, oil companies, coal companies and chemical companies, are liable for damages relating to losses suffered by victims of Hurricane Katrina. Plaintiffs claim that defendants’ greenhouse gas emissions contributed to the frequency and intensity of storms such as Hurricane Katrina. On August 30, 2007, the court dismissed the case. The plaintiffs have filed their appeal to the Fifth Circuit Court of Appeals and oral argument was heard on August 6, 2008. Due to the late recusal of one of the judges on the Fifth Circuit panel, the court has scheduled the second oral argument for the week of November 3, 2008. It is not possible to predict with certainty whether Duke Energy will incur any liability or to estimate the damages, if any, that Duke Energy might incur in connection with this matter.

San Diego Price Indexing Cases . Duke Energy and several of its affiliates, as well as other energy companies, have been parties to 13 lawsuits which have been coordinated as the “Price Indexing Cases” in San Diego, California. The plaintiffs allege that the defendants conspired to manipulate the price of natural gas in violation of state and/or federal antitrust laws, unfair business practices and other laws. Plaintiffs in some of the cases further allege that such activities, including engaging in “round trip” trades, providing false information to natural gas trade publications and unlawfully exchanging information, resulted in artificially high energy prices. In December 2007, Duke Energy reached a settlement in principle to settle the 13 cases. A settlement agreement was executed in February 2008 and amended and restated in July 2008. The settlement did not have a material adverse effect on Duke Energy’s consolidated results of operations, cash flows or financial position.

Other Price Reporting Cases . A total of 12 lawsuits have been filed against Duke Energy affiliates and other energy companies. Ten of these cases have been consolidated into a single proceeding. In February 2008, the judge in this proceeding granted a motion to dismiss one of the cases and entered judgment in favor of DETM. Plaintiffs’ motion to reconsider was, in large part, denied. One case was filed in Tennessee state court, which dismissed the case on filed rate and preemption grounds. That case was appealed to the Tennessee Court of Appeals, where oral argument was heard in November 2007. The Tennessee Court of Appeals reversed this lower court ruling in October 2008. Duke Energy is currently analyzing the decision to determine whether to file an appeal with the Tennessee Supreme Court. Another case is currently pending in Missouri state court. Each of these cases contains similar claims, that the respective plaintiffs, and the classes they claim to represent, were harmed by the defendants’ alleged manipulation of the natural gas markets by various means, including providing false information to natural gas trade publications and entering into unlawful arrangements and agreements in violation of the antitrust laws of the respective states. Plaintiffs seek damages in unspecified amounts. In October 2008, a settlement in principle was reached with the class plaintiffs in five of the cases. The settlement is subject to execution of definitive settlement documents and approval by the court. The settlement is not expected to have a material adverse effect on Duke Energy’s consolidated results of operations, cash flows or financial position. It is not possible to predict with certainty whether Duke Energy will incur any liability or to estimate the damages, if any, that Duke Energy might incur in connection with the remaining matters.

Western Electricity Litigation . Plaintiffs, on behalf of themselves and others, in three lawsuits allege that Duke Energy affiliates, among other energy companies, artificially inflated the price of electricity in certain western states. Two of the cases were dismissed and

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plaintiffs appealed to the U.S. Court of Appeal for the Ninth Circuit. Of those two cases, one was dismissed by agreement in March 2007. In November 2007, the court issued an opinion affirming dismissal of the other case, plaintiffs’ motion for reconsideration was denied and plaintiffs did not file a petition for certiorari to the Supreme Court. Plaintiffs in the remaining case seek damages in unspecified amounts. It is not possible to predict with certainty whether Duke Energy will incur any liability or to estimate the damages, if any, that Duke Energy might incur in connection with these lawsuits, but Duke Energy does not presently believe the outcome of these matters will have a material adverse effect on its consolidated results of operations, cash flows or financial position.

Trading Related Investigations . Beginning in February 2004, Duke Energy has received requests for information from the U.S. Attorney’s office in Houston focused on the natural gas price reporting activities of certain individuals involved in DETM trading operations. Duke Energy has cooperated with the government in this investigation and is unable to express an opinion regarding the probable outcome or estimate damages, if any, related to this matter at this time.

ExxonMobil Disputes . In March 2007, Duke Energy and Mobil Natural Gas, Inc. (MNGI) and 3946231 Canada, Inc. (together with MNGI and ExxonMobil) executed a settlement agreement for global settlement of both parties’ claims raised in arbitration proceedings relating to DETM and Duke Energy Marketing Limited Partnership (DEMLP). In the arbitration brought in Canada by DEMLP, the arbitrators held that ExxonMobil was not required to take assignment of certain gas supply and transportation agreements with other parties, under which DEMLP continues to remain obligated. These contracts are currently estimated to result in losses of up to approximately $70 million through 2011; however, these losses could be significantly less based on in-service dates of certain gas infrastructure facilities. As Duke Energy has an ownership interest of approximately 60% in DEMLP, only 60% of any losses would impact pre-tax earnings for Duke Energy. However, these losses are subject to change in the future in the event of changes in market conditions and underlying assumptions.

Duke Energy Retirement Cash Balance Plan . A class action lawsuit was filed in federal court in South Carolina against Duke Energy and the Duke Energy Retirement Cash Balance Plan, alleging violations of Employee Retirement Income Security Act (ERISA) and the Age Discrimination in Employment Act (ADEA). These allegations arise out of the conversion of the Duke Energy Company Employees’ Retirement Plan into the Duke Energy Retirement Cash Balance Plan. The case also raises some Plan administration issues, alleging errors in the application of Plan provisions (i. e. , the calculation of interest rate credits in 1997 and 1998 and the calculation of lump-sum distributions). The plaintiffs seek to represent present and former participants in the Duke Energy Retirement Cash Balance Plan. This group is estimated to include approximately 36,000 persons. The plaintiffs also seek to divide the putative class into sub-classes based on age. Six causes of action are alleged, ranging from age discrimination, to various alleged ERISA violations, to allegations of breach of fiduciary duty. The plaintiffs seek a broad array of remedies, including a retroactive reformation of the Duke Energy Retirement Cash Balance Plan and a recalculation of participants’/ beneficiaries’ benefits under the revised and reformed plan. Duke Energy filed its answer in March 2006. A portion of this contingent liability was assigned to Spectra Energy in connection with the spin-off in January 2007. A hearing on the plaintiffs’ motion to amend the complaint to add an additional age discrimination claim, defendant’s motion to dismiss and the respective motions for summary judgment was held in December 2007. On June 2, 2008, the court issued its ruling denying plaintiffs’ motion to add the additional claim and dismissing a number of plaintiffs’ claims, including the claims for ERISA age discrimination. Since that date, plaintiffs have notified Duke Energy that they are withdrawing their ADEA claim. No trial date has been set. At mediation, plaintiffs quantified their claims as being in excess of $150 million. It is not possible to predict with certainty the damages, if any, that Duke Energy might incur in connection with this matter.

Ohio Antitrust Lawsuit . In January 2008, four plaintiffs, including individual, industrial and non-profit customers, filed a lawsuit against Duke Energy in federal court in the Southern District of Ohio. Plaintiffs allege that Duke Energy (then Cinergy and The Cincinnati Gas & Electric Company (CG&E)), conspired to provide inequitable and unfair price advantages for certain large business consumers by entering into non-public option agreements with such consumers in exchange for their withdrawal of challenges to Duke Energy Ohio’s (then CG&E’s) pending RSP, which was implemented in early 2005. Duke Energy denies the allegations made in the lawsuit. Following Duke Energy’s filing of a motion to dismiss plaintiffs’ claims, plaintiffs amended their complaint on May 30, 2008. Plaintiffs now contend that the contracts at issue were an illegal rebate which violate antitrust and Racketeer Influenced and Corrupt Organizations (RICO) statutes. Defendants have again moved to dismiss the claims. It is not possible to predict with certainty whether Duke Energy will incur any liability or to estimate the damages, if any, that Duke Energy might incur in connection with this matter.

Duke Energy International Paranapanema Lawsuit . In June 2007, the Brazilian electricity regulatory agency (ANEEL) issued resolution 497/2007 (the Resolution) which purports to impose additional assessments (retroactive to July 1, 2004) on generation companies located in the State of São Paulo for utilization of the electric transmission system. The new assessments are based upon a flat-fee charge that fails to take into account the proportional usage by each generator. Pursuant to the Resolution, Duke Energy Interna-

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tional Geracao Paranapanema S.A. (Paranapanema) was assessed approximately $40 million, inclusive of interest. Following various failed administrative challenges, on July 16, 2008, Paranapanema filed a lawsuit in the Brazilian federal court challenging the merits of the assessment. On July 29, 2008 the court granted Paranapanema’s request for continued suspension of any payment obligation while the legal challenge on the merits remains pending before the Brazilian court. On September 15, 2008, ANEEL filed an appeal of the July 29, 2008 decision which is pending at the Brazil federal court. At this time, Duke Energy is unable to express an opinion regarding the probable outcome related to this matter; however, ultimate resolution of this matter is not expected to have a material impact on Duke Energy’s results of operations, cash flows or financial position.

Asbestos-related Injuries and Damages Claims . Duke Energy has experienced numerous claims for indemnification and medical cost reimbursement relating to damages for bodily injuries alleged to have arisen from the exposure to or use of asbestos in connection with construction and maintenance activities conducted by Duke Energy Carolinas on its electric generation plants prior to 1985.

Amounts recognized as asbestos-related reserves related to Duke Energy Carolinas in the Consolidated Balance Sheets totaled approximately $1,044 million and $1,082 million as of September 30, 2008 and December 31, 2007, respectively, and are

classified in Other within Deferred Credits and Other Liabilities and Other within Current Liabilities. These reserves are based upon the minimum amount in Duke Energy’s best estimate of the range of loss for current and future asbestos claims through 2027. Management believes that it is possible there will be additional claims filed against Duke Energy Carolinas after 2027. In light of the uncertainties inherent in a longer- term forecast, management does not believe that they can reasonably estimate the indemnity and medical costs that might be incurred after 2027 related to such potential claims. Asbestos-related loss estimates incorporate anticipated inflation, if applicable, and are recorded on an undiscounted basis. These reserves are based upon current estimates and are subject to greater uncertainty as the projection period lengthens. A significant upward or downward trend in the number of claims filed, the nature of the alleged injury, and the average cost of resolving each such claim could change our estimated liability, as could any substantial adverse or favorable verdict at trial. A federal legislative solution, further state tort reform or structured settlement transactions could also change the estimated liability. Given the uncertainties associated with projecting matters into the future and numerous other factors outside our control, management believes that it is possible Duke Energy Carolinas may incur asbestos liabilities in excess of the recorded reserves.

Duke Energy has a third-party insurance policy to cover certain losses related to Duke Energy Carolinas’ asbestos-related injuries and damages above an aggregate self insured retention of $476 million. Duke Energy Carolinas’ cumulative payments began to exceed the self insurance retention on its insurance policy during the second quarter of 2008. Future payments up to the policy limit will be reimbursed by Duke Energy’s third party insurance carrier. The insurance policy limit for potential insurance recoveries for indemnification and medical cost claim payments is $1,107 million in excess of the self insured retention. Insurance recoveries of approximately $1,036 million and $1,040 million related to this policy are classified in the Consolidated Balance Sheets in Other within Investments and Other Assets and Receivables as of September 30, 2008 and December 31, 2007, respectively. Duke Energy is not aware of any uncertainties regarding the legal sufficiency of insurance claims. Management believes the insurance recovery asset is probable of recovery as the insurance carrier continues to have a strong financial strength rating.

Duke Energy Indiana and Duke Energy Ohio have also been named as defendants or co-defendants in lawsuits related to asbestos at their electric generating stations. The impact on Duke Energy’s consolidated results of operations, cash flows or financial position of these cases to date has not been material. Based on estimates under varying assumptions concerning uncertainties, such as, among others: (i) the number of contractors potentially exposed to asbestos during construction or maintenance of Duke Energy Indiana and Duke Energy Ohio generating plants; (ii) the possible incidence of various illnesses among exposed workers, and (iii) the potential settlement costs without federal or other legislation that addresses asbestos tort actions, Duke Energy estimates that the range of reasonably possible exposure in existing and future suits over the foreseeable future is not material. This estimated range of exposure may change as additional settlements occur and claims are made and more case law is established.

EI UK Holdings, Inc . In March, 2004, EI UK Holdings, Inc., a subsidiary of FirstEnergy Corp, filed a complaint in Ohio State Court. The complaint alleged that Cinergy, and an affiliate, had breached certain agreements and sought indemnification from Cinergy. The case went to trial and on February 14, 2008, the jury returned a verdict in favor of EI UK Holdings and against Cinergy and its affiliate and awarded EI UK Holdings $15 million, plus interest. Post judgment motions were denied and Cinergy paid the verdict and prejudgment interest in June 2008.

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Other Litigation and Legal Proceedings . Duke Energy and its subsidiaries are involved in other legal, tax and regulatory proceedings arising in the ordinary course of business, some of which involve substantial amounts. Duke Energy believes that the final disposition of these proceedings will not have a material adverse effect on its consolidated results of operations, cash flows or financial position.

Duke Energy has exposure to certain legal matters that are described herein. As of both September 30, 2008 and December 31, 2007, Duke Energy has recorded reserves, including reserves related to the aforementioned asbestos-related injuries and damages claims, of approximately $1.1 billion for these proceedings and exposures. Duke Energy has insurance coverage for certain of these losses incurred. These reserves represent management’s best estimate of probable loss as defined by SFAS No. 5, “ Accounting for Contingencies .” As of September 30, 2008 and December 31, 2007, Duke Energy recognized approximately $1,036 million and $1,040 million, respectively of probable insurance recoveries related to these losses.

Duke Energy expenses legal costs related to the defense of loss contingencies as incurred.

Other Commitments and Contingencies

Synfuel. Commercial Power produced synfuel from facilities that qualified for tax credits (through 2007) in accordance with Section 29/45K of the Internal Revenue Code if certain requirements were satisfied. Section 29/45K provided for a phase-out of the credit if the average price of crude oil during a calendar year exceeded a specified threshold. The phase-out was based on a prescribed calculation and definition of crude oil prices. The exposure to synfuel tax credit phase-out was monitored as Duke Energy was able to reduce or cease synfuel production based on the expectation of any potential tax credit phase-out. The objective of these activities was to reduce potential losses incurred if the reference price in a year exceeded a level triggering a phase-out of synfuel tax credits.

These credits reduced Duke Energy’s income tax liability and, therefore, Duke Energy’s tax expense recorded in (Loss) Income from Discontinued Operations, net of tax (see Note 12). Commercial Power’s sale of synfuel had generated $339 million in tax credits through December 31, 2005. After reducing for the possibility of phase-out, the amount of additional credits generated during the years ended December 31, 2007 and 2006 were approximately $84 million and $20 million, respectively. Duke Energy ceased production of synfuel upon the expiration of the tax credits at the end of 2007.

The Internal Revenue Service (IRS) has completed the audit of Cinergy for the 2002, 2003, and 2004 tax years, including the synfuel facility owned during that period, which represents $222 million of tax credits generated during the aforementioned audit period. The IRS has not proposed any adjustment that would disallow the credits claimed during that period. Subsequent periods are still subject to audit. Duke Energy believes that it operated in conformity with all the necessary requirements to be allowed such credits under Section 29/45K.

DEGS of Narrows, L.L.C. Investigation. In October 2006, Duke Energy began an internal investigation into improper data reporting to the EPA regarding air emissions under the NO _x Budget Program at Duke Energy’s DEGS of Narrows, L.L.C. power plant facility in Narrows, Virginia. The investigation has revealed evidence of falsification of data by an employee relating to the quality assurance testing of its continuous emissions monitoring system to monitor heat input and NO _x emissions. In December 2006, Duke Energy voluntarily disclosed the potential violations to the EPA and Virginia Department of Environmental Quality (VDEQ), and in January 2007, Duke Energy made a full written disclosure of the investigation’s findings to the EPA and the VDEQ. In December 2007, the EPA issued a notice of violation. Duke Energy has taken appropriate disciplinary action, including termination, with respect to the employees involved with the false reporting. It is not possible to predict with certainty whether Duke Energy will incur any liability or to estimate the damages, if any, that Duke Energy might incur in connection with this matter.

Other Matters. Duke Energy was party to an agreement with a third party service provider related to certain future purchases. The agreement contained certain damage payment provisions if qualifying purchases were not initiated by September 2008. In the fourth quarter of 2006, Duke Energy initiated early settlement discussions regarding this agreement and recorded a reserve of approximately $65 million. During the third quarter of 2007, Duke Energy paid the third party service provider approximately $20 million, which directly reduced Duke Energy’s future exposure under the agreement, and further reduced the reserve by $20 million based upon qualifying purchase commitments that, once satisfied, will fulfill Duke Energy’s obligations under the agreement. As a result of additional adjustments to this reserve during the fourth quarter of 2007, there was no remaining reserve associated with this agreement at December 31, 2007.

General . As part of its normal business, Duke Energy is a party to various financial guarantees, performance guarantees and other contractual commitments to extend guarantees of credit and other assistance to various subsidiaries, investees and other third parties. To varying degrees, these guarantees involve elements of performance and credit risk, which are not included on the Consolidated Bal-

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ance Sheets. The possibility of Duke Energy having to honor its contingencies is largely dependent upon future operations of various subsidiaries, investees and other third parties, or the occurrence of certain future events. For further information see Note 16.

In addition, Duke Energy enters into various fixed-price, non-cancelable commitments to purchase or sell power (tolling arrangements or power purchase contracts), take-or-pay arrangements, transportation or throughput agreements and other contracts that may or may not be recognized on the Consolidated Balance Sheets. Some of these arrangements may be recognized at market value on the Consolidated Balance Sheets as trading contracts or qualifying hedge positions.

16. Guarantees and Indemnifications

Duke Energy and its subsidiaries have various financial and performance guarantees and indemnifications which are issued in the normal course of business. As discussed below, these contracts include performance guarantees, stand-by letters of credit, debt guarantees, surety bonds and indemnifications. Duke Energy and its subsidiaries enter into these arrangements to facilitate commercial transactions with third parties by enhancing the value of the transaction to the third party.

As discussed in Note 1, on January 2, 2007, Duke Energy completed the spin-off of its natural gas businesses to shareholders. Guarantees that were issued by Duke Energy, Cinergy, or International Energy, or were assigned to Duke Energy prior to the spin-off remained with Duke Energy subsequent to the spin-off. Guarantees issued by Spectra Energy Capital or its affiliates prior to the spin-off remained with Spectra Energy Capital subsequent to the spin-off, except for certain guarantees discussed below that are in the process of being assigned to Duke Energy. During this assignment period, Duke Energy has indemnified Spectra Energy Capital against any losses incurred under these guarantee obligations.

Duke Energy has issued performance guarantees to customers and other third parties that guarantee the payment and performance of other parties, including certain non-wholly-owned entities, as well as guarantees of debt of certain non-consolidated entities and less than wholly-owned consolidated entities. If such entities were to default on payments or performance, Duke Energy would be required under the guarantees to make payments on the obligations of the less than wholly-owned entities. The maximum potential amount of future payments Duke Energy could have been required to make under these guarantees as of September 30, 2008 was approximately $675 million. Approximately $481 million of the guarantees expire between 2008 and 2039, with the remaining performance guarantees having no contractual expiration. In addition, Spectra Energy Capital is in the process of assigning performance guarantees with maximum potential amounts of future payments of approximately $329 million to Duke Energy, as discussed above. Duke Energy has indemnified Spectra Energy Capital for any losses incurred as a result of these guarantees during the assignment period.

Duke Energy uses bank-issued stand-by letters of credit to secure the performance of non-wholly-owned entities to a third party or customer. Under these arrangements, Duke Energy has payment obligations to the issuing bank which are triggered by a draw by the third party or customer due to the failure of the non-wholly-owned entity to perform according to the terms of its underlying contract. The maximum potential amount of future payments Duke Energy could have been required to make under these letters of credit as of September 30, 2008 was approximately $21 million. Substantially all of these letters of credit were issued on behalf of less than wholly-owned consolidated entities and non-consolidated affiliated entities and expire in 2008 and 2009.

Duke Energy has guaranteed certain issuers of surety bonds, obligating itself to make payment upon the failure of a non-wholly-owned entity to honor its obligations to a third party. As of September 30, 2008, Duke Energy had guaranteed approximately $120 million of outstanding surety bonds related to obligations of non-wholly-owned entities, substantially all of which relates to projects at Crescent. This amount represents the face value of the guarantees; however, Crescent has already completed a substantial portion of its obligations under these guarantees.

Additionally, Duke Energy has issued guarantees to customers or other third parties related to the payment or performance obligations of certain entities that were previously wholly owned by Duke Energy but which have been sold to third parties, such as DukeSolutions, Inc. (DukeSolutions) and Duke Engineering & Services, Inc. (DE&S). These guarantees are primarily related to payment of lease obligations, debt obligations, and performance guarantees related to provision of goods and services. Duke Energy has received back-to-back indemnification from the buyer of DE&S indemnifying Duke Energy for any amounts paid related to the DE&S guarantees. Duke Energy also received indemnification from the buyer of DukeSolutions for the first $2.5 million paid by Duke Energy related to the DukeSolutions guarantees. Further, Duke Energy granted indemnification to the buyer of DukeSolutions with respect to losses arising under some energy services agreements retained by DukeSolutions after the sale, provided that the buyer agreed to bear 100% of the performance risk and 50% of any other risk up to an aggregate maximum of $2.5 million (less any amounts paid by the buyer under the

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indemnity discussed above). Additionally, for certain performance guarantees, Duke Energy has recourse to subcontractors involved in providing services to a customer. These guarantees have various terms ranging from 2008 to 2019, with others having no specific term. The maximum potential amount of future payments under these guarantees as of September 30, 2008 was approximately $72 million.

Duke Energy has entered into various indemnification agreements related to purchase and sale agreements and other types of contractual agreements with vendors and other third parties. These agreements typically cover environmental, tax, litigation and other matters, as well as breaches of representations, warranties and covenants. Typically, claims may be made by third parties for various periods of time, depending on the nature of the claim. Duke Energy’s potential exposure under these indemnification agreements can range from a specified amount, such as the purchase price, to an unlimited dollar amount, depending on the nature of the claim and the particular transaction. Duke Energy is unable to estimate the total potential amount of future payments under these indemnification agreements due to several factors, such as the unlimited exposure under certain guarantees.

At September 30, 2008, the amounts of the fair value recorded for the guarantees and indemnifications mentioned above are insignificant, both individually and in the aggregate.

17. Fair Value of Financial Assets and Liabilities

On January 1, 2008, Duke Energy adopted SFAS No. 157, Duke Energy’s adoption of SFAS No. 157 is currently limited to financial instruments and to non-financial derivatives as, in February 2008, the FASB issued FSP No. 157-2, which delayed the effective date of SFAS No. 157 for one year for non-financial assets and liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. There was no cumulative effect adjustment to retained earnings for Duke Energy as a result of the adoption of SFAS No. 157. The provisions of SFAS No. 157 have not been applied to the annual goodwill impairment test (see Note 9) or to certain non-financial assets acquired from Catamount (see Note 9).

SFAS No. 157 defines fair value, establishes a framework for measuring fair value in GAAP in the U.S. and expands disclosure requirements about fair value measurements. Under SFAS No. 157, fair value is considered to be the exchange price in an orderly transaction between market participants to sell an asset or transfer a liability at the measurement date. The fair value definition under SFAS No. 157 focuses on an exit price, which is the price that would be received by Duke Energy to sell an asset or paid to transfer a liability versus an entry price, which would be the price paid to acquire an asset or received to assume a liability. Although SFAS No. 157 does not require additional fair value measurements, it applies to other accounting pronouncements that require or permit fair value measurements.

Duke Energy determines fair value of financial assets and liabilities based on the following fair value hierarchy, as prescribed by SFAS No. 157, which prioritizes the inputs to valuation techniques used to measure fair value into three levels:

Level 1 inputs —unadjusted quoted prices in active markets for identical assets or liabilities that Duke Energy has the ability to access. An active market for the asset or liability is one in which transactions for the asset or liability occur with sufficient frequency and volume to provide ongoing pricing information. Duke Energy does not adjust quoted market prices on Level 1 inputs for any blockage factor.

Level 2 inputs —inputs other than quoted market prices included in Level 1 that are observable, either directly or indirectly, for the asset or liability. Level 2 inputs include, but are not limited to, quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active and inputs other than quoted market prices that are observable for the asset or liability, such as interest rate curves and yield curves observable at commonly quoted intervals, volatilities, credit risk and default rates.

Level 3 inputs —unobservable inputs for the asset or liability.

In February 2007, the FASB issued SFAS No. 159, “ The Fair Value Option for Financial Assets and Financial Liabilities- including an amendment of FASB Statement No. 115 ” (SFAS No. 159), which permits entities to elect to measure many financial instruments and certain other items at fair value. For Duke Energy, SFAS No. 159 was effective as of January 1, 2008 and had no impact on amounts presented for periods prior to the effective date. Duke Energy does not currently have any financial assets or financial liabilities for which the provisions of SFAS No. 159 have been elected. However, in the future, Duke Energy may elect to measure certain financial instruments at fair value in accordance with this standard.

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The following table provides the fair value measurement amounts for financial assets and liabilities recorded on Duke Energy’s Consolidated Balance Sheets at fair value at September 30, 2008:


	Total Fair Value Amounts at September 30, 2008			Level 1			Level 2			Level 3
	(in millions)
Description
Investments in available for sale auction rate securities ^(a)	$	258		$	—		$	—		$	258
Short-term investments ^(a)		117			—			117			—
Nuclear decommissioning trust fund		1,675			1,090			585			—
Other long-term available for sale securities ^(b)		348			97			251			—
Derivative assets ^(c)		371			10			96			265

Total Assets	$	2,769		$	1,197		$	1,049		$	523
Derivative liabilities ^(d)		(337	)		(25	)		(132	)		(180	)

Net Assets	$	2,432		$	1,172		$	917		$	343

(a)	Approximately $195 million of auction rates securities are included in Other within Investments and Other Assets and approximately $63 million are classified as Short-Term Investments within Current Assets on the Consolidated Balance Sheets.

(b)	Included in Other within Investments and Other Assets on the Consolidated Balance Sheets.

(c)	Included in Other within Current Assets and Other within Investments and Other Assets on the Consolidated Balance Sheets.

(d)	Included in Other within Current Liabilities and Other within Deferred Credits and Other Liabilities on the Consolidated Balance Sheets.

The following table provides a reconciliation of beginning and ending balances of assets and liabilities measured at fair value on a recurring basis where the determination of fair value includes significant unobservable inputs (Level 3):


Rollforward of Level 3 Measurements	Available-for-Sale Auction Rate Securities			Derivatives (net)			Total
	(in millions)
Three Months Ended September 30, 2008
Balance at July 1, 2008	$	273		$	91		$	364
Total pre-tax realized or unrealized gains included in earnings:
Revenue, non-regulated		—			10			10
Fuel used in electric generation and purchased power-non-regulated		—			5			5
Other income and expense, net		(1	)		—			(1	)
Total pre-tax gains included in other comprehensive income		1			8			9
Net purchases, sales, issuances and settlements		(15	)		(17	)		(32	)
Total losses included on balance sheet as regulatory asset or liability or as non-current liability		—			(12	)		(12	)

Balance at September 30, 2008	$	258		$	85		$	343

Nine Months Ended September 30, 2008
Balance at January 1, 2008	$	15		$	8		$	23
Transfers in to Level 3		285			—			285
Total pre-tax realized or unrealized gains included in earnings:
Revenue, non-regulated		—			(11	)		(11	)
Fuel used in electric generation and purchased power-non-regulated		—			105			105
Other income and expense, net		(5	)		—			(5	)
Total pre-tax losses included in other comprehensive income		(22	)		(1	)		(23	)
Net purchases, sales, issuances and settlements		(15	)		(52	)		(67	)
Total gains included on balance sheet as regulatory asset or liability or as non-current liability		—			36			36

Balance at September 30, 2008	$	258		$	85		$	343

Pre-tax amounts included in the Consolidated Statements of Operations related to Level 3 measurements outstanding at September 30, 2008:
Revenue, non-regulated	$	—		$	(1	)	$	(1	)
Fuel used in electric generation and purchased power-non-regulated		—			62			62
Other income and expense, net		(5	)		—			(5	)

Total	$	(5	)	$	61		$	56

PART I

DUKE ENERGY CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Valuation methods of the primary fair value measurements disclosed above are as follows:

Investments in equity securities : Investments in equity securities are typically valued at the closing price in the principal active market as of the last business day of the quarter. Principal active markets for equity prices include published exchanges such as NASDAQ, NYSE, NYMEX and Chicago Board of Trade, as well as pink sheets, which is an electronic quotation system that displays quotes for broker-dealers for many over-the-counter securities. Foreign equity prices are translated from their trading currency using the currency exchange rate in effect at the close of the principal active market. Duke Energy does not adjust prices to reflect for after-hours market activity. The majority of Duke Energy’s investments in equity securities are valued using Level 1 measurements.

Investments in available-for-sale auction rate securities : As of September 30, 2008, Duke Energy has approximately $285 million par value (approximately $258 million fair value) of auction rate securities for which an active market does not currently exist. All of these securities were valued as of September 30, 2008 using Level 3 measurements. Valuations were determined based on a combination of broker quotes, where available, internal modeling of comparable instruments or discounted cash flow analyses. In preparing the valuations, all significant value drivers were considered, including the underlying collateral. Refer to Note 10 for additional information on Duke Energy’s investments in auction rate securities.

Investments in debt securities : Most debt investments are valued based on a calculation using interest rate curves and credit spreads applied to the terms of the debt instrument (maturity and coupon interest rate) and consider the counterparty credit rating. Most debt valuations are Level 2 measures. If the market for a particular fixed income security is relatively inactive or illiquid, the measurement is a Level 3 measurement. U.S. Treasury debt is typically a Level 1 measurement.

Commodity derivatives : The pricing for commodity derivatives is primarily a calculated value which incorporates the forward price and is adjusted for liquidity (bid-ask spread), credit or non-performance risk (after reflecting credit enhancements such as collateral) and discounted to present value. The primary difference between a Level 2 and a Level 3 measurement has to do with the level of activity in forward markets for the commodity. If the market is relatively inactive, the measurement is deemed to be a Level 3 measurement. Some commodity derivatives are NYMEX contracts, which Duke Energy classifies as Level 1 measurements.

18. New Accounting Standards

The following new accounting standards were adopted by Duke Energy subsequent to September 30, 2007 and the impact of such adoption, if applicable, has been presented in the accompanying Consolidated Financial Statements:

SFAS No. 157. Refer to Note 17 for a discussion of Duke Energy’s adoption of SFAS No. 157.

SFAS No. 159. Refer to Note 17 for a discussion of Duke Energy’s adoption of SFAS No. 159.

FSP No. FIN 39-1 . Refer to Note 1 and Note 13 for a discussion of Duke Energy’s adoption of FSP No. FIN 39-1.

EITF Issue No. 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards” (EITF 06-11) . In June 2007, the EITF reached a consensus that would require realized income tax benefits from dividends or dividend equivalents that are charged to retained earnings and paid to employees for equity-classified nonvested equity shares, nonvested equity share units, and outstanding equity share options to be recognized as an increase to additional paid-in capital. In addition, EITF 06-11 requires that dividends on equity-classified share-based payment awards be reallocated between retained earnings (for awards expected to vest) and compensation cost (for awards not expected to vest) each reporting period to reflect current forfeiture estimates. For Duke Energy, EITF 06-11 has been applied prospectively to the income tax benefits of dividends on equity-classified employee share-based payment awards that are declared in fiscal years beginning January 1, 2008, as well as interim periods within those fiscal years. The adoption of EITF 06-11 did not have a material impact on Duke Energy’s consolidated results of operations, cash flows or financial position.

The following new accounting standards have been issued, but have not yet been adopted by Duke Energy as of September 30, 2008:

PART I

DUKE ENERGY CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

business combination or gain recognized from a bargain purchase. For Duke Energy, SFAS No. 141R must be applied prospectively to business combinations for which the acquisition date occurs on or after January 1, 2009. The impact to Duke Energy of applying SFAS No. 141R for periods subsequent to implementation will be dependent upon the nature of any transactions within the scope of SFAS No. 141R. SFAS No. 141R changes the accounting for income taxes related to prior business combinations, such as Duke Energy’s merger with Cinergy. Subsequent to the effective date of SFAS No. 141R, the resolution of tax contingencies relating to Cinergy that existed as of the date of the merger will be required to be reflected in the Consolidated Statements of Operations instead of being reflected as an adjustment to the purchase price via an adjustment to goodwill.

SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of Accounting Research Bulletin (ARB) No. 51” (SFAS No. 160). In December 2007, the FASB issued SFAS No. 160, which amends ARB No. 51, “ Consolidated Financial Statements ,” to establish accounting and reporting standards for the noncontrolling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 clarifies that a noncontrolling interest in a subsidiary is an ownership interest in a consolidated entity that should be reported as equity in the consolidated financial statements. This statement also changes the way the consolidated income statement is presented by requiring consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. In addition, SFAS No. 160 establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation. For Duke Energy, SFAS No. 160 is effective as of January 1, 2009, and must be applied prospectively, except for certain presentation and disclosure requirements which must be applied retrospectively. The impact to Duke Energy of applying SFAS No. 160 for periods subsequent to implementation will be dependent upon the nature of any transaction within the scope of SFAS No. 160.

SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment to FASB Statement No. 133” (SFAS No. 161). In March 2008, the FASB issued SFAS No. 161, which amends and expands the disclosure requirements for derivative instruments and hedging activities prescribed by SFAS No. 133, “ Accounting for Derivative Instruments and Hedging Activities .” SFAS No. 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. Duke Energy will adopt SFAS No. 161 as of January 1, 2009 and SFAS No. 161 encourages, but does not require, comparative disclosure for earlier periods at initial adoption. The adoption of SFAS No. 161 will not have any impact on Duke Energy’s consolidated results of operations, cash flows or financial position.

FSP No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (FSP APB 14-1). In May 2008, the FASB issued FSP APB 14-1, which addresses the accounting for convertible debt securities that, upon conversion, may be settled by the issuer fully or partially in cash. FSP APB 14-1 does not change the accounting for more traditional types of convertible debt securities that do not have a cash settlement feature and FSP APB 14-1 does not apply if, under existing GAAP for derivatives, the embedded conversion feature must be accounted for separately from the rest of the instrument. For Duke Energy, FSP APB 14-1 is applicable as of January 1, 2009 and must be applied retrospectively to all prior periods presented, even if the instrument has matured, has been converted, or has otherwise been extinguished as of the effective date of FSP APB 14-1. Duke Energy is currently evaluating the impact of adopting FSP APB 14-1 on its historical results of operations as, in 2003, Duke Energy issued $770 million of convertible debt with a cash settlement option that was fully converted to common stock during the years ended December 31, 2005, 2006 and 2007; however, Duke Energy does not anticipate the retrospective application of FSP APB 14-1 will have a material impact on Duke Energy’s historical results of operations, cash flows or financial position. Future impacts of FSP APB 14-1 will be determined by whether Duke Energy issues convertible debt with cash settlement options.

FSP EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (FSP EITF 03-6-1). In June 2008, the FASB issued FSP EITF 03-6-1 to address whether instruments granted in share-based payment transactions may be participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing basic EPS pursuant to the two-class method described in SFAS No. 128. The FASB concluded that rights to dividends or dividend equivalents (whether paid or unpaid) on unvested share-based payment awards that provide a noncontingent transfer of value (such as a nonforfeitable right to receive cash when dividends are paid to common stockholders, irrespective of whether the award ultimately vests) to the holder of the share-based payment award constitute participation rights and, therefore, should be included in the computation of basic EPS using the two-class method. Duke Energy issues certain share-based payment awards under which rights to dividends during the vesting period are nonforfeitable. For Duke Energy, FSP EITF 03-6-1 is effective as of January 1, 2009 and all prior-period EPS data is required to be adjusted retrospectively to conform to the provisions of FSP EITF 03-6-1. Duke Energy is currently evaluating the impact of

PART I

DUKE ENERGY CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

adoption of FSP No. EITF 03-6-1 on its EPS; however, Duke Energy does not currently anticipate the adoption of FSP EITF 03-6-1 will have a material impact on its calculated future or historical EPS amounts.

19. Income Taxes and Other Taxes

Duke Energy or its subsidiaries file income tax returns in the U.S. with federal and various state governmental authorities, and in certain foreign jurisdictions.

The following table details the changes in Duke Energy’s unrecognized tax benefits from January 1, 2008 to September 30, 2008.


	Increase/(Decrease)
	(in millions)
Unrecognized Tax Benefits—January 1, 2008	$	348

Unrecognized Tax Benefits Changes
Gross increases—tax positions in prior periods		293
Gross decreases—tax positions in prior periods		(22	)
Gross increases—current period tax positions		12
Settlements		(2	)
Statute of limitations expirations		(2	)

Total Changes		279

Unrecognized Tax Benefits—September 30, 2008	$	627

At September 30, 2008 and December 31, 2007, Duke Energy had approximately $301 million and $114 million, respectively, of unrecognized tax benefits that, if recognized, may affect the effective tax rate or a regulatory liability. At this time, Duke Energy is unable to estimate the specific effect to either. Additionally, at September 30, 2008, Duke Energy has approximately $15 million and $9 million that, if recognized, would affect (Loss) Income From Discontinued Operations, net of tax, and Goodwill, respectively, if recognized prior to the adoption of SFAS No. 141R.

It is reasonably possible that Duke Energy will reflect an approximate $65 million reduction in unrecognized tax benefits within the next twelve months due to expected settlements.

Duke Energy has the following tax years open.


Jurisdiction		Tax Years
Federal		1999 and after (except for Cinergy and its subsidiaries, which are open for years 2000 and after)
State		Majority closed through 2001 except for certain refund claims for tax years 1978-2001 and any adjustments related to open federal years
International		2000 and after

Three Months Ended September 30, 2008 as Compared to September 30, 2007 . Consolidated income tax expense from continuing operations for the three months ended September 30, 2008 and 2007 was $132 million and $304 million, respectively. The decrease is primarily the result of a lower pre-tax income in the third quarter 2008 compared to the third quarter 2007. The effective tax rate increased for the three months ended September 30, 2008 (38.0%) compared to the same period in 2007 (34.7%) primarily due to adjustments related to prior year tax returns partially offset by higher AFUDC equity.

Nine Months Ended September 30, 2008 as Compared to September 30, 2007 . Consolidated income tax expense from continuing operations for the nine months ended September 30, 2008 and 2007 was $521 million and $595 million, respectively. The decrease is primarily the result of lower pre-tax income. The effective tax rate increased for the nine months ended September 30, 2008 (33.9%) compared to the same period in 2007 (33.0%) primarily due to adjustments related to prior year tax returns partially offset by higher AFUDC equity.

As of September 30, 2008 and December 31, 2007, approximately $298 million and $312 million, respectively, of current deferred tax assets were included in Other within Current Assets on the Consolidated Balance Sheets. At both September 30, 2008 and December 31, 2007, these balances exceeded 5% of Total Current Assets.

PART I

DUKE ENERGY CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Excise Taxes . Certain excise taxes levied by state or local governments are collected by Duke Energy from its customers. These taxes, which are required to be paid regardless of Duke Energy’s ability to collect from the customer, are accounted for on a gross basis.

When Duke Energy acts as an agent, and the tax is not required to be remitted if it is not collected from the customer, the taxes are accounted for on a net basis. Duke Energy’s excise taxes accounted for on a gross basis and recorded as operating revenues in the accompanying Consolidated Statements of Operations were approximately $72 million and $77 million for the three months ended September 30, 2008 and 2007, respectively, and approximately $216 million and $214 million for the nine months ended September 30, 2008 and 2007, respectively.

20. Comprehensive Income and Accumulated Other Comprehensive Income

Comprehensive Income . Comprehensive income includes net income and all other non-owner changes in equity. The table below provides the components of other comprehensive income and total comprehensive income for the three months ended September 30, 2008 and 2007. Components of other comprehensive income and total comprehensive income for the nine months ended September 30, 2008 and 2007 are presented in the Consolidated Statements of Common Stockholder’s Equity and Comprehensive Income.

Total Comprehensive Income


	Three Months Ended September 30,
	2008			2007
	(in millions)
Net Income	$	215		$	607

Other comprehensive (loss) income
Foreign currency translation adjustments		(207	)		51
Net unrealized gains (losses) on cash flow hedges ^(a)		13			(19	)
Pension and OPEB-related Adjustments to AOCI ^(b)		(7	)		7
Reclassification into earnings from cash flow hedges ^(c)		2			4
Unrealized loss on investments in auction rate securities ^(d)		3			—
Reclassification to earnings of losses on investments in auction rate securities and other available-for-sale securities ^(e)		2			—
Other ^(f)		(9	)		—

Other comprehensive (loss) income, net of tax		(203	)		43

Total Comprehensive Income	$	12		$	650

(a)	Net unrealized gains on cash flow hedges, net of $9 million tax expense and $11 million tax benefit for the three months ended September 30, 2008 and 2007, respectively.

(b)	Net of $4 million tax benefit and $2 million tax expense for the three months ended September 30, 2008 and 2007, respectively.

(c)	Reclassification into earnings from cash flow hedges, net of $1 million and $2 million tax expense for the three months ended September 30, 2008 and 2007, respectively.

(d)	Net of $1 million tax benefit for the three months ended September 30, 2008.

(e)	Net of $1 million tax expense for the three months ended September 30, 2008.

(f)	Net of $3 million tax benefit for the three months ended September 30, 2008.

21. Related Party Transactions

In early 2008, Duke Energy began discussions with Crescent to purchase certain parcels of land in North Carolina and South Carolina that potentially have strategic value to Duke Energy’s regulated operations in those states. During the second quarter of 2008, Duke Energy had independent third party appraisals performed for each parcel of land in order to assist in the determination of a potential purchase price. In June 2008, Duke Energy acquired approximately 12,700 acres of land for a purchase price of approximately $51 million. Crescent recorded a gain on the sale. Since Duke Energy is a joint venture owner in Crescent, its proportionate share of the gain was eliminated and instead recorded as a reduction in the carrying amount of the purchased real estate in accordance with SOP 78-9, “Accounting for Investments in Real Estate Ventures.”

22. Subsequent Events

For information on subsequent events related to debt and credit facilities, regulatory matters, and commitments and contingencies, see Notes 7, 14 and 15, respectively.

PART I

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

INTRODUCTION

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

Executive Overview

Three months ended September 30, 2008

Net income decreased from $607 million in the third quarter of 2007 to $215 million for the third quarter of 2008. Diluted earnings per share decreased from $0.48 per share in the third quarter of 2007 to $0.17 per share in the third quarter of 2008 primarily due to the decrease in net income in the third quarter of 2008 as compared to the same period in 2007, as described further below.

Income from continuing operations decreased from $573 million for the third quarter of 2007 to $216 million for the third quarter of 2008. Total reportable business segment EBIT (defined below in “Segment Results” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations) decreased from $1,025 million to $571 million. The results for each of Duke Energy’s reportable business segment, as well as Other, are as follows:

•

Segment EBIT for U.S. Franchised Electric and Gas decreased approximately $34 million primarily due to milder weather as, during the third quarter of 2007, U.S. Franchised Electric and Gas experienced record setting weather in both the Carolinas and Midwest, unfavorable operation and maintenance expenses primarily due to storm costs in the Midwest and lower rates in the Carolinas resulting from the 2007 North Carolina rate review. Partially offsetting these decreases were the conclusion in the third quarter of 2007 of North Carolina clean air amortization, higher allowance for funds used during construction (AFUDC), higher rates in the Midwest primarily as a result of recovery of qualifying pollution control costs in Indiana and rate increases in Ohio, as well as higher results from sales to wholesale customers.

•

Segment EBIT for Commercial Power declined approximately $271 million due primarily to mark-to-market losses on economic hedges driven by sharply declining commodity prices, an impairment of emission allowances resulting from the invalidation in federal court of the Clean Air Interstate Rule (CAIR), the timing of recovery of fuel and purchased power costs under the Ohio Rate Stabilization Plan (RSP) and milder weather. The decrease was partially offset by lower purchase accounting and operating and maintenance expenses.

•

Segment EBIT for International Energy decreased approximately $15 million primarily due to unfavorable hydrology and lower prices in Peru and lower results in Central America, partially offset by increased demand in Brazil, favorable average foreign exchange rates and higher results at National Methanol Company (NMC).

•

Segment EBIT for Crescent was a loss of approximately $124 million compared to $10 million of equity earnings in the third quarter of 2007, substantially due to approximately $114 million of asset impairments primarily related to residential properties as Crescent continued to assess projects in troubled real estate markets, consistent with its revised business strategy developed in connection with the June 2008 restructuring of the terms of its long-term debt obligations.

•

Additionally, net losses at Other increased $27 million due primarily to a prior year benefit related to contract settlement negotiations, increased benefit costs and lower captive insurance results.

The effective tax rate for the third quarter 2008 increased to approximately 38% compared to 35% in the same period in 2007 due primarily to adjustments related to prior year tax returns, partially offset by higher AFUDC equity. The decrease in income tax expense was primarily due to lower pre-tax income.

The decrease in (loss) income from discontinued operations from income of $34 million in the third quarter of 2007 to a loss of $1 million in 2008 primarily relates to the inclusion in the three months ended September 30, 2007 of the results of Commercial Power’s synfuel operations (approximately $38 million of after-tax earnings, including an approximate $80 million tax benefit), which ceased upon the expiration of tax credits on December 31, 2007 and were reclassified to discontinued operations.

Nine months ended September 30, 2008

Net income decreased from $1,257 million for the nine months ended September 30, 2007 to $1,031 million for the nine months ended September 30, 2008. Diluted earnings per share decreased from $0.99 per share for the nine months ended September 30, 2007 to $0.81 per share for the nine months ended September 30, 2008 primarily due to the decrease in net income for the nine months ended September 30, 2008 as compared to the same period in 2007, as described further below.

PART I

Income from continuing operations decreased from $1,209 million for the nine months ended September 30, 2007 to $1,017 million for the nine months ended September 30, 2008. Total reportable business segment EBIT decreased from $2,338 million to $2,216 million. The results for each of Duke Energy’s reportable business segment, as well as Other, are as follows:

•

Segment EBIT for U.S. Franchised Electric and Gas increased $80 million primarily due to the conclusion in the third quarter of 2007 of North Carolina clean air amortization, the substantial completion of rate credits in 2007 related to the merger with Cinergy Corp. (Cinergy), and higher AFUDC including the impact of a favorable Indiana Utility Regulatory Commission (IURC) ruling. Partially offsetting these increases were higher operation and maintenance costs, primarily due to storm costs in the Midwest ,unfavorable weather in both the Carolinas and Midwest, higher depreciation expense due to additional capital spending and a decrease in retail rates and rate riders primarily related to new retail base rates implemented in North Carolina in the first quarter of 2008, net of increases in recoveries of Duke Energy Indiana’s environmental compliance costs from retail customers, a new demand side management rider implemented in Ohio in the third quarter of 2007, higher electric transmission rates in Ohio and new gas base rates implemented in Ohio in the second quarter of 2008.

•

Segment EBIT for Commercial Power increased $33 million, primarily due to lower purchase accounting net expenses, gains on the sales of emission allowances, and improved mark-to-market impacts of economic hedges, partially offset by an impairment of emission allowances resulting from the invalidation of the CAIR, the timing of recovery of fuel and purchased power costs under the Ohio RSP and milder weather.

•

Segment EBIT for International Energy increased $24 million primarily due to higher margins at NMC and favorable foreign exchange rates, partially offset by lower results in Latin America.

•

Segment EBIT for Crescent was a loss of approximately $230 million, primarily due to approximately $238 million of asset impairments, as discussed above.

•

Additionally, losses at Other increased $36 million, primarily due to unfavorable net returns on investments, a prior year benefit related to contract settlement negotiations and lower captive insurance results, partially offset by prior year convertible debt charges related to the spin-off of Spectra Energy with no comparable charges in 2008 and reduced severance and benefit costs.

In addition to the decrease in segment EBIT, interest expense increased by approximately $53 million due primarily to higher debt balances. The effective tax rate for the nine months ended September 30, 2008 increased to approximately 34% compared to 33% in the same period in 2007 primarily due to adjustments related to prior year tax returns, partially offset by higher AFUDC equity.

(Loss) income from discontinued operations decreased, with income of $14 million in the nine months ended September 30, 2008 compared to $48 million for the same period in 2007. The 2008 amounts primarily reflect the sale of Commercial Power’s Brownsville plant, as discussed below, while the 2007 results primarily reflect the classification of the results of operations for Commercial Power’s synthetic fuel (synfuel) operations as discontinued operations as a result of the cessation of synfuel operations on December 31, 2007 due to the expiration of certain tax credits.

RESULTS OF OPERATIONS

Results of Operations and Variances


	Three Months Ended September 30,									Nine Months Ended September 30,
	2008			2007			Increase (Decrease)			2008			2007			Increase (Decrease)
	(in millions)
Operating revenues	$	3,508		$	3,688		$	(180	)	$	10,074		$	9,689		$	385
Operating expenses		2,933			2,758			175			8,116			7,670			446
Gains (losses) on sales of other assets and other, net		2			—			2			53			(10	)		63

Operating income		577			930			(353	)		2,011			2,009			2
Other income and expenses, net		(55	)		120			(175	)		76			293			(217	)
Interest expense		176			177			(1	)		552			499			53
Minority interest benefit		(2	)		(4	)		(2	)		(3	)		(1	)		2

Income from continuing operations before income taxes		348			877			(529	)		1,538			1,804			(266	)
Income tax expense from continuing operations		132			304			(172	)		521			595			(74	)

Income from continuing operations		216			573			(357	)		1,017			1,209			(192	)
(Loss) Income from discontinued operations, net of tax		(1	)		34			(35	)		14			48			(34	)

Net income	$	215		$	607		$	(392	)	$	1,031		$	1,257		$	(226	)

PART I

The following is a summary discussion of the consolidated results of operations and variances, which is followed by a discussion of EBIT results by reportable business segment, as well as Other.

Consolidated Operating Revenues

Three Months Ended September 30, 2008 as Compared to September 30, 2007. Consolidated operating revenues for the three months ended September 30, 2008 decreased $180 million, compared to the same period in 2007. This change was primarily driven by the following:

•

A $145 million decrease at Commercial Power. See Operating Revenue discussion within “Segment Results” for Commercial Power below for further information; and

•

A $58 million decrease at U.S. Franchised Electric and Gas. See Operating Revenue discussion within “Segment Results” for U.S. Franchised Electric and Gas below for further information.

Partially offsetting these decreases was:

•

A $21 million increase at International Energy. See Operating Revenue discussion within “Segment Results” for International Energy below for further information.

Nine Months Ended September 30, 2008 as Compared to September 30, 2007. Consolidated operating revenues for the nine months ended September 30, 2008 increased $385 million, compared to the same period in 2007. This change was primarily driven by the following:

•

A $297 million increase at U.S. Franchised Electric and Gas. See Operating Revenue discussion within “Segment Results” for U.S. Franchised Electric and Gas below for further information; and

•

A $138 million increase at International Energy. See Operating Revenue discussion within “Segment Results” for International Energy below for further information.

Partially offsetting these increases was:

•

A $45 million decrease at Commercial Power. See Operating Revenue discussion within “Segment Results” for Commercial Power below for further information.

Consolidated Operating Expenses

Three Months Ended September 30, 2008 as Compared to September 30, 2007. Consolidated operating expenses for the three months ended September 30, 2008 increased $175 million, compared to the same period in 2007. This change was primarily driven by the following:

•

A $129 million increase at Commercial Power. See Operating Expense discussion within “Segment Results” for Commercial Power below for further information; and

•

A $39 million increase at International Energy. See Operating Expense discussion within “Segment Results” for International Energy below for further information.

Partially offsetting these increases was:

•

A $2 million decrease at U.S. Franchised Electric and Gas. See Operating Expense discussion within “Segment Results” for U.S. Franchised Electric and Gas below for further information.

Nine Months Ended September 30, 2008 as Compared to September 30, 2007. Consolidated operating expenses for the nine months ended September 30, 2008 increased $446 million, compared to the same period in 2007. This change was primarily driven by the following:

•

A $289 million increase at U.S. Franchised Electric and Gas. See Operating Expense discussion within “Segment Results” for U.S. Franchised Electric and Gas below for further information, and

•

A $155 million increase at International Energy See Operating Expense discussion within “Segment Results” for International Energy below for further information.

Partially offsetting these increases was:

•

A $23 million decrease at Commercial Power. See Operating Expense discussion within “Segment Results” for Commercial Power below for further information

PART I

Consolidated Gains (Losses) on Sales of Other Assets and Other, Net

Three Months Ended September 30, 2008 as Compared to September 30, 2007. Consolidated gain (losses) on sales of other assets and other, net, was a gain of approximately $2 million for the three months ended September 30, 2008, with no corresponding gains or losses in the same period in 2007.

Nine Months Ended September 30, 2008 as Compared to September 30, 2007. Consolidated gain (losses) on sales of other assets and other, net, was a gain of approximately $53 million and a loss of approximately $10 million for the nine months ended September 30, 2008 and 2007, respectively. The net gain for the nine months ended September 30, 2008 and net loss for the nine months ended September 30, 2007 were due primarily to Commercial Power’s sale of emission allowances. Gains in 2008 were primarily a result of sales of zero cost basis emission allowances. Losses in 2007 were a result of sales of emission allowances acquired in connection with Duke Energy’s merger with Cinergy in April 2006 which were written up to fair value as part of purchase accounting.

Consolidated Operating Income

Three Months Ended September 30, 2008 as Compared to September 30, 2007. Consolidated operating income for the three months ended September 30, 2008 decreased $353 million compared to the same period in 2007. Drivers to operating income are discussed above.

Nine Months Ended September 30, 2008 as Compared to September 30, 2007. Consolidated operating income for the nine months ended September 30, 2008 increased $2 million compared to the same period in 2007. Drivers to operating income are discussed above.

Consolidated Other Income and Expenses, Net

Three Months Ended September 30, 2008 as Compared to September 30, 2007. Consolidated other income and expenses, net for the three months ended September 30, 2008 decreased $175 million compared to the same period in 2007. The decrease was driven primarily by a decrease in equity earnings of approximately $118 million due primarily to impairment charges recorded by Crescent, of which Duke Energy’s proportionate share was approximately $114 million, and lower interest income of approximately $35 million, largely due to approximately $30 million of favorable adjustments related to income taxes in 2007.

Nine Months Ended September 30, 2008 as Compared to September 30, 2007. Consolidated other income and expenses, net for the nine months ended September 30, 2008 decreased $217 million compared to the same period in 2007. The decrease was driven primarily by a decrease in equity earnings of approximately $206 million due primarily to impairment charges recorded by Crescent, of which Duke Energy’s proportionate share was approximately $238 million, partially offset by increased equity earnings at International Energy of approximately $48 million primarily related to its investment in NMC, and lower interest income of approximately $48 million, largely due to approximately $40 million of favorable adjustments related to income taxes in 2007, partially offset by a $21 million charge in the first quarter of 2007 associated with convertible debt related to the spin-off of Spectra Energy with no comparable charge during in 2008 and a $63 million increase at U.S. Franchised Electric and Gas in the equity component of AFUDC primarily as a result of additional capital spending for ongoing construction projects and a favorable Indiana Utility Regulatory Commission (IURC) ruling.

Consolidated Interest Expense

Three Months Ended September 30, 2008 as Compared to September 30, 2007. Consolidated interest expense for the three months ended September 30, 2008 was flat compared to the same period in 2007. The increase in interest expense due to debt issuances in 2008 was offset primarily by an increase in the debt component of AFUDC (capitalized interest) due to additional capital spending and lower interest rates on floating debt and commercial paper.

Nine Months Ended September 30, 2008 as Compared to September 30, 2007. Consolidated interest expense for the nine months ended September 30, 2008 increased $53 million, compared to the same period in 2007. This increase was due primarily to higher debt balances.

Consolidated Income Tax Expense from Continuing Operations

Three Months Ended September 30, 2008 as Compared to September 30, 2007. Consolidated income tax expense from continuing operations for the three months ended September 30, 2008 decreased $172 million compared to the same period in 2007. The decrease is primarily the result of lower pre-tax income partially offset by a higher effective tax rate for the three months ended September 30, 2008 (38%) compared to the same period in 2007 (35%). The increase in the effective tax rate is due primarily to adjustments related to prior year tax returns partially offset by higher AFUDC equity.

PART I

Nine Months Ended September 30, 2008 as Compared to September 30, 2007. Consolidated income tax expense from continuing operations for the nine months ended September 30, 2008 decreased $74 million compared to the same period in 2007. The decrease is primarily the result of lower pre-tax income partially offset by a higher effective tax rate for the nine months ended September 30, 2008 (34%) compared to the same period in 2007 (33%). The increase in the effective tax rate is primarily due to adjustments related to prior year tax returns partially offset by higher AFUDC equity.

Consolidated (Loss) Income From Discontinued Operations, Net of tax

Three Months Ended September 30, 2008 as Compared to September 30, 2007. Consolidated (loss) income from discontinued operations, net of tax, for the three months ended September 30, 2008 decreased $35 million compared to the same period in 2007. The decrease primarily relates to the inclusion in the three months ended September 30, 2007 of the results of Commercial Power’s synfuel operations (approximately $38 million of after-tax earnings, including an approximate $80 million tax benefit), which ceased upon the expiration of tax credits on December 31, 2007 and were reclassified to discontinued operations.

Nine Months Ended September 30, 2008 as Compared to September 30, 2007. Consolidated (loss) income from discontinued operations, net of tax, for the nine months ended September 30, 2008 decreased $34 million compared to the same period in 2007. (Loss) income from discontinued operations, net of tax, for the nine months ended September 30, 2007 includes the results of Commercial Power’s synfuel operations (approximately $54 million of after-tax earnings, including an approximate $148 million tax benefit), which ceased upon the expiration of tax credits on December 31, 2007 and were reclassified to discontinued operations. This decrease is partially offset by Commercial Power’s sale during the nine months ended September 30, 2008 of its 480 MW natural gas-fired peaking generating station located near Brownsville, Tennessee to Tennessee Valley Authority (approximately $15 million after-tax gain).

Segment Results

Management evaluates segment performance based on earnings before interest and taxes from continuing operations, after deducting minority interest expense related to those profits (EBIT). On a segment basis, EBIT excludes discontinued operations, represents all profits from continuing operations (both operating and non-operating) before deducting interest and taxes, and is net of the minority interest expense related to those profits. Cash, cash equivalents and short-term investments are managed centrally by Duke Energy, so the gains and losses on foreign currency remeasurement and interest and dividend income on those balances are excluded from the segments’ EBIT. Management considers segment EBIT to be a good indicator of each segment’s operating performance from its continuing operations as it represents the results of Duke Energy’s ownership interest in operations without regard to financing methods or capital structures.

Duke Energy’s segment EBIT may not be comparable to a similarly titled measure of another company because other entities may not calculate EBIT in the same manner. Segment EBIT is summarized in the following table, and detailed discussions follow.

EBIT by Business Segment (in millions)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
	(in millions)
U.S. Franchised Electric and Gas	$	726		$	760		$	1,866		$	1,786
Commercial Power		(108	)		163			273			240
International Energy		77			92			307			283
Crescent		(124	)		10			(230	)		29

Total reportable segment EBIT		571			1,025			2,216			2,338
Other		(71	)		(44	)		(230	)		(194	)

Total reportable segment and other EBIT		500			981			1,986			2,144
Interest expense		(176	)		(177	)		(552	)		(499	)
Interest income and other ^(a)		24			73			104			159

Consolidated income from continuing operations before income taxes	$	348		$	877		$	1,538		$	1,804

(a)	Other within Interest Income and Other includes foreign currency transaction gains and losses.

PART I

The amounts discussed below include intercompany transactions that are eliminated in the Consolidated Financial Statements.

U.S. Franchised Electric and Gas

U.S. Franchised Electric and Gas includes the regulated operations of Duke Energy Carolinas, LLC (Duke Energy Carolinas), Duke Energy Ohio, Inc. (Duke Energy Ohio), Duke Energy Indiana, Inc. (Duke Energy Indiana) and Duke Energy Kentucky, Inc. (Duke Energy Kentucky).


	Three Months Ended September 30,								Nine Months Ended September 30,
(in millions, except where noted)	2008		2007			Increase (Decrease)			2008		2007		Increase (Decrease)
Operating revenues	$	2,698	$	2,756		$	(58	)	$	7,701	$	7,404	$	297
Operating expenses		2,003		2,005			(2	)		5,941		5,652		289
Gains (Losses) on sales of other assets and other, net		1		(1	)		2			4		—		4

Operating income		696		750			(54	)		1,764		1,752		12
Other income and expenses, net		30		10			20			102		34		68

EBIT	$	726	$	760		$	(34	)	$	1,866	$	1,786	$	80

Duke Energy Carolinas GWh sales ^(a)		22,785		23,797			(1,012	)		65,875		66,209		(334	)
Duke Energy Midwest GWh sales ^(a)(b)		16,566		17,230			(664	)		47,860		49,038		(1,178	)
Net proportional MW capacity in operation ^(c)										27,487		27,590		(103	)

(a)	Gigawatt-hours (GWh)

(b)	Duke Energy Ohio, Duke Energy Indiana and Duke Energy Kentucky collectively referred to as Duke Energy Midwest

(c)	Megawatt (MW)

The following table shows the percent changes in GWh sales and average number of customers for Duke Energy Carolinas for the three and nine months ended September 30, 2008 compared to the same periods in the prior year.


Increase (decrease) over prior year	Three Months Ended September 30, 2008		Nine Months Ended September 30, 2008
Residential sales ^(a)	(6.1	)%	(1.7	)%
General service sales ^(a)	(1.4	)%	(0.1	)%
Industrial sales ^(a)	(4.2	)%	(3.7	)%
Wholesale sales	68.3	%	26.5	%
Total Duke Energy Carolinas sales ^(b)	(4.3	)%	(0.5	)%
Average number of customers	1.5	%	1.6	%

(a)	Major components of Duke Energy Carolinas’ retail sales.

(b)	Consists of all components of Duke Energy Carolinas’ sales, including retail sales and wholesale sales to incorporated municipalities and to public and private utilities and power marketers.

The following table shows the percent changes in GWh sales and average number of customers for Duke Energy Midwest for the three and nine months ended September 30, 2008 compared to the same period in the prior year.


Increase (decrease) over prior year	Three Months Ended September 30, 2008		Nine Months Ended September 30, 2008
Residential sales ^(a)	(9.0	)%	(3.6	)%
General service sales ^(a)	(3.9	)%	(1.0	)%
Industrial sales ^(a)	(4.6	)%	(4.7	)%
Wholesale sales	11.7	%	4.3	%
Total Duke Energy Midwest sales ^(b)	(3.9	)%	(2.4	)%
Average number of customers	0.2	%	0.4	%

(a)	Major components of Duke Energy Midwest’s retail sales.

(b)	Consists of all components of Duke Energy Midwest’s sales, including retail sales, and wholesale sales to incorporated municipalities and to public and private utilities and power marketers.

Three Months Ended September 30, 2008 as compared to September 30, 2007

PART I

Operating Revenues. The decrease was driven primarily by:

•

A $111 million decrease in GWh/Thousand Cubit Feet (Mcf) sales to retail customers due to milder weather during the third quarter of 2008 compared with the same period in 2007. Both the Carolinas and Midwest experienced record setting weather during the third quarter of 2007. For the Midwest, cooling degree days for the third quarter of 2008 were approximately 3% above normal compared to 39% above normal during the same period in 2007. For the Carolinas, cooling degree days for the third quarter of 2008 were approximately 2% above normal compared to 25% above normal during the same period in 2007; and

•

An $11 million decrease in retail rates and riders primarily related to the new retail base rates implemented in North Carolina in the first quarter of 2008 as a result of the 2007 rate review, net of increases in recoveries of Duke Energy Indiana’s environmental compliance costs from retail customers and higher gas base rates implemented in the second quarter of 2008 for Duke Energy Ohio.

Partially offsetting these decreases were:

•

A $24 million increase in fuel revenues (including emission allowances) driven primarily by higher fuel rates primarily in the Midwest, partially offset by lower demand from retail customers primarily in the Carolinas. Fuel revenues represent sales to retail and wholesale customers; and

•

A $26 million increase in wholesale power revenues, net of sharing, primarily due to higher prices and increased sales volumes on near-term sales as a result of favorable market conditions driven by strong natural gas prices, coupled with increased sales volumes to customers served under long-term contracts, partially offset by increased fuel costs and increased sharing of profits as a result of the 2007 North Carolina rate review.

Operating Expenses. The decrease was driven primarily by:

•

A $68 million decrease in regulatory amortization expenses. Approximately $75 million of the decrease relates to the amortization of compliance costs related to North Carolina clean air legislation, which was completed in 2007.

Partially offsetting this decrease was:

•

A $46 million increase in operating and maintenance expenses primarily due to storm costs in the Midwest related to Hurricane Ike in September 2008, higher maintenance costs at fossil generating plants, and increased capacity costs due to additional contracts entered into in late 2007 to ensure customer electricity needs were met despite ongoing drought conditions, partially offset by lower benefit costs including short-term incentives; and

•

A $21 million increase in depreciation due primarily to additional capital spending, including costs related to Duke Energy Indiana’s clean coal expenditures.

Other Income and Expenses, net. The increase resulted primarily from the equity component of AFUDC due to additional capital spending for ongoing construction projects.

EBIT . The decrease resulted primarily from milder weather, higher operation and maintenance costs and increased depreciation. These increases were partially offset by decreased regulatory amortization, increased wholesale power revenues and higher AFUDC.

Nine Months Ended September 30, 2008 as compared to September 30, 2007

Operating Revenues. The increase was driven primarily by:

•

A $334 million increase in fuel revenues (including emission allowances) driven primarily by higher fuel rates in all regions and legislative changes that allow Duke Energy Carolinas to collect additional purchased power and environmental compliance costs from retail customers. Fuel revenues represent sales to retail and wholesale customers; and

•

A $91 million increase related to the substantial completion in 2007 of the sharing of anticipated merger savings through rate decrement riders with regulated customers.

Partially offsetting these increases were:

•

An $89 million decrease in GWh/Mcf sales to retail customers due to milder weather in 2008 compared to the same period in 2007. While weather statistics for heating degree days in 2008 were favorable compared to the same period in 2007, this favorable impact was more than offset by the impact of fewer cooling degree days in 2008 compared to the same period in 2007; and

•

A $38 million decrease in retail rates and rate riders primarily related to the new retail base rates implemented in North Carolina in the first quarter of 2008, net of increases in recoveries of Duke Energy Indiana’s environmental compliance costs from retail customers, higher gas base rates implemented in the second quarter of 2008 for Duke Energy Ohio and the demand side management rider implemented in Ohio in the third quarter of 2007.

PART I

Operating Expenses. The increase was driven primarily by:

•

A $287 million increase in fuel expense (including purchased power and natural gas purchases for resale) primarily due to higher coal and natural gas prices, an increased volume of coal used in electric generation and increased purchased power. This increase also reflects a $21 million reimbursement in first quarter 2007 of previously incurred fuel expenses resulting from a settlement between Duke Energy Carolinas and the U.S. Department of Justice resolving Duke Energy’s used nuclear fuel litigation against the Department of Energy (DOE). The settlement between the parties was finalized on March 5, 2007;

•

A $105 million increase in operating and maintenance expenses primarily due to storm costs in the Midwest related to Hurricane Ike in September 2008, higher outage and maintenance costs at nuclear and fossil generating plants, increased capacity costs due to additional contracts that were entered into in late 2007 to ensure customer electricity needs were met despite ongoing drought conditions and increased power delivery maintenance charges to increase system reliability, partially offset by lower benefit costs including short-term incentives; and

•

A $62 million increase in depreciation due primarily to additional capital spending.

Partially offsetting these increases was:

•

A $164 million decrease in regulatory amortization expenses, including approximately $187 million for the amortization of compliance costs related to North Carolina clean air legislation, which was completed in 2007.

Other Income and Expenses, net. The increase resulted primarily from the equity component of AFUDC due to a favorable IURC ruling and additional capital spending for ongoing construction projects.

EBIT . The increase resulted primarily from decreased regulatory amortization, the substantial completion of the required rate reductions due to the merger with Cinergy and increased AFUDC. These increases were partially offset by higher operation and maintenance costs, milder weather, additional depreciation as rate base increased during 2008, overall net lower retail rates and rate riders and the 2007 DOE settlement.

Commercial Power


	Three Months Ended September 30,								Nine Months Ended September 30,
(in millions, except where noted)	2008			2007		Increase (Decrease)			2008		2007			Increase (Decrease)
Operating revenues	$	498		$	643	$	(145	)	$	1,429	$	1,474		$	(45	)
Operating expenses		614			485		129			1,219		1,242			(23	)
Gains (Losses) on sales of other assets and other, net		—			—		—			46		(11	)		57

Operating income		(116	)		158		(274	)		256		221			35
Other income and expenses, net		8			5		3			17		19			(2	)

EBIT	$	(108	)	$	163	$	(271	)	$	273	$	240		$	33

Actual Plant Production, GWh		5,027			7,230		(2,203	)		15,893		18,228			(2,335	)
Proportional MW capacity in operation										7,550		8,100			(550	)

Three Months Ended September 30, 2008 as compared to September 30, 2007

Operating Revenues. The decrease was primarily driven by:

•

A $58 million decrease in retail electric revenues due to lower retail pricing principally related to the timing of collections on the fuel and purchase power (FPP) rider and lower retail volumes due to milder weather, net of increased amortization of purchase accounting valuation liability of the RSP in 2008 compared to 2007;

•

A $51 million decrease in net mark-to-market revenues on non-qualifying power and capacity hedge contracts, consisting of mark-to-market losses of $45 million in 2008 compared to gains of $6 million in 2007;

•

A $19 million decrease in wholesale electric revenues due to lower generation volumes primarily resulting from higher plant outages and lower hedge realization in 2008 compared to 2007; and

•

A $12 million decrease in revenues due to lower generation volumes from the Midwest gas-fired assets resulting from milder weather net of increased PJM capacity revenues in 2008 compared to 2007.

Operating Expenses. The increase was primarily driven by:

•

An $82 million impairment of emission allowances due to the invalidation of CAIR in July 2008;

PART I

•

A $72 million increase in fuel expense due to mark-to-market losses on non-qualifying fuel hedge contracts of $74 million in 2008 compared to losses of $2 million in 2007; and

•

A $5 million increase in fuel and operating expenses for the Midwest gas-fired assets primarily due to bad debt reserves associated with the Lehman Brothers bankruptcy, partially offset by lower generation volumes in 2008 compared to 2007.

Partially offsetting these increases were:

•

An $20 million decrease in emission allowance expenses due to installation of flue gas desulfurization equipment and lower generation volumes resulting from higher plant outages in 2008 compared to 2007;

•

A $9 million decrease in operating expenses primarily due to lower administrative costs, partially offset by higher plant maintenance expenses resulting from increased plant outages in 2008 compared to 2007; and

•

A $5 million decrease in net fuel and purchased power expenses for retail load due to realized gains on fuel hedges, partially offset by higher purchased power as a result of plant outages in 2008 compared to 2007.

Other Income and Expenses, net. The increase is driven primarily by higher equity earnings of unconsolidated affiliates.

EBIT. The decline is primarily attributable to the impairment of emission allowances, higher mark-to-market losses on economic hedges due to decreasing commodity prices, and timing of collections on the FPP rider of the RSP, net of lower emission allowance expenses due to installation of flue gas desulfurization equipment and lower purchase accounting expenses primarily related to the RSP valuation.

Nine Months Ended September 30, 2008 as compared to September 30, 2007

Operating Revenues. The decrease was primarily driven by:

•

A $32 million decrease in retail electric revenues due to lower retail pricing principally related to the timing of collections on the FPP rider and lower retail volumes due to milder weather, net of increased amortization of purchase accounting valuation liability of the RSP in 2008 compared to 2007;

•

A $22 million decrease in wholesale electric revenues due to lower generation volumes primarily resulting from higher plant outages and lower hedge realization in 2008 compared to 2007; and

•

A $4 million decrease in revenues due to lower generation volumes from the Midwest gas-fired assets resulting from milder weather net of increased PJM capacity revenues in 2008 compared to 2007.

Partially offsetting these decreases was:

•

An $8 million increase in net mark-to-market revenues on non-qualifying power and capacity hedge contracts, consisting of mark-to-market losses of $38 million in 2008 compared to losses of $46 million in 2007.

Operating Expenses. The decrease was primarily driven by:

•

A $52 million decrease in emission allowance expenses due to installation of flue gas desulfurization equipment and lower generation volumes resulting from higher plant outages in 2008 compared to 2007;

•

A $27 million decrease in fuel expense due to mark-to-market gains on non-qualifying fuel hedge contracts of $73 million in 2008 compared to gains of $46 million in 2007;

•

A $14 million decrease in operating expenses primarily due to lower administrative costs partially offset by higher plant maintenance expenses resulting from increased plant outages in 2008 compared to 2007; and

•

A $7 million decrease in net fuel and purchased power expense for retail load due to realized gains on fuel hedges, partially offset by higher purchased power as a result of plant outages in 2008 compared to 2007.

Partially offsetting these decreases was:

•

An $82 million impairment of emission allowances due to the invalidation of CAIR in July 2008.

Gains (Losses) on Sales of Other Assets and Other, net. The increase in 2008 as compared to 2007 is attributable to gains on sales of emission allowances in 2008 compared to losses on sales of emission allowances in 2007. Gains in 2008 were primarily a result of sales of zero cost basis emission allowances. Losses in 2007 were a result of sales of emission allowances acquired in connection with Duke Energy’s merger with Cinergy in April 2006 which were written up to fair value as part of purchase accounting.

PART I

EBIT. The improvement is primarily attributable to higher mark-to-market earnings on economic hedges due to increasing commodity prices, gains on sales of emission allowances, lower emission allowance expenses due to installation of flue gas desulfurization equipment, and lower purchase accounting expense primarily due to the RSP valuation. These factors were partially offset by the impairment of emission allowances, lower retail and wholesale revenues resulting from FPP rider collection timing and milder weather.

International Energy


	Three Months Ended September 30,								Nine Months Ended September 30,
(in millions, except where noted)	2008		2007			Increase (Decrease)			2008		2007		Increase (Decrease)
Operating revenues	$	297	$	276		$	21		$	920	$	782	$	138
Operating expenses		250		211			39			716		561		155
Gains (Losses) on sales of other assets and other, net		—		—			—			1		—		1

Operating income		47		65			(18	)		205		221		(16	)
Other income and expenses, net		36		24			12			119		69		50
Minority interest expense (benefit)		6		(3	)		(9	)		17		7		(10	)

EBIT	$	77	$	92		$	(15	)	$	307	$	283	$	24

Sales, GWh		4,379		4,200			179			13,541		12,854		687
Proportional MW capacity in operation										4,010		3,940		70

Three Months Ended September 30, 2008 as compared to September 30, 2007

Operating Revenues. The increase was driven primarily by:

•

A $33 million increase in Brazil due to favorable average sales prices, increased demand and the strengthening of the Real against the U.S. dollar; partially offset by

•

A $13 million decrease in Peru primarily due to unfavorable hydrology and lower average spot prices in 2008 due to transmission line congestion in 2007, partially offset by favorable hydrocarbon sales prices in 2008 compared to 2007.

Operating Expenses. The increase was driven primarily by:

•

A $30 million increase in Peru primarily due to higher purchased power costs, higher fuel prices and higher royalty fees;

•

An $11 million increase in Central America primarily related to write-offs of obsolete property, plant and equipment and fuel inventory adjustments; and

•

A $5 million increase in Argentina primarily due to higher purchased power costs and an increase in the bad debt provision.

Partially offsetting these increases was:

•

A $9 million decrease in Brazil primarily due to a transmission credit adjustment.

Other Income and Expenses, net. The increase was primarily driven by a $9 million increase in equity earnings at NMC due to higher pricing for both MTBE and methanol, partially offset by lower volumes and higher butane costs.

EBIT. The decrease was due primarily to unfavorable hydrology in Peru, and fuel inventory adjustments and write-offs of obsolete property, plant and equipment in Central America; partially offset by lower transmission costs, favorable prices, increased demand and the strengthening of the Real in Brazil as well as favorable prices at NMC.

Nine Months Ended September 30, 2008 as compared to September 30, 2007

Operating Revenues. The increase was driven primarily by:

•

An $81 million increase in Brazil due to favorable average sales prices and the strengthening of the Real against the U.S. dollar;

•

A $59 million increase in Central America due to favorable sales prices; and

•

A $9 million increase in Argentina due to favorable sales prices.

Partially offsetting these increases was:

•

A $14 million decrease in Ecuador primarily due to lower dispatch as a result of unfavorable hydrology.

Operating Expenses. The increase was driven primarily by:

•

A $72 million increase in Central America primarily due to higher fuel prices;

•

A $51 million increase in Peru primarily due to unfavorable purchased power costs and higher royalty fees;

PART I

•

A $19 million increase in Brazil due to higher royalty fees, higher revenue tax and strengthening of the Real against the U.S. dollar, partially offset by a transmission credit adjustment; and

•

A $16 million increase in Argentina due to an increase in the bad debt provision and higher purchased power.

Partially offsetting these increases was:

•

A $16 million decrease in Ecuador due to lower fuel consumption as a result of lower dispatch.

Other Income and Expenses, net. The increase was primarily driven by a $43 million increase in equity earnings at NMC due to higher pricing and volumes for both methanol and MTBE, partially offset by higher butane costs.

EBIT. The increase was due primarily due to higher prices, increased demand and the strengthening of the Real in Brazil and increased equity earnings at NMC, partially offset by lower results in Central America, Argentina and Peru.

Crescent


	Three Months Ended September 30,								Nine Months Ended September 30,
	2008			2007		Increase (Decrease)			2008			2007		Increase (Decrease)
	(in millions)
Equity in (loss) earnings of unconsolidated affiliates	$	(124	)	$	10	$	(134	)	$	(230	)	$	29	$	(259	)

EBIT	$	(124	)	$	10	$	(134	)	$	(230	)	$	29	$	(259	)

EBIT. Segment EBIT for Crescent decreased for both the three and nine months ended September 30, 2008 as compared to the same periods in the prior year primarily as a result of impairment charges recorded by Crescent, for which Duke Energy’s proportionate share was approximately $114 million and $238 million, respectively. See Note 10 “Impairment Charges,” to the Consolidated Financial Statements for additional information related to these impairment charges.

Other


	Three Months Ended September 30,									Nine Months Ended September 30,
	2008			2007			Increase (Decrease)			2008			2007			Increase (Decrease)
	(in millions)
Operating revenues	$	38		$	40		$	(2	)	$	94		$	131		$	(37	)
Operating expenses		90			83			7			311			317			(6	)
Gains (losses) on sales of other assets and other, net		1			2			(1	)		2			1			1

Operating income		(51	)		(41	)		(10	)		(215	)		(185	)		(30	)
Other income and expenses, net		(25	)		(3	)		(22	)		(24	)		(12	)		(12	)
Minority interest benefit		(5	)		—			5			(9	)		(3	)		6

EBIT	$	(71	)	$	(44	)	$	(27	)	$	(230	)	$	(194	)	$	(36	)

Three Months Ended September 30, 2008 as Compared to September 30, 2007

Operating Expenses. The increase was primarily driven by a prior year benefit related to contract settlement negotiations and prior year recoveries for mutual insurance exit obligations at Bison Insurance Company Limited (Bison). These unfavorable variances were partially offset by reduced benefit costs.

Other Income and Expenses, net. The increase in net expense was due primarily to unfavorable investment returns related to executive life insurance.

EBIT. The decrease was primarily driven by a prior year benefit related to contract settlement negotiations, unfavorable investment returns related to executive life insurance and prior year recoveries for mutual insurance exit obligations, partially offset by favorable benefit costs.

Nine Months Ended September 30, 2008 as Compared to September 30, 2007

Operating Revenues . The reduction was primarily driven by decreased premiums earned by Bison due to premiums earned in the prior year related to the assumption of liabilities by Bison from other Duke Energy business units, which increased premiums charged to business units in 2007.

PART I

Operating Expenses. The reduction was primarily driven by the establishment of reserves related to liabilities assumed by Bison from other Duke Energy business units in 2007 with no comparable charges in 2008, decreased severance costs and reduced benefit costs. These favorable variances were partially offset by a prior year benefit related to contract settlement negotiations, unfavorable property loss experience and prior year recoveries for mutual insurance exit obligations at Bison.

Other Income and Expenses, net. The increase in net expense was primarily due to unfavorable investment returns related to executive life insurance, partially offset by prior year convertible debt charges related to the spin-off of Spectra Energy with no comparable charges in 2008.

EBIT . The decrease was due primarily to unfavorable investment returns related to executive life insurance, a prior year benefit related to contract settlement negotiations, unfavorable property loss experience and prior year recoveries for mutual insurance exit obligations at Bison, partially offset by prior year convertible debt charges related to the spin-off of Spectra Energy with no comparable charges in 2008, decreased severance costs and reduced benefit costs.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2008, Duke Energy had cash, cash equivalents and short-term investments of approximately $2,056 million, partially offset by approximately $901 million of short-term notes payable and commercial paper. Duke Energy relies primarily upon cash flows from operations, borrowings, and its existing cash, cash equivalents and short-term investments to fund its liquidity and capital requirements. A material adverse change in operations, or in the availability or cost of financing, could impact Duke Energy’s ability to fund its future liquidity and capital resource requirements.

Duke Energy has access to unsecured revolving credit facilities, which are not restricted upon general market conditions, with aggregate bank commitments of approximately $3.2 billion at September 30, 2008. As a result of recent financial market developments, Duke Energy has taken action to preserve liquidity and bridge access to uncertain capital markets. In September 2008, Duke Energy and its wholly owned subsidiaries, Duke Energy Carolinas, Duke Energy Ohio, Duke Energy Indiana and Duke Energy Kentucky, borrowed a total of approximately $1 billion under Duke Energy’s master credit facility, which is discussed further below. At September 30, 2008, Duke Energy had available liquidity under the master credit agreement of approximately $0.6 billion.

Duke Energy has taken steps to maintain sufficient liquidity for the near term, and is focused on maintaining liquidity in 2009 and beyond, should the current period of financial market uncertainty become extended. Duke Energy has re-prioritized some of its capital projects in U.S. Franchised Electric and Gas, and has deferred and delayed some of these projects beyond 2009. Duke Energy plans to issue common stock under its Dividend Reinvestment Program (DRIP) and internal plan equity issuances. Duke Energy had originally expected to do this in the beginning of 2010; but will now start in the fourth quarter of 2008 and continue throughout 2009 to generate about $450 million during that period.

During 2009, Duke Energy currently anticipates making contributions to its qualified pension plans. However, the amount of actual contributions that Duke Energy makes will ultimately be determined by a number of currently undeterminable factors, including, but not limited to, near-term market performance and the level of interest rates that would impact the discount rate used in the calculation of Duke Energy’s obligations under its defined benefit plans.

Operating Cash Flows

Net cash provided by operating activities was $2,477 million for the nine months ended September 30, 2008 compared to $2,465 million for the same period in 2007, an increase in cash provided of $12 million. This change was driven primarily by:

•

Net income of $1,031 million in the nine months ended September 30, 2008 compared to $1,257 million for the same period in 2007, and

•

An approximate $412 million decrease in contributions to company sponsored pension plans,

Investing Cash Flows

Net cash used in investing activities was $3,484 million for the nine months ended September 30, 2008 compared to $1,703 million for the same period in 2007, an increase in cash used of $1,781 million. This change was driven primarily by:

•

An approximate $1,300 million increase in capital and investment expenditures, due primarily to capital expansion projects, the acquisition of Catamount Energy Corporation (approximately $240 million) and the purchase of a portion of Saluda River Electric Cooperative, Inc.’s ownership interest in the Catawba Nuclear Station in 2008 (approximately $150 million), and

PART I

•

An approximate $550 million decrease in proceeds from available for sale securities, net of purchases, due to net purchases of approximately $50 million in 2008 compared to net proceeds of approximately $500 million in 2007, primarily as a result of investing excess cash obtained from the issuances of debt during 2008, partially offset by:

•

An approximate $100 million increase in proceeds from the sale of emission allowances, net of purchases.

Financing Cash Flows and Liquidity

Net cash provided by financing activities was $2,205 million for the nine months ended September 30, 2008 compared to $1,035 million of cash used for the same period in 2007, an increase in cash provided of $3,240 million. This change was driven primarily by:

•

An approximate $2,870 million increase in proceeds from issuances of long-term debt, net of redemptions, as a result of net issuances of approximately $2,700 million during 2008 as compared to net repayments of approximately $160 million during 2007,

•

An approximate $400 million increase due to the distribution of cash in 2007 related to the spin-off of Spectra Energy,

•

An approximate $110 million decrease in payments for the redemption of convertible notes, partially offset by

•

An approximate $80 million decrease in proceeds from issuances of notes payable and commercial paper, net of repayments, and

•

An approximate $40 million increase in dividends paid in 2008

Significant Financing Activities . In January 2008, Duke Energy Carolinas issued $900 million principal amount of mortgage refunding bonds, of which $400 million carries a fixed interest rate of 5.25% and matures January 15, 2018 and $500 million carries a fixed interest rate of 6.00% and matures January 15, 2038. Proceeds from the issuance were used to fund capital expenditures and for general corporate purposes, including the repayment of commercial paper.

In March 2008, Duke Energy entered into an amendment to its $2.65 billion master credit facility whereby the borrowing capacity was increased by $550 million to $3.2 billion. Pursuant to the amendment, the additional credit capacity of $550 million specifically increased the borrowing sublimits for Duke Energy Ohio and Duke Energy Indiana to $750 million and $700 million, respectively. Duke Energy has the unilateral ability under the master credit facility to increase or decrease the borrowing sublimits of each borrower, subject to the maximum cap limitations at any time.

In April 2008, Duke Energy Carolinas issued $900 million principal amount of mortgage refunding bonds, of which $300 million carries a fixed interest rate of 5.10% due April 15, 2018 and $600 million carries a fixed interest rate of 6.05% and matures April 15, 2038. Proceeds from the issuance were used to fund capital expenditures and for general corporate purposes.

In April 2008, Duke Energy Carolinas refunded $100 million of tax-exempt auction rate bonds through the issuance of $100 million of tax-exempt variable-rate demand bonds, which are supported by a direct-pay letter of credit. The variable-rate demand bonds, which are due November 1, 2040, had an initial interest rate of 2.15% which will be reset on a weekly basis. While Duke Energy has plans to refund and refinance its remaining tax exempt auction rate bonds, the timing of such refinancing transaction is uncertain and subject to market conditions.

In June 2008, Duke Energy issued $500 million principal amount of senior notes, of which $250 million carries a fixed interest rate of 5.65% and matures June 15, 2013 and $250 million carries a fixed interest rate of 6.25% and matures June 15, 2018. Proceeds from the issuance were used to redeem commercial paper, to fund capital expenditures in Duke Energy’s unregulated businesses in the U.S. and for general corporate purposes.

In June 2008, Duke Energy increased its common stock dividend from $0.22 per share to $0.23 per share, which became effective with the dividend declared in June 2008 payable in September 2008.

In August 2008, Duke Energy Indiana issued $500 million principal amount of first mortgage bonds, which carries a fixed interest rate of 6.35% and matures August 15, 2038. Proceeds from this issuance will be used to fund capital expenditures and for general corporate purposes, including the repayment of short-term notes and to redeem first mortgage bonds maturing in September 2008.

PART I


	Amounts Borrowed Under Master Credit Facility at September 30, 2008 (in millions)
Duke Energy	$	271
Duke Energy Carolinas		257
Duke Energy Ohio		276
Duke Energy Indiana		121
Duke Energy Kentucky		73

Total	$	998

During the nine months ended September 30, 2008, Duke Energy increased the amount of commercial paper issuances classified as long-term from approximately $300 million to approximately $473 million as Duke Energy has the intent and ability to utilize such borrowings as long-term borrowings since Duke Energy’s master credit facility has non-cancelable terms in excess of one year as of the balance sheet date; therefore, Duke Energy has the ability to refinance these short-term obligations on a long-term basis.

In September 2008, Duke Energy Indiana and Duke Energy Kentucky collectively entered into a $330 million letter of credit agreement with a syndicate of banks, under which Duke Energy Indiana and Duke Energy Kentucky may request the issuance of letters of credit on their behalf to support various series of variable rate demand bonds issued or to be issued on behalf of either Duke Energy Indiana or Duke Energy Kentucky. This credit facility, which is not part of Duke Energy’s master credit facility may not be used for any purpose other than to support the variable rate demand bonds issued by Duke Energy Indiana and Duke Energy Kentucky.

On May 15, 2007, substantially all of the holders of the Duke Energy convertible debt required Duke Energy to repurchase the balance then outstanding at a price equal to 100% of the principal amount plus accrued interest. In May 2007, Duke Energy repurchased approximately $110 million of the convertible debt.

In June 2007, Duke Energy Carolinas issued $500 million principal amount of 6.10% senior unsecured notes due June 1, 2037. The net proceeds from the issuance were used to redeem commercial paper that was issued to repay the outstanding $249 million 6.6% Insured Quarterly Senior Notes due 2022 on April 30, 2007, and approximately $110 million of convertible debt discussed above. The remainder was used for general corporate purposes.

Restrictive Debt Covenants . Duke Energy’s debt and credit agreements contain various financial and other covenants. Failure to meet those covenants beyond applicable grace periods could result in accelerated due dates and/or termination of the agreements. As of September 30, 2008, Duke Energy was in compliance with all covenants related to its significant debt agreements. In addition, some credit agreements may allow for acceleration of payments or termination of the agreements due to nonpayment, or to the acceleration of other significant indebtedness of the borrower or some of its subsidiaries. None of the debt or credit agreements contain material adverse change clauses.

PART I

Credit Ratings. In September 2008, S&P revised the outlook on Duke Energy from stable to positive and affirmed the credit ratings of Duke Energy and its subsidiaries. The credit ratings of Duke Energy and its subsidiaries remain unchanged from those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” in Duke Energy’s Annual Report on Form 10-K for the year ended December 31, 2007.

Duke Energy’s credit ratings are dependent on, among other factors, the ability to generate sufficient cash to fund capital and investment expenditures and pay dividends on its common stock, while maintaining the strength of its current balance sheet. If, as a result of market conditions or other factors, Duke Energy is unable to maintain its current balance sheet strength, or if its earnings and cash flow outlook materially deteriorates, Duke Energy’s credit ratings could be negatively affected.

Other Financing Matters . In October 2007, Duke Energy filed a registration statement (Form S-3) with the Securities and Exchange Commission. Under this Form S-3, which is uncapped, Duke Energy, Duke Energy Carolinas, Duke Energy Ohio and Duke Energy Indiana may issue debt and other securities in the future at amounts, prices and with terms to be determined at the time of future offerings. The registration statement also allows for the issuance of common stock by Duke Energy.

Dividend and Other Funding Restrictions of Duke Energy Subsidiaries . As discussed in Note 14, “Regulatory Matters” to the Consolidated Financial Statements, Duke Energy’s wholly-owned public utility operating companies have restrictions on the amount of funds that can be transferred to Duke Energy via dividend, advance or loan as a result of conditions imposed by various regulators as a condition of Duke Energy’s merger with Cinergy. Additionally, certain other Duke Energy subsidiaries have other restrictions, such as minimum working capital and tangible net worth requirements pursuant to debt and other agreements that limit the amount of funds that can be transferred to Duke Energy. At September 30, 2008, the amount of restricted net assets of wholly-owned subsidiaries of Duke Energy that may not be distributed to Duke Energy in the form of a loan or dividend is approximately $10.7 billion. However, Duke Energy does not have any legal or other restrictions on paying common stock dividends to shareholders out of its consolidated Retained Earnings account. Although these restrictions cap the amount of funding the various operating subsidiaries can provide to Duke Energy, management does not believe these restrictions will have any significant impact on Duke Energy’s ability to access cash to meet its payment of dividends on common stock and other future funding obligations.

Other Matters

Duke Energy has a third-party insurance policy to cover certain losses related to Duke Energy Carolinas’ asbestos-related injuries and damages above an aggregate self insured retention of $476 million. Duke Energy Carolinas’ cumulative payments began to exceed the self-insured retention on its insurance policy during the second quarter of 2008. Future payments up to the policy limit will be reimbursed by Duke Energy’s third party insurance carrier. The insurance policy limit for potential insurance recoveries for indemnification and medical cost claim payments is $1,107 million in excess of the self insured retention. Insurance recoveries of approximately $1,036 million related to this policy are classified in the Consolidated Balance Sheets in Other within Investments and Other Assets and Receivables as of September 30, 2008. Duke Energy is not aware of any uncertainties regarding the legal sufficiency of insurance claims. The insurance company continues to have financial strength ratings as an insurer from major rating agencies that are defined as “strong” and/or “excellent.” Based on the foregoing, management believes the insurance recovery asset is probable of recovery. However, while the insurance carrier is highly rated and appears to be in a strong financial position, it also appears to be exposed, along with many other companies in the insurance industry, to the current credit market situation and the volatility of the equity and fixed income markets. Other insurance companies have experienced rapid credit rating downgrades and there is no assurance that it will retain its current rating.

Off-Balance Sheet Arrangements

During the nine months ended September 30, 2008, there were no material changes to Duke Energy’s off-balance sheet arrangements. For information on Duke Energy’s off-balance sheet arrangements, see “Off-Balance Sheet Arrangements” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Duke Energy’s Annual Report on Form 10-K for the year-ended December 31, 2007.

Contractual Obligations

Duke Energy enters into contracts that require cash payment at specified periods, based on specified minimum quantities and prices. During the nine months ended September 30, 2008, there were no material changes in Duke Energy’s contractual obligations. For an

PART I

in-depth discussion of Duke Energy’s contractual obligations, see “Contractual Obligations” and “Quantitative and Qualitative Disclosures about Market Risk” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Duke Energy’s Annual Report on Form 10-K for the year-ended December 31, 2007.

New Accounting Standards

The following new accounting standards have been issued, but have not yet been adopted by Duke Energy as of September 30, 2008:

SFAS No. 141 (revised 2007), “Business Combinations” (SFAS No. 141R). In December 2007, the FASB issued SFAS No. 141R, which replaces SFAS No. 141, “ Business Combinations .” SFAS No. 141R retains the fundamental requirements in SFAS No. 141 that the acquisition method of accounting be used for all business combinations and that an acquirer be identified for each business combination. This statement also establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling (minority) interests in an acquiree, and any goodwill acquired in a business combination or gain recognized from a bargain purchase. For Duke Energy, SFAS No. 141R must be applied prospectively to business combinations for which the acquisition date occurs on or after January 1, 2009. The impact to Duke Energy of applying SFAS No. 141R for periods subsequent to implementation will be dependent upon the nature of any transactions within the scope of SFAS No. 141R. SFAS No. 141R changes the accounting for income taxes related to prior business combinations, such as Duke Energy’s merger with Cinergy. Subsequent to the effective date of SFAS No. 141R, the resolution of tax contingencies relating to Cinergy that existed as of the date of the merger will be required to be reflected in the Consolidated Statements of Operations instead of being reflected as an adjustment to the purchase price via an adjustment to goodwill.

FSP No APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (FSP APB 14-1). In May 2008, the FASB issued FSP APB 14-1, which addresses the accounting for convertible debt securities that, upon conversion, may be settled by the issuer fully or partially in cash. FSP APB 14-1 does not change the accounting for more traditional types of convertible debt securities that do not have a cash settlement feature and FSP APB 14-1 does not apply if, under existing GAAP for derivatives, the embedded conversion feature must be accounted for separately from the rest of the instrument. For Duke Energy, FSP APB 14-1 is applicable as of January 1, 2009 and must be applied retrospectively to all prior periods presented, even if the instrument has matured, has been converted, or has otherwise been extinguished as of the effective date of FSP APB 14-1. Duke Energy is currently evaluating the impact of adopting FSP APB 14-1 on its historical results of operations as, in 2003, Duke Energy issued $770 million of convertible debt with a cash settlement option that was fully converted to common stock during the years ended December 31, 2005, 2006 and 2007; however, Duke Energy does not anticipate the retrospective application of FSP APB 14-1 will have a material impact on Duke Energy’s historical results of operations, cash flows or financial position. Future impacts of FSP APB 14-1 will be determined by whether Duke Energy issues convertible debt with cash settlement options.

PART I

Subsequent Events

For information on subsequent events related to debt and credit facilities, regulatory matters, and commitments and contingencies, see Note 7, “Debt and Credit Facilities,” Note 14, “Regulatory Matters,” and Note 15, “Commitments and Contingencies” to the Consolidated Financial Statements, respectively.

PART I

Item 3. Quantitative and Qualitative Disclosures about Market Risk

For an in-depth discussion of Duke Energy’s market risks, see “Management’s Discussion and Analysis of Quantitative and Qualitative Disclosures about Market Risk” in Duke Energy’s Annual Report on Form 10-K for the year ended December 31, 2007.

Interest Rate Risk

Based on a sensitivity analysis as of September 30, 2008, it was estimated that if market interest rates average 1% higher (lower) over the next twelve months, interest expense, net of offsetting impacts in interest income, would increase (decrease) by approximately $23 million. Comparatively, based on a sensitivity analysis as of December 31, 2007, had interest rates averaged 1% higher (lower) in 2007, it was estimated that interest expense, net of offsetting impacts in interest income, would have increased (decreased) by approximately $22 million. These amounts were estimated by considering the impact of the hypothetical interest rates on variable-rate securities outstanding, adjusted for interest rate hedges, auction rate investments with interest rates that periodically reset, cash and cash equivalents outstanding as of September 30, 2008 and December 31, 2007. The increase in interest rate sensitivity was primarily due to an increase in other subsidiary debt. If interest rates changed significantly, management would likely take actions to manage its exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no changes in Duke Energy’s financial structure.

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by Duke Energy in the reports it files or submits under the Securities Exchange Act of 1934 (Exchange Act) is recorded, processed, summarized, and reported, within the time periods specified by the Securities and Exchange Commission’s (SEC) rules and forms.

Disclosure controls and procedures include, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed by Duke Energy in the reports it files or submits under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, Duke Energy has evaluated the effectiveness of its disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2008, and, based upon this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these controls and procedures are effective in providing reasonable assurance of compliance.

Changes in Internal Control over Financial Reporting

Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, Duke Energy has evaluated changes in internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarter ended September 30, 2008, and other than the third quarter financial system changes described below, have concluded that no change has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.

During the third quarter of 2008, Duke Energy converted the general ledger and consolidation systems for the Midwest operations to those currently used for the Carolinas and Houston operations. Additionally, Duke Energy implemented a new income tax system and upgraded the asset accounting system used for the Midwest operations. These system changes are a result of an evaluation of previous systems and related processes to support evolving operational needs, and are not the result of any identified deficiencies in the previous systems. Duke Energy reviewed the implementation effort as well as the impact on Duke Energy’s internal control over financial reporting and where appropriate, made changes to internal controls over financial reporting to address these system changes.

PART II. Other Information

Item 1. Legal Proceedings.

For information regarding legal proceedings that became reportable events or in which there were material developments in the third quarter of 2008, see Note 14 to the Consolidated Financial Statements, “Regulatory Matters” and Note 15 to the Consolidated Financial Statements, “Commitments and Contingencies.”

Item 1A. Risk Factors.

In addition to the other information set forth in this report, careful consideration should be given to the factors discussed in Part I, “Item 1A. Risk Factors” in Duke Energy’s Annual Report on Form 10-K for the year ended December 31, 2007, which could materially affect Duke Energy’s financial condition or future results. In addition to the risk factor included in Duke Energy’s Annual Report on Form 10-K for the year ended December 31, 2007, Duke Energy has identified the following additional risk factors as of September 30, 2008:

Current Levels of Market Volatility are Unprecedented

The capital and credit markets have been experiencing extreme volatility and disruption. In recent months, the volatility and disruption have reached unprecedented levels. In some cases, the markets have exerted downward pressure on stock prices and credit capacity for certain issuers. A portion of Duke Energy’s borrowings have been issued in the commercial paper markets and, although Duke Energy has continued to issue commercial paper, there can be no assurance that such markets will continue to be a reliable source of short-term financing for Duke Energy. If current levels of market disruption and volatility continue or worsen, Duke Energy may be forced to repay commercial paper as it becomes due or to meet its other liquidity needs by further drawing upon contractually committed lending agreements primarily provided by global banks, although there is no assurance that the commitments made by lenders under Duke Energy’s master credit facility will be available if needed due to the recent turmoil throughout the financial services industry. This could require Duke Energy to seek other funding sources. However, under such extreme market conditions, there can be no assurance other funding sources would be available or sufficient.

Additional risks and uncertainties not currently known to Duke Energy or that Duke Energy currently deems to be immaterial also may materially adversely affect Duke Energy’s financial condition and/or results of operations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Issuer Purchases of Equity Securities for Third Quarter of 2008

There were no issuer purchases of equity securities during the third quarter of 2008.

Item 4. Submission of Matters to a Vote of Security Holders.

No matters were submitted to a vote of Duke Energy’s security holders during the third quarter of 2008.

PART II

Item 6. Exhibits

(a) Exhibits

Exhibits filed or furnished herewith are designated by an asterisk (*). All exhibits not so designated are incorporated by reference to a prior filing, as indicated. Items constituting management contracts or compensatory plans or arrangements are designated by a double asterisk (**).


Exhibit Number
*10.1		Operating Agreement of Pioneer Transmission, LLC

10.2**		Amendment to Duke Energy Corporation Executive Savings Plan, effective as of August 26, 2008 (filed on Form 8-K of Duke Energy Corporation September 2, 2008, file no. 1-32853 as exhibit 10.1).

10.3**		Duke Energy Corporation Executive Cash Balance Plan, as Amended and Restated Effective August 26, 2008 (filed on Form 8-K of Duke Energy Corporation September 2, 2008, file no. 1-32853 as exhibit 10.2).

10.4**		Amendment to Employment Agreement with James E. Rogers, effective as of August 26, 2008 (filed on Form 8-K of Duke Energy Corporation September 2, 2008, file no. 1-32853 as exhibit 10.3).

10.5**		Form of Amended and Restated Change in Control Agreement, effective as of August 26, 2008 (filed on Form 8-K of Duke Energy Corporation September 2, 2008, file no. 1-32853 as exhibit 10.4).

10.6**		Amendment to Phantom Stock and Performance Awards with James E. Rogers, effective as of August 26, 2008 (filed on Form 8-K of Duke Energy Corporation September 2, 2008, file no. 1-32853 as exhibit 10.5).

10.7**		Amendment to Deferred Compensation Agreement with James E. Rogers, effective as of August 26, 2008 (filed on Form 8-K of Duke Energy Corporation September 2, 2008, file no. 1-32853 as exhibit 10.6).

10.8**		Amendment to Award Agreements pursuant to the Long-Term Incentive Plans (Employees), effective as of August 26, 2008 (filed on Form 8-K of Duke Energy Corporation September 2, 2008, file no. 1-32853 as exhibit 10.7).

10.9**		Amendment to Award Agreements pursuant to the Long-Term Incentive Plans (Directors), effective as of August 26, 2008 (filed on Form 8-K of Duke Energy Corporation September 2, 2008, file no. 1-32853 as exhibit 99.1).

10.10**		Amendment to Duke Energy Corporation Directors’ Savings Plan, effective as of August 26, 2008 (filed on Form 8-K of Duke Energy Corporation September 2, 2008, file no. 1-32853 as exhibit 99.2).

*31.1		Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

*31.2		Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

*32.1		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*32.2		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

The total amount of securities of the registrant or its subsidiaries authorized under any instrument with respect to long-term debt not filed as an exhibit does not exceed 10% of the total assets of the registrant and its subsidiaries on a consolidated basis. The registrant agrees, upon request of the Securities and Exchange Commission, to furnish copies of any or all of such instruments to it.

PART II

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


				DUKE ENERGY CORPORATION

Date: November 7, 2008				/s/ D AVID L. H AUSER
				David L. Hauser Group Executive and Chief Financial Officer

Date: November 7, 2008				/s/ S TEVEN K. Y OUNG
				Steven K. Young Senior Vice President and Controller

Exhibit 10.1

EXECUTION COPY

OPERATING AGREEMENT

OF PIONEER TRANSMISSION, LLC

AN INDIANA LIMITED LIABILITY COMPANY

THE MEMBERSHIP INTERESTS REPRESENTED BY THIS OPERATING AGREEMENT HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE INDIANA SECURITIES ACT OR OTHER SIMILAR STATE STATUTES IN RELIANCE UPON EXEMPTIONS FROM REGISTRATION AS PROVIDED IN THOSE STATUTES. THE SALE OR OTHER DISPOSITION OF THE MEMBERSHIP INTERESTS IS RESTRICTED, AS SET FORTH IN THIS OPERATING AGREEMENT, AND IN ANY EVENT IS PROHIBITED UNLESS THE BOARD OF MANAGERS RECEIVE AN OPINION OF COUNSEL SATISFACTORY TO THE BOARD OF MANAGERS AND ITS COUNSEL THAT SUCH SALE OR OTHER DISPOSITION CAN BE MADE WITHOUT REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND UNDER APPLICABLE STATE STATUTES. EACH MEMBER REPRESENTS THAT IT WILL NOT SELL OR OTHERWISE DISPOSE OF ITS MEMBERSHIP INTEREST WITHOUT REGISTRATION OR OTHER COMPLIANCE WITH THE AFORESAID STATUTES AND THE RULES AND REGULATIONS THEREUNDER AND THE TERMS AND PROVISIONS OF THIS AGREEMENT.

OPERATING AGREEMENT

OF PIONEER TRANSMISSION, LLC

TABLE OF CONTENTS


1.	DEFINITIONS		1
2.	ORGANIZATION		9
	2.1	Formation	9
	2.2	Name	10
	2.3	Principal Place of Business	10
	2.4	Registered Office; Registered Agent	10
	2.5	Term	10
	2.6	Purposes	10
	2.7	Powers	10
	2.8	Qualification in Other Jurisdictions	10
	2.9	Independent Activities; Disclaimer of Duties; Release	11
	2.10	Statutory Requirements	13
	2.11	Members; Interest	13
3.	CAPITAL		13
	3.1	Maintenance of Capital Accounts	13
	3.2	Liability of Members	14
	3.3	Negative Capital Accounts	14
	3.4	Other Matters	14
	3.5	Development Budget Capital Contributions	15
	3.6	Additional Capital Contributions	15
	3.7	Failure to make Capital Contributions	15
4.	ALLOCATION OF INCOME, GAINS, AND LOSSES		16
5.	TAX ELECTIONS		16
6.	COMPANY PROPERTY; INTELLECTUAL PROPERTY RIGHTS		16
	6.1	Company Property	16
	6.2	Intellectual Property Rights	16
7.	DISTRIBUTIONS AND ALLOCATIONS		16
	7.1	In General	16
	7.2	Distributions on Termination of the Company	16
	7.3	Incorrect Payments	16
	7.4	Distributions in Kind	17
	7.5	Amounts Withheld	17
	7.6	Regulatory Allocations	17
	7.7	Curative Allocations	18
	7.8	Special Allocation of Gain or Loss on Contributed Property	19
	7.9	Change or Transfer of Interests in Profits and Capital	19
	7.10	Deemed Income or Gain	19
	7.11	Recapture Items	19
8.	ACCOUNTING AND TAX MATTERS		19
	8.1	Fiscal Year	20
	8.2	Method of Accounting	20
	8.3	Adjusted Basis of Company Assets	20


	8.4	Tax Returns	20
	8.5	Tax Matters	20
9.	BOARD OF MANAGERS		20
	9.1	Board of Managers	20
	9.2	Composition	21
	9.3	Term of Managers	21
	9.4	Resignation; Removal; Vacancies	21
	9.5	Meetings	21
	9.6	Power and Authority	22
	9.7	Certain Affiliate Agreements	23
	9.8	Limitation on Authority	24
	9.9	Budgets	24
10.	OFFICERS AND COMMITTEES		25
	10.1	Officers	25
	10.2	Committees	28
11.	MEMBERS, MEETINGS OF THE MEMBERS		28
	11.1	Meetings of Members	28
	11.2	Action Without Meetings	28
	11.3	Voting	28
	11.4	Meetings by Telephone or Other Technology	28
	11.5	Defaulting Member	28
	11.6	Cooperation of Members for Regulatory Proceedings	28
	11.7	Third Party Dealings With Members	29
12.	COMPLIANCE WITH CERTAIN LAWS		29
	12.1	Compliance with Certain Codes of Conduct	29
	12.2	Compliance with Antitrust Laws	29
	12.3	Regulatory Compliance	29
13.	INSURANCE		29
14.	COMPANY PROJECTS		29
	14.1	Initial Project	29
	14.2	Conditions Precedent	29
	14.3	Proposal of Projects by Members	30
	14.4	Member Rights	30
	14.5	Right of Members to Pursue the Initial Project	30
15.	MEMBERS’ INTERNAL COSTS		30
	15.1	Pre-Formation Internal Costs	30
	15.2	Post-Formation Internal Costs	30
	15.3	Cost Pass Through	31
16.	SERVICES AGREEMENTS, WAIVER OF CONFLICTS		31
17.	ADMISSION OF MEMBERS; TRANSFERS OF INTERESTS; WITHDRAWAL OF A MEMBER		31
	17.1	No New Members	31
	17.2	Transfers of Membership Interests by Members	31
	17.3	Withdrawal of a Member	34
	17.4	Transfer Compensation Amount	34
18.	DEFAULT, REMEDIES, DISSOLUTION AND TERMINATION		35


	18.1	Events of Default	35
	18.2	Remedies	35
	18.3	Indemnification; Limitation of Liability	38
	18.4	Causes of Dissolution	40
	18.5	Winding Up	41
	18.6	Liquidation Proceeds	41
	18.7	Rights of Member	41
	18.8	Survival of Section	41
19.	REPRESENTATIONS AND WARRANTIES OF AEPTHC		41
	19.1	Organization and Good Standing of AEPTHC	41
	19.2	Enforceability; Authority; No Conflict; Third Party Approvals with Respect to AEPTHC	42
	19.3	Litigation	42
20.	REPRESENTATIONS AND WARRANTIES OF DUKE		42
	20.1	Organization and Good Standing of Duke	42
	20.2	Enforceability; Authority; No Conflict; Third Party Approvals with Respect to Duke	43
	20.3	Litigation	43
21.	DEADLOCKS		43
	21.1	Senior Executives	43
	21.2	Deadlock Arbitration	44
22.	CONFIDENTIALITY		45
	22.1	Definition of Confidential Information	45
	22.2	Confidentiality Obligation; Permitted Disclosures	46
	22.3	Exceptions	47
	22.4	Legally Required Disclosures	47
	22.5	Survival	47
23.	COMPANY RECORDS, REPORTS		47
	23.1	Company Records	47
	23.2	Written Form	48
	23.3	Registered Office	48
	23.4	Examination of Records	48
	23.5	Reports	48
24.	GENERAL PROVISIONS		48
	24.1	Applicable Law; Forum	48
	24.2	WAIVER OF RIGHT TO JURY TRIAL	49
	24.3	Binding Agreement	49
	24.4	Notices	49
	24.5	Terminology	50
	24.6	Entire Agreement	50
	24.7	Severability	50
	24.8	Other Instruments	50
	24.9	Waiver of Partition	50
	24.10	Amendments	51
	24.11	Waivers	51
	24.12	Counterparts	51
	24.13	No State-Law Partnership	51

Exhibits


Exhibit A		Members
Exhibit B		Initial Managers
Exhibit C		Initial Officers

Schedules


Schedule 9.9.1		Development Budget
Schedule 14.1		Initial Project
Schedule 14.2		Conditions Precedent

OPERATING AGREEMENT

OF PIONEER TRANSMISSION, LLC

This Operating Agreement of Pioneer Transmission, LLC is executed to be effective as of August , 2008 (the “Effective Date” ) among the Persons listed on Exhibit A as the Members.

NOW, THEREFORE, in consideration of the premises and mutual promises contained in this Agreement (the mutuality, adequacy and sufficiency of which are hereby acknowledged), the parties agree as follows:

1.	DEFINITIONS.

Subject to additional definitions contained in subsequent Articles of this Agreement which are applicable to specific Articles or Sections hereof, capitalized terms used in this Agreement have the meanings set forth below:

1.1	“Act” means the Indiana Business Flexibility Act, and any successor statute, as amended from time to time.

1.2

“Adjusted Capital Account Deficit” means, with respect to any Member, the deficit balance, if any, in such Member’s Capital Account as of the end of the relevant taxable year, after giving effect to the following adjustments: (i) credit to such Capital Account any amounts which such Member is obligated to restore or is deemed to be obligated to restore pursuant to the penultimate sentence of Reg. §1.704-2(g)(1) and (i)(5); and (ii) debit to such Capital Account the items described in Reg. §1.704-1(b)(2)(ii)(d)(4),(5) and (6) (generally including certain Capital Account adjustments for depletion allowances, certain future allocations of loss and deduction which are reasonably expected as of year end, and future distributions, in excess of offsetting Capital Account increases, which are reasonably expected as of year end). The foregoing definition of Adjusted Capital Account Deficit is intended to comply with the provisions of Reg. §1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith.

1.3	“AEPSC” means American Electric Power Service Corporation.

1.4	“AEPSC Services Agreement” means that certain Services Agreement between the Company and AEPSC of even date herewith.

1.5	“AEPTHC” means AEP Transmission Holding Company, LLC.

1.6	“Affiliate Arrangements” has the meaning set forth in Section 9.7 .

1.7	“Agreement” means this Operating Agreement, as it may be amended, supplemented or otherwise modified from time to time.

1.8	“Annual Operating Budget” has the meaning set forth in Section 9.9.5 .

1.9

“Applicable Law” means any statute, law, ordinance, executive order, rule, or regulation (including a regulation that has been formally promulgated in a rule making proceeding but, pending final adoption, is in proposed or temporary form having force of law); guideline, or notice having force of law; or approval, permit, license, franchise, judgment, order, decree, injunction, or writ of any Governmental Authority applicable to a specified Person or specified property, as in effect from time to time.

1.10	“Articles of Organization” means the Articles of Organization filed with the Secretary of State of the State of Indiana pursuant to Section 23-18-2-4 of the Act, as amended and restated from time to time.

1.11

“Available Cash” means the cash balance of the Company from time to time after the payment of, or provision for the payment of, all of the Company’s obligations then due and after the establishment of such reserves as the Board of Managers may determine for the Company Projects and all other debts, expenses, construction costs, capital improvements, replacements, and contingencies of the Company.

1.12	“Board of Managers” has the meaning set forth in Article 9.1 .

1.13	“Book Value” means the Company’s total assets less total liabilities as determined in accordance with GAAP.

1.14	“Budgets” means, collectively, the Development Budget, the Initial Operating Budget, the Construction Budget and the Annual Operating Budget.

1.15	“Business Day” means any day other than a Saturday, Sunday or other day on which commercial banks in the State of Indiana are authorized or required by law to close.

1.16	“Buyer” has the meaning set forth in Section 18.2.5 .

1.17	“Capital Account” means, with respect to any Member, the capital account maintained for such Member in accordance with the provisions of Section 3.1 of this Agreement.

1.18

“Capital Contributions” means, with respect to any Member, the amount of money and the Net Book Value of any non-cash property contributed to the Company with respect to the Interest held by such Member. The Net Book Value of any non-cash property contributed to the Company shall be reduced by the amount, as mutually agreed by the Members, of any liabilities assumed by the Company in relation to the non-cash property contributed regardless or whether or not such debt is secured by the non-cash property contributed.

1.19	“Code” means the Internal Revenue Code of 1986, as now in effect or as hereafter amended.

1.20	“Company” means the limited liability company formed under the Act pursuant to this Agreement, under the name Pioneer Transmission, LLC.

1.21

“Company Minimum Gain” means that amount determined by first computing the Company’s Non-Recourse Liability, any gain the Company would realize if it disposed of the Company property subject to such liability for no consideration other than full satisfaction of the liability, and by then aggregating the separately computed gains. For purposes of determining the amount of such gain, the additional rules set forth in Reg. §1.704-2(d) shall be followed.

1.22	“Company Project” means any project approved by the Board of Managers.

1.23	“Conditions Precedent” means, collectively, the conditions precedent listed in Schedule 14.2.

1.24	“Confidential Information” has the meaning set forth in Section 22.1 .

1.25	“Construction Budget” has the meaning set forth in Section 9.9.4 .

1.26

“Corporate Affiliate” of a specified Person means any other Person other than a natural person, directly or indirectly controlling, controlled by, or under common control with the Person specified. For purposes of this Agreement, the term “control” (including its correlative meanings, “controlled by” and “under common control with”) shall mean possession, directly or indirectly, of the power to direct or cause the direction of management or policies (whether through ownership of securities or partnership or other ownership interests, by contract or otherwise).

1.27	“Credit Rating” means, with respect to any Person, each of the ratings given to such Person’s long-term unsecured debt obligations by Standard & Poor’s Ratings Group (a division of McGraw Hill, Inc.) or Moody’s Investors Services, Inc., as applicable, and any successors thereto.

1.28

“Creditworthy” means, with respect to any Person, a Credit Rating for senior unsecured debt of at least “BBB-” from Standard & Poor’s Ratings Group (a division of The McGraw Hill Companies, Inc.), provided that if such Credit Rating is “BBB-” such Person shall not be on “CreditWatch Negative”, or at least “Baa3” from Moody’s Investors Services, Inc., provided that if such Credit Rating is “Baa3” such Person shall not be on “Review for possible downgrade”. A Person that is not otherwise Creditworthy shall be deemed Creditworthy if its obligations under this Agreement are absolutely, irrevocably and unconditionally guaranteed pursuant to a guaranty agreement that is reasonably acceptable to the non-transferring Member by a Creditworthy Person that is either a direct or indirect parent entity of such Person or has otherwise received adequate and sufficient consideration for such guaranty.

1.29	“Damages” has the meaning set forth in Sections 18.3.1 and 18.3.3(b) .

1.30

“Deadlock” means a dispute, including the inability to agree on a vote or other decision, that has continued for more than fifteen (15) days among the Members or Managers concerning the business or affairs of the Company; provided, however, that a Deadlock shall not include a dispute regarding an interpretation of any terms or conditions of this Agreement.

1.31	“Deadlock Arbitration” has the meaning set forth in Section 21.1.2 .

1.32	“Deadlock Arbitration Parties” means the Members of the Company; provided, however, that a Defaulting Member may not be a Deadlock Arbitration Party.

1.33	“Deadlock Arbitrator” has the meaning set forth in Section 21.2.3 .

1.34	“Deadlock Notice” has the meaning set forth in Section 21.1.1 .

1.35	“Defaulting Member” means a Member with respect to which an Event of Default has occurred.

1.36	“Designating Member” means, with respect to any Manager, the Member that appointed or designated such Manager in accordance with Section 9.1 hereof.

1.37	“Development Budget” has the meaning set forth in Section 9.9.1 .

1.38	“Drag-Along Notice” has the meaning set forth in Section 18.2.5 .

1.39	“Duke” means Duke Energy Transmission Holding Company, LLC, a Delaware limited liability company.

1.40	“Duke Services Agreement” means that certain Services Agreement between the Company and Duke of even date herewith.

1.41	“Effective Date” has the meaning set forth in the opening paragraph hereof.

1.42	“Employed Officer” means an officer of the Company who is also an employee of a Member or any Corporate Affiliate of a Member.

1.43	“Encumbrance” means any lien, security interest, mortgage, pledge, hypothecation, assignment, easement, right-of-way, servitude, other encumbrance, equitable interest, charge, restrictive covenant, or other restriction or matter affecting title to the involved property.

1.44	“Event of Default” has the meaning set forth in Section 18.1 .

1.45	“Failed Contribution” has the meaning set forth in Section 18.2.4(a) .

1.46

“Fair Market Value” means the fair market value as determined in the reasonable discretion of the Board of Managers; provided that, at the request of two or more Managers (the “Request”), the Company shall engage an independent appraiser to determine such value, which determination shall be binding upon the Members absent manifest error. If the Board of Managers cannot agree on an independent appraiser within fourteen (14) days after the date of the Request, then the independent appraiser shall be selected by the American Arbitration Association.

1.47	“FERC” means the Federal Energy Regulatory Commission or any Governmental Authority succeeding to the powers of such entity.

1.48	“GAAP” means generally accepted accounting principles for U.S. companies in effect from time to time.

1.49

“General Exceptions to Enforceability” means limitations on or exceptions to the enforceability of an agreement or instrument by (i) bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium, or other similar laws affecting creditors’ rights, or (ii) general principles of equity relating to the availability of equitable remedies (regardless of whether such agreement or instrument is sought to be enforced in a proceeding at law or in equity).

1.50

“Governing Documents” means, with respect to a particular Person, (i) if a corporation, the articles or certificate of incorporation, the bylaws and any stockholders agreement or voting agreement; (ii) if a general partnership, the partnership agreement and any statement of partnership; (iii) if a limited partnership, the limited partnership agreement and the certificate of limited partnership; (iv) if a limited liability company, the articles of organization and operating agreement or similar charter documents; (v) if another type of Person, any other charter or similar document promulgated, adopted, or filed in connection with the creation, formation, or organization of the Person; and (vi) any amendment or supplement to any of the foregoing.

1.51

“Governmental Authority” means any federal, state, foreign, tribal, local, or municipal governmental body; and any governmental, regulatory, or administrative agency, commission, body, agency, instrumentality, or other authority exercising or entitled to exercise any executive, judicial, legislative, administrative, regulatory, or taxing authority or power, including any court or other tribunal.

1.52	“Indemnified Party” has the meaning set forth in Section 18.3.3(c) .

1.53	“Indemnifying Member” has the meaning set forth in Section 18.3.1 .

1.54	“Indemnifying Party” has the meaning set forth in Section 18.3.3(c) .

1.55	“Indemnitee” has the meaning set forth in Section 18.3.2 .

1.56	“In-Service Date” means the date on which all of the initial facilities comprising the Initial Project are energized (other than merely for test purposes).

1.57	“Initial Operating Budget” has the meaning set forth in Section 9.9.3 .

1.58	“Initial Project” has the meaning set forth in Section 14.1 .

1.59

“Interest” means a membership interest in the Company held by a Person representing a percentage of the total membership interests in the Company, including any and all benefits to which the holder of such an Interest may be entitled as provided in this Agreement, together with all obligations of such Person to comply with the terms and provisions of this Agreement and Applicable Law.

1.60	“Interim Period” has the meaning set forth in Section 18.2.2(b) .

1.61

“Internal Costs” means (i) direct labor determined on an hourly basis, (ii) reasonable allocations of overhead, determined on an hourly basis, (iii) out-of-pocket costs and expenses, including third-party costs, legal fees and travel expenses, that are reasonably incurred by the applicable Member, and (iv) costs resulting from any upgrades of computer systems and/or other technology reasonably required by the applicable Member to achieve compatibility with the systems and/or technology used in the operation of the Initial Project or any other Company Project (provided that, if such upgrades are used for more than achieving such compatibility, Internal Costs shall only include a reasonable allocation of such costs based on the extent to which such upgrades are required to achieve such compatibility as compared with other uses of such upgrades by such Member).

1.62	“Issues Statement” has the meaning set forth in Section 21.2.1 .

1.63	“Liquidator” has the meaning set forth in Section 18.5 .

1.64	“Manager” has the meaning set forth in Section 9.2 .

1.65

“Member Loan Non-Recourse Deductions” shall have the meaning set forth in Reg. §1.704-2(i)(2). The amount of Member Loan Non-Recourse Deductions with respect to a Member Minimum Gain attributable to such Member Non-Recourse Debt during that taxable year, reduced (but not below zero) by proceeds of the liability distributed during the year to the Member bearing the economic risk of loss for the liability that are both attributable to the liability and allocable to an increase in the Member Non-Recourse Debt Minimum Gain.

1.66	“Member Minimum Gain” means an amount, with respect to each Member Non-Recourse Debt, equal to the Company Minimum Gain that would result if such Member Non-Recourse Debt were treated as a Non-Recourse Liability, determined in accordance with Reg. §1.704-2(i).

1.67	“Member Non-Recourse Debt” shall have the meaning set forth in Reg. §1.704-2(b)(4), being generally any non-recourse debt of the Company for which any Member (or related person within the meaning of Reg. §1.752-4(b)) bears the economic risk of loss.

1.68

“Member Non-Recourse Debt Minimum Gain” shall have the meaning set forth in Reg. §1.704-2(i)(3). The amount of Member Non-Recourse Debt Minimum Gain is determined by computing for each Member Non-Recourse Debt any gain the Member would realize if it disposed of the property subject to that liability for no consideration other than full satisfaction of the liability, and then aggregating the separately computed gains. For any taxable year, the net increase or decrease in Member Non-Recourse Debt Minimum Gain is determined by comparing the Member Non-Recourse Debt Minimum Gain on the last day of the immediately preceding taxable year with the Member Non-Recourse Debt Minimum Gain on the last day of the current taxable year.

1.69	“Member Obligation” means the obligation, if any, of a Member to the extent required by the terms of this Agreement: (a) to make Capital Contributions, (b) to compensate the Company for any Damages or (c) to pay any other amount due and owing to the Company pursuant to this Agreement.

1.70

“Members” means those Persons listed on Exhibit A attached hereto and made a part hereof and such other Persons as may become Members from time to time in accordance with this Agreement. No Person shall cease to be a Member of the Company solely as a result of one or more events described in clauses 3(B), 4, 5, 6, 7 or 8 of Section 23-18-6-5 of the Act.

1.71	“MISO” means Midwest Independent Transmission System Operators, Inc. or successors thereto.

1.72	“Net Book Value” means, with respect to a non-cash asset, the original cost of such asset, less accumulated depreciation as determined in accordance with GAAP.

1.73	“Net Income” means income as shown on line 1 of a Schedule K-1 of IRS Form 1065.

1.74	“Non-Party Member” shall have the meaning set forth in Section 9.7 .

1.75

“Non-Recourse Deductions” shall have the meaning set forth in Reg. §1.704-2(b)(1). The amount of Non-Recourse Deductions for a Company’s taxable year equals the net increase in the amount of Company Minimum Gain during that taxable year determined under Reg. §1.704-2(d), reduced (but not below zero) by the aggregate distributions made during the taxable year of proceeds of a Non-Recourse Liability that are allocable to an increase in Company Minimum Gain determined pursuant to Reg. §1.704-2(h).

1.76	“Non-Recourse Liability” shall have the meaning set forth in Reg. §1.704-2(b)(3).

1.77	“Other Indemnified Persons” has the meaning set forth in Section 18.3.1 .

1.78	“Ownership Interests” means stock, partnership interests, or other indicia of ownership.

1.79	“Permitted Activities” has the meaning set forth in Section 2.9.1(a) .

1.80	“Person” means an individual, trust, estate, corporation, partnership, joint venture, limited liability company, business trust, unincorporated association, or a government or agency or political subdivision thereof.

1.81	“PJM” means PJM Interconnection, L.L.C. or successors thereto.

1.82	“PPI” means the Producer Price Index for Finished Goods published by the U.S. Bureau of Labor Statistics (or any successor index).

1.83	“PPI Adjustment” means, for a calendar year, the percent change (expressed as a decimal) in the PPI published in December of the previous year from the PPI published in December of the year immediately preceding such previous year.

1.84	“Post-Formation Internal Costs” has the meaning set forth in Section 15.2 .

1.85	“Pre-Formation Internal Costs” has the meaning set forth in Section 15.1 .

1.86	“Preliminary Construction Budget” has the meaning set forth in Section 9.9.2 .

1.87

“Proceeding” means any action, arbitration proceeding, audit, hearing, investigation, inquiry, litigation, or suit (in each such case whether civil, criminal, administrative, judicial, or investigative and whether formal or informal, public, or private) commenced, brought, conducted, or heard by or before any Governmental Authority or arbitrator.

1.88	“Profits and Losses” means, for each fiscal year or other period, an amount equal to the Company’s taxable income or loss for such year or period, as determined in accordance with GAAP.

1.89	“Provider” means the service provider designated under the AEPSC Services Agreement or the Duke Services Agreement, as applicable.

1.90	“Purchase Remedy Notice” has the meaning set forth in Section 18.2.2(a) .

1.91

“Qualified Development Expenses” means all expenses, including Internal Costs approved by the Board of Managers, reasonably incurred by a Member or its Corporate Affiliates in planning or evaluating any proposal for a new electric transmission project, excluding the Initial Project, up to the date on which such project becomes a Company Project, but only to the extent permitted pursuant to an order from FERC.

1.92

“Qualified Person” means with respect to any Deadlock Arbitration, an individual who: (a) at no time has been employed or retained (other than as a mediator or arbitrator) by, or affiliated with, any Member or any Corporate Affiliate of a Member; (b) has experience in the construction and operation of high voltage electric transmission facilities; and (c) is knowledgeable professionally regarding the matters that are the subject of such Deadlock Arbitration.

1.93	“Receiving Member” has the meaning set forth in Section 17.2.4 .

1.94	“ Regulations ” or “ Reg .” means the Income Tax Regulations, including Temporary Regulations, promulgated under the Code, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations).

1.95	“Regulatory Allocations” has the meaning set forth in Section 7.7 .

1.96	“Regulatory Affiliate” means, with respect to matters subject to the jurisdiction of a Governmental Authority, an “affiliate” as defined by Applicable Law relevant to such Governmental Authority.

1.97	“Released Party” has the meaning set forth in Section 2.9.3 .

1.98	“Releasing Member” has the meaning set forth in Section 2.9.3 .

1.99	“Representatives” has the meaning set forth in Section 22.2 .

1.100

“RTO” means a regional transmission organization approved by the FERC under the Federal Power Act and FERC’s orders and regulations issued thereunder.

1.101

“Sale” has the meaning set forth in Section 18.2.5 .

1.102

“Settlement Proposal” has the meaning set forth in Section 21.2.1 .

1.103

“Sharing Percentage” means the allocable share of an indicated item of profit, income, gain, loss, expense, deduction, or other allocable item of the Company expressed as a percentage and associated with an Interest as set forth opposite the name of each Member under the column “Sharing Percentage” on Exhibit A, as such percentage may be adjusted from time to time in accordance with this Agreement.

1.104

“Tax Items” means Profits and Losses of the Company.

1.105

“Tax Matters Partner” means the Member designated pursuant to Section 8.5.2 .

1.106

“TEFRA Partnership” means an entity subject to the provisions of Code §6221.

1.107

“Third Party Approval” means any consent, approval, permit, license, franchise, or other authorization, or a variance or exemption therefrom or waiver thereof, from a Governmental Authority or other Person.

1.108

“Third Party Claim” has the meaning set forth in Section 18.3.3(c) .

1.109

“Transfer” means any actual or proposed disposition of all or a portion of an Interest by any means, direct or indirect, absolute or conditional, voluntary or involuntary, including by sale, assignment, put, transfer, pledge, hypothecation, mortgage or other encumbrance, court order, operation of law, distribution, settlement, exchange, waiver, abandonment, gift, alienation or disposal.

1.110

“Transfer Compensation Amount” has the meaning set forth in Section 17.4 .

1.111

“Ultimate Parent” means (a) with respect to AEPTHC, American Electric Power Company Inc. (or any successor thereto) and (b) with respect to Duke, Duke Energy Corporation (or any successor thereto) and Cinergy Corp. (or any successor thereto).

The definitions in this Agreement shall apply equally to both the singular and the plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words “include,” “includes” and “including” shall be deemed to be followed by the phrase “without limitation.”

2.	ORGANIZATION .

2.1	Formation . The Company is governed by the Articles of Organization, by this Agreement, and by the Act.

2.2

Name . The name of the Company is Pioneer Transmission, LLC; provided, however, that (a) the Company’s business may be conducted under one or more assumed names deemed advisable by the Board of Managers, subject to any restrictions imposed by Applicable Law, and (b) the Board of Managers in its sole discretion may change the name of the Company at any time and from time to time.

2.3	Principal Place of Business . The principal place of business of the Company is at 526 S. Church Street, Charlotte, North Carolina 28202, or such other address as the Board of Managers, in its discretion, may determine.

2.4

Registered Office; Registered Agent . The registered agent of the Company is CT Corporation System, and the registered office of the Company within the State of Indiana is 251 East Ohio Street, Suite 1100, Indianapolis, Indiana 46204. The Board of Managers may change the registered office and/or the registered agent of the Company in accordance with the Act.

2.5	Term . The term of the Company commenced when the Articles of Organization were filed with the Indiana Secretary of State and shall continue until the Company is dissolved under Article 18 of this Agreement.

2.6	Purposes . The Company is organized for the purposes of:

2.6.1

acting as a regulated electric utility that is a transmission service provider within the State of Indiana;

2.6.2

designing, acquiring, constructing, owning and operating electric transmission facilities within the State of Indiana;

2.6.3

conducting any and all activities normally exercised by an owner and operator of property in relation or incidental to the business conducted or property held by the Company; and

2.6.4

conducting any other purpose or activity as the Members shall unanimously agree, provided such other purpose or activity is permissible under the laws of the State of Indiana.

2.7

Powers . Subject to all of the terms, covenants, conditions and limitations contained in this Agreement, the Company shall have the power and authority to do any and all acts and things necessary, appropriate, proper, advisable, desirable, incidental to or convenient for the furtherance and accomplishment of the purposes and activities described in Section 2.6 and for the protection and benefit of the Company.

2.8

Qualification in Other Jurisdictions . The Board of Managers shall take any and all actions reasonably necessary to perfect and maintain the status of the Company as a limited liability company under the laws of the State of Indiana. Before conducting business in any jurisdiction other than the State of Indiana, the Company shall file all forms and take all other actions required under Applicable Laws, including the tax laws, of that jurisdiction in order to conduct such business.

2.9	Independent Activities; Disclaimer of Duties; Release .

2.9.1

Independent Activities of the Board of Managers and Members .

(a)

To the maximum extent permitted by Applicable Law, any Member and any Member’s Corporate Affiliates may, notwithstanding this Agreement, engage in whatever activities it chooses, whether or not the same are competitive with those of the Company, without having or incurring any obligation to offer any interest in such activities to the Company or any other Member. Without limitation of the foregoing, each of AEPTHC and Duke and their respective Corporate Affiliates may, in its discretion, (i) undertake transmission projects alone or with any other Person or Persons without proposing that such projects be undertaken by the Company, (ii) engage in the same or similar activities or line of business as the Company or develop or market any services or activities that compete directly or indirectly with those of the Company, or (iii) beneficially own securities of or develop a business relationship with any Person engaged in the same or similar activities or line of business as, or otherwise in competition with, the Company (the activities, projects and relationships described in this Section 2.9.1(a) are collectively referred to as “Permitted Activities” ).

(b)

Any Member and any of its Corporate Affiliates may independently pursue any project or other Permitted Activities which would otherwise be in the scope of this Agreement (other than the Initial Project, except to the extent permitted by Section 14.5 ) without offering such project or Permitted Activities to the Company. Any Member and any of its Corporate Affiliates may further independently pursue any project which is either considered by the Company or offered to the Company, but in either case, does not become a Company Project.

(c)

Without limiting this Section 2.9.1 in any way, neither the Company nor any Member or any Corporate Affiliates of any Member by virtue of this Agreement shall have any rights in or to any Permitted Activity or the income or profits derived therefrom of any other Member, regardless of whether or not such Permitted Activity was presented to or otherwise became known to that other Member as a direct or indirect result of its connection with the Company. No Member or any of its Corporate Affiliates shall have any obligation to present or offer any project or other Permitted Activity to the Company, even if the project or other Permitted Activity is one that the Company might reasonably be deemed to have pursued or had the ability or desire to pursue if granted the opportunity to do so, and no Member or any Corporate Affiliate thereof shall be liable to the Company or any other Member for breach of any fiduciary or other duty by reason of the fact that such Member or any Corporate Affiliate thereof pursues or acquires such business opportunity, directs such business opportunity to another Person or fails to present such business opportunity, or information regarding such business opportunity, to the Company.

(d)

Without limiting this Section 2.9.1 in any way, in the event that a Manager or an Employed Officer acquires knowledge of a Permitted Activity that may be a corporate opportunity for the Company or the Members, on the one hand, and the Designating Member of such Manager or employer of such Employed Officer, on the other hand, the Manager or Employed Officer shall have fully satisfied and fulfilled his or her fiduciary duty, if any, to the Company and the Members (other than the Designating Member of such Manager or employer of such Employed Officer) with respect to such corporate opportunity, and the Company and the Members (other than the Designating Member of such Manager or employer of such Employed Officer) hereby renounce their respective interest in such business opportunity and waive any claim that such business opportunity constituted a corporate opportunity that should have been presented to the Company, the Members or any of their respective Corporate Affiliates, if the Manager or Employed Officer acts in a manner consistent with the following policy: a corporate opportunity presented to any Manager of the Company or an Employed Officer shall belong to the Designating Member of such Manager or employer of such Employed Officer, unless such opportunity was presented in writing to the Manager or Employed Officer expressly and solely in his or her capacity as a Manager or officer of the Company, in which event such corporate opportunity shall belong to the Company. If a corporate opportunity that belongs to the Company pursuant to the immediately preceding sentence is not approved as a Company Project, any Member and any of its Corporate Affiliates may independently pursue such corporate opportunity.

2.9.2

Disclaimer of Certain Duties . Each Member acknowledges its express intent, and agrees with each other Member for the mutual benefit of both the Members, that to the maximum extent permitted by Applicable Law:

(a)

no Member shall owe any duty of loyalty, under this Agreement, the Act or otherwise, to the Company, to the other Member or any Managers in connection with the exercise of its voting, consent or approval rights under this Agreement or the granting or withholding of any vote, consent or approval by any Manager appointed by such Member under this Agreement;

(b)

no Manager shall owe any duty of loyalty, under this Agreement, the Act or otherwise, to the Company, to any Member (other than the Designating Member of such Manager) or any other Manager in connection with the exercise of his or her voting, consent or approval rights under this Agreement; and

(c)

the provisions of this Section 2.9.2 shall apply for the benefit of each Member and Manager and no standard of care, duty or other legal restriction or theory of liability shall limit or modify the right of each Member or Manager to act, and, in the case of each Member, to direct the Managers appointed by such Member to vote in the manner determined by such Member in its sole discretion, other than those expressly set forth in this Agreement.

2.9.3

Release . To the maximum extent permitted by Applicable Law, each Member (the “Releasing Member” ) hereby releases and forever discharges each other Member and the Managers appointed by the other Member (each, a “Released Party” ) from all liabilities that any Released Party might owe, under the Act or otherwise, to the Company, the Releasing Member or the Managers appointed by the Releasing Member based on (a) any action or omission by such Released Party in its capacity as a member or manager of the Company (other than any fraud or willful misconduct of the Released Party) or (b) on the ground that any decision of any Released Party to grant or withhold any vote, consent or approval constituted a breach or violation of any standard of care or duty applicable to the Releasing Member or Managers appointed by the Releasing Member.

2.9.4

Covenant Not to Sue . Each Releasing Member hereby irrevocably covenants to refrain from, directly or indirectly, asserting any claim, or commencing, joining in, prosecuting, participating in, funding any part of, instituting or causing to be commenced, prosecuted, funded or instituted, any suit or other proceeding of any kind against any Released Party based upon any matter released or purported to be released by Section 2.9.3 above.

2.9.5

Fiduciary Duties . To the extent permitted by Applicable Law, the provisions of this Section 2.9 constitute an agreement to modify or eliminate fiduciary duties.

2.10

Statutory Requirements . The Company’s organizer has caused the Articles of Organization to be executed and filed with the Secretary of State of the State of Indiana. The Board of Managers may file Articles of amendment to the Articles of Organization or restated Articles of Organization and any other certificates of amendment as may be authorized by the Board of Managers (except any Articles of Dissolution, which shall require consent in accordance with this Agreement). Any amendments to this Agreement shall be subject to the provisions of Section 24.10 .

2.11

Members; Interest . The name, mailing address and Sharing Percentage of each Member are set forth on Exhibit A hereto. Each Member’s Interest in the Company shall be equal to the Sharing Percentage designated to it in Exhibit A as the same may be changed from time to time as expressly mandated or permitted under this Agreement.

3.	CAPITAL.

3.1

Maintenance of Capital Accounts . A separate Capital Account shall be maintained on the books of the Company for each Member consistent with and to the extent required by the Act. The definition of Capital Account and certain other provisions of this Agreement are intended to comply with Reg. §1.704-1(b), and shall be interpreted and applied in a manner consistent with that Regulation.

3.2	Liability of Members . Each Member’s liability shall be limited as described in Section 23-18-3-3 of the Act.

3.3	Negative Capital Accounts .

3.3.1

Except as otherwise provided in this Agreement, no Member shall be obligated to restore a deficit in the Member’s Capital Account solely by reason of such negative Capital Account balance.

3.3.2

A transferee of an Interest transferred in accordance with Section 17.2 will succeed to the Capital Account relating to the Member transferring such Interest. However, if the transfer causes a termination of the Company under Section 708(b)(1)(B) of the Code, the Company shall not dissolve and wind up but shall be continued under the provisions of Reg. §1.708-1(b)(iv) and the Capital Accounts of the Members shall remain unchanged and shall continue to be maintained in accordance with the principles of this Section 3.3.2 .

3.3.3

At such times as may be permitted or required by Regulations issued pursuant to Section 704 of the Code, the Capital Accounts shall be revalued and adjusted to reflect the then fair market value of Company property and the Capital Accounts shall be maintained to comply with Reg. §1.704-1(b)(2)(iv)(f). All allocations of gain resulting from such revaluation shall be made consistently with that Regulation, and to the extent not inconsistent therewith, the allocation provisions of Article 7 hereof.

3.4	Other Matters .

3.4.1

Except as otherwise provided in this Agreement, no Member shall demand or receive a return of its Capital Contributions or withdraw capital from the Company without the consent of all Members. Under circumstances requiring a return of any Capital Contributions, no Member shall have the right to receive property other than cash except as may be specifically provided herein.

3.4.2

No Member shall receive any interest on, or salary or drawing with respect to, its Capital Contributions or its Capital Account except as otherwise provided in this Agreement or under a separate written agreement approved in writing by all Members providing therefor.

3.4.3

Except as otherwise provided by this Agreement or by an assumption agreement, no Member shall be liable for the debts, liabilities, contracts or any other obligations of the Company in its capacity as a Member. Except as otherwise provided by this Agreement, by any other agreements among the Members, or by applicable state law, a Member shall be liable only to make Capital Contributions as required pursuant to Sections 3.5 and 3.6 and shall not be required to lend any funds to the Company.

3.4.4

Notwithstanding anything to the contrary in this Agreement, with respect to any Capital Contributions consisting in whole or in part of non-cash assets, the amount of the Capital Contributions attributable to such non-cash assets shall be equal to the Net Book Value of such non-cash assets at the time of the contribution reduced by the amount of any liabilities of such Member assumed by the Company in connection with the contribution or secured by any contributed property. The relevant Capital Account shall not be adjusted with respect to such value at any time after the time of the contribution.

3.5

Development Budget Capital Contributions . The Members shall, at such times as specified in the Development Budget or as otherwise modified by the Board of Managers, each make the Capital Contributions provided for in the Development Budget, and shall not be required to make any further Capital Contributions prior to the satisfaction of each of the Conditions Precedent unless otherwise approved by the Board of Managers. Without limiting the remedies of a non-Defaulting Member, payment of such Capital Contributions shall be one of the Conditions Precedent in Schedule 14.2; provided, however, that only a non-Defaulting Member may waive or exercise any rights under Section 14.2 for failure of such a Condition Precedent.

3.6

Additional Capital Contributions . Subsequent to the satisfaction of each of the Conditions Precedent, the Members shall be required to make additional Capital Contributions from time to time (i) as and when required by the Construction Budget, the Initial Operating Budget and/or the Annual Operating Budget approved or continued pursuant to Section 9.9.5 hereof or (ii) upon the approval of the Board of Managers (including, with respect to the Initial Project or any Company Project, as necessary in the judgment of the Board of Managers to timely comply with any requirements of the North American Electric Reliability Corporation or Applicable Law after the In-Service Date), with any such contributions to be made by each Member no later than ten (10) Business Days after the date specified in the applicable Budget or by the Board of Managers, as applicable, in an amount equal to the applicable capital or operating cash requirements set forth in the applicable Budget or as otherwise approved by the Board of Managers, multiplied by each such Member’s Sharing Percentage.

3.7

Failure to make Capital Contributions . If any Member fails or refuses to pay any Capital Contribution to the Company when due, the due date for such Member shall be extended for a period of ten (10) Business Days thereafter; provided, however, that a Member shall not be permitted to take advantage of this extension more than three (3) times per calendar year. After either (i) the end of the twenty (20) Business Day period (commencing from the applicable due date specified in the Development Budget, the Construction Budget, the Initial Operating Budget, the Annual Operating Budget, or any extension of such due date approved by the Board of Managers, as applicable) in which a Member has failed or refused to pay any Capital Contribution or (ii) the fourth time in any calendar year in which a Member has failed or refused to pay any Capital Contribution within the ten (10) Business Day period provided in Section 3.6 , then any non-Defaulting Member may exercise the remedies set forth in Section 18.2 hereof.

4.	ALLOCATION OF INCOME, GAINS, AND LOSSES.

Except as otherwise provided in Article 7 and Section 18.2.2(a) , Profits and Losses for any fiscal year shall be allocated among the Members in direct proportion to each Member’s Sharing Percentage in a manner consistent with, and to the extent required by, the Code.

5.	TAX ELECTIONS.

The Company shall elect to be treated as a TEFRA Partnership. No election shall be made by the Company or any Member for the Company to be excluded from the application of any provision of Subchapter K, Chapter 1 of Subtitle A of the Code or from any similar provisions of any state tax laws.

6.	COMPANY PROPERTY; INTELLECTUAL PROPERTY RIGHTS.

6.1

Company Property . Real or personal property owned or purchased by the Company shall be held and owned, and conveyance shall be made, in the name of the Company. Instruments and documents providing for the acquisition, mortgage, or disposition of the property of the Company or for the incurrence of debt shall be valid and binding upon the Company if they are executed by a duly authorized officer or agent of the Company.

6.2

Intellectual Property Rights . The right, if any, of the Company to use any trademark, service mark, trade-name, patent, copyright, trade secret or similar or other intellectual property belonging to a Member shall be controlled by the terms of one or more written license agreements in effect from time to time. The right, if any, of a Member to use any trademark, service mark, trade-name, patent, copyright, trade secret or similar or other intellectual property belonging to the Company shall also be controlled by the terms of one or more written license agreements in effect from time to time.

7.	DISTRIBUTIONS AND ALLOCATIONS.

7.1

In General . Except as otherwise specifically provided in this Agreement or as may be otherwise agreed to in writing by all Members and subject to Section 23-18-5-6 of the Act, Available Cash as of the end of each calendar quarter shall be distributed to the Members within thirty (30) days after the end of each such calendar quarter in accordance with the Members’ respective Sharing Percentages as of the end of each such calendar quarter.

7.2	Distributions on Termination of the Company . Distributions on termination of the Company shall be made in accordance with Section 18 .

7.3

Incorrect Payments . To the extent any payment made to a Member is incorrectly paid, based on the Company’s financial statements, any Member who receives more than should have been paid to such Member shall promptly contribute to the Company the amount of any such incorrect payment, and any such repaid amounts shall be

redistributed pursuant to this Agreement. If the Member fails to contribute such incorrect payment to the Company within thirty (30) days of receiving written notice of such incorrect payment (unless such failure is due to a good faith dispute as to whether there was, in fact, an incorrect payment made), such failure shall be considered a failure to make an additional Capital Contribution pursuant to this Agreement. Any dispute between the Members with respect to an incorrect payment shall be deemed a Deadlock and resolved in accordance with Section 21 hereof.

7.4

Distributions in Kind . If any assets of the Company are to be distributed in kind, such assets shall be distributed, unless otherwise agreed by all Members, to the Members entitled thereto as tenants-in-common in the same proportions as such Members would have been entitled to receive cash distributions.

7.5

Amounts Withheld . All amounts withheld pursuant to the Code or any provision of any state or local tax law with respect to any payment or distribution to any Member shall be treated as amounts distributed to that Member pursuant to this Article 7 for all purposes under this Agreement. The Board of Managers may allocate any such amounts among the Members in any manner that is in accordance with Applicable Law.

7.6	Regulatory Allocations . The following special allocations shall be made for each Company taxable year in the following order:

7.6.1

Minimum Gain Chargeback . If there is a net decrease in Company Minimum Gain (other than Company Minimum Gain attributable to Member Non-Recourse Debt or net decreases in Company Minimum Gain attributable to transactions subject to the exceptions contained in Reg. §1.704-2(f)(2)-(5)) during any Company taxable year, each Member shall be specially allocated items of Company income and gain for such year equal to such Member’s share of the net decrease in Company Minimum Gain during that year. Each Member’s share of the net decrease in Company Minimum Gain shall be determined in accordance with Reg. §1.704-2(g)(2). This Section 7.6.1 is intended to comply with the minimum gain chargeback requirement in Reg. §1.704-2(f) and shall be interpreted consistently therewith.

7.6.2

Member Non-Recourse Debt Minimum Gain Chargeback . If there is a net decrease in Member Minimum Gain attributable to a Member Non-Recourse Debt during any Company taxable year, each Member with a share of such Member Minimum Gain attributable to a Member Non-Recourse Debt determined in accordance with Reg. §1.704-2(i)(5), shall be specially allocated items of Company income and gain for such year (and, if necessary, subsequent years) equal to such Member’s share of the net decrease in Member Minimum Gain during such year. Each Member’s share of the net decrease in Member Minimum Gain attributable to a Member Non-Recourse Debt shall be determined in a manner consistent with Reg. §1.704-2(g)(2). This Section 7.6.2 is intended to comply with the minimum gain chargeback requirement in Reg. §1.704-2(i)(4) pertaining to Member Non-Recourse Debt and shall be interpreted consistently therewith.

7.6.3

Gross Income Allocation . In the event any Member has a Capital Account deficit at the end of any Company taxable year which is in excess of the sum of (i) the amount such Member is obligated to restore, and (ii) the amount such Member is deemed to be obligated to restore pursuant to the penultimate sentence of Reg. §1.704-2(g)(1), each Member shall be specially allocated items of Company income and gain in the amount of such excess as quickly as possible, provided that an allocation pursuant to this Section 7.6.3 shall be made only if and to the extent that any such Member would have a deficit Capital Account in excess of such sum after all other allocations provided for in this Article 7 have been tentatively made as if this Section 7.6.3 and Section 7.6.4 were not in this Agreement.

7.6.4

Qualified Income Offset . In the event any Member unexpectedly receives any adjustments, allocations or distributions described in Reg. §1.704-1(b)(2)(ii)(d)(4),(5) or (6), items of Company income and gain shall be specially allocated to each such Member in an amount and manner sufficient to eliminate, to the extent required by Regulations, the Adjusted Capital Account Deficit of such Member as quickly as possible, provided that an allocation pursuant to this Section 7.6.4 shall be made only if and to the extent that any such Member would have an Adjusted Capital Account Deficit after all other allocations provided for in this Article 7 have been tentatively made as if Section 7.6.3 and this Section 7.6.4 were not in this Agreement.

7.6.5

Non-Recourse Deductions . Non-Recourse Deductions for any taxable year or other periods shall be allocated among the Members in proportion to their respective Capital Contributions.

7.6.6

Member Loan Non-Recourse Deductions . Any Member Loan Non-Recourse Deductions for any fiscal year or other period shall be allocated to the Members who bear the risk of loss with respect to the loan to which such Member Loan Non-Recourse Deductions are attributable in accordance with Reg. §1.704-2(i).

7.6.7

Section 754 Adjustments . To the extent an adjustment to the adjusted tax basis of any Company property pursuant to Section 734(b) or Section 743(b) of the Code is required, pursuant to Reg. §1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital Accounts, the amount of such adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis) and such gain or loss shall be specially allocated to the Member(s) in a manner consistent with the manner in which their Capital Accounts are required to be adjusted pursuant to such Section of the Regulations.

7.7

Curative Allocations . The allocations set forth in Section 7.6 hereof (the “Regulatory Allocations” ) are intended to comply with certain requirements of the Regulations. It is the intent of the Members that, to the extent possible, all Regulatory Allocations shall be offset either with other Regulatory Allocations or with special allocations of other Tax Items pursuant to this Article 7 . Therefore, notwithstanding any other provision of this

Article 7 (other than the Regulatory Allocations), the Board of Managers shall make such offsetting special allocations of Tax Items in whatever manner it determines appropriate so that, after such offsetting allocations are made, each Member’s Capital Account balance is, to the extent possible, equal to the Capital Account balance such Member would have had if the Regulatory Allocations were not part of this Agreement and all Tax Items were allocated pursuant to Section 7.6 . In exercising its discretion under this Section 7.7 , the Board of Managers shall take into account future Regulatory Allocations under Sections 7.6.1 and 7.6.2 that, although not yet made, are likely to offset other Regulatory Allocations previously made under Sections 7.6.5 and 7.6.6 .

7.8

Special Allocation of Gain or Loss on Contributed Property . Under Regulations prescribed by the Secretary of the Treasury pursuant to Section 7.04(c) of the Code, Tax Items with respect to property contributed to the Company by a Member shall be shared among Members so as to take account of the variation between the basis of the property to the Company and its fair market value at the time of contribution. The Board of Managers shall make such elections, adopt such conventions, and allocate Tax Items as it deems appropriate to comply with Section 7.04(c) of the Code and any Regulations promulgated thereunder and to preserve, to the extent possible, uniformity of the Members’ interests in the profits and capital of the Company. Any Tax Items allocated under this Section 7.8 shall not be debited or credited to Capital Accounts to the extent that item is already taken into account (upon formation or otherwise) in determining a Member’s Capital Account.

7.9

Change or Transfer of Interests in Profits and Capital . Upon the Transfer of an Interest in the profits and capital of the Company in accordance with Section 17.2.1 , Tax Items attributable to the Transferred Interest shall, for federal income tax purposes, be allocated between the transferor and the transferee of such Interest based on the number of months that each such Person was the owner of the Interest, in a manner determined by the Board of Managers to be consistent with the requirements of Section 706 of the Code and Regulations or rulings promulgated thereunder.

7.10

Deemed Income or Gain . If, and to the extent that, any Member is deemed to recognize income or gain as a result of any transaction between the Member and the Company pursuant to Sections 482, 483, 1272-1274, or 7872 of the Code, or any similar provision now or hereafter in effect, any corresponding resulting loss or deduction of the Company shall be allocated to the Member who was allocated such income or gain.

7.11

Recapture Items . Any portion of any income or gain attributable to the sale or other disposition of any depreciable Company property required to be recaptured as ordinary income shall, to the maximum extent possible in accordance with Section 704 of the Code and the Regulations thereunder, be allocated among the Members for tax purposes in the same ratio as the deductions giving rise to such recapture were allocated. Any recapture of tax credit shall be allocated among the Members in accordance with Reg. §1.704-1(b)(4)(ii).

8.	ACCOUNTING AND TAX MATTERS.

8.1	Fiscal Year . The fiscal year of the Company shall be the calendar year ending on December 31.

8.2	Method of Accounting . The books of the Company, for tax and financial reporting purposes, shall each be kept using the accrual method of accounting in accordance with GAAP.

8.3	Adjusted Basis of Company Assets . Each Member will provide the Company with the information requested by the Company for the Company to be able to determine the Company’s adjusted basis in the Company’s assets.

8.4	Tax Returns . The Company shall cause Company tax returns to be prepared and filed with appropriate authorities on a timely basis. It is the intent of the Members that the Company be taxed as a partnership, based on provisions of the current Code and Regulations.

8.5	Tax Matters .

8.5.1

Statute of Limitations . The Board of Managers shall have authority to extend the statute of limitations for assessment of tax deficiencies against the Company with respect to adjustments to the Company’s federal, state, or local tax returns; represent the Company in proceedings with taxing authorities or courts of competent jurisdiction in tax matters affecting the Company; and execute any agreements or other documents relating to or affecting such tax matters, including agreements or other documents that bind the Company with respect to such tax matters or otherwise affect the rights of the Company.

8.5.2

Tax Controversies . The Tax Matters Partner shall initially be Duke. The Tax Matters Partner shall, as specifically authorized by unanimous approval of the Board of Managers, represent the Company, at the Company’s expense, in connection with all examinations of the Company’s affairs by tax authorities, including resulting administrative and judicial proceedings. Each Member agrees to cooperate with the Tax Matters Partner, and to do or refrain from doing any or all things reasonably required by the Tax Matters Partner to conduct such proceedings.

9.	BOARD OF MANAGERS.

9.1

Board of Managers . The business and affairs of the Company shall be managed under the direction and control of the board of managers (the “Board of Managers” ). Subject to all of the terms, covenants, conditions and limitations contained in this Agreement and any other agreement entered into by the Company and subject to the limitations imposed by Applicable Law, including the Act, the Board of Managers shall have the power, on behalf of the Company, to do or to direct to be done all things necessary or convenient to carry out the business and affairs of the Company. The Board of Managers shall act as the “manager” of the Company under the Act, subject to the provisions of this Article 9 .

9.2

Composition . The Board of Managers shall consist of four (4) individuals (each a “Manager” ). Each of AEPTHC and Duke, and their respective permitted transferees pursuant to Article 17 , shall have the right to appoint two (2) Managers. The initial Managers shall consist of the four individuals set forth on Exhibit B. Each such person shall be deemed duly appointed to the Board of Managers as of the date of this Agreement.

9.3	Term of Managers . Each Manager shall serve until the earlier of such Manager’s resignation or such Manager’s removal by the Designating Member of such Manager in accordance with Section 9.4 .

9.4

Resignation; Removal; Vacancies . A Manager may resign as such by delivering written notice to that effect to the Members at least thirty (30) days prior to the effective date of such resignation. A Manager may be removed at any time and for any reason by the Designating Member of such Manager. In the event a vacancy on the Board of Managers occurs as a result of the death, disability, resignation or removal of a Manager or otherwise, such vacancy shall be filled by the Designating Member of such Manager. The Designating Member shall provide written notice to the other Member at any time that a Manager of such Designating Member is removed or replaced.

9.5	Meetings .

9.5.1

Meetings . Regular meetings of the Board of Managers shall be held on a quarterly basis or more frequently as determined by the Board of Managers, on such dates and at such times as may be determined by the Board of Managers. Special meetings of the Board of Managers may be called at any time by any Manager. All meetings of the Board of Managers shall be held at the principal place of business of the Company or at such other place within or without the State of Indiana as shall be specified in the notice of such meeting. The Board of Managers or its designee shall record minutes of each meeting and, prior to the next regularly scheduled meeting, provide to each Manager a copy of such minutes.

9.5.2

Notice of Meetings . Unless waived, written notice of the place and time of any regular or special meeting of the Board of Managers shall be delivered to each Manager not less than ten (10) days before the date of the meeting. A Manager may waive notice of a Board of Managers meeting by delivering a written waiver to the Board of Managers. A Manager’s attendance at or participation in a meeting waives any required notice of such meeting, unless at the beginning of such meeting or promptly upon his or her arrival, such Manager objects to holding the meeting or transacting business at the meeting, and does not thereafter vote for or assent to action taken at the meeting. Unless otherwise required by law or by this Agreement, a notice need not specify the business to be transacted at, or the purpose of, any meeting of the Board of Managers; provided, however, if such notice does specify the business to be transacted at, or the purpose of, a meeting of the Board of Managers, such notice shall not limit the actions the Board of Managers may take at such meeting.

9.5.3

Action by the Board of Managers . Except as otherwise provided in this Agreement or the Act, all of the Managers shall constitute a quorum for the transaction of business and the affirmative vote of all of the Managers shall be the act of the Board of Managers.

9.5.4

Action by Written Consent . Any action may be taken without a meeting and without a vote if a consent in writing, setting forth the action so taken, shall be signed by all of the Managers. Any action taken by the written consent of the Managers shall have the same force and effect as if taken by the Managers at a meeting.

9.5.5

Telephonic Meetings . Managers may participate in any meeting of the Board of Managers by means of a conference telephone or similar communication equipment by which all Managers participating in the meeting can hear each other at the same time. Such participation shall constitute presence in person at the meeting.

9.5.6

Defaulting Member . Notwithstanding anything to the contrary in this Section 9.5 , if one of the Members is a Defaulting Member, the business of the Board of Managers, including the scheduling of meetings, shall be conducted or determined solely by the Managers of the non-Defaulting Member and the presence of or participation by the Managers of the Defaulting Member shall not be required.

9.5.7

Delegation . Any Manager, at any time, may designate or otherwise appoint a Person (whether or not a Member or Manager or an affiliate of a Member or Manager) as a proxy, with full power of substitution for and in the name of such Manager, to vote and otherwise act on his or her behalf at any meeting of the Board of Managers in the event that he or she is unable to attend for any reason, with all powers the unavailable Manager would possess if personally present. Such Manager shall provide prior written notice to the Chairman of the Board of Managers (or, in the event that such unavailable Member or Manager is the Chairman or there is no Chairman, then to the Secretary) not less than one (1) Business Day prior to the date of the meeting which he or she will be unable to attend.

9.6	Power and Authority . Except as provided in Sections 9.6.5 , 9.7 , 9.8 , or 18.2 :

9.6.1

the Board of Managers, acting as a group or through the officers of the Company, has sole authority to manage the Company and is authorized to make any contracts, enter into any transactions, make and obtain any commitments and take any and all actions on behalf of the Company to conduct or further the Company’s business. Any action taken by the Managers or officers of the Company on behalf of the Company in accordance with the provisions of this Agreement shall constitute the act of and shall serve to bind the Company. Except as otherwise specifically provided in this Agreement or by written agreement or written resolution of the Board of Managers, (i) no Manager or group of Managers will have any actual, implied or apparent authority to enter into contracts on behalf of,

or to otherwise bind, the Company, nor take any action or incur any obligation, liability, debt, cost or expense in the name of or on behalf of the Company or conduct any business of the Company, and (ii) no Manager will have the power or authority to delegate to any Person such Manager’s rights and powers as a Manager to manage the business and affairs of the Company;

9.6.2

each Manager has one (1) vote in all decisions of the Board of Managers;

9.6.3

any action by the Board of Managers requires either (a) the affirmative vote of all of the Managers present at a meeting of the Board of Managers or (b) a written resolution signed by all of the Managers;

9.6.4

no Member who is not an agent specifically authorized by the Board of Managers with respect to such action shall take any action to bind the Company; and

9.6.5

notwithstanding anything contained herein to the contrary, if a Member is a Defaulting Member based on a breach described in Section 18.1.2 , the Managers designated by such Defaulting Member shall not be entitled to vote on any matters requiring the approval of the Board of Managers for the remainder of the term of this Agreement, and any matters requiring the approval of the Board of Managers shall thereafter be decided by the affirmative vote of the Managers of the non-Defaulting Member.

9.7

Certain Affiliate Agreements . With reference to any transaction, agreement, license, permit, easement or other arrangement to which the Company is a party or otherwise benefits or is bound and to which a Member or Members or a Corporate Affiliate of any Member is a party or is otherwise bound or obligated, including the AEPSC Services Agreement and the Duke Services Agreement (collectively, “Affiliate Arrangements” ), (i) the Board of Managers shall have the right, without unanimous consent and with the consent of only the Managers designated by the Member who is not, and whose Corporate Affiliates are not, a party to or is not otherwise bound or obligated by such Affiliate Arrangement (the “Non-Party Member” ) to cause the Company to pursue or enforce any remedy or exercise any other rights of the Company under such Affiliate Arrangement, provided, however, that if the Non-Party Member is a Defaulting Member, then the Board of Managers shall require only the consent of the Managers designated by the other Member for such purposes; and (ii) in the case of any Affiliate Arrangement to which both Members are a party or are otherwise bound or obligated and one of such Members is in breach or other default or otherwise required to act, the Board of Managers shall have the right, without unanimous consent and with the consent of only the members of the Board of Managers designated by the non-Defaulting Member or the Member not required to take the relevant action, as applicable, to cause the Company to pursue or enforce any remedy or exercise any other rights of the Company under such Affiliate Arrangement.

9.8	Limitation on Authority . Without the unanimous approval of the Members, none of the Board of Managers, the officers of the Company, or the Company shall take, or cause its subsidiaries and commonly controlled Corporate Affiliates to take, any of the following actions with respect to the Company:

9.8.1

liquidate, file for bankruptcy, reorganize, dissolve, wind up, or make a general assignment for the benefit of creditors;

9.8.2

merge or consolidate with or into any other Person;

9.8.3

transfer, sell, lease or otherwise dispose of all or substantially all of the Company’s assets, in any one transaction or in a series of related transactions;

9.8.4

issue, repurchase, redeem, or reclassify any Interest in the Company or any securities convertible or exchangeable for any such Interest;

9.8.5

make an initial public offering of equity securities of the Company or a subsidiary thereof;

9.8.6

provide secured or unsecured guarantees of third party debt;

9.8.7

incur any third party debt other than trade debt in the ordinary course of business;

9.8.8

make any material change in the Company’s tax and accounting policies;

9.8.9

enter into a new business, change the scope or nature of the business of the Company or create any subsidiaries;

9.8.10

enter into any amendment to the Company’s organizational documents; or

9.8.11

except as set forth in Sections 3.5 and 3.6 , make any determination as to the amount and timing of any Capital Contributions to the Company.

9.9

Budgets .

9.9.1

Development Budget . The budget for the development activities of the Company is attached hereto as Schedule 9.9.1 (the “Development Budget” ). The Development Budget is intended to cover the external operating costs of the Company from the Effective Date through the date that the Conditions Precedent are satisfied. The Members shall, at such times as specified in the Development Budget or as otherwise determined by the Board of Managers, make the Capital Contributions provided for in the Development Budget in the amounts provided for therein.

9.9.2

Preliminary Construction Budget . The approval by the Board of Managers of the preliminary budget for the construction of the Initial Project (the “Preliminary Construction Budget” ) shall be one of the Conditions Precedent in Schedule 14.2. The Preliminary Construction Budget shall be the initial estimate of the construction costs and schedule of funds required to complete the Initial Project.

9.9.3

Initial Operating Budget . The approval by the Board of Managers of the budget for operating the Company for the partial calendar year and the ensuing calendar year subsequent to the satisfaction of the Conditions Precedent (the “Initial Operating Budget” ) shall be one of the Conditions Precedent in Schedule 14.2. The Initial Operating Budget shall include (i) that portion of the Preliminary Construction Budget or the Construction Budget, as applicable, relating to the period covered by the Initial Operating Budget and (ii) an estimate of the costs and schedule of funds required to operate and maintain the Company and the assets of the Company during such period covered by the Initial Operating Budget.

9.9.4

Construction Budget . The approval by the Board of Managers of the final budget for the construction of the Initial Project (the “Construction Budget” ) shall be one of the Conditions Precedent in Schedule 14.2. The Construction Budget shall contain an estimate of the construction costs and schedule of funds required to complete the Initial Project and shall not be exceeded without the approval of the Board of Managers.

9.9.5

Annual Operating Budget . No later than August 31 of the calendar year in which the Initial Operating Budget ends and by August 31 of each subsequent year, the Treasurer shall propose, for approval by the Board of Managers, an operating budget for the operation of the Company for the next calendar year (the “Annual Operating Budget” ). The Annual Operating Budget shall include (i) that portion of the Construction Budget relating to the calendar year covered by the Annual Operating Budget, if applicable, (ii) an estimate of the operating and maintenance costs for such calendar year, (iii) an estimate of the capital costs during such calendar year and (iv) a schedule of funds required for such calendar year. A meeting of the Board of Managers shall be held prior to November 1 to approve the Annual Operating Budget for the forthcoming calendar year. In the event the Board of Managers cannot reach agreement as to the Annual Operating Budget prior to the start of such calendar year, the Company shall continue to be operated in accordance with the Annual Operating Budget for the previous calendar year or the Initial Operating Budget for such calendar year if applicable, with an adjustment to each line item in either such budget to reflect the PPI Adjustment, exclusive of that portion of the Construction Budget for the previous calendar year but inclusive of that portion of the Construction Budget for such calendar year, until a new Annual Operating Budget is agreed upon.

10.

OFFICERS AND COMMITTEES.

10.1	Officers .

10.1.1

In General; Limitations on Authority . For the purpose of supervising the day-to-day operations of the Company, the Board of Managers may appoint officers of the Company. The officers of the Company shall include a President, a Treasurer, and a Secretary, and may include such Vice Presidents and other officers or assistant officers as the Board of Managers may from time to time deem

necessary and appoint. Subject to any limitations established by the Board of Managers, the duties and authorities of the President, Treasurer, Secretary and Vice President are set forth in Section 10.1.2 . In addition, the Board of Managers may elect a Chairman from among themselves. More than one office may be held by the same Person, but only a Manager may serve as Chairman. Each officer will have only such authority and perform only such duties as set forth below or as the Board of Managers may delegate to such officer from time to time pursuant to a unanimous written resolution. The initial officers of the Company shall consist of the individuals set forth on Exhibit C. Each such person shall be deemed duly appointed to the office(s) set forth opposite such person’s name on Exhibit C as of the date of this Agreement.

10.1.2

Officers .

(a)

President . The President shall have full responsibility and authority for management of the day-to-day operations of the Company, subject to the authority of the Board of Managers, and shall exercise the duties and have the powers usually pertaining to the office held by the President of a company. The President may sign and execute, in the name of the Company, deeds, mortgages, bonds, contracts and other instruments, except in cases where the signing and the execution thereof shall be expressly delegated by the Board of Managers or by this Agreement to some other officer or agent of the Company. The President may, by instrument in writing, delegate authority to any employee, representative, or agent to sign and execute in the name of the Company deeds, mortgages, bonds, contracts or other instruments except where the signing and execution of such documents shall be expressly delegated by the Board of Managers to some other officer or agent of the Company. In addition, the President shall perform all duties incident to the office of the President and such other duties as from time to time may be assigned to him or her by the Board of Managers.

(b)

Vice Presidents . Each Vice President, if any, shall have such powers and duties as may from time to time be assigned to him or her by the President or the Board of Managers. Any Vice President may sign and execute in the name of the Company deeds, mortgages, bonds, contracts or other instruments, except where the signing and execution of such documents shall be expressly delegated by the Board of Managers or the President to some other officer or agent of the Company. Each Vice President may, by instrument in writing, delegate authority to any employee, representative, or agent to sign and execute in the name of the Company deeds, mortgages, bonds, contracts or other instruments, except where the signing and execution of such documents shall be expressly delegated by the Board of Managers or the President to some other officer or agent of the Company.

(c)

Treasurer . The Treasurer shall have charge of and be responsible for all funds, securities, receipts and disbursements of the Company, and shall deposit all monies and securities of the Company in such banks and depositories as shall be designated by the Board of Managers. The Treasurer shall be responsible for: (i) maintaining adequate financial accounts and records in accordance with generally accepted accounting practices; (ii) the preparation of financial statements and draft operating budgets for approval by the Board of Managers; (iii) the preparation and filing of all tax returns required by Applicable Law; and (iv) the performance of all duties incident to the office of Treasurer and such other duties as from time to time may be assigned to him by the Board of Managers or the President. The Treasurer may sign and execute in the name of the Company deeds, mortgages, notes, bonds, contracts or other instruments authorized by the Board of Managers, except in cases where the signing and the execution thereof shall be expressly delegated by the Board of Managers or by this Agreement to some other officer or agent of the Company.

(d)

Secretary . The Secretary shall act as secretary of all meetings of the Board of Managers. The Secretary shall keep and preserve the minutes of all such meetings in permanent books. The Secretary shall see that all notices required to be given by the Company are duly given and served; shall have charge of the books, records and papers of the Company relating to its organization and management as a Company; shall see that all reports, statements and other documents required by Applicable Law (except tax returns) are properly filed; and shall in general perform all the duties incident to the office of Secretary and such other duties as from time to time may be assigned to the Secretary by the Board of Managers or the President.

10.1.3

Appointment and Term of Office . The officers of the Company shall be appointed annually by the Board of Managers as it shall determine, and new offices may be created and filled at any meeting of the Board of Managers. Each officer shall hold office for a period of one (1) year or until such officer’s successor has been duly elected and qualified or until such officer’s death, resignation as provided in Section 10.1.4 or removal by the Board of Managers as provided in Section 10.1.5 . In addition, on the day of the occurrence of a Defaulting Member’s Event of Default, each officer of the Company that is an employee, officer or director of the Defaulting Member or one of its Corporate Affiliates shall automatically be terminated as an officer of the Company.

10.1.4

Resignation . Any officer or assistant officer may resign at any time by giving written notice to the Board of Managers or the Chairman, if any, or to the President or Secretary of the Company. A resignation shall take effect at the time specified therein, and unless otherwise specified therein, shall become effective upon delivery. The acceptance of such resignation shall not be necessary to make it effective unless so specified in the resignation.

10.1.5

Removal . Any officer or assistant officer may be removed by the Board of Managers with or without cause whenever in its judgment the best interests of the Company would be served thereby.

10.2	Committees . The Board of Managers shall have authority to create such committees, and delegate to such committees such authority and responsibility, and rescind any such delegation, as it deems appropriate.

11.

MEMBERS, MEETINGS OF THE MEMBERS.

11.1	Meetings of Members . Members shall meet at such times and places as unanimously agreed to by the Members.

11.2

Action Without Meetings . Any action required or permitted to be taken at a meeting of the Members may be taken without a meeting without prior notice, and without a vote, if a consent in writing, setting forth the action so taken, is signed by all of the Members. Such consent shall have the same force and effect as a unanimous vote at a meeting.

11.3	Voting . Except as otherwise provided in this Agreement, any action by the Members requires either (a) the affirmative vote of all of the Members at a meeting of the Members or (b) a written resolution signed by all of the Members.

11.4

Meetings by Telephone or Other Technology . Any or all Members may participate in a meeting, by or conduct the meeting through the use of, telephone or any other means of communication by which either: (a) all participating Members may simultaneously hear each other during the meeting or (b) all communication during the meeting is immediately transmitted to each participating Member, and each participating Member is able to immediately send messages to all other participating Members. If a meeting will be conducted through the use of any means described in this Section 11.4 , all participating Members shall be informed that a meeting is taking place at which official business may be transacted. A Member participating in a meeting by any means described in this Section 11.4 is deemed to be present in Person at the meeting.

11.5

Defaulting Member . Notwithstanding anything contained in this Agreement to the contrary, if a Member is a Defaulting Member based on a breach described in Section 18.1.2 , such Defaulting Member shall not be entitled to vote on any matters requiring the approval of the Members for the remainder of the term of this Agreement and any matters requiring unanimity or approval by the Members (including the matters set forth in Sections 11.1 and 11.2 above) shall thereafter be decided or determined solely by the non-Defaulting Member. If a Member is a Defaulting Member based on a breach described in Section 18.1.2 , the non-Defaulting Member shall have no duties to Company or the Defaulting Member under Section 23-18-4-2(b) of the Act.

11.6	Cooperation of Members for Regulatory Proceedings . The Members will reasonably cooperate, and will cause each of its Regulatory Affiliates to reasonably cooperate, with all regulatory proceedings reasonably necessary or convenient for the Company to conduct its business.

11.7	Third Party Dealings With Members . Except as permitted by this Agreement, no Member will have any right or authority to take any action on behalf of the Company with respect to third parties.

12.

COMPLIANCE WITH CERTAIN LAWS.

12.1

Compliance with Certain Codes of Conduct . In no event shall the Company be permitted to engage in any activity which would violate any codes or standards of conduct imposed on it by the regulations or orders of the FERC, any state public utility commission, or any similar regulatory authority of another jurisdiction. The Members agree to comply with any such codes and standards of conduct imposed on them, including any restrictions on disclosure of information to Corporate Affiliates or Regulatory Affiliates.

12.2	Compliance with Antitrust Laws . The Board of Managers shall adopt, from time to time, appropriate procedures and regulations necessary or advisable for the Company to comply with all applicable antitrust laws.

12.3

Regulatory Compliance . The Company shall at all times be operated in and conduct its business in a manner which complies in all material respects with all Applicable Laws. No Member, Manager or officer shall be permitted to proceed with any act under this Agreement unless and until appropriate regulatory approval for such act, if necessary, has been obtained. This Agreement shall at all times be interpreted consistently with this Section 12.3 .

13.

INSURANCE.

The Company will maintain insurance with responsible and reputable insurance companies or associations in such amounts and covering such risks as is usually carried by companies of similar size and credit standing engaged in similar business and owning similar property, provided that such insurance is and remains available to the Company at commercially reasonable rates and all such insurance policies shall name each Member as an additional insured thereunder.

14.

COMPANY PROJECTS.

14.1	Initial Project . The initial project being undertaken by the Company, subject to the satisfaction of the Conditions Precedent as provided in Section 14.2 below, is identified and described on Schedule 14.1 hereof (the “Initial Project” ).

14.2

Conditions Precedent . The Members shall have no obligation, other than their respective obligations to make the Capital Contributions required by the Development Budget as provided for in Section 9.9.1 , to make any other Capital Contributions until such time, if ever, that each of the Conditions Precedent listed in Schedule 14.2 hereof has been satisfied as provided in Schedule 14.2 or, except as provided in Section 3.5 , waived by all of the Members.

14.3

Proposal of Projects by Members . In addition to the Initial Project, either Member may propose to the Board of Managers one or more other projects to be undertaken by the Company; provided, however, that all proposed projects must fall within the scope of the Company’s purposes. A proposal for a project shall include such detail as is reasonably necessary to enable the Board of Managers to evaluate the proposal, including cost estimates, required regulatory approvals and cost recovery. The Board of Managers shall have forty–five (45) days to accept or reject the proposed project, which acceptance or rejection of which shall be in each Manager’s sole discretion. A proposed project under this Section 14.3 shall become a “Company Project” only if it unanimously approved as a Company Project by the Board of Managers. If a proposed project becomes a Company Project, the Members shall appropriately amend this Agreement to provide for such Company Project. The Company shall promptly reimburse each Member for its Qualified Development Expenses following the designation of a project as a Company Project.

14.4

Member Rights . In accordance with the provisions of Section 2.9 , nothing in this Article 14 is intended to restrict the right of any Member and its Corporate Affiliates (other than the Company and its subsidiaries) to independently pursue any project, until such time as that project becomes a Company Project. During the term of this Agreement, if any Member identifies any project that it believes would be suitable for the Company to examine, evaluate, or invest in, such Member shall have, in its sole discretion, the right, but not the obligation, to present such project to the Board of Managers for consideration.

14.5

Right of Members to Pursue the Initial Project . If the Company determines not to pursue the Initial Project, as evidenced by, among other things, (a) dissolution of the Company, (b) adoption by the Board of Managers of a resolution not to pursue the Initial Project, or (c) written agreement of the Members not to pursue the Initial Project, either Member shall have the right to independently pursue the Initial Project. Any dispute between the Members with respect to whether the Company has determined not to pursue the Initial Project shall be deemed a Deadlock and resolved in accordance with Section 21 hereof.

15.

MEMBERS’ INTERNAL COSTS.

15.1

Pre-Formation Internal Costs . Within one hundred and twenty (120) days following the Effective Date, each Member shall submit to the Company a detailed accounting of its (including its Corporate Affiliates’) Internal Costs relating to the formation of the Company (the “Pre-Formation Internal Costs” ). The Members and their Corporate Affiliates shall be entitled to reimbursement by the Company of their respective Pre-Formation Internal Costs but only to the extent permitted pursuant to an order from the FERC.

15.2

Post-Formation Internal Costs . On or before the twentieth (20th) day of each month, each Member shall submit to the Company a detailed accounting of its (including its Corporate Affiliates’) Internal Costs associated with services performed for or in connection with the Company and the Initial Project (the “Post-Formation Internal Costs” ) during the preceding month. The Members and their Corporate Affiliates shall be entitled to reimbursement by the Company for their Post-Formation Internal Costs but only to the extent provided for in any of Budgets or permitted (i) under the terms of the AEPSC Services Agreement, the Duke Services Agreement, or any other written agreement approved by the Board of Managers, or (ii) pursuant to an order from the Federal Energy Regulatory Commission.

15.3	Cost Pass Through . A Member’s Pre-Formation Internal Costs and Post-Formation Internal Costs shall be on a cost pass through basis without any markup for profit.

16.

SERVICES AGREEMENTS, WAIVER OF CONFLICTS.

The Members hereby waive any and all conflict of interest claims that any Member may have with respect to the execution of the AEPSC Services Agreement and the Duke Services Agreement. The Company may enter into other services agreements with Members or other Persons to provide construction, operation and maintenance services for the Company Projects and certain other services for the Company.

17.

ADMISSION OF MEMBERS; TRANSFERS OF INTERESTS; WITHDRAWAL OF A MEMBER.

17.1	No New Members . No Person shall be permitted to acquire an Interest in the Company from the Company unless mutually agreed by all Members.

17.2	Transfers of Membership Interests by Members . Except as expressly provided in this Section 17.2 , no Member shall be permitted at any time to Transfer, directly or indirectly, or by operation of law or otherwise, any Interest unless unanimously agreed by all Members.

17.2.1

Transfers to Corporate Affiliates . Any Member may Transfer all or any part of an Interest to one or more of its Corporate Affiliates at any time, provided, however, that such Corporate Affiliate must be Creditworthy, and such Corporate Affiliate must agree in writing to be bound by the terms and conditions of this Agreement, and provided further that the transferring or assigning Member must pay any Transfer Compensation Amount owed pursuant to Section 17.4 . In the event of a partial Transfer of an Interest, there shall be no increase in the number of Managers and the transferring Member and its transferee shall agree among themselves as to who will serve as the two (2) Managers to be appointed or designated in accordance with Section 9.2 .

17.2.2

Transfers After First Anniversary . At any time after the first anniversary of the In-Service Date of the Initial Project, either Member may Transfer all, but not less than all, of its Interest in the Company (treating each Member and its Corporate Affiliates as a single entity for this purpose) to a third party, subject to the terms and conditions in this Section 17.2.2 .

(a)

The proposed transferee must be Creditworthy and the proposed transferee must agree in writing to be bound by the terms and conditions of this Agreement;

(b)

The other Member shall have a right of first refusal to purchase such Interest; provided, however, if such other Member is a Defaulting Member based on a breach described in Section 18.1.2 , such Defaulting Member shall not have a right of first refusal to purchase such interest. The right of first refusal shall be exercised as set forth in Section 17.2.4 ; and

(c)

The transferring or assigning Member must pay any Transfer Compensation Amount owed pursuant to Section 17.4 .

17.2.3

Deemed Dispositions . Any sale, transfer, assignment, pledge, hypothecation, mortgage or other conveyance of all or substantially all of the Ownership Interests in a Member that owns no substantial assets other than its Interest and any assets directly related thereto shall be deemed a Transfer of its Interest hereunder and must comply with the requirements set forth in this Section 17.2 and, for purposes of Section 17.2.4 , references to a Member’s Interest shall be deemed to be references to such Ownership Interests. For the avoidance of doubt, the sale, transfer, assignment, pledge, hypothecation, mortgage or other conveyance, by operation of law or otherwise, of all or substantially all of the Ownership Interests in the Ultimate Parent of either Member shall not constitute a Transfer of Interests hereunder or otherwise trigger the requirements set forth in this Section 17.2 .

17.2.4

Right of First Refusal .

(a)

If a Member desires to sell all, but not less than all, of its Interest and has a written offer from a Creditworthy Person (other than a Corporate Affiliate) to purchase such, it must give written notice to the other Member describing all the material terms of that sale (including the purchase price, the terms for payment, the anticipated closing date, any conditions to the sale, any non-cash consideration and the selling Member’s estimate of the Fair Market Value of any non-cash consideration), and completely identifying the proposed third party purchaser. The terms of that sale shall not be bundled with or directly or indirectly connected to a transaction involving assets or securities other than Company assets.

(b)

The written notice delivered pursuant to Section 17.2.4(a) shall be accompanied by a written offer, irrevocable until the later of (i) thirty (30) days from its receipt or (ii) ten (10) Business Days after determination of the Fair Market Value of any non-cash consideration in accordance with the provisions of this Agreement, to sell to the Member receiving such written notice delivered pursuant to Section 17.2.4(a) hereof (the “Receiving Member” ) all, but not less than all, of the Interest described in the selling Member’s notice on the same terms and conditions as described in the notice, except that in lieu of any consideration which is other than cash, the Receiving Member will pay cash equal to the Fair Market Value of the consideration, as determined in accordance with the provisions of this Agreement.

If the Receiving Member elects to purchase the Interest described in the selling Member’s notice, the Receiving Member shall give the selling Member written notice that it has elected to accept the offer made to the Receiving Member pursuant to this Section 17.2.4 , and the Receiving Member will become bound to purchase, and the selling Member will become bound to sell, the selling Member’s Interest.

The closing of any purchase by the Receiving Member will take place in accordance with the specifications in the selling Member’s notice, including any specifications concerning regulatory approvals and other conditions.

If the Receiving Member does not accept the offer made to the Receiving Member pursuant to this Section 17.2.4 , the proposed sale to the third party may take place on the terms and conditions, including price, specified in the written notice delivered pursuant to Section 17.2.4(a) hereof. However, the Receiving Member will have the right to examine, within the thirty (30) days following the closing date described in the selling Member’s notice or any later date on which the sale is consummated, the records of the selling Member and the third party to satisfy itself that the sale has been consummated on the terms described in the selling Member’s notice. If the sale is not consummated on those terms within one (1) year after the delivery of the selling Member’s notice, or, if later, within thirty (30) days after receipt of all regulatory approvals required in connection with such sale, the Company may cancel on its books any transfer of Interest previously made to reflect that sale, and the selling Member shall be required to comply with the terms of this Section with respect to any subsequent Transfer of the Interest.

(c)

Each Member acknowledges that: (i) the right of first refusal provided in this Section 17.2.4 is, subject to Section 17.2.2 , a material part of the bargained for consideration under this Agreement, (ii) the inability of a Member to exercise its right of first refusal under this Agreement, except where such Member is a Defaulting Member, would result in a substantial economic detriment to such Member, and (iii) the exercise of the right of first refusal would not hamper the efforts of any Member seeking to transfer its Interest under this Agreement. Further, each Member acknowledges that the identity of the other Member under this Agreement at any point in time is a material element of this Agreement bargained for by each party to this Agreement, and it would be a substantial detriment to each such Member if any proposed new Member under this Agreement was not acceptable to the existing Members.

17.2.5

Interest Pledge . The Members may, with the unanimous approval of the Members, Transfer their Interests or any part thereof in connection with any project or other financing by the Company of the Initial Project or any other Company Project. Notwithstanding any other provision of Section 17.2 , no Transfer of an Interest by a Member in connection with a financing transaction shall be permitted except in accordance with this Section 17.2.5 .

17.2.6

Prohibited Transfers . Any purported Transfer of any Interests that is not in compliance with this Article 17 shall be null and void and of no force or effect; provided that if the Company is required to recognize any such Transfer, the Interests Transferred shall be strictly limited to the transferor’s right to allocations and distributions as provided by this Agreement with respect to the Interests Transferred, which allocations and distributions may be applied (without limiting any other legal or equitable rights of the Company) to satisfy any debts or liabilities for damages that the transferor or transferee may have to the Company, and shall not include the right to any information or accounting of the affairs of the Company, the right to inspect the books or records of the Company, and/or any of the other rights of a Member under the Act or this Agreement.

17.2.7

Compliance with Securities Laws . If any Interests are to be Transferred, either (a) such Interests shall be registered under the Securities Act of 1933, as amended, and any applicable state securities laws, or (b) at the request of the Board of Managers, the transferor shall provide an opinion of counsel, satisfactory to the Board of Managers, that the proposed Transfer is exempt from such registration requirements. The Company and the Members have no obligation or intention whatsoever either to register Interests for resale under any federal or state securities laws or to take any action which would make available to any Person any exemption from the registration requirements of such laws.

17.3	Withdrawal of a Member . No Member may withdraw from membership in the Company prior to the dissolution and winding up of the Company.

17.4

Transfer Compensation Amount . If a Member Transfers its Interest to a Corporate Affiliate pursuant to Section 17.2.1 or to a third party pursuant to Section 17.2.2 , and if such Transfer results in a termination of the tax partnership pursuant to Section 708(b)(1)(B) of the Code, then the Member transferring its Interest shall pay the Member who is not transferring its Interest a cash amount equal to the excess of (a) the present value of the depreciation and amortization deductions that the non-transferring Member would have received with respect to the assets owned by the Company on the Transfer date if such transfer had not occurred over (b) the present value of such deductions after giving effect to Section 168(i)(7) of the Code, which has the effect of restarting the depreciation or amortization period for such assets (such amount the “Transfer Compensation Amount” ). “Present value” for purposes of the preceding sentence shall be determined (i) by using as the discount rate the prime rate as published by The Wall Street Journal for the date of the Transfer, (ii) by using as the tax rate the highest federal and Oklahoma combined corporate income tax rate in effect on the date of the transfer, and (iii) by assuming that the Company will depreciate or amortize all of the assets that it owns on the Transfer date over their entire tax lives. The non-transferring Member shall calculate the Transfer Compensation Amount and make written demand for its payment on the transferring Member, who shall pay such amount within ten (10) Business Days of receipt of such demand. The Members shall submit any dispute over the operation of this Section 17.4 to the Arbitrator for resolution. A Member Transferring its Interest pursuant to Section 17.2.1 or 17.2.2 may effect such Transfer in a series of transactions for the purpose of avoiding a termination of the tax partnership; provided, however, that such series results in the Transfer of such Member’s entire interest within a period that does not exceed thirteen (13) calendar months. This Section 17.4 shall not apply to any Transfer pursuant to Section 17.2.4 .

18.

DEFAULT, REMEDIES, DISSOLUTION AND TERMINATION.

18.1	Events of Default . It shall be an “Event of Default” under this Agreement if:

18.1.1

a Member or its Ultimate Parent files a voluntary petition for bankruptcy or is adjudged bankrupt or insolvent, or has entered against such Member or the Ultimate Parent of such Member an order for relief, in any bankruptcy or insolvency proceeding;

18.1.2

a Member fails to make any Capital Contribution as required by this Agreement but subject to the extensions permitted by Section 3.7 ; or

18.1.3

a Member breaches any of its other material obligations under this Agreement and fails to cure such breach within thirty (30) days of receipt of written notice of such breach from any other Member.

18.2	Remedies .

18.2.1

If an Event of Default occurs, the Company and the non-Defaulting Member may pursue all available remedies.

18.2.2

Purchase Remedy .

(a)

Without limiting Section 18.2.1 , the non-Defaulting Member shall have the right, but not the obligation, to elect in its sole discretion upon written notice to the Defaulting Member within sixty (60) days after the Event of Default (the “Purchase Remedy Notice” ), but subject to obtaining Third Party Approvals, to purchase all, but not less than all, of the Defaulting Member’s Interest at a price equal to the Defaulting Member’s Capital Account balance, as adjusted in accordance with Section 18.2.2(b) , on the date the Defaulting Member’s Interest is transferred to the non-Defaulting Member less (i) any other amounts owed to the Company by the Defaulting Member and (ii) all third party costs reasonably incurred by the non-Defaulting Member to acquire the Defaulting Member’s Interest and to obtain all Third Party Approvals, payable in cash to the Defaulting Member within thirty (30) days after delivery of the Purchase Remedy Notice subject, however, to Section 18.2.5 .

(b)

In the event that the non-Defaulting Member provides a Purchase Remedy Notice, then, during the period that commences on the day of the occurrence of the Defaulting Member’s Event of Default and ends on the day immediately preceding the day on which the Defaulting Member’s Interest is transferred to the non-Defaulting Member (the “Interim Period” ), (i) all losses of the Company, determined in accordance with

GAAP, shall be allocated 50% to the Defaulting Member’s Capital Account and 50% to the non-Defaulting Member’s Capital Account and (ii) all profits of the Company shall be determined monthly, in accordance with GAAP, as of the last day of each month during the Interim Period and such profits shall be allocated to each Member’s Capital Account based on the percentage that each Member’s Capital Account is of the combined balance of the Members’ Capital Accounts as of the last day of each month during the Interim Period.

(c)

There shall be no distributions of Available Cash to the Members during the Interim Period if the In-Service Date has not occurred. If the In-Service Date has occurred, Available Cash shall be distributed to the Members during the Interim Period in accordance with their respective Sharing Percentages.

(d)

The thirty (30) day time period referred to in Section 18.2.2(a) shall be extended for such period of time as is necessary for the non-Defaulting Member to obtain Third-Party Approvals so long as the non-Defaulting Member is diligently pursuing obtaining any such Third-Party Approvals.

(e)

At the closing of the transfer of the Defaulting Member’s Interest to the non-Defaulting Member, the Defaulting Member shall (i) sign such documents as may reasonably be requested by the non-Defaulting Member in order to consummate the transfer, (ii) represent and warrant that (A) it has good title to its Interest, (B) there are no Encumbrances on such Interest (other than pursuant to this Agreement or any indebtedness of the Company), (C) it has due authority to transfer the Interest, (D) the agreement transferring such Interest is valid and enforceable against the Defaulting Member and (E) the transfer of the Interest does not violate Applicable Law in any material respect and (iii) disclose in writing the existence and nature of any pending or, to the Defaulting Member’s actual knowledge without any obligation of due inquiry, threatened litigation or arbitration or any audit or investigation initiated by any Governmental Authority against the Defaulting Member or the Company with respect to the Defaulting Member’s Interest. In the event the Defaulting Member discloses the existence of any pending or threatened litigation or other Proceeding required to be disclosed herein or the non-Defaulting Member reasonably determines that any representation or warranty required by clause (ii) herein is inaccurate, the non-Defaulting Member may, in its sole discretion, withdraw its election to purchase the Defaulting Member’s Interest and pursue any other remedies that are available to it under this Agreement.

18.2.3

The provisions of Section 18.2.2 shall not be applicable to an Event of Default that results from a Member’s breach of the confidentiality obligations contained in Section 22 unless such Member’s breach is an intentional breach.

18.2.4

If the Event of Default is described in Section 18.1.2 , in addition to having the remedies provided in Section 18.2.2 , but in lieu of an action by the Company to pursue any remedies for such Event of Default:

(a)

The non-Defaulting Member shall have the right, but not the obligation, to elect, in its sole discretion at any time after the Event of Default, but subject to obtaining required Third-Party Approvals, to deliver to the Company within sixty (60) days after occurrence of the Event of Default, all, but not less than all, of the capital contribution which the Defaulting Member has failed to contribute (the “Failed Contribution” ). The amount shall be treated as payment of the Failed Contribution by the non-Defaulting Member and the non-Defaulting Member’s Capital Account shall be increased accordingly. In addition, the non-Defaulting Member’s Interest and Sharing Percentage shall be increased (and the Defaulting Member’s Interest and Sharing Percentage shall be correspondingly decreased) by an amount equal to twice the percentage increase in the non-Defaulting Member’s Capital Account that occurs as a result of the non-Defaulting Member’s payment of the Failed Contribution.

(b)

Additionally, upon notice to the Defaulting Member, the non-Defaulting Member may prohibit the Defaulting Member from making any subsequent Capital Contributions in which case the non-Defaulting Member shall be required to make such Capital Contributions on behalf of the Defaulting Member. In each instance that the non-Defaulting Member makes a subsequent Capital Contribution on behalf of the Defaulting Member, the amount shall be treated as payment of a Capital Contribution by the non-Defaulting Member and the non-Defaulting Member’s Capital Account shall be increased accordingly. In addition, the non-Defaulting Member’s Interest and Sharing Percentage shall be increased (and the Defaulting Member’s Interest and Sharing Percentage shall be correspondingly decreased) by an amount equal to twice the percentage increase in the non-Defaulting Member’s Capital Account that occurs as a result of the non-Defaulting Member’s payment of the Capital Contribution; provided, however, that in no event shall the Defaulting Member’s Sharing Percentage be less than 1%. Notwithstanding anything to the contrary set forth in this Agreement, neither the Company nor the non-Defaulting Member shall be required to provide any advance notice to the Defaulting Member of any Capital Contribution made pursuant to this Section 18.2.4(b) ; provided that the Company shall provide the Defaulting Member with written notice of each adjustment of the Members’ Capital Accounts, Interests and Sharing Percentages as a result of Capital Contributions by the non-Defaulting Member pursuant to this Section 18.2.4(b) .

18.2.5

If a non-Defaulting Member elects to exercise the remedy set forth in Section 18.2.4 and it subsequently desires to Transfer its Interest to any party that is not a Corporate Affiliate or to cause the Company to merge with or into or consolidate

with any party that is not a Corporate Affiliate (in each case, the “Buyer” ) in a bona fide negotiated transaction or series of related transactions (a “Sale” ), the Defaulting Member shall, if requested by the non-Defaulting Party, Transfer to such Buyer its Interest on the same terms and conditions (including time of payment and amount and form of consideration per Sharing Percentage) applicable to the non-Defaulting Member. The non-Defaulting Member shall give notice (the “Drag-Along Notice” ) to the Defaulting Party of any proposed Transfer giving rise to the rights of the non-Defaulting Member set forth in this Section 18.2.5 at least sixty (60) days prior to such Transfer. The Drag-Along Notice will set forth the name of the Buyer, the proposed amount and form of consideration, and the other material terms and conditions of the proposed transfer. In connection with any such Transfer, the Defaulting Party shall be obligated to (i) make representations and warranties (and provide related indemnities) with respect to its ownership of its Interest, (ii) agree to pay its proportionate share of any liability arising out of any representations, warranties, covenants or agreements of the Members with respect to the Company that survive the closing of the Sale and (iii) execute and deliver such instruments of conveyance, purchase agreement, merger agreement, escrow agreements and/or related documents and take such other actions as the non-Defaulting Member or the Buyer may reasonably require in order to carry out the Sale and the terms of this Section 18.2.5 and. The terms of the Sale shall not be bundled with or directly or indirectly connected to a transaction involving assets or securities other than the Company’s assets.

18.2.6

With respect to any Proceedings that result from or are required in connection with the non-Defaulting Member’s exercise of any of the remedies provided for herein, the Defaulting Member shall cooperate with the non-Defaulting Member to the extent reasonably requested to effectuate the non-Defaulting Member’s remedy election and the Defaulting Member shall not oppose or in any way interfere with, directly or indirectly, such Proceedings.

18.2.7

The exercise of any of the remedies set forth in this Section 18.2 shall be in all cases subject to receipt of all necessary Third Party Approvals. The non-Defaulting Member and, if applicable, the Defaulting Member, shall diligently and in good faith pursue all necessary Third Party Approvals.

18.3	Indemnification; Limitation of Liability .

18.3.1

Indemnification by a Member . Subject to Section 18.3.3 , each Member (the “Indemnifying Member” ) shall indemnify, defend and hold harmless the Company, the other Members, the other Members’ Corporate Affiliates, and the other Members’ and each such Corporate Affiliate’s officers, directors, employees, agents and representatives, and the Company’s Managers and officers (collectively the “Other Indemnified Persons” ) from and against any and all claims, demands, actions, suits, damages, liabilities, losses, costs and expenses (including reasonable attorneys’ fees and out-of-pocket disbursements), judgments, fines, settlements and other amounts (collectively “Damages” ), to the extent caused by, resulting from or arising out of or in connection with any action by the Indemnifying Member outside the scope of the Indemnifying Member’s rights or authority conferred by this Agreement.

18.3.2

Indemnification by the Company . Subject to Section 18.3.3 , the Company shall indemnify, defend and hold harmless each Member (including any Person who has been but is no longer a Member), each Member’s Corporate Affiliates and the officers, directors, employees, agents and representatives of each Member and its Corporate Affiliates, the Managers, the officers and employees of the Company, and the heirs, executors, successors and assigns of each of the foregoing (individually an “Indemnitee” ) from and against all Damages to the extent caused by, resulting from or arising out of or in connection with any of the following:

(a)

any claim, action, suit or proceeding or threat thereof, made or instituted in which such Member, such Member’s Corporate Affiliates or Indemnitee may be involved or be made a party by reason of such Member being, or having been in the past, a Member, or by reason of any action alleged to have been taken or omitted by such Member in such capacity, or by such Member’s Corporate Affiliates or Indemnitees acting on behalf of the Company, provided that a Member, Member’s Corporate Affiliate or Indemnitee shall only be entitled to indemnification hereunder to the extent such Member’s, Member’s Corporate Affiliate’s or Indemnitee’s conduct did not constitute bad faith, willful misconduct, gross negligence or a material breach of this Agreement. The termination of any proceeding by settlement, judgment, order, conviction or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that such Member’s, Member’s Corporate Affiliate’s or Indemnitee’s conduct constituted bad faith, willful misconduct, gross negligence or a material breach of this Agreement, by such Member, such Member’s Corporate Affiliate or such Indemnitee;

(b)

any guarantees or promises of performance of any obligations of the Company; and

(c)

any actions or omissions to act by the Company in connection with its business or operations, or the ownership of its assets and properties; provided, however, that nothing in this Section 18.3.2 will be construed to require the Company to reimburse, defend, indemnify or hold harmless any Member, its Corporate Affiliates, or Indemnitee with respect to any Damages in any circumstance in which this Agreement requires such Member to reimburse, defend, indemnify or hold harmless any other Member, its Corporate Affiliates or Indemnitee or the Company in respect of such Damages.

18.3.3

Survival; Limitations; Procedures .

(a)

The indemnification obligations contained in Section 18.3.1 will survive any termination of this Agreement or the dissolution and winding up of the Company. The indemnification obligations contained in Section 18.3.2 will survive any dissolution of the Company until its affairs have been fully wound up and all of its properties and assets distributed in accordance with this Agreement.

(b)

For the purposes of this Agreement and except to the extent payments on account of or relating to losses or damages are made to a third party, “Damages” shall exclude any special, incidental, indirect, punitive, exemplary, or consequential damages (including damages for loss of use of equipment, lost business opportunities or profits, or damage to reputation).

(c)

If a Member or the Company (the “Indemnifying Party” ) is obligated hereunder to indemnify any other Member, the Company, a Member’s Corporate Affiliate or any Other Indemnified Person or Indemnitee (in any case the “Indemnified Party” ) from any claim, suit, action or proceeding brought by any other person or entity (a “Third Party Claim” ), the Indemnified Party shall give notice as promptly as is reasonably practicable to the Indemnifying Party of such Third Party Claim; provided that the failure of the Indemnified Party to give notice shall not relieve the Indemnifying Party of its obligations under this Article 18 except to the extent (if any) that the Indemnifying Party shall have been materially prejudiced thereby. Such Indemnifying Member or the Company, as the case may be, will have the right to control the defense and settlement of such Third Party Claim with counsel reasonably acceptable to the Indemnified Party, provided that (i) such Indemnified Party may retain counsel at its expense to assist in the defense and settlement of such Third Party Claim, and (ii) no settlement of any Third Party Claim will contain terms or provisions requiring the Indemnified Party to take any action or perform any undertaking, or prohibit or restrain the Indemnified Party from taking any action, without the written consent of the Indemnified Party.

(d)

Without the prior written consent of the Indemnifying Party, the Indemnified Party shall not accept any settlement or compromise of any claim, suit, action or proceeding of the nature referred to in Section 18.3.3(c) above.

18.4	Causes of Dissolution . The Company shall be dissolved upon the earliest to occur of the following:

18.4.1

the sale or other disposition of all or substantially all of the Company’s property;

18.4.2

the unanimous agreement of the Members that the Company should be dissolved;

18.4.3

entry of a decree of judicial dissolution under Section 23-18-9-2 of the Act; or

18.4.4

any of the Conditions Precedent listed in Schedule 14.2 are not satisfied by the date provided for therein.

18.5

Winding Up . Upon the dissolution of the Company, the Company shall continue solely for the purposes of winding up its affairs in an orderly manner, liquidating its assets, and satisfying the claims of its creditors and Members. No Member shall take any action with respect to the Company that is inconsistent with, or not necessary to or appropriate for, the winding up of the Company’s business and affairs. Each Member shall repay any Member Obligation which it owes the Company. The Board of Managers (or, in the event there are no remaining members of the Board of Managers, any Person designated by the Members) (the “Liquidator” ) shall be responsible for overseeing the winding up of the Company and shall take full account of the Company’s liabilities and property. The Company property shall be liquidated as promptly as is consistent with obtaining the fair value thereof.

18.6	Liquidation Proceeds . The proceeds from the liquidation, to the extent sufficient therefor, shall be applied and distributed in the following order:

18.6.1

first, to the payment and discharge of all of the Company’s debts and liabilities to creditors other than the Members;

18.6.2

second, to the payment and discharge of all of the Company’s debts and liabilities to the Members; and

18.6.3

thereafter, the balance, if any, to the Members in direct proportion to each Member’s Sharing Percentage.

18.7

Rights of Member . Except as otherwise provided in this Agreement, each Member shall look solely to the assets of the Company for the return of its Capital Contributions and shall have no right or power to demand or receive property other than cash from the Company. Except as otherwise provided in this Agreement, no Member shall have priority over any other Member as to the return of its Capital Contributions, distributions, or allocations.

18.8	Survival of Section . The provisions of this Section 18 shall survive the expiration or earlier termination of this Agreement.

19.

REPRESENTATIONS AND WARRANTIES OF AEPTHC.

19.1

Organization and Good Standing of AEPTHC . AEPTHC is a limited liability company, duly organized, validly existing, and in good standing under the laws of the State of Delaware, with full corporate power and authority to conduct its business as it is now being conducted and to own or use the properties and assets that it purports to own or use.

19.2	Enforceability; Authority; No Conflict; Third Party Approvals with Respect to AEPTHC .

19.2.1

This Agreement constitutes the legal, valid, and binding obligation of AEPTHC, enforceable against AEPTHC in accordance with its terms, except as such enforceability may be limited by General Exceptions to Enforceability. The execution and delivery by AEPTHC of this Agreement has been duly authorized by all necessary action by AEPTHC’s governing bodies.

19.2.2

Neither the execution and delivery of this Agreement by AEPTHC nor the consummation of or performance by AEPTHC of its obligations hereunder will, directly or indirectly (with or without notice or lapse of time or both):

(a)

breach (i) any provision of any of the Governing Documents of AEPTHC or (ii) any resolution adopted by the governing bodies of AEPTHC;

(b)

breach in any material respect any Applicable Law applicable to AEPTHC or give any Governmental Authority or other Person the right to challenge AEPTHC’s execution and delivery of this Agreement or performance of its material obligations hereunder or to exercise any remedy or obtain any relief under any Applicable Law as a result of AEPTHC’s execution and delivery of this Agreement or performance of its material obligations hereunder; or

(c)

result in the imposition or creation of any Encumbrance upon or with respect to any of the Company’s assets, other than such Encumbrances created under the terms and conditions of this Agreement.

19.2.3

AEPTHC is not required to give any notice to or obtain any other Third Party Approval from any Person in connection with its execution and delivery of this Agreement which, if not given or obtained, would materially impair AEPTHC’s ability to perform its material obligations under this Agreement.

19.3

Litigation . There is no pending, or to AEPTHC’s knowledge threatened, Proceeding against AEPTHC or any of its Corporate Affiliates that challenges, or seeks to restrain, delay, or prohibit the execution, delivery, and performance of this Agreement. There is not in effect any order, judgment, or decree of any Governmental Authority against AEPTHC or any of its Corporate Affiliates enjoining, barring, suspending, prohibiting, or otherwise limiting the right of AEPTHC to execute and deliver this Agreement or to perform its material obligations hereunder.

20.

REPRESENTATIONS AND WARRANTIES OF DUKE .

20.1

Organization and Good Standing of Duke . Duke is a limited liability company, duly organized, validly existing, and in good standing under the laws of the State of Delaware, with full corporate power and authority to conduct its business as it is now being conducted and to own or use the properties and assets that it purports to own or use.

20.2	Enforceability; Authority; No Conflict; Third Party Approvals with Respect to Duke .

20.2.1

This Agreement constitutes the legal, valid, and binding obligation of Duke, enforceable against Duke in accordance with its terms, except as such enforceability may be limited by General Exceptions to Enforceability. The execution and delivery by Duke of this Agreement has been duly authorized by all necessary action by Duke’s governing bodies.

20.2.2

Neither the execution and delivery of this Agreement by Duke nor the consummation or performance by Duke of its obligations hereunder will, directly or indirectly (with or without notice or lapse of time or both):

(a)

breach (i) any provision of any of the Governing Documents of Duke or (ii) any resolution adopted by the governing bodies of Duke;

(b)

breach in any material respect any Applicable Law applicable to Duke or give any Governmental Authority or other Person the right to challenge Duke’s execution and delivery of this Agreement or performance of its material obligations hereunder or to exercise any remedy or obtain any relief under any Applicable Law as a result of Duke’s execution and delivery of this Agreement or performance of its material obligations hereunder; or

(c)

result in the imposition or creation of any Encumbrance upon or with respect to any of the Company’s assets, other than such Encumbrances created under the terms and conditions of this Agreement.

20.2.3

Duke is not required to give any notice to or obtain any other Third Party Approval from any Person in connection with its execution and delivery of this Agreement which, if not given or obtained, would materially impair Duke’s ability to perform its material obligations under this Agreement.

20.3

Litigation . There is no pending, or to Duke’s knowledge threatened, Proceeding against Duke or any of its Corporate Affiliates that challenges, or seeks to restrain, delay, or prohibit the execution, delivery, or performance of this Agreement. There is not in effect any order, judgment, or decree of any Governmental Authority against Duke or any of its Corporate Affiliates enjoining, barring, suspending, prohibiting, or otherwise limiting the right of Duke to execute and deliver this Agreement or to perform its material obligations hereunder.

21.

DEADLOCKS .

21.1	Senior Executives .

21.1.1

If a Member reasonably determines that a Deadlock exists, such Member may cause one of its Managers, by written notice (a “Deadlock Notice” ) to the other Member, to refer such Deadlock to the Presidents of AEPTHC and Duke or their designees. Such Deadlock Notice shall describe in reasonable detail the nature of the Deadlock. Each Member shall cause the individual it designates to resolve the Deadlock promptly to consult and negotiate in good faith with the individual designated by the other Member in an effort to resolve such Deadlock.

21.1.2

If the individuals designated to resolve a Deadlock pursuant to Section 21.1.1 are unable to resolve such Deadlock within twenty (20) days of delivery of the Deadlock Notice, a Member may commence an arbitration pursuant to Section 21.2 (a “Deadlock Arbitration” ) by delivering written notice to the other Member stating its intent to commence such Deadlock Arbitration.

21.1.3

Without limiting any rights or remedies that may otherwise be available to the Members pursuant to this Agreement or the Act, the procedures set forth in this Article 21 shall constitute the exclusive remedy to resolve a Deadlock.

21.2	Deadlock Arbitration .

21.2.1

No later than ten (10) days after issuance of a written notice to commence a Deadlock Arbitration pursuant to Section 21.1.2 , each Deadlock Arbitration Party shall prepare and deliver to each other Deadlock Arbitration Party a written statement (an “Issues Statement” ) of each issue that such Deadlock Arbitration Party believes constitutes a Deadlock. No later than twenty (20) days after the deadline for delivery of Issue Statements, each Deadlock Arbitration Party shall deliver to each other Deadlock Arbitration Party a written statement (a “Settlement Proposal” ) of such Deadlock Arbitration Party’s proposed resolution of the Deadlock, which shall be limited to the issues set forth in the Issues Statements. A Settlement Proposal need not address every issue described in every Issues Statement. If a Deadlock Arbitration Party fails to deliver a Settlement Proposal within such period, such Deadlock Arbitration Party shall be deemed to have waived its rights to submit a Settlement Proposal.

21.2.2

The Deadlock Arbitration Parties shall attempt in good faith to resolve the Deadlock that is the subject of the Deadlock Arbitration based on the positions set forth in the Settlement Proposals. If the Deadlock Arbitration Parties are unable to resolve such Deadlock within twenty (20) days after the deadline for delivery of Settlement Proposals (or such longer period as may be agreed among the Members), each Deadlock Arbitration Party shall submit the name of a Qualified Person in writing to each other Deadlock Arbitration Party. Any Deadlock Arbitration Party that fails to submit the name of a Qualified Person within such period shall be deemed to have waived its right to designate a Qualified Person.

21.2.3

All of the Qualified Persons designated by the Deadlock Arbitration Parties pursuant to Section 21.1.2 shall, within ten (10) days of their designation (or such longer period as may be agreed among the Deadlock Arbitration Parties), select a single Qualified Person (the “Deadlock Arbitrator” ) to resolve the Deadlock; provided, however, that if only one Deadlock Arbitration Party designates a Qualified Person or if all Deadlock Arbitration Parties submitting names of Qualified Persons submit the name of the same Qualified Person, such Qualified Person shall serve as the Deadlock Arbitrator. The Qualified Persons shall notify each Deadlock Arbitration Party of the name of the Deadlock Arbitrator promptly upon designation of such Deadlock Arbitrator.

21.2.4

No later than three (3) days (or such longer period as may be agreed among the Deadlock Arbitration Parties) after the Deadlock Arbitrator is selected, each Deadlock Arbitration Party shall deliver a copy of its Settlement Proposal to the Deadlock Arbitrator.

21.2.5

The Deadlock Arbitrator shall review the Settlement Proposals and, after due consideration thereof, the Deadlock Arbitrator shall select the one Settlement Proposal that, in the Deadlock Arbitrator’s reasoned judgment, best resolves the Deadlock on a basis that is consistent with the terms of this Agreement; provided, however, that the Deadlock Arbitrator may not alter or add to the terms of any Settlement Proposal in reaching its determination. A Deadlock Arbitrator’s decision pursuant to this Section 21.2.5 shall be final and binding on the Company and the Members with respect to the Deadlock.

21.2.6

No Member or any of its Corporate Affiliates, nor any of their respective employees, agents, counsel, consultants or other representatives, shall be permitted to have any ex parte communications with the Deadlock Arbitrator. The Deadlock Arbitrator shall be advised of this restriction and shall be instructed by the Deadlock Arbitration Parties to notify all Deadlock Arbitration Parties of any such attempted ex parte communications.

21.2.7

Each Deadlock Arbitration Party shall pay the fees and expenses of the Qualified Person selected by it. The Deadlock Arbitration Parties shall equally share the fees and expenses of the Deadlock Arbitrator.

22.

CONFIDENTIALITY.

22.1

Definition of Confidential Information . “Confidential Information” means any and all confidential or proprietary information or knowledge of a Person, whether or not it constitutes a trade secret under Applicable Law, including: (i) non-public information regarding research, development, products, services, or markets or marketing; (ii) non-public information regarding financial condition or results of operations, business plans, budgets, financial projections, forecasts or estimates, or financing sources and methods; (iii) non-public information concerning inventions (whether or not patentable), discoveries, unpublished works, software, data compilations, improvements, developments, designs, concepts, techniques, or know-how; (iv) non-public information concerning past, present, and potential suppliers, or customers, their personnel, purchasing, selling methods, business methods, prices, capacities, requirements, or credit or credit policies; (v) non-public information regarding the skills and compensation of past, present, and potential employees and other personnel; (vi) non-public information concerning advice received from attorneys, accountants, and other advisers; (vii) non-public information concerning pending, threatened, or contemplated litigation or administrative proceedings, (viii) other non-public, commercially valuable information

which the recipient knew was confidential at the time of its receipt; and (ix) all information protected under that certain Mutual Confidentiality Agreement dated as of October 15, 2007, between American Electric Power Service Corporation and Duke Energy Corporation.

22.2

Confidentiality Obligation; Permitted Disclosures . The Company agrees that it shall hold in strict confidence and shall not disclose or use any Confidential Information of any Member or any Corporate Affiliate of such Member, and each Member agrees that it shall hold in strict confidence and shall not disclose or use any Confidential Information of the Company or the other Member or the Corporate Affiliates of such Member, for the period ending two (2) years after the date of disclosure of such Confidential Information.

Notwithstanding the foregoing, a recipient shall be entitled to disclose Confidential Information to its respective officers, employees, Corporate Affiliates, Regulatory Affiliates, agents, lenders, attorneys, and other advisors (collectively “Representatives” ) for purposes of pursuing the business of Company, meeting its obligations and exercising its rights hereunder, and with respect to the Members, as may otherwise be deemed appropriate by the Members in connection with their direct or indirect ownership of Company, provided that the Representatives shall be informed of the confidentiality obligations provided herein. Each recipient agrees to be responsible for any breach of the confidentiality obligations under this Agreement by its Representatives. Further, a recipient shall also be entitled to disclose Confidential Information to the extent such disclosure: (a) is necessary or convenient as part of any regulatory proceeding in which Company or a Regulatory Affiliate is a party subject to a protective order or such other remedy as the disclosing party may consider appropriate in the circumstances; (b) is required to be disclosed by stock exchange requirements applicable to the recipient or its Corporate Affiliates, (c) is necessary or otherwise reasonably deemed appropriate in connection with any dispute resolution commenced pursuant to this Agreement or any litigation commenced in respect of this Agreement, (d) is disclosed to an entity whose primary business is the issuance of credit ratings, provided the information is disclosed pursuant to a confidentiality agreement (which agreement shall be no less restrictive than the recipient’s obligations under this Agreement) and is disclosed solely for the purpose of developing a credit rating and the entity’s ratings are publicly available, (e) is disclosed to a prospective purchaser of a Membership Interest or other interest in Company, provided the information is disclosed pursuant to a confidentiality agreement (which agreement shall be no less restrictive than the recipient’s obligations under this Agreement) and is disclosed on a need to know basis, or (f) is disclosed to a prospective merger partner of a Member or prospective purchaser of a Member, provided the information is disclosed pursuant to a confidentiality agreement (which agreement shall be no less restrictive than the recipient’s obligations under this Agreement) and is disclosed on a need to know basis.

The mere possession by a Member of Confidential Information is not intended to preclude or inhibit such Member from engaging in a merger, acquisition or sale provided such Member has complied with the terms hereof.

If a project does not become a Company Project pursuant to Article 14 , the foregoing shall not be construed to limit either Member from using for its own purposes the information developed by the Members for the Company as a result of the project development activities in connection with such project.

22.3

Exceptions . Notwithstanding anything to the contrary in this Article 22 , Confidential Information will not include information that: (a) has become part of the public domain other than by acts or omissions of the recipient or its Representatives, (b) to the recipient’s knowledge, has been furnished or made known to the recipient by third Persons (other than those acting on behalf of the disclosing party) as a matter of legal right and without relevant restriction on disclosure or use, (c) was in the recipient’s possession prior to disclosure by the disclosing party and was not previously acquired by the recipient or its Representatives directly or indirectly from the disclosing party, or (d) is independently developed by Representatives of the recipient without access to Confidential Information.

22.4

Legally Required Disclosures . Under circumstances other than those provided in Section 22.2 , if Company or either Member to whom Confidential Information is transmitted is required pursuant to Applicable Law or otherwise becomes legally compelled to disclose any of the Confidential Information or the fact that the Confidential Information has been made available to it, such party shall (unless prohibited by Applicable Law from doing so) promptly advise the disclosing party in order that the disclosing party may seek a protective order or such other remedy as the disclosing party may consider appropriate in the circumstances. In any event, the compelled party may disclose only that portion of the Confidential Information which such party is legally required to disclose in the judgment of the party’s legal counsel without any liability to the disclosing party hereunder and such disclosure shall not be a breach of this Section 22.4 .

22.5	Survival . The provisions of this Article 22 will survive a termination of this Agreement and the dissolution and winding up of the Company.

23.

COMPANY RECORDS, REPORTS .

23.1	Company Records . The Company shall keep and maintain the following records in its principal office in the United States or make them available in that office within ten (10) days after the date of receipt of a written request:

23.1.1

a current list that states the name and mailing address of each Member and the percentage or other Interest in the Company owned by each Member;

23.1.2

copies of the federal, state, and local information or income tax returns for each of the Company’s six most recent tax years;

23.1.3

a copy of the Articles of Organization and this Agreement, all amendments or restatements, and executed copies of any powers of attorney;

23.1.4

a written statement of:

(a)

the amount of the cash Capital Contributions and a description and statement of the agreed value of any other Capital Contributions made by each Member, and the amount of the cash Capital Contributions and a description and statement of the agreed value of any other Capital Contributions that the Member has agreed to make in the future as additional contributions;

(b)

the date on which each Member in the Company became a Member; and

(c)

correct and complete books and records of account of the Company.

23.2	Written Form . The Company shall maintain its records in written form or in another form capable of conversion into written form within a reasonable time.

23.3	Registered Office . The Company shall keep and make available to Members on reasonable request the street address of its principal United States office in which the records required by this Section are maintained or will be available.

23.4

Examination of Records . A Member or a permitted transferee of an Interest, on written request stating the purpose, may examine and copy, in person or by the Member’s or transferee’s representative, at any reasonable time, for any proper purpose, and at the Member’s expense, records required to be kept under this Section and other information regarding the business, affairs, and financial condition of the Company as is just and reasonable for the Person to examine and copy.

23.5

Reports . The Board of Managers shall cause to be prepared and delivered to each Member: (a) no later than six (6) Business Days after the end of each month, a trial balance; (b) no later than ten (10) Business Days after the end of each month, financial statements including balance sheet, statements of operations, statement of cash flows and statements of capital accounts of each Member of the Company relative to the budget; (c) no later than twelve (12) Business Days after the end of each month, a forecast of the financial statements, including capital spending by project and capital contributions, by month for the remainder for the then current calendar year; (d) no later than thirty (30) days after the end of each quarter, unaudited quarterly financial statements in a format as mutually agreed by the Members; (e) no later than September 30 of each year an updated forecast of tax information for the current tax year and forecast of tax information for the forthcoming tax year (such information consistent with the information provided for the Members as would be provided to the Members via the Company’s tax return; and (f) no later than ninety (90) days after the end of each calendar year, audited financial statements for the Company for such year along with that tax information concerning the Company that is necessary for preparing the Member’s income tax returns for that year.

24.

GENERAL PROVISIONS .

24.1	Applicable Law; Forum . This Agreement shall be governed by, interpreted, construed, and enforced in accordance with the laws of the State of Indiana. The Members agree and consent to the non-exclusive jurisdiction and venue of any state or federal court sitting in the State of Indiana.

24.2	WAIVER OF RIGHT TO JURY TRIAL . TO THE FULLEST EXTENT PERMITTED BY LAW, AND AS SEPARATELY BARGAINED-FOR CONSIDERATION, EACH PARTY HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT, PROCEEDING, OR COUNTERCLAIM OF ANY KIND ARISING OUT OF OR RELATING TO THIS AGREEMENT.

24.3	Binding Agreement . Subject to the restrictions on Transfers set forth in Article 17 , this Agreement shall be binding upon and shall inure to the benefit of the Members and their respective successors and permitted assigns.

24.4

Notices . All notices, requests, demands for payment, or communications required or permitted to be given under any provision of this Agreement must be in writing, signed by or on behalf of the Person giving the same, and shall be deemed to have been given when delivered by personal delivery, overnight courier, e-mail (with confirmation of receipt) or facsimile transmission or mailed by certified mail, postage prepaid, return receipt requested, addressed to the Person or Persons to whom such notice is to be given at the addresses set forth below (or at such other address as shall be stated in a notice similarly given):


If to AEPTHC:		Heather Geiger
		American Electric Power Service Corporation
		700 Morrison Road
		Gahanna, Ohio 43230
		Telephone: (614) 552-1702
		Fax: (614) 552-1628
		E-mail: hlgeiger@aep.com

with a copy to:		Jeffrey D. Cross
		Deputy General Counsel
		American Electric Power Service Corporation
		1 Riverside Plaza
		Columbus, Ohio 43215
		Telephone: (614) 716-1580
		Fax: (614) 716-3440
		E-mail: jdcross@aep.com

If to Duke:		Chris Fallon
		Duke Energy Corporation
		526 S. Church Street, Mail Code EC12H
		Charlotte, North Carolina 28202
		Telephone : (704) 382-9248
		Fax : (980) 373-5393
		E-mail: cmfallon@duke-energy.com


With a copy to:		Catherine Stempien
		Duke Energy Corporation
		526 S. Church Street, Mail Code EC03T
		Charlotte, North Carolina 28202
		Telephone : (704) 382-0364
		Fax : (704) 382-4439
		E-mail: catherine.stempien@duke-energy.com

Except as otherwise specifically provided in this Agreement, all notices, requests, demands, payments, or communications shall be deemed effective for the purpose of computing any time period for the time within which any act must be performed from the earlier of the date of actual receipt or the date of receipt noted on the return receipt thereof; provided, however, that in the event the addressee should reject or refuse to accept same, then such shall be deemed effective as of the date of mailing if sent by mail or the date of attempted delivery if service is attempted by hand delivery or overnight courier. If an attempt to give notice by e-mail or facsimile transmission fails because of any problem with the recipient’s designated e-mail address or facsimile number or facsimile equipment, such notice will nevertheless be considered to have been effected on the day of that attempted transmission if it is also transmitted that day by overnight delivery to the recipient and is actually received on the next following delivery day. Any Person may from time to time specify a different address by notice to the Company and the Members.

24.5	Terminology . All personal pronouns used in this Agreement, whether masculine, feminine, or neuter, shall include all other genders, and the singular shall include the plural and vice versa whenever the context requires.

24.6

Entire Agreement . This Agreement, together with the Articles of Organization, contains the entire agreement between the Members hereto relative to the formation and operation of the Company. This Agreement supersedes any prior understanding or oral or written agreement between the Members respecting the subject matter of this Agreement.

24.7

Severability . If any one or more of the provisions contained in this Agreement, or the application thereof to any Member or the Company or to circumstances that may arise hereunder, shall for any reason be held to be invalid, illegal, or unenforceable in any respect, the remainder of this Agreement and the application of such provision to other Persons or circumstances shall not be affected thereby and shall be enforced to the greatest extent permitted by Applicable Law.

24.8	Other Instruments . The Members covenant and agree that they will execute such other and further instruments and documents as are or may become necessary or convenient to effectuate and carry out the purposes of the Company consistent with this Agreement.

24.9	Waiver of Partition . To the maximum extent permitted under Applicable Law, each Member hereby waives the right, if any, to partition the property and/or any other assets of the Company.

24.10

Amendments . Except as otherwise specifically provided in this Agreement, no amendment, modification, or change of this Agreement, or any part thereof, shall be valid and effective unless made in writing and signed by all of the Members.

24.11

Waivers . No waiver of this Agreement, or any part hereof, shall be binding unless made in writing and signed by the party to be charged with such waiver. No waiver of any breach or condition of this Agreement shall be deemed to be a waiver of any subsequent breach or other condition whether of like or different nature.

24.12

Counterparts . This Agreement may be executed in counterparts, each of which shall be deemed an original, and all of which, taken together, shall constitute but one and the same instrument, which may be sufficiently evidenced by one counterpart.

24.13

No State-Law Partnership . The Members intend that the Company not be a partnership (including a limited partnership) or joint venture, and that no Member or member of the Board of Managers be a partner or joint venturer of any other Member or member of the Board of Managers, for any purposes other than federal and state tax purposes, and this Agreement may not be construed to suggest otherwise.

[The remainder of this page is intentionally left blank.]

IN WITNESS WHEREOF , the Members have executed this Agreement to be effective as set forth herein.


AEP TRANSMISSION HOLDING COMPANY, LLC						DUKE ENERGY TRANSMISSION HOLDING COMPANY, LLC

By:						By:

Name:						Name:

Title:						Title:

EXHIBIT A

MEMBERS


Member Name And Mailing Address	Sharing Percentage
Duke Energy Transmission Holding Company, LLC 526 S. Church Street Charlotte, North Carolina 28202 Attention: Chris Fallon	50	%

AEP Transmission Holding Company, LLC 700 Morrison Road Gahanna, Ohio 43230 Attention: John J. Flynn	50	%

EXHIBIT B

INITIAL MANAGERS

(1)	Lisa Barton (Designating Member: AEPSC)

(2)	Mike Heyeck (Designating Member: AEPSC)

(3)	Christopher M. Fallon (Designating Member: Duke)

(4)	Ronald C. Snead (Designating Member: Duke)

EXHIBIT C

INITIAL OFFICERS

President – John J. Flynn

Vice President – Christopher M. Fallon

Treasurer – Charles H. Wilson

Controller – James D. Wiles

Secretary – Richard G. Beach

SCHEDULE 9.9.1

DEVELOPMENT BUDGET

Duke Development Budget


	2008				2009								2010
	Q3		Q4		Q1		Q2		Q3		Q4		Q1		Total
Corporation filing	$	20,000	$	20,000											$	40,000
Indiana Certificate Application	$	15,000	$	65,000	$	60,000									$	140,000
FERC filings	$	20,000	$	75,000	$	125,000	$	125,000	$	100,000	$	50,000	$	25,000	$	520,000
Regional Rate Development	$	10,000	$	50,000	$	20,000	$	25,000	$	10,000					$	115,000
Siting, routing, and Application	$	100,000	$	300,000	$	325,000	$	150,000	$	100,000	$	80,000	$	55,000	$	1,110,000
Communication activities	$	12,500	$	12,500	$	12,500	$	10,000	$	10,000	$	10,000	$	7,500	$	75,000

Total External Costs	$	177,500	$	522,500	$	542,500	$	310,000	$	220,000	$	140,000	$	87,500	$	2,000,000

Internal AEP Costs*	$	100,000	$	400,000	$	450,000	$	450,000	$	300,000	$	200,000	$	100,000	$	2,000,000

Internal Duke Costs*	$	100,000	$	400,000	$	450,000	$	450,000	$	300,000	$	200,000	$	100,000	$	2,000,000

Total Development Budget	$	377,500	$	1,322,500	$	1,442,500	$	1,210,000	$	820,000	$	540,000	$	287,500	$	6,000,000

*	Assumes business and management/oversight services are shared equally.

SCHEDULE 14.1

INITIAL PROJECT

The Initial Project will consist of construction of approximately 240 miles of 765kV transmission line between American Electric Power’s Rockport plant near Rockport, Indiana and the Greentown Substation near Greentown, Indiana. The Initial Project will consist primarily of towers, substations, lines, and rights-of-way acquired for the Initial Project. It is understood that the starting and ending points, path, and detailed scope and parameters of the Initial Project cannot be determined until the Initial Project is included in applicable regional transmission plans.

SCHEDULE 14.2

CONDITIONS PRECEDENT

1. The following shall have been obtained by the respective dates set forth below and shall not contain terms and conditions substantially different from those requested in the applications filed therefor unless otherwise acceptable to each Member in its sole discretion:

(a)

A FERC order, issued not later than March 31, 2009, accepting or approving the Company’s FPA Section 205 filing of a “forward-looking formula rate” for the recovery of the capital and operating costs incurred in connection with the Initial Project under the MISO and PJM open access tariffs (as applicable). A “forward looking formula rate” is a formula rate that recovers costs on a projected basis utilizing a forecast of transmission expenses and capital additions, with a true-up mechanism to actual costs once actual costs are known. The Company’s forward-looking formula rate filing will include the following elements: (i) an incentive rate of return on equity, (ii) return on and recovery of one hundred percent (100%) of Construction Work in Progress (CWIP), (iii) an agreed target capital structure for ratemaking purposes to be used during the Initial Project’s construction period, (iv) recovery of abandoned plant costs in circumstances where the Initial Project is abandoned for reasons beyond the control of the Company, and (v) such other items as the Company chooses to request in the Section 205 application.

(b)

A FERC order, issued not later than December 31, 2009, pursuant to Section 204 of the Federal Power Act of 1935, granting the Company the right to incur debt as contemplated by this Agreement and the right of Duke and AEPSC to provide equity capital to the Company.

(c)

A FERC order, issued not later than March 31, 2010, approving a mutually acceptable mechanism for allocation and recovery of costs of the Initial Project.

(d)

A FERC order, issued not later than March 31, 2010, accepting or approving Interconnection Agreements with PJM and MISO.

(e)

A final order from the Indiana Utility Regulatory Commission shall have been received by the Company not later than December 31, 2009, recognizing it as a public utility with condemnation rights under Indiana law, or the Company shall have received a legal opinion acceptable to both Members from an attorney licensed in Indiana, confirming that the Company is a public utility with condemnation rights under Indiana law and that all necessary state regulatory approvals have been received by the Company to move forward with construction of the Initial Project.

2. By not later than December 31, 2009, the Initial Project shall have (i) been included in the applicable regional transmission expansion plan(s), (ii) received construction approval from appropriate state commissions or state siting authorities, or (iii) received other statutory or regulatory construction approval.

3. Subject to the limitation set forth in Section 3.5, all of the Capital Contributions shall have been paid to the Company when and as due as set forth in the Development Budget.

4. The Board of Managers shall have approved the Preliminary Construction Budget by no later than 90 days after the date on which the condition precedent set forth in paragraph 2 above has been satisfied.

5. The Board of Managers shall have approved the Initial Operating Budget by no later than 90 days after the date on which the condition precedent set forth in paragraph 2 above has been satisfied.

6. The Board of Managers shall have approved the Construction Budget by no later than 90 days after the date on which the condition precedent set forth in paragraph 2 above has been satisfied.

7. The Company shall have received a commitment(s) for debt financing that is mutually acceptable to the Members by no later than 30 days after the date on which all of the conditions precedent set forth in paragraphs 1 and 2 above have been satisfied.

8. The Company and the Members, as applicable, shall have executed and delivered the following agreements by no later than 90 days after the Effective Date:

(a)

the AEPSC Services Agreement; and

(b)

the Duke Services Agreement.

9. By no later than the date on which all of the conditions precedent set forth in paragraphs 1 and 2 above have been satisfied, a license agreement shall have been executed and delivered, in form and substance mutually acceptable to Duke and AEPSC, granting to the Company a royalty free, nonexclusive, perpetual, non-transferable (except to Duke should it succeed to the assets of the Company upon a dissolution) license to use, for the Initial Project, the intellectual property owned or licensed by AEPSC or its Corporate Affiliates, which shall include trade secrets, operating experience, EHV operating guidelines, power system concepts, measurements and specifications on certain transmission equipment, systems or configurations that (i) is designed to be applied to 765 kV or equivalent EHV transmission; and (ii) is to be used in connection with the Initial Project;

10. By no later than the date on which all of the conditions precedent set forth in paragraphs 1 and 2 above have been satisfied, the Members shall have agreed on the general form and substance of the license agreement described in the second sentence of Section 6.2 of this Agreement, subject to finalization of such form and substance when the intellectual property that is subject to such license agreement has been generally identified.

EXHIBIT 31.1

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, James E. Rogers, certify that:

1)	I have reviewed this quarterly report on Form 10-Q of Duke Energy Corporation;

2)	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3)	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Acts Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5)	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 7, 2008

/s/ JAMES E. ROGERS

James E. Rogers

Chairman, President and

Chief Executive Officer

EXHIBIT 31.2

CERTIFICATION OF THE CHIEF FINANCIAL OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, David L. Hauser, certify that:

1)	I have reviewed this quarterly report on Form 10-Q of Duke Energy Corporation;

2)	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3)	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

5)	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 7, 2008

/s/ DAVID L. HAUSER

David L. Hauser

Group Executive and

Chief Financial Officer

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Duke Energy Corporation (“Duke Energy”) on Form 10-Q for the period ending September 30, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, James E. Rogers, Chairman, President and Chief Executive Officer of Duke Energy, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)

The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Duke Energy.

/s/ J AMES E. R OGERS

James E. Rogers

Chairman, President and Chief Executive Officer

November 7, 2008

EXHIBIT 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Duke Energy Corporation (“Duke Energy”) on Form 10-Q for the period ending September 30, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, David L. Hauser, Group Executive and Chief Financial Officer of Duke Energy, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)

The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Duke Energy.

/s/ D AVID L. H AUSER

David L. Hauser

Group Executive and Chief Financial Officer

November 7, 2008