Duke Energy Corporation (DUK)

Commercial Power

Commercial Power reported a third-quarter 2009 segment EBIT loss from continuing operations of $234 million, compared to a loss of $108 million in the third quarter of 2008.

Results were driven lower by non-cash impairment charges primarily related to goodwill associated with non-regulated generation operations in the Midwest. This goodwill impairment charge reflects the current estimated value of these operations, which has declined principally as a result of sustained lower power prices and demand. Absent this impairment charge, results were favorable due to prior year mark-to-market losses on economic hedges and a prior-year emission allowance impairment due to the invalidation of the Clean Air Interstate Rule (CAIR).

Also, native margins were higher in the third quarter of 2009 primarily due to increased Electric Security Plan rates in the Midwest and timing of fuel and purchased power rider collections in 2008, net of lower volumes and milder weather. Additionally, the Midwest gas-fired assets recognized higher EBIT in 2009 as a result of additional capacity revenues in 2009 and a receivable writeoff in the prior year related to Lehman Brothers. Non-native margins increased principally as a result of gains on coal sales.

Commercial Power

Commercial Power reported second-quarter 2009 segment EBIT from continuing operations of $79 million, compared to $235 million in the second quarter 2008. Results were adversely affected by mark-to-market losses on economic hedges in 2009 as compared to gains in 2008, lower power prices for wholesale customers and lower volumes for Ohio retail customers. These results were partially offset by prior year timing of expenses on a fuel and purchased power rider, and increased native margins related to the implementation of the Electric Security Plan in Ohio at the beginning of 2009.

Commercial Power.

As discussed in Note 1, effective December 17, 2008, Commercial Power reapplied the provisions of SFAS No. 71 to certain portions of its operations due to the passing of SB 221 and the PUCO’s approval of the ESP. However, since certain portions of Commercial Power’s operations are not subject to regulatory accounting pursuant to SFAS No. 71, reported results for Commercial Power are subject to volatility due to the over- or under-collection of certain costs for which recovery is not automatic under the ESP. Commercial Power may 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 was 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. As part of the settlement that was approved by the PUCO on December 17, 2008 (see discussion above). Duke Energy Ohio agreed to withdraw that portion of its application for approval related to the transfer of its generating facilities designated to serve Ohio customers and the PUCO approved of the transfer for the remaining generating facilities. Duke Energy Ohio filed a new application requesting FERC approval to transfer to affiliate companies only the remaining generating facilities not designated to serve Ohio customers, which was conditionally approved by the FERC on February 19, 2009. As a condition of approval, the FERC requires that all acquisition premiums related to generating assets being transferred to an affiliate of Duke Energy be removed from Duke Energy Ohio’s financial statements when Duke Energy Ohio submits its final accounting entries and that any debt associated with the generation assets being transferred be transferred to the generating facility before Duke Energy Ohio submits its final accounting entries. In addition, the FERC will hold Duke Energy Ohio to its commitments to not pay taxes associated with the proposed transaction, to maintain a minimum equity to total capital ratio of 30%, and to retain an amount of debt that will accommodate the preservation of Duke Energy Ohio’s current credit ratings.

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 the FERC. The complaint asks the 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 and dismissing the RPM Buyer’s 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.

33

Table of Contents

PART I

DUKE ENERGY CORPORATION

Notes To Unaudited Consolidated Financial Statements—(Continued)

Commercial Power

Three Months Ended March 31, 2009 as compared to March 31, 2008

Operating Revenues. The increase was primarily driven by:

Partially offsetting these increases was:

Operating Expenses. The increase was primarily driven by:

55

Table of Contents

PART I

Gains on Sales of Other Assets and Other, net. The decrease in 2009 compared to 2008 is attributable to lower gains on sales of emission allowances in 2009 compared to 2008.

Other Income and Expenses, net. The increase is driven by higher equity earnings in unconsolidated affiliates, primarily as a result of the acquisition of Catamount in September 2008.

EBIT. The decrease is primarily attributable to lower mark-to-market earnings on economic hedges due to decreasing commodity prices, increased plant maintenance expenses and fewer gains on sales of emission allowances, partially offset by higher retail revenue pricing as a result of the implementation of the ESP and higher margins from the Midwest gas-fired assets due to increased generation volumes and PJM capacity revenues.

Matters Impacting Future Commercial Power Results

Commercial Power evaluates the carrying amount of its recorded goodwill for impairment under the guidance of SFAS No. 142, “Goodwill and Intangible Assets.” For further information on key assumptions that impact Commercial Power’s goodwill impairment assessments, see Critical Accounting Policy for Goodwill Impairment in Duke Energy’s Annual Report on Form 10-K for the year ended December 31, 2008. As of the date of the August 2008 annual impairment test, the fair value of Commercial Power’s reporting units exceeded their respective carrying values, thus no goodwill impairment charges were recorded. However, management is continuing to monitor the impact of recent market and economic events to determine if it is more likely than not that the carrying values of Commercial Power’s reporting units have been impaired. Should any such triggering events or circumstances occur in 2009 prior to the annual August 2009 testing date that would more likely than not reduce the fair value of a reporting unit below its carrying value, management would perform an interim detailed impairment test of Commercial Power’s goodwill and it is possible that goodwill impairment charges could be recorded as a result of these tests. At March 31, 2009, the Commercial Power segment had goodwill of approximately $960 million.

Commercial Power

Commercial Power reported first-quarter 2009 segment EBIT from continuing operations of $114 million, compared to $146 million in the first quarter 2008. Results were adversely affected by lower mark-to-market gains on economic hedges and higher operations and maintenance costs due to the timing of plant outages. These results were partially offset by increased native margins related to the implementation of the Electric Security Plan in Ohio at the beginning of 2009.

COMMERCIAL POWER

Commercial Power owns, operates and manages power plants and engages in the wholesale marketing and procurement of electric power, fuel and emission allowances related to these plants as well as other contractual positions. Commercial Power’s generation asset fleet consists of Duke Energy Ohio’s non-regulated generation in Ohio, acquired from Cinergy in April 2006 and the five Midwestern gas-fired non-regulated generation assets that were a portion of former DENA. Commercial Power’s assets, excluding wind energy generation assets, are comprised of approximately 7,550 net MW of power generation primarily located in the Midwestern United States. The asset portfolio has a diversified fuel mix with baseload and mid-merit coal-fired units as well as combined cycle and peaking natural gas-fired units. Most of the generation asset output in Ohio has been contracted through the RSP, which expired on December 31, 2008. Effective January 1, 2009, Commercial Power began operating under an ESP, which expires on December 31, 2011, and is described below.

20

Table of Contents

PART I

The following map shows the Commercial Power service territories and generation facilities.

21

Table of Contents

PART I

Through DEGS, Commercial Power is an on-site energy solutions and utility services provider. Primarily through joint ventures, DEGS engages in utility systems construction, operation and maintenance of utility facilities, as well as cogeneration. Cogeneration is the simultaneous production of two or more forms of usable energy from a single source. In support of a strategy to increase its renewable energy portfolio, DEGS acquired the wind power development assets of Energy Investor Funds from Tierra Energy in May 2007 and, in September 2008, acquired Catamount Energy Corporation (Catamount) from Diamond Castle Partners. DEGS currently has approximately 370 net MW of wind energy in operation and over 5,000 MW of wind energy projects in the development pipeline.

The following map show the location of DEGS wind energy generation assets.

In October 2006, Duke Energy completed the sale of Commercial Power’s energy marketing and trading activities, which were acquired in the Cinergy merger. In December 2006, Duke Energy completed the sale of Caledonia Power 1, LLC, which is the project company that operated and managed the Caledonia peaking generation facility in Mississippi. Additionally, Duke Energy completed the sale of Commercial Power’s Brownsville, Tennessee peaking generation facility in April 2008.

Commercial Power.

As discussed in Note 1, effective December 17, 2008, Commercial Power reapplied the provisions of SFAS No. 71 to certain portions of its operations due to the passing of SB 221 and the PUCO’s approval of the ESP. However, since certain portions of Commercial Power’s operations are not subject to regulatory accounting pursuant to SFAS No. 71, reported results for Commercial Power are subject to volatility due to the over- or under-collection of certain costs for which recovery is not automatic under the ESP. Commercial Power may 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 was 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 believed that in light of those discussions good cause existed 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. As part of the settlement that was approved by the PUCO on December 17, 2008 (see discussion above) Duke Energy Ohio agreed to withdraw that portion of its application for approval related to the transfer of its generating facilities designated to serve Ohio customers and the PUCO approved of the transfer for the remaining generating facilities. Duke Energy Ohio filed a new application requesting FERC approval to transfer to affiliate companies only the remaining generating facilities not designated to serve Ohio customers, which was approved by the FERC on February 19, 2009.

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 mar-

124

Table of Contents

PART II

DUKE ENERGY CORPORATION

Notes To Consolidated Financial Statements—(Continued)

ket. 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.

Commercial Power

In February 2008, Duke Energy entered into an agreement to sell its 480 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.

Commercial Power

Due to the expiration of certain tax credits (see Note 18), Duke Energy 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 all periods presented. For the year ended December 31, 2007, synfuel operations had after-tax earnings of approximately $23 million, which includes tax benefits of approximately $84 million.

Commercial Power

In June 2006, Duke Energy announced it had reached an agreement to sell CMT, as well as certain Duke Energy Ohio trading contracts, to Fortis, a Benelux-based financial services group. In October 2006, the sale transaction was completed. Under the purchase and sale agreement, Fortis purchased CMT at a base price of approximately $210 million. In addition, Fortis paid approximately $200 million for the portfolio of contracts and an amount equal to the estimated net working capital associated with these companies at the time of close. In October 2006, Duke Energy received total pre-tax cash proceeds of approximately $700 million and recorded an approximate $25 million pre-tax gain on the sale. Income tax expense recorded as a result of this transaction relates to the approximate $135 million of goodwill that was not deductible for tax purposes, thus creating a taxable gain that was greater than the gain for book purposes. Results of operations for CMT, as well as certain Duke Energy Ohio trading contracts, have been reflected in Income (Loss) from Discontinued Operations, net of tax, from the date of the Cinergy merger through the date of sale.

In October 2006, in connection with this transaction, Duke Energy entered into a series of TRS with Fortis, which are accounted for as mark-to-market derivatives. The TRS offsets the net fair value of the contracts being sold to Fortis. The TRS will be cancelled for each underlying contract as each is transferred to Fortis. All economic and credit risk associated with the contracts has been transferred to Fortis as of the date of the sale through the TRS.

As discussed above, due to the expiration of certain tax credits, Duke Energy ceased all synfuel operations as of December 31, 2007. Accordingly, the results of operations for synfuel have been reclassified to discontinued operations for all periods presented. For the year ended December 31, 2006, synfuel operations had after-tax earnings of approximately $3 million, which includes tax benefits of approximately $20 million.

Commercial Power

Commercial Power reported a fourth quarter 2008 segment EBIT loss from continuing operations of $9 million, compared to $38 million in positive EBIT in the fourth quarter 2007.

2

Commercial Power results decreased primarily due to mark-to-market losses on economic hedges driven by sharply declining commodity prices. Excluding these mark-to-market losses, Commercial Power’s results were favorable, primarily due to timing on the recovery of environmental and capacity riders, lower net purchase accounting expenses and gains on the sale of emission allowances. The business segment results also reflect improved results from its Midwest gas assets.

Full-year 2008 segment EBIT from continuing operations for Commercial Power was $264 million, compared to $278 million in 2007.

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.

37

Table of Contents

PART I

DUKE ENERGY CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Commercial Power

Commercial Power reported a third-quarter 2008 segment EBIT loss from continuing operations of $108 million, compared to $163 million positive EBIT in the third quarter 2007.

Commercial Power results decreased 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, the timing of recovery of fuel and purchased power costs under the Ohio RSP, and milder weather. The decrease was partially offset by lower purchase accounting and operating and maintenance expenses.

Year-to-date segment EBIT from continuing operations for Commercial Power was $273 million, compared to $240 million in 2007.

2

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.

Commercial Power

Commercial Power reported second-quarter 2008 segment EBIT from continuing operations of $235 million, compared to $64 million in the second quarter 2007.

Commercial Power results increased primarily because of higher mark-to-market gains due to economic hedges, gains on the sale of emission allowances, lower purchase accounting expenses and improved operations. These positive impacts were partially offset by milder weather.

Year-to-date segment EBIT from continuing operations for Commercial Power was $381 million, compared to $77 million in 2007.

Commercial Power

Three Months Ended March 31, 2008 as compared to March 31, 2007

Operating Revenues. The increase was primarily driven by:

Operating Expenses. The decrease was primarily driven by:

Partially offsetting these decreases were:

47

Table of Contents

PART I

Gains (Losses) on Sales of Other Assets and Other, net. Increase in 2008 compared to 2007 is attributable to gains on sales of emission allowances in 2008 compared to losses on sales of emission allowances in 2007.

EBIT. The improvement is primarily attributable to higher mark-to-market earnings on economic hedges due primarily to increasing coal prices, improved results from the Midwest gas-fired assets as a result of higher generation volumes and increased PJM capacity revenues, gains on sales of emission allowances and lower emission allowance expenses due to installation of flue gas desulfurization equipment. These favorable variances were partially offset by higher expenses from increased plant maintenance in 2008.

Commercial Power

Commercial Power reported first-quarter 2008 segment EBIT from continuing operations of $146 million, compared to $13 million in the first quarter 2007.

Commercial Power’s improved results for the quarter were due primarily to mark-to-market impacts of economic hedges, lower purchase accounting net expenses, gains on the sale of emission allowances and improved results of the Midwest gas-fired assets.

The contribution was partially offset by higher expenses from increased plant maintenance in the quarter due to plant outages.

Commercial Power

In June 2006, Duke Energy announced it had reached an agreement to sell CMT, as well as certain Duke Energy Ohio trading contracts, to Fortis, a Benelux-based financial services group. In October 2006, the sale transaction was completed. Under the purchase and sale agreement, Fortis purchased CMT at a base price of approximately $210 million. In addition, Fortis paid approximately $200 million for the portfolio of contracts and an amount equal to the estimated net working capital associated with these companies at the time of close. In October 2006, Duke Energy received total pre-tax cash proceeds of approximately $700 million and recorded an approximate $25 million pre-tax gain on the sale. Income tax expense recorded as a result of this transaction relates to the approximate $135 million of goodwill that was not deductible for tax purposes, thus creating a taxable gain that was greater than the gain for book purposes. Results of operations for CMT, as well as certain Duke Energy Ohio trading contracts, have been reflected in (Loss) Income from Discontinued Operations, net of tax, from the date of the Cinergy merger through the date of sale.

In October 2006, in connection with this transaction, Duke Energy entered into a series of TRS with Fortis, which are accounted for as mark-to-market derivatives. The TRS offsets the net fair value of the contracts being sold to Fortis. The TRS will be cancelled for each underlying contract as each is transferred to Fortis. All economic and credit risk associated with the contracts has been transferred to Fortis as of the date of the sale through the TRS.

As discussed above, due to the expiration of certain tax credits, Duke Energy ceased all synfuel operations as of December 31, 2007. Accordingly, the results of operations for synfuel have been reclassified to discontinued operations for all periods presented. For the year ended December 31, 2006, synfuel operations had after-tax earnings of approximately $3 million, which includes tax credits of approximately $20 million.

Commercial Power

Commercial Power reported fourth-quarter 2007 segment EBIT from continuing operations of $38 million, compared to a $19 million loss in the fourth quarter 2006.

Commercial Power’s improved results for the quarter were due primarily to a reduction in net purchase accounting charges associated with the Cinergy merger, favorable timing of recoveries of fuel and purchased power costs, and improved mark-to-market results from economic hedges due to increasing coal prices. The Midwest gas-fired assets continued to deliver improved results due to increased generation and higher capacity revenues.

The contribution was partially offset by higher expenses from increased plant maintenance in the quarter.

Results for the synfuel operations are now presented in discontinued operations following the wind down of those operations at the end of 2007.

Full-year 2007 segment EBIT from continuing operations for Commercial Power was $278 million in 2007, compared to segment EBIT of $47 million in 2006.

Commercial Power

For third-quarter 2007, Commercial Power reported segment EBIT of $121 million from continuing operations, compared to $57 million in the prior year’s quarter.

Commercial Power’s improved results were driven by improved retail margins resulting mainly from the timing of the recovery of fuel and purchased power costs, higher overall prices and favorable weather. The Midwest gas-fired assets also contributed to Commercial Power’s improved results due to increased generation and higher revenues from capacity and tolling agreements.

This contribution was partially offset by higher costs associated with increased synfuel production.

Year-to-date segment EBIT from continuing operations for Commercial Power was $147 million, compared to $50 million in 2006.

2

Commercial Power

In June 2006, Duke Energy announced it had reached an agreement to sell CMT, as well as certain Duke Energy Ohio trading contracts, to Fortis, a Benelux-based financial services group. In October 2006, the sale transaction was completed. Under the purchase and sale agreement, Fortis purchased CMT at a base price of approximately $210 million. In addition, Fortis paid approximately $200 million for the portfolio of contracts and an amount equal to the estimated net working capital associated with these companies at the time of close. In October 2006, Duke Energy received total pre-tax cash proceeds of approximately $700 million and recorded an approximate $25 million pre-tax gain on the sale. Income tax expense recorded as a result of this transaction relates to the approximate $135 million of goodwill included in assets held for sale that was not deductible for tax purposes, thus creating a taxable gain that was greater than the gain for book purposes. Results of operations for CMT, as well as certain Duke Energy Ohio trading contracts, have been reflected in Income from Discontinued Operations, net of tax, from the date of the Cinergy acquisition through the date of sale.

In October 2006, in connection with this transaction, Duke Energy entered into a series of Total Return Swaps (TRS) with Fortis, which are accounted for as mark to market derivatives. The TRS offsets the net fair value of the contracts being sold to Fortis. The TRS will be cancelled for each underlying contracts as each is transferred to Fortis. All economic and credit risk associated with the contracts has been transferred to Fortis as of the date of the sale through the TRS. As of December 31, 2006, approximately 70% of the contracts had been novated by Fortis. At December 31, 2006, contracts with a net fair value of approximately $43 million remain in Assets Held for Sale and represent contracts that have yet to be novated by Fortis.

Commercial Power

For second-quarter 2007, Commercial Power reported segment EBIT of $35 million from continuing operations, compared to $20 million in the prior year’s quarter.

Commercial Power results were higher due to increased retail demand resulting largely from favorable weather, as well as higher mark-to-market gains due to economic hedges.

This contribution was partially offset by higher operation and maintenance costs mainly due to plant outages and costs associated with increased synfuel production.

Year-to-date segment EBIT from continuing operations for Commercial Power was $26 million, compared to a loss of $7 million in 2006.

2

Commercial Power

Commercial Power includes the operations of former DENA’s Midwestern gas-fired generation assets. Additionally, Commercial Power includes former Cinergy’s non-regulated generation in the Midwest, the results of which have been included from the date of acquisition and thereafter.

Three Months Ended March 31, 2007 as compared to March 31, 2006

Operating Revenues. The increase was primarily driven by:

Partially offsetting these increases was a $45 million mark-to-market loss on non-qualifying power hedge contracts.

Operating Expenses. The increase was primarily driven by:

48

Table of Contents

PART I

Partially offsetting these increases was a $19 million mark-to-market gain on non-qualifying fuel hedge contracts.

Losses on Sales of Other Assets and Other, net. During 2007, Commercial Power recognized net losses related to sales of emission allowances.

Other Income and Expenses, net. The increase is driven primarily by equity earnings of unconsolidated affiliates related to investments acquired in connection with the Cinergy merger in 2006.

EBIT. Approximately $5 million of the improved EBIT relates to the legacy Cinergy operations, with the remainder related to the former DENA Midwestern operations. EBIT was negatively impacted in the first quarter 2007 by approximately $26 million of net mark-to-market losses on economic hedges and approximately $23 million of losses related to synfuel operations, which excludes the impact of a $26 million income tax credit recorded as a reduction to income tax expense from continuing operations.

Commercial Power

Commercial Power reported a first quarter 2007 segment EBIT loss of $9 million from continuing operations, compared to a $26 million segment EBIT loss in the prior year’s quarter. These results reflect the contribution of approximately $107 million from the addition of Cinergy’s non-regulated generation in the Midwest. This contribution was offset by $53 million of purchase accounting charges associated with the merger, $26 million of mark-to-market losses on economic hedges and $23 million of costs associated with our synfuel facilities (before the benefit of associated tax credits).

Commercial Power’s first quarter 2007 reported results also reflect reductions in governance costs related to the gas-fired plants in the Midwest.

Commercial Power

In June 2006, Duke Energy announced it had reached an agreement to sell CMT, as well as certain Duke Energy Ohio trading contracts, to Fortis, a Benelux-based financial services group. In October 2006, the sale transaction was completed. Under the purchase and sale agreement, Fortis purchased CMT at a base price of approximately $210 million. In addition, Fortis paid approximately $200 million for the portfolio of contracts and an amount equal to the estimated net working capital associated with these companies at the time of close. In October 2006, Duke Energy received total pre-tax cash proceeds of approximately $700 million and recorded an approximate $25 million pre-tax gain on the sale. Income tax expense recorded as a result of this transaction relates to the approximate $135 million of goodwill included in assets held for sale that was not deductible for tax purposes, thus creating a taxable gain that was greater than the gain for book purposes. Results of operations for CMT, as well as certain Duke Energy Ohio trading contracts, have been reflected in (Loss) Income from Discontinued Operations, net of tax, from the date of the Cinergy acquisition through the date of sale.

In October 2006, in connection with this transaction, Duke Energy entered into a series of Total Return Swaps (TRS) with Fortis, which are accounted for as mark to market derivatives. The TRS offsets the net fair value of the contracts being sold to Fortis. The TRS will be cancelled for each underlying contracts as each is transferred to Fortis. All economic and credit risk associated with the contracts has been transferred to Fortis as of the date of the sale through the TRS. As of December 31, 2006, approximately 70% of the contracts had been novated by Fortis. At December 31, 2006, contracts with a net fair value of approximately $43 million remain in Assets Held for Sale and represent contracts that have yet to be novated by Fortis.